ITEM 7 – MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the
consolidated financial condition and results of operations should be read in conjunction with the consolidated financial statements and
related notes appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. Our actual results could differ materially from the results described in or implied by these forward-looking
statements as a result of various factors, including those discussed below and elsewhere in this Annual Report on Form 10-K, particularly
under the heading “Risk Factors.”
Overview
Future FinTech is a holding company incorporated under the laws of
the State of Florida and it is not a Chinese operating company. As a holding company with no material operations of our own, we conduct
a substantial majority of our operations through our subsidiaries and contractual arrangements with a variable interest entity (VIE) –
Cloud Chain E-Commerce (Tianjin) Co., Ltd. (“E-Commerce Tianjin”), based in China and this structure involves unique risks
to investors. The Company historically engaged in the production and sale of fruit juice concentrates (including fruit purees and fruit
juices), fruit beverages (including fruit juice beverages and fruit cider beverages) in People’s Republic of China. Due to drastically
increased production costs and tightened environmental laws in China, the Company had transformed its business from fruit juice manufacturing
and distribution to a real-name blockchain based e-commerce platform, supply chain financing services and trading business and financial
services and technology business. The business operations of the Company include blockchain based online shopping platform, Chain Cloud
Mall (“CCM”), supply chain financing services and trading, asset management and money transfer service. The Company is also
developing cryptocurrency mining and cryptocurrency market data services.
On August 6, 2021, the Company completed acquisition
of 90% of the issued and outstanding shares of Nice Talent Asset Management Limited (“NTAM”), a Hong Kong-based asset management
company, from Joy Rich Enterprises Limited (“Joy Rich”). NTAM is licensed under the Securities and Futures Commission of
Hong Kong (“SFC”) to carry out regulated activities in Type 4: Advising on Securities and Type 9: Asset Management.
In December 2021, FTFT Capital Investments, LLC
officially launched FTFTX, a cryptocurrency market data platform that provides investors with real-time cryptocurrency market data and
trading information from a large number of cryptocurrency exchanges. The market data is available for Bitcoin, ETH, EOS, Litecoin, TRON
and other cryptocurrencies at https://www.ftftx.com and via the FTFTX App on iOS and Android devices. The FTFTX app is free to download
on Google Play and the Apple Store.
In
March 2022, FTFT UK Limited received has received approval to operate as an Electronic Money Directive (“EMD”) Agent and
has been registered as such with the Financial Conduct Authority (FCA), a UK regulator. This status grants FTFT UK Limited the ability
to distribute or redeem e-money and provide certain financial services on behalf of an e-money institution (registration number 903050).
On April 18, 2022, the
Company and Future Fintech (Hong Kong) Limited, a wholly owned subsidiary of the Company jointly acquired 100% equity interest of
KAZAN S.A., a company incorporated in Republic of Paraguay for $288. The Company owns 90% and FTFT HK owns 10% of Kazan S.A.,
respectively. Kazan S.A. has no operation before the acquisition. The Company plans to develop bitcoin and other cryptocurrency mining
and related services in Paraguay. The Company has changed its name from KAZAN S.A to FTFT Paraguay S.A. on July 28, 2022.
On September 29, 2022, FTFT UK Limited
completed its acquisition of 100% of the issued and outstanding shares of Khyber Money Exchange Ltd., a company incorporated in
England and Wales, from Rahim Shah, a resident of United Kingdom for a total of Euros €685,000 (“Purchase Price”),
pursuant to a Share Purchase Agreement (the “Agreement”) dated September 1, 2021. Khyber Money Exchange Ltd. is a money
transfer company with a platform for transferring money through one of its agent locations or via its online portal, mobile platform
or over the phone. Khyber Money Exchange Ltd. is regulated by the UK Financial Conduct Authority (FCA) and the parties received
approval by the FCA before the formal closing of the transaction. On October 11, 2022, the Company changed the name of Khyber Money
Exchange Ltd. to FTFT Finance UK Limited.
On February 27, 2023, Future FinTech (Hong Kong)
Limited (“Buyer”), a company incorporated in Hong Kong and a wholly owned subsidiary of Future FinTech Group Inc. (the “Company”)
entered into a Share Transfer Agreement (the “Agreement”) with Alpha Financial Limited, a company incorporated in Hong Kong
(“Seller”) and sole owner and shareholder of Alpha International Securities (Hong Kong) Limited, a company incorporated
in Hong Kong (“Alpha HK”) and Alpha Information Service (Shenzhen) Co., Ltd., a company incorporated in China (“Alpha
SZ”). Alpha HK holds Type 1 ‘Securities Trading’, Type 2 ‘Futures Contract Trading’ and Type 4 ‘Securities
Consulting’ financial licenses issued by the Hong Kong Securities and Futures Commission. Alpha SZ provides technical support services
to Alpha HK.
We are a holding company incorporated in Florida
and we are not a Chinese operating company. As a holding company with no material operations of our own, we conduct a substantial majority
of our operations through our subsidiaries and the VIE E-Commerce Tianjin in China and this structure involves unique risks. Our shares
of common stock are shares of our Florida holding company, and we do not have any equity ownership of the VIE, instead we control and
is the primary beneficiary of the VIE for accounting purposes through certain contractual arrangements, which are used to provide investors
with exposure foreign investment in Chinese-based companies where Chinese law prohibits or restricts direct foreign investment in value
added telecom/e-commerce business. Chinese regulatory authorities could disallow the VIE structure, which would likely result in a material
change in our operations and/or value of our securities, including that it could cause the value of our securities to significantly decline
or worthless. See “Risk Factors— If the PRC government deems that the contractual arrangements in relation to the
consolidated variable interest entity do not comply with PRC regulatory restrictions on foreign investment in the relevant industries,
or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or
be forced to relinquish our interests in those operations.”
