Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
No ☒
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ☐ No ☒
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge,
in definitive proxy statement or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. Yes ☐ No ☐
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions
of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company
(as defined in rule 12b-2 of the Exchange Act). Yes ☐ No
☒
The aggregate market value of voting and nonvoting stock held
by non-affiliates of the registrant, based upon the closing price of $1.25 per share for shares of the registrant’s Common
Stock on June 28, 2019, the last business day of the registrant’s most recently completed second fiscal quarter as reported
by the NASDAQ Capital Market, was approximately $9.57 million.
The number of shares of Common Stock outstanding as of May 29,
2020 was 38,345,415.
In response to
a comment letter received from the Securities and Exchange Commission (the “SEC”), dated September 29, 2020, Future
FinTech Group, Inc. (the “Company,” “we,” “us” or “our”) is filing this Amendment
No. 1 on Form 10-K/A to our Annual Report on Form 10-K for the year ended December 31, 2019, originally filed with the SEC
on June 2, 2020 (the “Original Form 10-K”) to correct typographical errors in Item 7 Management’s Discussion
and Analysis of Financial Condition and Results of Operation and on page F-17 of the Original Form 10-K which incorrectly stated
our long term investment in InUnion Chain Limited (“InUnion”) included the INU Digital Assets Token and 10% equity
investment in InUnion, however, it should only be 10% equity investment in InUnion without any INU Digital Assets Token as the
Company didn’t purchase or own any INU Digital Assets Token. Except as described above, this Form 10-K/A does not modify,
amend, or otherwise supplement the Original Form 10-K.
This Form 10-K/A
should be read in conjunction with the Company’s periodic filings made with the SEC subsequent to the filing date of the
Original Form 10-K, including any amendments to those filings, as well as any Current Reports, filed on Form 8-K subsequent to
the date of the Original Form 10-K. In addition, in accordance with applicable rules and regulations promulgated by the SEC, the
Company’s Chief Executive Officer and Chief Financial Officer are providing currently dated certifications in connection
with this Form 10-K/A. The certifications are filed as Exhibits 31.1, 31.2, 32.1 and 32.2. Because this Form 10-K/A sets forth
the Original Form 10-K in its entirety, it includes both items that have been changed as a result of the amended disclosures and
items that are unchanged from the Original Form 10-K. Other than the revision of the disclosures as discussed above, this Form
10-K/A speaks as of the original filing date of the Original Form 10-K and has not been updated to reflect other events occurring
subsequent to the original filing date. This includes forward-looking statements and all other sections of this Form 10-K/A that
were not directly impacted by this amendment, which should be read in their historical context.
On March 25, 2020 we filed a Current Report
on Form 8-K in compliance with and in reliance upon the SEC Order issued pursuant to Section 36 of the Securities Exchange Act
of 1934, as amended, granting Exemptions from Specified Provisions of the Exchange Act and Certain Rules thereunder (SEC Release
No. 34-88465 on March 25, 2020) (the “Relief Order”). By way of filing the Current Report, we, among other things,
extended the time of filing of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the “Annual Report”),
until no later than May 14, 2020 in reliance on the Relief Order. The Current Report disclosed the reasons that our Annual Report
could not be filed timely.
As required by the Relief Order, we hereby
disclose that we were unable to timely file our Annual Report and had to avail ourselves of the Relief Order because of the following
issues posed by the COVID-19 outbreak:
In December 2019, a novel strain of coronavirus
was reported to have surfaced in Wuhan, China, which has and is continuing to spread throughout China and other parts of the world,
including the United States. On January 30, 2020, the World Health Organization declared the outbreak of the coronavirus disease
(COVID-19) a “Public Health Emergency of International Concern,” and on March 11, 2020, the World Health Organization
characterized the outbreak as a “pandemic”. Xi’an City and Beijing City, where our headquarters are located,
are among the most affected areas in China. The Company has been following the orders of local government and health authorities
to minimize exposure risk for its employees, including the closures of its offices and having employees work remotely. Our offices
were closed for the Lunar New Year Holiday Break in late January 2020 and remained closed as a result of the outbreak until late
March 2020. As a result, the Company’s books and records were not easily accessible, resulting in a delay in the preparation,
audit and completion of the Company’s financial statements for the Annual Report.
This Annual Report on Form 10-K for the
fiscal year ended December 31, 2019 (“Annual Report”) of Future Fintech Group, Inc. (together with our direct or indirect
subsidiaries, “we,” “us,” “our”, “the Company” or “Future FinTech”)
includes forward-looking statements regarding, among other things, Future FinTech’s plans, strategies and prospects,
both business and financial. Although Future FinTech believes that its plans, intentions and expectations reflected in or suggested
by these forward-looking statements are reasonable, Future FinTech cannot assure you that we will achieve or realize these plans,
intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions including,
without limitation, the factors described under “Risk Factors” from time to time in Future FinTech’s
filings with the SEC. Many of the forward-looking statements contained in this presentation may be identified by the use of forward-looking
words such as “believe”, “expect”, “anticipate”, “should”, “planned”,
“will”, “may”, “intend”, “estimated”, “aim”, “on track”,
“target”, “opportunity”, “tentative”, “positioning”, “designed”, “create”,
“predict”, “project”, “seek”, “would”, “could”, “continue”,
“ongoing”, “upside”, “increases” and “potential”, among others. Important factors
that could cause actual results to differ materially from the forward-looking statements we make in this presentation are set
forth in other reports or documents that we file from time to time with the SEC, and include, but are not limited to:
Any or all of our forward-looking statements
in this report may turn out to be inaccurate. They can be affected by inaccurate assumptions we might make or by known or unknown
risks or uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially
as a result of various factors, including, without limitation, the risks outlined under “Item 1A. Risk Factors” in
this Annual Report. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained
in this filing will in fact occur. You should not place undue reliance on these forward-looking statements.
We undertake no obligation to update forward-looking
statements to reflect subsequent events, changed circumstances or the occurrence of unanticipated events except as required by
law.
PART I
ITEM 1 – BUSINESS
Overview
Future FinTech is a holding company incorporated under the laws
of the State of Florida. 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 the Peoples Republic of
China (“PRC”). Due to drastically increased production costs and tightened environmental laws in China, the Company
has been transforming its business from fruit juice manufacturing and distribution to a real-name blockchain e-commerce platform
that integrates blockchain and internet technology. The main business of the Company includes a shopping platform, Chain Cloud
Mall (CCM), which is based on blockchain technology; a cross-border e-commerce platform (NONOGIRL) which is online and has started
its trial operation in March 2020 and is expected for a formal launch in the third quarter of 2020; a blockchain-based application
incubator and a digital payment system (DCON); and the application and development of blockchain-based e-commerce technology and
financial technology.
Chain Cloud Mall adopts a
“multi-vendor hosted stores + platform self-hosted stores” model. The platform supports various marketing methods,
including point rewards programs, coupons, live webcasts, game interaction, and social media sharing. Besides the
blockchain-powered features, CCM is also fully equipped with the same functions and services that other Chinese leading
traditional e-commerce platforms provide.
Based on blockchain technology, CCM is
established to transform the relationship between companies and consumers from traditional selling and buying relationships to
a value-sharing relationship. The platform will fairly distribute the benefit of the entire mall to users who engaged in the promotion,
development, and consumption based on their contributions to the platform. The members of CCM are not only consumers and entrepreneurs
but also participants, promoters and beneficiaries. 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.
Chain Cloud Mall is an enterprise customer
interactive and comprehensive shopping and sales service platform. It is an open network promotion system with a blockchain based
anti-counterfeit system including point issuance, point referral and discount points settlement. The brand-new business model
creates a completely new source of data traffic for enterprises.
Merchants in the Chain Cloud Mall issue
their own blockchain points and anti-counterfeiting QR codes. Every product comes with unique anti-counterfeiting QR codes. Customers
collect the points of the enterprise by scanning products for anti-counterfeiting check with their mobile phones. The successful
collection of the merchant points confirms that the authentication of product from such enterprise. It also enables the Chain
Cloud Mall to record and provide Chain Cloud Mall points to its members upon a successful new member and/or product referral,
which can be used as credit when making purchases on CCM. It incentivize its members to promote the platform and share the products
with their social contacts, which in turn increases the sales through Chain Cloud Mall and helps the Company generate greater
value.
The Company has three direct wholly-owned
subsidiaries: SkyPeople Foods Holding Limited (“SkyPeople BVI”), a company organized under the laws of the British
Virgin Islands, DigiPay FinTech Limited (“DigiPay,”) formerly known as Belkin Foods Holdings Group Limited, which
changed its name on January 4, 2018), a company incorporated under the laws of the British Virgin Islands, and Digital Online
Marketing Limited (“Digital Online”) (formerly known as FullMart Holding Limited, which changed its name on January
5, 2018), a company organized under the laws of the British Virgin Islands. In September 2017, all of Digital Online’s operations
were transferred to a subsidiary of SkyPeople BVI, and Digital Online has no operational assets or businesses.
SkyPeople BVI holds 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 holds
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) has eleven subsidiaries in the PRC, which are 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.
DigiPay holds 100% of the equity
interest of Future FinTech (HongKong) Limited (“FinTech HK”), a company organized under the laws of Hong Kong.
FinTech HK holds 100% of the equity interest of Hedetang Foods (China) Ltd. (“Hedetang Foods (China)”) which
changed its name to China Agricultural Silkroad Finance Lease Ltd. (“Finance Lease”) on May 24, 2018. Finance
Lease transferred two of its subsidiaries to Chain Cloud Mall Network and Technology (Tianjin) Co., Limited (“CCM
Network” or “CCM Tianjin”), namely, Hedetang Farm Products Trading Market (Mei County) Co., Ltd and China
Agricultural Silk Road Trading Center, which changed its name to Chain Cloud Mall Logistics Center (Shaanxi) Co., Limited
(“CCM Logistics”) on April 17, 2019. CCM Network holds 90% of the equity interest of Hedetang Farm Products
Trading Market (Mei County) Co., Ltd. (“Trading Market Mei County”), a company incorporated under the laws of the
PRC. Chain Cloud Mall Logistics Center (Shaanxi) Co., Limited (“CCM Logistics”) holds the remaining 10% of the
equity interest of Trading Market Mei County. Finance Lease also holds 80% of the equity interest of CCM Logistics. Finance
Lease holds 55% of the equity interest of Zhonglian Hengxin Assets Management Co., Ltd. (“Zhonglian Hengxin”).
CCM Logistics holds 100% of the equity interest of GlobalKey Supply Chain Limited (GlobalKey Supply Chain). CCM Logistics is
located in the national kiwifruit Industrial Park of Baoji City. It provides kiwifruit distributors and farmers an integrated
supply chain solution through its distribution network, including transportation, after-sale service and other customer
services.
On July 31, 2019, Chain Cloud Mall Network
and Technology (Tianjin) Co., Ltd., Chain Cloud Mall E-commerce (Tianjin) Co., Ltd., a limited liability company incorporated
under the laws of the China (the “E-commerce Tianjin”), and Mr. Zeyao Xue and Mr. Kai Xu, citizens of China and shareholders
of E-commerce Tianjin, entered into the following agreements, or collectively, the “Variable Interest Entity Agreements”
or “VIE Agreements,” pursuant to which CCM Network has contractual rights to control and operate the business of E-commerce
Tianjin (the “VIE”).
Pursuant to Chinese law and regulations,
a foreign owned enterprise cannot apply for and hold a license for operation of certain e-commerce businesses, the category of
business which the Company plans to expand in China. CCM Network is an indirectly wholly foreign owned enterprise of the Company.
In order to comply with Chinese law and regulations, CCM Network agreed to provide E-commerce Tianjin an Exclusive Operation and
Use Rights Authorization to operate and use the Chain Cloud Mall System owned by CCM Network.
The following is a summary of the currently
effective contractual arrangements relating to E-commerce Tianjin.
Contractual Arrangements with Our Consolidated
Affiliated Entity and Its Respective Shareholders
Our contractual arrangements with our
VIE and their respective shareholders allow us to (i) exercise effective control over our VIE, (ii) receive substantially all
of the economic benefits of our VIE, and (iii) have an exclusive option to purchase all or part of the equity interests in our
VIE when and to the extent permitted by PRC law.
As a result of our direct ownership in
our WFOE and the contractual arrangements with our VIE, we are regarded as the primary beneficiary of our VIE, and we treat them
and their subsidiaries as our consolidated affiliated entities under U.S. GAAP. We have consolidated the financial results of
our VIE in our consolidated financial statements in accordance with U.S. GAAP.
Agreements that Provide us with Effective
Control over our VIE
Exclusive Purchase Option Agreement.
Pursuant to the Exclusive Purchase Option
Agreement, Mr. Zeyao Xue and Mr. Kai Xu granted to CCM Network and any party designated by CCM Network the exclusive right to
purchase, at any time during the term of this agreement, all or part of the equity interests in E-commerce Tianjin, or the “Equity
Interests,” at a purchase price equal to the registered capital paid by Mr. Zeyao Xue and Mr. Kai Xu for the Equity Interests,
or, in the event that applicable law requires an appraisal of the Equity Interests, the lowest price permitted under applicable
law. Pursuant to powers of attorney executed by Mr. Zeyao Xue and Mr. Kai Xu, they irrevocably authorized any person appointed
by CCM Network to exercise all shareholder rights, including but not limited to voting on their behalf on all matters requiring
approval of E-commerce Tianjin’s shareholder, disposing of all or part of the shareholder’s equity interest in E-commerce
Tianjin, and electing, appointing or removing directors and executive officers. The person designated by CCM Network is entitled
to dispose of dividends and profits on the equity interest without reliance on any oral or written instructions of Mr. Zeyao Xue
and Mr. Kai Xu. The powers of attorney will remain in force for so long as Mr. Zeyao Xue and Mr. Kai Xu remain the shareholders
of E-commerce Tianjin. Mr. Zeyao Xue and Mr. Kai Xu have waived all the rights which have been authorized to CCM Network’s
designated person under the powers of attorney.
Equity Pledge Agreement.
Pursuant to the Equity Pledge Agreements,
Mr. Zeyao Xue and Mr. Kai Xu pledged all of the Equity Interests to CCM Tianjin to secure the full and complete performance of
the obligations and liabilities on the part of E-commerce Tianjin and them under this and the above contractual arrangements.
If E-commerce Tianjin, Mr. Zeyao Xue, or Mr. Kai Xu breaches their contractual obligations under these agreements, then CCM Tianjin,
as pledgee, will have the right to dispose of the pledged equity interests. Mr. Zeyao Xue and Mr. Kai Xu agree that, during the
term of the Equity Pledge Agreements, they will not dispose of the pledged equity interests or create or allow any encumbrance
on the pledged equity interests, and they also agree that CCM Tianjin’s rights relating to the equity pledge should not
be interfered with or impaired by the legal actions of the shareholders of E-commerce Tianjin, their successors or designees.
During the term of the equity pledge, CCM Tianjin has the right to receive all of the dividends and profits distributed on the
pledged equity. The Equity Pledge Agreements will terminate on the second anniversary of the date when E-commerce Tianjin, Mr.
Zeyao Xue and Mr. Kai Xu have completed all their obligations under the contractual agreements described above.
Agreements that Allow us to Receive Economic Benefits from
our VIE
Exclusive Technology Consulting and
Service Agreement.
Pursuant to the Exclusive Technology Consulting
and Service Agreement, CCM Tianjin agreed to act as the exclusive consultant of E-commerce Tianjin and provide technology consulting
and services to E-commerce Tianjin. In exchange, E-commerce Tianjin agreed to pay CCM Tianjin a technology consulting and service
fee, the amount of which is to be equivalent to the amount of net profit before tax of E-commerce Tianjin, payable on a quarterly
basis after making up losses of previous years (if necessary) and deducting necessary costs, expenses and taxes related to the
business operations of E-commerce Tianjin. Without the prior written consent of CCM Tianjin, E-commerce Tianjin may not accept
the same or similar technology consulting and services provided by any third party during the term of the agreement. All the benefits
and interests generated from the agreement, including but not limited to intellectual property rights, know-how and trade secrets,
will be CCM Tianjin’s sole and exclusive property. This agreement has a term of 10 years and may be extended unilaterally
by CCM Tianjin with CCM Tianjin’s written confirmation prior to the expiration date. E-commerce Tianjin cannot terminate
the agreement early unless CCM Tianjin commits fraud, gross negligence or illegal acts, or becomes bankrupt or winds up.
Agreements that Provide us with the
Option to Purchase the Equity Interests in and Assets of our VIE
See Exclusive Purchase Option Agreement
above
Spousal Consent Letters. The spouse
of Mr. Kai Xu (Mr. Zeyao Xue is not married) of Chain Cloud Mall E-commerce (Tianjin) Co., Ltd. has signed a spousal consent letter
agreeing that the equity interests in Chain Cloud Mall E-commerce (Tianjin) Co., Ltd. held by and registered under the name of
the shareholder will be disposed pursuant to the contractual agreements with our WFOE. The spouse agreed not to assert any rights
over the equity interest in Chain Cloud Mall E-commerce (Tianjin) Co., Ltd. held by the shareholder.
Through its subsidiaries, DigiPay is mainly
involved blockchain based E-commerce platform and related business.
Organizational Structure
The
following diagram illustrates our corporate structure, including our principal subsidiaries and our VIE as of the December 31,
2019.
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Contractual Arrangements
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Equity Interest
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(1)
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Xi’an Qinmei Food Co., Ltd., an entity not affiliated
with the Company, owns the remaining 8.85% of the equity interest in Shaanxi Qiyiwangguo Modern Organic Agriculture Co., Ltd.
(“Shaanxi Qiyiwangguo”). (The ownership was transferred as a subsidiary of HeDeTang Holdings (HK) Ltd. to New Continent
International Co., Ltd. on February 27, 2020 pursuant to a Share Transfer Agreement entered into by HeDeTang Holdings (HK) Ltd.
and New Continent International Co., Ltd. on September 18, 2019)
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(2)
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SkyPeople Juice Group Co., Ltd., formerly known as Shaanxi
Tianren Organic Food Co. Ltd. (The ownership was transferred as a subsidiary of HeDeTang Holdings (HK) Ltd. to New Continent International
Co., Ltd. on February 27, 2020 pursuant to a Share Transfer Agreement entered into by HeDeTang Holdings (HK) Ltd. and New Continent
International Co., Ltd. on September 18, 2019)
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(3)
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Hedetang Foods Industry (Yidu) Co., Ltd. (“Foods
Industry Yidu”), formerly known as SkyPeople Juice Group Yidu Orange Products Co., Ltd., was established on March 13, 2012.
Its scope of business includes deep processing and sales of oranges. (The ownership was transferred as a subsidiary of HeDeTang
Holdings (HK) Ltd. to New Continent International Co., Ltd. on February 27, 2020 pursuant to a Share Transfer Agreement entered
into by HeDeTang Holdings (HK) Ltd. and New Continent International Co., Ltd. on September 18, 2019)
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(4)
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Hedetang Agricultural Plantations (Yidu) Co., Ltd., formerly
known as Hedetang Fruit Juice Beverages (Yidu) Co., Ltd., was established on March 13, 2012. Its scope of business includes the
planting, acquisition and sales of vegetables, fruits, flowers, farm products; fresh fruit picking; research, training and promotion
of planting and breeding technology. (The ownership was transferred as a subsidiary of HeDeTang Holdings (HK) Ltd. to New Continent
International Co., Ltd. on February 27, 2020 pursuant to a Share Transfer Agreement entered into by HeDeTang Holdings (HK) Ltd.
and New Continent International Co., Ltd. on September 18, 2019)
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(5)
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SkyPeople (Suizhong) Fruit and Vegetable Products Co.,
Ltd. was established on April 26, 2012. Its scope of business includes the initial processing, quick-freezing and sales of agricultural
products and related by-products. (The ownership was transferred as a subsidiary of HeDeTang Holdings (HK) Ltd. to New Continent
International Co., Ltd. on February 27, 2020 pursuant to a Share Transfer Agreement entered into by HeDeTang Holdings (HK) Ltd.
and New Continent International Co., Ltd. on September 18, 2019)
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(6)
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Hedetang Farm Products Trading Market (Mei County) Co.,
Ltd., formerly known as SkyPeople Juice Group (Mei County) Kiwi Fruit and Farm Products Trading Market Co., Ltd. (“Kiwi
Fruit & Farm Products”) was established on April 19, 2013. Its scope of business includes preliminary processing of
agricultural and subsidiary products, establishment of trading markets for agriculture products, and similar activities.
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(7)
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Shaanxi Guo Wei Mei Kiwi Deep Processing Co., Ltd. was
established on April 19, 2013. Its scope of business includes producing kiwi fruit juice, kiwi puree, cider beverages, and similar
products. (The ownership was transferred as a subsidiary of HeDeTang Holdings (HK) Ltd. to New Continent International Co., Ltd.
on February 27, 2020 pursuant to a Share Transfer Agreement entered into by HeDeTang Holdings (HK) Ltd. and New Continent International
Co., Ltd. on September 18, 2019)
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(8)
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Xi’an Hedetang Fruit Juice Beverages Co., Ltd. (“Xi’an
Hedetang”) was established on March 31, 2014. Its scope of business includes the production and sales of fruit juice beverages.
On August 10, 2017, it changed its name to Xi’an Hedetang Nutritious Food Research Institute Co., Ltd. (The ownership was
transferred as a subsidiary of HeDeTang Holdings (HK) Ltd. to New Continent International Co., Ltd. on February 27, 2020 pursuant
to a Share Transfer Agreement entered into by HeDeTang Holdings (HK) Ltd. and New Continent International Co., Ltd. on September
18, 2019)
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(9)
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Xi’an Cornucopia International Co., Ltd. (“Cornucopia”)
was established on July 2, 2014. Its scope of business includes the retail and wholesale of pre-packaged food. (The ownership
was transferred as a subsidiary of HeDeTang Holdings (HK) Ltd. to New Continent International Co., Ltd. on February 27, 2020 pursuant
to a Share Transfer Agreement entered into by HeDeTang Holdings (HK) Ltd. and New Continent International Co., Ltd. on September
18, 2019)
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(10)
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Shaanxi Fruitee Fun Co., Ltd. (“Fruitee Fun”) was established on July 3, 2014. Its scope of business includes retail and wholesale of pre-packaged food. Shaanxi Fruitee Fun Co., Ltd. (also known as Shaanxi Guoweiduomei Beverage Co., Limited) changed its name to Hedetang Foods Industry (Xi’an) Co., Ltd. (“Foods Industry Xi’an”) on July 5, 2016. On June 6, 2017, it again changed its name to HedeJiachuan Foods (Xi’an) Co. Ltd. (The ownership was transferred as a subsidiary of HeDeTang Holdings (HK) Ltd. to New Continent International Co., Ltd. on February 27, 2020 pursuant to a Share Transfer Agreement entered into by HeDeTang Holdings (HK) Ltd. and New Continent International Co., Ltd. on September 18, 2019)
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(11)
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Hedetang Holding Group Co., Ltd., formerly known as Hedetang Holding Co., Ltd., (“Hedetang Holding”) was established on July 21, 2014. Its scope of business includes corporate investment consulting, corporate management consulting, corporate image design and corporate marketing planning. On June 14, 2017, it changed its name to HedeJiachuan Holding Group Co. Ltd. (The ownership was transferred as a subsidiary of HeDeTang Holdings (HK) Ltd. to New Continent International Co., Ltd. on February 27, 2020 pursuant to a Share Transfer Agreement entered into by HeDeTang Holdings (HK) Ltd. and New Continent International Co., Ltd. on September 18, 2019)
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(12)
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The Company acquired Huludao Wonder Co. Ltd. (“Huludao”) on September 10, 2008. Its scope of business mainly includes the manufacture and sale of concentrated fruit juice and fruit juice beverages. (The ownership was transferred as a subsidiary of HeDeTang Holdings (HK) Ltd. to New Continent International Co., Ltd. on February 27, 2020 pursuant to a Share Transfer Agreement entered into by HeDeTang Holdings (HK) Ltd. and New Continent International Co., Ltd. on September 18, 2019)
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(13)
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The Company acquired Yingkou Trusty Fruits Co., Ltd. (“Yingkou”) on November 25, 2009. Its scope of business mainly includes the manufacture of concentrated fruit juice. (The ownership was transferred as a subsidiary of HeDeTang Holdings (HK) Ltd. to New Continent International Co., Ltd. on February 27, 2020 pursuant to a Share Transfer Agreement entered into by HeDeTang Holdings (HK) Ltd. and New Continent International Co., Ltd. on September 18, 2019)
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(14)
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Hedetang Foods Industry (Jingyang) Co., Ltd. (“Foods Industry Jingyang”) was established on September 7, 2016. Its scope of business includes processing, storage and sales of farm products, fruits, tea and snacks; as well as research and promotion of processing technology of organic agriculture, fruit industry and agricultural products. (The ownership was transferred as a subsidiary of HeDeTang Holdings (HK) Ltd. to New Continent International Co., Ltd. on February 27, 2020 pursuant to a Share Transfer Agreement entered into by HeDeTang Holdings (HK) Ltd. and New Continent International Co., Ltd. on September 18, 2019)
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(15)
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HedeJiachuan Foods (Yichang) Co. Ltd (“Hedejiachuan Yichang”), formerly known as Hedetang Farm Products Trading Market (Yidu) Co., Ltd., and Hedetang Foods Industry (Yichang) Co., Ltd, was established on March 23, 2016. Its scope of business includes construction, operation, and property management of a farm products trading market; e-commerce services for farm products; and construction and operation management of an e-commerce information platform. (The ownership was transferred as a subsidiary of HeDeTang Holdings (HK) Ltd. to New Continent International Co., Ltd. on February 27, 2020 pursuant to a Share Transfer Agreement entered into by HeDeTang Holdings (HK) Ltd. and New Continent International Co., Ltd. on September 18, 2019)
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(16)
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Yichang Old Orchard Morden Specialized Farmers Cooperatives Union (“Old Orchard”) was established on April 8, 2016. Its main business scope is the purchase, sales, trading and reprocessing of farm products, development of products for the union, introducing new technology and new plants, and technology training for union members. Old Orchard dissolved in 2020 and canceled its registration with the State Administration for Industry and Commerce of the People’s Republic of China (the “SAIC”) on April 7, 2020. (The ownership was transferred as a subsidiary of HeDeTang Holdings (HK) Ltd. to New Continent International Co., Ltd. on February 27, 2020 pursuant to a Share Transfer Agreement entered into by HeDeTang Holdings (HK) Ltd. and New Continent International Co., Ltd. on September 18, 2019)
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(17)
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The Company acquired Hedetang Foods (China) Co., Ltd. (“Hedetang Foods China”) on May 18, 2016 through the acquisition of DigiPay FinTech Limited (formerly known as Belking Foods Holdings Group Co., Ltd.), the 100% indirect shareholder of Hedetang Foods China, on the same date. It changed its name to China Agricultural Silkroad Finance Lease Ltd. on May 24, 2018. The scope of business of China Agricultural Silkroad Finance Lease Ltd. includes consulting services for corporate bankruptcy and liquidation, mergers and acquisitions, assets restructuring, corporate listing and disposal services of non-performing assets.
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(18)
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Hedetang Agricultural Plantations (Mei County) Co., Ltd.
was established on September 2, 2016. Its scope of business includes the planting, acquisition and sales of vegetables, fruits,
flowers, Chinese herbal medicine, and farm products; fresh fruit picking; research, training and promotion of planting and breeding
technology, development and training for E-commerce and online sales of agricultural and sideline products. On September 6, 2017,
it changed its name to Shaanxi China Agricultural Silk Road Farm Products Trading Center Co., Ltd. On April 17, 2019, it changed
its name to Chain Cloud Mall Logistics Center.
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(19)
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Hedetang Foods Industry (Zhouzhi) Co., Ltd. (“Foods
Industry Zhouzhi”) was established on November 29, 2016. Its scope of business includes production, processing and sales
of kiwifruit wine, juice, puree and beverages; storage and sales of fresh fruits; and import and export of a variety of products
and technology. (The ownership was transferred as a subsidiary of HeDeTang Holdings (HK) Ltd. to New Continent International Co.,
Ltd. on February 27, 2020 pursuant to a Share Transfer Agreement entered into by HeDeTang Holdings (HK) Ltd. and New Continent
International Co., Ltd. on September 18, 2019)
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(20)
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Future FinTech (HongKong) Limited (“FinTech HK”),
formerly known as Future World Trading (Hong Kong) and SkyPeople International Trading (HK) Limited, was first established on
July 27, 2016. It mainly engages in the import and export of food products.
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(21)
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GlobalKey Supply Chain Limited, formerly known as Shaanxi
Quangoutong E-commerce Inc., was acquired on May 27, 2017. Its main business scope includes computer hardware and software development
and sales, electronic products and communication equipment, computer network engineering design, business information consultation,
online sales and online marketing, and investment management.
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(22)
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Shaanxi Heying Trading Co. Ltd was established on December
17, 2009. Its main business scope includes the sales of pre-packaged food and bulk food; import and export of goods and technology;
food technology research and development; business management and consulting; and corporate planning services. (The ownership
was transferred as a subsidiary of HeDeTang Holdings (HK) Ltd. to New Continent International Co., Ltd. on February 27, 2020 pursuant
to a Share Transfer Agreement entered into by HeDeTang Holdings (HK) Ltd. and New Continent International Co., Ltd. on September
18, 2019)
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(23)
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Zhonglian Hengxin Assets Management Co., Ltd. (“Zhonglian
Hengxin”) was established in Xi’an in 2017. Its main business scope includes asset management (except for financial,
securities, futures and other restricted items); asset acquisition, asset disposal and asset operation (except for financial,
securities, futures and other restricted items); planning and advisory services for corporate restructures and mergers and acquisitions;
equity and real estate investment (no public offerings, restricted to investment through assets of the company itself); financial
business process outsourcing entrusted by financial institutions; financial information technology outsourcing entrusted by financial
institutions; and financial knowledge process outsourcing. Any such businesses that require approval by government agencies shall
only operate within the scope of such approval.
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(24)
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Shenzhen Hedetang Industrial Co., Ltd. (“Shenzhen
Hedetang”) was established on September 29, 2017. Its main business scope includes industrial projects (specific items to
be declared separately); domestic trade; and import and export businesses. (The ownership was transferred as a subsidiary of HeDeTang
Holdings (HK) Ltd. to New Continent International Co., Ltd. on February 27, 2020 pursuant to a Share Transfer Agreement entered
into by HeDeTang Holdings (HK) Ltd. and New Continent International Co., Ltd. on September 18, 2019)
|
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(25)
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DigiPay FinTech Limited (“DigiPay FinTech”),
formerly known as Belking Foods Holdings Group Co., Ltd., was established on May 3, 2016.
|
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(26)
|
QR (HK) Limiter (“QR HK”), formerly known as
GlobalKey Holdings Limited, was established on January 13, 2012 and its name was changed on October 23, 2018. It was established
mainly to engage in product import and export.
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(27)
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DCON DigiPay Limited (“DCON DigiPay”) was established
on February 5, 2018 in Tokyo, Japan. Its main business scope includes the development and marketing of a blockchain based payment
system, computer software, asset management consulting, and business consulting.
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(28)
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Future Digital FinTech (Xi’an) Co., Ltd. (“FinTech
(Xi’an)”) was established on February 9, 2018 in Xi’an. Its main business scope includes software development
and marketing, information consulting services, and financial information technology development.
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(29)
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GlobalKey SharedMall Limited (“GlobalKey SharedMall”)
was established on March 6, 2018 in the Cayman Islands. Its main business scope includes an online trading and shopping platform
for fresh fruits, juices and other products and services, using blockchain technology.
|
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(30)
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Chain Future Digital Tech (Beijing) Co., Ltd, (“Chain
Future”) was established on July 10, 2018. Its main business scope includes technical services and technology transfer,
development, promotion and consultation; wholesale of computers, software and auxiliary equipment, electronic products, and other
related products. This company focuses its business on acting as an accelerator for blockchain projects and it provides basic
support including technical support, whitepaper editing, solution design and financial management services for its clients. Its
business also includes training and cultivating technicians for blockchain projects, providing consultation services regarding
cryptocurrency exchanges and tokens listing matters, as well as marketing-related services.
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(31)
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Chain Future Digital Tech (Tianjin) Co., Ltd, (“Chain
Future Tianjin”) was established on November 12, 2018. Its main business scope includes digital technology development,
technology transfer, technical consultation and technical services; services in business incubation; development and sales of
software technology; computer system integration services; company management consulting; financial information consulting; technology
services on computer system, basic software, application software; exhibition services; meeting services; and advertisement business.
Its business also includes training and cultivating technicians for blockchain projects, providing consultation services regarding
cryptocurrency exchanges and tokens listing matters, as well as marketing-related services. Chain Future Tianjin dissolved in
2019 and canceled its registration with State Administration for Market Regulation (SAMR and formerly known as SAIC) on November
4, 2019.
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(32)
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The Company acquired 19.88% shares of Hedetang Holdings
(Shenzhen) Co., Limited which is an NEEQ listed company, through Shenzhen Hedetang Industrial Co., Ltd on March 26, 2018. The
business scope of Hedetang Holdings (Shenzhen) Limited is information consultation (excluding restricted projects and talent intermediary
services); import and export business (except for the items prohibited by law, administrative regulations and the state council,
which restricted items can only be operated after obtaining permission); venture capital business; business information consulting,
financial, investment and enterprise management consulting (the above items do not include restricted items); research and development
of prepackaged food and health food; pre-packaged food, health food production and sales; and information service business (internet
information service business only). (The ownership was transferred as a subsidiary of HeDeTang Holdings (HK) Ltd. to New Continent
International Co., Ltd. on February 26, 2020 pursuant to a Share Transfer Agreement entered into by HeDeTang Holdings (HK) Ltd.
and New Continent International Co., Ltd. on September 18, 2019)
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According to USGAAP Code No. 810-10-15-8,
for legal entities other than limited partnerships, the usual condition for a controlling financial interest is ownership of a
majority voting interest, and, therefore, as a general rule, ownership by one reporting entity, directly or indirectly, of more
than 50 percent of the outstanding voting shares of another entity is a condition pointing toward consolidation. The power to
control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders,
or by court decree.
As all the board members, General
Manager and Financial Controller of Hedetang Holdings (Shenzhen) Co., Limited are appointed by the Company, Hedetang Holdings (Shenzhen)
Co., Limited. is consolidated into the Company’s financial statements.
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(33)
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SkyPeople Foods Holdings Limited, established in British
Virgin Island in 2011. Its main business scope includes trading, import and export of food products.
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(34)
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HeDeTang Holdings (HK) Ltd. incorporated in Hong Kong,
China in 2007. Its main business scope includes the research and development of food packages, food production techniques; the
research and development of technology consultation and transfer. (The ownership was transferred as a subsidiary of HeDeTang Holdings
(HK) Ltd. to New Continent International Co., Ltd. on February 27, 2020 pursuant to a Share Transfer Agreement entered into by
HeDeTang Holdings (HK) Ltd. and New Continent International Co., Ltd. on September 18, 2019)
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(35)
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Digital Online Marketing Limited was established in British Virgin Island in 2011. Its main business scope includes trading consultancy, corporation management, software development and marketing, and information consulting services.
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(36)
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GlobalKey Network Technology (Tianjin) Co., Ltd. which was changed to Chain Cloud Mall (CCM) Network and Technology (Tianjin) Co., Ltd. (“CCM Tianjin”), was established in January 2019. Its main business scope includes blockchain technology development, service, consultation and transfer; encryption technology; digital integral system technology; and e-commerce platform technology development.
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(37)
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GloblalKey Network and Technology (Beijing) Co., Ltd was established on March 20, 2018. Its main business scope is technology service, development, consultation, transfer and technology popularization; technology import and export, serving as agent for import and export, and import and export of goods. GloblalKey Network and Technology (Beijing) Co., Ltd dissolved in 2019 and canceled its registration with the SAMR on November 20, 2019.
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(38)
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Chain Cloud Mall E-commerce (Tianjin) Co., Ltd. (“E-commerce”) was established on April 4, 2019 by Mr. Zeyao Xue and Kai Xu and is a variable interest entity (“VIE”) of the Company. Its main business scope is sale of products through e-commerce. Mr. Zeyao Xue is a major shareholder of the Company and the son of Mr. Yongke Xue, our Chairman. Mr. Kai Xu is the Chief Operating Officer of the Company.
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(39)
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Guowei Duomei (Shenzhen) E-commerce Co., Ltd. was established on August 20, 2018. Its main business scope is the sale of health foods, local products, pre-packaged foods, agricultural and agricultural by-products, bulk foods and online sales. (The ownership was transferred as a subsidiary of HeDeTang Holdings (HK) Ltd. to New Continent International Co., Ltd. on February 27, 2020 pursuant to a Share Transfer Agreement entered into by HeDeTang Holdings (HK) Ltd. and New Continent International Co., Ltd. on September 18, 2019)
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(40)
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Changchun Xinghua Tianbao Software Technology Development Co., Ltd. was established on August 7, 2018. Its main business scope is software development, technology transfer and software information consultation. (The ownership was transferred as a subsidiary of HeDeTang Holdings (HK) Ltd. to New Continent International Co., Ltd. on February 27, 2020 pursuant to a Share Transfer Agreement entered into by HeDeTang Holdings (HK) Ltd. and New Continent International Co., Ltd. on September 18, 2019)
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(41)
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Shenzhen Jiatong Tianxia Supply Chain Co., Ltd. was established on March 19, 2018. Its main business scope is trading, import and export, supply chain management and the related support services, whole selling and retailing of pre-packaged foods, sale of dairy products (including infant formula milk powder), beverages, and health products. (The ownership was transferred as a subsidiary of HeDeTang Holdings (HK) Ltd. to New Continent International Co., Ltd. on February 27, 2020 pursuant to a Share Transfer Agreement entered into by HeDeTang Holdings (HK) Ltd. and New Continent International Co., Ltd. on September 18, 2019)
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(42)
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Jiangyang Branch of Sky People Juice Group Co. Ltd. was established on September 26, 2016. Its main business scope is the production of beverages (fruit and vegetable juices, solid beverages and other beverages), the storage and sale of fresh fruit and vegetables, organic agriculture, research into the processing technology of the fruit industry, research on high grade production and technical services, processing and the sale of packaging products. (The ownership was transferred as a subsidiary of HeDeTang Holdings (HK) Ltd. to New Continent International Co., Ltd. on February 27, 2020 pursuant to a Share Transfer Agreement entered into by HeDeTang Holdings (HK) Ltd. and New Continent International Co., Ltd. on September 18, 2019)
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Certain Highlights For the Fiscal Year ended December
31, 2019
In
January 2019, the Company established Chain Cloud Mall Network and Technology (Tianjin) Co., Ltd., (“CCM Tianjin”),formerly
known as GlobalKey Network Technology (Tianjin) Co., Ltd.). Its main business scope includes blockchain technology development,
service, consultation and transfer; Encryption technology, digital integral system technology, e-commerce platform technology
development, etc.
On January 22, 2019, CCM Tianjin formally
launched Chain Cloud Mall (CCM) v1.0, the real-name and membership-based blockchain shared shopping mall platform that integrates
blockchain and internet technology and distinguishes itself by utilizing the automatic value distribution system of blockchain
and sharing the value of the platform to all the participants in the system.
On June 1, 2019, CCM Tianjin formally
launched CCM v2.0. Compared to the 1.0 version, CCM v2.0 has a wider variety of product categories, easier user interface,
more transparent information, more stable operations, a higher security level, and faster logistics. The CCM v2.0 adopts a
“multi-vendor hosted stores + platform self-hosted stores” model. The platform supports various marketing
methods, including point rewards programs, coupons, live webcasts, game interaction, and social media sharing. Besides the
blockchain-powered features, CCM v2.0 is also fully equipped with the same functions and services that other Chinese leading
traditional e-commerce platforms provide.
On July 30, 2019, the Company announced
E-commerce Tianjin adopted the QRO anti-counterfeiting code to all products under the Company’s Hedetang brand. By adopting the
QRO anti-counterfeit code technology, each Hedetang product will be issued an unalterable anti-counterfeit code that records every
event or transaction on a distributed ledger, which makes the whole process from manufacturing to delivering traceable. On August
2, 2019, the Company announced the adoption of the QRO anti-counterfeit code technology for the entire CCM Mall platform.
On July 31, 2019, CCM Tianjin, E-commerce
Tianjin, and Mr. Zeyao Xue and Mr. Kai Xu, citizens of China and shareholders of E-commerce Tianjin, entered into the “Variable
Interest Entity Agreements” or “VIE Agreements,” pursuant to which CCM Tianjin has contractual rights to control
and operate the business of E-commerce Tianjin (the “VIE”).
