ITEM
1 – BUSINESS
Overview
We are an integrated producer of fruit-related
products and a financial technology company. We engage 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 law in China, the Company is transforming its business from fruit juice
manufacturing and distribution to a real-name blockchain e-commerce platform that integrates blockchain and internet technology.
On January 22, 2019, the company formally
launched of GlobalKey SharedMall, also known as Chain Cloud Mall (CCM) V1.0, the real-name and membership-based blockchain sharing
shopping platform that integrates blockchain and 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.
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 operation, higher security level, and faster logistics. Currently, CCM v2.0 adopts a “multi-vendor hosted stores
+ platform self-hosted stores” model, supported by multiple local warehouses in different regions. 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.
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.
On January 19, 2018, the Company filed
a definitive Schedule 14A (the “Proxy”) to solicit shareholders’ proxies for a special meeting of the Company’s
shareholders in connection with proposals to (i) spin-off the Company’s wholly-owned subsidiaries, SkyPeople Foods Holding
Limited (“SkyPeople BVI”) and Digital Online Marketing Limited (“Digital Online”), through a pro rata distribution
of the ordinary shares of each of SkyPeople BVI and Digital Online to holders of the Company’s common stock at the close
of business on January 22, 2018, the record date (the “Spin Offs”); (ii) to approve an amendment to the Company’s
Second Amended and Restated Articles of Incorporation, which increased the amount of authorized shares of common stock, par value
$0.001 per share, of the Company from 8,333,333 to 60,000,000; (iii) adopted and approved the Future FinTech Group Inc. 2017 Omnibus
Equity Plan; (iv) approved the issuance of an aggregate 7,111,599 shares of the Company’s common stock pursuant to certain
Creditor’s Rights Transfer Agreements between a wholly owned subsidiary of the Company and sellers of such creditor’s
rights; and (v) approved the issuance of an aggregate 11,362,159 shares of the Company’s common stock pursuant to a Share
Purchase Agreement between the Company and a certain investor. On March 13, 2018, the Company held the Special Meeting of Shareholders
and the above proposals were approved by the shareholders of the Company. The Company is currently reviewing the costs of completing
the Spin Offs and registering the shares of SkyPeople BVI and Digital Online.
Our 60% owned subsidiary DCON
DigiPay Limited develops and operates a global digital payment system, “DCON,” through blockchain technology.
DCON is built to be a transparent digital payment system backed by blockchain technology and its mBTC is the only currency
and payment system used in Nova Realm City (“NRC”) communities. Each Bitcoin exchanges for one million mBTC and
DCON provides exchange services between its mBTC and Bitcoin. Bitcoin has a very high market value with each of them
currently trading for thousands of dollars. As a currency, Bitcoin has limited everyday usage for ordinary payments. The mBTC
has a 1,000,000:1 exchange rate pegged against Bitcoin and can be used in real life by consumers. Currently all of the
members of the communities of NRC use mBTC to conduct their transactions. Currently, DCON charges no transaction fees for
using mBTC and a 0.3% exchange fee for currency exchange between Bitcoin and mBTC. As of December 31, 2018, DCON DigiPay
Limited has not generated any meaningful revenue from these blockchain-related technologies.
Nova Realm Limited (“Nova Realm”)
is a blockchain technology research and development company registered in the United Kingdom. We own a 5% minority interest in
Nova Realm and Mr. Yongke Xue, our Chairman and Chief Executive Officer, owns 55% of Nova Realm. Nova Realm developed NRC, which
is a blockchain technology value community registered with real name users. NRC delivers asset-based digital services to global
blockchain projects as well as providing a platform to its members to participate in those projects. NRC is capable of supporting
4.3 billion communities that are independent from each other on its platform. Every operational and maintenance action of NRC is
recorded by blockchain technology, so fraud can be relatively easily detected. On NRC’s platform, every operator of an NRC
community and each user of NRC must register his or her real name to realize the services offered on NRC.
Organizational
Structure
The following diagram illustrates our corporate
structure, including our principal subsidiaries and our VIE as of the date of this report.
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Contractual
Arrangements
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Equity
Interest
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Future Fintech Group Inc. is a holding
company incorporated under the laws of the State of Florida. We have three direct wholly-owned subsidiaries: 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, 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, and SkyPeople Foods Holding Limited (“SkyPeople BVI”), a company organized under the laws of the British
Virgin Islands.