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There are legal and operational risks associated
with being based in and having majority of our operations in Hong Kong and China. Recently, the PRC government initiated a series of
regulatory actions and statements to regulate business operations in China with little advance notice, including cracking down on illegal
activities in the securities market, enhancing supervision over China-based companies listed overseas using variable interest entity
structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement.
On July 6, 2021, the General Office of the Communist Party of China Central Committee and the General Office of the State Council jointly
issued an announcement to crack down on illegal activities in the securities market and promote the high-quality development of the capital
market, which, among other things, requires the relevant governmental authorities to strengthen cross-border oversight of law-enforcement
and judicial cooperation, to enhance supervision over China-based companies listed overseas, and to establish and improve the system
of extraterritorial application of the PRC securities laws. On December 28, 2021, Cybersecurity Review Measures was published by Cyberspace
Administration of China or the CAC, National Development and Reform Commission, Ministry of Industry and Information Technology, Ministry
of Public Security, Ministry of State Security, Ministry of Finance, Ministry of Commerce, People’s Bank of China, State Administration
of Radio and Television, China Securities Regulatory Commission, State Secrecy Administration and State Cryptography Administration,
effective on February 15, 2022, which provides that, Critical Information Infrastructure Operators (“CIIOs”) that purchase
internet products and services and Online Platform Operators engaging in data processing activities that affect or may affect national
security shall be subject to the cybersecurity review by the Cybersecurity Review Office. On November 14, 2021, CAC published the Administration
Measures for Cyber Data Security (Draft for Public Comments), or the “Cyber Data Security Measure (Draft)”, which requires
cyberspace operators with personal information of more than 1 million users who want to list abroad to file a cybersecurity review with
the Office of Cybersecurity Review. On April 2, 2022, the CSRC released the Provisions on Strengthening Confidentiality and Archives
Administration of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments), which provide that a domestic
company that seeks to offer and list its securities in a overseas market shall strictly abide by applicable PRC laws and regulations,
enhance legal awareness of keeping state secrets and strengthening archives administration, institute a sound confidentiality and archives
administration system, and take necessary measures to fulfill confidentiality and archives administration obligations. On July 7, 2022,
CAC promulgated the Measures for the Security Assessment of Data Cross-border Transfer, effective on September 1, 2022, which requires
the data processors to apply for data cross-border security assessment coordinated by the CAC under the following circumstances: (i)
any data processor transfers important data to overseas; (ii) any critical information infrastructure operator or data processor who
processes personal information of over 1 million people provides personal information to overseas; (iii) any data processor who provides
personal information to overseas and has already provided personal information of more than 100,000 people or sensitive personal information
of more than 10,000 people to overseas since January 1st of the previous year; and (iv) other circumstances under which
the data cross-border transfer security assessment is required as prescribed by the CAC. On February 17, 2023, the CSRC released the
Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Enterprises (the “New Overseas Listing Rules”)
with five interpretive guidelines, which took effect on March 31, 2023. The New Overseas Listing Rules require Chinese domestic enterprises
to complete filings with relevant governmental authorities and report related information under certain circumstances. The required filing
scope is not limited to the initial public offering, but also includes subsequent overseas securities offering, single or multiple acquisition(s),
share swap, transfer of shares or other means to seek an overseas direct or indirect listing and a secondary listing or dual major listing
of issuers already listed overseas. According to the Notice on Arrangements for Overseas Securities Offering and Listing by Domestic
Enterprises, published by the CSRC on February 17, 2023, a company that (i) has already completed overseas listing or (ii) has already
obtained the approval for the offering or listing from overseas securities regulators or exchanges but has not completed such offering
or listing before effective date of the new rules and also completes the offering or listing before September 30, 2023 will be considered
as an existing listed company and is not required to make any filing until it conducts a new offering in the future. Furthermore, upon
the occurrence of any of the material events specified below after an issuer has completed its offering and listed its securities on
an overseas stock exchange, the issuer shall submit a report thereof to the CSRC within 3 working days after the occurrence and public
disclosure of the event: (i) change of control; (ii) investigations or sanctions imposed by overseas securities regulatory agencies or
other competent authorities; (iii) change of listing status or transfer of listing segment; or (iv) voluntary or mandatory delisting.
On February 24, 2023, the CSRC revised the Provisions on Strengthening the Management of Confidentiality and Archives Related to the
Overseas Issuance of Securities and Overseas Listing by Domestic Companies which were issued in 2009 (the “Archives Rules”).
The revised Archives Rules took effect on March 31, 2023. The revised Archives Rules expands their application to cover indirect overseas
offering and listing, stipulating that a domestic company which plans to publicly disclose any documents and materials containing state
secrets or working secrets of government agencies, shall first obtain approval from competent authorities according to law, and file
with the secrecy administrative department at the same level. As of the date of this report, these new laws and guidelines have not impacted
the Company’s ability to conduct its business, accept foreign investments, or list on a U.S. or other foreign stock exchange; however,
there are uncertainties in the interpretation and enforcement of these new laws and guidelines, which could materially and adversely
impact our business and financial outlook and may impact our ability to accept foreign investments or continue to list on a U.S. or other
foreign stock exchange. In the opinion of our PRC counsel Fengdong Law Firm, the VIE and certain subsidiaries of the Company are incorporated
and operating in mainland China and they have received all required permissions from Chinese authorities to operate their current business
in China, including a Business license, Bank Account Open Permits and Value Added Telecom Business License. As of the date of this report,
in the opinion of our PRC counsel Fengdong Law Firm, we, our subsidiaries and the VIE in China are not subject to permission requirements
from the China Securities Regulatory Commission (“CSRC”), Cyberspace Administration of China (“CAC”) or any other
entity that is required to approve of the VIE’s operations and have not received or were denied such permissions by any PRC authorities.