On September 18, 2019, SkyPeople BVI,
entered into a Share Transfer Agreement (the “Agreement”) with New Continent International Co., Ltd., a company incorporated
in the British Virgin Islands (the “Buyer”). Pursuant to the terms of the Agreement, SkyPeople BVI will sell
all of the issued and outstanding shares of HeDeTang HK, a wholly owned subsidiary of SkyPeople BVI, to the Buyer for a total
of RMB 600,000, or approximately US$85,714. The above-mentioned share transfer was approved by the Company’s shareholders
on February 27, 2020. On February 27, 2020, SkyPeople BVI completed the transfer of its ownership of HeDeTang HK to the Buyer.
On November 8, 2019, GlobalKey
SharedMall entered into a Three-Party Cooperation Agreement (the “Agreement”) with Fan Zhang, a citizen of China,
and Caixia Wang, a citizen of China. Pursuant to the Agreement, the three parties agreed to make cash contributions totaling
RMB 1,000,000 (approximately $142,857) to QR(HK) Limited (“QR HK”), a wholly owned subsidiary of GlobalKey
SharedMall. Of this total, GlobalKey SharedMall shall contribute RMB 510,000 (approximately $72,857); Fan Zhang shall
contribute RMB 300,000 (approximately $42,857); and Caixia Wang shall contribute RMB 190,000 (approximately $27,143).
GlobalKey SharedMall agreed to loan Fan Zhang RMB 300,000 for his cash contribution obligation, which shall be repaid from
dividends of QR HK in the future. If QR HK is terminated by the parties before the loan is paid off from the dividends or by
liquidation of Fan Zhang’s ownership of QR HK, Fan Zhang shall repay the loan to GlobalKey SharedMall in two years. Fan
Zhang shall be responsible for the operations and daily management of QR HK’s cross-border e-commerce platform NONOGIRL
and shall be paid RMB 12,000 (approximately $1,714) per month. GlobalKey SharedMall is responsible for accounting,
supervision of Fan Zhang’s management, and auditing the financials of QR HK, and additionally has the right to veto
material business decisions of QR HK.
On November 18, 2019, E-Commerce
Tianjin entered a cooperation agreement with Chifeng Supply and Marketing E-commerce Co., Ltd. to develop a blockchain contract
farming platform focusing on sheep farming.
Company strategy and Principal Products and Services
Our core business historically has been
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 the PRC and internationally. Revenue from the sale of fruit juice concentrates and
fruit beverages accounted for 18% and 72% of our total revenue for fiscal years 2019 and 2018 respectively. Due to drastically
increased production cost and tightened environmental laws in China, the Company has transformed its main business from fruit juice
manufacturing and distribution to a real-name blockchain e-commerce platform that integrates blockchain and internet technology
in fiscal year 2019. The e-commerce platform contributed 96.4% and 0% to the total revenue for fiscal 2019 and 2018 respectively.
On February 27, 2020, the Company completed
the transfer of its ownership of HeDeTang HK to New Continent International Co., Ltd. (the “Buyer”), a company incorporated
in the British Virgin Islands, pursuant to a Share Transfer Agreement (the “Agreement”) entered on September 18, 2019.
Pursuant to the terms of the Agreement, the Buyer purchased 100% ownership of HeDeTang HK. (the “Sale Transaction”)
Following the completion of the Sale Transaction,
the main business operations of the Company are focused on our real-name and membership-based blockchain shared shopping mall
platform and cross-border e-commerce platform NONO Girl to be formally launched in 2020.
As the Company sold its juice
related segment, the financial position and operating results of HeDeTang HK have
been classified as discontinued operations within the accompanying consolidated financial statements of the Company.
Shared Shopping Mall
The Company has transformed its business
from fruit juice manufacturing and distribution to a real-name and membership-based blockchain e-commerce platform that integrates
blockchain and internet technology. On March 6, 2018, the Company established GlobalKey SharedMall Limited in the Cayman
Islands to operating its global business service center based on blockchain technology.
The trial operation of GlobalKey ShareMall,
also known as Chain Cloud Mall (CCM) started on December 26, 2018. On January 22, 2019, the Company formally launched Chain Cloud
Mall, the real-name and membership-based blockchain shared shopping mall platform that integrates blockchain and internet technology
and distinguishes itself by utilizing the automatic value distribution system of blockchain and sharing the value of the platform
to all the participants in the system.
On June 1, 2019, CCM v2.0 was
launched. Compared to the 1.0 version, CCM v2.0 has a wider variety of product categories, easier user interface, more
transparent information, more stable operations, a higher security level, and faster logistics. Currently, CCM v2.0 adopts a
“multi-vendor hosted stores + platform self-hosted stores” model. The platform supports various marketing
methods, including point rewards programs, coupons, live webcasts, game interaction, and social media sharing. Besides the
blockchain-powered features, CCM v2.0 is also fully equipped with the same functions and services that other Chinese leading
traditional e-commerce platforms provide.
On August 2, 2019, CCM adopted the QRO
anti-counterfeit code on the CCM. QRO code is a blockchain-powered unalterable Quick Response One (QRO) anti-counterfeit code
issued by the manufacturer. It ensures the authenticity of products and directly links manufacturers with their targeted customers
as a way of precision marketing. The system includes point issuance, point referral and discount points settlement. The brand-new
business model creates a completely new source of data traffic for enterprises. Merchants in the Chain Cloud Mall issue their
own blockchain points and anti-counterfeiting QR codes. Every product comes with unique anti-counterfeiting QR codes. Customers
collect the points of the enterprise by scanning products for anti-counterfeiting check with their mobile phones. The successful
collection of the merchant points confirms that the authentication of product from such enterprise.
On May 1, 2020, CCM v3.0 was launched. It creates a new value
cycle system of online shopping mall with the real-name blockchain system. There are four major functions:
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1.
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Tracking reward points provided to its members.
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2.
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Blockchain anti-counterfeiting system.
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3.
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Member community system.
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4.
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Points promotion system.
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The blockchain technology enables CCM
to record every event or transaction on a distributed ledger and makes the whole process traceable. It also enables the CCM to
record and provide CCM points to its members upon a successful new member and/or product referral, which can be used as credit
when making purchases on CCM. It incentivizes its members to promote the platform and share the products with their social contacts,
which in turn increases the sales through CCM.
Based on blockchain technology, CCM is
established to transform the relationship between companies and consumers from a traditional selling and buying relationship to
a value-sharing relationship. The platform will fairly distribute the benefits of the entire mall to users who engage in promotion,
development, and consumption based on their contributions to the platform. The members of CCM are not only consumers and entrepreneurs
but also participants, promoters and beneficiaries.
CCM has attracted a growing base of users,
including members and non-members. These users are actively purchasing products on the platform. Members are the key participants
on CCM and drivers of its growth. Our members typically pay to gain access to a dedicated app that provides access to a curated
selection of products, exclusive membership benefits, and features, including discounted prices and point rewards. Members can
refer others to become members and are rewarded for doing so. Members can also promote products on various social platforms and
are rewarded if those users purchase our products.
Currently, there are three kinds of membership
programs with different membership Fees. The members are required to log onto Chain Cloud Mall (CCM) app or web portal in order
to download some of their rewarding points each day. The member could download all his/her rewarding points if he/she log onto
the app or web portal for at least 200 days within the membership valid period which is 365 days. Members must renew their membership
before expiration to continue earning points and enjoy the discounts. A non-member user can purchase products from the platform
but does not enjoy the above mentioned benefits.
Membership benefits are as follows:
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1)
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Receive a merchandise gift
package
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2)
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Exclusive discounts for merchandise
sold on the Chain Cloud Mall (CCM) Web and App
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3)
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Receive CCM-Points upon a
successful new member and product referral
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CCM-Points can be used as coupons for the member’s future
purchases on our app and website.
Since the trial operations of CCM began
on December 26, 2018, CCM had approximately 164 and 6,401 users as of December 31, 2018 and December 31, 2019, respectively.
We currently generate revenues primarily
from fixed membership fees and selling products on our platform to users, including both members and non-members. Membership
revenue is recognized when a member registers and makes his/her first order on CCM app or web portal.
For the year ended December 31, 2019,
approximately $0.54 million was recognized for fixed membership fees revenue from 6,401 members and approximately $0.39 million
for merchandise sales revenue from orders on the Company’s own sales platform, which in total account for 56.7% of our total
revenue.
Fruit Juice Concentrates and Fruit
Beverages
There are two general categories of fruit
and vegetable juices available in the market. One is fresh juice that is canned directly upon filtering and sterilization after
being squeezed out of fresh fruits or vegetables. The other general category is juice drinks made out of concentrated fruit and
vegetable juices. Concentrated fruit and vegetable juices are produced through the pressing, filtering, sterilization and evaporation
of fresh fruits or vegetables. Concentrated juices are not drinkable. Instead, they are used as a basic ingredient for manufacturing
juice drinks and as an additive to fruit wine, fruit jam, cosmetics and medicines.
The core products for the juice business
are (1) fruit juice concentrates, mainly including concentrated apple, pear, and kiwi juices; (2) fruit beverages, including pure
fruit beverages and fruit cider beverages; and (3) other fruit-related products, including, for example, fresh fruits, vegetables
and fructose.
Fruit Juice Concentrate
Our family of fruit juice concentrate
products mainly includes concentrated apple, pear, and kiwi juices. Our concentrated kiwifruits are made of three different
categories: kiwifruit puree, concentrated kiwifruit puree and concentrated kiwifruit juice. Kiwifruit puree is prepared from clean,
sound kiwifruits that have been washed and sorted prior to processing. The kiwifruits are crushed and pressed and the pulp of
the kiwifruit is kept. All of the water and some of the pulp are then removed from the kiwifruit puree and the sugar level is
increased in order to produce concentrated kiwifruit puree. We use advanced technologies to maintain the natural flavors and nutrients
of the kiwifruit puree. Kiwifruit puree and concentrated kiwifruit puree are ideal raw materials used in the production of concentrated
kiwifruit juices, kiwifruit beverages, kiwifruit flavored ice creams, smoothies and health care products. Concentrated kiwifruit
juice is made from concentrated kiwifruit puree by removing all of the remaining pulp. Concentrated apple juice and concentrated
pear juice are prepared from fresh fruits during the “squeezing season” of a year, when fresh fruits are available
in the market. Generally, the squeezing season for apples is from August through January or February of the following year, the
squeezing season for pears is from July or August through April of the following year, and the squeezing season for kiwifruits
is from September through December or January of the following year.
Our production line at the Shaanxi Qiyiwangguo
factory can only produce puree and concentrated puree. We use the production line that produces concentrated apple and pear juice
in the facility of the Jingyang branch of SkyPeople BVI to produce concentrated clear kiwifruit juice.
Fruit Juice Beverages
As compared to our fruit juice concentrate
products, which experience seasonality, fruit juice beverages can be produced and sold year-round.
The manufacturing process for fruit juice
beverages involves further processing of fruit juice concentrates. Our fruit juice beverages are divided into two categories:
pure fruit juice and fruit cider beverages. Currently we produce five flavors of fruit beverages in 236 ml glass bottles, 258
ml glass bottles, 280 ml glass bottles, 418 ml glass and 500 ml glass bottles, 888 ml glass bottles, 1.21 L glass bottles and
BIB (bag in box) packages, including kiwifruit juice, mulberry juice, peach juice, pomegranate juice and fruit and vegetable juice.
We also produce two flavors of lactobacillus fruit beverages in 268 ml glass bottles, including lactobacillus kiwifruit juice
and lactobacillus mulberry juice, as well as three beverages with rich dietary fiber in 330 ml glass bottles, including kumquat
and grapefruit juice, kiwifruit juice and mulberry juice. Our products are sold through distributors in stores.
Competition and our Competitive Advantages
The e-commerce industry in China is intensely
competitive. Our competitors include all major e-commerce companies in China, and other internet companies that engage in social
e-commerce businesses.
We anticipate that the e-commerce industry
will continually evolve and will continue to experience rapid technological change, evolving industry standards, shifting customer
requirements, and frequent innovation. We must continually innovate to remain competitive.
We compete primarily on the basis of the
following factors: (i) our ability to attract and retain a large number of members and other users and establish strong community
bonding and maintain member loyalty through social interaction effectively; (ii) our shared shopping platform that enables users
to buy products easily; (iii) strong fulfillment capabilities, including logistics and online payment, (iv) advanced technology
infrastructure, and (v) reliable and flexible supply chain and strong manufacturing partner network.
We have a unique real-name and membership–based
blockchain e-commerce shopping platform that integrates blockchain, internet technology and distinguishes itself by utilizing
the automatic value distribution system of the blockchain and sharing the value of the platform to all the participants in the
system. In addition to providing value and convenience to our members, we reward them for referring new members and promoting
our products and helping to generate transactions. Based on blockchain technology, CCM is established to transform the relationship
between companies and consumers from traditional selling and buying relationship to a value-sharing relationship. The platform
will fairly distribute the benefit of the entire mall to users who engage in promotion, development, and consumption based on
their contributions to the platform.
Our latest CCM v3.0 creates a new value cycle system of online
shopping mall with the real-name blockchain system with following characteristics:
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1.
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Blockchain anti-counterfeiting
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Using
real-name blockchain technology to carry out anti-counterfeiting for products produced by the enterprises. The essence of anti-counterfeiting
is to determine the person responsible for the product. Using real-name blockchain system, it provides the assurance to our customers
to the authentication of the products they purchase and solve the problem of counterfeiting products in online shopping mall.
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2.
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Blockchain
points settlement leads to secondary data traffic
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Blockchain points are also discount
coupons for enterprises, guiding customers to the platform of the enterprises, and provide them discounts when purchasing. This
process is called secondary data traffic. Every company is aware of the importance of maintaining old customers. Blockchain anti-counterfeiting
technology through scanning of QR codes by the customers helps companies identify such customers and allows them to systematically
maintain contacts with such customers.
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3.
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Points
promotion system
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Points
promotion system brings secondary data traffic comes with volume and high turnover ratio. All such sales are directed to the enterprise
platform when customers possess and use enterprise coupons. With a high level of user stickiness, customers are likely to purchase
products again and collect more blockchain points.
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4.
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Member
community system to build a high value community
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Anti-counterfeiting technology
plus the Company’s secondary data traffic platform have created great value for the enterprises that have stores on our
platform. By gathering all loyal customers to an enterprise platform, we can build a standard value community.With the same experiences
and common interest, the value community of an enterprise can form a self-organizing system of customer groups to maximize the
interests of such enterprise.
For our juice products, we believe that
a number of companies are producing juice products that compete directly with our product offerings and some of our competitors
have significantly more financial resources than we possess. Our apple juice concentrate competitors include Sdic Zhounglu Fruit
Juice Co., Ltd., Yantai North Andre Juice Co., Ltd., Shaanxi Hengxing Fruit Juice and Shaanxi Haisheng Juice Holdings Co., Ltd.
We also compete with fruit juice companies such as Wahaha, Huiyuan, Nongfu Guoyuan, Tongyi and Meizhiyuan. We believe our
competitive advantages include the modern equipment and technology employed at our production factories in Shaanxi Province and
the strategic locations of our manufacturing facilities. Our equipment and technology help us to improve product quality, control
costs and allow us to meet international fruit juice production standards such as ISO9001, HACCP, and Kosher certifications, and
those imposed by the United States Food and Drug Administration. In addition, our manufacturing facilities are strategically located
near regional fruit production centers. For example, Shaanxi Province, where two of our manufacturing facilities are located,
is known in the PRC for pear and kiwi production. Our proximity to regional fruit production centers enables us to purchase fresh
fruits directly from farmers, avoid the need of transporting fresh fruit over long distances to processing facilities, reduce
our transportation expenses and damage to fresh fruit during transportation, and helps us maintain a high quality of finished
products by preserving freshness.
We believe that our management team, which
includes Vincent Xue, our Chairman of Board of Directors, Shanchun Huang, Chief Executive Officer, Veronica Chen, our Chief Financial
Officer, Yan Zhi, our Chief Technology Officer, and a seasoned team of senior managers with significant experience in the areas
of operations, marketing, technology and finance, is one of the strongest management teams in e-commerce and blockchain technology
and integrated fruit-related products industry.
Production Capacity
The following table sets forth our production capacity as of
December 31, 2019.
Subsidiary/branch
|
|
Location
|
|
Products
|
|
Production capacity
|
|
Notes
|
Shaanxi Qiyiwangguo*
|
|
Zhouzhi county, Shaanxi province
|
|
Kiwi puree,
concentrated kiwi puree and fruit beverages
|
|
(1)
|
Sorting fresh fruits: 10 tons fresh fruits per hour;
|
|
Approximately 1.5 tons of fresh fruits are used to produce 1 ton of puree;
4 to 4.5 tons of fresh fruits are used to produce 1 ton of concentrated puree
|
|
|
|
|
|
|
(2)
|
Puree/concentrated puree: processing 20 tons of fresh fruits per hour;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3)
|
Fruit beverages: producing 6,000 bottles per hour
|
|
|
|
|
|
|
|
|
|
|
|
|
Jingyang branch of SkyPeople (China)*
|
|
Jingyang County, Xianyang City,
Shaanxi Province
|
|
Concentrated apple and pear juice, concentrated kiwifruit juice and fruit-related products
|
|
(1)
|
Concentrated apple/kiwi/pear juice: processing 40 tons of fresh fruits per hour;
|
|
All concentrated juice products are manufactured using the same type of production line
with slight variations in processing methods
|
|
|
|
|
|
|
(2)
|
Fructose: processing 10 tons of fresh fruits per hour
|
|
|
|
|
|
|
|
|
|
|
|
|
Yingkou*
|
|
Gaotai Town, Gaizhou, Liaoning Province
|
|
Concentrated apple juice
|
|
(1)
|
Processing 20 tons of fresh fruits per hour
|
|
All concentrated juice products are manufactured using the same type of production line
with slight variations in processing methods.
|
* All these are the subsidiaries of HeDeTang
HK and were transferred along with the transfer of HeDeTang HK to New Continent International Co., Ltd. on February 27, 2020 pursuant
to a Share Transfer Agreement entered into by HeDeTang HK and New Continent International Co., Ltd. on September 18, 2019.
Industry and Principal Markets
E-commerce Industry and Social e-commerce Platforms in China
According to digital data and research
company eMarketer, China has the most mobile users in the world and more e-commerce activity than any other country in the world.
In 2017, Chinese consumers spent more than $750 billion online – more than the UK and US combined. And in June 2019, retail
e-commerce spend in China for 2019 was said to increase 27.3% to $1.935 trillion – making up 36.6% of total retail sales,
according to digital data and research company eMarketer. eMarketer also forecast Chinese retail e-commerce sales to maintain
its strong growth through the end of its forecast in 2023.
Blockchain Technology and Digital Economy
Development
In 2016, the China State Council included
blockchain technology as a new technology and started the promotion and development of blockchain technology and applications.
Since then, the central and local governments have issued relevant supervision and support policies to support blockchain technology
and industry development to enable commercialization. In April 2020, the Chinese Ministry of Industry and Information Technology
(“MITT”) announced that it will strongly support technological innovation and industrial applications such as blockchain
technology. Blockchain technology is now widely used by Chinese leading financial organizations and institutions. In early 2020,
Alibaba announced its integration of a full-link traceability blockchain system into its importation e-commerce platform, Kaola.
2020 is a year of China-ASEAN digital
economic cooperation. Leading high-quality development with a credible digital economy is becoming a new highlight in the development
of cooperation between China and ASEAN countries. In the field of digital economy, China and ASEAN countries have a good foundation
and environment of cooperation. We believe it is a good time to create application demonstration projects through the construction
of digital infrastructure, support for 5G networks, the advancement of artificial intelligence, the initiation of innovative applications
of blockchain and other emerging technologies.
At present, ASEAN countries hope to keep
up with the development of the digital economy in order to start the digitalization of border markets, e-commerce, cross-border
settlement, smart logistics, supply chain finance and traditional industries as soon as possible. As a basic and systematic technology
and facility, the application of blockchain is expected to become an important force for future industrial revolution.
Market of Fruit Juice
Fruit juices in the Chinese market are mainly dominated by juice
mixtures, smoothies & orange juice. The Chinese market of fruit and high pressure processing (HPP) vegetable juices is very
competitive. Forecasts indicate likely coconut and other plant water booms; and demand for HPP juices is on the rise. According
to website of www.China juice.net, revenue in the juice market amounted in China to US$4,639 million in 2019.
Marketing, Sales and Distribution
For our CCM shared shopping mall, we incentivize
our members to recommend and market products through their own social networks and communities. Customers tend to find recommendations
by influencers, including friends and families, who customers tend to deem trustworthy. Members who promote products are rewarded
if other users purchase our products based on that promotion.
We market our juice products through two
primary methods: attendance at international exhibitions and sales made through distributors and trade websites. Our marketing
and sales teams work closely together to maintain a consistent message to our customers.
The sales team is divided into three subdivisions,
focusing on the sales of fruit juice concentrates, fruit beverage products and derivative products including foods. We sell our
products either indirectly through distributors with good credit histories or directly to end-users.
The Chinese market drives our fruit beverage
sales, with most beverages sold through provincial, city and county-level agents.
Raw Materials and Other Supplies
Historically, fresh fruits, including apples,
pears and kiwifruits were the primary raw materials for our juice related products. The continuous supply of high quality fresh
fruit was necessary for the fruit juice related operations.
The PRC has the largest planting area
of kiwifruit and apples in the world. Shaanxi Province, the location of two of our factories, has the largest planting area of
kiwifruit and apples in the PRC. Pomegranate, strawberry, peach and cherry yields are also high in Shaanxi Province. Other raw
materials used in our business include pectic enzyme, amylase, auxiliary power fuels and other power sources such as coal, electricity
and water.
We purchase raw materials from local markets
and fruit growers that deliver directly to our plants. We have implemented a fruit purchasing program in areas surrounding our
factories. In addition, we organize purchasing centers in rich fruit production areas, helping farmers deliver fruit to our purchasing
agents easily and in a timely manner. We are then able to deliver the fruit directly to our factory for production. We have assisted
local farmers in their development of kiwifruit fields to help ensure a high quality product throughout the production channel.
Our raw material supply chain is highly fragmented and raw fruit prices are highly volatile.
In addition to raw materials, we purchase
various ingredients and packaging materials such as sweeteners, glass and plastic bottles, cans and packing barrels. We generally
purchase our materials or supplies from multiple suppliers. We are not dependent on any one supplier or group of suppliers.
For our E-commerce business, we don’t
carry large inventory for our sales platform, instead we are mainly a service provider.
Seasonality
We can only produce fruit juice concentrates
during the squeezing season generally from July or August through April of the following year, while our fruit juice beverages
can be produced year round. Annual capacity of our production lines varies based on the availability of the fresh fruit and is
ultimately contingent on weather and other climatic conditions leading up to and through the harvest seasons. As a result, our
fruit juice business is highly seasonal as sales of our products are generally higher during the squeezing season. Sales of our
juice products during the months from March through July, or the non-squeezing season, generally tend to be lower due to a shortage
of fresh fruit and a lower level of production activity.
The E-commerce
business is less susceptible to disruption due to seasonality.
Government Regulations
Food and Beverage Regulations and Permits
Our products are subject to central government
regulation as well as provincial government regulation in Shaanxi, Hubei and Liaoning Provinces. Business and product licenses
must be obtained through application to the central, provincial and local governments. We have obtained our business licenses
to operate domestically in the PRC and export products under the laws and regulations of the PRC. We obtained business licenses
to conduct businesses, including an operating license to sell packaged foods such as concentrated fruit and vegetable juices,
fruit sugar, fruit pectin, frozen and freeze dried fruits and vegetables, dehydrated fruits and vegetables, fruit and vegetable
juice drinks, fruit cider and organic food. Business, company and product registrations are certified on a regular basis and we
must comply with the laws and regulations of the PRC, provincial and local governments and industry agencies.
In accordance with PRC laws and regulations,
we are required to comply with applicable hygiene and food safety standards in relation to our production processes. Failure to
pass these inspections, or the loss of or failure to renew our licenses and permits, could require us to temporarily or permanently
suspend some or all of our production activities, which could disrupt our operations and adversely affect our business.
The Chinese government recently tightened
its enforcement of existing and new environmental regulations. The Company is in the process of adapting to the new standards
and certain of our construction projects have been delayed or suspended.
Regulations Relating to E-Commerce
In January 2014, the former State of Administration
of Industry and Commerce (which has been merged into State Administration for Market Regulation or SAMR) adopted the Administrative
Measures for Online Trading, or the Online Trading Measures, which took effect in March 2014. Under the Online Trading Measures,
e-commerce platform operators are required to examine, register and archive the identity information of the merchants applying
for access to their platforms as sellers, and verify and update such information regularly. The Online Trading Measures also provide
that e-commerce platform operators must make publicly available (i) the link to or the information contained in the business licenses
of the merchants, in the case of business entities, or (ii) a label confirming the verified identity of the merchants, in the
case of individuals. A consumer is entitled to return the commodities within seven days after receipt of the commodities without
giving a reason, except for the following commodities: customized commodities, fresh and perishable commodities, audio-visual
products downloaded online or unpackaged by consumers and computer software and other digital commodities, and newspapers and
journals that have been delivered. E-commerce platform operators must, within seven days upon receipt of the returned commodities,
provide full refunds to consumers. In addition, operators are prohibited from setting forth provisions in contracts or other terms
that are not fair or reasonable to consumers such as those excluding or restraining consumers’ rights, relieving or exempting
operators’ responsibilities, and increasing the consumers’ responsibilities, or conducting transactions in a forcible
manner taking advantage of contractual terms or technical means.
In March 2016, the State Administration
of Taxation, or the SAT, the Ministry of Finance, or the MOF, and the General Administration of Customs jointly issued the Circular
on Tax Policy for Cross-Border E-Commerce Retail Imports, which took effect in April 2016. Pursuant to this circular, goods imported
through the cross-border e-commerce retail are subject to tariff, import value-added tax, and consumption tax based on the types
of goods. Individuals purchasing any goods imported through cross-border e-commerce retail are taxpayers, and e-commerce companies,
companies operating e-commerce transaction platforms or logistic companies are required to withhold the taxes.
On August 31, 2018, the Standing Committee
of the National People’s Congress promulgated the E-Commerce Law, which became effective on January 1, 2019. The E-Commerce
Law sets forth a series of requirements on e-commerce platform operators. According to the E-Commerce Law, e-commerce platform
operators shall verify and register platform merchants, and cooperate with the market regulatory administrative department and
tax administrative department to conduct industry and commerce registrations and tax registrations for merchants. The e-commerce
platform operators shall also prepare a contingency plan for cybersecurity events and take technological measures and other measures
to prevent online illegal and criminal activities. The E-Commerce Law also expressly requires platform operators to take necessary
actions to ensure fair dealing on their platforms to safeguard the legitimate rights and interests of consumers, including to
prepare platform service agreements and transaction information record-keeping and transaction rules, to prominently display such
documents on the platform’s website, and to keep such information for no fewer than three years following the completion
of a transaction. To legally handle intellectual property infringement disputes, upon receipt of the notice specifying preliminary
evidence for alleged infringement, the platform operators are required to take necessary measures in a timely manner, such as
deleting, blocking and disconnecting the hyperlinks, terminating transactions and services, and forwarding notices to merchants
on its platform. If an e-commerce platform operator fails to take necessary measures when it knows or should have known that a
merchant on the platform infringes any third-party intellectual property rights, products or services provided by a merchant on
its platform do not meet the requirements regarding personal or property safety, or any merchant otherwise impairs the lawful
rights and interests of consumers, the e-commerce platform operator will be held jointly liable with the merchants on its platform.
Moreover, the E-Commerce Law imposes a
requirement on operators of e-commerce platforms to assist in tax collection with respect to income generated by sellers from
transactions conducted on e-commerce platforms, including among others, submitting to the tax authority information on the identities
of sellers on e-commerce platforms and other information relating to tax payment. Failure to comply with the requirement may result
in operators of e-commerce platform being subject to fines and, in severe circumstances, suspension of business operations of
e-commerce platforms. If the merchants on our platform were deemed to be selling our products on consignment basis, the PRC tax
authorities may require our members to make tax registration and request our assistance in these efforts, pursuant to the new
E-Commerce Law, and the merchants may be subject to more stringent tax compliance requirements. See “Risk Factors—
Failure to comply with the relatively new E-Commerce Law may have a material adverse impact on our business, financial conditions
and results of operations.” According to the EIT Law, the VAT Law and other applicable regulations, sellers that conduct
transactions on e-commerce platforms are generally subject to enterprise income tax at a rate of 25%, and value-added tax at a
rate of 13% or 9% for services or products sold on the e-commerce platforms. Certain sellers that are deemed as small taxpayers
under PRC law are subject to reduced value-added tax at a rate of 3%.
Value-Added Telecommunication Business Operating Licenses
The PRC Telecommunications Regulations,
or the Telecom Regulations, which were issued by the State Council in 2000 and were most recently amended in February 2016 are
the primary governing law on telecommunication services. The Telecom Regulations set out the general framework for the provision
of telecommunication services by PRC entities. Under the Telecom Regulations, telecommunications service providers are required
to procure operating licenses prior to their commencement of operations. The Telecom Regulations draw a distinction between “basic
telecommunications services” and “value-added telecommunications services.” A “Catalog of Telecommunications
Business” was issued as an attachment to the Telecom Regulations to categorize telecommunications services as basic or value-added.
In December 2015, MIIT released the Catalog of Telecommunication Business (2015 Revision), or the 2015 Telecom Catalog, implemented
in March 2016. Under the 2015 Telecom Catalog, both the online data processing and transaction processing business (i.e., operating
e-commerce business) and information service business, continue to be categorized as value-added telecommunication services.
In March 2009, MIIT issued the Administrative
Measures for Telecommunications Business Operating Permit, or the Telecom Permit Measures, which was implemented in 2009 and most
recently amended in 2017. Pursuant to the Telecom Permit Measures, the operation scope of the value-added telecommunication business
operating license, or VATS license, shall detail the permitted activities of the enterprise to which it is granted. An approved
telecommunication services operator shall conduct its business in accordance with the specifications recorded on its VATS License.
The VATS Licenses can be further categorized based on the specific business operations permitted to be carried out under such
licenses, including among others, the VATS Licenses for internet information services, or the ICP License, and the VATS License
for electronic data interchange business, or the EDI License. In addition, a VATS License holder is required to obtain approval
from the original permit-issuing authority prior to any change to its shareholders, business scope or other information recorded
on such license. In February 2015, the State Council issued the Decisions on Cancelling and Adjusting a Batch of Administrative
Approval Items, which, among other things, replaced the pre-registration approval requirement for telecommunications businesses
with a post-registration approval requirement.
In September 2000, the State Council promulgated
the Administrative Measures on Internet Information Services, or the Internet Measures, most recently amended in January 2011.
Under the Internet Measures, “internet information services” refer to the provision of information through the internet
to online users, and are divided into “commercial internet information services” and “non-commercial internet
information services”. Commercial internet information services operators shall obtain an ICP License, from the relevant
government authorities within China. Chain Cloud Mall E-commerce (Tianjin) Co., Ltd., our VIE, holds our VATS License for our
Value-Added Telecommunication businesses.
Regulations Relating to Internet Information Security and
Privacy Protection
Internet information in China is regulated
from a national security standpoint. The National People’s Congress, or the NPC, enacted the Decisions on Preserving Internet
Security in December 2000 and amended in August 2009, which subject violators to potential criminal punishment in China for any
attempt to: (i) gain improper entry into a computer or system of strategic importance; (ii) disseminate politically disruptive
information; (iii) leak state secrets; (iv) spread false commercial information; or (v) infringe intellectual property rights.
The Ministry of Public Security of the PRC, or the MPS, promulgated the Administrative Measures for the Computer Information Network
and Internet Security Protection in December 1998 and amended in January 2011, which prohibits use of the internet in ways which,
among other things, result in a leak of state secrets or a spread of socially destabilizing content. If an internet information
service provider violates these measures, the MPS and its local branches may issue a warning, confiscate the illegal gains, impose
fines, and, in severe cases, advise competent authority to revoke its operating license or shut down its websites.
Under the Several Provisions on Regulating
the Market Order of Internet Information Services, issued by the MIIT in December 2011 and implemented in March 2012, an internet
information service provider may not collect any user personal information or provide any such information to third parties without
the consent of the user. An internet information service provider must expressly inform the users of the method, content and purpose
of the collection and processing of such user personal information and may only collect such information necessary for the provision
of its services. An internet information service provider is also required to properly maintain the user’s personal information,
and in case of any leak or likely leak of the user’s personal information, the internet information service provider must
take immediate remedial measures and, in severe circumstances, immediately report to the telecommunications authority. Moreover,
pursuant to the Ninth Amendment to the Criminal Law issued by Standing Committee of the National People’s Congress (the “SCNPC”)
in August 2015 and implemented in November 2015, any internet service provider that fails to fulfill the obligations related to
internet information security administration as required by applicable laws and refuses to rectify such failure upon orders, shall
be subject to criminal penalty for the result of (i) any dissemination of illegal information in large scale; (ii) any severe
effect due to the leakage of the client’s information; (iii) any serious loss of criminal evidence; or (iv) other severe
situation. Any individual or entity that (i) sells or provides personal information to others in a way violating the applicable
law, or (ii) steals or illegally obtains any personal information, shall be subject to criminal penalty in severe situation. In
addition, the Interpretations of the Supreme People’s Court and the Supreme People’s Procuratorate of the PRC on Several
Issues Concerning the Application of Law in Handling Criminal Cases of Infringing Personal Information, issued in May 2017 and
implemented in June 2017, clarified certain standards for the conviction and sentencing of the criminals in relation to personal
information infringement.
In November 2016, the SCNPC promulgated
the Cyber Security Law of the PRC, or the Cyber Security Law, which became effective on June 1, 2017. The Cyber Security Law requires
that a network operator, which includes, among other things, internet information services providers, take technical measures
and other necessary measures in accordance with applicable laws and regulations and the compulsory requirements of the national
and industrial standards to safeguard the safe and stable operation of its networks. We are subject to such requirements as we
are operating websites and mobile applications and providing certain internet services mainly through our mobile applications.
The Cyber Security Law further requires internet information service providers to formulate contingency plans for network security
incidents, report to the competent departments immediately upon the occurrence of any incident endangering cyber security and
take corresponding remedial measures.
Internet information service providers
are also required to maintain the integrity, confidentiality and availability of network data. The Cyber Security Law reaffirms
the basic principles and requirements specified in other existing laws and regulations on personal data protection, such as the
requirements on the collection, use, processing, storage and disclosure of personal data, and internet information service providers
being required to take technical and other necessary measures to ensure the security of the personal information they have collected
and prevent the personal information from being divulged, damaged or lost. Any violation of the Cyber Security Law may subject
the internet information service provider to warnings, fines, confiscation of illegal gains, revocation of licenses, cancellation
of filings, shutdown of websites or criminal liabilities.
Furthermore, MIIT’s Rules on Protection
of Personal Information of Telecommunications and Internet Users promulgated in July 2013, effective September 2013, contain detailed
requirements on the use and collection of personal information as well as security measures required to be taken by telecommunications
business operators and internet information service providers.
Regulations Relating to Pyramid Selling in the PRC
The Regulations on Prohibition of Pyramid
Selling, that were promulgated by the State Council in August 2005 and became effective in November 2005, prohibit pyramid selling
activities. According to the Regulations on Prohibition of Pyramid Selling, the following activities taken by organizers or operators
are considered as “pyramid selling”: (i) taking in new members and compensating each member by giving material awards
or other financial benefits, based upon the number of new members directly or indirectly introduced by such member on a rolling
basis, so as to gain illegal benefits; or (ii) requesting a sum of money as entry fee or as a condition to membership for new
members, either directly or through purchasing commodities, so as to gain illegal benefits; or (iii) requesting members to introduce
additional members to establish a multi-level relationship and compensating each member based on the level of sales generated
by the additional members introduced by such member, so as to gain illegal benefits. The PRC laws and regulations have not defined
“illegal benefit” and the determination of gaining “illegal benefit” is to a large extent subject to discretionary
view of the competent authorities in the PRC. Any individual or entity engaging in organization of pyramid selling may be subject
to confiscation of illegal gains and fines ranging from RMB0.5 million to RMB2.0 million (US$0.3 million), and criminal liabilities
if a crime is committed. On March 23, 2016, the former State of Administration of Industry and Commerce (which has been merged
into SAMR) promulgated the Risk Warning for New Types of Pyramid Selling, which provides that if an activity satisfies the three
features stated above at the same time, it will be identified as pyramid selling, regardless of whether any illegal benefit is
obtained. We believe we don’t request a sum of money as entry fee through purchasing commodities, our membership package,
which individuals are required purchase to become a member of our platform, include a set of selected products or services
and access to our app containing membership benefits and features. Also, we grant to our members upon a successful new member
referral to blockchain points, which are not redeemable for cash and can only be used as coupons for future purchases on our platform.
We also avoid establishing multi-level relationship of members, we grant members incentives only for products sold directly via
the links that such member shares through his/her social network, and not for products sold via links shared by any other member
that was originally invited by such member. In addition, since we have provided products of value and services to our members
as consideration for purchasing our membership package, and the products on our platform are offered at market prices, we believe
our current business practices do not constitute as gaining “illegal benefits.” We believe that our current business
model is not in violation of applicable PRC laws and regulations, including the Regulations on the Prohibition of Pyramid Selling.
See “Risk Factors—If our business model were found to be in violation of applicable laws and regulations, our business
financial condition and results of operations would be materially and adversely affected.”
Regulations Relating to Intellectual Property in the PRC
Trademark
The PRC Trademark Law and its
implementation rules protect registered trademarks. The PRC Trademark Office of State Administration of Industry and Commerce
is responsible for the registration and administration of trademarks throughout the PRC. The Trademark Law has adopted a
“first-to-file” principle with respect to trademark registration. Registered trademarks are granted a valid term
of ten years, which can be renewed each time for another ten years commencing from the day after the expiry date of the last
period of validity if the required renewal formalities have been completed. Pursuant to the PRC Trademark Law, counterfeit or
unauthorized production of the label of another person’s registered trademark, or sale of any label that is
counterfeited or produced without authorization will be deemed as an infringement to the exclusive right to use a registered
trademark. The infringing party will be ordered to stop the infringement immediately, a fine may be imposed, and the
counterfeit goods will be confiscated. The infringing party may also be held liable for the right holder’s damages,
which will be equal to the gains obtained by the infringing party or the losses suffered by the right holder as a result of
the infringement, including reasonable expenses incurred by the right holder for stopping the infringement. The Company
currently holds 10 trademarks in China, including Hedetang, SkyPeople, Qianmeiduo, VCFruits King, ZhenGuoShu, ZhenMiHouTao,
ZhenSangshen, ZhenShiLiu, Quangou, FullMart. All these trademarks are owned by the subsidiaries of HeDeTang HK and were
transferred along with the transfer of HeDeTang HK to New Continent International Co., Ltd. on February 27, 2020 pursuant to
a Share Transfer Agreement entered into by HeDeTang HK and New Continent International Co., Ltd. on September 18, 2019.
Domain Name
The MIIT promulgated the Measures on Administration
of Internet Domain Names, or the Domain Name Measures, on August 24, 2017, which took effect on November 1, 2017. The MIIT is
the major regulatory body responsible for the administration of PRC internet domain names, under supervision of which the China
Internet Network Information Center, or CNNIC, is responsible for the daily administration of “.cn” domain names and
Chinese domain names. CNNIC adopts a “first-to-file” principle with respect to the registration of domain names. Applicants
for registration of domain names must provide the true, accurate and complete information of their identities to domain name registration
service institutions. The applicants will become the holder of such domain names upon the completion of the registration procedure.
The Company current has 20 registered Internet Domain names, including dcon.top, dcon.cc, dconio.com, dconpay.com, digipay.ink,
digipay.vip, digipay.ltd, digipay.net.cn, globalkey.store, globalkey.shop, globalkey.vip, globalkey.net.cn, globalkey.top, globalkey.cc,
ftft.top, digipay.one, globalkey.one,ftex.one, ftftex.com gksharedmall.net, gksharedmall.com, gksharedmall.cn and intervalue.one.
All these Domain names are owned by the subsidiaries of DigiPay.
Copyright
The PRC Copyright Law, or the Copyright
Law, which took effect on June 1, 1991 and was amended in 2001 and 2010, provides that Chinese citizens, legal persons, or other
organizations shall, whether published or not, own copyright in their copyrightable works, which include, among other things,
works of literature, art, natural science, social science, engineering technology and computer software. Copyright owners enjoy
certain legal rights, including the right of publication, right of authorship and right of reproduction. The Copyright Law extends
copyright protection to Internet activities, products disseminated over the Internet and software products. In addition, the Copyright
Law provides for a voluntary registration system administered by the China Copyright Protection Center, or the CPCC. According
to the Copyright Law, an infringer of copyrights shall be subject to various civil liabilities, which include ceasing infringement
activities, apologizing to the copyright owners and compensating the loss of copyright owner. Infringers of copyright may also
be subject to fines and/or administrative or criminal liabilities in severe situations.