SkyPeople
BVI holds 100% of the equity interest of HeDeTang Holding (HK) Ltd. (“HeDeTang Holding (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 Holding (HK) holds 73.41% 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, all limited liability companies organized
under the laws of the PRC: (i) Shaanxi Qiyiwangguo Modern Organic Agriculture Co., Ltd. (“Shaanxi Qiyiwangguo”); (ii)
Huludao Wonder Fruit Co., Ltd. (“Huludao Wonder”); (iii) Yingkou Trusty Fruits Co., Ltd. (“Yingkou”);
(iv) Hedetang Foods Industry (Yidu) Co. Ltd. (“Food Industry Yidu”); (v) Shaanxi Heying Trading Co. Ltd (“Shaanxi
Heying”); (vi) Hedetang Agricultural Plantation (Yidu) Co. Ltd. (“Agricultural Plantation Yidu”); (vii) Xi’an
Hedetang Nutritious Food Research Institute Co., Ltd. (“Hedetang Reseach”); (viii) Xi’an Cornucopia International
Co., Ltd. (“Xi’an Cornucopia”); (ix) Xi’an Hedetang E-commerce Co. Ltd. (“Hedetang E-commerce”),
which was dissolved on January 17, 2019; (x) Hedetang Foods Industry (Zhouzhi) Co. Ltd (“Foods Industry Zhouzhi”);
and (xi) Hedetang Foods Industry (Jingyang) Co. Ltd. (“Foods Industry (Jingyang”). Shenzhen TianShunDa Equity Investment
Fund Management Co., Ltd. (the “TSD”), a limited liability corporation registered in China, holds another 26.36% of
the equity interest of SkyPeople (China). HeDeTang Holdings (HK) also holds 100% of the equity interest of HeDeJiaChuan Holding
Group Co. Ltd. (“HeDeJiaChuan Holding”), a company incorporated under the laws of the PRC. HeDeJiaChuan Foods Xi’an
has three subsidiaries: (i) SkyPeople (Suizhong) Fruit and Vegetable Products Co., Ltd (“SkyPeople Suizhong”); (ii)
HedeJiachuan Foods (Yichang) Co. Ltd (“Hedejiachuan Yichang”); and (iii) Shaanxi Guo Wei Mei Kiwi Deep Processing
Co., Ltd. (“Guo Wei Mei”).
GlobalKey SharedMall Limited (“GlobalKey
SharedMall”), a company incorporated under the laws of the Cayman Islands, holds 100% of the equity interest of QR (HK) Limited
(“QRHK”, which changed its name from Globalkey Holdings Limited (“Globalkey Holdings”) on October 23, 2018),
a company organized under the laws of Hong Kong. In September 2017, Globalkey Holdings transferred its wholly owned subsidiary
Hedejiachuan Holding Group Co., Ltd., along with its two other subsidiaries, a 99.5% owned subsidiary and a 96.67% owned subsidiary,
to HeDeTang Holding (HK) Ltd. The transferee is a subsidiary of Skypeople BVI. As a result of these transactions, all of Digital
Online’s operations were transferred to a subsidiary of SkyPeople BVI, and Digital Online has no operational assets or businesses.
As discussed above, if we complete the
Spin-Offs, we will not have a fruit juice manufacturing businesses and DigiPay will be our only direct and wholly-owned subsidiary.
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”), 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 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).
(1)
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.
(2)
Formerly known as Shaanxi Tianren Organic Food Co. Ltd.
(3)
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.
(4)
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.
(5)
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.
(6)
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.
(7)
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.
(8)
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.
(9)
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.
(10)
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.
(11)
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.
(12)
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.
(13)
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.
(14)
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.
(15)
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.
(16) 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 technically training for union members.
(17) 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 finance leasing; purchasing leased property domestically and abroad; commercial factoring related to
its main businesses; residual value processing related to the leasing business; and similar activities.
(18) 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.
(19)
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.
(20)
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.
(21)
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.
(22) 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.
(23) 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. Businesses that require approval by government
agencies shall only operate within the scope of such approval.
(24)
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.
(25)
DigiPay FinTech Limited (“DigiPay FinTech”), formerly known as Belking Foods Holdings Group Co., Ltd., was established
on May 3, 2016.
(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.
(27)
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.
(28)
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.
(29)
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.
(30)
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.
(31)
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.
(32) 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 the 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).
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 Contraller of Hedetang Holdings (Shenzhen) Co., Limited are appointed by the Company, Hedetang Holdings (Shenzhen)
Co., Limited. is consolidated into the company’s financial statements.
(33) SkyPeople Foods Holdings Limited,
established in British Virgin Island in 2011. Its main business scope includes trading, import and export of food products.
(34) 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 technique consultancy and transferring.
(35)
Digital Online Marketing Limited established in British Virgin Island in 2011. Its main business scope includes trading consultancy,
corporation management, software development and marketing, information consulting services.
(36) GlobalKey Network Technology (Tianjin)
Co., Ltd. which was changed to Chain Cloud Mall (CCM) Network and Technology (Tianjin) Co., Ltd., 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.
(37) 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.
(38) Chain Cloud Mall E-commerce (Tianjin) Co., Ltd. was established
on April 4, 2019 by Mr. Zeyao Xue and Kai Xu and it is a variable interest entity 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
and Chief Executive Officer. Mr. Kai Xu is the Chief Operating Officer of the Company.
On
July 31, 2019, Chain Cloud Mall Network and Technology (Tianjin) Co., Ltd., (“CCM Tianjin”), a wholly owned subsidiary
of the Company, Chain Cloud Mall E-commerce (Tianjin) Co., Ltd., a limited liability company incorporated under the laws of the
China (the “E-commerce Tianjin” or “WOFE”), 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”).
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.
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 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.
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.
Competitive
Advantages
For
our juice products, 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 ensure 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 high quality
of finished products by preserving freshness.
For our CCM shared shopping mall, 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. The members of CCM are not only consumers and entrepreneurs but also
participants, promoters and beneficiaries.
We believe that our management team, which
includes Vincent Xue, our Chairman and 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 financial technology and integrated fruit-related products industry.
Corporate
History
We
were initially incorporated in 1998 in Florida as Cyber Public Relations, Inc. for the purpose of providing internet electronic
commerce consulting services to small and medium sized businesses and did not have any material operations or revenue. On January
21, 2004, we purchased all of the outstanding share capital of Environmental Technologies, Inc., (“Environmental Technologies”),
a Nevada corporation, in exchange for approximately 29,051 shares of the Company’s common stock (“Common Stock”).