However, given the current PRC regulatory environment, it is uncertain whether we, our subsidiaries or the VIE, will be able to obtain
permission from the PRC government to offer our securities to foreign investors, and even when such permission is obtained, whether it
will be denied or rescinded. If we or any of our subsidiaries or the VIE do not receive or maintain such permissions or approvals, inadvertently
conclude that such permissions or approvals are not required, or applicable laws, regulations, or interpretations change and we or our
subsidiaries are required to obtain such permissions or approvals, it could significantly limit or completely hinder our ability to offer
or continue to offer our securities to investors and cause the value of our securities to significantly decline or become worthless.
If applicable laws, regulations, or interpretations change and the VIE is required to obtain permissions or approvals in the future,
we may face substantial uncertainties as to whether we can obtain such permissions or approvals in a timely manner, or at all. Failure
to take timely and appropriate measures to adapt to any of these or similar regulatory compliance challenges could materially and adversely
affect our current corporate structure and business operations.
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Chain Cloud Mall is
a unique real-name based blockchain e-commerce shopping platform that integrates blockchain, internet technology. The CCM shared shopping
mall platform is designed to be a block-chain based shopping mall for merchants and goods, not the exchange of digital currencies, and
it currently only accepts payment from credit cards, Alipay and WeChat.
The Company started
its trial operation of NONOGIRL, a cross-border e-commerce platform, in March 2020 and formally launched it in July 2020. The cross-border
e-commerce platform aimed to build a new s2b2c (supplier to business and consumer) outsourcing sales platform dominated by social media
influencers. It was aimed at the growing female consumer market, with the ability to broadcast, short video, and all forms communication
through the platform. It could also create a sales oriented sharing ecosystem with other major social media used by customers, etc. The
Company’s promotion strategy previously mainly relied on the training of members and distributors through meetings and conferences.
Due to the outbreak of COVID-19, the Chinese government put a restriction on large gatherings. These restrictions made the promotion
strategy for our online e-commerce platforms difficult to be implemented and the Company has experienced difficulties to subscribe new
members for its online e-commerce platforms. Due to the lack of new subscribers, in June 2021, the Company suspended its cross-border
e-commerce platform (NONOGIRL) which has been closed now. Also, since the second quarter of 2021, the Company has transformed its member-based
business model of Chain Cloud Mall to a sale agent based eCAAS platform and began to provide supply chain financing services and trading
of coal for coal mines and power generation plants as well as aluminum ingots.
The Company currently has ten directly controlled
subsidiaries: DigiPay FinTech Limited (“DigiPay”), a company incorporated under the laws of the British Virgin Islands, Future
FinTech (Hong Kong) Limited, a company incorporated under the laws of Hong Kong, GlobalKey Shared Mall Limited, a company incorporated
under the laws of Cayman Islands (“GlobalKey Shared Mall”), Tianjin Future Private Equity Fund Management Partnership, a
Limited Partnership under the laws of China, FTFT UK Limited, a company incorporated under the laws of United Kingdom, Future Fintech
Digital Capital Management, LLC, a company incorporated under the laws of Connecticut, Future Fintech Digital Number One GP, LLC, a company
incorporated under the laws of Connecticut, Future FinTech Labs Inc., a company incorporated under the laws of New York, FTFT SuperComputing
Inc. a company incorporated under the laws of Ohio and FTFT Paraguay S.A., a company incorporated under the laws of Paraguay.
SkyPeople Foods Holdings Limited (“SkyPeople
BVI”) was a wholly owned subsidiary of the Company and a company organized under the laws of the British Virgin Islands, which
held 100% of the equity interest of HeDeTang Holdings (HK) Ltd. (“HeDeTang HK”), a company organized under the laws of the
Hong Kong Special Administrative Region of the People’s Republic of China (“Hong Kong”), and HeDeTang HK held 73.42%
of the equity interest of SkyPeople Juice Group Co., Ltd., (“SkyPeople (China)”), a company incorporated under the laws of
the PRC. SkyPeople (China) had eleven subsidiaries in the PRC, which were mainly involved in the production and sales of fruit juice
concentrates, fruit juice beverages and other fruit-related products in the PRC and overseas markets. On February 27, 2020, SkyPeople
BVI (the “Seller”) completed the transfer of its ownership of HeDeTang HK to New Continent International Co., Ltd. (the “Buyer”),
an unrelated third party and a company incorporated in the British Virgin Islands for a total price of RMB 0.6 million (approximately
$85,714), pursuant to a Share Transfer Agreement entered into by the Seller and the Buyer on September 18, 2019 and approved at the special
shareholders meeting of the Company on February 26, 2020 (the “Sale Transaction”). SkyPeople BVI had no operational assets
or business after the transfer and the Company dissolved SkyPeople BVI on July 27, 2020.
CCM Shopping Mall
Due to the lack of new member subscriptions caused
by restrictions on our promotion strategy for the control of spread of COVID-19, we have transformed the CCM shopping mall from a member
based platform to a sale agent based eCAAS platform. The eCAAS platform is entrusted by the Anti-Counterfeiting Committee to run its
Responsible Brand Program.