Pursuant to the Computer Software
Copyright Protection Regulations promulgated by the State Council on December 20, 2001 and amended on January 30, 2013,
Chinese citizens, legal persons and other organizations shall enjoy copyright on software they develop, regardless of whether
the software is released publicly. Software copyright commences from the date on which the development of the software is
completed. The protection period for software copyright of a legal person or other organizations shall be 50 years,
concluding on December 31 of the 50th year after the software’s initial release. The software copyright owner may go
through the registration formalities with a software registration authority recognized by the State Council’s copyright
administrative department. The software copyright owner may authorize others to exercise that copyright, and is entitled to
receive remuneration. The company owns copyright for the software for its cross-border e-commerce platform NONOGIRL
application.
Intellectual Property
According to the PRC Patent Law (revised in 2008), the State
Intellectual Property Office is responsible for administering patent law in the PRC. The patent administration departments of
provincial, autonomous region or municipal governments are responsible for administering patent law within their respective jurisdictions.
The Chinese patent system adopts a first-to-file principle, which means that when more than one person files different patent
applications for the same invention, only the person who files the application first is entitled to obtain a patent of the invention.
Patents in China fall into three categories: invention, utility model and design. To be patentable, an invention or a utility
model must meet three criteria: novelty, inventiveness and practicability. A patent is valid for twenty years in the case of an
invention and ten years in the case of utility models and designs.
We hold twenty-one active patents granted
by the State Intellectual Property Office of the PRC, (“SIPO”), which include the following. All these patents were
sold along with HedeTang HK pursuant to the Transfer Agreement SkyPeople BVI entered with New Continent International Co., Ltd
on September 18, 2019.
A crushing and peeling device (Patent No. ZL 201120445624.6)
A peeling and dirt removal device (Patent No. ZL 201120445621.2)
A kiwifruit cider beverage and its production method (Patent
No. ZL 2009 1 0022739.1)
A production technology for strawberry juice concentrates (Patent
No. ZL 2010 1 0209900.9)
A production technology for turnjujube juice concentrates (Patent
No. ZL 2010 1 0108318.3)
A production technology for cherry juice concentrates (Patent
No. ZL 2010 1 0209899.X)
A production technology for persimmon
juice concentrates (Patent No. ZL 2010 1 0013613.0) (granted to SkyPeople (China) on January 16, 2013)
A production technology for medlar juice
concentrates (Patent No. ZL 2010 1 0227315.1) (granted to SkyPeople (China) on April 24, 2013)
A production technology for sea-buckthorn
juice concentrates (Patent No. ZL 2010 1 0227303.9) (granted to SkyPeople (China) on April 24, 2013)
A production technology for tomato cherry
juice concentrates (Patent No. ZL 2010 1 0207254.2) (granted to SkyPeople (China) on March 6, 2013)
A production technology for apricot juice
concentrates (Patent No. ZL 2010 1 0207253.8) (granted to SkyPeople (China) on April 9, 2014)
500 ml Hedetang-branded fruit juice beverages
in glass bottle label (Patent No. ZL 2012302099757) (granted to SkyPeople (China) on May 30, 2012)
418 ml Hedetang-branded fruit juice beverages
in glass bottle label (Patent No. ZL 2012302099935) (granted to SkyPeople (China) on May 30, 2012)
280 ml Hedetang-branded fruit juice beverages
in glass bottle (Patent No. ZL 2012 3 0557344.4) (granted to SkyPeople (China) on April 24, 2013)
418 ml Hedetang-branded fruit juice beverages
in glass bottle (Patent No. ZL 2012 3 0557424.X) (granted to SkyPeople (China) on April 3, 2013)
500 ml Hedetang-branded fruit juice beverages
in glass bottle (Patent No. ZL 2012 3 0557301.6) (granted to SkyPeople (China) on March 20, 2013)
236 ml Hedetang-branded fruit juice beverages
in glass bottle (Patent No. ZL 2014302060578) (granted to SkyPeople (China) on December 17, 2014)
888 ml fruit juice beverages in glass
bottle (Patent No. ZL 2014 3 0206022.4) (granted to SkyPeople (China) on February 18, 2015)
Kiwifruits packing box (Patent No. ZL
2012 3 0561124.9) (granted to SkyPeople (China) on April 24, 2013)
418 ml fruits juice beverage packing box
(Patent No. ZL 2012 3 0557226.3) (granted to SkyPeople (China) on April 3, 2013)
500 ml fruits juice beverage packing box
(Patent No. ZL 2012 3 0557346.3) (granted to SkyPeople (China) on April 24, 2013)
We believe that these technologies are
leading technologies in our industry in China.
In addition, using our proprietary technologies,
we have developed flow-through capacitor membrane, reverse osmosis concentration and composite biological enzymolysis technology
to clarify and remove murkiness from fruit juice. We believe that such are leading technologies in our industry in China.
We believe that our continued success
and competitive status depend largely on our proprietary technology and ability to innovate. We have taken measures to protect
the confidentiality of our proprietary technologies and processes. We rely on a combination of know-how, patent and trade secret
laws, as well as confidentiality agreements to protect our proprietary rights. We will take the necessary action to seek remuneration
if we believe our intellectual property rights have been infringed upon. As of December 31, 2019, we held twenty-one active patents
granted by SIPO related to breaking up and separating fruit peel; removing fruit peel and fruit hair; production of various concentrated
fruit juice; and bottle tags, respectively. These patents have a duration of 10 years. However, we do not have patents on certain
other intellectual property that we possess.
We also hold registered trademarks for
our “Hedetang” brand with the Trademark Bureau of the State Administration for Industry and Commerce (“SAIC”)
granted on September 14, 2008 in Category 29, Category 30, Category 31 and Category 32, and on April 21, 2009 in Category 5. The
trademarks expire on September 13, 2028 and April 20, 2029, respectively, and can be extended upon expiration.
We hold registered trademarks for our
“SkyPeople” brand with the Trademark Bureau of the SAIC in Category 30 and Category 32 with period of validity from
May 14, 2011 to May 13, 2021, and in Category 31 with period of validity from September 7, 2011 to September 6, 2021. The registration
of such trademarks can be extended upon expiration if all formalities are met.
Employees
As of December 31, 2019, we had 222 full-time
employees and 1 part-time employees, all of whom are located in the PRC. None of our employees are covered by a collective bargaining
agreement as of the date of this Report.
ITEM 1A – RISK FACTORS
An investment in the Company’s common
stock involves a high degree of risk. In addition to the following risk factors, you should carefully consider the risks, uncertainties
and assumptions discussed herein, and in other documents that the Company subsequently files with the Securities and Exchange
Commission, (the “Commission” or the “SEC”), that update, supplement or supersede such information for
which documents are incorporated by reference into this Report. Additional risks not presently known to the Company, or which
the Company considers immaterial based on information currently available, may also materially adversely affect the Company’s
business. If any of the events anticipated by the risks described herein occur, the Company’s business, cash flow, results
of operations and financial condition could be adversely affected, which could result in a decline in the market price of the
Company’s common stock, causing you to lose all or part of your investment.
Risks Related to Our Business
An occurrence of an uncontrollable
event such as the COVID-19 pandemic may negatively affect our operations and financial results.
In recent years, there have been outbreaks
of epidemics in various countries, including China. Recently, there was an outbreak of a novel strain of coronavirus (COVID-19)
in China, which has spread rapidly to many parts of the world, including the U.S. In March 2020, the World Health Organization
declared COVID-19 a pandemic. The COVID-19 pandemic has resulted in, among other things, quarantines, travel restrictions, and
the temporary closure of office buildings and facilities in China and in the U.S.
Substantially all of our revenues are
generated in China. Consequently, our results of operations will likely be adversely, and may be materially, affected, to the
extent that COVID-19 or any other epidemic harms the Chinese and global economy. Any potential 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 COVID-19
and the actions taken by government authorities and other entities to contain COVID-19 or treat its impact, almost all of which
are beyond our control. Potential impacts include, but are not limited to, the following:
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temporary closure of offices,
travel restrictions or suspension of transportation of our products to our customers
and our suppliers, who have been negatively affected, and could continue to be negatively
affected, on their ability to fulfill our demands;
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our customers that are negatively
impacted by the outbreak of COVID-19 may reduce their budgets to purchase our products
and services, which may materially adversely impact our revenue;
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We may have to provide significant
sales incentives to our customers in response to the COVID-19 outbreak, which may in
turn materially adversely affect our financial condition and operating results;
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The business operations of our
customers and suppliers have been and could continue to be negatively impacted by the
outbreak, which may result in loss of customers or disruption of our services, which
may in turn materially adversely affect our financial condition and operating results;
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any disruption of our supply
chain, logistics providers or customers could adversely impact our business and results
of operations, including causing our suppliers to cease manufacturing products for a
period of time or materially delay delivery to customers, which may also lead to loss
of customers, as well as reputational, competitive and business harm to us;
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many of our customers, distributors,
suppliers and other partners are individuals and small and medium-sized enterprises (SMEs),
which may not have strong cash flows or be well capitalized, and may be vulnerable to
an epidemic outbreak and slowing macroeconomic conditions. If the SMEs that we work with
cannot weather COVID-19 and the resulting economic impact, or cannot resume business
as usual after a prolonged outbreak, our revenues and business operations may be materially
and adversely impacted;
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The global stock markets have
experienced, and may continue to experience, significant decline from the COVID-19 outbreak,
which could materially adversely affect our stock price; and
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Because of the uncertainty surrounding
the COVID-19 outbreak, the financial impact related to the outbreak and the local and global response cannot be reasonably estimated
at this time, and our results for the first quarter and full year of 2020 may be adversely affected.
The global economy
has also been materially negatively affected by the COVID-19 and there is continued severe uncertainty about the duration and
intensity of its impacts. The Chinese and global growth forecast is extremely uncertain, which would seriously affect the consumer
spending on shopping malls.
While the potential
economic impact brought by, and the duration of, COVID-19 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 could materially affect our business
and the value of our common stock.
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.
In general, our business could be adversely
affected by the epidemics, including, but not limited to, COVID-19, avian influenza, severe acute respiratory syndrome (SARS),
the influenza A virus, the Ebola virus, or other outbreaks. In response to an epidemic or other outbreaks, governments and other
organizations may adopt regulations and policies that could lead to severe disruption to our daily operations, including temporary
closure of our offices and other facilities. These severe conditions may cause us and/or our partners to make internal adjustments,
including but not limited to, temporarily closing down business, limiting business hours, and setting restrictions on travel and/or
visits with clients and partners for a prolonged period of time. Various impacts arising from severe conditions may cause business
disruption, resulting in material, adverse effects to our financial condition and results of operations.
Economic conditions have had and
may continue to have an adverse effect on consumer spending on our products.
The worldwide economy remains volatile
and may have entered in global recession. The adverse effect of a sustained international economic downturn, including sustained
periods of decreased consumer spending, high unemployment levels, declining consumer or business confidence and continued volatility
and disruption in the credit and capital markets, would likely result in reduced demand for our products and service as consumers
may forego certain purchases. To the extent an international economic downturn develops, we could experience a reduction in sales
volume. If we are unable to reduce our operating costs and expenses proportionately, many of which are fixed, our results of operations
would be adversely affected.
We may not be able to effectively
control and manage our growth, and a failure to do so could adversely affect our operations and financial condition.
If our newly developed blockchain based
e-commerce business and markets experience significant growth, we will need to expand our business to maintain our competitive
position. We may face challenges in managing and financing expansion of our business, facilities and product offerings, including
challenges relating to integration of acquired businesses and increased demands on our management team, employees and facilities.
Failure to effectively deal with increased demands on us could interrupt or adversely affect our operations and cause production,
service and transportation backlogs, longer new products or services development time frames and administrative inefficiencies.
Other challenges involved with expansion, acquisitions and operation include:
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the
diversion of management’s attention from other business concerns;
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potential
adverse effects on existing business relationships with suppliers and customers;
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obtaining
sufficient working capital to support expansion;
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expanding
our product offerings and maintaining the high quality of our products and services;
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continuing
to fill customers’ orders on time; maintaining adequate control of our expenses
and accounting systems;
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successfully
integrating any future acquisitions; and
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anticipating
and adapting to changing conditions in the blockchain and/or ecommerce online shopping
industries and financial technology, whether from changes in government regulations,
mergers and acquisitions involving our competitors, technological developments or other
economic, competitive or market dynamics.
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Even if we obtain benefits of expansion
in the form of increased sales, there may be delay between the time when the expenses associated with an expansion or acquisition
are incurred and the time when we recognize such benefits, which could negatively affect our earnings.
We may engage in future acquisitions
involving significant expenditures of cash, the incurrence of debt or the issuance of stock, all of which could have a materially
adverse effect on our operating results.
As part of our business strategy, we review
acquisition and strategic investment prospects that we believe would complement our current product offerings, augment our market
coverage, enhance our technological capabilities or otherwise offer growth opportunities. From time to time, we review investments
in new businesses and we expect to make investments in, and to acquire, businesses, products or technologies in the future. In
the event of any future acquisitions, we may expend significant cash, incur substantial debt and/or issue equity securities and
dilute the percentage ownership of current shareholders, all of which could have a material adverse effect on our operating results
and the price of our stock. We cannot guarantee that we will be able to successfully integrate any businesses, products, technologies
or personnel that we may acquire in the future, and our failure to do so could have a material adverse effect on our business,
operating results and financial condition.
If we fail to maintain membership
loyalty or sustain membership growth, or fail to maintain member relationships effectively and retain existing members, our business
and operating results may be materially and adversely affected.
We are a membership-based value sharing
e-commerce platform and therefore membership loyalty and growth are essential to our business. The growth of our business depends
on our ability to maintain and increase the number of members on our platform and improve the level of their engagement. Individuals
can become our members mainly by purchasing our membership at a fixed price. We currently do not charge membership renewal fees
or periodic membership fees. We may decide to charge membership renewal fees or other type of fees in the future. Such change
in practice may negatively impact the membership loyalty and result in a decline in the level of engagement of our members. Damage
to our reputation or our failure to anticipate needs of and provide value-added services to our members, among other things, could
also diminish membership loyalty and reduce activity of members on our platform, which could cause our revenue and operating income
to decline and negatively impact our profitability. If our existing and new business opportunities and incentives, products, services
and other initiatives do not generate sufficient enthusiasm and economic incentive to retain our existing members or attract new
members on a sustained basis, our operating results could be adversely affected. As a result, in order to maintain our business
growth in the future, we need to increase our retention of existing members and continue to successfully attract additional members.
Weather and other environmental
factors affect our raw material supply and a reduction in the quality or quantity of our fresh fruit supplies may have material
adverse consequences on our financial results.
Our juice business may be adversely affected
by weather and environmental factors beyond our control, such as adverse weather conditions during the growing or squeezing seasons.
A significant reduction in the quantity or quality of fresh fruit harvested resulting from adverse weather conditions, disease
or other factors could result in increased per unit processing costs and decreased production, with adverse financial consequences
to us.
We sell our juice products primarily through
distributors and delays in delivery or poor handling by distributors may affect our sales and damage our reputation.
We primarily sell our juice products through
our distributors and rely on these distributors for the distribution of our products. These distributors are not obligated to
continue to sell our products. Any disruptions in our relationships with our distributors could cause interruption to the supply
of our juice products to retailers, which would harm our revenue and results of operations. In addition, delivery disruptions
may occur for various reasons beyond our control, including poor handling by distributors or third party transport operators,
transportation bottlenecks, natural disasters and labor strikes, and could lead to delayed or lost deliveries. Some of our juice
products are perishable and poor handling by distributors and third party transport operators could also result in damage to our
products that would make them unfit for sale. If our juice products are not delivered to retailers on time, or are delivered damaged,
we may have to pay compensation, we could lose business and our reputation could be harmed.
Concerns over food safety and public
health may affect our juice business by increasing our costs and negatively impacting demand for our products.
We could be adversely affected by diminishing
confidence in the safety and quality of certain food products or ingredients. As a result, we may elect or be required to incur
additional costs aimed at increasing consumer confidence in the safety of our juice products. In addition, our concentrated fruit
juices exported to foreign countries must comply with quality standards in those countries. Our success depends on our ability
to maintain the quality of our existing and new products. Product quality issues, real or imagined, or allegations of product
contamination, even if false or unfounded, could tarnish the image of our brands and may cause consumers to choose other products
and claim for damages due to product quality issues, which could negatively impact our financial results.
We may not be able to prevent others
from unauthorized use of our intellectual property, which could harm our business and competitive position.
Our success depends, in part, on our ability
to protect our proprietary technologies. The process of seeking intellectual property protection can be lengthy and expensive
and we cannot guarantee that our existing or future intellectual property rights will be fully protected or bring us the commercial
advantages. We also cannot guarantee that our current or potential competitors do not have, and will not obtain, patents that
will prevent, limit or interfere with our ability to make or sell our products in the PRC or other countries.
The implementation and enforcement of
PRC intellectual property laws historically have not been vigorous or consistent. Accordingly, intellectual property rights and
confidentiality protections in the PRC are not as effective as those in the United States and other countries. We may need to
resort to litigation to enforce or defend patents issued to us or to determine the enforceability, scope and validity of our proprietary
rights or those of others. Such litigation will require significant expenditures of cash and management efforts and could harm
our business, financial condition and results of operations. An adverse determination in any such litigation will impair our intellectual
property rights and may harm our business, competitive position, business prospects and reputation.
The blockchain related products
and services that we are developing have the potential to be used in ways we do not intend, including for criminal or other illegal
activities.
Blockchain-related products and services,
in particular cryptocurrencies, have the potential to be used for financial crimes or other illegal activities. Because the blockchain
platform that we are developing is novel, there are uncertainties regarding any legal and regulatory requirements for preventing
blockchain-related products and services from being put to such uses, and there are uncertainties regarding the liabilities and
risks to the Company if we are unable to prevent such uses. Even if we comply with all laws and regulations regarding financial
and blockchain related products and services, we have no ability to ensure that our customers, partners or others to whom we license
or sell our products and services comply with all laws and regulations applicable to them and their transactions.
DCON uses what is called “cold”
wallets for these accounts, which also have multiple signature requirements to protect the digital assets. mBTC uses the SHA256
algorithm, which by itself gives a high level of safety. A “cold wallet” is a wallet that is not connected to the
internet. A user can store his or her crypto assets in a cold wallet if such user has no immediate plan to use those assets because
it is safer than “hot wallet” storage, which refers to a storage system that is connected to the internet and is potentially
more vulnerable to hacking. Through the use of cold wallet technology, DCON can increase the safety of users’ assets, which
can be selectively moved to “hot wallets” in preparation for specific transactions. Additionally, DCON requires real
name registration for its cryptocurrency and each wallet and address can match a real person, i.e. a user must use his/her real
name in order to use his/her wallet. User anonymity is an important property of the traditional blockchain system, which uses
as its core premise absolutely free and anonymous exchanges. However, there are disadvantages related to user anonymity. For example,
the loss of key records or hard drive failure may result in the loss of tens of millions of dollars in assets. Aiming to become
a blockchain-based financial center, DCON will have real life business through its community stores, fund investment, mortgage
loans, and similar products. Because these social and business activities involve risks and large amounts of capital, they should
be conducted under a framework of regulatory and financial policies, which is a common theme in the worldwide financial system.
Based on years of experience in the financial industry, DCON has cautiously chosen the real-name system described above to make
sure, to the extent possible, that the assets of its users are protected and in compliance with applicable laws and regulations.
Due to the nature of blockchain, all the assets on the blockchain can be tracked, traced and monitored. The Shared Shopping Mall
employs security measures common to blockchain technologies, such a multiple identity authentication and multi-signature requirements.
The security measures to be employed by our blockchain projects currently in development have not yet been determined. There is
no guarantee that these security measures or any that we may develop in the future will be effective.
Any negative publicity we receive regarding
any allegations of unlawful uses of our blockchain platform could damage our reputation. More generally, any negative publicity
regarding unlawful uses of blockchain technology in the marketplace could reduce the demand for our products and services. The
occurrence of any of the foregoing could have a material adverse effect on our financial results and business.
The regulatory regime governing
blockchain technologies, cryptocurrencies, digital assets, and offerings of digital assets is uncertain, and new regulations or
policies may materially adversely affect the development and the value of such cryptocurrencies and assets.
Regulation of digital assets, cryptocurrencies,
blockchain technologies, and the blockchain platform we are developing is currently undeveloped and likely to rapidly evolve as
government agencies take greater interest in them. Regulation also varies significantly among international, federal, state and
local jurisdictions and is subject to significant uncertainty. Various legislative and executive bodies in the United States and
in other countries may in the future adopt laws, regulations, or guidance, or take other actions, which may severely impact the
permissibility of tokens generally and the technology behind them or the means of transaction or in transferring them. Failure
by our subsidiaries to comply with any laws, rules and regulations, some of which may not exist yet or are subject to interpretation
and may be subject to change, could result in a variety of adverse consequences, including civil penalties and fines.
Intellectual property infringement
claims may adversely impact our results of operations.
As we develop and introduce new products
and services, we may be increasingly subject to claims of infringement of another party’s intellectual property. If a claim
for infringement is brought against us, such claim may require us to modify our products or services, cease selling certain products
or engage in litigation to determine the validity and scope of such claims. Any of these events may harm our business and results
of operations.
Our business and operations may
be subject to disruption from work stoppages, terrorism or natural disasters.
Our operations may be subject to disruption
for a variety of reasons, including work stoppages, acts of war, terrorism, pandemics, fire, earthquake, flooding or other natural
disasters and events beyond our control. If a major incident were to occur in any of the regions where our facilities or offices
are located, our facilities or offices or those of critical suppliers and customers could be damaged or destroyed. Such a disruption
could result in a reduction in available raw materials, the temporary or permanent loss of critical data, suspension of operations,
delays in shipment of products and disruption of business generally, which would adversely affect our revenue and results of operations.
Our success depends substantially
on the continued retention of certain key personnel and our ability to hire and retain qualified personnel in the future to support
our growth.
If one or more of our senior executives
or other key personnel are unable or unwilling to continue in their present positions, our business may be disrupted and our financial
condition and results of operations may be materially and adversely affected. While we depend on the abilities and participation
of our current management team generally, we rely particularly upon Mr. Yongke Xue, our Chairman of the Company’s Board
of Directors (the “Board”); Shanchun Huang, our chief executive officer (“CEO”); Mr. Kai Xu, our chief
operating officer (“COO”); Mr. Zhi Yan, our chief technology office (“CTO”) and Ms. Jing Chen, our chief
financial officer (“CFO”). The loss of the services of Messrs. Yongke Xue, Shanchun Huang, Kai Xu, Zhi Yan or Jing
Chen for any reason could significantly adversely impact our business and results of operations. Competition for senior management
and senior technology personnel in the PRC is intense and the pool of qualified candidates is very limited. Accordingly, we cannot
guarantee that the services of our senior executives and other key personnel will continue to be available to us, or that we will
be able to find a suitable replacement for them if they were to leave.
Our e-commerce business depends
on the continued use of the Internet and the adequacy of the Internet infrastructure.
Our e-commerce business depends upon the
widespread use of the Internet and e-commerce. Factors which could reduce the widespread use of the Internet for e-commerce include,
without limitation, actual or perceived lack of security of information or privacy protection, cyberattacks or other disruptions
or damage to the Internet or to users’ computers, significant increases in the costs of transportation of goods, and taxation
and governmental regulation.
Our business depends on our website,
app, network infrastructure and transaction-processing systems.
Our e-commerce business is completely
dependent on our infrastructure. Any system interruption that results in the unavailability of our website, app or reduced performance
of our transaction systems could reduce our ability to conduct our business. We use internally and externally developed systems
for our website, app and our transaction processing systems. We expect to experience system interruptions due to software failure.
We may also experience temporary capacity constraints due to sharply increased traffic during sales or other promotions and during
the holiday shopping season. Capacity constraints can cause system disruptions, slower response times, delayed page presentation,
degradation in levels of customer service and other problems. We may also experience difficulties with our infrastructure upgrades.
Any future difficulties with our transaction processing systems or difficulties upgrading, expanding or integrating aspects of
our systems may cause system disruptions, slower response times, and degradation in levels of customer service, additional expense,
impaired quality and speed of order fulfilment or other problems.
If the location where all of our computer
and communications hardware is located is compromised, our business, prospects, financial condition and results of operations
could be harmed. If we suffer an interruption or degradation of services at the location for any reason, our business could be
harmed. Our success, and in particular, our ability to successfully receive and fulfil orders and provide high-quality customer
service, largely depends on the efficient and uninterrupted operation of our computer and communications systems. These limitations
could have an adverse effect on our conversion rate and sales. Our disaster recovery plan may be inadequate, and we do not carry
business interruption insurance to compensate us for the losses that could occur. Despite our implementation of network security
measures, our servers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, the occurrence
of any of which could lead to interruptions, delays, loss of critical data or the inability to accept and fulfil customer orders.
The occurrence of any of the foregoing risks could harm our business.
Our platform requires frequent updates
on pricing from our vendors. If these updates are inaccurate or do not occur, there could be a negative influence on our business.
We update the prices of products listed
on our site frequently from our vendors. If we are unable to obtain, or are not provided updated pricing information from our
vendors, or if we fail to act on information from our vendors, then it could require us to remedy the pricing difference to complete
the transaction, or source the product from an alternative vendor at their price, which could materially adversely affect our
financial results.
We are subject to cyber security
risks and may incur increasing costs in an effort to minimize those risks and to respond to cyber incidents.
Our e-commerce business is entirely dependent
on the secure operation of our website and systems as well as the operation of the Internet generally. Our business involves the
storage and transmission of users’ proprietary information, and security breaches could expose us to a risk of loss or misuse
of this information, litigation, and potential liability. A number of large Internet companies have suffered security breaches,
some of which have involved intentional attacks. From time to time we and many other Internet businesses also may be subject to
a denial of service attacks wherein attackers attempt to block customers’ access to our Website. If we are unable to avert
a denial of service attack for any significant period, we could sustain substantial revenue loss from lost sales and customer
dissatisfaction. We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of
cyberattacks.
Cyberattacks may target us, our customers,
our suppliers, banks, payment processors, e-commerce in general or the communication infrastructure on which we depend. If an
actual or perceived attack or breach of our security occurs, customer and/or supplier perception of the effectiveness of our security
measures could be harmed and we could lose customers, suppliers or both. Actual or anticipated attacks and risks may cause us
to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees, and engage
third party experts and consultants. A person who is able to circumvent our security measures might be able to misappropriate
our or our users’ proprietary information, cause interruption in our operations, damage our computers or those of our users,
or otherwise damage our reputation and business. Any compromise of our security could result in a violation of applicable privacy
and other laws, significant legal and financial exposure, damage to our reputation, and a loss of confidence in our security measures,
which could harm our business.
Failure to comply with the relatively
new E-Commerce Law may have a material adverse impact on our business, financial conditions and results of operations.
As the e-commerce industry is still evolving
in China, new laws and regulations may be adopted from time to time to address new issues that arise from time to time. For example,
in August 2018, the Standing Committee of the National People’s Congress promulgated the E-Commerce Law, which became effective
on January 1, 2019. The E-Commerce Law generally provides that e-commerce operators must obtain administrative licenses if
business activities conducted by the e-commerce operators are subject to administrative licensing requirements under applicable
laws and regulations. In addition, the E-Commerce Law imposes a number of obligations on e-commerce platform operators, including
the obligations: (i) to verify and register platform merchants, (ii) to ensure platform cybersecurity, including, but
not limited to, data privacy, (iii) to ensure fair dealing and the legitimate rights and interests of consumers on the platform,
(iv) to publicize transaction information preservation and transaction rules, and (v) to protect intellectual properties.
See “Item 1. Overview—Government Regulations—Regulations Relating to E-Commerce” for further details.
As the E-Commerce Law is relatively new, no detailed interpretation and implementation rules have been promulgated, and it remains
uncertain how the E-Commerce Law will be interpreted and implemented. We cannot assure you that our current business operations
satisfy the obligations provided under the E-Commerce Law in all respects. If the PRC governmental authorities determine that
we are not in compliance with all the requirements proposed under the E-Commerce Law, we may be subject to fines and/or other
sanctions.
The E-Commerce Law also imposes a requirement
on operators of e-commerce platforms, such as our company, to assist in tax collection with respect to income generated by sellers
from transactions conducted on e-commerce platforms, including, among others, submitting to the tax authority information on the
identities of sellers on e-commerce platforms and other information relating to tax payment. Failure to comply with the requirement
may result in operators of e-commerce platforms being subject to fines and, in severe circumstances, suspension of business operations
of e-commerce platforms. Substantial uncertainties exist regarding the interpretation and implementation of the E-Commerce Law.
We encourage and incentivize merchants to promote the products on our platform. If the merchants were deemed to be selling our
products on consignment basis, the PRC tax authorities may require them to make tax registration and request our assistance in
these efforts, pursuant to the E-Commerce Law, and the merchants on our platform may be subject to more stringent tax compliance
requirements. The PRC government may adopt additional requirements from time to time, and we may be requested by tax authorities
to provide further assistance in the enforcement of tax regulations, such as disclosure of transaction records and bank account
information of the merchants, and withholding taxes for such merchants. If any of these were to occur, we may lose our existing
stores or fail to attract new stores on our platform and the level of activity may be reduced on our platform. We may also incur
increased costs and expenses as a result. The tightened tax enforcement by PRC tax authorities in the e-commerce industry, such
as imposition of reporting or withholding obligations on operators of e-commerce platforms with respect to tax payable of merchants
on e-commerce platforms, may have a material and adverse effect on our business, financial condition and results of operations.
If our business model were found to be in violation of
applicable laws and regulations, our business, financial condition and results of operations would be materially and adversely
affected.
In August 2005, the State Council promulgated
the Regulations on the Prohibition of Pyramid Selling, which prohibits individuals and entities in China from engaging in pyramid
selling. See “Item 1. Overview—Government Regulations—Regulations Relating to Pyramid Selling in the PRC.”
We believe that our current business model is not in violation of applicable PRC laws and regulations, including the Regulations
on the Prohibition of Pyramid Selling. However, there is no assurance that the relevant government authorities will
find our business model not in violation of any applicable regulations, given the uncertainties in the interpretation and application
of existing PRC laws, regulations and policies relating to our current business model, including, but not limited to, regulations
regulating pyramid selling. Moreover, new laws, regulations or policies may also be promulgated in the future, and there is no
assurance that our current business model will be in full compliance with the new laws, regulations or policies. If our business
model were to be found in violation in the future, we will have to make adjustment to our business model or cease certain of our
business operations, and the relevant governmental authorities may confiscate any illegal gains and impose a fine, which would
have a material and adverse impact on our business, financial condition and results of operations.
The relative lack of public company
experience of our management team may put us at a competitive disadvantage.
Our management team lacks significant
public company experience, which could impair our ability to comply with legal and regulatory requirements such as, but not limited
to, those imposed by the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”). Our senior management does not have significant
experience managing a publicly traded company. Such responsibilities include complying with federal securities laws and making
required disclosures on a timely basis. Our senior management may be unable to implement programs and policies in an effective
and timely manner or that adequately respond to the increased legal, regulatory and reporting requirements associated with being
a publicly traded company. Our failure to comply with all applicable requirements could lead to the imposition of fines and penalties,
distract our management from attending to the management and growth of our business, result in a loss of investor confidence in
our financial reports and have an adverse effect on our business and stock price.
As a public company, we are
obligated to maintain effective internal controls over financial reporting. Our internal controls may be determined not to be
effective, which may adversely affect investor confidence in us and, as a result, decrease the value of our Common Stock.
The PRC has not adopted management and
financial reporting concepts and practices similar to those in the United States. We may have difficulty in hiring and retaining
a sufficient number of qualified finance and management employees to work in the PRC. As a result of these factors, we may experience
difficulty in establishing and maintaining accounting and financial controls, collecting financial data, budgeting, managing our
funds and preparing financial statements, books of account and corporate records and instituting business practices that meet
investors’ expectations in the United States.
Rules adopted by the SEC, or the Commission,
pursuant to Sarbanes-Oxley Section 404 require annual assessment of our internal controls over financial reporting. This
requirement first applied to our annual report on Form 10-K for the fiscal year ended December 31, 2008. The standards
that must be met for management to assess the internal controls over financial reporting as effective are relatively new and complex,
and they require significant documentation, testing and possible remediation to meet the detailed standards. This assessment will
need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting.
During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial
reporting as we have done previously, we will be unable to assert that our internal controls are effective. If we continue to
be unable to conclude that our internal control over financial reporting is effective, we could lose investor confidence in the
accuracy and completeness of our financial reports, which could harm our business and cause the price of our stock to decline.
We may need additional capital to
fund our future operations and, if it is not available when needed, we may need to reduce our planned development and marketing
efforts, which may reduce our sales revenue.
We believe that our existing working capital
and cash available from operations will enable us to meet our working capital requirements for at least the next twelve months.
However, if cash from future operations is insufficient, or if cash is used for acquisitions or other currently unanticipated
uses, we may need additional capital. The development and marketing of new products and the expansion of distribution channels
and associated support personnel require a significant commitment of resources. In addition, if the markets for our products and
services develop more slowly than anticipated, or if we fail to establish significant market share and achieve sufficient net
revenues, we may continue to consume significant amounts of capital. As a result, we could be required to raise additional capital.
To the extent that we raise additional capital through the sale of equity or convertible debt securities or other methods, the
issuance of such securities could result in dilution of the shares held by existing shareholders. If additional funds are raised
through the issuance of debt securities, such securities may provide the holders certain rights, preferences, and privileges senior
to those of common shareholders, and the terms of such debt could impose restrictions on our operations. We cannot guarantee that
additional capital, if required, will be available on acceptable terms, or at all. If we are unable to obtain sufficient amounts
of additional capital, we may be required to reduce the scope of our planned product development and marketing efforts, which
could harm our business, financial condition and operating results.
If our costs and demands upon management
increase disproportionately to the growth of our business and revenue as a result of complying with the laws and regulations affecting
public companies, our operating results could be harmed.
As a public company, we do and will continue
to incur significant legal, accounting, investor relations and other expenses, including costs associated with public company
reporting requirements. We also have incurred and will incur costs associated with current corporate governance requirements,
including requirements under Section 404 and other provisions of Sarbanes-Oxley, as well as rules implemented by the SEC
and the stock exchange on which our common stock is traded. The expenses incurred by public companies for reporting and corporate
governance purposes have increased dramatically over the past several years. These rules and regulations have increased our legal
and financial compliance costs substantially and make some activities more time consuming and costly. If our costs and demands
upon management increase disproportionately to the growth of our business and revenue, our operating results could be harmed.
There are inherent uncertainties
involved in estimates, judgments and assumptions used in the preparation of financial statements in accordance with generally
accepted accounting principles in the United States, or U.S. GAAP. Any changes in estimates, judgments and assumptions could have
a material adverse effect on our business, financial condition and operating results.
The preparation of financial statements
in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) involves making estimates, judgments
and assumptions that affect reported amounts of assets (including intangible assets), liabilities and related reserves, revenue,
expenses and income. Estimates, judgments and assumptions are inherently subject to change in the future, and any such changes
could result in corresponding changes to the amounts of assets, liabilities, revenue, expenses and income. Any such changes could
have a material adverse effect on our business, financial condition and operating results.
We will
no longer have any equity participation in HeDeTang HK or in the fruit juice industry.
After the Sale Transaction closed on
February 27, 2020, we will have no ongoing equity participation in the fruit juice business in China. We will cease to
participate in HeDeTang HK’s future earnings or growth, if any, and will not participate in any potential future sale
of HeDeTang HK even if there is significant growth of fruit juice business in China in the future. It is possible that New
Continent could sell some or all of its equity in HeDeTang HK following the Sale Transaction at a valuation higher than that
being paid in the Sale Transaction and New Continent could realize significant returns on its equity investment in
HeDeTang.
We may be exposed to litigation
related to the Sale Transaction on February 27, 2020 from the holders of our common stock.
Transactions such as the Sale Transaction
are often subject to lawsuits by stockholders. Particularly because the holders of our common stock will not receive any consideration
from the Sale Transaction, it is possible that they may sue the Company or the Board of Directors. Such lawsuits could result
in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our
business.
We are subject to the risk of increased
income taxes, which could harm our business, financial condition and operating results.
We base our tax position upon the anticipated
nature and conduct of our business and upon our understanding of the tax laws of the various countries in which we have assets
or conduct activities. However, our tax position is subject to review and possible challenge by tax authorities and to possible
changes in law, which may have retroactive effect. We currently operate through three direct wholly-owned subsidiaries: DigiPay
FinTech Limited, a company incorporated under the laws of the British Virgin Islands, Digital Online Marketing Limited, a company
organized under the laws of the British Virgin Islands, and SkyPeople Foods Holding Limited, a company organized under the laws
of the British Virgin Islands, and their subsidiaries and VIE in Hong Kong, Japan, Cayman Islands and China, and we maintain manufacturing
and e-commerce operations in China. Any of these jurisdictions could assert tax claims against us. We cannot determine in advance
the extent to which some jurisdictions may require us to pay taxes or make payments in lieu of taxes. If we become subject to
additional taxes in any jurisdiction, such tax treatment could materially and adversely affect our business, financial condition
and operating results.
Increases in income tax rates, changes
in income tax laws or disagreements with tax authorities could adversely affect our business, financial condition or results of
operations.
We are subject
to income taxes in the United States and in certain foreign jurisdictions in which we operate. Increases in income tax rates or
other changes in income tax laws that apply to our business could reduce our after-tax income from such jurisdiction and could
adversely affect our business, financial condition or results of operations. Our operations outside the United States generate
a significant portion of our income. In addition, the United States and many of the other countries in which our products are
distributed or sold, including countries in which we have significant operations, have recently made or are actively considering
changes to existing tax laws. For example, the Tax Cuts and Jobs Act (the “TCJ Act”) was recently signed into law
in the United States. The changes in the TCJ Act are broad and complex and we are continuing to examine the impact the TCJ Act
may have on our business and financial results. Additional changes in the U.S. tax regime or in how U.S. multinational corporations
are taxed on foreign earnings, including changes in how existing tax laws are interpreted or enforced, could adversely affect
our business, financial condition or results of operations.
We are also subject
to regular reviews, examinations and audits by the IRS and other taxing authorities with respect to income and non-income based
taxes both within and outside the United States. Economic and political pressures to increase tax revenues in jurisdictions in
which we operate, or the adoption of new or reformed tax legislation or regulation, may make resolving tax disputes more difficult
and the final resolution of tax audits and any related litigation could differ from our historical provisions and accruals, resulting
in an adverse impact on our business, financial condition or results of operations. In addition, in connection with the Organization
for Economic Co-operation and Development Base Erosion and Profit Shifting project, companies are required to disclose more information
to tax authorities on operations around the world, which may lead to greater audit scrutiny of profits earned in various countries.
Risks Related to Doing Business in
the PRC
We face the risk that changes in
the policies of the PRC government could have a significant impact upon the business we may be able to conduct in the PRC and
the profitability of such business.
We conduct substantially all of our operations
and generate most of our revenue in the PRC. Accordingly, economic, political and legal developments in the PRC will significantly
affect our business, financial condition, results of operations and prospects. The PRC economy is in transition from a planned
economy to a market oriented economy subject to plans adopted by the government that set national economic development goals.
Policies of the PRC government can have significant effects on economic conditions in the PRC. While we believe that the PRC will
continue to strengthen its economic and trading relationships with foreign countries and that business development in the PRC
will continue to follow market forces, we cannot guarantee that this will be the case. Our interests may be adversely affected
by changes in policies by the PRC government, including:
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changes in laws, regulations or their interpretation;
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confiscatory taxation;
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restrictions on currency conversion, imports or sources of supplies;
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expropriation or nationalization of private enterprises; and
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the allocation of resources.
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Although the PRC government has been pursuing
economic reform policies for more than two decades, the PRC government continues to exercise significant control over economic
growth in the PRC through the allocation of resources, controlling payments of foreign currency, setting monetary policy and imposing
policies that impact particular industries in different ways. We cannot guarantee that the PRC government will continue to pursue
policies favoring a market oriented economy or that existing policies will not be significantly altered, especially in the event
of a change in leadership, social or political disruption, or other circumstances affecting political, economic and social life
in the PRC.
The original incorporation of SkyPeople
(China) as a joint stock company in 2001 did not obtain all required approvals from the PRC government authorities pursuant to
the relevant PRC law effective at the time, and we may be subject to various penalties under the law retroactively.