As a result, Environmental Technologies became our wholly-owned subsidiary and the Environmental Technologies shareholders acquired
approximately 97% of our issued and outstanding Common Stock, and we changed our name to Entech Environmental Technologies, Inc.
After
our acquisition of Environmental Technologies, we operated through our wholly-owned subsidiary, H.B. Covey, Inc. (“H.B.
Covey”), a business providing construction and maintenance services to petroleum service stations in the southwestern part
of the United States and installation services for consumer home products in Southern California. In July 2007, we entered into
and consummated a Stock Sale and Purchase Agreement pursuant to which we sold H.B. Covey.
We
were a shell company with no significant business operations after we sold H.B. Covey. As a result of the consummation of a reverse
merger transaction, on February 26, 2008 we ceased being a shell company and became an indirect holding company for SkyPeople
(China) through Pacific Industry Holdings Group Co., Ltd. (“Pacific”). Pacific was incorporated under the laws of
the Republic of Vanuatu, and was a holding company for our operating subsidiary, SkyPeople (China). We closed Pacific in the second
quarter of 2017. In May 2008, we changed our name to SkyPeople Fruit Juice, Inc.
On
June 10, 2008, we acquired Huludao Wonder from Shaanxi Hede Investment Management Co., Ltd., (“Hede”), for a total
purchase price of RMB 48,250,000, or approximately $6,308,591, based on the exchange rate on June 1, 2007. The payment was made
through the offset of related party receivables. Prior to that, we operated our apple concentrate business out of the facilities
of Huludao Wonder under a one-year lease agreement with Hede.
On
June 17, 2009, we incorporated a new Delaware corporation called Harmony to be a wholly owned subsidiary of the Company with offices
initially in California to act as a sales company for the Company. The total number of shares of capital stock that Harmony has
authority to issue is 3,000 shares, all of which are Common Stock with a par value of $1.00 per share. On June 20, 2009, HMN was
registered in the State of California to transact business in such state. HMN did not commence operations and the Company closed
this dormant subsidiary in the second quarter of 2017.
On
November 25, 2009, we acquired Yingkou for a purchase price of RMB 22,700,000 (or $3,325,569 based on the exchange rate of December
31, 2009), pursuant to the Stock Purchase Agreement that SkyPeople (China) entered into with Shaanxi Boai Pharmaceutical &
Scientific Development Co., Ltd. (“Shaanxi Boai”, formerly known as “Xi’an Dehao Investment & Consultation
Co., Ltd.”), on November 18, 2009. Yingkou commenced operating activities in the fourth quarter of 2010.
On
March 13, 2012, we established Foods Industry Yidu (formerly known as SkyPeople Juice Group Yidu Orange Products Co., Ltd.) to
engage in the business of deep processing and sales of oranges.
On
March 13, 2012, we established Agricultural Plantations Yidu, (formerly known as Hedetang Fruit Juice Beverages (Yidu) Co., Ltd.)
to engage the business of production and sales of fruit juice beverages.
On
April 26, 2012, we established SkyPeople Suizhong to engage in the business of initial processing, quick-frozen and sales of agricultural
products and related by-products.
On
May 28, 2012, we acquired Hededetang Holdings (Asia-Pacific) to engage in the store and sales of pre-packed foods, production
and sales of fruit juice beverages through its controlling of its subsidiaries.
On
April 19, 2013, we established Trading Market Mei County (formerly known as SkyPeople Juice Group (Mei County) Kiwi Fruit and
Farm Products Trading Market Co., Ltd.) to engage in preliminary processing of agricultural and subsidiary products, and agricultural
products trading and similar activities.
On
April 19, 2013, we established Guo Wei Mei to engage in the business of producing kiwi fruit juice, kiwi puree and cider beverages,
and similar products.
On
March 31, 2014, we established Xi’an Hedetang to engage in the business of production and sales of fruit juice beverages.
On
July 2, 2014, we established Xi’an Cornucopia to engage in the business of the retail and wholesale of pre-packaged food.
On
July 3, 2014, we established Foods Industry Xi’an (formerly known as Shaanxi Fruitee Fun Co., Ltd.) to engage in the business
of the retail and wholesale of pre-packaged food.
On
July 21, 2014, we established Hedetang Holding to engage in the business of the retail and wholesale of pre-packaged food, research
and development regarding pre-packaged food, bio-tech, machinery and packages, export of manufactured products and technology,
business consulting and marketing planning.
On
November 16, 2015, Agricultural Plantations Yidu (formerly known as Hedetang Fruit Juice Beverages (Yidu) Co., Ltd.) signed a
construction agreement with China Yi Ye Group Co. Ltd. to engage China Yi Zhi Group Co. Ltd. to establish an orange comprehensive
deep processing zone in Yidu. On November 23, 2015, construction began on the agricultural products trading market. As the Chinese
government recently tightened its enforcement of new and existing environmental regulations, the Company is in the process of
adapting to the new standards and the project has been delayed. Since the Company’s current cash cannot support the future
input requirements of this project and there is no forecasted cash flow from this project, the Company recorded an impairment
cost of $16.80 million with respect to construction in progress and fixed assets of this project, and an impairment cost of $0.62
million with respect to the orange plantation.