Anti-Counterfeiting Committee will review and
accept the companies to join its Responsible Brand Program. After acceptance, these companies are authorized to use 315 anti-counterfeiting
labels on their products and sell them on our eCAAS platform. The companies can also use sales agents to sell their products on our eCAAS
platform and parties can negotiate the commission percentages for the products sold. Any new sales agent must be recommended by existing
agents and pay a one-time fee to the eCAAS platform to be admitted as the authorized agent to provide sales agent services on the platform.
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Coal and Aluminum Ingots Supply Chain Financing
Service and Trading
Since the second quarter
of 2021, we started coal supply chain financing service and trading business. Since the third quarter of 2021, we started aluminum ingots
supply chain financing service and trading business.
Our supply chain finance business mainly serves
the receivables and payables of industrial customers, obtains the creditor’s rights or commodity goods rights of large state-owned
enterprises through trade execution, provides customers with working capital, accelerates capital turnover, and then expands the business
scale and improves the industrial value.
Through our supply chain service ability and
customer resources, we can tap into low-risk assets, flexibly carry out financial services around the actual financial needs of certain
industries, and reduce the overall risk of the business by using the control of business flow, goods logistics and capital flow in the
process of commodity circulation.
We focus on bulk coal and aluminum ingots and
take large state-owned or listed companies as the core service targets; We use our own funds as the operation basis, actively uses a
variety of channels and products for financing, such as banks, commercial factoring companies, accounts receivable, asset-backed securities,
and other innovative financing methods to obtain sufficient funds.
We sign purchase and sale agreements with suppliers and buyers. The
suppliers are responsible for the supply and transportation of coal to the end users’ designated freight yard or transfer the title
of aluminum ingots to us in certain warehouses. We also provide trading service as we don’t take control over the ownership of the
goods and lower margin for the transaction. We select the customers and suppliers that have good credit and reputation.
The Company’s revenues are substantially
reported on a net basis as the supply chain service is primarily responsible for providing the underlying supply chain service and the
Company does not control the service provided by the supply chain supplier to the customer.
Asset Management
Service
NTAM engages assets management and advisory services.
NTAM’s main revenue is generated from providing professional advices to customers and management fees for managing the investment
of the clients. NTAM is licensed under the Securities and Futures Commission of Hong Kong (SFC) for carrying out regulated activities
in “Advising on Securities” and “Asset Management”. NTAM offers diversified asset management portfolio for professional
investors. Assets of NTAM’s clients are held in banks, where clients gave the banks their authorization allowing NTAM to place
trading instructions on behalf of the clients in order to manage the clients’ assets.
NTAM mainly engages in following asset management services for its
clients:
(1) Equity Investment
NTAM manages clients’ investment portfolio
in stocks of the companies listed on the international market with strong liquidity. At the same time, it selects companies that have
unique or differentiated businesses, realizing above average profit growth.
(2) Debt investment
When NTAM manages clients’ investment portfolio
in bonds that are denominated in major international currencies such as US dollar, euro and sterling, the issuer of debts shall have
good credit rating and asset liability ratio. Through active management, NTAM focuses in bonds with higher yield to maturity among bonds
with the same maturity and credit rating.
(3) Precious metals and currencies investment
NTAM also manages clients’ investment portfolio
in major international currencies and precious metals, including US dollar, euro, British pound, Japanese yen, Australian dollar and
offshore Chinese yuan. Precious metals include gold, platinum and silver. With research on the fundamentals of market supply and demand
to predict the trend of commodity prices, NTAM endeavors to improve the rate of return for clients through dual currency investment,
options and structured products.
(4) Derivative Investment
NTAM also manages clients’ investment portfolio
in financial derivatives in different asset classes, such as options and structured products.
(5) External Asset Management Services (EAM)
This business takes customer demand as the service
purpose, cooperates with several private banks which provide asset custody services, and innovatively introduces the function of investment
bank to provide exclusive private solutions for our clients.
NTAM’s main revenue is generated from providing
professional advices to clients and management fees for managing the investment of the clients. As of March 15, 2023, NTAM has approximately
US$300 million assets under its management.
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Money Transfer Business
FTFT Finance UK Limited (“FTFT Finance”)
formerly known as Khyber Money Exchange Ltd. was acquired by FTFT UK in September 2022. It is regulated by UK Financial Conduct Authority
(“FCA”) for its cross-border money transfer systems and service. FTFT Finance was incorporated in 2009 and is a pioneer in
the UK for money remittance services. FTFT Finance provides money transfer services through its platform to transfer money around the
world via one of its agent locations or its online portal, mobile platform, or over the phone. FTFT Finance is headquartered in the UK
and it has a trade name of FTFT Pay. FTFT Finance’s plan is to develop products and services across different regions of the world
and become a global name in money remittance services.
FTFT Finance is a financial platform that enables
its customers to send their hard-earned money to their country of origin, or any other country of their liking, with ease and at a reasonable
cost, transparent exchange rate and without any hidden charges. We believe that it is our understanding of our customers and their diverse
backgrounds that has helped FTFT Finance to become a credible and trustworthy money remittance business. The FTFT Pay platform and system
support direct connections to over 130 countries and their local banks, targeting customers with transfer destinations based in prominent
countries across the Middle East and Southeast Asia.
Remittance service is a highly saturated market
in the United Kingdom. There are many companies that offer remittance services however FTFT Finance only sees Ace Money Transfer, Wise
(formerly known as Transfer Wise), Remitly and Remit World as its main competitors.
FTFT Finance has an edge over companies like wise
in many different ways, for example, FTFT Finance offers competitive rates for our services and does not charge customer fees for remittance to Pakistan as it receives
its rebate from local banks is Free of Cost. This
approach provides gives us an advantage over our competitors.