The original incorporation of SkyPeople
(China) (under the original name of Xi’an Zhonglv Ecology Science and Technology Industry Co., Ltd.) as a joint stock company
in 2001 was approved by the Xi’an Municipal People’s Government. However, according to the applicable PRC Company
Law that was in force in 2001, the incorporation of SkyPeople (China) as a joint stock company shall be subject to the approval
by the government authority of Shaanxi Province. Pursuant to the PRC Company Law which was in force in 2001, if company stocks
is arbitrarily issued without obtaining the approval of the relevant competent authorities stipulated under the law, the parties
concerned may be ordered to cease the issuance of the stock, refund the raised capital and the interests accrued therefrom, and
may be subject to a fine of no less than one percent but no more than five percent of the amount of the raised capital. As such,
SkyPeople (China) may be subject to any or all of the foregoing penalties as provided under the PRC Company Law effective in 2001
should the relevant government authorities choose to enforce the law retroactively.
However, we believe that the regulatory authorities may consider
the following factors as mitigating factors if such authorities choose to enforce the applicable laws:
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the incorporation of SkyPeople (China) obtained the approval
by the Xi’an local government. As general practice in approval procedures, the applicants may only be able to first approach
the Xi’an local government authority in order to acquire the approval by a higher level government authority, and would
generally rely on the Xi’an local government to then submit the application to a higher level authority for its final approval;
and
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(ii)
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the trend of the PRC Company Law is to deregulate the approvals
on the incorporation of joint stock companies in China. In particular, the current PRC Company Law, effective since January 1,
2006, has eliminated the relevant approval requirement relating to the incorporation of joint stock companies. Instead, the current
PRC Company Law merely requires a registration with the competent Administration for Industry and Commerce in connection with
the incorporation of joint stock companies in the PRC as long as the stock is not issued to the public.
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In addition, if needed in the future,
we may make efforts to seek a written confirmation from the Shaanxi Provencal People’s Government regarding its ratification
of the original incorporation of SkyPeople (China) as a joint stock company.
Our current manufacturing operations
are subject to various environmental protection laws and regulations issued by the central and local governmental
authorities, and we cannot guarantee that we have fully complied with all such laws and regulations. In addition, changes in the
existing laws and regulations or additional or stricter laws and regulations on environmental protection in the PRC may cause
us to incur significant capital expenditures, and we cannot guarantee that we will be able to comply with any such laws and regulations.
We carry out our juice business in an
industry that is subject to PRC environmental protection laws and regulations. These laws and regulations require enterprises
engaged in manufacturing and construction that may cause environmental waste to adopt effective measures to control and properly
dispose of waste gases, waste water, industrial waste, dust and other environmental waste materials, as well as fee payments from
producers discharging waste substances. Fines may be levied against producers causing pollution. Although we have made efforts
to comply with such laws and regulations, we cannot guarantee that we have fully complied with all such laws and regulations.
Except for Yingkou, all of our operating facilities hold a Pollution Emission Permit. The failure of complying with such laws
or regulations may subject us to various administrative penalties such as fines. If the circumstances of the breach are serious,
the central government of the PRC, including all governmental subdivisions, has the discretion to cease or close any operations
failing to comply with such laws or regulations. There can also be no assurance that the PRC government will not change the existing
laws or regulations or impose additional or stricter laws or regulations, compliance with which may cause us to incur significant
capital expenditure, which we may be unable to pass on to our customers through higher prices for our products. In addition, we
cannot guarantee that we will be able to comply with any such laws and regulations.
Changes in existing PRC food hygiene
and safety laws may cause us to incur additional costs to comply with the more stringent laws and regulations, which could have
an adverse impact on our financial position.
Manufacturers within the PRC beverage
industry are subject to compliance with PRC food hygiene laws and regulations. These food hygiene and safety laws require all
enterprises engaged in the production of juice and other beverages to obtain a food production license for each of their production
facilities. They also set out hygiene and safety standards with respect to food and food additives, packaging and containers,
information to be disclosed on packaging as well as hygiene requirements for food production and sites, facilities and equipment
used for the transportation and sale of food. Failure to comply with PRC food hygiene and safety laws may result in fines, suspension
of operations, loss of business licenses and, in more extreme cases, criminal proceedings against an enterprise and its management.
Although we comply with current food hygiene laws, in the event that the PRC government increases the stringency of such laws,
our production and distribution costs may increase, which could adversely impact our financial position.
We benefit from various forms of
government subsidies and grants, the withdrawal of which could affect our operations.
Certain of our subsidiaries have received
government subsidies from local governments. We recognized $1,001 and $0 in government subsidies for fiscal years 2019 and 2018, respectively. Past government grants or subsidies are not indicative of what we will obtain in the future. We cannot guarantee
that we will continue to be eligible for government grants or other forms of government support. In the event that we are no longer
eligible for grants, subsidies or other government support, our business and financial condition could be adversely affected.
PRC laws and regulations governing
our current business operations are sometimes vague and uncertain and any changes in such laws and regulations may harm our business.
There are substantial uncertainties regarding
the interpretation and application of PRC laws and regulations including, but not limited to, the laws and regulations governing
our business and the enforcement and performance of our arrangements with customers in certain circumstances. We are considered
foreign persons or foreign funded enterprises under PRC laws and, as a result, we are required to comply with PRC laws and regulations
related to foreign persons and foreign funded enterprises. These laws and regulations are sometimes vague and may be subject to
future changes, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly
enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance. New laws and regulations that affect
existing and proposed future businesses may also be applied retroactively. We cannot predict what effect the interpretation of
existing or new PRC laws or regulations may have on our business.
We could be restricted from paying
dividends to shareholders due to PRC laws and other contractual requirements.
We are a holding company incorporated
in the State of Florida and do not have any assets or conduct any business operations other than our investments in our subsidiaries
and affiliates. As a result of our holding company structure, we rely entirely on dividend payments from our subsidiaries in China.
PRC accounting standards and regulations currently permit payment of dividends only out of accumulated profits, a portion of which
is required to be set aside for certain reserve funds. Furthermore, if our subsidiaries in China incur debt on its own in the
future, the instruments governing the debt may restrict its ability to pay dividends or make other payments. Although we do not
intend to pay dividends in the future, our inability to receive all of the revenue from our China subsidiaries’ operations
may provide an additional obstacle to our ability to pay dividends if we so decide in the future.
Governmental control of currency conversion may affect the value of shareholder investments.
The PRC government imposes controls on
the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of the PRC. RMB is currently
not a freely convertible currency. Shortages in the availability of foreign currency may restrict our ability to remit sufficient
foreign currency to satisfy foreign currency obligations. Under existing PRC foreign exchange regulations, payments of current
account items, including profit distributions, interest payments and expenditures from the transaction, can be made in foreign
currencies without prior approval by complying with certain procedural requirements. Approval from appropriate governmental authorities,
however, is required where RMB is to be converted into foreign currency and remitted out of the PRC to pay capital expenses such
as the repayment of bank loans denominated in foreign currencies. In addition, the PRC government could restrict access to foreign
currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient
foreign currency to satisfy our currency demands, we may not be able to pay certain of our expenses as they come due.
The fluctuation of the RMB may harm
shareholder investments.
The value of the RMB against the U.S. dollar
and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions.
Any significant revaluation of the RMB may materially and adversely affect our cash flows, revenue and financial condition. For
example, to the extent that we need to convert U.S. dollars we receive from an offering of our securities into RMB for our operations,
appreciation of the RMB against the U.S. dollar would diminish the value of the proceeds of the offering and could harm our business,
financial condition and results of operations. Conversely, if we decide to convert our RMB into U.S. dollars for business purposes
and the U.S. dollar appreciates against the RMB, the U.S. dollar equivalent of the RMB we convert would be reduced. In addition,
the depreciation of significant U.S. dollar denominated assets could result in a charge to our income statement and a reduction
in the value of these assets.
PRC regulations relating to mergers
and the establishment of offshore special purpose companies by PRC residents, if applied to us, may limit our ability to operate
our business as we see fit.
On August 8, 2006, six Chinese regulatory
agencies, namely, Ministry of Commerce (“MOFCOM”), the State Assets Supervision and Administration Commission, the
State Administration for Taxation (“SAT”), SAIC, the Securities Regulatory Commission (“CSRC”) and the
State Administration of Foreign Exchange (“SAFE”), jointly promulgated the Regulation on Mergers and Acquisitions of
Domestic Companies by Foreign Investors, generally referred to as the 2006 M&A Rules, which became effective on September 8,
2006. The 2006 M&A Rules, among other things, govern the approval process by which an offshore investor may participate in
an acquisition of assets or equity interests of a Chinese domestic company. Depending on the structure of the transaction, the
2006 M&A Rules require the transaction parties to make a series of applications to the government agencies. In some instances,
the application process may require the presentation of economic data concerning a transaction, including appraisals of the target
business and evaluations of the acquirer, which are designed to allow the government to assess the transaction. Under certain circumstances,
government approvals will have expiration dates by which a transaction must be completed and reported to the government agencies.
Compliance with the 2006 M&A Rules will be more time consuming and expensive than in the past, and the government can exert
more control over the combination of two businesses under the 2006 M&A Rules. As a result of any potential application of the
2006 M&A Rules, our ability to engage in business combination transactions in the PRC has become significantly more complicated,
time consuming and expensive, and we may not be able to negotiate a transaction that is acceptable to us or sufficiently protective
of our interests in a transaction.
In October 2005, SAFE issued the Notice
on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents
Inside the PRC, generally referred to as Circular 75. Circular 75 requires Chinese residents to register with an applicable branch
of SAFE before establishing or acquiring control over an offshore special purpose company for the purpose of engaging in an equity
financing outside of the PRC that is supported by domestic Chinese assets originally held by those residents. Following the issuance
of Circular 75, SAFE issued internal implementing guidelines for Circular 75 in June 2007. These implementing guidelines, known
as Notice 106, effectively expanded the reach of Circular 75 by:
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purporting to regulate the establishment or acquisition of control by Chinese residents of offshore entities which merely acquire “control” over domestic companies or assets, even in the absence of legal ownership;
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adding requirements relating to the source of the Chinese resident’s funds used to establish or acquire the offshore entity;
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regulating the use of existing offshore entities for offshore financings;
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purporting to regulate situations in which an offshore entity establishes a new subsidiary in the PRC or acquires an unrelated company or unrelated assets in the PRC;
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making the domestic affiliate of the offshore entity responsible for the accuracy of certain documents which must be filed in connection with any such registration, notably, the business plan which describes the overseas financing and the use of proceeds; and
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requiring that the registrant establish that all foreign exchange transactions undertaken by the offshore entity and its affiliates were in compliance with applicable laws and regulations.
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In July 2014, SAFE promulgated the Notice
of the State Administration of Foreign Exchange on the Administration of Foreign Exchange Involved in Overseas Investment, Financing
and Return on Investment Conducted by Residents in China via Special-Purpose Companies, or Circular 37, which replaced the former
circular commonly known as Circular 75 promulgated by SAFE in October 2005. Circular 37 requires PRC residents to register with
local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose
of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises
or offshore assets or interests, referred to in Circular 37 as a “special purpose vehicle.” Circular 37 further requires
amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as an increase
or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In
the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration,
the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent
and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in
its ability to contribute additional capital into its PRC subsidiary. Furthermore, failure to comply with the various SAFE registration
requirements described above could result in liability under PRC law for evasion of foreign exchange controls.
In February 2015, SAFE released the Notice
of the State Administration of Foreign Exchange on Further Simplifying and Improving the Policies of Foreign Exchange Administration
Applicable to Direct Investment, or Circular 13, which has amended Circular 37 by requiring PRC residents or entities to register
with qualified banks rather than SAFE or its local branch in connection with their establishment or control of an offshore entity
established for the purpose of overseas investment or financing.
No assurance can be given that our shareholders
who are the residents as defined in Circular 37 and who own or owned our shares have fully complied with, and will continue to
comply with, all applicable registration and approval requirements of Circular 37 in connection with their equity interests in
us and our acquisition of equity interests in our PRC based subsidiaries by virtue of our acquisition of Pacific. Moreover, because
of uncertainty over how Circular 37 will be interpreted and implemented, and how or whether SAFE will apply it to us following
the Pacific acquisition, we cannot predict how it will affect our business operations or future strategies. For example, the ability
of our present and prospective PRC subsidiaries to conduct foreign exchange activities, such as the remittance of dividends and
foreign currency denominated borrowings, may be subject to compliance with Circular 37 by our Chinese resident beneficial holders.
In addition, such Chinese residents may not always be able to complete the necessary registration procedures required by Circular
37. We have little control over our present or prospective direct or indirect shareholders /beneficial owners or the outcome of
such registration procedures. If our Chinese shareholders/beneficial owners or the Chinese shareholders/beneficial owners of the
target companies we acquired in the past or will acquire in the future fail to comply with Circular 37 and related regulations,
and if SAFE requires it, they may be subject to fines or legal sanctions, and Chinese authorities could restrict our investment
activities in the PRC, limit our subsidiaries’ ability to make distributions or pay dividends, or affect the ownership structure,
which could adversely affect business and prospects.
Our acquisition of SkyPeople (China)
could constitute a Round-trip Investment under the 2006 M&A Rules.
Prior to obtaining the MOFCOM approval
on September 3, 2007 and Xi’an AIC approval on October 18, 2007, and prior to the full payment of the purchase price by Pacific
for 99% of SkyPeople (China)’s capital stock, SkyPeople (China) was a PRC business some of whose shareholders were PRC individuals
including Hongke Xue, chairman of SkyPeople (China). When Pacific was incorporated on November 30, 2006 and when the SkyPeople
(China) acquisition was approved, none of the shareholders of Pacific were PRC citizens. Immediately after the consummation of
the share exchange, shareholders of Pacific became our shareholders, including Fancylight, our controlling shareholder. To incentivize
Mr. Hongke Xue in connection with the continuous development of SkyPeople (China)’s business, a call option agreement was
entered into between Fancylight and Mr. Hongke Xue on February 25, 2008 pursuant to which Mr. Xue had the opportunity to acquire
a majority of our Common Stock held by Fancylight. Mr. Xue and Fancylight also entered into a voting trust agreement pursuant to
which Mr. Xue has the right to vote such shares on Fancylight’s behalf.
The PRC regulatory authorities may take
the view that the SkyPeople (China) acquisition, the share exchange transaction and the call option and voting trust arrangements
are part of an overall series of arrangements which constitute a round-trip investment regulated by the 2006 M&A Rules, because
at the end of these transactions the same PRC individual who controlled SkyPeople (China) became the effective controlling party
of a foreign entity that acquired ownership of SkyPeople (China). The PRC regulatory authorities may also take the view that the
approval of the SkyPeople (China) acquisition by the MOFCOM and the registration of such acquisition with the AIC in Xi’an
AIC may not be evidence that the SkyPeople (China) acquisition has been properly approved because the relevant parties did not
fully disclose to the MOFCOM or AIC the overall restructuring arrangements. If the PRC regulatory authorities take the view that
the SkyPeople (China) acquisition constitutes a round-trip investment under the 2006 M&A Rules, we cannot guarantee that we
will be able to obtain the required MOFCOM approval.
If the PRC regulatory authorities take
the view that the SkyPeople (China) acquisition constitutes a round-trip investment without MOFCOM approval on such round-trip
investment, they could invalidate our acquisition and ownership of SkyPeople (China).
Additionally, the 2006 M&A Rules also
purport to require that an offshore special purpose vehicle (“SPV”) formed for listing purposes and controlled directly
or indirectly by PRC companies or individuals shall obtain the approval of the CSRC prior to the listing and trading of such SPV’s
securities on an overseas stock exchange. On September 21, 2006, the CSRC published on its official website procedures specifying
documents and materials required to be submitted to it by SPVs seeking CSRC approval of their overseas listings. However, the application
of this PRC regulation remains unclear, with no consensus currently existing regarding the scope and applicability of the CSRC
approval requirement. Given that we established our PRC subsidiaries by means of direct investments, we believe that these regulations
do not require an application to be submitted to the CSRC for the approval of the listing and trading of our stock on the NASDAQ,
unless we are clearly required to do so by subsequently promulgated rules of the CSRC. If the CSRC or another PRC regulatory agency
subsequently determines that CSRC approval was required for the offerings, we may need to apply for a remedial approval from the
CSRC and may be subject to certain administrative punishments or other sanctions from these regulatory agencies. The regulatory
agencies may take actions that could have a material adverse effect on our business, financial condition, results of operations,
reputation and prospects, as well as the trading price of our stock.
We believe that if this takes place, we
may be able to find a way to reestablish control of SkyPeople (China)’s business operations through a series of contractual
arrangements rather than an outright purchase of SkyPeople (China). But we cannot guarantee that such contractual arrangements
will be protected by PRC law or that we can receive as complete or effective economic benefit and overall control of SkyPeople
(China)’s business than if we had direct ownership of SkyPeople (China). In addition, we cannot guarantee that such contractual
arrangements can be successfully implemented under PRC law. If we cannot obtain approval from MOFCOM and/or CSRC if required by
the PRC regulatory authorities to do so, and if we cannot put in place or enforce relevant contractual arrangements as an alternative
and equivalent means of control of SkyPeople (China), our business and financial performance will be materially adversely affected.
Because our principal assets are
located outside of the United States, it may be difficult for investors to use U.S. securities laws to enforce their rights against
us, our officers and some of our directors in the United States or to enforce judgments of United States courts against us or them
in the PRC.
All of our present officers and directors
reside outside of the United States. In addition, all of our subsidiaries and assets are located outside of the United States.
Therefore, it may be difficult for investors in the United States to enforce their legal rights based on the civil liability provisions
of the U.S. securities laws against us in the courts of either the United States or the PRC and, even if civil judgments are obtained
in courts of the United States, to enforce such judgments in the PRC courts. Further, it is unclear if extradition treaties now
in effect between the United States and the PRC would permit effective enforcement against us or our officers and directors of
criminal penalties under the U.S. Federal securities laws or otherwise.
Risks Related to Our Common Stock
We are authorized to issue blank check preferred stock,
which may be issued without shareholder approval and which may adversely affect the rights of holders of our Common Stock.
We are authorized to issue 10,000,000 shares
of preferred stock. The Board is authorized under our articles of incorporation, as amended, to provide for the issuance of shares
of preferred stock by resolution and by filing a certificate of designations under Florida law, to fix the designation, powers,
preferences and rights of the shares of each such series of preferred stock and the qualifications, limitations or restrictions
thereof without any further vote or action by the shareholders. The Board previously designated and issued 1,000,000 shares of
Series A preferred stock which were automatically converted into our Common Stock upon the effective date of our two-for-three
reverse split and returned to the status of authorized and unissued shares of preferred stock following the reverse split. As of
December 31, 2019, there were no shares of Series A preferred stock issued and outstanding. Any shares of preferred stock that
are issued are likely to have priority over our Common Stock with respect to dividend or liquidation rights. In the event of issuance,
the preferred stock could be utilized under certain circumstances as a method of discouraging, delaying or preventing a change
in control, which could have the effect of discouraging bids to acquire us and thereby prevent shareholders from receiving the
maximum value for their shares. We have no present intention to issue any additional shares of preferred stock in order to discourage
or delay a change of control or for any other reason. However, there can be no assurance that preferred stock will not be issued
at some time in the future.
Zeyao Xue has control over key decision making as a result
of his control of a substantial amount of our voting stock.
Zeyao Xue, the son of our Chief Executive
Officer and Chairman of the Board of Directors, indirectly and directly beneficially owns 13,012,622 shares, or approximately 33.94%,
of our outstanding common stock as of May 25, 2020. Mr. Zeyao Xue’s beneficial ownership of 33.94% of Future FinTech’s
issued and outstanding common stock will likely give him the ability to control the outcome of matters submitted to shareholders
for approval, including but not limited to the election of directors and any merger, consolidation, or sale of all or substantially
all of the Company’s assets. This concentrated control could delay, defer, or prevent a change of control, merger, consolidation,
or sale of all or substantially all of the Company’s assets that other shareholders support, or conversely this concentrated
control could result in the consummation of such a transaction that other shareholders do not support. This concentrated control
could also discourage a potential investor from acquiring the common stock of the Company due to the limited voting power of such
shares. As a shareholder, even a controlling shareholder, Mr. Zeyao Xue is entitled to vote his shares, and shares over which he
has voting control, in his own interests, which may not always be in the interests of our shareholders generally.
Anti-takeover provisions in our charter documents and
under Florida law could discourage, delay or prevent a change in control of our Company and may affect the trading price of our
Common Stock.
We are a Florida corporation and the anti-takeover
provisions of the Florida Business Corporation Act may discourage, delay or prevent certain changes in control unless such change
in control is approved by a majority of our disinterested shareholders. In addition, the terms of our articles of incorporation
and bylaws may discourage, delay or prevent a change in our management or control over us that shareholders may consider favorable.
Our articles of incorporation and bylaws:
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authorize the issuance of “blank check” preferred stock that could be issued by the
Board to thwart a takeover attempt;
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require that directors only be removed from office upon a majority shareholder vote;
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provide that vacancies on the board of directors, including newly created directorships, may be
filled only by a majority vote of directors then in office;
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limit who may call special meetings of shareholders; and
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prohibit shareholder action by written consent, requiring certain actions to be taken at a meeting
of the shareholders.
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For more information regarding these and other provisions, see
the section titled “Description of Our Securities — Anti-Takeover Effects of Florida Law and Provisions of Our Articles
of Incorporation and Bylaws.”
In recent years, our Common Stock has been in danger of
being delisted from the NASDAQ Stock Market (“NASDAQ”).
On each of April 20, 2016, May 24, 2016
and August 17, 2016, the Company received a notification letter from the staff of the Listing Qualifications Department of NASDAQ
(the “Staff”) indicating that the Company was not in compliance with NASDAQ’s continued listing requirements
because the Company was not in compliance with the NASDAQ Listing Rule 5250(c)(1) (the “Rule”) with respect to certain
of its annual and quarterly reports.
On October 12, 2016, the Company received
a delisting determination letter (the “Determination Letter”) from the Staff notifying the Company that because the
Company had not filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (the “Form 10-K”)
and its Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2016 and June 30, 2016, (together, the “Reports”)
by October 11, 2016, the deadline by which the Company was to file all Reports in order to regain compliance with the Rule, the
Company’s common stock was subject to delisting from the NASDAQ Global Market.
On October 19, 2016, the Company requested
a hearing before the NASDAQ Hearings Panel (the “Panel”) under Listing Rule 5815(a) to appeal the delisting determination
from the Staff. On November 2, 2016, the Company was granted an extended stay as to the suspension of the Company’s shares
from trading by the Panel until the Company’s scheduled hearing before the Panel on December 15, 2016 and issuance of a final
Panel decision. Following a hearing, the Panel required that the Company regain compliance by January 31, 2017. By letter dated
February 2, 2017, the Panel notified the Company that (i) the Company had regained compliance, (ii) the Company’s Common
Stock would continue to be listed on the NASDAQ Global Market, and (iii) the Panel was closing the matter.
On December 1, 2017, the Company received
written notice from NASDAQ stating that the Company was not in compliance with the requirement of the minimum Market Value of Publicly
Held Shares (“MVPHS”) of $5,000,000 for continued listing on the NASDAQ Global Market, as set forth in NASDAQ Listing
Rule 5450(b)(1)(C). The Company received notice that it had regained compliance on January 4, 2018.
On November 26, 2018, the Company received
written notice from the NASDAQ Stock Market stating that the Company was not in compliance with the requirement of maintaining
a minimum of $10,000,000 in stockholders’ equity for continued listing on the NASDAQ Global Market, as set forth in NASDAQ
Listing Rule 5450(b)(1)(A). Alternatively, the Company could consider applying to transfer the Company’s securities to the
NASDAQ Capital Market, which has a minimum stockholders’ equity requirement of $2,500,000.
On December 28, 2018, the Company received
confirmation from the Nasdaq Stock Market that its application to transfer the listing of its common stock from the Nasdaq Global
Market to the Nasdaq Capital Market (the “Capital Market”) had been approved. The Company’s common stock began
trading on the Capital Market on December 31, 2018.
On February 28, 2019, the Company received
a letter from NASDAQ notifying the Company that, because the closing bid price for the Company’s common stock listed on NASDAQ
was below $1.00 for 30 consecutive trading days, the Company no longer met the minimum bid price requirement for continued listing
on NASDAQ under NASDAQ Marketplace Rule 5550(a)(2). On May 7, 2019, the Company received a written notification from the NASDAQ
Stock Market Listing Qualifications Staff indicating that the Company has regained compliance with the $1.00 minimum closing bid
price requirement and that the matter is now closed.
On April 17, 2019, the Company received
a notification letter from NASDAQ stating the Company was not in compliance with NASDAQ Listing Rule 5250(c)(1), due to its failure
to timely file its Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 10-K”).
On May 21, 2019, the Company received a
notification letter from NASDAQ stating the Company was not in compliance with NASDAQ Listing Rule 5250(c)(1), due to its failure
to timely file its Quarterly Report on Form 10-Q for the quarter ended March 31, 2019.
On August 20, 2019, the Company received
a notification letter from the NASDAQ stating the Company was not in compliance with NASDAQ Listing Rule 5250(c)(1), due to its
failure to timely file its Quarterly Report on Form 10-Q for the quarter ended June 30, 2019.
On October 16, 2019, the Company
received a letter from the NASDAQ Listing Qualifications Staff notifying the Company that it has regained compliance with NASDAQ’s
periodic filing requirements for continued listing on the Nasdaq Capital Market. The letter noted that as a result of the September
3, 2019 filing of the 201810-K and the September 30, 2019 filing of the Forms 10-Q for the periods ended March
31, and June 30, 2019 with the Securities and Exchange Commission, the Company has regained compliance with Listing Rule
5250(c)(1) and the matter is now closed.
On September 4, 2019, the Company received written notice
from the NASDAQ stating that the Company did not meet the requirement of maintaining a minimum of $2,500,000 in stockholders’
equity for continued listing on the NASDAQ Capital Market, as set forth in NASDAQ Listing Rule 5550(b)(1), the Company also does
not meet the alternative of market value of listed securities of $35 million under NASDAQ Listing Rule 5550(b)(2) or
net income from continuing operations of $500,000 in the most recently completed fiscal year or in two of the last three
most recently completed fiscal years under NASDAQ Listing Rule 5550(b)(3), and the Company is no longer in compliance with the
NASDAQ Listing Rules. On March 18, 2020, the Company received written notice form NASDAQ stating that the Company complies with
the Listing Rule 5550(b)(1). However, as noted in NASDAQ letter dated December 17, 2019, if the Company fails to evidence such
compliance upon filing its Form 10-K for the fiscal year ended December 31, 2019, it may be subject to delisting. At that time,
NASDAQ will provide written notification to the Company, which may then appeal Staff’s determination to a Hearings Panel.
ITEM 1B – UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2 – PROPERTIES
Our principal executive offices are located
at Room 2103, 21st Floor, SK Tower 6A, Jianguomenwai Avenue, Chaoyang District, Beijing, PRC 100022 and 23/F, China Development
Bank Tower, No. 2 Gaoxin 1st Road, Hi-Tech Industrial Zone, Xi’an, Shaanxi Province, PRC 710065, and our telephone number
is (86-10) 8589-9303. The area of our office in Beijing is approximately 250 square meters.
We operate four factories through a branch
office of SkyPeople (China) and three subsidiaries of SkyPeople (China ). In each of these factories, we own all the factory
facilities except for land with regard to which we own land use rights. There is no private ownership of land in the PRC. All land
ownership is held by the government of the PRC. Land use rights can be transferred upon approval by the land administrative authorities
of the PRC (State Land Administration Bureau) upon payment of the required land transfer fee. The chart summarizes the information
of the facilities and the four factories that we operate in:
Location
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Products
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Operator
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Size
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Land Use Rights Expiration Date
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A-19, Kexin Industry Park, Zhongguancun,
Shuangjiezhen Beichen
District, Tianjin, P.R. China
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23rd Floor, China Development
Bank Tower, No. 2 Gaoxin 1st Road,
Hi-Tech Industrial Zone, Xi’an,
Shaanxi Province
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Headquarters*
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N/A
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1,425.96 square meters
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**
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Sanqu Town, Jingyang County, Xianyang City, Shaanxi Province
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Concentrated apple and pear juice and concentrated kiwifruit juice
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SkyPeople (China)
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34,476.04 square meters
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December 27, 2056
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Siqun Village, Mazhao Town,
Zhouzhi County, Xi’an City, Shaanxi Province
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Kiwifruit puree, concentrated kiwifruit puree, and fruit beverages
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Shaanxi Qiyiwangguo
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23,599.78 square meters and 34,335.05 square meters
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December 5, 2048 November 14, 2048
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Yuton Village, Shizijie Town,
Gaizhou, Liaoning Province
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Concentrated apple juice and apple aroma
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Yingkou
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20,732 square meters
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April 5, 2055
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*
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Our headquarters are moved to Room 2103, 21st Floor, SK Tower 6A, Jianguomenwai Avenue, Chaoyang District, Beijing, China 100022 on April 9, 2020.
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**
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Our certificate of this facility does not indicate any expiration date, although the usage of this property shall not exceed 50 years under the PRC law.
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We believe that our current offices and facilities are adequate
to meet our needs, and that additional facilities will be available for lease, if necessary, to meet our future needs.
ITEM 3 – LEGAL PROCEEDINGS
Legal case with Beijing Bank
On June 29, 2015, SkyPeople China entered
into a loan agreement with Beijing Bank. Pursuant to the loan agreement, SkyPeople China borrowed RMB 30 million (approximately
$4.36 million) from Beijing Bank. Hongke Xue, Yongke Xue and Xiujun Wang provided guarantees for the loan and Shaanxi Boai Medical
Technology Development Co., Ltd. (“Shaanxi Boai”) provided certain real estate property as a pledge for the loan. SkyPeople
China did not repay the loan on time and Beijing Bank filed an enforcement request with Xi’an Intermediate People’s
Court in June 2017. The Xi’an Intermediate People’s Court seized real estate properties pledged by Shaanxi Boai and
Xiujun Wang. In November 2018, the Court sold the real estate property pledged by Xiujun Wang at RMB 1.17 million (approximately
$0.17 million). Because the real estate property is Xiujun Wang’s primary home, the Court allocated RMB 0.12 million to Xiujun
Wang as transition home leasing fee and deducted outstanding mortgage payments, and the remaining amount was delivered to the Beijing
Bank as the repayment. The Court has also made inquiries to the Beijing Bank as to whether it is willing to accept the pledged
real estate property of Shaanxi Boai as the repayment of the outstanding loan for the amount of RMB 27.93 million (approximately
$4.06 million) but Beijing Bank has refused to take the real property as repayment of the loan and the enforcement action has been
terminated by the Court on December 18, 2018. As of December 31, 2019, SkyPeople China still owe the unpaid amount. SkyPeople
China was one of the subsidiaries transferred along with HeDengTang HK to New Continent International Co., Ltd. on February 27,
2020.
Legal case with Ningxia Bank
On March 8, 2016, SkyPeople China entered
into a loan agreement with Ningxia Bank. Pursuant to the loan agreement, SkyPeople China borrowed RMB 25 million (approximately
$3.63 million) from Ningxia Bank. Hongke Xue, Yongke Xue, Lake Chen, Shaanxi Boai Medical Technology Development Co., Ltd. and
Shaanxi Qiyiwangguo provided guarantees for the loan. SkyPeople China also pledged 37 pieces of equipment and the related trademarks
to Ningxia Bank for the loan. SkyPeople China has not repaid the loan and Ningxia Bank filed an enforcement action with Xi’an
Intermediate people’s court in August 2017. The Court has frozen the assets of SkyPeople China that were pledged as guarantee
for the loan from being transferred to any third-party, but the freeze does not limit or affect the use of these properties by
SkyPeople China for its business. In July 2018, Shaanxi Qiyiwangguo filed a petition to the Court and requested the termination
of the enforcement action on the basis that its guarantee of the loan was not valid because the seal used on the guarantee agreement
was not authentic and the guarantee was not approved by the shareholders of Shaanxi Qiyiwangguo. On November 27, 2018, Shaanxi
Qiyiwangguo withdrew its petition. The Court agreed to such withdrawal and there has been on other progress of this case. As of
December 31, 2019, SkyPeople China still owe the unpaid amount. SkyPeople China was one of the subsidiaries transferred along with
HeDengTang HK to New Continent International Co., Ltd. on February 27, 2020.
Legal case with China Construction Bank
On December 23, 2015, SkyPeople China entered
into two loan agreements with China Construction Bank. Pursuant to the loan agreements, SkyPeople China borrowed RMB 13.90 million
(approximately $2.13 million), and RMB 30 million (approximately $4.59 million) from China Construction Bank, respectively. Shaanxi
Boai Medical Technology Development Co., Ltd. (“Boai”), Hongke Xue, Yongke Xue, Xiujun Wang and Yingkou Trusty Fruits
Co., Ltd. (“Yingkou”) provided pledges for the loans. SkyPeople China has not repaid the loans and China Construction
Bank filed an enforcement action with Xi’an Intermediate People’s Court in March 2017. In December 2017, SkyPeople
China received the enforcement notice from the Court. The Court has seized certain parking space and land use rights pledged by
Xiujun Wang and Boai and sold the land use right pledged by Boai in auction for approximately RMB 24,835,790 as repayment to China
Construction Bank. The Court also seized certain land use rights pledged by Yingkou Trusty Fruits Co., Ltd., but the auction sale
for those rights was not successful. As of December 31, 2019, SkyPeople China still owe the unpaid amount. SkyPeople China was
one of the subsidiaries transferred along with HeDengTang HK to New Continent International Co., Ltd. on February 27, 2020.
On May 9, 2016, SkyPeople China entered
into loan agreements with China Construction Bank. Pursuant to the loan agreements, SkyPeople China borrowed RMB 22.9 million (approximately
$3.50 million) from China Construction Bank. Shaanxi Province Credit Reassurance Company (“Credit Reassurance Company”)
provided a guarantee to China Construction Bank for the loan, Hongke Xue and Yongke Xue provided their guarantees, and SkyPeople
China provided an office space that it owned to Credit Reassurance Company as a pledge. SkyPeople China has not repaid the loan
and Credit Reassurance Company repaid the loan for SkyPeople China. In June 2017, Credit Reassurance filed an enforcement action
request with Xi’an Intermediate People’s Court (the “Court”) in June 2017. In December 2017, SkyPeople
China received the enforcement notice from the Court. The Court issued a verdict to seize the office space of SkyPeople China for
auction sale on December 26, 2017. In February 2018, the auction sale was conducted but not successful. In June 2018, the Court
decided to use the pledge property as the repayment for the outstanding loan of RMB 12.21 million (approximately $1.78 million).
Legal case with China Cinda Asset Management
Co., Ltd.
In April 2015, China Cinda Asset Management
Co., Ltd. Shaanxi Branch (“Cinda Shaanxi Branch”) filed two enforcement proceedings with Xi’an Intermediate People’s
Court (the “Court”) against SkyPeople China for alleged defaults pursuant to guarantees by SkyPeople China to its suppliers
for a total amount of RMB 39.60 million or approximately $5.8 million.
In September 2014, two long term suppliers
of pear, mulberry, and kiwi fruits to SkyPeople China requested that SkyPeople China provide guarantees for their loans with Cinda
Shaanxi Branch. Considering the long term business relationship and to ensure the timely supply of raw materials, SkyPeople China
agreed to provide guarantees on the value of the raw materials supplied to SkyPeople China. Because Cinda Shaanxi Branch is not
a bank authorized to provide loans, it eventually provided financing to the two suppliers through the purchase of accounts receivables
of the two suppliers with SkyPeople China. In July 2014, the parties entered into two agreements – an Accounts Receivables
Purchase and Debt Restructure Agreement, and Guarantee Agreements for Accounts Receivables Purchase and Debt Restructure. Pursuant
to the agreements, Cinda Shaanxi Branch agreed to provide a RMB 100 million credit line on a rolling basis to the two suppliers
and SkyPeople China agreed to pay its accounts payables to the two suppliers directly to Cinda Shaanxi Branch and provided guarantees
for the two suppliers. In April 2015, Cinda Shaanxi Branch stopped providing financing to the two suppliers and the two suppliers
were unable to continue the supply of raw materials to SkyPeople China. Consequently, SkyPeople China stopped making any payment
to Cinda Shaanxi Branch.
SkyPeople China has responded to the Court
and taken the position that the financings under the agreements are essentially the loans from Cinda Shaanxi Branch to the two
suppliers, and because Cinda Shaanxi Branch does not have permits to make loans in China, the agreements are invalid, void and
had no legal effect from the beginning. Therefore, SkyPeople China has no obligation to repay the debts owed by the two suppliers
to Cinda Shaanxi Branch.
Upon the Court’s suggestion, the
parties agreed to a settlement discussion in April 2017. As a part of the settlement discussion, on April 18, 2017, SkyPeople China
withdrew its non-enforcement request with the Court without prejudice. As of December 31, 2019, SkyPeople China still have liability
of $5.8 million related with these two enforcement proceedings. SkyPeople China was one of the subsidiaries transferred along with
HeDengTang HK to New Continent International Co., Ltd. on February 27, 2020.
Legal case with Cinda Capital Financing
Co. Ltd.
In August 2017, Cinda Capital Financing
Co. Ltd. (“Cinda”) filed a lawsuit with Beijing 2nd Intermediate People’s Court (the “Beijing Intermediate
Court”) against the Company’s indirectly wholly-owned subsidiaries Shaanxi Guoweimei Kiwi Deep Processing Company,
Ltd. (“Guoweimei”) and Hedetang Farm Products Trading Market (Mei County) Co., Ltd. (“Trading Market Mei County
Co”, and together with Guoweimei, “Lessees”) requested that Lessees repay RMB 50 million (approximately $7.27
million) in capital lease fees, plus interest. Cinda purchased or paid for refrigerant warehouse and trading hall to the suppliers
and vendors and agreed to lease them to the Lessees for a leasing fee of RMB 50 million in December 2016. The capital leasing fee
became due on its maturity date of June 2017, with certain land use rights of Lessees in Mei County and equity of Guoweimei as
a pledge. The Company disputed that the land use rights for the refrigerant warehouse and trading hall were never sold to or transferred
to Cinda, and argues that therefore it is a loan agreement and not a capital lease agreement among the parties. Lessees have taken
the position that Cinda is not a bank and does not have government permits required to make loans in China, and the agreements
including pledge agreement were invalid, void and without legal effect from the beginning. Therefore, the Company only has the
obligations to repay principal but not the interest. In November 2017, Beijing Intermediate Court ruled in favor of Cinda and the
Lessees appealed the case to the Beijing Supreme Court. The Beijing Supreme Court held a hearing at the end of July 2018. On December
4, 2018, the Beijing Supreme Court upheld the lower court’s decision. On April 8, 2019, Beijing Intermediate Court issued
the verdict for enforcement of the judgment and the plaintiff has the priority rights for the repayment for the pledged land use
rights of Lessees in Mei County and equity of Guoweimei. The case is under enforcement procedure and Cinda is in the process of
sale the land use rights. Before the land use right is sold, the subsidiaries of SkyPeople China still owns the seized properties
and the liabilities to Cinda. As of December 31, 2019, SkyPeople China has not repaid the amount. SkyPeople China was one of the
subsidiaries transferred along with HeDengTang HK to New Continent International Co., Ltd. on February 27, 2020.
In August 2017, Cinda Capital Financing
Co. Ltd. (“Cinda”) filed another lawsuit with Beijing Intermediate Court against the Company’s indirectly wholly-owned
subsidiaries Guoweimei and SkyPeople China for repayment of a leasing fee of RMB 84.97 million (approximately $12.35 million) plus
interest. In January 2014, Guoweimei and SkyPeople China (the “Equipment Lessees”) signed an Equipment Financial Lease
Purchase Agreement with Cinda and an equipment supplier pursuant to which Cinda would provide funds to purchase equipment and the
Equipment Lessees would lease the equipment from Cinda. Guoweimei pledged certain land use rights in Mei County to Cinda and Xi’an
Hedetang and Hedetang Holding pledged their equities in Guoweimei to Cinda to secure the repayment. Mr. Hongke Xue also provided
a personal guarantee for the payment of the leasing fee. Beijing Intermediate Court had two hearings of the case and on March 21,
2018, and it ruled in favor of Cinda to the effect that SkyPeople China and Guoweimei shall pay leasing fees due in the amount
of RMB 21.00 million (approximately $3.05 million), as well as leasing fees not yet due in the amount of RMB 63.98 million (approximately
$9.30 million), plus attorney’s fees and expenses. Beijing Intermediate Court also ruled that Mr. Hongke Xue is jointly liable
for the debt as the guarantor, and that Cinda has priority rights to the pledged land use rights in Mei County and the pledged
equities of Guoweimei as well as the ownership of the leasing properties until the leasing fees are paid. SkyPeople China has appealed
the decision to the Beijing Supreme Court. The Beijing Supreme Court rejected the appeal and upheld the original verdict on
September 7, 2018. The case is under enforcement procedure and Cinda is in the process of sale the seized properties. Before they
are sold, the subsidiaries of SkyPeople China still owns the seized properties and the liabilities to Cinda. As of December 31,
2019, SkyPeople China has not repaid the amount. SkyPeople China was one of the subsidiaries transferred along with HeDengTang
HK to New Continent International Co., Ltd. on February 27, 2020.