On March 11, 2016, SkyPeople China entered
into a Share Transfer Agreement and a Capital Contribution (the “Agreements”) with Shenzhen TianShunDa Equity Investment
Fund Management Co., Ltd. (the “TSD”), a limited liability corporation registered in China. Pursuant to the Agreements,
TSD shall acquire 112,809,100 shares of SkyPeople China from SkyPeople HK and shall make a total capital contribution RMB 131,761,028.80
(approximately $20,270,928) to SkyPeople China, which is calculated based upon 8 times of SkyPeople China’s net profit per
share for 2014 (about RMB 0.146 per share) multiplied by 112,809,100 shares. On March 18, 2016, TSD made a capital contribution
of RMB 112,809,100 out of the RMB 131,761,029 (the “Capital Contributions”) as payment for the outstanding capital
contribution due to SkyPeople China by SkyPeople HK. On May 9, 2016, TSD made a capital contribution of the remaining RMB 18,951,929
(approximately $2,915,681) as an additional capital contribution to SkyPeople China, which was deposited into SkyPeople China’s
capital surplus account. Following SkyPeople China’s receipt of the full Capital Contributions, the shares were transferred,
resulting in TSD owning 112,809,100 shares, or 26.36%, of SkyPeople China.
On
March 23, 2016, we established Hedejiachuan Yichang (formerly known as “Trading Market Yidu”) to construct, operate,
and manage property of the farm products trading market.
On
April 21, 2016, we established Hedetang E-Commerce Co., Ltd. to sale pre-packaged foods and bulk foods online.
On
May 18, 2016, we acquired Hedetang Foods China through the acquisition of Belkin to wholesale and retail of foods and beverages,
import and export fruit, vegetables and dried fruit.
On
June 7, 2016, we established Foods Industry Jingyang to engage in the business of processing, storage and sales of farm products,
fruits, tea and snacks. Foods Industry Jingyang began operations in April 2017.
On
September 2, 2016, we established Agricultural Plantations Mei County to plant, acquire and sale vegetables, fruits, flowers,
Chinese herbal medicine and other farm products.
On
November 4, 2016, we acquired Future World Trading (HK) to engage in the import and export of food products.
On
November28, 2016, we acquired SkyPeople Hedetang Foods China, formerly known as SkyPeople Foods China, to engage in the production
and sale of foods and beverages through its subsidiaries.
On
November 29, 2016, we established Foods Industry Zhouzhi to produce, process and sell kiwifruit wine, juice, puree and beverages.
This company has not commenced operations as the date of this report.
On
November 30, 2016, we acquired FullMart to engage in foods trading business through its subsidiaries.
In
December 2016, we established a restructuring plan to close Huludao Wonder Operation.
On
May 27, 2017, the Company acquired GlobalKey Supply Chain Limited, formerly known as Shaanxi Quangoutong E-commerce Inc. Its main
business scope includes computer hardware and software development and sales, electronic products and communication equipment
development and sales, computer network engineering design, business information consultation, online sales and online marketing,
and investment management.
On
June 6, 2017, the Company filed a Certificate of Amendment with the Secretary of State for the State of Florida to amend and restate
its articles of incorporation to change its name from SkyPeople Fruit Juice, Inc. to Future FinTech Group Inc., effective immediately
(“the Name Change”). The Name Change was approved by the Company’s Board of Directors on March 30, 2017 and
by shareholders holding a majority of the Company’s issued and outstanding capital stock on March 31, 2017. In addition,
effective as of June 6, 2017, the Company’s bylaws were amended and restated to reflect the Name Change.
On
September 29, 2017, the Company established Shenzhen Hedetang Industrial Co., Ltd. (Shenzhen Hedetang). Its main business scope
includes industrial projects; domestic trade; and import and export businesses.
On
November 2, 2017, 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”). Pursuant to the Acquisition Agreements,
Hedetang agreed to purchase certain creditor’s rights of associated with companies located in the PRC for an aggregate purchase
price of RMB 181,006,980 (approximately $27,344,096), of which RMB 108,604,188 (approximately $16,437,248.50) has been paid in
cash and RMB 72,402,792 (approximately $10,937,638.50) has been paid in shares of common stock of the Company (the “Share
Payment”) 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. The Share Payment was contingent on Future FinTech receiving shareholder approval at a
Special Shareholders Meeting to increase its authorized common stock to 60,000,000 shares and to approve the Share Payment issuance
under Acquisition Agreements. On March 13, 2018, the Company held a Special Meeting of shareholders, and the shareholders approved
an amendment to the Second Amended and Restated Articles of Incorporation of the Company (the “Articles Amendment”),
which increased the amount of authorized shares of common stock, par value $0.001 per share, of the Company from 8,333,333 to
60,000,000, as well as the Share Payment.
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 $16,437,248.50. The consummation of the Share Purchase Agreement was contingent on Future FinTech receiving shareholder
approval at a Special Shareholders Meeting for the Articles Amendment and the approval of Shares issuance under the Share Purchase
Agreement by the shareholders of the Company. At the Special Meeting of shareholders held on March 13, 2018, and the shareholders
approved the Articles Amendment and the consummation of the Share Purchase Agreement.
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 “Agreement”).
Under the terms of the 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, codes, architectures, codes, software, 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”). DigiPay and Peng further established a Japanese operating company DCON DigiPay Limited
for the Transfer Assets in February, 2018, of which DigiPay holds a 60% ownership interest and Peng holds a 40% ownership interest.
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.
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.
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.
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.
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.
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 the Hedetang Holdings (Shenzhen) Limited is information consultation (excluding restricted projects and talent intermediary
services);import and export business (except for the items prohibited by laws, administrative regulations and by the state council,
the restricted items can only be operated after obtaining the permission);Venture capital business; Business information consulting,
financial, investmentand 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; Information service business (Internet
information service business only).