In the Year 2022, the total UK Remittance
Market was estimated to be valued at $49.55 billion with a growth rate of 6.0% according to a report of Remittance Brave Global
Headwinds of World Bank in November 2022. It is also estimate that by the year 2027 the UK’s remittance market will be $66.5 billion according
to the UK remittance statistics from Finder.com.
Expats living in the United Kingdom often send
money to their relatives either to support them, or for emergency uses or weddings. The UK has a large migrant population of Indians,
Pakistanis and Bangladeshis.
FTFT Finance has been in money remittance business
since 2009 and has over 500,000 customers. FTFT Finance advertises through Instagram, Twitter, Facebook and LinkedIn in order to reach
out to new customers. FTFT Finance implemented email marketing, in which they email customers daily to keep them updated on their account,
transactions as well as marketing and promotions.
The management of FTFT Finance are currently engaged
in talks with different PR companies to kick start a new campaign under FTFT Finance brand name as all previous campaigns were under Khyber
Money Exchange brand.
Recent Developments Related to the COVID-19
Outbreak
In December 2019, a
novel strain of coronavirus was reported and has spread throughout China and other parts of the world. On March 11, 2020, the World Health
Organization characterized the outbreak as a “pandemic”. In early 2020, Chinese government took emergency measures to
combat the spread of the virus, including quarantines, travel restrictions, and the temporary closure of office buildings and facilities
in China. In response to the evolving dynamics related to the COVID-19 outbreak, the Company followed the guidelines of local authorities
as it prioritizes the health and safety of its employees, contractors, suppliers and business partners. Our offices in China were closed
and the employees worked from home at the end of January 2020 until late March 2020. The quarantines, travel restrictions, and the temporary
closure of office buildings have materially negatively impacted our business. Our suppliers were negatively affected, and could continue
to be negatively affected in their ability to supply and ship products to our customers in case of any resurgence of COVID-19. Our customers
that have been negatively impacted by the outbreak of COVID-19 may reduce their budgets to purchase products and services from us, which
may materially adversely impact our revenue. The business operations of the third parties’ stores on our e-commerce platform have
been and continue to be negatively impacted by the outbreak, which in turn adversely affects the business of our platform as a whole
as well as our financial condition and operating results. The outbreak has had and continues to have disruption to our supply chain,
logistics providers, customers or our marketing activities with the new variants of COVID-19, which could materially adversely impact
our business and results of operations, especially to our supply chain financing and trading business during the first quarter of 2022.
There was outbreak in various cities and provinces due to Omicron variant in Xi’an city, Hong Kong, Shanghai and Beijing in 2022,
which have resulted quarantines, travel restrictions, and temporary closure of office buildings and facilities in these cities. In December 2022,
the Chinese government eased its strict zero COVID-19 policy which resulted in a surge of new COVID-19 cases during December 2022 and
January 2023, which has disrupted our business operations in China. The Company’s promotion strategy of CCM Shopping Mall previously
mainly relied on the training of members and distributors through meetings and conferences. Chinese government put a restriction on large
gatherings in 2020 and 2021, which made the promotion strategy for our online e-commerce platforms difficult to implement and the Company
experienced difficulties to subscribe new members for its online e-commerce platforms. Due to the lack of new subscribers, in June
2021, the Company suspended its cross-border e-commerce platform NONOGIRL which has been closed now. Also, since the second quarter of
2021, the Company has transformed its member-based Chain Cloud Mall to a sale agent based eCAAS platform and began to provide supply
chain financing services.
The global economy has
also been materially negatively affected by the COVID-19 and there is continued uncertainty about the duration and intensity of its impacts.
The Chinese and global growth forecast is extremely uncertain, which would seriously affect our business.
While the potential
economic impact brought by, and the duration of COVID-19 and its new variants may be difficult to assess or predict, a widespread pandemic
could result in significant disruption of global financial markets, reducing our ability to access capital, which could negatively affect
our liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 and its new variants could materially
negatively affect our business and the value of our common stock.
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Further, as we do not
have access to a revolving credit facility, there can be no assurance that we would be able to secure commercial debt financing in the
future in the event that we require additional capital. We currently believe that our financial resources will be adequate to see us
through the outbreak. However, in the event that we do need to raise capital in the future, outbreak-related instability in the securities
markets could adversely affect our ability to raise additional capital.
Consequently, our results of operations have
been materially and adversely affected by COVID-19 pandemic. Any potential further impact to our results will depend on, to a large extent,
future developments and new information that may emerge regarding the duration and severity of the COVID-19, new variants of COVID-19,
the efficacy and distribution of COVID-19 vaccines and the actions taken by government authorities and other entities to contain the
COVID-19 or treat its impact, almost all of which are beyond our control.
Discontinued Operations
On September 18, 2019, SkyPeople Foods Holdings
Limited, entered into a Share Transfer Agreement (the “Agreement”) with New Continent International Co., Ltd., (the “Buyer”)
a company incorporated in the British Virgin Islands. Pursuant to the terms of the Agreement, the Buyer purchased 100% ownership of HeDeTang
HK from SkyPeople Foods Holdings Limited, which value is primarily derived from HeDeTang HK’s wholly-owned subsidiary HeDeJiaChuan
Holdings Co., Ltd. and 73.41% owned subsidiary SkyPeople Juice Group Co., Ltd., for a total price of RMB 600,000 (approximately $85,714)
(the “Sale Transaction”). The Sale Transaction was closed on February 27, 2020. In accordance with ASC Topic 205, Presentation
of Financial Statement Discontinued Operations (“ASC Topic 205”), the Company presented the operation results of HeDeTang
HK and its subsidiaries as a discontinued operation, as the Company believed that no continued cash flow would be generated by the discontinued
component and that the Company would have no significant continuing involvement in the operations of the discontinued component. The
total assets of HeDeTang HK were $106.85 million as of February 27, 2020 and the total liabilities of HeDeTang HK were $231.21 million
as of February 27, 2020, resulting in a gain on disposal of $123.69 million. There was no income or loss from HeDeTang HK from January
1, 2020 to the close of Sale Transaction.