Legal case with Shaanxi Fangtian Decoration
Co. Ltd
In April 2015, SkyPeople China entered
into a loan agreement with Shaanxi Fangtian Decoration Co. Ltd. (“Fangtian”). Pursuant to the loan agreement, SkyPeople
China borrowed RMB 3.5 million (approximately $508,780) from Fangtian. SkyPeople China has not repaid the loan and Fangtian filed
a lawsuit with Xi’an Yanta District People’s Court (“Yanta District Court”). On August 10, 2017, Yanta
District Court ruled against SkyPeople China and determined that SkyPeople China must repay the loan of RMB 3.5 million plus interest
RMB of 0.40 million (approximately $585,098). Fangtian has requested court enter into enforcement procedures for the case. As
of December 31, 2019, SkyPeople China has not repaid the amount. SkyPeople China was one of the subsidiaries transferred along
with HeDengTang HK to New Continent International Co., Ltd. on February 27, 2020.
Legal case with Shanghai Pudong Development
Bank
On May 4, 2015, SkyPeople China and Xi’an
Branch of Shanghai Pudong Development Bank (SPD Bank Xi’an Branch) renewed a Working Capital Loan Contract and Repayment
Schedule, according to which both parties agreed that SPD Bank Xi’an Branch loaned RMB 26.9 million (approximately $3.92
million) to SkyPeople China with a term of one year. On the signing date of the Loan Contract, Hongke Xue, Yongke Xue, Xiujun
Wang and SPD Bank Xi’an Branch signed a Contract of Guaranty guaranteeing the repayment of loan and undertaking joint liability.
According to a Mortgage Contract of Maximum Amount signed between SkyPeople China and SPD Bank Xi’an Branch on April 2,
2013, SkyPeople China provided the property and land use rights of Jingyang factory as the pledge. In October 2015, SPD Bank Xi’an
Branch filed an enforcement request with the Intermediate Court of Xi’an and the Court seized the property and the land
use rights of Jingyang factory. During the enforcement procedure, SPD Bank Xi’an Branch transferred its creditor’s
rights to China Huarong Asset Management Co., Ltd. (“China Huarong”). The Court changed the execution applicant to
China Huarong. In March 2019, China Huarong applied to the Intermediate Court of Xi’an for a valuation of the property
and land use rights of Jingyang factory. As of the date of this report, the valuation has not been completed.
Legal case with Shaanxi Fangyuan construction
co., Ltd.
Shaanxi Guoweimei Kiwi Deep Processing
Co. Ltd (“Guoweimei”), entered into a construction agreement with Shaanxi Fangyuan construction co., Ltd. (“Fangyuan”)
in July 2013. On October 8, 2018, Fangyuan filed a lawsuit and requested that Guoweimei pay a project construction fee plus penalty
of RMB 56.32 million (approximately $8.22 million). On June 10, 2019, Baoji Intermediate People’s Court issued a verdict
that Guoweimei must pay RMB 41.58 million (approximately $6.07 million) plus penalty to Fangyuan, and Fangyuan will enjoy preferential
right for the projects in processing zone of National Wholesale and Trading Center in Mei County for Kiwi Fruits developed by Guoweimei.
As of December 31, 2019, Guoweimei has not repaid the amount. Guoweimei was one of the subsidiaries transferred along with HeDengTang
HK to New Continent International Co., Ltd. on February 27, 2020.
Legal case with Shaanxi Zhongkun Construction
Co., Ltd.
In May 2015, Hedetang Farm Products Trading
Markets (Mei County) Co., Ltd. (“Hedetang”), subsidiary of GlobalKey Tianjin, and Shaanxi Zhongkun Construction
Co., Ltd. (“Zhongkun”) entered into a construction and decoration agreement. On September 5, 2018, Zhongkun filed
the lawsuit with Mei County People’s Court (the “Court”) for repayment of construction and decoration fees.
The Court issued a civil judgement in November 2018, ordering Hedetang to pay project funds of RMB 1.65 million (approximately
$0.24 million) to Zhongkun, plus interest. On April 19, 2020, the Court issued a verdict to terminate the enforcement because
assets of Hedetang had already been seized by Xi’an Yanta District People’s Court and Baoji Intermediate People’s
Court, and there were no other assets for enforcement. Currently the Company is still liable for the unpaid amount and the interest.
Legal case with Xi’an Shanmei
Food Co., Ltd.
On October 31, 2017, Xi’an Shanmei
Food Co. Ltd. filed a lawsuit against Shaanxi Qiyiwangguo, a majority-owned subsidiary of the Company, with Zhouzhi County People’s
Court in connection with a Land Lease Agreement entered into by the parties on October 1, 2013. On March 2, 2018, Zhouzhi County
People’s Court issued a verdict that: (i) the Land Lease Agreement was thereby terminated; (ii) Shaanxi Qiyiwangguo shall
pay Xi’an Shanmei the outstanding leasing fee RMB 0.21 million (approximately $30,762) and (iii) Shaanxi Qiyiwangguo shall
return the 29.3 mu industrial use land to Xi’an Shanmei. Shaanxi Qiyiwangguo has appealed the decision to the Xi’an
Intermediate People’s Court on the basis that: (x) the land use right was a capital contribution by Xi’an Shanmei for
a shareholder of Shaanxi Qiyiwangguo who is also the sole shareholder of Xi’an Shanmei and the Land Lease Agreement was invalid
and has no legal effect; (y) Zhouzhi Court did not schedule the hearing for the count claims filed by Shaanxi Qiyiwangguo; and
(z) Zhouzhi Court violated certain civil procedures during the trial of the case. Due to the late notice to Zhouzhi Court, the
case file was not timely transferred to Xi’an Intermediate Court and no appeal hearing was scheduled. Zhouzhi Court has issued
verdict for enforcement procedure and Qiyiwangguo has filed petition of disagreement for the enforcement which is still under Zhouzhi
Court’s review. On January 23, 2019, the Court rejected the petition of disagreement and the case has been under enforcement
procedure. As of December 31, 2019, Shaanxi Qiyiwanggu has not repaid the amount. Shaanxi Qiyiwanggu was one of the subsidiaries
transferred along with HeDengTang HK to New Continent International Co., Ltd. on February 27, 2020.
Legal case with Nanjing Bailuotong Logistics
Services Co., Ltd.
In January 2016 Shaanxi Qiyiwangguo and
Nanjing Bailuotong Logistics Services Co., Ltd (“Bailutong”) entered into a transportation agreement to ship fruit
juices. Bailutong failed to deliver the juice products and held them after their expiration date. Shaanxi Qiyiwangguo filed a
lawsuit against Bailutongwith Zhouzhi county People’s Court, and the Court issued the verdict in February 2018 that: (1)
the transportation contract between Shaanxi Qiyiwangguo and Bailutong was terminated, and (2) Bailutong owed RMB0.20 million (approximately
$29,715) to Shaanxi Qiyiwangguo for the loss of Shaanxi Qiyiwangguo. Bailutong appealed the case to Xi’an Intermediate People’s
Court. Xi’an Intermediate People’s Court rejected the appeal and upheld the original verdict. As of the date
of this report, Shaanxi Qiyiwangguo has not received the payment of RMB0.20 million from Bailutong.
Legal case with Henan Huaxing Glass
Co., Ltd.
Shaanxi Qiyiwangguo entered into an agreement
with Henan Huaxing Glass Co., Ltd. (“Huaxing”) in May 2014 for Huaxing to supply glass bottles to Shaanxi Qiyiwangguo.
However, due to the disputes regarding the quality of products supplied by Huaxing, Shaanxi Qiyiwangguo did not pay the prices
for certain glass bottles. In August 2017, Huaxing filed a lawsuit and the court ruled that Shaanxi Qiyiwangguo owed Huaxing RMB
203,742 (approximately $29,743) in July 2018. During the enforcement process, the parties reached a settlement agreement but Shaanxi
Qiyiwangguo failed to pay the amount due and now the case is still in the court enforcement process. As of December 31, 2019, Shaanxi
Qiyiwanggu has not repaid the amount. Shaanxi Qiyiwanggu was one of the subsidiaries transferred along with HeDengTang HK to New
Continent International Co., Ltd. on February 27, 2020.
Legal case with Huludao Banking Co.
Ltd.
In September 2016, the Suizhong Branch
of Huludao Banking Co. Ltd. (“Suizhong Branch”) filed a lawsuit with Huludao Intermediate People’s Court (the
“Huludao Court”) against the Company’s indirectly wholly-owned subsidiary Huludao Wonder Fruit Co., Ltd. (“Wonder
Fruit”) and requested that Wonder Fruit repay a RMB 40 million (approximately $5.81 million) bank loan, plus interest. The
loan became due on its maturity date of December 9, 2016. On December 19, 2016, the Huludao Court accepted the case. The Company
has been disputing the interest rate of the loan with Suizhong Branch, and has not repaid the loan to date. Wonder Fruit believes
that the interest charged by Suizhong Branch is 100% higher than the base rate set by People’s Bank of China and is not consistent
with the China People’s Bank’s base interest and floating rate. The Huludao Court has seized land use rights, buildings
and equipment of Wonder Fruit that were pledged as guarantee for the loan and has organized two auction sales for these assets
in January and February of 2018, but both auction sales have been unsuccessful in finding a buyer. On July 19, 2018, the Court
issued a verdict ordering Huludao Wonder to transfer its land use rights, building, equipment, electronic and transportation assets
to Zuizhong Branch as payment of the outstanding principal, auction and evaluation fees and some interest of the loan for RMB 42.64
million (approximately $6.22 million). As of December 31, 2019, there was RMB 11.95 million (approximately $1.74 million) in interest
on the loan unpaid. Huludao Wonder was one of the subsidiaries transferred along with HeDengTang HK to New Continent International
Co., Ltd. on February 27, 2020.
Legal case with Andrew Chien
In September 2017, Andrew Chien, a former
consultant of SkyPeople China, brought a lawsuit against the Company and Mr. Hongke Xue in the District Court of Connecticut (the
“Court”). The complaint was not properly served and the Company learned of the litigation in December 2017. In the
complaint, Mr. Chien has made several claims, most of which attempt to hold the Company liable under novel legal theories that
relate back to an alleged breach of a consulting agreement between SkyPeople China and Chien from August 2006. Mr. Chien claimed
approximately $257,000 damages and interest plus 2.00% of the Company’s then-outstanding shares. Mr. Chien has unsuccessfully
attempted to sue the Company on the breach of the same consulting agreement several times in the courts of Connecticut and New
York, and these cases have been dismissed. The Company has filed a motion to dismiss (“MTD”) and all proceedings are
stayed pending determination of the MTD. On August 31, 2018, the Court granted our MTD. On September 10, 2018, Mr. Chien filed
a motion for reconsideration. On September 28, 2018, the Court denied Mr. Chien’s motion for reconsideration. On October
26, 2018, Mr. Chien appealed the case to the United States Court of Appeals for the Second Circuit. The Court of Appeals
affirmed the trial court’s dismissal of the action on January 22, 2020, and denied Mr. Chien’s petition for en banc
rehearing on March 27, 2020. Mr. Chien’s time to pursue a discretionary appeal to the Supreme Court of the United States
has not yet lapsed. The Company will vigorously defend any further appeal.
Legal case with Luwei
In 2018, Mr. Luwei, an individual, filed
a claim for arbitration against SkyPeople China in Xi’an Arbitration Commission for breach of contract pursuant to a new
share purchase agreement and a share redemption agreement. On April, 11, 2019, Xi’an Arbitration Commission made its decision
and ordered SkyPeople China to repay RMB 3 million investment to Luwei. Mr. Luwei applied with Intermediate Court of Xi’an
(the “Court”) for enforcement of the arbitration award which process was terminated by the Court due to no assets for
enforcement. As of December 31, 2019, SkyPeople China has not repaid the amount. SkyPeople China was one of the subsidiaries transferred
along with HeDengTang HK to New Continent International Co., Ltd. on February 27, 2020.
Legal case with Shaanxi Overseas Investment
Development Corp.
In November 2019, Shaanxi Overseas
Investment Development Corp (“Shaanxi Overseas Investment”) filed a lawsuit against SkyPeople China, Hongke Xue
and Shenzhen Tian Shun Da Equity Investment Fund Management Co., Ltd. (“Shenzhen Tian Shun Da”) pursuant to an
investment agreement entered in March, 2016. According to the agreement, Shaanxi Overseas Investment agreed to invest RMB 5
million for the preferred shares of SkyPeople China with an annual interest rate of 2.38%. Shenzhen Tian Shun Da pledged 1.17%
of the shares SkyPeople China that it owned and Hongke Xue provided guarantee for the performance of agreement by SkyPeople
China. SkyPeople China failed to make the interests payment and Shaanxi Overseas Investment filed the lawsuit for breach of
agreement. On December 26, 2019, Yanta District Court of Xi’an City (the “Court”) ordered SkyPeople China
to pay Shaanxi Overseas Investment the preferred share redemption amount of RMB 5 million plus penalty which is calculated
based upon the RMB 5 million at a rate of 24% a year. The Court also ruled that Shaanxi Overseas Investment may sell the
pledged shares owned by Shenzhen Tianshun Da as the repayment for SkyPeople China and Hongkong Xue shall also assume the
repayment obligation as guarantor. As of December 31, 2019, SkyPeople China has not repaid the amount. SkyPeople China was
one of the subsidiaries transferred along with HeDengTang HK to New Continent International Co., Ltd. on February 27,
2020.
Legal case with Shaanxi Wanyuan Construction
Co., Ltd.
In July 2019, Shaanxi Wanyuan Construction
Co., Ltd. (“Wanyuan) filed a lawsuit with Shaanxi Baoji Municipal Intermediate People’s Court (the “Baoji Court”)
against Guoweimei for repayment of construction and decoration costs of RMB 55.07 million pursuant to a Construction and Decoration
Agreement entered by the parties in May 2017. In July, 2019, the Baoji Court ordered Guoweimei to pay construction and decoration
costs of RMB55.07 million to Wanyuan, plus interest. As of December 31, 2019, Guoweimei has not repaid the amount. Guoweimei was
one of the subsidiaries transferred along with HeDengTang HK to New Continent International Co., Ltd. on February 27, 2020.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our Common Stock is currently traded on the Nasdaq Capital Market
under the symbol “FTFT.” Prior to December 31, 2018, our stock traded on the Nasdaq Global Market, and before that,
on the NYSE Amex.
As of May 25, 2020, there were 38,345,415
shares of our Common Stock issued and outstanding, and the Company had approximately 74 record holders of Common Stock. The number
of holders of record does not include the number of persons whose stock is in nominee or “street name” accounts through
brokers.
Dividend Policy
We have never declared or paid any cash
dividends on our Common Stock. The payment of dividends is at the discretion of the Board and is contingent on our revenues and
earnings, capital requirements, financial condition and the ability of our operating subsidiaries to obtain governmental approval
to send funds out of the PRC. We currently intend to retain all earnings, if any, for use in business operations. Accordingly,
we do not anticipate declaring any dividends in the near future.
The PRC’s national currency, the
RMB or yuan, is not a freely-convertible currency. Please refer to the risk factors “Governmental control of currency conversion
may affect the value of shareholder investment,” and “PRC regulations relating to mergers and the establishment of
offshore special purpose companies by PRC residents, if applied to us, may limit our ability to operate our business as we see
fit.”
Recent Sales of Unregistered Securities and Use of Proceeds
The Company did not make any sales of unregistered securities
during the fiscal year ended December 31, 2019 that were not previously disclosed in a quarterly report on Form 10-Q or a current
report on Form 8-K.
Securities Authorized for Issuance Under Equity Compensation
Plans
The following table sets forth information
as of December 31, 2019, with respect to our equity compensation plans previously approved by stockholders and equity compensation
plans not previously approved by stockholders.
|
|
Equity
Compensation Plan Information
|
|
Plan
Category
|
|
Number
of securities to be issued upon exercise of outstanding options, warrants and rights
|
|
|
Weighted
average exercise price of outstanding options, warrants and rights
|
|
|
Number
of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column
(a))
|
|
|
|
|
(a)
|
|
|
|
(b)
|
|
|
|
(c)
|
|
Equity compensation plans approved by stockholders
(1)(4)
|
|
|
62,500
|
|
|
$
|
3.57
|
(2)
|
|
|
-
|
|
Equity compensation plans not approved
by stockholders (3)(4)
|
|
|
-
|
|
|
$
|
-
|
|
|
|
3,000,000
|
|
Total
|
|
|
|
|
|
$
|
3.57
|
|
|
|
|
|
(1)
|
Consists of equity incentive plans,
which was approved by the Company’s shareholders at its annual meetings on August 18, 2011, November 19, 2015 and March
13, 2018. As of December 31, 2019, there were no shares available for issuance under all three stock incentive plans.
On March 13, 2018, the Company’s
shareholders approved the 2017 Omnibus Equity Plan at the annual shareholders meeting, which permits the grant of incentive stock
options (“ISOs”), nonqualified stock options (“NQSOs”), stock appreciation rights (“SARs”),
restricted stock, unrestricted stock and restricted stock units (“RSUs”) to its employees of up to 1,300,000 shares
of Common Stock. On December 21, 2018, the Company issued 1,300,000 shares of the Company’s unrestricted common stock to
seven of the Company’s employees pursuant to our 2017 Omnibus Equity Plan, which was approved by the Company’s shareholders
at the annual shareholders meeting on December 6, 2018. The Company recorded an expense of $13,000 in the fourth quarter of fiscal
year 2018 under the 2017 Omnibus Equity Plan, reflecting a par value of $0.001 per share of the Company’s common stock.
|
|
|
(2)
|
The exercise price of options granted and stock appreciation rights under the Plan may be no less than the fair market value of the Company’s Stock on the date of grant.
|
(3)
|
The Board of Directors of the Company approved and adopted the
Future FinTech Group Inc. 2019 Omnibus Equity Plan (the “Equity Plan”) on October 9, 2019, which was approved by the
shareholders on the shareholders meeting on February 26, 2020.
|
(4)
|
The Company did not provide any stock related compensation
during fiscal year 2019.
|
ITEM 6 – SELECTED FINANCIAL DATA
Not Applicable.
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 our 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. The Company historically engages 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 the PRC. Due to drastically
increased production costs and tightened environmental laws in China, the Company has been transforming its business from fruit
juice manufacturing and distribution to a real-name blockchain e-commerce platform that integrates blockchain and internet technology.
The main business of the Company includes a shopping platform, Chain Cloud Mall (CCM), which is based on blockchain technology;
a cross-border e-commerce platform (NONOGIRL) which is online and has started its trial operation in March 2020 and is expected
for a formal launch in the third quarter of 2020; a blockchain-based application incubator and a digital payment system (DCON);
and the application and development of blockchain-based e-commerce technology and financial technology.
Chain Cloud Mall adopts a
“multi-vendor hosted stores + platform self-hosted stores” model. The platform supports various marketing
methods, including point rewards programs, coupons, live webcasts, game interaction, and social media sharing. Besides the
blockchain-powered features, CCM is also fully equipped with the same functions and services that other Chinese leading
traditional e-commerce platforms provide.
Based on blockchain technology, CCM is
established to transform the relationship between companies and consumers from traditional selling and buying relationships to
a value-sharing relationship. The platform will fairly distribute the benefit of the entire mall to users who engaged in the promotion,
development, and consumption based on their contributions to the platform. The members of CCM are not only consumers and entrepreneurs
but also participants, promoters and beneficiaries. 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.
Chain Cloud Mall is an enterprise customer
interactive and comprehensive shopping and sales service platform. It is an open network promotion system with a blockchain based
anti-counterfeit system including point issuance, point referral and discount points settlement. The brand-new business model creates
a completely new source of data traffic for enterprises.
Merchants
in the Chain Cloud Mall issue their own blockchain points and anti-counterfeiting
QR codes. Every product comes with unique anti-counterfeiting QR codes. Customers collect the points of the enterprise by scanning
products for anti-counterfeiting check with their mobile phones. The successful collection of the merchant points confirms that
the authentication of product from such enterprise, which provides quality confidence to our customers. Our
blockchain based system also enables the Chain Cloud Mall to record and provide Chain Cloud Mall points to its members upon
a successful new member and/or product referral, which can be used as credit when making purchases on CCM. It incentivizes its members
to promote the platform and share the products with their social contacts, which in turn increases the sales through Chain Cloud
Mall and helps the Company generate greater value.
The Company has three direct wholly-owned
subsidiaries: SkyPeople Foods Holding Limited (“SkyPeople BVI”), a company organized under the laws of the British
Virgin Islands, DigiPay FinTech Limited (“DigiPay,” formerly known as Belkin Foods Holdings Group Limited, which changed
its name on January 4, 2018), a company incorporated under the laws of the British Virgin Islands, and Digital Online Marketing
Limited (“Digital Online”) (formerly known as FullMart Holding Limited, which changed its name on January 5, 2018),
a company organized under the laws of the British Virgin Islands. In September 2017, all of Digital Online’s operations were
transferred to a subsidiary of SkyPeople BVI, and Digital Online has no operational assets or businesses.
SkyPeople BVI holds 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 holds 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) has eleven subsidiaries in the PRC, which are 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”),
a company incorporated in the British Virgin Islands for a total price of RMB 600,000 (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.
DigiPay holds 100% of the equity interest
of Future FinTech (HongKong) Limited (“FinTech HK”), a company organized under the laws of Hong Kong. FinTech HK holds
100% of the equity interest of Hedetang Foods (China) Ltd. (“Hedetang Foods (China)”) which changed its name to China
Agricultural Silkroad Finance Lease Ltd. (“Finance Lease”) on May 24, 2018. Finance Lease transferred two of its subsidiaries
to Chain Cloud Mall Network and Technology (Tianjin) Co., Limited (“CCM Network” or “CCM Tianjin”), namely,
Hedetang Farm Products Trading Market (Mei County) Co., Ltd and China Agricultural Silk Road Trading Center, which changed its
name to Chain Cloud Mall Logistics Center (Shaanxi) Co., Limited (“CCM Logistics”) on April 17, 2019. CCM Network holds
90% of the equity interest of Hedetang Farm Products Trading Market (Mei County) Co., Ltd. (“Trading Market Mei County”),
a company incorporated under the laws of the PRC. Chain Cloud Mall Logistics Center (Shaanxi) Co., Limited (“CCM Logistics”)
holds the remaining 10% of the equity interest of Trading Market Mei County. Finance Lease also holds 80% of the equity interest
of CCM Logistics. Finance Lease holds 55% of the equity interest of Zhonglian Hengxin Assets Management Co., Ltd. (“Zhonglian
Hengxin”). CCM Logistics holds 100% of the equity interest of GlobalKey Supply Chain Limited (GlobalKey Supply Chain). CCM
Logistics is located in the national kiwifruit Industrial Park of Baoji City. It provides kiwifruit distributors and farmers an
integrated supply chain solution through its distribution network, including transportation, after-sale service and customer service.
On July 31, 2019, Chain Cloud Mall Network
and Technology (Tianjin) Co., Ltd., Chain Cloud Mall E-commerce (Tianjin) Co., Ltd., a limited liability company incorporated under
the laws of the China (the “E-commerce Tianjin”), and Mr. Zeyao Xue and Mr. Kai Xu, citizens of China and shareholders
of E-commerce Tianjin, entered into the following agreements, or collectively, the “Variable Interest Entity Agreements”
or “VIE Agreements,” pursuant to which CCM Network has contractual rights to control and operate the business of E-commerce
Tianjin (the “VIE”).
Pursuant to Chinese law and regulations,
a foreign owned enterprise cannot apply for and hold a license for operation of certain e-commerce businesses, the category of
business which the Company plans to expand in China. CCM Network is an indirectly wholly foreign owned enterprise of the Company.
In order to comply with Chinese law and regulations, CCM Network agreed to provide E-commerce Tianjin an Exclusive Operation and
Use Rights Authorization to operate and use the Chain Cloud Mall System owned by CCM Network.
The following is a summary of the currently
effective contractual arrangements relating to E-commerce Tianjin.
Contractual Arrangements with Our Consolidated
Affiliated Entity and Its Respective Shareholders
Our contractual arrangements with our VIE
and their respective shareholders allow us to (i) exercise effective control over our VIE, (ii) receive substantially all of the
economic benefits of our VIE, and (iii) have an exclusive option to purchase all or part of the equity interests in our VIE when
and to the extent permitted by PRC law.
As a result of our direct ownership in
our WFOE and the contractual arrangements with our VIE, we are regarded as the primary beneficiary of our VIE, and we treat them
and their subsidiaries as our consolidated affiliated entities under U.S. GAAP. We have consolidated the financial results of our
VIE in our consolidated financial statements in accordance with U.S. GAAP.
Agreements that Provide us with Effective
Control over our VIE
Exclusive Purchase Option Agreement.
Pursuant to the Exclusive Purchase Option
Agreement, Mr. Zeyao Xue and Mr. Kai Xu granted to CCM Network and any party designated by CCM Network the exclusive right to purchase,
at any time during the term of this agreement, all or part of the equity interests in E-commerce Tianjin, or the “Equity
Interests,” at a purchase price equal to the registered capital paid by Mr. Zeyao Xue and Mr. Kai Xu for the Equity Interests,
or, in the event that applicable law requires an appraisal of the Equity Interests, the lowest price permitted under applicable
law. Pursuant to powers of attorney executed by Mr. Zeyao Xue and Mr. Kai Xu, they irrevocably authorized any person appointed
by CCM Network to exercise all shareholder rights, including but not limited to voting on their behalf on all matters requiring
approval of E-commerce Tianjin’s shareholder, disposing of all or part of the shareholder’s equity interest in E-commerce
Tianjin, and electing, appointing or removing directors and executive officers. The person designated by CCM Network is entitled
to dispose of dividends and profits on the equity interest without reliance on any oral or written instructions of Mr. Zeyao Xue
and Mr. Kai Xu. The powers of attorney will remain in force for so long as Mr. Zeyao Xue and Mr. Kai Xu remain the shareholders
of E-commerce Tianjin. Mr. Zeyao Xue and Mr. Kai Xu have waived all the rights which have been authorized to CCM Network’s
designated person under the powers of attorney.
Equity Pledge Agreement.
Pursuant to the Equity Pledge Agreements,
Mr. Zeyao Xue and Mr. Kai Xu pledged all of the Equity Interests to CCM Tianjin to secure the full and complete performance of
the obligations and liabilities on the part of E-commerce Tianjin and them under this and the above contractual arrangements. If
E-commerce Tianjin, Mr. Zeyao Xue, or Mr. Kai Xu breaches their contractual obligations under these agreements, then CCM Tianjin,
as pledgee, will have the right to dispose of the pledged equity interests. Mr. Zeyao Xue and Mr. Kai Xu agree that, during the
term of the Equity Pledge Agreements, they will not dispose of the pledged equity interests or create or allow any encumbrance
on the pledged equity interests, and they also agree that CCM Tianjin’s rights relating to the equity pledge should not be
interfered with or impaired by the legal actions of the shareholders of E-commerce Tianjin, their successors or designees. During
the term of the equity pledge, CCM Tianjin has the right to receive all of the dividends and profits distributed on the pledged
equity. The Equity Pledge Agreements will terminate on the second anniversary of the date when E-commerce Tianjin, Mr. Zeyao Xue
and Mr. Kai Xu have completed all their obligations under the contractual agreements described above.
Agreements that Allow us to Receive Economic Benefits from
our VIE
Exclusive Technology Consulting and
Service Agreement.
Pursuant to the Exclusive Technology Consulting
and Service Agreement, CCM Tianjin agreed to act as the exclusive consultant of E-commerce Tianjin and provide technology consulting
and services to E-commerce Tianjin. In exchange, E-commerce Tianjin agreed to pay CCM Tianjin a technology consulting and service
fee, the amount of which is to be equivalent to the amount of net profit before tax of E-commerce Tianjin, payable on a quarterly
basis after making up losses of previous years (if necessary) and deducting necessary costs, expenses and taxes related to the
business operations of E-commerce Tianjin. Without the prior written consent of CCM Tianjin, E-commerce Tianjin may not accept
the same or similar technology consulting and services provided by any third party during the term of the agreement. All the benefits
and interests generated from the agreement, including but not limited to intellectual property rights, know-how and trade secrets,
will be CCM Tianjin’s sole and exclusive property. This agreement has a term of 10 years and may be extended unilaterally
by CCM Tianjin with CCM Tianjin’s written confirmation prior to the expiration date. E-commerce Tianjin cannot terminate
the agreement early unless CCM Tianjin commits fraud, gross negligence or illegal acts, or becomes bankrupt or winds up.
Agreements that Provide us with the
Option to Purchase the Equity Interests in and Assets of our VIE
See Exclusive Purchase Option Agreement
above
Spousal Consent Letters. The spouse
of Mr. Kai Xu (Mr. Zeyao Xue is not married) of Chain Cloud Mall E-commerce (Tianjin) Co., Ltd. has signed a spousal consent letter
agreeing that the equity interests in Chain Cloud Mall E-commerce (Tianjin) Co., Ltd. held by and registered under the name of
the shareholder will be disposed pursuant to the contractual agreements with our WFOE. The spouse agreed not to assert any rights
over the equity interest in Chain Cloud Mall E-commerce (Tianjin) Co., Ltd. held by the shareholder.
Through its subsidiaries, DigiPay is mainly
involved blockchain based E-commerce platform and related business.
Recent Developments Related to the COVID-19
Outbreak
All of the disclosures set forth below
should be read in the context of the recent COVID-19 related developments discussed immediately below. All of the disclosures
recited in “Recent Developments Related to the COVID-19 Outbreak” are as of the date of this filing.
In December 2019, a novel strain of coronavirus,
causing a disease referred to as COVID-19, was reported to have surfaced in Wuhan, China, which has spread rapidly to many parts
of the world, including the U.S. In March 2020, the World Health Organization declared the COVID-19 a pandemic. The pandemic has
resulted in quarantines, travel restrictions, and the temporary closure of office buildings and facilities in China.
Substantially
all of our revenues are generated in China. The Company’s business and services and results of operations have been adversely
affected and could continue to be adversely affected by the COVID-19 pandemic. In response to the evolving dynamics related
to the COVID-19 outbreak, the Company is following the guidelines of local authorities as it prioritizes the health and safety
of its employees, contractors, suppliers and business partners. Our offices in China have been closed and all of the Company’s
employees have been working from home from Chinese New Year at the end of January until late March 2020. The quarantines, travel
restrictions, and the temporary closure of office buildings have negatively impacted our business. Our suppliers have negatively
been affected, and could continue to be negatively affected in their ability to supply and ship products to our customers. Our
customers that are 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
platform have been and could continue to be negatively impacted by the outbreak, which may negatively impact their operations
and business, which may in turn adversely affect the business of our platform as a whole as well as our financial condition and
operating results. The outbreak has had and might continue to have disruption to our supply chain, logistics providers, customers
or our marketing activities which could materially adversely impact our business and results of operations, including causing our
suppliers to cease manufacturing products for a period of time or materially delay delivery to us and customers, which may also
lead to loss of customers, as well as reputational, competitive and business harm to us. Some of our customers, contractors, suppliers
and other business partners are small and medium-sized enterprises (SMEs), which may not have strong cash flows or be well capitalized,
and may be vulnerable to an epidemic outbreak and slowing macroeconomic conditions. If the SMEs that we work with cannot weather
the COVID-19 and the resulting economic impact, or cannot resume business as usual after a prolonged outbreak, our revenues and
business operations may be materially and adversely impacted.
The global economy
has also been materially negatively affected by the COVID-19 and there is continued severe uncertainty about the duration and intensity
of its impacts. The Chinese and global growth forecast is extremely uncertain, which would seriously affect customer spending on
our shopping mall.
While the potential
economic impact brought by, and the duration of, COVID-19 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 could materially affect our business
and the value of our common stock.
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
has been adversely, and may be materially, affected, to the extent that the COVID-19 harms the Chinese and global economy. Any
potential 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 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.
General Financial Information
During the fiscal year 2019, total assets increased by $53.03
million from $62.95 million in fiscal year 2018 to $115.98 million in fiscal year 2019. The increase was mainly due to an increase
in cash, advances to suppliers and other current assets, assets related with discontinued operations, and amount due from related
parties, which was partially offset by the decrease in accounts receivables, other receivable, inventory, property, plant and equipment,
intangible assets and long term investment.
Cash and cash equivalents at December 31,
2019 were $0.54 million, an increase of $0.29 million, compared to $0.25 million at December 31, 2018. The increase was mainly
due to a decrease in operating loss.
Trade accounts receivable at December 31,
2019 was $4,954, compared to $0.07 million at December 31, 2018. 56.7% of our revenue of 2019 was from CCM Shopping Mall Membership,
which were collected immediately when the membership was purchased.
As December 31, 2019, other
receivables were $0.01 million, a decrease of $23.76 million, compared to $23.77 million at December 31, 2018. The decrease
was primarily due to the reclassification of certain assets to the discontinued operations in fiscal year 2019.
Inventories were $3,594 as at December 31, 2019 a decrease of
$0.06 million, compared to $0.06 million at December 31, 2018. The decrease in inventory was mainly due to a decrease in purchase
from our traditional juice business
Advances to suppliers and other current
assets as of December 31, 2019 were $1.67 million, as compared from $0 at December 31, 2018. The increase was primarily due to
the prepayment that the Company made for the technology development service contract that the Company’s subsidiary, Chain
Cloud Mall Technology (Tianjin) Co. Ltd. entered for the Block-chain related technology.
Assets related with discontinued operation was $92.77 million
as of December 31, 2019. We reclassified the assets of Hedetang HK which was settled on February 27, 2020 and other operation which
were closed down into assets related with discontinued operation in fiscal year 2019.
Property, plant and equipment as at December
31, 2019 were $0.02 million, a decrease of 2.32 million, compared to $2.34 at December 31, 2018. The decrease in property, plant
and equipment was mainly due to the reclassification of certain assets to the discontinued operations in fiscal year 2019.
Intangible assets at December 31,
2019 were $5.31 million, a decrease of $16.14 million, or 75.2% compared to $21.45 million at December 31, 2018 which mainly
consisted of the land use right of Hedetang Farm Products Trading (Mei County) Co. Ltd. The decrease in intangible assets was
due to the reclassification of certain assets to the discontinued operations in fiscal year 2019.
Long term investment was $12.25 million
as of December 31, 2019, a decrease of $2.75 million as compared to $15.00 million as of December 31, 2018. The decrease was mainly
due to the impairment of the 10% equity investment in InUnion Chain Limited that Digipay Finteh Limited invested in June 2018.
Total liabilities at December 31, 2019 were $204.06 million,
a decrease of $52.44 million, or 35.0%, compared to $149.62 million December 31, 2018. The decrease in liabilities was primarily
due to the decrease in accounts payable and accrued expenses.
Accounts payable as of December 31, 2019
was $0.32 million, a decrease of $10.73 million, as compared to $11.05 million as of December 31, 2018. The decrease was mainly
due to the decrease in purchases from our E-commerce business in fiscal year 2019.
Accrued expenses as of December 31,
2019 decreased by $94.58 million to $4.55 million from $99.13 million as of December 31, 2018. The decrease was mainly due to
the repayment of accrued expenses in fiscal year 2019. The decrease was mainly due to the reclassification of certain
liabilities to the discontinued operations in fiscal year 2019.
Advances from customers as of December 31, 2019 decreased by
$0.46 million to $0.70 million from $1.16 million as of December 31, 2018. We have had less advances from customers in our new
E-commerce business.
Liabilities related with discontinued operation was $196.26
as at December 31, 2019, We reclassified the liabilities of Hedetang HK which was settled on February 27, 2020, and other operation
which were closed down, into the liabilities related with discontinued operation as of December 31, 2019.
Critical Accounting Estimates & Policies
Management’s discussion and analysis
of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared
in accordance with U.S. GAAP. Our financial statements reflect the selection and application of accounting policies, which require
management to make significant estimates and judgments. Management bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions. We believe that the following reflects the more critical accounting policies that currently
affect our financial condition and results of operations.
Discontinued Operations
As discussed previously, 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. As the Company believed
that no continued cash flow would be generated by the sold component, in accordance with ASC 205-20, the Company presented the
operating results from Hedetang HK has been presented as discontinued operations within the accompanying consolidated financial
statements of the Company.
In addition, The Company’s Huludao
Wonder operation, a subsidiary which produces concentrated apple juice, suffered continued operating losses since 2014 and its
cash flow was minimal for these three years. In December 2016, the Company established a winding-down plan to close this operation.
Based on the restructuring plan and in accordance with ASC 205-20, the Company presented the operating results from Huludao Wonder
as a discontinued operation.
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
and close the operation of Digital Online Marketing Limited, Future Digital Fintech (Xi’an) Co. Ltd., SkyPeople Foods Holding
Ltd. and Chain Future Digital Tech (Beijing) Co. Ltd. Management is looking actively for a buyer for the two companies and are
preparing the closing down plan for the other four operations. 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.
Segment Information Reclassification
Historically, the Company operated in five segments: concentrated
apple juice and apple aroma, concentrated kiwifruit juice and kiwifruit puree, concentrated pear juice, fruit juice beverages,
and others.
As the Company classified the juice related
operation into discontinued operation, in the beginning of year 2019, and in accordance with the Company’s new business
strategy, the Company classified business segment into CCM Shopping Mall Membership, sales of goods and others.
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 product and the distributor still has rights with respect to that product.
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, 2019 and 2018 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
In June 2016, the FASB issued ASU No. 2016-13
(“ASU 2016-13”) “Financial Instruments - Credit Losses” (“ASC 326”): Measurement of Credit
Losses on Financial Instruments” which requires the measurement and recognition of expected credit losses for financial assets
held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires
the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary
impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit
losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition
of credit losses. In November 2019, the FASB issued ASU 2019-10 “Financial Instruments – Credit Losses (Topic 326),
Derivatives and Hedging (Topic 815), and Leases (Topic 842)” (“ASC 2019-10”), which defers the effective date
of ASU 2016-13 to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, for public
entities which meet the definition of a smaller reporting company. The Company will adopt ASU 2016-13 effective January 1, 2023.
Management is currently evaluating the effect of the adoption of ASU 2016-13 on the consolidated financial statements. The effect
will largely depend on the composition and credit quality of our investment portfolio and the economic conditions at the time of
adoption.
In December 2019, the FASB issued the amendments
in ASU 2019-12 ASC Topic 740, Income Taxes: Simplifying Accounting for Income Taxes, which removes specific exceptions
to the general principles in Topic 740 in Generally Accepted Accounting Principles (GAAP). The amendments eliminate the need for
an organization to analyze whether the specific exceptions apply in a given period, improve financial statement preparers’
application of income tax-related guidance and simplify GAAP. The amendments are effective for all entities for fiscal years beginning
after December 15, 2020, and interim periods within those fiscal years. While early application is permitted, including adoption
in an interim period, the Company has not elected to early adopt. The effectiveness of this update is not expected to have a significant
effect on the Company’s consolidated financial position or results of operations.
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.
Comparison of Operation Results of years ended December 31,
2019 and 2018
Revenue
The following table presents our consolidated
revenues for our main products for the fiscal years 2019 and 2018, respectively, (in thousands):
|
|
Year ended December 31,
|
|
|
% of
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
CCM Shopping Mall Membership
|
|
|
542
|
|
|
|
-
|
|
|
|
100
|
%
|
Sale of goods
|
|
|
379
|
|
|
|
-
|
|
|
|
100
|
%
|
Others
|
|
|
34
|
|
|
|
889
|
|
|
|
(96.18
|
)%
|
Total
|
|
$
|
955
|
|
|
$
|
889
|
|
|
|
7.42
|
%
|
In fiscal year 2018, the Company’s main business was sales
of juice related products.
In 2019, the Company started to sell products
on its on-line shopping platform, Chain Cloud Mall (CCM) based on blockchain technology to its members or non-members.
In order to increase the repeat sales
from customers and drive sales growth, the Company also subscribes members on its sales platform. Currently, there are three kinds
of membership programs, Diamond Elite, Gold Elite and Silver Elite, with different membership fees and benefits. The higher membership
fee provides more benefits to the members. Members can earn points on the Company’s sales platform and enjoy discounts on
their purchases. Members can refer others to become members and are rewarded for doing so. Members can also promote products on
various social platforms and are rewarded if those users purchase the Company’s products. Membership revenue is recognized
when member registers and makes his/her first order on our sales platform.
Revenue increased from $0.89 million in
2018 to $0.96 million in 2019, an increase of $0.07 million or 7.9%. The increase in revenue was due to an increase in sales through
the E-commerce business which started operating at the end of 2018.
The revenue generated by the CCM Shopping Mall Membership segment
in fiscal year 2019 was $0.54 million, which accounted for 56.7% of total sale. As December 31, 2019, we had 4,926 Diamond Elite
members, 129 Gold Elite members and 1,346 Silver Elite members, making up 6,401 members in total as of December 31, 2019.