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 Contraller
of Hedetang Holdings (Shenzhen) Co., Limited are appointed by the Company, Hedetang Holdings (Shenzhen) Co., Limited. is consolidated
into the company’s financial statement.
SkyPeople Foods Holdings Limited established in British Virgin
Island in 2011. Its main business scope includes trading, import and export of food products.
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 technique consultancy and transferring.
Digital Online Marketing Limited established in British Virgin
Island in 2011. Its main business scope includes trading consultancy, corporation management, software development and marketing,
information consulting services.
GlobalKey Network Technology (Tianjin) Co., Ltd. which
was changed to Chain Cloud Mall (CCM) Network and Technology (Tianjin) Co., Ltd. , was established in January 2019. Its main
business scope include, blockchain technology development, service, consultation and transfer; Encryption technology, digital integral
system technology, e-commerce platform technology development, etc.
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, agent for import and export, import and export of goods.
Chain Cloud Mall E-commerce (Tianjin) Co., Ltd. was established
on April 4, 2019 by Mr. Zeyao Xue and Kai Xu and it is a variable interest entity 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
and Chief Executive Officer. Mr. Kai Xu is the Chief Operating Officer of the Company.
On July 31, 2019, Chain Cloud Mall Network
and Technology (Tianjin) Co., Ltd., (“CCM Tianjin”), a wholly owned subsidiary of the Company, Chain Cloud Mall E-commerce
(Tianjin) Co., Ltd., a limited liability company incorporated under the laws of the China (the “E-commerce Tianjin”
or “WOFE”), 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”).
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.
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.
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.
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.
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.
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.
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 the Hedetang Holdings (Shenzhen) Limited is information consultation (excluding restricted projects and talent intermediary
services);import and export business (except for the items prohibited by laws, administrative regulations and by the state council,
the restricted items can only be operated after obtaining the permission);Venture capital business; Business information consulting,
financial, investmentand 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; Information service business (Internet
information service business only).
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 Contraller
of Hedetang Holdings (Shenzhen) Co., Limited are appointed by the Company, Hedetang Holdings (Shenzhen) Co., Limited. is consolidated
into the company’s financial statement.
SkyPeople Foods Holdings Limited established in British Virgin
Island in 2011. Its main business scope includes trading, import and export of food products.
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 technique consultancy and transferring.
Digital Online Marketing Limited established in British Virgin
Island in 2011. Its main business scope includes trading consultancy, corporation management, software development and marketing,
information consulting services.
GlobalKey Network Technology (Tianjin) Co., Ltd. which
was changed to Chain Cloud Mall (CCM) Network and Technology (Tianjin) Co., Ltd. , was established in January 2019. Its main
business scope include, blockchain technology development, service, consultation and transfer; Encryption technology, digital integral
system technology, e-commerce platform technology development, etc.
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, agent for import and export, import and export of goods.
Chain Cloud Mall E-commerce (Tianjin) Co., Ltd. was established
on April 4, 2019 by Mr. Zeyao Xue and Kai Xu and it is a variable interest entity 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
and Chief Executive Officer. Mr. Kai Xu is the Chief Operating Officer of the Company.
On July 31, 2019, Chain Cloud Mall Network
and Technology (Tianjin) Co., Ltd., (“CCM Tianjin”), a wholly owned subsidiary of the Company, Chain Cloud Mall E-commerce
(Tianjin) Co., Ltd., a limited liability company incorporated under the laws of the China (the “E-commerce Tianjin”
or “WOFE”), 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”).
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.
Principal
Products and Services
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.
Our
core products 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. Fruit juice concentrates
can only be produced 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.
Fruit
juice concentrates are manufactured through a multi-stage process, which includes pressing, filtering, sterilizing and evaporating
fresh fruits and fruit juices.
Fruit
juice concentrates are used as the base ingredient in fruit juice beverages and are also used in other products such as ice cream,
fruit wine and, to a lesser extent, cosmetics and medicine.
We
currently sell apple, pear, and kiwifruit concentrates. Our fruit juice concentrate products include concentrated apple and pear
juice. 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.
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 (China) to produce concentrated
clear kiwifruit juice.
Concentrated
apple juice and concentrated pear juice are prepared from fresh fruits. Fruit juice concentrates can also be combined with other
fruit juices for the production of blended fruit juices, canned foods, confectionaries, fruit cider beverages and other beverage
products.
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.
Shared Shopping Mall
The Company is transforming 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. The trial operation of GlobalKey ShareMall, also known as Chain Cloud Mall (CCM) started on
December 26, 2018. The CCM versions 1.0 and 2.0 were launched on January 22, 2019 and June 1, 2019, respectively.
We offer high-quality products at
attractive prices and incentivize our members to promote our platform and share our products with their social contacts. Our
platform has attracted a growing base of users, including members and non-members. These users are actively purchasing
products on our platform. Since our trial operation of our platform on December 26, 2018, we had approximately 164 and 4,014
users as of December 31, 2018 and June 30, 2019, respectively.
Members are the key participants on our
platform and drivers of our 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. We currently generate revenues primarily from fixed membership fees and selling
products on our platform to users, including both members and non-members.
Currently, there are two kinds of membership
programs, Diamond Elite and Silver Elite, with a different membership fees, each of which is valid for 200 days. The member must
renew its membership before expiration to continue enjoying the discounts and earn points as a member. A non-member user can purchase
products from the platform but does not enjoy any benefits or earn points.