On March 11, 2020, the Company’s Board
of Directors passed a resolution to sell the operation of Globalkey Supply Chain Limited and Zhonglian Hengxin Assets Management Co.,
Ltd (“Zhonglian Hengxin”) and close the operation of Digital Online Marketing Limited, SkyPeople Foods Holdings Limited and
Chain Future Digital Tech (Beijing) Co., Ltd. Based on the disposal plan and in accordance with ASC 205-20, the Company presented the
operating results from these operations as a discontinued operation.
On May 7, 2020, Future Business Management Co., Ltd. completed the
transfer of its ownership of Zhonglian Hengxin to an individual third party. On July 24, 2020, the Company’s Board of Directors
passed a resolution to sale the operation of Hedetang Farm Products Trading Markets (Mei County) Co., Ltd. and close the operation of
Chain Cloud Mall Logistics Center (Shaanxi) Co., Ltd, which was dissolved and deregistered in June 2022. On July 27, 2020, Skypeople Foods
Holdings Limited was dissolved; On July 28, 2020, Digital Online Marketing Limited was dissolved;
On November 12, 2020, CCM Tianjin, a wholly owned
subsidiary of the Company entered into an Equity Transfer Agreement with Xi’an Yishengkang Information Technology, Ltd. (“Xi’an
Yishengkang”), an unrelated third party, pursuant to which CCM Tianjin agreed to sell 90% of total issued and outstanding capital
stock of in Hedetang Farm Products Trading Markets (Mei county) Co., Ltd. that it owns to Xi’an Yishengkang for RMB9,000 (approximately
$1,324). On the same date, CCM Logistics entered into another Equity Transfer Agreement with an individual and unrelated third party,
Liyuan Ying, pursuant to which CCM Tianjin agreed to sell 10% of total issued and outstanding capital stock of in Hedetang Farm Products
Trading Markets (Mei county) Co., Ltd. that it owns to Liyuan Ying for RMB1,000 (approximately $147).
On April 9, 2021, FT Commercial Management (Beijing)
Co., Ltd. was dissolved and deregistered.
On August 2, 2021, the Company sold Guangchengji
(Guangdong) Industrial Co., Ltd. to an unrelated third party.
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On September 2, 2021, Future Supply Chain Co.,
Ltd. discontinued its operations, and on November 4, 2021, it completed the transfer of its ownership to Shaanxi Fu Chen Venture Capital
Management Co. Ltd.
On June 27, 2022, Chain Cloud Mall Logistics Center (Shaanxi) Co.,
Limited was dissolved and deregistered.
Segment Information Reclassification
The Company’s businesses mainly are CCM
Shopping Mall, Coal and Aluminum Ingots Supply Chain Financing Service and Trading and Asset Management Services.
Use of Estimates
The Company’s consolidated financial statements
have been prepared in accordance with U.S. GAAP and this requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure at contingent assets and liabilities at the date of the consolidated financial statements
and reported amounts of revenue and expenses during the reporting period. The significant areas requiring the use of management estimates
include the allowance for doubtful accounts receivable, estimated useful life and residual value of property, plant and equipment, impairment
of long-lived assets, provision for staff benefit, valuation of change in fair value of warrant liability, recognition and measurement
of deferred income taxes and valuation allowance for deferred tax assets. Although these estimates are based on management’s knowledge
of current events and actions management may undertake in the future, actual results may ultimately differ from those estimates.
Fair Value of Financial Instruments
On January 1, 2009, the Company adopted FASB
Accounting Standard Codification Topic on Fair Value Measurements and Disclosures (“ASC 820”), which defines fair value,
establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. ASC 820 does not require
any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify
the source of the information. In February 2008, FASB deferred the effective date of ASC 820 by one year for certain non-financial assets
and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). The Company adopted the provisions of ASC 820, except as it applies to those non-financial assets and non-financial
liabilities for which the effective date has been delayed by one year.
ASC 820 establishes a three-level valuation hierarchy
of valuation techniques based on observable and unobservable input, which may be used to measure fair value and include the following:
Level 1 - Quoted prices in active markets for
identical assets or liabilities.
Level 2 - Input other than Level 1 that is observable,
either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active;
or other input that is observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable input that is supported
by little or no market activity and that is significant to the fair value of the assets or liabilities. Classification within the hierarchy
is determined based on the lowest level of input that is significant to the fair value measurement.
Revenue Recognition
The Company adopted ASC 606, Revenue from Contracts
with Customers, from January 1, 2018. The adoption had no impact on the Company’s retained earnings as of January 1, 2018 as well
as the Company’s financial statements for the year ended December 31, 2019. To achieve that core principle, we apply the five steps
defined under Topic 606: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii)
determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize
revenue when (or as) the entity satisfies a performance obligation. We assess its revenue arrangements against specific criteria in order
to determine if it is acting as principal or agent. Revenue is recognized upon the transfer of control of promised goods or services
to a customer. Historically, the Company has not had any returned products. Accordingly, no provision has been made for returnable goods.
The Company is not required to rebate or credit a portion of the original fee if it subsequently reduces the price of its products.