The revenue generated by the sale of goods
segment in fiscal year 2019 was $0.38 million, which accounted for 39.7% of total revenue. We expect that revenue from the sales
of goods will increase with an increase in subscribed members and the growth of the business.
As a percentage of total revenue, the revenue generated by others
was 3.6% and 100.0% of total sales in fiscal years 2019 and 2018, respectively. In terms of dollar value, revenue generated by
others for fiscal year 2019 was $0.03 million, a decrease of $0.86 million, compared to $0.89 million for fiscal year 2018. Other
revenue in 2018 was mainly from the sale of fruits related products from Trading Market Mei County and other revenue in 2019 mainly
consisted of the rental of the platform.
Gross Margin
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
|
Gross
profit
|
|
|
Gross
margin
|
|
|
Gross
profit
|
|
|
Gross
margin
|
|
CCM Shopping Mall Membership
|
|
|
401
|
|
|
|
74.0
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Sale of goods
|
|
|
72
|
|
|
|
19.0
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Others
|
|
|
18
|
|
|
|
52.9
|
%
|
|
|
(86
|
)
|
|
|
(9.7
|
)%
|
Total
|
|
$
|
491
|
|
|
|
51.4
|
%
|
|
$
|
(86
|
)
|
|
|
(9.7
|
)%
|
Overall gross margin as a percentage of revenue was 51.4% in
fiscal year 2019, an increase of 61.1% compared to negative gross margin 9.7% in fiscal year 2018. The increase in gross margin
as a percentage of revenue was mainly attributable to the CCM Shopping Mall Membership segments, which has high gross margin. In
terms of dollar value, the overall gross profit for fiscal year 2019 was $0.49 million, an increase of $0.58 million, compared
to negative gross margin of $0.09 million for fiscal year 2018. The increase in the dollar value of overall gross margin was mainly
due to the increase in sales from the CCM Shopping Mall Membership segment.
The gross margin as a percentage of revenue in the CCM Shopping
Mall Membership segment was 74.0% in fiscal year 2019. There is little cost of goods sold allocated to this segment.
The gross margin as a percentage of revenue
in the sale of goods segment was 19.0% in the fiscal year 2019. The lower gross margin was due to the promotions we did for our
members as we tried to attract more members at the initial stage of the on-line sales platform launch, to grow the revenue in future.
The gross margin as a percentage of
revenue in the other revenue segment was 52.9% in fiscal year 2019, as compared to negative gross margin of 9.7% in fiscal
year 2018. The increase in gross margin percentage was due to the change in product mix, as this segment had more sales
of products with a higher profit margin as compared to the same period of last fiscal year. Other revenue in 2018 was mainly
from the sale of fruits related products from Trading Market Mei County and other revenue in 2019 mainly consisted of the
rental of the platform.
In terms of dollar amount, gross profit in the other revenue
segment was $0.02 million, an increase of $0.11 million, compared $0.09 million in fiscal year 2018.
Operating Expenses
The following table presents consolidated
operating expenses and operating expenses as a percentage of revenue for 2019 and 2018, respectively, (in thousands):
|
|
2019
|
|
|
2018
|
|
|
|
Amount
|
|
|
% of revenue
|
|
|
Amount
|
|
|
% of revenue
|
|
General and administrative
|
|
$
|
4,914
|
|
|
|
514.4
|
%
|
|
$
|
11,945
|
|
|
|
1,344.1
|
%
|
Selling expenses
|
|
|
501
|
|
|
|
52.4
|
%
|
|
|
188
|
|
|
|
21.2
|
%
|
Bad debt expenses
|
|
|
5,234
|
|
|
|
548.0
|
%
|
|
|
-
|
|
|
|
-
|
|
Inventory markdown
|
|
|
27
|
|
|
|
2.9
|
|
|
|
-
|
|
|
|
-
|
|
Impairment loss
|
|
|
2,751
|
|
|
|
288.0
|
%
|
|
|
178,297
|
|
|
|
20,063.3
|
%
|
Total operating expenses
|
|
$
|
13,427
|
|
|
|
1,405.7
|
%
|
|
$
|
190,430
|
|
|
|
214.3
|
%
|
General and administrative expenses decreased by $7.04 million,
or 58.9% from $11.95 million in 2018 to $4.91 million in 2019, which was mainly due to a decrease in depreciation expenses and
payroll related expenses from the discontinued operation.
Selling expenses increased by $0.31 million
to $0.50 million in 2019 as compared to $0.19 million in 2018, mainly due to an increase in selling expenses from our E-commerce
business.
Bad debt provision was $5.23 million in
2019, which was for the doubtful accounts receivables.
Inventory markdown was $0.03 million in
2019, which was for some finished products.
The Company recorded an impairment
loss of $2.75 million in fiscal year 2019, which was mainly related with 10% equity investment in InUnion Chain Limited that Digipay
Finteh Limited invested in June. In 2018, the Company recorded an impairment loss $178.30 million related to its fixed assets,
distressed assets, other assets, amortization, construction in progress, intangible assets and inventory. Amont this amount, $26.23
million was with respect to distressed assets, $35.75 million was with respect to the construction in progress, intangible assets
and fixed assets of Food Industry Yidu; an impairment loss of $25.68 million with respect to the construction in progress and
fixed assets of SkyPeople Suizhong; an impairment loss of $13.26 million with respect to the construction in progress of Hedetang
Agricultural Plantations (Yidu) Co., Ltd.; and an impairment loss of $45.0 million of Shaanxi Guoweimei Kiwi Deep Processing Co.,
Ltd. (“Guo Wei Mei”), an impairment loss of $10.78 million with respect to fixed assets of Huludao Wonder, $2.2 million
was with inventory. The construction of these operations has been stopped for more than three years due to a shortage of capital,
and the Company cannot forecast the possible cash flow from these assets, and as a result, the Company recorded the impairment
of assets for these assets.
Loss from Operations
Loss from operations decreased by $177.58 million to $12.94
million for 2019 from $190.52 million for 2018, mainly due to an increase in revenue and a decrease in operating expenses.
Noncontrolling Interests
As of December 31, 2019, Shaanxi Chunlv holds 20.0% interest
in CCM logistics, CCM Logistics holds 10% interest in Trading Market Mei County, Nature Worldwide Resources Ltd. held a 40% interest
in DCON Digipay, and Shaanxi Yinlian holds 45% interest in Zhonglian Hengxin.
Loss from Continuing Operations
Loss from continuing operations decreased by $160.49 million
from $174.01 million in 2018 to $13.52 million in 2019 as the result an increase in revenue and a decrease in operating expenses,
which was paritally offset by an increase in other expenses, as discussed previously.
Loss per Share
Basic and diluted loss per share from continuing operations
were $0.40 in fiscal 2019, respectively, as compared to a loss of $8.04 and $7.92 in fiscal 2018, respectively. Basic and diluted
income per share attributable to discontinued operations was $0 for fiscal year 2019 and $0.19 and $0.18 for fiscasl year 2018,
respectively.
Liquidity and Capital Resources
As of December 31, 2019, we had cash and cash equivalents of
$0.54 million, an increase of $0.29 million, from $0.25 million as of December 31, 2018. The increase in cash, cash equivalents
and restricted cash was mainly due to a decrease in operating loss.
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 negative
$107.79 million as of December 31, 2019, a decrease of $14.78 million from negative $93.01 million as of December 31, 2018, mainly
due to an increase in current liabilities.
In 2019, net cash used in our operating activities was $15.84
million compared to net cash used in operating activities of $4.88 million in 2018. The increase in net cash used in our operating
activities was primarily due to an increase in non-cash expenses in the fiscal year 2019 as compared to the fiscal year 2018.
In 2019, the capital expenditure was $0.05
million, which was mainly related with the application of Chain Cloud Mall (CCM) v2.0, that CCM Tianjin purchased in fiscal year
2019. We did not have any capital expenditure in 2018.
In 2019, cash used in financing activities
was $5.43 million as compared to cash provided by financing activities $0.16 million in 2018. In 2019, we received $1.5 million
from the Secured Convertible Promissory Note pursuant to the Securities Purchase Agreement that the Company entered with Iliad
Research and Trading, L.P. on March 26, 2019.
Off-Balance Sheet Arrangements
As of December 31, 2019, 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, 2019.
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 effective as of December 31, 2019.
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:
|
●
|
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
|
|
|
|
|
●
|
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
|
|
|
|
|
●
|
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.
|
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, 2019. 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
using the COSO criteria, our CEO and CFO concluded that our internal control over financial reporting as of December 31, 2019
was effective.
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 has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
ITEM 9B – OTHER INFORMATION
None
FUTURE
FINTECH GROUP INC.
CONSOLIDATED
BALANCE SHEETS
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
539,316
|
|
|
$
|
253,804
|
|
Accounts
receivable, net of allowance of $16,127,000 as of December 31,
2019 and $15,650,217 as of December 31, 2018, respectively
|
|
|
4,954
|
|
|
|
73,244
|
|
Other
receivables
|
|
|
7,489
|
|
|
|
23,774,163
|
|
Inventories
|
|
|
3,594
|
|
|
|
63,017
|
|
Advances
to suppliers and other current assets
|
|
|
1,668,847
|
|
|
|
-
|
|
Assets
related to discontinued operations
|
|
|
92,772,786
|
|
|
|
-
|
|
TOTAL
CURRENT ASSETS
|
|
$
|
94,996,986
|
|
|
$
|
24,164,227
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
$
|
17,855
|
|
|
$
|
2,336,036
|
|
Intangible
assets
|
|
|
5,312,906
|
|
|
|
21,446,345
|
|
Amount
due from related parties
|
|
|
3,402,823
|
|
|
|
-
|
|
Long-term
investments
|
|
|
12,250,000
|
|
|
|
15,000,000
|
|
TOTAL
ASSETS
|
|
$
|
115,980,570
|
|
|
$
|
62,946,609
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
320,378
|
|
|
$
|
11,054,290
|
|
Accrued
expenses
|
|
|
4,547,380
|
|
|
|
99,131,073
|
|
Advances
from customers
|
|
|
702,179
|
|
|
|
1,160,029
|
|
Short-term
bank loans
|
|
|
957,990
|
|
|
|
5,828,185
|
|
Liabilities
related to discontinued operations
|
|
|
196,261,748
|
|
|
|
-
|
|
TOTAL
CURRENT LIABILITIES
|
|
$
|
202,789,675
|
|
|
$
|
117,173,578
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Amount
Due to Related Party
|
|
$
|
1,268,101
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Long-term
loan
|
|
|
-
|
|
|
|
32,450,867
|
|
TOTAL
NON-CURRENT LIABILITIES
|
|
|
1,268,101
|
|
|
|
32,450,867
|
|
TOTAL
LIABILITIES
|
|
$
|
204,057,776
|
|
|
$
|
149,624,445
|
|
Commitments and contingencies (Note
16)
|
|
|
|
|
|
|
|
|
STOCKHOLDER’S
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future FinTech Group, Inc, Stockholders’
equity
|
|
|
|
|
|
|
|
|
Common stock,
$0.001 par value; 60,000,000 shares authorized and 33,810,416 shares and
31,017,083 shares issued and outstanding as of December 31, 2019 and
December 31, 2018, respectively
|
|
$
|
33,810
|
|
|
$
|
31,017
|
|
Additional
paid-in capital
|
|
|
107,852,827
|
|
|
|
105,737,256
|
|
Accumulated deficits
|
|
|
(213,314,612
|
)
|
|
|
(188,085,680
|
)
|
Accumulated
other comprehensive income (loss)
|
|
|
12,989,408
|
|
|
|
(8,961,549
|
)
|
Total
Future FinTech Group, Inc. stockholders’ equity
|
|
|
(92,438,567
|
)
|
|
|
(91,278,957
|
)
|
Non-controlling
interests
|
|
|
4,361,361
|
|
|
|
4,601,121
|
|
Total
stockholders’ equity
|
|
|
(88,077,206
|
)
|
|
|
(86,677,836
|
)
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
115,980,570
|
|
|
$
|
62,946,609
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
FUTURE
FINTECH GROUP INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
|
|
For the Year Ended
|
|
|
|
2019
|
|
|
2018
|
|
Revenue
|
|
$
|
955,172
|
|
|
$
|
888,670
|
|
Cost of goods sold
|
|
|
464,307
|
|
|
|
975,042
|
|
Gross profit
|
|
|
490,865
|
|
|
|
(86,372
|
)
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
4,913,656
|
|
|
|
11,944,924
|
|
Selling expenses
|
|
|
500,949
|
|
|
|
188,579
|
|
Bad debt provision
|
|
|
5,234,205
|
|
|
|
-
|
|
Inventory markdown
|
|
|
27,247
|
|
|
|
-
|
|
Impairment Loss
|
|
|
2,751,099
|
|
|
|
178,296,747
|
|
Total operating expenses
|
|
|
13,427,156
|
|
|
|
190,430,250
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(12,936,291
|
)
|
|
|
(190,516,623
|
)
|
|
|
|
|
|
|
|
|
|
Other (expenses) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
3,995
|
|
|
|
1,372
|
|
Interest expenses
|
|
|
(523,676
|
)
|
|
|
(1,624,683
|
)
|
Other income(expenses), net
|
|
|
(229,042
|
)
|
|
|
2,387,813
|
|
Total other income (expenses), net
|
|
|
(748,723
|
)
|
|
|
764,502
|
|
|
|
|
|
|
|
|
|
|
Loss from Continuing Operations before Income Tax
|
|
|
(13,685,014
|
)
|
|
|
(189,752,121
|
)
|
Income tax provision
|
|
|
-
|
|
|
|
237
|
|
Loss from Continuing Operations before Non-controlling Minority Interest
|
|
|
(13,685,014
|
)
|
|
|
(189,752,358
|
)
|
|
|
|
|
|
|
|
|
|
Less: Net loss attributable to non-controlling interests
|
|
|
(163,576
|
)
|
|
|
(15,741,937
|
)
|
|
|
|
|
|
|
|
|
|
Loss from Continuing Operations
|
|
$
|
(13,521,438
|
)
|
|
$
|
(174,010,421
|
)
|
|
|
|
|
|
|
|
|
|
Discontinued Operations (Note 18)
|
|
|
-
|
|
|
|
-
|
|
Income (loss) from discontinued operations
|
|
|
(11,707,494
|
)
|
|
|
4,013,367
|
|
NET LOSS ATTRIBUTABLE TO FUTURE FINTECH GROUP, INC.
|
|
$
|
(25,228,932
|
)
|
|
$
|
(169,997,054
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net
|
|
|
|
|
|
|
-
|
|
Net loss
|
|
$
|
(27,074,245
|
)
|
|
$
|
(169,997,054
|
)
|
Foreign currency translation, net of tax
|
|
|
23,556,511
|
|
|
|
85,180,932
|
|
Comprehensive loss
|
|
|
(3,517,734
|
)
|
|
|
(100,558,059
|
)
|
Less: Comprehensive loss attributable to non-controlling interests
|
|
|
(239,760
|
)
|
|
|
-
|
|
COMPREHENSIVE LOSS ATTRIBUTABLE TO FUTURE FINTECH GROUP INC. STOCKHOLDERS
|
|
$
|
(3,277,974
|
)
|
|
$
|
(100,558,059
|
)
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic earnings per share from continued operation
|
|
$
|
(0.42
|
)
|
|
$
|
(8.04
|
)
|
Basic earnings per share from discontinued operation
|
|
|
(0.37
|
)
|
|
|
0.19
|
|
|
|
$
|
(0.79
|
)
|
|
$
|
(7.85
|
)
|
Diluted Earnings per share:
|
|
|
|
|
|
|
|
|
Diluted loss per share from continued operation
|
|
$
|
(0.42
|
)
|
|
$
|
(7.92
|
)
|
Diluted earnings per share from discontinued operation
|
|
|
(0.37
|
)
|
|
|
0.18
|
|
|
|
$
|
(0.79
|
)
|
|
$
|
(7.74
|
)
|
Weighted average number of shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
31,996,279
|
|
|
|
21,636,146
|
|
Diluted
|
|
|
31,996,279
|
|
|
|
21,966,612
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
FUTURE
FINTECH GROUP INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
Accumulative
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Non-
|
|
|
|
|
|
|
Common Stock
|
|
|
paid-in
|
|
|
Accumulated
|
|
|
comprehensive
|
|
|
controlling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
deficits
|
|
|
income
|
|
|
interests
|
|
|
Total
|
|
Balance at December 31, 2017
|
|
|
5,173,234
|
|
|
$
|
5,173
|
|
|
$
|
109,090,782
|
|
|
$
|
(2,346,689
|
)
|
|
$
|
(94,142,381
|
)
|
|
$
|
20,343,058
|
|
|
$
|
32,949,843
|
|
Common Stocks issued during 2018
|
|
|
25,843,849
|
|
|
|
25,844
|
|
|
|
155,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181,814
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(169,997,054
|
)
|
|
|
|
|
|
|
(15,741,937
|
)
|
|
|
(185,738,991
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
(3,509,496
|
)
|
|
|
(15,741,937
|
)
|
|
|
85,180,832
|
|
|
|
|
|
|
|
65,929,499
|
|
Balance at December 31, 2018
|
|
|
31,017,083
|
|
|
$
|
31,017
|
|
|
$
|
105,737,256
|
|
|
$
|
(188,085,680
|
)
|
|
$
|
(8,961,549
|
)
|
|
$
|
4,601,121
|
|
|
$
|
(86,677,835
|
)
|
Share based compensation
|
|
|
1,300,000
|
|
|
|
1,300
|
|
|
|
702,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
703,300
|
|
Issuance of common stock for conversion of debts
|
|
|
1,493,333
|
|
|
|
1,493
|
|
|
|
1,413,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,415,064
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,228,932
|
)
|
|
|
|
|
|
|
(1,845,313
|
)
|
|
|
(27,074,245
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,950,957
|
|
|
|
1,605,554
|
|
|
|
23,556,511
|
|
Balance at December 31, 2019
|
|
|
33,810,416
|
|
|
$
|
33,810
|
|
|
$
|
107,852,827
|
|
|
$
|
(213,314,612
|
)
|
|
$
|
12,989,408
|
|
|
$
|
4,361,361
|
|
|
$
|
(88,077,206
|
)
|
The
accompanying notes are an integral part of these consolidated financial
statements.
FUTURE
FINTECH GROUP INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For the Year Ended
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net loss
|
|
$
|
(27,074,245
|
)
|
|
$
|
(169,997,054
|
)
|
Adjustments to reconcile net income to net cash provided by operating activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,674,923
|
|
|
|
-
|
|
Bad debt provision
|
|
|
8,260,677
|
|
|
|
16,314,293
|
|
Inventory markdown
|
|
|
27,247
|
|
|
|
2,464,364
|
|
Impairment loss
|
|
|
2,750,000
|
|
|
|
178,296,747
|
|
Share based compensation
|
|
|
702,000
|
|
|
|
-
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(4,95
|
)
|
|
|
(17,082,886
|
)
|
Other receivable
|
|
|
124,533
|
|
|
|
(12,939,323
|
)
|
Advances to suppliers and other current assets
|
|
|
(1,668,847
|
)
|
|
|
2,805,215
|
|
Inventories
|
|
|
(30,841
|
)
|
|
|
(4,246,665
|
)
|
Accounts payable
|
|
|
(1,731,528
|
)
|
|
|
(223,416
|
)
|
Accrued expenses
|
|
|
(15,939,575
|
)
|
|
|
(779,504
|
|
Changes in net assets related to discontinued operations
|
|
|
13,756,540
|
|
|
|
|
|
Advances from customers
|
|
|
314,228
|
|
|
|
504,091
|
|
Net cash used in operating activities
|
|
|
(15,839,843
|
)
|
|
|
(4,880,137
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
(5,006
|
)
|
|
|
-
|
|
Purchase of intangible assets
|
|
|
(43,003
|
)
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(48,009
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Issue of common stock
|
|
|
-
|
|
|
|
155,970
|
|
Changes in financing amount due to/from related parties
|
|
|
(2,134,722
|
)
|
|
|
-
|
|
Proceeds from Secured Convertible Promissory Note
|
|
|
1,503,793
|
|
|
|
-
|
|
Changes in net assets related to discontinued operations
|
|
|
(4,800,701
|
)
|
|
|
-
|
|
Net cash (used in) provided by financing activities
|
|
|
(5,431,630
|
)
|
|
|
155,970
|
|
|
|
|
|
|
|
|
|
|
Effect of change in exchange rate
|
|
|
21,728,082
|
|
|
|
390,494
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
408,599
|
|
|
|
(4,333,673
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
253,804
|
|
|
|
4,586,757
|
|
Cash and cash equivalents, end of year
|
|
|
662,403
|
|
|
|
253,804
|
|
Less: Cash and cash equivalents from the discontinued operations, end of year
|
|
|
(123,087
|
)
|
|
|
-
|
|
Cash and cash equivalents, from the continuing operations end of year
|
|
$
|
539,316
|
|
|
$
|
253,804
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
|
-
|
|
|
|
-
|
|
Cash paid for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY DISCLOSURE OF SIGNIFICANT NON-CASH TRANSACTION
|
|
|
|
|
|
|
|
|
Conversion of convertible notes
|
|
$
|
1,415,064
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
FUTURE FINTECH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2019 AND
2018
1. CORPORATE INFORMATION
Future FinTech is a holding company incorporated
under the laws of the State of Florida. The Company engages 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 the PRC. Due to
drastically increased production cost and tightened environmental laws in China, the Company transformed its business from fruit
juice manufacturing and distribution to a real-name blockchain e-commerce platform that integrates blockchain and internet technology
in 2018.
The main business of the Company includes a shopping platform,
Chain Cloud Mall (CCM), which is based on blockchain technology; a cross-border e-commerce platform (NONOGIRL) which is online
and has started its trial operation in March 2020 and is expected for a formal launch in the third quarter of 2020; a blockchain-based
application incubator and a digital payment system (DCON); and the application and development of blockchain-based e-commerce technology
and financial technology.
The Company’s activities are principally
conducted by subsidiaries operating in the PRC.
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of preparation and principle
of consolidation
These financial statements have been prepared
in conformity with accounting principles generally accepted in the United States of America, or US GAAP.
The Company’s functional currency
of subsidiaries and VIEs in China is the Chinese Renminbi (RMB). Other subsidiaries outside of China use USD as the functional
currency; however, the accompanying consolidated financial statements have been translated and presented in USD.
According to USGAAP ASC 810-10-15-8, for
legal entities other than limited partnerships, the usual condition for a controlling financial interest is ownership of a majority
voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent
of the outstanding voting shares of another entity is a condition pointing toward consolidation. The power to control may also
exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders, or by court decree.
The consolidated financial statements
include the accounts of the Company and its subsidiaries. The consolidated financial statements are prepared in accordance with
U.S. GAAP. This basis differs from that used in the statutory accounts of subsidiaries and VIEs in the PRC, which were prepared
in accordance with the accounting principles and relevant financial regulations applicable to enterprises in the PRC. All necessary
adjustments have been made to present the financial statements in accordance with U.S. GAAP. All significant inter-company accounts
and transactions have been eliminated.
Certain amounts of prior years were reclassified
to conform with current year presentation.
Discontinued Operations
As discussed previously, 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. As the Company believed
that no continued cash flow would be generated by the sold component, in accordance with ASC 205-20, the Company presented the
operating results from Hedetang as discontinued operations within the accompanying consolidated financial statements.
In addition, The Company’s Huludao
Wonder operation, a subsidiary which produces concentrated apple juice, suffered continued operating losses since 2014 and its
cash flow was minimal for these three years. In December 2016, the Company established a winding-down plan to close this operation.
Based on the restructuring plan and in accordance with ASC 205-20, the Company presented the operating results from Huludao Wonder
as a discontinued operation.
On March 11,2020, the Company’s Board
of Directors passed a resolution to sale the operation of Globalkey Supply Chain limited and Zhonglian Hengxin Assets Management
Co. Ltd and close the operation of Digital Online Marketing Limited, Future Digital Fintech (Xi’an) Co. Ltd., SkyPeople Foods
Holding Ltd. 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.
Segment Information Reclassification
Historically, the Company operated in
five segments: concentrated apple juice and apple aroma, concentrated kiwifruit juice and kiwifruit puree, concentrated pear juice,
fruit juice beverages, and others.
As the Company classified the juice related
operation into discontinued operation, in the beginning of year 2019, and in accordance with the Company’s new business
strategy, the Company classified business segment into CCM Shopping Mall Membership, sales of goods and others.
Use of Estimates
The Company’s consolidated financial
statements have been prepared in accordance with US GAAP and this requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of 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, but not limited to, 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 and such differences may be material to
our consolidated financial statements.
Going Concern
The Company’s financial statements
are prepared assuming that the Company will continue as a going concern.
The Company incurred operating losses and
had negative operating cash flows and may continue to incur operating losses and generate negative cash flows as the Company implements
its future business plan. In order to meet its working capital needs through the next twelve months and to fund the growth of the
Company, the Company may consider plans to raise additional funds through the issuance of equity or debt. Although the Company
intends to obtain additional financing to meet its cash needs, the Company may be unable to secure any additional financing on
terms that are favorable or acceptable to it, if at all.
The ability of the Company to continue
as a going concern is dependent upon its ability to successfully execute its new business strategy and eventually attain profitable
operations. The accompanying financial statements do not include any adjustments that may be necessary if the Company is unable
to continue as a going concern.
Impairment of Long-Lived Assets
In accordance with the Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“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, or it is reasonably possible that these assets could become impaired as a result of technological
or other industrial changes. The determination of recoverability of assets to be held and used is made by comparing the carrying
amount of an asset to future 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 cost to sell.
Fair Value of Financial Instruments
The Company has 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 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.
Our cash and cash equivalents and restricted
cash are classified within level 1 of the fair value hierarchy because they are value using quoted market price.
Earnings (Loss) Per Share
Under ASC 260-10, Earnings Per Share,
basic EPS excludes dilution for Common Stock equivalents and is calculated by dividing net income (loss) available to common stockholders
by the weighted-average number of Common Stock outstanding for the period.
Diluted EPS is calculated by using the
treasury stock method, assuming conversion of all potentially dilutive securities, such as stock options and warrants. Under this
method, (i) exercise of options and warrants is assumed at the beginning of the period and shares of Common Stock are assumed
to be issued, (ii) the proceeds from exercise are assumed to be used to purchase Common Stock at the average market price during
the period, and (iii) the incremental shares (the difference between the number of shares assumed issued and the number of shares
assumed purchased) are included in the denominator of the diluted EPS computation. The numerators and denominators used in the
computations of basic and diluted EPS are presented in the following table.
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
NUMERATOR FOR BASIC AND DILUTED EPS
|
|
|
|
|
|
|
Net loss from continuing operations (numerator for EPS)
|
|
$
|
(13,521,438
|
)
|
|
$
|
(174,010,421
|
)
|
Net (income) )loss from discontinued operations (numerator for EPS)
|
|
|
(11,707,493
|
)
|
|
|
4,013,367
|
|
Net loss allocated to Common Stockholders
|
|
$
|
(25,228,932
|
)
|
|
$
|
(169,997,054
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic loss per share from continued operations
|
|
$
|
(0.42
|
)
|
|
$
|
(8.04
|
)
|
Basic income (loss) per share from discontinued operations
|
|
|
(0.37
|
)
|
|
|
0.19
|
|
Basic loss per share from net loss
|
|
$
|
(0.79
|
)
|
|
$
|
(7.85
|
)
|
Diluted loss per share:
|
|
|
|
|
|
|
|
|
Diluted loss per share from discontinued operations
|
|
$
|
(0.42
|
)
|
|
$
|
(7.92
|
)
|
Diluted income (loss) per share from discontinued operations
|
|
|
(0.37
|
)
|
|
|
0.18
|
|
Diluted loss per share from net loss
|
|
$
|
(0.79
|
)
|
|
$
|
(7.74
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average Common Stock outstanding
|
|
|
31,996,279
|
|
|
|
21,636,146
|
|
DENOMINATOR FOR BASIC AND DILUTED EPS
|
|
|
31,996,279
|
|
|
|
21,966,612
|
|
Cash and Cash Equivalents
Cash and cash equivalents included cash
on hand and demand deposits placed with banks or other financial institutions, which are unrestricted as to withdrawal and use
and with an original maturity of three months or less.
Deposits in banks in the PRC are only
insured by the government up to RMB500,000, and are consequently exposed to risk of loss. The Company believes the probability
of a bank failure, causing loss to the Company, is remote.
Accounts Receivable and Allowances
Accounts receivable are recognized and
carried at the original invoice amounts less an allowance for any uncollectible amount. We have a policy of reserving for uncollectible
accounts based on our best estimate of the amount of probable credit losses in our existing accounts receivable. We extend credit
to our customers based on an evaluation of their financial condition and other factors. We generally do not require collateral
or other security to support accounts receivable. We perform ongoing credit evaluations of our customers and maintain an allowance
for potential bad debts if required.
We determine whether an allowance for
doubtful accounts is required by evaluating specific accounts where information indicates the customers may have an inability
to meet financial obligations. In these cases, we use assumptions and judgment, based on the best available facts and circumstances,
to record a specific allowance for those customers against amounts due to reduce the receivable to the amount expected to be collected.
These specific allowances are re-evaluated and adjusted as additional information is received. The amounts calculated are analyzed
to determine the total amount of the allowance. We may also record a general allowance as necessary.
Direct write-offs are taken in the period
when we have exhausted our efforts to collect overdue and unpaid receivable or otherwise evaluate other circumstances that indicate
that we should abandon such efforts.
The Company has assessed its accounts receivable including credit
term and corresponding all its accounts receivables in December 2019. Upon such credit terms, bad debt expense was increased by
$5.23 million and $16.31 million during the years ended December 31, 2019 and 2018, respectively. Accounts receivables of $2,477
and $619.13 million have been outstanding for over 90 days as of December 31, 2019 and December 31, 2018, respectively.
Inventories
Inventories consist of raw materials, packaging
materials (which include ingredients and supplies) and finished goods (which include finished juice in the bottling, canning operations
and other. Inventories also consist of merchant gift package to be delivered with the new membership signed up in our e-commerce
platform. Inventories are valued at the lower of cost or market. We determine cost on the basis of the weighted average method.
The Company periodically reviews inventories for obsolescence and any inventories identified as obsolete are written off.
Revenue Recognition
We adopted Accounting
Standards Codification Topic 606, Revenue
from Contracts with Customers (ASC 606) and all related amendment from
January 1, 2018.
We apply
the five steps defined under ASC 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 arrangements with multiple performance
obligations are divided into separate distinct goods or services. We allocate the transaction price to each performance obligation
based on the relative standalone selling price of the goods or services provided. Revenue is recognized upon the transfer of control
of promised goods or services to a customer.
We do not make any significant judgment
in evaluating when control is transferred. Revenue is recorded net of value-added tax.
Revenue recognitions are as follows:
Sales of juice and other products:
We recognize revenue when the receipt
of merchandise is confirmed by the customers, which is the point that the title of the goods is transferred to the customer.
We recognize revenues when we satisfy
a performance obligation by transferring a promised good or service (that is, an asset) to a customer. An asset is transferred
when the customer obtains control of that asset. Customers have no contractual right to return products. 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 product to its suppliers.
The Company does not make any significant
judgment in determination of the amount and timing of revenue from contracts with customers.
On-line sales and Membership fee:
The Company recognizes the sale of goods
15 days after the products are shipped (after the 15 days return policy). The revenue from the membership fee is amortized over
the lifetime of the membership, which is one year. For the merchandise gift package, revenue is recognized when the receipt of
the gift package is confirmed by the members. Other revenues include revenues earned on net basis from sales of certain products
on our platform.
Shipping and Handling Costs
Shipping and handling amounts billed to
customers in sales transactions are included in sales revenues and shipping expenses incurred by the Company are reported as a
component of selling expenses. The shipping and handling expenses of $1,180 and $33,145 for fiscal years 2019 and 2018, respectively,
are reported in the Consolidated Statements of Income and Comprehensive Income as a component of selling expenses.
Advertising and Promotional Expense
Advertising and promotional costs are expensed
as incurred and are included in selling expenses. The Company incurred $19,128 and $19,341 in advertising and promotional costs
for the years ended December 31, 2019 and 2018, respectively.
Property, Plant and Equipment
Property, plant and equipment are stated
at cost less accumulated depreciation and any impairment losses. Depreciation is computed using the straight-line method over
the useful lives of the assets. Major renewals and betterments are capitalized and depreciated; maintenance and repairs that do
not extend the life of the respective assets are expensed as incurred. Upon disposal of assets, the cost and related accumulated
depreciation are removed from the accounts and any gain or loss is included in the consolidated statements of income and comprehensive
income.
Depreciation related to property, plant
and equipment used in production is reported in cost of sales, and includes amortized amounts related to capital leases. We estimated
that the residual value of the Company’s property and equipment ranges from 3% to 5%. Property, plant and equipment are
depreciated over their estimated useful lives as follows:
Buildings
|
|
20-30 years
|
Machinery and equipment
|
|
5-10 years
|
Furniture and office equipment
|
|
3-5 years
|
Motor vehicles
|
|
5 years
|
Intangible Assets
Acquired intangible assets are recognized
based on their cost to the Company, which generally includes the transaction costs of the asset acquisition, and no gain or loss
is recognized unless the fair value of noncash assets given as consideration differs from the assets’ carrying amounts on
the Company’s book. These assets are amortized over their useful lives if the assets are deemed to have a finite life and
they are reviewed for impairment by testing for recoverability whenever events or changes in circumstances indicate that its carrying
amount may not be recoverable. The fair value of an intangible asset is the amount that would be determined if the entity used
the assumptions that market participants would use if they were pricing the intangible asset. The useful life of the Company’s
intangible assets is ten year, which is determined by using the time period that an intangible is estimated to contribute directly
or indirectly to a company’s future cash flows.
Foreign Currency and Other Comprehensive
Income (Loss)
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 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 exchange rate we used
to convert RMB to USD was 6.98 and 6.86 at the balance sheet date of December 31, 2019 and December 31, 2018, respectively. The
average exchange rate for the period has been used to translate revenues and expenses. The average exchange rate we used to convert
RMB to USD was 6.90 and 6.62 for fiscal year 2019 and fiscal year 2018, respectively. Translation adjustments are reported separately
and accumulated in a separate component of equity (cumulative translation adjustment).
Other comprehensive loss for the year
ended December 31, 2019 and 2018 represented foreign currency translation adjustments loss of $36.85 million and $85.18 million,
respectively, and were included in the consolidated statements of comprehensive income (loss).
Income Taxes
We use the asset and liability method
of accounting for income taxes in accordance with ASC Topic 740, “Income Taxes.” Under this method, income tax expense
is recognized for the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary
differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is
provided to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it
is more likely than not some portion or all of the deferred tax assets will not be realized.
ASC Topic 740-10-30 clarifies the accounting
for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold
and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken
in a tax return. ASC Topic 740-10-25 provides guidance on de-recognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. We have no material uncertain tax positions for any of the reporting periods presented.
Right of Use Assets
The Company paid in advance for land use
rights according to Chinese law. Prepaid land use rights are being amortized and recorded as lease expenses using the straight-line
method over the use terms of the lease, which are 40 to 50 years.
Lease
In February 2016, the Financial Accounting
Standards Board (FASB) issued ASU No. 2016-02, Leases, and in July 2018, issued ASU No. 2018-10 and 2018-11 and in December 2018,
issued ASU No. 2018-20 and in March 2019, issued ASU No. 2019-01, which amended the standard, replacing existing lease accounting
guidance. The new standard introduced a lessee model that requires entities to recognize assets and liabilities for most leases,
but recognize expenses on their income statements in a manner similar to current accounting. The ASU did not make fundamental
changes to previous lessor accounting. For the Company, the ASU was effective January 1, 2019. As amended, the ASU provided for
retrospective transition applied to earliest period presented or an adoption method by which entities would not need to recast
the comparative periods presented. The Company did not recast prior periods as it adopted this ASU. As a result of adopting this
ASU, the Company recorded approximately $0 of lease assets and lease liabilities related to transition upon this ASU’s adoption.
After adoption of ASU 2016-02 and related
standards, operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value
of lease payments over the lease term. For short-term leases with an initial lease term of 12 months or less and with purchase
options we are reasonably certain will not be exercised. As a lessee, the Company leases equipment, land and office building.
Lease expense is recognized on a straight-line basis over the lease term.
Convertible notes
The Company accounts for its convertible
notes at issuance by allocating the proceeds received from a convertible note among freestanding instruments according to ASC 470,
Debt, based upon their relative fair values. The fair value of debt and common stock is determined based on the closing price of
the common stock on the date of the transaction. Convertible notes are subsequently carried at amortized cost. Each convertible
note is analyzed for the existence of a beneficial conversion feature (“BCF”), defined as the fair value of the common
stock at the commitment date for the convertible note, less the effective conversion price. No BCF was recognized for the convertible
notes issued during 2019.
Share-based compensation
The Company awards share options and other
equity-based instruments to its employees, directors and consultants (collectively “share-based payments”). Compensation
cost related to such awards is measured based on the fair value of the instrument on the grant date. The Company recognizes the
compensation cost over the period the employee is required to provide service in exchange for the award, which generally is the
vesting period. The amount of cost recognized is adjusted to reflect the expected forfeiture prior to vesting. When no future services
are required to be performed by the employee in exchange for an award of equity instruments, and if such award does not contain
a performance or market condition, the cost of the award is expensed on the grant date. The Company recognizes compensation cost
for an award with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite service
period for the entire award, provided that the cumulative amount of compensation cost recognized at any date at least equals the
portion of the grant-date value of such award that is vested at that date.
New Accounting Pronouncements
In June 2016, the FASB issued ASU No.
2016-13 (“ASU 2016-13”) “Financial Instruments - Credit Losses” (“ASC 326”): Measurement
of Credit Losses on Financial Instruments” which requires the measurement and recognition of expected credit losses for
financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected
loss model which requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the
concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be
recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities.
These changes will result in earlier recognition of credit losses. In November 2019, the FASB issued ASU 2019-10
“Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic
842)” (“ASC 2019-10”), which defers the effective date of ASU 2016-13 to fiscal years beginning after
December 15, 2022, including interim periods within those fiscal years, for public entities which meet the definition of a
smaller reporting company. The Company will adopt ASU 2016-13 effective January 1, 2023. Management is currently evaluating
the effect of the adoption of ASU 2016-13 on the consolidated financial statements. The effect will largely depend on the
composition and credit quality of our investment portfolio and the economic conditions at the time of adoption.
In December
2019, the FASB issued the amendments in ASU 2019-12 ASC Topic 740, Income Taxes: Simplifying Accounting for Income
Taxes, which removes specific exceptions to the general principles in Topic 740 in Generally Accepted Accounting
Principles (GAAP). The amendments eliminate the need for an organization to analyze whether the specific exceptions apply in
a given period, improve financial statement preparers’ application of income tax-related guidance and simplify GAAP.
The amendments are effective for all entities for fiscal years beginning after December 15, 2020, and interim periods within
those fiscal years. While early application is permitted, including adoption in an interim period, the Company has not
elected to early adopt. The effectiveness of this update is not expected to have a significant effect on the Company’s
consolidated financial position or results of operations.
Management does not believe that any other
recently issued, but not yet effective accounting pronouncements, if adopted, would have a material impact on the accompanying
consolidated financial statements.
3. INVENTORIES
Inventories by major categories are summarized
as follows:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Raw materials and packaging
|
|
$
|
-
|
|
|
$
|
24,578
|
|
Finished goods
|
|
|
37,269
|
|
|
|
2,502,803
|
|
Less: impairment loss
|
|
|
(33,675
|
)
|
|
|
(2,464,364
|
)
|
Inventories
|
|
$
|
3,594
|
|
|
$
|
63,017
|
|
Inventory write-downs and write-offs made
during years ended December 31, 2019 and 2018 were $27,247 and $2.46 million, respectively.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist
of the following:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Machinery and equipment
|
|
$
|
|
|
|
$
|
32,702,621
|
|
Furniture and office equipment
|
|
|
36,958
|
|
|
|
368,875
|
|
Motor vehicles
|
|
|
-
|
|
|
|
355,820
|
|
Buildings
|
|
|
-
|
|
|
|
54,689,750
|
|
Construction in progress
|
|
|
-
|
|
|
|
185,646
|
|
Subtotal
|
|
|
36,958
|
|
|
|
88,302,711
|
|
Less: accumulated depreciation
|
|
|
(11,902
|
)
|
|
|
(41,420,859
|
)
|
Less: Impairment loss
|
|
|
(7,201
|
)
|
|
|
(44,545,816
|
)
|
Net property and equipment
|
|
$
|
17,855
|
|
|
|
$2,336,036
|
|
Depreciation expense
included in general and administration expenses for the years ended December 31, 2019 and 2018 was $6,051 and $2.93 million respectively.