Membership benefits are as follows:
(1) Receive a merchandise gift package;
(2) Exclusive discounts for merchandise sold on the Chain Cloud
Mall (CCM) Web and App;
(3) Receive CCM-Point upon a successful new member and
product referral;
CCM-Points can be used as coupons for the member’s future
purchases on our app and website.
In order to promote our membership program,
we currently allow our users to join the membership program by purchasing any merchandise of the equivalent value of the membership
fee through our CCM app or website as an alternative to paying the upfront fixed membership fee.
CCM-Point can only be used as credits when making purchases
on our platform, with one CCM Point representing RMB1.00. CCM-Point cannot be redeemed for cash. Members may transfer CCM Points
to others.
Production
Capacity
The
following table sets forth our current production capacity.
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.
|
*
In December 2016, we established a restructuring plan to close Huludao Wonder Operation.
Industry
and Principal Markets
Market
of Fruit Juice
Per the Bain & Company and Kantar
Worldpanel 2018 CPI index for China, the total consumption of fast-moving consumer goods continued to rebound, with a growth rate of
52%, which was slightly higher than 47% in the previous year. In 2018, packaged food sales increased by 4.7%, while sales
growth rates for beverages stayed at 1.5%. Sales of beverages increased by 1.5%, lower than the 2.8% growth in 2017.
From Dongxing Securites’ research
report on the Food, Beverage and Juice Industry dated April 24, 2018, the overall growth of fruit juice is slow, so structural
upgrade has become the key to boost growth. If comparing within the soft drink industry, the fruit juice segment has the lowest
year-to-year growth. In 2013, the fruit juice industry experienced negative growth. The reason is that the demand side has undergone
tremendous changes, and low-end juices with large market share are no longer popular. In 2016, there was a decline in sales volume
and sales in China’s juice market. In recent years, low concentration juices have experienced declines in sales volume and
sales; whereas mid concentration juices have the same sales performance as the juice segment as a whole, in which sales growth
has slowed down. High concentration juices have experienced an increase in sales volume and price because of their high nutritional
value and small customer base, and they has become the upgrade for most consumers.
E-commerce
Industry and Social e-commerce Platforms in China
China’s online retail
industry has experienced tremendous growth, with the overall market size growing from RMB3.88 trillion ($570 billion) in 2015
to RMB 9.01 trillion ($1.3 trillion) in 2018, according to China Internet Network Information Center. Within the growing online
retail industry, social e-commerce platforms experienced robust growth and commanded an increasing share of the overall online
retail industry. Social e-commerce platforms combine the attributes of mobile e-commerce and social media through its sharing
element, and leverage social networks of its customers to lower the costs of customer acquisition. It decentralizes marketing
and promotion activities from platform operators and manufacturers to the consumers/members of the platform, which provide more
development opportunities for small and medium sized businesses which can’t afford large scale of promotion and marketing
activities. The users of the platform and/or products are not only the consumers but also the recommenders and promoters for the
products and the platforms. The social e-commerce platform market grew from RMB4.69 billion ($685 million) in 2015 to RMB 626.8
billion ($91.5 billion) in 2018, which represents a 255.8% increase compared to RMB 176.2 billion ($25.7billion) in 2017, according
to iResearch Consulting Group. With the increasing use of social media, there is an increasing tendency for people to share their
everyday lives and obtain information, including news, shopping needs and experience through social media. As of December 31,
2018, the monthly active account on wechat has increased to 1 billion and everyday there is average 750 million wechat users read
the posts from their friends moments, according to iResearch Consulting Group.
Marketing,
Sales and Distribution
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, respectively. We sell our products either indirectly through distributors with good credit
history or directly to end-users.
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, more trustworthy. Members who promote products are rewarded if those users purchase
our products.
The
Chinese market drives our fruit beverage sales, with most beverages sold through provincial, city and county-level agents.
Competition
The
markets in which we operate are competitive, rapidly evolving and subject to shifting customer demands and expectations. 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 (Group) 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 our modern equipment and our proprietary processes for the production of specialty
fruit juices or small breed fruit juices. Among the twenty-one proprietary technologies, we have obtained ten design patents,
nine invention patents for production and two Utility Model Patents for equipment. Our current specialty fruit juice offering
includes kiwifruit and mulberry related juice products. We also have technologies to produce concentrated persimmon, turnjujube,
apricot, cherry, cherry tomato, sea-buckthorn, strawberry and wolfberry juices.
We
believe the proximity of our manufacturing facilities to fruit farms is also one of our competitive advantages. It allows us to
purchase fruit directly from fruit farmers, avoid the need for long distance transportation, minimize damages to the fruits and
maximize the freshness of the fruits.
We
produce fruit beverages from our fruit juice concentrates, which allows us to better control the quality of our beverages.
The
e-commerce industry in China is intensely competitive. Our competitors include all major e-commerce companies in China, and other
internet companies in China 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
believe that we are well-positioned to effectively compete on the basis of the factors listed above. However, some of our current
or future competitors may have longer operating histories, greater brand recognition, better supplier relationships, larger user
base or greater financial, technical or marketing resources than we do, and they may also adopt membership-based, value-sharing
e-commerce models or other similar models on their platforms.
Raw
Materials and Other Supplies
Fresh
fruits, including apples, pears and kiwifruits are the primary raw materials for our products. The continuous supply of high quality
fresh fruit is necessary for our current operations and our future business growth.
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.
Shaanxi
Province is a large agricultural and fruit producing province with sufficient resources to satisfy our raw material needs. Shaanxi
Province is also the main pear-producing province in the PRC and its pear supply can generally meet our production requirements.