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Foreign Currency and Other Comprehensive Income
The financial statements of the Company’s
foreign subsidiaries are measured using the local currency as the functional currency; however, the reporting currency of the Company
is the United States dollar (“USD”). Assets and liabilities of the Company’s foreign subsidiaries have been translated
into USD using the exchange rate at the balance sheet date, while equity accounts are translated using historical exchange rate. The
average exchange rate for the period has been used to translate revenues and expenses. Translation adjustments are reported separately
and accumulated in a separate component of equity (cumulative translation adjustment).
Other comprehensive income for the years ended
December 31, 2022 and 2021 represented foreign currency translation adjustments and were included in the consolidated statements of comprehensive
income.
There is no guarantee the RMB amounts could have
been, or could be, converted into USD at rates used in translation.
Income Taxes
Income taxes are provided on an asset and liability
approach for financial accounting and reporting of income taxes. Any tax paid by subsidiaries during the year is recorded. Current tax
is based on the profit or loss from ordinary activities adjusted for items that are non-assessable or disallowable for income tax purpose
and is calculated using tax rates that have been enacted at the balance sheet date. Deferred income tax liabilities or assets are recorded
to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and the financial reporting
amounts at each period end. A valuation allowance is recognized if it is more likely than not that some portion, or all, of a deferred
tax asset will not be realized.
ASC 740 provides guidance for recognizing and
measuring uncertain tax positions, and it prescribes a threshold condition that a tax position must meet for any of the benefits of the
uncertain tax position to be recognized in the financial statements. ASC 740 also provides accounting guidance on derecognizing, classification
and disclosure of these uncertain tax positions.
Impairment of Long-Lived Assets
In accordance with the FASB ASC 360-10, Accounting
for the Impairment or Disposal of Long-Lived Assets, long-lived assets, such as property, plant and equipment and purchased intangibles
subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an
asset may not be recoverable. It is reasonably possible that these assets could become impaired as a result of technological or other
industrial changes. Determination of recoverability of assets to be held and used is by comparing the carrying amount of an asset to
future net undiscounted cash flows to be generated by the assets.
If such assets are considered to be impaired,
the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Recent Accounting Pronouncements
We have reviewed all the recently issued, but
not yet effective, accounting pronouncements and we do not believe any of these pronouncements will have a material impact on the Company.
See Note 2. Summary of Significant Accounting Policies, to our Consolidated Financial Statements for a description of applicable recent
accounting pronouncements.
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Comparison of Operation Results of years ended
December 31, 2022 and 2021
Revenue
The following table presents our consolidated
revenues for our main products and services for the fiscal years 2022 and 2021, respectively, (in thousands):
Year ended December 31, Change
CCM Shopping Mall Membership $ - $ 0.09 $ (0.09 ) (100.00 )%
Revenue decreased from $25.05 million in 2021
to $23.88 million in 2022, decrease of $1.17million or 4.67%. The decrease in overall revenue was mainly due to decrease in revenues generated
from asset management services and supply chain financing service and trading business.
The Company has transformed its business model
of CCM Shopping Mall from a member-based platform to a sales agent based eCAAS platform. Due to COVID-19 related restriction and slow-down
of economy in China, we were unable to revenue for the sales agent based eCAAS platform during the year ended 2022.
Revenues from coal and aluminum ingots supply chain financing service
and trading business decreased from $19.73 million for year ended 2021 to $10.11 million for the year ended 2022. The COVID-19 outbreak
in Xi’an and other cities in China where we had our supply chain services and related control measures by local government in 2022
has had negative impact on the coal and aluminum ingot business and we also had more business in sales agent type trading service mode
which we did not take ownership of the goods but receive lower margin for the transactions in the third and fourth quarters of 2022, which
resulted the decrease in revenue in the year 2022 comparing to the same period of 2021.
Asset management service fee increased from $5.32 million for the year
ended 2021 to $13.63 million for the year ended 2022. We acquire this new business on August 6, 2021 and only consolidated partial of
its revenues for the five months revenues for the year ended December 31, 2021, comparing to full year revenues for 2022.
Gross Margin
(in thousands)
Gross profit Gross margin Gross profit Gross margin
CCM Shopping Mall Membership $ - - 0.09 98.95 %
Coal and Aluminum Ingots Supply Chain Financing/Trading 339 3.35 % 510 2.58 %
Overall
gross margin as a percentage of revenue was 22.59% for the year ended 2022, an increase of 15.4% compared to
7.19% for the same period of last fiscal year, mainly due to more revenues from the asset management service which had a
higher gross margin.
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Operating Expenses
The following table presents consolidated operating
expenses and operating expenses as a percentage of revenue for 2022 and 2021, respectively, (in thousands):
Amount % of revenue Amount % of revenue
General and administrative expenses increased
by $6.8 million, or 88.51%, from $7.7million to $14.47 million for the year ended 2022, compared to the same period of last fiscal year.
The increase in general and administrative expenses was mainly due to increased professional service fees for acquisition projects and
certain training and consulting fees for the acquired and newly established companies during the year ended December 31, 2022.
Selling expenses increased by $0.44 million to
$0.81 million in 2022 as compared to $0.37 million in 2021, the increase in selling expenses was mainly due to increased salary and advertising
fees.
Stock compensation expense was $1.28 million during the year ended
December 31, 2022, as the Compensation Committee of the Board of Directors (the “Board”) of the Company granted certain shares
of common stock of the Company to certain officers and employees in July 2022. Stock compensation expense was decreased 76.68% from $5.49
million in the year ended December 30, 2021 to $1.28 million in same period of 2022, mainly due to our stock price was lower in 2022 than
in 2021.