Depreciation expense included in cost of sales for the year ended December 31, 2019 and 2018 was $0 and $337,198 and respectively.
5. INTANGIBLE ASSETS
On January 23, 2018, DigiPay and Peng Youwang
(“Peng”), a Chinese citizen entered into the DCON Agreement. Under the terms of the DCON Agreement, Peng transferred
to DigiPay a 60% ownership interest in certain digital assets of DCON, a blockchain platform for cryptocurrency conversion, payment
and other services (“DCON”), including but not limited to its business plan and white papers, business models, software,
architectures, codes, software, applications, technologies, patents, copyrights, trade secrets, customer lists, business points,
trading platforms, digital rights, authentication systems, agreements and contracts, token, and the DCON communities established
on Nova Realm City (the “Transfer Assets”) for an aggregate purchase price of $9.6 million (the “Purchase Price”).
As of December 31, 2018, management has
determined that above acquired intangible assets were evaluated at the par value of the common stocks issued, or $1,200. We have
assessed the recoverability of such assets as of December 31, 2019 and concluded that no impairment indication was noted.
Also included in the intangible assets
is land use right. The government of the PRC, its agencies and collectives hold all land ownership. Companies or individuals are
authorized to use the land only through land usage rights granted by the PRC government. Land usage rights can be transferred upon
approval by the land administrative authorities of the PRC (State Land Administration Bureau) upon payment of the required land
transfer fee. Accordingly, the Company paid in advance for land usage rights. Prepaid land usage rights are being amortized and
recorded as lease expenses using the straight-line method over the terms of the leases, which range from 40 to 50 years. The amortization
expense was $0.12 million and $6.5 million and for fiscal years 2019 and 2018, respectively. The following table sets forth land
usage rights of the Company as of December 31, 2019 and 2018, respectively.
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cost
|
|
$
|
5,847,008
|
|
|
$
|
24,003,243
|
|
Less: Accumulated amortization
|
|
|
(574,996
|
)
|
|
|
(2,556,898
|
)
|
Less: Impairment Loss
|
|
|
-
|
|
|
|
(6,895,078
|
)
|
|
|
$
|
5,272,012
|
|
|
|
14,551,266
|
|
6. RELATED PARTY TRANSACTION
As
of December 31, 2019, the amount due to the related parties was $1.27 million, which consisted of the followings:
Name of Related Party from Whom Amounts were Received
|
|
Amount
(US$)
|
|
|
Relationship
|
|
Note
|
Yongke Xue
|
|
|
28,539
|
|
|
Chairman of the Company
|
|
Loan payable
|
Shanchun Huang
|
|
|
71,672
|
|
|
Chief Executive Officer of the Company
|
|
Loan payable
|
Shenzhen TianShunDa Equity Investment Fund Management Co., Ltd.,
|
|
|
573,142
|
|
|
Holds 26.36% of equity shares of SkyPeople China
|
|
Interest free loan*
|
InUnion Chain Ltd. (“INU”)
|
|
|
209,957
|
|
|
The Company is the 10% equity shareholder of INU
|
|
Accounts payables
|
Zhi Yan
|
|
|
40,710
|
|
|
Chief Technology Officer of the Company
|
|
Loan payable
|
Jing chen
|
|
|
6,527
|
|
|
Chief Financial Officer of the Company
|
|
Payable to employee
|
Zeyao Xue
|
|
|
310,746
|
|
|
Son of the Chairman of the Company and a shareholder of the Company Chief Operating Officer of the Company
|
|
Loan payable
|
Kai Xu
|
|
|
26,808
|
|
|
Chief Operating Officer of the Company
|
|
Payable to employee
|
As of December 31, 2019, the amount due from the related parties
was $3.40 million, which consisted of the followings:
Name of Related Party to Whom
the Amounts were Paid
|
|
Amount
(US$)
|
|
|
Relationship
|
|
Note
|
Shaanxi Chunlv Ecological Agriculture Co. Ltd.
|
|
|
3,356,070
|
|
|
Holds 20.0% interest in CCM logistics
|
|
Interest free loan*
|
Quangoutong Commercial Holdings (Xi’an) Co., Ltd (“Quangoutong”)
|
|
|
22,935
|
|
|
Shaanxi Fullmart Convenient Chain Supermarket Co., Ltd. (“Fullmart”) holds 16.67% equity of its subsidiary. The subsidiary is 83.33% owned by Quangoutong
|
|
Service fee due
|
Shaanxi Quangou Convenient Island Co. Ltd.
|
|
|
23,828
|
|
|
Fullmart holds 33.33% its equity
|
|
Interest free loan*
|
●
|
The
interest free loans have been approved by the Company’s Audit Committee.
|
In fiscal year 2019, the Company purchased
health insurance of $209,958 from InUnion Chain Ltd (“INU”), and the Company is the 10% equity shareholder of INU.
The Company’s
subsidiary sold fruit beverages to a related entity, Shaanxi Fullmart Convenient Chain Supermarket Co., Ltd. (“Fullmart”)
for approximately $8,810 for the year ended December 31, 2018. The sales to this related party were consistent with pricing and
terms offered to third parties. The remaining accounts receivable balances were $0 as of December 31, 2018.
Fullmart is a company indirectly owned by our Chairman and CEO, Mr. Yongke Xue.
7. INCOME TAX
The Company is incorporated in the United
States of America and is subject to United States federal taxation. No provisions for income taxes have been made, as the Company
had no U.S. taxable income for the years ended December 31, 2019 and 2018. The effective income tax rate for the Company for both
of the years ended December 31, 2019 and 2018 were 0% and 0% respectively. Some of our subsidiaries generated income and we accrued
income tax according to the Chinese corporate income tax rate, but some had a loss and no tax provision was made.
The amount of unrecognized deferred tax
liabilities for temporary differences related to the dividend from foreign subsidiaries is not determined because such determination
is not practical.
The Company has not provided deferred
taxes on undistributed earnings attributable to its PRC subsidiaries as they are to be permanently reinvested. On February 22,
2008, MOFCOM and SAT jointly issued Cai Shui 2008 Circular 1, “Circular 1.” According to Article 4 of Circular
1, distributions of accumulated profits earned by foreign investment enterprises, (“FIE”) prior to January 1, 2008
to their foreign investors will be exempt from withholding tax, (“WHT”) while distribution of the profits earned by
a FIE after January 1, 2008 to its foreign investors shall be subject to WHT.
The Company had no material
adjustments to its liabilities for unrecognized income tax benefits according to the provisions of ASC Topic 740, Income
Taxes. Since the Company intends to reinvest its earnings to further expand its businesses in mainland China, its PRC
subsidiaries do not intend to declare dividends to their immediate foreign holding companies in the foreseeable future.
Accordingly, the Company has not recorded any deferred taxes in relation to US tax on the cumulative amount of undistributed
retained earnings since January 1, 2008.
Effective on January 1, 2008, the PRC
Enterprise Income Tax Law, EIT Law, and Implementing Rules imposed a unified enterprise income tax rate of 25% on all domestic-invested
enterprises and foreign-invested enterprises in the PRC, unless they qualify under certain limited exceptions. All of the Companies’
Chinese subsidiaries were subject to an enterprise income tax rate of 25%.
In assessing the reliability of
deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become deductible or are utilized. Based upon an assessment of the level of historical taxable
income and projections for future taxable income over the periods on which the deferred tax assets are deductible or can be utilized,
management believes it is not likely for the Company to realize all benefits of the deferred tax assets as of December 31, 2019
and December 31, 2018. Therefore, the Company provided for a valuation allowance against its deferred tax assets as of December
31, 2019 and 2018, respectively.
8. IMPAIRMENT LOSS
The Company recorded $2.75 million
of impairment loss in fiscal year 2019 related with 10% equity investment in InUnion Chain Limited that Digipay Finteh Limited
invested in June 2018.
The Company recognized an impairment loss
of $4.36 million in fiscal year 2018 related with the fixed assets of the Company’s subsidiary Yingkou, which had no production
since the year 2016.
In 2018, the Company recorded an impairment
loss of $25.19 million regarding Company’s fixed assets and construction in progress. Among this amount, $11.51 million
was related with Shaanxi Guoweimei Kiwi Deep Processing Co., Ltd. (“Guo Wei Mei”). On April 19, 2013, we established
Guo Wei Mei to engage in the business of producing kiwi fruit juice, kiwi puree, cider beverages, and related products. The total
estimated investment was RMB 294 million. By the end of 2018, the Company has finished the building of an R&D center and an
office building with a total investment of approximately $11.24 million (RMB 76.2 million), the Company has also purchased a fruit
juice production line of approximately $19.02 million (RMB 129 million). As the Chinese government recently tightened environmental
regulations, the project has been delayed and the construction has been stopped since early 2017. Since the Company’s current
cash cannot support the future input of this project and there is no forecasted cash flow from this project, the value of the
construction in progress of this project was impaired.
An impairment loss of $25.68 million recorded
in 2018 was related with our Suizhong project in Liaoning Province, which was to establish a fruit and vegetable industry chain
and further processing demonstration zone in Suizhong County, Liaoning Province (the “Suizhong Project”). We started
the Suizhong project in August 2013. The Company has made partial payment to acquire land use rights from the local government,
purchase equipment and build facilities. By the end of 2018, the Company has finished construction of an office building, dormitory,
refrigeration storage facility and warehouse. However, due to heavy competition in the concentrated apple juice business in China,
our Huludao Wonder and Yingkou facilities in Liaoning have had no production in the past few years, and the construction work
on Suizhong project is also currently suspended. Since the Company’s current cash cannot support the future input of this
project and there is no forecasted cash flow from this project, the value of the construction in progress of this project was
impaired.
An impairment loss of $32.68 million recorded
in 2018 was related with our Yidu project. On November 23, 2015, the Company started the construction of the Yidu project, which
was to establish the distribution center and the deep processing zone on the project land of approximately 280 mu, or 46 acre.
As the Chinese government recently tightened environment regulations, the project has been delayed. Since the Company’s
current cash cannot support the future input of this project and there is no forecasted cash flow from this project, the value
of the construction in progress of this project was impaired.
9. RISKS AND UNCERTAINTIES
a) PRC Regulations
There are substantial
uncertainties regarding the interpretation and application of PRC laws and regulations including, but not limited to, the
laws and regulations governing our business and the enforcement and performance of our arrangements with customers in certain
circumstances. We are considered foreign persons or foreign funded enterprises under PRC laws and, as a result, we are
required to comply with PRC laws and regulations related to foreign persons and foreign funded enterprises. These laws and
regulations are sometimes vague and may be subject to future changes, and their official interpretation and enforcement may
involve substantial uncertainty. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting
in detrimental reliance. New laws and regulations that affect existing and proposed future businesses may also be applied
retroactively. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our
business.
b) Major customers and suppliers
No customer accounted for more than 10% of the
Company’s sales for the year ended December 31, 2019. There were two customers, Chengdu Hongkor Electromechanical Equipment
Co., Ltd. (“HongKor”), and Qifeng Fruit Industry Co., Ltd., who accounted for 40.96% and 10.17% respectively of the
Company’s sales for the year ended December 31, 2018,
Sales to our five largest customers accounted
for approximately 15.6% and 61.56% of our net sales during the years ended December 31, 2019 and 2018, respectively.
There was no suppliers accounted for more
than 10% of our purchase during the year ended December 31, 2019. Five top suppliers accounted for 14.42% of our purchases during
the year ended December 31, 2019.
In 2018, the company’s suppliers
were dispersed, no one occupied more than 1% of the total purchases. The first two largest suppliers were 0.99% during the year
ended December 31, 2018.
10. SHARE BASED COMPENSATION
The Company’s 2015 Omnibus Equity
Plan permits the grant of incentive stock options (“ISOs”), nonqualified stock options (“NQSOs”), stock
appreciation rights (“SARs”), restricted stock, unrestricted stock and restricted stock units (“RSUs”)
to its employees of up to 250,000 shares of Common Stock. As of December 31, 2019, there were no shares of stock available for
award under the 2015 Stock Incentive Plan.
On March 13, 2018, the Company’s shareholders approved
the 2017 Omnibus Equity Plan at the annual shareholders meeting, which permits the grant of incentive stock options (“ISOs”),
nonqualified stock options (“NQSOs”), stock appreciation rights (“SARs”), restricted stock, unrestricted
stock and restricted stock units (“RSUs”) to its employees of up to 1,300,000 shares of Common Stock. On December
21, 2018, the Company approved the issuance of 1,300,000 shares of the Company’s unrestricted common stock to seven of the
Company’s employees pursuant to our 2017 Omnibus Equity Plan. The Company recorded an expense of $13,000 in the fourth quarter
of fiscal year 2018 under the 2017 Omnibus Equity Plan, reflecting a par value of $0.001 per share of the Company’s common
stock. The shares were issued accordingly to these employees in May
and June of 2019.
The Company did not grant any stock options during the
fiscal year 2019.
11. COMMON STOCKS ISSUED IN CONNECTION WITH THE CONVERTIBLE
NOTES
Common stocks issued in connection with the convertible notes
From October to December 2019, the Company
issued 1,493,333 shares of its common stock to Iliad Research and Trading, L.P., a Utah limited partnership (the “Purchaser”)
pursuant to a series of Exchange Agreements entered into with the Purchaser.
On March 26, 2019, the Company entered
into a Securities Purchase Agreement (the “Purchase Agreement”) with the Purchaser pursuant to which the Company sold
and issued to the Purchaser a Secured Convertible Promissory Note (the “Note”) in the principal amount of $1,070,000.
The Purchaser purchased the Note with an original issue discount of $50,000, and the Company agreed to pay to the Purchaser $20,000
for fees and costs incurred by Purchaser in connection with the consummation of the Purchase Agreement. The Note was sold to the
Purchaser pursuant to an exemption from registration under Regulation D, promulgated under the Securities Act of 1933, as amended.
The purchase price for the Note was paid by the Purchaser through an initial cash payment of $500,000 and the issuance of an Investor
note to the Company with a one-year term and an interest rate of 8% (the “Investor Note”), which the Purchaser agrees
to prepay in full upon the satisfaction of certain conditions for pledged shares and transfer agent instruction letter pursuant
to the Investor Note and Purchase Agreement.
On May 2, 2019, the Company received a
second cash payment from Purchaser of $0.5 million after satisfying certain conditions for pledged shares as required in the Securities
Purchase Agreement, of which $3,818 was interest income for the Company due to late payment past the agreed date by the Purchaser.
The Note bears interest at the rate of
8% per annum. All outstanding principal and accrued interest on the Note became due and payable on March 26, 2020. The Company’s
obligations under the Note may be prepaid at any time, if the company elects to prepay the Company would pay 125% of any amount
outstanding under the Note. The Note may be converted at any time, at the Purchaser’s option, into shares of the Company’s
common stock at a conversion price of $3.00 per share. During the term of the Note, the Company shall not, without the prior written
consent of the Purchaser, enter into or effect certain fundamental business transactions. The Company has the option to redeem
the Note at any time after the six month anniversary of the date when the purchase price is delivered to the Company. The Company’s
obligations under the Note are secured by a pledge of 2,500,000 shares of the Company’s common stock by Mengyao Chan, an
unrelated third party, in favor of the Purchaser.
On October 15, 2019, the Company
entered into an Exchange Agreement (the “First Exchange Agreement”) with the Purchaser (the
“Lender”). Pursuant to the First Exchange Agreement, the Company and Lender agreed to partition a new Promissory
Note in the original principal amount of $100,000 (the “First Partitioned Note”) from the Note issued by the
Company on March 26, 2019. The outstanding balance of the Note shall be reduced by an amount equal to the outstanding balance
of the First Partitioned Note. The Company and Lender further agreed to exchange the First Partitioned Note for the delivery
of 133,333 shares of the Company’s Common Stock, par value $0.001, according to the terms and conditions of the First
Exchange Agreement.
On October 17, 2019, the Company
entered into a second Exchange Agreement (the “Second Exchange Agreement”) with the Lender. Pursuant to the
Second Exchange Agreement, the Company and Lender agreed to partition a new Promissory Note in the original principal amount
of $300,000 (the “Second Partitioned Note”) from the Note. The outstanding balance of the Note shall be reduced
by an amount equal to the outstanding balance of the Second Partitioned Note. The Company and Lender further agreed to
exchange the Second Partitioned Note for the delivery of 400,000 shares of the Company’s Common Stock, par value
$0.001, according to the terms and conditions of the Second Exchange Agreement.
On October 23, 2019, the Company
entered into a Forbearance Agreement with the Lender. Pursuant to the Forbearance Agreement, Lender agreed to withdraw a
Redemption Notice delivered by the Lender to the Company on September 30, 2019, which was issued pursuant to the Note issued
by the Company to the Lender dated March 26, 2019. Lender agreed not to make any redemptions pursuant to the Note before
October 25, 2019. The parties agreed, in the event Lender delivers a Redemption Notice to the Company and the redemption
amount set forth therein is not paid in cash to Lender within three (3) trading days, then the applicable redemption amount
shall be increased by 25% (the “First Adjustment,” and such increase to the redemption amount, the “First
Adjusted Redemption Amount”). In the event the First Adjusted Redemption Amount is not paid within three (3) trading
days after the date of First Adjustment, then the First Adjusted Redemption Amount shall be increased in accordance with the
following formula: $0.75 divided by the lowest closing trade price of the Common Stock of the Company during the twenty (20)
trading days prior to the date of the Second Adjustment and the resulting quotient multiplied by the First Adjusted
Redemption Amount (the “Second Adjustment,” and such increase to the First Adjusted Redemption Amount, the
“Second Adjusted Redemption Amount”), provided, however, that such formula shall only be applied if the resulting
quotient is greater than one (1) and such formula shall in no event be used to reduce the First Adjusted Redemption Amount.
Upon payment in cash of the First Adjusted Redemption Amount or Second Adjusted Redemption Amount, the outstanding balance of
the Note will be reduced by the original amount set forth in the Redemption Notice. The Company also agreed that during each
calendar month, beginning in the month of October 2019, it will reduce the outstanding balance of the Note by at least
$100,000 and if the outstanding balance is reduced by more than $100,000 in a given month, then the portion of the balance
reduction amount that exceeds $100,000 may be counted toward the minimum balance reduction requirement in the next month or
months. On November 6, 2019, the Lender issued a Redemption Notice, and the premium was agreed to be increased by $172,583.
On November 26, 2019, the Lender issued another Redemption Notice, and the premium was agreed to be increased by $170,407. On
January 21, 2020, the Lender issued another Redemption Notice, and the premium was agreed to be increased by $173,276.
On October 25, 2019, the Company entered
into the third Exchange Agreement (the “Third Exchange Agreement”) with the Lender. Pursuant to the Third Exchange
Agreement, the Company and Lender agreed to partition a new Promissory Note (the “Third Partitioned Note”) in the
original principal amount of $145,000 from the Note issued by the Company on March 26, 2019. The outstanding balance of the Note
shall be reduced by an amount equal to the outstanding balance of the Third Partitioned Note. The Company and Lender further agreed
to exchange the Third Partitioned Note for the delivery of 193,333 shares of the Company’s Common Stock, par value $0.001,
according to the terms and conditions of the Third Exchange Agreement.
On November 1, 2019, the Company
entered into the Fourth Exchange Agreement (the “Fourth Exchange Agreement”) with the Lender. Pursuant to the
Fourth Exchange Agreement, the Company and Lender agreed to partition a new Promissory Note (the “Fourth Partitioned
Note”) in the original principal amount of $175,000 from the Note issued by the Company on March 26, 2019. The
outstanding balance of the Note shall be reduced by an amount equal to the outstanding balance of the Fourth Partitioned
Note. The Company and Lender further agreed to exchange the Fourth Partitioned Note for the delivery of 233,333 shares of the
Company’s Common Stock, par value $0.001, according to the terms and conditions of the Fourth Exchange Agreement.
On November 13, 2019, the Company, entered
into the Fifth Exchange Agreement (the “Fifth Exchange Agreement”) with the Lender.
Pursuant to the Fifth Exchange Agreement,
the Company and Lender agreed to partition a new Promissory Note (the “Fifth Partitioned Note”) in the original principal
amount of $125,000 from the Note issued by the Company on March 26, 2019. The outstanding balance of the Note shall be reduced
by an amount equal to the outstanding balance of the Fifth Partitioned Note. The Company and Lender further agreed to exchange
the Fifth Partitioned Note for the delivery of 166,667 shares of the Company’s Common Stock, par value $0.001, according
to the terms and conditions of the Fifth Exchange Agreement.
On November 19, 2019, the Company, entered
into the Six Exchange Agreement (the “Six Exchange Agreement”) with the Lender.
Pursuant to the Six Exchange Agreement,
the Company and Lender agreed to partition a new Promissory Note in the original principal amount of $125,000 (the “Six
Partitioned Note”) from the Note issued by the Company on March 26, 2019. The outstanding balance of the Note shall be reduced
by an amount equal to the outstanding balance of the Six Partitioned Note. The Company and Lender further agreed to exchange the
Six Partitioned Note for the delivery of 166,667 shares of the Company’s Common Stock, par value $0.001, according to the
terms and conditions of the Six Exchange Agreement.
On November 26, 2019, the Company entered
into the Seventh Exchange Agreement (the “Seventh Exchange Agreement”) with the Lender.
Pursuant to the Seventh Exchange Agreement,
the Company and Lender agreed to partition a new Promissory Note (the “Seventh Partitioned Note”) in the original
principal amount of $150,000 from the Note issued by the Company on March 26, 2019. The outstanding balance of the Note shall
be reduced by an amount equal to the outstanding balance of the Seventh Partitioned Note. The Company and Lender further agreed
to exchange the Seventh Partitioned Note for the delivery of 200,000 shares of the Company’s Common Stock, par value $0.001,
according to the terms and conditions of the Seventh Exchange Agreement.
Acquisition of Creditor’s Rights
On November 2, 2017 (the “Agreement
Date”), a wholly-owned indirect subsidiary of the Company, Hedetang Foods (China) Co., Ltd. (“Hedetang”), entered
into a series of Creditor’s Rights Transfer Agreements (collectively, the “Acquisition Agreements”) with each
of Shaanxi Chunlv Ecological Agriculture Co. Ltd., Shaanxi Boai Medical Technology Development Co., Ltd., and Shaanxi Fu Chen Venture
Capital Management Co. Ltd. (collectively, the “Sellers”). The Sellers holds 70% of the equity shares of Shenzhen TianShunDa
Equity Investment Fund Management Co., Ltd., which holds 26.36% of equity shares of SkyPeople China. Pursuant to the Acquisition
Agreements, Hedetang agreed to purchase certain creditor’s rights associated with companies located in the PRC, for an aggregate
purchase price of RMB 181.01 million (approximately $27.34 million), of which RMB 108.60 million (approximately $16,44 million
was paid in cash and RMB 72,40 million approximately $10.94 million was paid in shares of common stock of the Company based on
the average of the closing prices of Future FinTech’s common stock over the five trading days preceding the date of the Acquisition
Agreements.
A summary of the Acquisition Agreements
is as follows:
1) Shaanxi Chunlv Ecological Agriculture
Co. Ltd. agreed to transfer all of its credit rights of principal and interest owed by Xi’an Tongji Department Store Co.,
Ltd. to Hedetang. As of the Agreement Date, the book balance of the principal was RMB 23.63 million, the interest was RMB 38.28
million, and the total credit balance, including the principal and the interest, was RMB 61.91 million, of which the RMB 19.76
million credit was guaranteed by a third party company.
2) Shaanxi Chunlv Ecological Agriculture
Co. Ltd. agreed to transfer all of its credit rights of principal and interest owed by Shaanxi Youyi Co., Ltd. to Hedetang. As
of the Agreement Date, the book balance for the principal was RMB 45.35 million, the interest was RMB 71.22 million, and the total
credit balance including the principal and the interest was RMB 116.57 million, all of which was guaranteed by a third party company.
3) Shaanxi Fu Chen Venture Capital Management
Co., Ltd. agreed to transfer all of its credit rights of principal and interest owed by State Owned Shaanxi No. 8 Cotton and Textile
Mill to Hedetang. As of the Agreement Date, the book balance for the principal was RMB 72.37 million the interest was RMB 138.04
million, the total of credit including the principal and the interest was RMB 210.41 million, and there was no effective guarantee
or pledged assets to secure this debt.
4) Shaanxi Boai Medical Technology Development
Co., Ltd. agreed to transfer all its credit rights of principal and interest owed by Xi’an Yanliang Economic Development
Co., Ltd. to Hedetang. As of the Agreement Date, the book balance for the principal was RMB 6.35 million, the interest was RMB
9.83 million, and the total of credit including the principal and the interest was RMB 16.18 million, which is secured by certain
land use rights.
In connection with the Acquisition Agreements
and to provide funding for their consummation, on November 3, 2017, the Company entered into a Share Purchase Agreement (the “Share
Purchase Agreement”) with Mr. Zeyao Xue (“Xue”) pursuant to which Future FinTech agreed to sell 11,362,159 shares
of its common stock (the “Shares”) to Xue for an aggregate purchase price of $16.44 million. The per share price for
the Shares was determined using the average closing price quoted on the NASDAQ Global Market for the common stock of the Company
over the three (3) trading days prior to the date of the Share Purchase Agreement (the “Purchase Price”), subject
to potential upward adjustment. The consummation of the Share Purchase Agreement was contingent on Future FinTech receiving shareholder
approval at a Special Shareholders Meeting for an amendment to its articles of incorporation and the approval of Share issuance
under the Share Purchase Agreement by the shareholders of the Company.
On April 6, 2018, the Company issued an
aggregate 7,111,599 shares of the Company’s common stock to three individuals designated by the Sellers in the respective
amounts of 3,409,466, 3,323,225 and 378,908 shares, pursuant to the Acquisition Agreements, and 11,362,159 shares of the Company’s
common stock pursuant to the Share Purchase Agreement, which such issuances were approved by the Company’s shareholders
at a special meeting held on March 13, 2018.
Acquisition of DCON
On January 23, 2018, DigiPay FinTech Limited
(“DigiPay”), a limited liability company incorporated in the British Virgin Islands and a wholly-owned subsidiary
of the Company, and Peng Youwang (“Peng”), a Chinese citizen, entered into a DCON Digital Assets Transfer Agreement
(the “DCON Agreement”).
Under the terms of the Agreement, Peng
transferred to DigiPay a 60.00% ownership interest in certain digital assets of DCON, a blockchain platform for cryptocurrency
conversion, payment and other services (“DCON”), including but not limited to its business plan and white papers,
business models, software, codes, architectures, applications, technologies, patents, copyrights, trade secrets, customer lists,
business points, trading platforms, digital rights, authentication systems, agreements and contracts, intellectual property, tokens,
and the DCON communities established on Nova Realm City (the “Transfer Assets”) for an aggregate purchase price of
$9,600,000 (the “Purchase Price”). The Company paid the Purchase Price by issuing to Peng 1,200,000 shares of the
Company’s common stock, par value $0.001 per share (the “Common Stock”), equaling a per share sale price of
$8.00 (the “Share Payment”). Half of the shares of Common Stock subject to the Share Payment were issued within 30
days of the date of the Agreement, and the remaining Share Payment shares were issued within 90 days of the date of the Agreement.
On May 3, 2018, the Company issued the remaining 600,000 shares of its common stock to Mr. Peng and his designee according to
the Agreement.
The Agreement also contains customary
representations and warranties regarding the Transfer Assets and the ownership thereof, and covenants regarding the parties’
cooperation. DigiPay and Peng further agreed to establish a Japanese operating company for the Transfer Assets, of which DigiPay
holds a 60.00% ownership interest and Peng’s designee holds a 40.00% ownership interest.
Reits Service Agreement
On January 5, 2018, the Company issued
880,580 shares of its common stock to Reits (Beijing) Technology Co. Ltd., a limited liability company incorporated in China (“Reits”)
pursuant to the Technology Development Service Contract (the “Service Agreement”) signed on December 18, 2017 by Reits
and GlobalKey Supply Chain Ltd. (“GlobalKey”), a limited liability company incorporated in China and a wholly owned
subsidiary of the Company.
Under the Service Agreement, Reits shall
provide services to GlobalKey relating to the design, development, testing, deployment and maintenance of a blockchain-based Globally
Shared Shopping Mall and other software systems (the “System”). Following the completion and delivery of the System
by Reits, (i) GlobalKey shall provide the hardware and network requirements for the trial deployment of the System, (ii) Reits
shall provide training of GlobalKey’s staff in the use and operation of the System, and (iii) for a period of one year from
the System delivery date and for no additional charge, Reits shall provide ongoing System maintenance and technical support (the
“Free Maintenance Period”). Following the completion of the Free Maintenance Period, GlobalKey may elect to engage
Reits for ongoing maintenance and technical support. Under the Service Agreement, GlobalKey shall pay Reits aggregate consideration
of RMB 13 million ($2.07 million), of which RMB 9.1 million ($1.45 million) may be paid in shares of the Company’s common
stock, par value $0.001 per share (the “Common Stock”), at a per share price equal to the average of the Common Stock’s
closing prices over the 5 trading days prior to the date of the Agreement, or $1.554 per share (the “Share Payment”).
The exchange rate between US dollar and RMB for the payment is 1:6.65. The Share Payment was made within 15 business days of the
date of the Service Agreement, and the remaining Service Agreement consideration shall be paid by GlobalKey in accordance with
the schedule described in the Service Agreement. The Company paid RMB 0.88 million ($0.14 million) and RMB 0.79 million ($0.12
million) in cash to Reits in the first and second quarters of 2018, respectively.
Exercise of warrants
On January 5, 2018, the Company issued
30,000 shares of the Company’s common stock to a certain warrant holder for the exercise of Warrants.
Acquisition of long-term investments
On October 19, 2018, the Company issued
5 million shares of its Common Stock to Mr. Chenliu pursuant to the InUnion Chain Ltd. Shares Transfer and IUN Digital Assets
Investment Agreement entered into on June 22, 2018 between Digipay, Mr. Chenliu, an individual resident of Costa Rica, and InUnion
Chain Ltd. (“InUnion”), a British Virgin Islands company wholly owned by Mr. Chenliu.
12. DISCONTINUED OPERATIONS
HeDeTang HK
On September 18, 2019, HeDeTang
Holdings (HK) Ltd. (“HeDeTang HK”) 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, 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 from HeDeTang
HK’s and 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 was $64.37 million as of December 31,2019 and the
total liabilities of HeDeTang HK was $196.87 million as of December 31, 2019.
Huludao Wonder
The Company’s Huludao Wonder operation,
a subsidiary which produces concentrated apple juice, suffered continued operating losses since 2014 and its cash flow was minimal
for these three years. In December 2016, the Company established a winding-down plan to close this operation. Based on the restructuring
plan and in accordance with ASC 205-20, the Company presented the operating results from Huludao Wonder as a discontinued operation,
as the Company believed that no continued cash flow would be generated by the disposed component (Huludao Wonder) and that the
Company would have no significant continuing involvement in the operation of the discontinued component. Management of the Company
initiated a plan to sell the property located in Huludao in December 2016, and ceased the depreciation of the property in accordance
with ASC 205-20. In accordance with the restructuring plan, the Company intends to transfer the concentrated fruit juice production
equipment in Huludao Wonder to another subsidiary and to sell the land and facilities upon favorable circumstances.
In year
2016, Huludao Wonder stopped payment of interest on the loan it obtained from Suizhong Branch of Huludao Banking Co. Ltd. (“Suizhong
Branch”) in 2016. Suizhong Branch sued Huludao Wonder in the Intermediate People’s Court (the “Huludao Court”),
and as a result, in accordance with of the ruling of the Huludao court, the Company’s fixed assets will offset long-term
borrowings, along with its owed interest. Since the loan amount is larger than the remaining value of the fixed assets, the transaction
became non-operating income for this subsidiary.
Loss from discontinued operations for fiscal years 2019
and 2018 was as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
REVENUES
|
|
$
|
330,195
|
|
|
$
|
756,838
|
|
COST OF SALES
|
|
|
315,737
|
|
|
|
891,154
|
|
GROSS PROFIT
|
|
|
14,459
|
|
|
|
(134,316
|
)
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
2,994,965
|
|
|
|
10,308,627
|
|
Selling expenses
|
|
|
172,449
|
|
|
|
174,097
|
|
Bad debt expenses
|
|
|
3,026,472
|
|
|
|
|
|
Impairment loss
|
|
|
-
|
|
|
|
133,631,129
|
|
Total
|
|
|
6,193,885
|
|
|
|
144,113,852
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
116
|
|
|
|
-
|
|
Interest expense
|
|
|
(7,300,070
|
)
|
|
|
(1,721,012
|
)
|
other income (expenses)
|
|
|
90,149
|
|
|
|
6,770,498
|
)
|
Total
|
|
|
(7,209,805
|
)
|
|
|
(5,050,147
|
)
|
Loss from discontinued operations before income tax
|
|
|
(13,389,231
|
)
|
|
|
(139,198,021
|
)
|
Income tax provision
|
|
|
-
|
|
|
|
31
|
|
Loss from discontinued operation before Minority Interest
|
|
$
|
(13,389,231
|
)
|
|
$
|
(139,198,052
|
)
|
Less: Net loss attributable to non-controlling interests
|
|
|
(1,681,738
|
)
|
|
|
15,618,798
|
|
LOSS FROM DISCONTINUED OPERATION
|
|
$
|
(11,707,493
|
)
|
|
$
|
(123,579,254
|
|
The non-operating loss from discontinued
operations was $11.71 million for fiscal year 2019 and $4.01 million for fiscal year 2018.
The major components of assets and liabilities
related to discontinued operations are summarized below:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Cash
|
|
$
|
123,087
|
|
|
$
|
220,342
|
|
Accounts receivable
|
|
|
11,720
|
|
|
|
73,244
|
|
Other receivables
|
|
|
1,861
|
|
|
|
15,381,465
|
|
Inventory
|
|
|
454,269
|
|
|
|
63,017
|
|
Advances to suppliers and other current assets
|
|
|
97,539
|
|
|
|
-
|
|
Property and equipment, net
|
|
|
1,176,163
|
|
|
|
2,276,704
|
|
Right of use assets
|
|
|
57,571,254
|
|
|
|
|
|
Intangible assets, net
|
|
|
15,347,535
|
|
|
|
15,968,625
|
|
Amount due from related parties
|
|
|
17,989,358
|
|
|
|
|
|
Total assets related to discontinued operations
|
|
$
|
92,772,786
|
|
|
|
33,933,396
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,084,735
|
|
|
$
|
9,002,384
|
|
Accrued expenses
|
|
|
81,279,952
|
|
|
|
78,644,119
|
|
Advances from customers
|
|
|
815,382
|
|
|
|
772,078
|
|
Short-term bank loans
|
|
|
37,245,139
|
|
|
|
5,828,185
|
|
Lease liabilities
|
|
|
60,613,970
|
|
|
|
-
|
|
Amount due from related parties
|
|
|
14,222,570
|
|
|
|
-
|
|
Long-term loan
|
|
|
14,222,570
|
|
|
|
32,450,867
|
|
Total liabilities related to discontinued operations
|
|
$
|
196,261,748
|
|
|
$
|
126,697,633
|
|
13. SEGMENT REPORTING
In its operation of the business, management,
including our chief operating decision maker, who is also our Chief Executive Officer, reviews certain financial information,
including segmented internal profit and loss statements prepared on a basis not consistent with GAAP. The Company operates in
four segments starting from fiscal 2019: shared shopping mall membership fee, fruit related products, sales of goods and others.
Our concentrated juice and juice beverages are primarily produced by the Company’s Jingyang factory. The operation of fruit
related products is classified as discontinued operation as disclosed in Note 12.
In compliance with the Company’s
business transformation strategy, membership fees from the shared shopping mall and sales of goods through the shared shopping
mall platform started to generate the main revenues for the Company and became more and more important business sections of the
Company since fiscal year 2019, while its traditional business section of seasonal fruit related products continued to shrink
in fiscal year 2019.
Some of our operation might not individually
meet the quantitative thresholds for determining reportable segments and we determine the reportable segments based on the discrete
financial information provided to the chief operating decision maker. The chief operating decision maker evaluates the results
of each segment in assessing performance and allocating resources among the segments. Since there is an overlap of services provided
and products manufactured between different subsidiaries of the Company, the Company does not allocate operating expenses and
assets based on the product segments. Therefore, operating expenses and asset information by segment are not presented. Segment
profit represents the gross profit of each reportable segment.
For fiscal year 2019 (in thousands):
|
|
CCM Shopping
Mall Membership
|
|
|
Sales of Goods
|
|
|
Others
|
|
|
Total
|
|
Reportable segment revenue
|
|
$
|
542
|
|
|
$
|
378
|
|
|
$
|
412
|
|
|
$
|
1,332
|
|
Inter-segment loss
|
|
|
-
|
|
|
|
-
|
|
|
|
(377
|
)
|
|
|
(377
|
)
|
Revenue from external customers
|
|
|
542
|
|
|
|
378
|
|
|
|
35
|
|
|
|
955
|
|
Segment gross profit
|
|
$
|
401
|
|
|
$
|
72
|
|
|
$
|
18
|
|
|
$
|
491
|
|
For fiscal year 2018 (in thousands):
|
|
CCM Shopping
Mall Membership
|
|
|
Sales of Goods
|
|
|
Others
|
|
|
Total
|
|
Reportable segment revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
132
|
|
|
$
|
132
|
|
Inter-segment loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Revenue from external customers
|
|
|
-
|
|
|
|
-
|
|
|
|
132
|
|
|
|
132
|
|
Segment gross profit
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
48
|
|
|
$
|
48
|
|
14. COMMITMENTS AND CONTINGENCIES
Litigation
Legal case with Beijing Bank
On June 29, 2015, SkyPeople China entered
into a loan agreement with Beijing Bank. Pursuant to the loan agreement, SkyPeople China borrowed RMB 30 million (approximately
$4.36 million) from Beijing Bank. Hongke Xue, Yongke Xue and Xiujun Wang provided guarantees for the loan and Shaanxi Boai Medical
Technology Development Co., Ltd. (“Shaanxi Boai”) provided certain real estate property as a pledge for the loan.
SkyPeople China did not repay the loan on time and Beijing Bank filed an enforcement request with Xi’an Intermediate People’s
Court in June 2017. The Xi’an Intermediate People’s Court seized real estate properties pledged by Shaanxi Boai and
Xiujun Wang. In November 2018, the Court sold the real estate property pledged by Xiujun Wang for RMB 1.17 million. Because the
real estate property is Xiujun Wang’s primary home, the Court allocated RMB 0.12 million to Xiujun Wang as transition home
leasing fee and deducted outstanding mortgage payments, and the remaining amount was delivered to Beijing Bank as the repayment.
The Court has also made inquiries to Beijing Bank as to whether it is willing to accept the pledged real estate property of Shaanxi
Boai as the repayment of the outstanding loan for the amount of RMB 27.93 million but Beijing Bank has refused to take the real
property as repayment of the loan and the enforcement action has been terminated by the Court on December 18, 2018. As of December 31, 2019, SkyPeople China still owe the unpaid amount. SkyPeople China was one of the subsidiaries
transferred along with HeDengTang HK to New Continent International Co., Ltd. on February 27, 2020
Legal case with Ningxia Bank
On March 8, 2016, SkyPeople China
entered into a loan agreement with Ningxia Bank. Pursuant to the loan agreement, SkyPeople China borrowed RMB 25 million
(approximately $3.63 million) from Ningxia Bank. Hongke Xue, Yongke Xue, Lake Chen, Shaanxi Boai Medical Technology
Development Co., Ltd. and Shaanxi Qiyiwangguo provided guarantees for the loan. SkyPeople China also pledged 37 pieces of
equipment and the related trademarks to Ningxia Bank for the loan. SkyPeople China has not repaid the loan and Ningxia Bank
filed an enforcement action with Xi’an Intermediate people’s court in August 2017. The Court has frozen the
assets of SkyPeople China that were pledged as guarantee for the loan from being transferred to any third-party, but the
freeze does not limit or affect the use of these properties by SkyPeople China for its business. In July 2018, Shaanxi
Qiyiwangguo filed a petition to the Court and requested the termination of the enforcement action on the basis that its
guarantee of the loan was not valid because the seal used on the guarantee agreement was not authentic and the guarantee was
not approved by the shareholders of Shaanxi Qiyiwangguo. On November 27, 2018 Shaanxi Qiyiwangguo withdrew its petition and
the Court agreed to such withdrawal and there has been no other progress of this case. As of December 31, 2019, SkyPeople
China still owe the unpaid amount. SkyPeople China was one of the subsidiaries transferred along with HeDengTang HK to New
Continent International Co., Ltd. on February 27, 2020.
Legal case with China Construction
Bank
On December 23, 2015, SkyPeople China
entered into two loan agreements with China Construction Bank. Pursuant to the loan agreements, SkyPeople China borrowed RMB 13.90
million (approximately $2.13 million), and RMB 30 million (approximately $4.59 million) from China Construction Bank, respectively.