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.
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.
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 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.
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 members 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 our members may be subject to more stringent tax compliance requirements. See “Risk Factors—The
newly adopted E-Commerce Law may have a material 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 has issued the Decisions on Cancelling
and Adjusting a Batch of Administrative Approval Items, which, among others, replaced the pre-registration approval requirement
for telecommunications business with 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, has 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, has 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 warning,
confiscate the illegal gains, impose fines, and, in severe cases, advice 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 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 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 others, 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 even criminal liabilities if a crime is constituted. 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.
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 could 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.
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.
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 others, 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 the 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
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.
Intellectual
Property
We
hold twenty-one active patents granted by the State Intellectual Property Office of the PRC, (“SIPO”). These include
the following:
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 the required 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, 2018, 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.
Employees
As
of December 31, 2018, we had approximately 85 full-time employees and approximately 5 part-time employees, all of whom are located
in the PRC. None of our employees are covered by a collective bargaining agreement.
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
Our
revenue and profitability are heavily dependent on prevailing prices for our products and raw materials, and if we are unable
to effectively offset cost increases by adjusting the pricing of our products, our margins and operating income may decrease.
Our
revenue, gross margins and cash flows from juice products are substantially dependent on the prevailing prices we receive for
our products and the cost of our raw materials, neither of which we control. The factors influencing the sales price of concentrated
fruit juice include the supply price of fresh fruit, supply and demand of our products in international and domestic markets and
competition in the fruit juice industry.
The
price of our principal raw materials, fresh fruit, is subject to market volatility as a result of numerous factors including,
but not limited to, general economic conditions, governmental regulations, weather, transportation delays and other uncertainties
that are beyond our control. Due to such market volatility, we generally do not, nor do we expect to, have long-term contracts
with our fresh fruit suppliers. Other significant raw materials used in our business include packing barrels, pectic enzyme, amylase
and auxiliary materials such as coal, electricity and water. Prices for these items may be volatile as well and we may experience
shortages in these items from time to time. As a result, we cannot guarantee that the necessary raw materials to produce our juice
products will continue to be available to us at prices currently in effect or acceptable to us. In the event raw material prices
increase materially, we may not be able to adjust our juice product prices, especially in the short term, to recover such cost
increases. If we are not able to effectively offset these cost increases by adjusting the price of our products, our margins will
decrease and earnings for our juice business will suffer accordingly.
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.
Because
we experience seasonal fluctuations in our sales, our quarterly results will fluctuate and our annual performance will depend
largely on results from our first and fourth quarters.
Our
fruit juice business is highly seasonal, reflecting the harvest season of our primary source fruits from July or August of a year
to April the following year. Typically, a substantial portion of our revenue from fruit juice products is earned during our first
and fourth quarters. We generally experience lower revenue during our second and third quarters. If sales in our first and fourth
quarters are lower than expected, our operating results would be adversely affected and it would have a disproportionately large
impact on our annual operating results.
If
we are unable to gain market acceptance or significant market share for the new products we introduce, our results of operations
and profitability could be adversely impacted.
Our
future business and financial performance depends, in part, on our ability to successfully respond to consumer preferences by
introducing new products and improving existing products. We cannot guarantee that we will be able to gain market acceptance or
significant market share for our new products. Consumer preferences change, and any new products that we introduce may fail to
meet the particular tastes or requirements of consumers, or may be unable to replace their existing preferences. Our failure to
anticipate, identify or react to these particular tastes or changes could result in reduced demand for our products, which could
in turn cause us to be unable to recover our development, production and marketing costs, thereby leading to a decline in our
profitability.
The
development and introduction of new products is key to our expansion strategy. We incur significant development and marketing
costs in connection with the introduction of new products. Successfully launching and selling new products puts pressure on our
sales and marketing resources, and we may fail to invest sufficient funds in order to market and sell a new product effectively.
If we are not successful in marketing and selling new products, our results of operations could be materially adversely affected.
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 contract in the near future. 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 as consumers turn to less expensive substitute goods or forego certain purchases altogether. 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.
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. For example, a crisis in the PRC over melamine contaminated milk in 2008 has adversely impacted Chinese food exports
since October 2008, as reported by the Chinese General Administration of Customs, although most foods exported from the PRC were
not significantly affected by the melamine contamination. 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.
We
face increasing competition from both domestic and foreign companies, and any failure by us to compete effectively could adversely
affect our results of operations.
The
juice beverage industry is highly competitive, and we expect it to continue to become even more competitive. Our ability to compete
in the industry depends, to a significant extent, on our ability to distinguish our products from those of our competitors by
providing high quality products at reasonable prices that appeal to consumers’ tastes and preferences. There are currently
a number of well-established companies producing products that compete directly with ours. Some of our competitors may have been
in business longer than we have, may have substantially greater financial and other resources than we have and may be better established
in their markets. We anticipate that our competitors will continue to improve their products and introduce new products with competitive
price and performance characteristics.
We
cannot guarantee that our current or potential competitors will not provide juice products comparable or superior to those we
provide or adapt more quickly than we do to evolving industry trends or changing market requirements. It is also possible that
there will be significant consolidation in the juice beverage industry among our competitors, and alliances may develop among
competitors. These alliances may rapidly acquire significant market share, and some of our distributors may commence production
of products similar to those we sell to them. Increased competition may result in price reductions, reduced margins and loss of
market share, any of which could materially adversely affect our profit margins. We cannot guarantee that we will be able to compete
effectively against current and future competitors. Aggressive marketing or pricing by our competitors or the entrance of new
competitors into our markets could have a material adverse effect on our business, results of operations and financial condition.