The Company recorded $0.91 million of impairment
loss in the year ended December 31, 2022 relating to short term investment which mainly due to Future Private Equity Fund Management
(Hainan) Co., Ltd. invested $1.87 million (RMB13,000,000) to entrust Shanghai Yuli Enterprise Management Consulting Firm to invest in
various types of investment portfolios. The impairment loss relating to the short term investment is due to that overall economic environment
has worsened in China with Covid-19 outbreak and related lockdown in various cities in China in 2022, Ukraine war, inflation, looming
recession worldwide. According to the market value, the Company’s balance of the short term investment was $0.91 million on December
31, 2022.
Loss from Operations
Loss from operations increased by $1.57 million to $14.77 million for
2022 from $13.21 million for 2021, mainly due to decrease in revenue.
Noncontrolling Interests
Shaanxi Chunlv Ecological Agriculture Co., Ltd.
(“Shaanxi Chunlv”) holds 20.0% interest in Chain Cloud Mall Logistics Center (Shaanxi) Co., Limited, which was dissolved and
deregistered on June 27, 2022. Nature Worldwide Resources Ltd. holds 40% interest in DCON DigiPay Limited (“DCON Digipay”).
Each of Bin Wu and Lixiong Huang holds 25% and 20% interest in FTFT Capital Investments L.L.C., respectively. Aspenwood Capital Partner
Limited holds 5%, Cheung Hiu Tung holds 2.22% and Choi Tsz Leung holds 2.78% of equity interest of NATM. Yaohua Dai holds
20% equity interest of Future Fintech Digital Capital.
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Loss per Share
Basic and diluted loss per share from continuing
operations were $0.19 and $0.19 in fiscal 2022, as compared to $0.17 and $0.17 in fiscal 2021, respectively. Basic and diluted loss per
share attributable to discontinued operations was nil and nil for fiscal year 2022 as compared to basic and diluted income per share
$0.04 and $0.04 for fiscal year 2021 respectively.
Liquidity and Capital Resources
As of December 31, 2022, we had cash and cash equivalents of $26.15
million, a decrease of $24.12 million, from $50.27 million as of December 31, 2021. The decrease in cash, cash equivalents was mainly
due the loss in operations and the Company did not issue shares of common stock to raise money for the year ended December 31, 2022 comparing
to the same period of 2021.
Our working capital has historically been generated
from our operating cash flows, advances from our customers and loans from bank facilities. Our working capital was $46.42 million as
of December 31, 2022, an increase of $19.07 million from $65.49 million as of December 31, 2021, mainly due to an increase in current
assets.
In 2022, net cash used in our operating activities
was $2.69 million compared to net cash used in operating activities of $18.74 million in 2021. The decrease in net cash used by operating
activities was primarily due to an increase in accounts payable and notes payable during the year ended December 31, 2022.
In 2022, net cash used in our investing activities
was $14.18 million compared to net cash used in operating activities of $11.18 million in 2021 mainly due to payment for loan receivable
and repayment for loan receivable.
In 2022, cash provided by financing activities
was negative $0.25 million as compared to cash used in financing activities positive $69.27 million in 2021. The decrease in cash provided
by financing activities was mainly due to financing from the issuance of shares of common stock.
Off-Balance Sheet Arrangements
As of December 31, 2022, we did not have any
off-balance sheet arrangements.
ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not applicable.
ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this item is included
in the Company’s consolidated financial statements beginning on page F-1 of this Annual Report on Form 10-K.
ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A – CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our
CEO and CFO, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e)
and 15d-15(e) of the Exchange Act, as of December 31, 2022.
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The term “disclosure controls and procedures”
as defined in Rules 13a-15(e) and 15d-15(e) means controls and other procedures of the Company that are designed to ensure that information
required to be disclosed by a company in reports, such as this report, that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it
files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive
and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that
any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives,
and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based
on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were not effective as of December 31, 2022,
due to a material weakness in our internal control over financial reporting. We have weakness of controls over i) loans to third
parties; ii) identify the related party transaction; iii) assessment for impairment and iv) lack sufficient accounting personnel with
the appropriate level of knowledge, experience and training in U.S. GAAP and SEC reporting requirements.
Management’s Report on Internal Controls
Over Financial Reporting
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide
reasonable assurances regarding the reliability of financial reporting and the preparation of our consolidated financial statements in
accordance with U.S. GAAP. Our accounting policies and internal controls over financial reporting, established and maintained by management,
are under the general oversight of the Board’s audit committee.
Our internal control over financial reporting
includes those policies and procedures that:
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance
with the policies or procedures may deteriorate.
Management assessed our internal control over
financial reporting as of December 31, 2022.
The standard measures adopted by management in
making its evaluation are the measures in the Internal-Control Integrated Framework published by the Committee of Sponsoring Organizations
of the Treadway Commission.
Based on management’s assessment, our CEO
and CFO concluded that our internal control over financial reporting as of December 31, 2022 was ineffective. We have taken, and
will take, certain actions to remediate the material weakness related to our lack of U.S. GAAP and SEC reporting experience. We engaged
a consultant with U.S. GAAP knowledge and experience to supplement our current internal accounting personnel and assist us in the preparation
of our financial statements to ensure that our financial statements are prepared in accordance with U.S. GAAP. We will engage an internal control consultant to improve our internal
control procedures on loans to third parties, related party transactions management and assessment for impairment. We are also planning
to arrange additional training of internal control for our employees and management on disclosure controls and procedures.
The Company continues to make efforts to implementing
our existing and newly adopted procedures to improve our disclosure controls and internal controls over financing reporting.
Changes to Internal Control over Financial
Reporting
Other than discussed above, there has been no
change to our internal control over financial reporting that occurred during the period covered by this annual report on Form 10-K that
has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.