Shaanxi Boai Medical Technology Development Co., Ltd. (“Boai”), Hongke Xue, Yongke Xue, Xiujun Wang and Yingkou Trusty
Fruits Co., Ltd. (“Yingkou”) provided pledges for the loans. SkyPeople China has not repaid the loans and China Construction
Bank filed an enforcement action with Xi’an Intermediate People’s Court in March 2017. In December 2017, SkyPeople
China received the enforcement notice from the Court. The Court has seized certain parking space and land use rights pledged by
Xiujun Wang and Boai and sold the land use right pledged by Boai in auction for approximately RMB 24,835,790 as repayment to China
Construction Bank. The Court also seized certain land use rights pledged by Yingkou Trusty Fruits Co., Ltd., but the auction sale
for those rights was not successful. As of December 31, 2019, SkyPeople China still owe the unpaid amount. SkyPeople China was
one of the subsidiaries transferred along with HeDengTang HK to New Continent International Co., Ltd. on February 27, 2020.
On May 9, 2016, SkyPeople China
entered into loan agreements with China Construction Bank. Pursuant to the loan agreements, SkyPeople China borrowed RMB 22.9
million (approximately $3.50 million) from China Construction Bank. Shaanxi Province Credit Reassurance Company
(“Credit Reassurance Company”) provided a guarantee to China Construction Bank for the loan, Hongke Xue and
Yongke Xue provided their guarantees, and SkyPeople China provided an office space that it owned to Credit Reassurance
Company as a pledge. SkyPeople China has not repaid the loan and Credit Reassurance Company repaid the loan for SkyPeople
China. In June 2017, Credit Reassurance filed an enforcement action request with Xi’an Intermediate People’s
Court (the “Court”) in June 2017. In December 2017, SkyPeople China received the enforcement notice from the
Court. The Court issued a verdict to seize the office space of SkyPeople China for auction sale on December 26, 2017. In
February 2018, the auction sale was conducted but not successful. In June 2018, the Court decided to use the pledge property
as the repayment for the outstanding loan of RMB 12.21 million (approximately $1.78 million). The Company has transferred the
ownership of the pledge property to China Construction Bank and the assets were wrote off.
Legal case with China Cinda Asset Management
Co., Ltd
In April 2015, China Cinda Asset Management
Co., Ltd. Shaanxi Branch (“Cinda Shaanxi Branch”) filed two enforcement proceedings with Xi’an Intermediate People’s
Court (the “Court”) against SkyPeople China for alleged defaults pursuant to guarantees by the SkyPeople China to its
suppliers for a total amount of RMB 39.60 million or approximately $5.80 million.
In September 2014, two long term suppliers
of pear, mulberry, and kiwi fruits to the SkyPeople China requested that the Company provide guarantees for their loans with Cinda
Shaanxi Branch. Considering the long term business relationship and to ensure the timely supply of raw materials, the SkyPeople
China agreed to provide guarantees on the value of the raw materials supplied to the SkyPeople China. Because Cinda Shaanxi Branch
is not a bank authorized to provide loans, it eventually provided financing to the two suppliers through the purchase of accounts
receivables of the two suppliers with the SkyPeople China. In July 2014, the parties entered into two agreements – an Accounts
Receivables Purchase and Debt Restructure Agreement, and Guarantee Agreements for Accounts Receivables Purchase and Debt Restructure.
Pursuant to the agreements, Cinda Shaanxi Branch agreed to provide a RMB 100 million credit line on a rolling basis to the two
suppliers and the Company agreed to pay its accounts payables to the two suppliers directly to Cinda Shaanxi Branch and provided
guarantees for the two suppliers. In April 2015, Cinda Shaanxi Branch stopped providing financing to the two suppliers and the
two suppliers were unable to continue the supply of raw materials to the SkyPeople China. Consequently, the SkyPeople China stopped
making any payment to Cinda Shaanxi Branch.
The SkyPeople China has responded to the
Court and taken the position that the financings under the agreements are essentially the loans from Cinda Shaanxi Branch to the
two suppliers, and because Cinda Shaanxi Branch does not have permits to make loans in China, the agreements are invalid, void
and had no legal effect from the beginning. Therefore, SkyPeople China has no obligation to repay the debts owed by the two suppliers
to Cinda Shaanxi Branch.
Upon the Court’s suggestion, the
parties agreed to a settlement discussion in April 2017. As a part of the settlement discussion, on April 18, 2017, SkyPeople China
withdrew its non-enforcement request from the Court without prejudice. As SkyPeople China may is liable for this loan, SkyPeople
China recorded expenses of $5.80 million in the third quarter of 2018 as the result of these two enforcement proceedings. As of
December 31, 2019, SkyPeople China still have liability of $5.80 million related with these two enforcement proceedings. SkyPeople
China was one of the subsidiaries transferred along with HeDengTang HK to New Continent International Co., Ltd. on February 27,
2020.
Legal case with Cinda Capital Financing
Co. Ltd
In August 2017, Cinda Capital Financing
Co. Ltd. (“Cinda”) filed a lawsuit with Beijing 2nd Intermediate People’s Court (the “Beijing Intermediate
Court”) against the Company’s indirectly wholly-owned subsidiaries Shaanxi Guoweimei Kiwi Deep Processing Company,
Ltd. (“Guoweimei”) and Hedetang Farm Products Trading Market (Mei County) Co., Ltd. (“Trading Market Mei County
Co”, and together with Guoweimei, “Lessees”) requested that Lessees repay RMB 50 million (approximately $7.27
million) in capital lease fees, plus interest. Cinda has purchased or paid for refrigerant warehouse and trading hall to the suppliers
and vendors and agreed to lease them to the Lessees for a leasing fee of RMB 50 million in December 2016. The capital leasing fee
became due on its maturity date of June 2017, with certain land use rights of Lessees in Mei County and equity of Guoweimei as
a pledge. The Company has disputed that the land use rights for the refrigerant warehouse and trading hall were never sold to or
transferred to Cinda, therefore it is loan agreement and not capital lease agreement among the parties. Lessees have taken the
position that Cinda is not a bank and does not have government permits required to make loans in China, and the agreements including
pledge agreement were invalid, void and without legal effect from the beginning. Therefore, the lessees only has the obligations
to repay principal but not the interest. In November 2017, Beijing Intermediate Court ruled in favor of Cinda and the Lessees appealed
the case to the Beijing Supreme Court. The Beijing Supreme Court held a hearing at the end of July 2018. On December 4, 2018, the
Beijing Supreme Court upheld the lower court’s decision. On April 8, 2019, Beijing Intermediate Court issued the verdict
for enforcement of the judgment and the plaintiff has the priority rights for the repayment for the pledged land use rights of
Lessees in Mei County and equity of Guoweimei. The case is under enforcement procedure and Cinda is in the process of sale the
land use rights. Before the land use right is sold, the subsidiaries of SkyPeople China still owns the seized properties and the
liabilities to Cinda. As of December 31, 2019, SkyPeople China has not repaid the amount. SkyPeople China was one of the subsidiaries
transferred along with HeDengTang HK to New Continent International Co., Ltd. on February 27, 2020.
In August 2017, Cinda filed another lawsuit
with Beijing Intermediate Court against the Company’s indirectly wholly-owned subsidiaries Guoweimei and SkyPeople China
for repayment of leasing fee of RMB 84.97 million (approximately $12.35 million) plus interest. In January 2014, Guoweimei and
SkyPeople China (the “Equipment Lessees”) signed an Equipment Financial Lease Purchase Agreement with Cinda and an
equipment supplier pursuant to which Cinda would provide funds to purchase equipment and the Equipment Lessees would lease the
equipment from Cinda. Guoweimei pledged certain land use rights in Mei County to Cinda and Xi’an Hedetang and Hedetang Holding
pledged their equities in Guoweimei to Cinda to secure the repayment. Mr. Hongke Xue also provided a personal guarantee for the
payment of the leasing fee. Beijing Intermediate Court had two hearings of the case and on March 21, 2018 it ruled in favor of
Cinda to the effect that SkyPeople China and Guoweimei shall pay leasing fees due in the amount of RMB 21.00 million (approximately
$3.05 million), as well as leasing fees not yet due in the amount of RMB 63.98 million (approximately $9.30 million), plus attorney’s
fees and expenses. Beijing Intermediate Court also ruled that Mr. Hongke Xue is jointly liable for the debt as the guarantor, and
that Cinda has priority rights to the pledged land use rights in Mei County and the pledged equities of Guoweimei as well as the
ownership of the leasing properties until the leasing fees are paid. SkyPeople China appealed the decision to the Beijing Supreme
Court. The Beijing Supreme Court rejected the appeal and upheld the original verdict on September 7, 2018. The case is under enforcement
procedure and Cinda is in the process of sale the seized properties. Before they are sold, the subsidiaries of SkyPeople China
still owns the seized properties and the liabilities to Cinda. As of December 31, 2019, SkyPeople China has not repaid the amount.
SkyPeople China was one of the subsidiaries transferred along with HeDengTang HK to New Continent International Co., Ltd. on February
27, 2020
Legal case with Shaanxi Fangtian Decoration
Co. Ltd
In April 2015, SkyPeople China entered
into a loan agreement with (“Fangtian”). Pursuant to the loan agreement, SkyPeople China borrowed RMB 3.50 million
(approximately $0.51 million) from Fangtian. SkyPeople China has not repaid the loan and Fangtian filed a lawsuit with Xi’an
Yanta District People’s Court (“Yanta District Court”). On August 10, 2017, Yanta District Court ruled against
SkyPeople China and determined that SkyPeople China must repay the loan of RMB 3.50 million plus interest RMB of 0.40 million (approximately
$0.59 million) Fangtian has requested that the Yanta District Court enter into enforcement procedures for the case. As of
December 31, 2019, SkyPeople China has not repaid the amount. SkyPeople China was one of the subsidiaries transferred along with
HeDengTang HK to New Continent International Co., Ltd. on February 27, 2020.
Legal case with Shanghai Pudong Development
Bank
On May 4, 2015, SkyPeople China and Xi’an
Branch of Shanghai Pudong Development Bank (SPD Bank Xi’an Branch) renewed a Working Capital Loan Contract and Repayment
Schedule, according to which both parties agreed that SPD Bank Xi’an Branch loaned RMB 26.90 million (approximately $3.92
million) to SkyPeople China with a term of one year. On the signing date of the Loan Contract, Hongke Xue, Yongke Xue, Xiujun
Wang and SPD Bank Xi’an Branch signed a Contract of Guaranty, guaranteeing the repayment of loan and undertaking joint liability.
According to a Mortgage Contract of Maximum Amount signed between SkyPeople China and SPD Bank Xi’an Branch on April 2,
2013, SkyPeople China provided the property and land use rights of Jingyang factory as the pledge. In October 2015, SPD Bank Xi’an
Branch filed an enforcement request with the Intermediate Court of Xi’an and the Court seized the property and the land
use rights of Jingyang factory. During the enforcement procedure, SPD Bank Xi’an Branch transferred its creditor’s
rights to China Huarong Asset Management Co., Ltd. (“China Huarong”). The Court changed the execution applicant to
China Huarong. In March 2019, the Intermediate Court of Xi’an issued a verdict
for the transfer of the pledged property and land use rights of Jingyang factory to China Huarong as the repayment of the loan.
Legal case with Shaanxi Fangyuan Construction
Co., Ltd.
Shaanxi Guoweimei Kiwi Deep
Processing Co. Ltd (“Guoweimei”), entered into a construction agreement with Shaanxi Fangyuan construction co.,
Ltd. (“Fangyuan”) in July 2013. On October 8, 2018, Fangyuan filed a lawsuit and requested that Guoweimei pay a
project construction fee plus penalty of RMB 56.32 million (approximately $8.22 million). On June 10, 2019, Baoji
Intermediate People’s Court issued a verdict that Guoweimei just pay RMB 41.58 million (approximately $6.07 million)
plus penalty to Fangyuan, and Fangyuan will enjoy preferential right for the projects in processing zone of National
Wholesale and Trading Center in Mei County for Kiwi Fruits developed by Guoweimei. Currently the Company is still liable for
the unpaid amount and the interest. As of December 31, 2019, Guoweimei has not repaid the amount. Guoweimei was one of the
subsidiaries transferred along with HeDengTang HK to New Continent International Co., Ltd. on February 27, 2020.
Legal case with Shaanxi Zhongkun Construction
Co., Ltd.
In May 2015, Hedetang Farm Products
Trading Markets (Mei County) Co., Ltd. (“Hedetang”) and Shaanxi Zhongkun Construction Co., Ltd.
(“Zhongkun”) entered into a construction and decoration agreement. On September 5, 2018, Zhongkun filed the
lawsuit with Mei County People’s Court (the “Court”) for repayment of construction and decoration fees. The
Court issued a civil judgement in November 2018, ordering Hedetang to pay project funds of RMB 1.65 million (approximately
$0.24 million) to Zhongkun, plus interest. On April 19, 2020, the Court issued a verdict to terminate the
enforcement because assets of Hedetang had already been seized by Xi’an Yanta District People’s Court and Baoji Intermediate
People’s Court, and there were no other assets for enforcement. Currently the Company is still liable for the unpaid amount
and the interest.
Legal case with Xi’an Shanmei
Food Co. Ltd.
On October 31, 2017, Xi’an
Shanmei Food Co. Ltd. filed a lawsuit against Shaanxi Qiyiwangguo, a majority-owned subsidiary of the Company, with Zhouzhi
County People’s Court in connection with a Land Lease Agreement entered into by the parties on October 1, 2013. On
March 2, 2018, Zhouzhi County People’s Court issued a verdict that: (i) the Land Lease Agreement was thereby
terminated; (ii) Shaanxi Qiyiwangguo shall pay Xi’an Shanmei the outstanding leasing fee RMB 0.21 million
(approximately $0.03 million) and (iii) Shaanxi Qiyiwangguo shall return the 29.30 mu industrial use land to Xi’an
Shanmei. Shaanxi Qiyiwangguo appealed the decision to the Xi’an Intermediate People’s Court on the basis that:
(x) the land use right was a capital contribution by Xi’an Shanmei for a shareholder of Shaanxi Qiyiwangguo who is also
the sole shareholder of Xi’an Shanmei and the Land Lease Agreement was invalid and has no legal effect; (y) Zhouzhi
Court did not schedule the hearing for the count claims filed by Shaanxi Qiyiwangguo; and (z) Zhouzhi Court violated certain
civil procedures during the trial of the case. Due to the late notice to Zhouzhi Court, the case file was not timely
transferred to Xi’an Intermediate Court and no appeal hearing was scheduled. Zhouzhi Court has issued verdict for
enforcement procedure and Qiyiwangguo has filed petition of disagreement for the enforcement which is still under Zhouzhi
Court’s review. On January 23, 2019, the Court rejected the petition of disagreement and the case has been under
enforcement procedure. As of December 31, 2019, Shaanxi Qiyiwanggu has not repaid the amount. Shaanxi Qiyiwanggu was one of
the subsidiaries transferred along with HeDengTang HK to New Continent International Co., Ltd. on February 27, 2020.
Legal case with Nanjing Bailuotong
Logistics Services Co., Ltd.
In January 2016 Shaanxi Qiyiwangguo Modern
Organic Agriculture Co., Ltd (“Shaanxi Qiyiwangguo”) and Nanjing Bailuotong Logistics Services Co., Ltd (“Bailutong”)
entered into a transportation agreement to ship fruit juices. Bailutong failed to deliver the juice products and held them after
their expiration date. Shaanxi Qiyiwangguo filed a lawsuit against Bailutong with Zhouzhi county People’s Court, and the
Court issue the verdict in February 2018 that: (1) the transportation contract between Shaanxi Qiyiwangguo and Bailutong was terminated;
and (2) Bailutong owed RMB 0.20 million (approximately $0.03 million) to Qiyiwangguo for the loss of Shaanxi Qiyiwangguo. Bailutong
appealed the case to Xi’an Intermediate People’s Court. Xi’an Intermediate People’s Court rejected the
appeal and upheld the original verdict.
Legal case with Henan Huaxing Glass
Co., Ltd.
Qiyiwangguo entered into an agreement
with Henan Huaxing Glass Co., Ltd. (“Huaxing”) in May 2014 for Huaxing to supply glass bottles to Qiyiwangguo. However,
due to the disputes regarding the quality of products supplied by Huaxing, Qiyiwangguo did not pay the prices for certain glass
bottles. In August 2017, Huaxing filed a lawsuit and the court ruled Shaanxi Qiyiwangguo was required to pay Huaxing RMB 203,742
(approximately $29,743) in July 2018. During the enforcement process, the parties reached a settlement agreement but Shaanxi Qiyiwangguo
failed to pay the amount due and now the case is still in the court enforcement process. As of December 31, 2019, Shaanxi Qiyiwanggu has not repaid the amount. Shaanxi Qiyiwanggu was one of the
subsidiaries transferred along with HeDengTang HK to New Continent International Co., Ltd. on February 27, 2020.
Legal case with Huludao Banking Co.
Ltd.
In September 2016, the Suizhong Branch
of Huludao Banking Co. Ltd. (“Suizhong Branch”) filed a lawsuit with Huludao Intermediate People’s Court (the
“Huludao Court”) against the Company’s indirectly wholly-owned subsidiary Huludao Wonder Fruit Co., Ltd. (“Wonder
Fruit”) and requested that Wonder Fruit repay a RMB 40 million (approximately $5.81 million) bank loan, plus interest. The
loan became due on its maturity date of December 9, 2016. On December 19, 2016, the Huludao Court accepted the case. The Company
has been disputing the interest rate of the loan with Suizhong Branch, and has not repaid the loan to date. Wonder Fruit believes
that the interest charged by Suizhong Branch is 100.00% higher than the base rate set by People’s Bank of China and is not
consistent with the China People’s Bank’s base interest and floating rate. The Huludao Court has seized land use rights,
buildings and equipment of Wonder Fruit that were pledged as guarantee for the loan and organized two auction sales for these
assets in January and February of 2018, but both auction sales were unsuccessful in finding a buyer. On July 19, 2018, the Court
issued a verdict ordering Huludao Wonder to transfer its land use rights, building, equipment, electronic and transportation assets
to Zuizhong Branch as payment of the outstanding principal, auction and evaluation fees and some interest of the loan for RMB
42.64 million (approximately $6.22 million). As of December 31, 2019, there was RMB 11.95 million (approximately $1.74 million)
in interest on the loan unpaid. Huludao Wonder was one of the subsidiaries transferred along with HeDengTang HK to New Continent
International Co., Ltd. on February 27, 2020.
Legal case with Andrew Chien
In September 2017, Andrew Chien, a former
consultant of SkyPeople China, brought a lawsuit against the Company and Mr. Hongke Xue in the District Court of Connecticut (the
“Court”). The complaint was not properly served and the Company learned of the litigation in December 2017.
In the complaint, Mr. Chien made several claims, most of which attempt to hold the Company liable under novel legal theories that
relate back to an alleged breach of a consulting agreement between SkyPeople China and Chien from August 2006. Mr. Chien claimed
approximately $257,000 damages and interest plus 2.00% of the Company’s then-outstanding shares. Mr. Chien has as-yet unsuccessfully
attempted to sue the Company on the breach of the same consulting agreement several times in the courts of Connecticut and New
York, and these cases have been dismissed. The Company has filed a motion to dismiss (“MTD”) and all proceedings are
stayed pending determination of the MTD. On August 31, 2018, the Court granted our MTD. On September 10, 2018, Mr. Chien filed
a motion for reconsideration. On September 28, 2018, the Court denied Mr. Chien’s motion for reconsideration. On October
26, 2018, Mr. Chien appealed the case to the United States Court of Appeals for the Second Circuit. The appeal is fully
briefed and presently awaiting decision. The Company will vigorously defend this lawsuit and expects to obtain early dismissal
of Mr. Chien’s claims.
Legal case with Luwei
In 2018, Mr. Luwei, an individual, filed
a claim for arbitration against SkyPeople China in Xi’an Arbitration Commission for breach of contract pursuant to a new
share purchase agreement and a share redemption agreement. On April, 11, 2019, Xi’an Arbitration Commission made its decision
and ordered SkyPeople China to repay RMB 3 million investment to Luwei. Mr. Luwei applied with Intermediate Court of Xi’an
(the “Court”) for enforcement of the arbitration award which process was terminated by the Court due to no assets for
enforcement. As of December 31, 2019, SkyPeople China has not repaid the amount. SkyPeople China was one of the subsidiaries transferred
along with HeDengTang HK to New Continent International Co., Ltd. on February 27, 2020.
Legal case with Shaanxi Overseas Investment
Development Corp.
In November, Shaanxi Overseas Investment
Development Corp (“Shaanxi Overseas Investment”) filed a lawsuit against SkyPeople China, Hongke Xue and Shenzhen Tian
Shun Da Equity Investment Fund Management Co., Ltd. (“Shenzhen Tian Shun Da”) pursuant to an investment agreement entered
in March, 2016. According to the agreement, Shaanxi Overseas Investment agreed to invest RMB 5 million for the preferred shares
of SkyPeople China with an annual interest rate of 2.38%. Shenzhen Tian Shun Da pledged 1.17% of the shares SkyPeople China that
it owned and Hongke Xue provided guarantee for the performance of agreement by SkyPeople China. SkyPeople China failed to make
the interests payment and Shaanxi Overseas Investment filed the lawsuit for breach of agreement. On December 26, 2019, Yanta District
Court of Xi’an City (the “Court”) ordered SkyPeople China to pay Shaanxi Overseas Investment the preferred share
redemption amount of RMB 5 million plus penalty which is calculated based upon the RMB 5 million at a rate of 24% a year. The Court
also ruled that Shaanxi Overseas Investment may sell the pledged shares owned by Shenzhen Tianshun Da as the repayment for SkyPeople
China and Hongkong Xue shall also assume the repayment obligation as guarantor. As of December 31, 2019, SkyPeople China has not
repaid the amount. SkyPeople China was one of the subsidiaries transferred along with HeDengTang HK to New Continent International
Co., Ltd. on February 27, 2020.
Legal case with Shaanxi Wanyuan Construction
Co., Ltd.
In July 2017, Shaanxi Wanyuan Construction Co., Ltd. (“Wanyuan”)
filed a lawsuit with Shaanxi Baoji Municipal Intermediate People’s Court (the “Baoji Court”) against Guoweimei
for repayment of construction and decoration costs of RMB 55.07 million pursuant to a Construction and Decoration Agreement entered
by the parties in May 2017. In July, 2019, the Baoji Court ordered Guoweimei to pay construction and decoration costs of RMB 55.07
million (approximately $7.98 million) to Wanyuan, plus interest. As of December 31, 2019, Guoweimei has not repaid the amount.
Guoweimei was one of the subsidiaries transferred along with HeDengTang HK to New Continent International Co., Ltd. on February
27, 2020.
15. VARIABLE INTEREST ENTITIES
On July 31, 2019, CCM Tianjin, E-commerce Tianjin, and Mr. Zeyao
Xue and Mr. Kai Xu, citizens of China and shareholders of E-commerce Tianjin, entered into the following agreements, or collectively,
the “Variable Interest Entity Agreements” or “VIE Agreements,” pursuant to which CCM Tianjin has contractual
rights to control and operate the business of E-commerce Tianjin (the “VIE”). Therefore, pursuant to ASC 810, E-Commerce
Tianjin is included in the Company’s consolidated financial statements since then.
Pursuant to Chinese law and regulations,
a foreign owned enterprise cannot apply for and hold a license for operation of certain e-commerce businesses, the category of
business which the Company plans to expand in China. CCM Tianjin is an indirectly wholly foreign owned enterprise of the Company.
In order to comply with Chinese law and regulations, CCM Tianjin agreed to provide E-commerce Tianjin an Exclusive Operation and
Use Rights Authorization to operate and use the Chain Cloud Mall System owned by CCM Tianjin.
E-commerce Tianjin was incorporated by
Mr. Zeyao Xue and Mr. Kai Xu solely for the purpose of holding the operation license of the Chain Cloud Mall System. Mr. Zeyao
Xue is a major shareholder of the Company and the son of Mr. Yongke Xue, our Chairman and Chief Executive Officer. Mr. Kai Xu
is the Chief Operating Officer of the Company.
The VIE Agreements are as follows:
|
1)
|
Exclusive Technology Consulting and Service Agreement by
and between CCM Tianjin and E-commerce Tianjin. Pursuant to the Exclusive Technology Consulting and Service Agreement, CCM Tianjin
agreed to act as the exclusive consultant of E-commerce Tianjin and provide technology consulting and services to E-commerce Tianjin.
In exchange, E-commerce Tianjin agreed to pay CCM Tianjin a technology consulting and service fee, the amount of which is to be
equivalent to the amount of net profit before tax of E-commerce Tianjin, payable on a quarterly basis after making up losses of
previous years (if necessary) and deducting necessary costs, expenses and taxes related to the business operations of E-commerce
Tianjin. Without the prior written consent of CCM Tianjin, E-commerce Tianjin may not accept the same or similar technology consulting
and services provided by any third party during the term of the agreement. All the benefits and interests generated from the agreement,
including but not limited to intellectual property rights, know-how and trade secrets, will be CCM Tianjin’s sole and exclusive
property. This agreement has a term of 10 years and may be extended unilaterally by CCM Tianjin with CCM Tianjin’s written
confirmation prior to the expiration date. E-commerce Tianjin cannot terminate the agreement early unless CCM Tianjin commits
fraud, gross negligence or illegal acts, or becomes bankrupt or winds up.
|
|
2)
|
Exclusive Purchase Option Agreement by and among CCM Tianjin,
E-commerce Tianjin, Mr. Zeyao Xue and Mr. Kai Xu. Pursuant to the Exclusive Purchase Option Agreement, Mr. Zeyao Xue and Mr. Kai
Xu granted to CCM Tianjin and any party designated by CCM Tianjin the exclusive right to purchase, at any time during the term
of this agreement, all or part of the equity interests in E-commerce Tianjin, or the “Equity Interests,” at a purchase
price equal to the registered capital paid by Mr. Zeyao Xue and Mr. Kai Xu for the Equity Interests, or, in the event that applicable
law requires an appraisal of the Equity Interests, the lowest price permitted under applicable law. Pursuant to powers of attorney
executed by Mr. Zeyao Xue and Mr. Kai Xu, they irrevocably authorized any person appointed by CCM Tianjin to exercise all shareholder
rights, including but not limited to voting on their behalf on all matters requiring approval of E-commerce Tianjin’s shareholder,
disposing of all or part of the shareholder’s equity interest in E-commerce Tianjin, and electing, appointing or removing
directors and executive officers. The person designated by CCM Tianjin is entitled to dispose of dividends and profits on the
equity interest without reliance on any oral or written instructions of Mr. Zeyao Xue and Mr. Kai Xu. The powers of attorney will
remain in force for so long as Mr. Zeyao Xue and Mr. Kai Xu remain the shareholders of E-commerce Tianjin. Mr. Zeyao Xue and Mr.
Kai Xu have waived all the rights which have been authorized to CCM Tianjin’s designated person under the powers of attorney.
|
|
3)
|
Equity Pledge Agreements by and among CCM Tianjin, E-commerce
Tianjin, Mr. Zeyao Xue and Mr. Kai Xu. Pursuant to the Equity Pledge Agreements, Mr. Zeyao Xue and Mr. Kai Xu pledged all of the
Equity Interests to CCM Tianjin to secure the full and complete performance of the obligations and liabilities on the part of
E-commerce Tianjin and them under this and the above contractual arrangements. If E-commerce Tianjin, Mr. Zeyao Xue, or Mr. Kai
Xu breaches their contractual obligations under these agreements, then CCM Tianjin, as pledgee, will have the right to dispose
of the pledged equity interests. Mr. Zeyao Xue and Mr. Kai Xu agree that, during the term of the Equity Pledge Agreements, they
will not dispose of the pledged equity interests or create or allow any encumbrance on the pledged equity interests, and they
also agree that CCM Tianjin’s rights relating to the equity pledge should not be interfered with or impaired by the legal
actions of the shareholders of E-commerce Tianjin, their successors or designees. During the term of the equity pledge, CCM Tianjin
has the right to receive all of the dividends and profits distributed on the pledged equity. The Equity Pledge Agreements will
terminate on the second anniversary of the date when E-commerce Tianjin, Mr. Zeyao Xue and Mr. Kai Xu have completed all their
obligations under the contractual agreements described above.
|
16.
Unaudited Condensed Pro Forma Financial Statements
The following unaudited pro forma condensed
consolidated financial statements have been prepared to illustrate the effect after the Sale Transaction. The unaudited pro forma
condensed consolidated balance sheet as of December 31, 2019 reflects the pro forma effect as if the sale of HeDeTang HK was consummated
at December 31, 2019. The unaudited pro forma condensed consolidated statements of operations of the Company for the periods ended
December 31, 2019 and December 31, 2018, respectively, assume that the sale was consummated on January 1, 2019, and January 1,
2018, respectively.
The unaudited pro forma condensed consolidated
balance sheet and statements of operations include pro forma adjustments which reflect transactions and events that (a) are directly
attributable to the Sale Transaction, (b) are factually supportable and (c) with respect to the statements of operations, have
a continuing impact on consolidated results of the Company. The pro forma adjustments are described in the accompanying notes to
the unaudited pro forma condensed consolidated financial statements. The unaudited pro forma condensed consolidated financial information
does not reflect the tax consequences in any jurisdictions attributable to the Sale Transaction, and it does not reflect future
events that may occur after the sale, including potential general and administrative cost savings. The unaudited pro forma condensed
consolidated financial information is provided for informational purposes only and is not necessarily indicative of the Company’s
future operating results. The pro forma adjustments are subject to change and are based upon currently available information.
FUTURE FINTECH GROUP INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEETS
|
|
December 31,
2019
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
Cash and cash equivalents
|
|
$
|
539,316
|
|
Accounts receivable, net of allowance of $16,127,000 as of December 31, 2019 and $15,650,217 as of December 31, 2018, respectively
|
|
|
4,954
|
|
Other receivables, net
|
|
|
7,489
|
|
Inventories
|
|
|
3,594
|
|
Advances to suppliers and other current assets
|
|
|
1,668,847
|
|
TOTAL CURRENT ASSETS
|
|
$
|
2,224,200
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
17,855
|
|
Intangible assets
|
|
|
5,312,906
|
|
Amount due from related parties
|
|
|
3,402,823
|
|
Long-term investments
|
|
|
12,250,000
|
|
TOTAL ASSETS
|
|
$
|
23,207,784
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
Accounts payable
|
|
$
|
320,378
|
|
Accrued expenses
|
|
|
4,547,380
|
|
Advances from customers
|
|
|
702,179
|
|
Short-term bank loans
|
|
|
957,990
|
|
TOTAL CURRENT LIABILITIES
|
|
$
|
6,527,927
|
|
|
|
|
|
|
NON-CURRENT LIABILITIES
|
|
|
|
|
Amount due to related parties
|
|
|
1,268,101
|
|
TOTAL NON-CURRENT LIABILITIES
|
|
|
1,268,101
|
|
TOTAL LIABILITIES
|
|
$
|
7,796,028
|
|
Commitments and contingencies(Note 16)
|
|
|
|
|
STOCKHOLDER’S EQUITY
|
|
|
|
|
|
|
|
|
|
Future FinTech Group, Inc, Stockholders’ equity
|
|
|
|
|
Common stock, $0.001 par value; 60,000,000 shares authorized and 33,810,416 shares and 31,017,083 shares issued and outstanding as of December 31, 2019 and December 31, 2018, respectively
|
|
$
|
33,810
|
|
Additional paid-in capital
|
|
|
107,852,827
|
|
Accumulated deficits
|
|
|
(109,825,651
|
)
|
Accumulated other comprehensive income (loss)
|
|
|
12,989,409
|
|
Total Future FinTech Group, Inc. stockholders’ equity
|
|
|
11,050,395
|
|
Non-controlling interests
|
|
|
4,361,361
|
|
Total stockholders’ equity
|
|
|
15,411,756
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
23,207,784
|
|
FUTURE FINTECH GROUP INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS
OF INCOME AND COMPREHENSIVE INCOME (LOSS)
OF COMPARISON BETWEEN PRO FORMA AND FUTURE
FINTECH GROUP INC.
Currency: USD
|
|
Pro Forma For
the Year
Ended
|
|
|
Pro Forma For
the Year
Ended
|
|
|
|
2019
|
|
|
2018
|
|
Revenue
|
|
$
|
955,172
|
|
|
$
|
131,832
|
|
Cost of goods sold
|
|
|
464,307
|
|
|
|
83,888
|
|
Gross profit
|
|
|
490,865
|
|
|
|
47,944
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
4,913,656
|
|
|
|
1,636,298
|
|
Selling expenses
|
|
|
500,949
|
|
|
|
14,482
|
|
Bad debt provision
|
|
|
5,234,205
|
|
|
|
-
|
|
Inventory markdown
|
|
|
27,247
|
|
|
|
-
|
|
Impairment Loss
|
|
|
2,751,099
|
|
|
|
44,665,618
|
|
Total operating expenses
|
|
|
13,427,156
|
|
|
|
46,316,398
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(12,936,291
|
)
|
|
|
(46,268,454
|
)
|
|
|
|
|
|
|
|
|
|
Other (expenses) income
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
3,995
|
|
|
|
711
|
|
Interest expenses
|
|
|
(523,676
|
)
|
|
|
96,329
|
|
Other income(expenses)
|
|
|
(229,042
|
)
|
|
|
(4,382,686
|
)
|
Total other income (expenses), net
|
|
|
(748,723
|
)
|
|
|
(4,285,646
|
)
|
|
|
|
|
|
|
|
|
|
Loss from Continuing Operations before Income Tax
|
|
|
(13,685,014
|
)
|
|
|
(50,554,100
|
)
|
Income tax provision
|
|
|
-
|
|
|
|
206
|
|
Loss from Continuing Operations before Non-controlling Minority Interest
|
|
|
(13,685,014
|
)
|
|
|
(50,554,306
|
)
|
|
|
|
|
|
|
|
|
|
Less: Net loss attributable to non-controlling interests
|
|
|
(163,576
|
)
|
|
|
(123,139
|
)
|
|
|
|
|
|
|
|
|
|
Loss from Continuing Operations
|
|
$
|
(13,521,438
|
)
|
|
$
|
(50,431,167
|
)
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
NET LOSS ATTRIBUTABLE TO FUTURE FINTECH GROUP INC
|
|
$
|
(13,521,438
|
)
|
|
$
|
(50,431,167
|
)
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic earnings per share from continued operation
|
|
$
|
(0.42
|
)
|
|
$
|
(2.33
|
)
|
Basic earnings per share from discontinued
operation
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
(0.42
|
)
|
|
$
|
(2.33
|
)
|
Diluted Earnings per share:
|
|
|
|
|
|
|
|
|
Diluted earnings per share from continued operation
|
|
$
|
(0.42
|
)
|
|
$
|
(2.30
|
)
|
Diluted earnings per share from discontinued
operation
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
(0.42
|
)
|
|
$
|
(2.30
|
)
|
Weighted average number of shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
33,996,279
|
|
|
|
21,636,146
|
|
Diluted
|
|
|
33,996,279
|
|
|
|
21,966,612
|
|
17. SUBSEQUENT EVENTS
On January 6, 2020, the Company entered
into the Eighth Exchange Agreement (the “Eighth Exchange Agreement”) with Iliad Research and Trading, L.P., a Utah
limited partnership (the “Lender”). Pursuant to the Eighth Exchange Agreement, the Company and Lender agreed to partition
a new Secured Convertible Promissory Note in the original principal amount of $145,000 (the “Eighth Partitioned Note”)
from a Secured Convertible Promissory Note (the “Note”) issued by the Company on March 26, 2019. The outstanding balance
of the Note shall be reduced by an amount equal to the outstanding balance of the Partitioned Note. The Company and Lender further
agreed to exchange the Eighth Partitioned Note for the delivery of 193,333 shares of the Company’s Common Stock, par value
$0.001, according to the terms and conditions of the Exchange Agreement.
On January 15, 2020, the Company entered
into the Ninth Exchange Agreement (the “Ninth Exchange Agreement”) with the Lender. Pursuant to the Exchange Agreement,
the Company and Lender agreed to partition a new Secured Convertible Promissory Note in the original principal amount of $140,000
(the “Ninth Partitioned Note”) from the Note issued by the Company on March 26, 2019. The outstanding balance of the
Note shall be reduced by an amount equal to the outstanding balance of the Ninth Partitioned Note. The Company and Lender further
agreed to exchange the Partitioned Note for the delivery of 186,666 shares of the Company’s Common Stock, par value $0.001,
according to the terms and conditions of the Exchange Agreement.
On January 25, 2020, the Company
entered into a Consulting Service Agreement (the “Agreement”) with Dragon Investment Holding Limited (Malta) (the
“Consultant”), a company incorporated in Malta, pursuant to which Consultant will: (i) help the Company to locate
new merger projects globally, develop new merger strategy and provide the Company with at least five (5) merger and acquisition
targets that have synergy with the Company’s business and development plans and could clearly contribute to the Company’s
strategic goals each year; (ii) help the Company to map out new growth strategies in addition to its current business; (iii) work
with the Company to explore new lines of business and associated growth strategies; and (iv) conduct market research and evaluating
variable projects and providing feasibility studies per Company’s request from time to time. The term of the Agreement is
three years. In consideration of the services to be provided by Consultant to the Company, the Company agrees to pay the Consultant
a three-year consulting fee totaling $3 million. The Company shall issue a total of 3,750,000 restricted shares of common stock
of the Company (the “Shares”) at a price of $0.80 per share as the payment for the above mentioned consultant fee
to the Consultant. The parties agree that no shares will be issued until the board of directors of the Company (the “Board”)
and NASDAQ approve the issuance of the Shares. The Company agrees to issue the Shares in the name of the Consultant within 10
days after approval from the Board and NASDAQ, among which 1,500,000 shares should be released to the Consultant immediately upon
issuance, 1,125,000 shares will be held by the Company and released to the Consultant on January 25, 2021 if this Agreement has
not been terminated and there has been no breach of Agreement by the Consultant at such time, and the last 1,125,000 shares will
be held by the Company and released to the Consultant on January 25, 2022 if this Agreement has not been terminated and there
has been no breach of the Agreement by the Consultant at such time. If the second and/or third release of the shares mentioned
above does not occur, such shares shall be returned to the Company as treasury shares. If NASDAQ does not approve the issuance
of the Shares, the parties agree to negotiate other payment methods and, if no agreement can be reached by the parties, this Agreement
shall be terminated immediately. The shares contemplated in the Agreement will be issued pursuant to the exemption from registration
provided by Regulation S promulgated under the Securities Act of 1933, as amended.
On February 26, 2020, the Company
held a Special Meeting of shareholders (the “Special Meeting”). A quorum was present at the Special Meeting, and
shareholders: (i) approved the sale of the Company’s subsidiary, HeDeTang Holdings (HK) Ltd. (“HeDeTang
HK”), to New Continent International Co., Ltd., (the “Buyer”) a company incorporated in the British Virgin
Islands (the “Sale Transaction”), which was closed on February 27, and (ii) approved and adopted the Future
FinTech Group Inc. 2019 Omnibus Equity Plan.
On March 11, 2020, the Company entered
into the Tenth Exchange Agreement (the “Tenth Exchange Agreement”) with the Lender.
Pursuant to the Tenth Exchange Agreement,
the Company and Lender agreed to partition a new Secured Convertible Promissory Note in the original principal amount of $150,000
(the “Tenth Partitioned Note”) from the Note issued by the Company on March 26, 2019. The outstanding balance of the
Note shall be reduced by an amount equal to the outstanding balance of the Partitioned Note. The Company and Lender further agreed
to exchange the Partitioned Note for the delivery of 200,000 shares of the Company’s Common Stock, par value $0.001, according
to the terms and conditions of the Exchange Agreement.
In December 2019, a novel strain of coronavirus
was reported to have surfaced in Wuhan, China, which has and is continuing to spread throughout China and other parts of the world,
including the United States. On January 30, 2020, the World Health Organization declared the outbreak of the coronavirus disease
(COVID-19) a “Public Health Emergency of International Concern,” and on March 11, 2020, the World Health Organization
characterized the outbreak as a “pandemic”. Xi’an City and Beijing City, where our headquarters are located,
are among the most affected areas in China. The pandemic has resulted in quarantines, travel restrictions, and the temporary closure
of office buildings and facilities in China.Substantially all of our revenues are generated in China. The Company’s business
and services and results of operations have been adversely affected and could continue to be adversely affected by the COVID-19
pandemic.
On March 11,2020, the Company’s Board
of Directors passed a resolution to sale the operation of Globalkey Supply Chain limited and Zhonglian Hengxin Assets Management
Co. Ltd and close the operation of Digital Online Marketing Limited, Future Digital Fintech (Xi’an) Co. Ltd., SkyPeople Foods
Holding Ltd. 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.
F-31
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