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 and service 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 Common 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.
We
require various licenses and permits to operate our juice business, and the loss of or failure to renew any or all of these licenses
and permits could materially adversely affect our business.
In
accordance with PRC laws and regulations, we have been required to maintain various licenses and permits in order to operate our
business at the relevant manufacturing facilities including, without limitation, industrial product production permits. We are
required to comply with applicable hygiene and food safety standards in relation to our production processes. Our premises and
transportation vehicles are subject to regular inspections by the regulatory authorities for compliance with the Detailed Rules
for Administration and Supervision of Quality and Safety in Food Producing and Processing Enterprises. 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.
Governmental
regulations affecting the import or export of products could negatively affect our revenue.
The
United States and various other governments have imposed controls, export license requirements and restrictions on the export
of some of our products. Governmental regulation of exports, or our failure to obtain required export approval for our products,
could harm our international sales and adversely affect our revenue and profits. In addition, failure to comply with such regulations
could result in penalties, costs and restrictions on export privileges. Additionally, the U.S. has imposed additional tariffs
on products from China . Uncertainty regarding policies affecting global trade may make it difficult for our management to accurately
forecast our business, and increases in the duties, tariffs and other charges imposed on our products by the United States or
other countries in which on our products are sold, or other restraints on international trade, could negatively affect our business
and the results of our 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 “Regulation—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 competent governmental authorities in China will share our view, or that they 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 adjustments 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.
We
do not presently maintain product liability insurance, and our property and equipment insurance does not cover the full value
of our property and equipment, which leaves us with exposure in the event of loss or damage to our properties or claims filed
against us.
We
currently do not carry any product liability or other similar insurance. Product liability claims and lawsuits in the PRC generally
are still rare, unlike in some other countries. Product liability exposures and litigation, however, could become more commonplace
in the PRC. Moreover, we have product liability exposure in countries in which we sell our products, such as the United States,
where product liability claims are more prevalent.
We
may be required from time to time to recall products entirely or from specific copackers, markets or batches. Although historically
we have not had any recall of our products, we cannot guarantee that circumstances or incidents will not occur that will require
us to recall our products. We do not maintain recall insurance. In the event we experience product liability claims or a product
recall, our business operations and financial condition could be materially adversely affected.
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. If a major incident were to occur in either of the regions where our facilities
or main offices are located, our facilities or offices or those of critical suppliers 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 chief executive officer (“CEO”); Mr. Zhi Yan, a member of the Company’s Board of Directors (the “Board”)
and our Chief Technology Officer; and Ms. Veronica Chen, our chief financial officer (“CFO”). The loss of the services
of Messrs. Yongke Xue, Zhi Yan or Ms. 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.
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, we will be unable to assert that our internal controls are effective. If we are
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 Common 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 12 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 business
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 shared shopping mall 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, the issuance of such securities could result in dilution of the shares held by existing stockholders.
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 stockholders, 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 business
development and marketing efforts, which could harm our business, financial condition and operating 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. We hold twenty-one patents in the PRC covering
our fruit processing technology. The process of seeking patent protection can be lengthy and expensive and we cannot guarantee
that our existing or future issued patents will be sufficient to provide us with meaningful protection or 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.
Our
ecommerce business depends on the continued use of the Internet and the adequacy of the Internet infrastructure.
Our
ecommerce business depends upon the widespread use of the Internet and ecommerce. Factors which could reduce the widespread use
of the Internet for ecommerce include 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
ecommerce business depends on our Website, network infrastructure and transaction-processing systems.
Our
ecommerce business is completely dependent on our infrastructure. Any system interruption that results in the unavailability of
our Website 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 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 fulfillment 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 fulfill 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 fulfill
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 through a third party vendor. If we are unable to obtain, or are not
provided updated pricing information from our third party vendor, or if we fail to act on information provided by our third party
vendor, then it could cause us to remedy the pricing difference to complete the transaction, or source the product from an alternative
vendor at their price.
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
ecommerce 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 cyber-attacks.
Cyberattacks
may target us, our customers, our suppliers, banks, payment processors, ecommerce 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.
Our
transition to blockchain-related products and services may subject us to new laws, rules and regulations that may materially adversely
affect the development and the value of such assets and lines of business.
Following the completion of the contemplated
spin-off of our fruit juice business, our main businesses will be e-commerce, financial leasing and project finance, investment
and asset management, business incubation and acceleration services for blockchain companies, blockchain related training, capital
market and consulting services as well as using blockchain technology for these businesses, such as the DCON payment system. Our
new businesses create the risk that we will be subject to the laws and regulations of a number of jurisdictions, which we intend
to continually work with counsel to identify and with which we intend to conform. Identifying the application of, and conforming
with, laws and regulations in jurisdictions around the world may increase our operating costs and adversely affect our results
of operations. If we are unable to adequately identify and address such compliance issues, we may face increased risks of government
action against us, which could inhibit the development, growth and operation of our new businesses.
In particular, we will be subject to the
laws and regulations of China in financial leasing and project finance, investment and asset management and blockchain areas, such
as the Administrative Laws for Financial Leasing Enterprises Supervision, Guidelines for Acceleration of the Development of Financial
Leasing Industry. There are no specific regulations in China regarding to the application of blockchain technology. Currently,
our subsidiaries in China have received government approval for their businesses. Chain Cloud Mall logistics Center has approval
from the State Administration for Industry and Commerce (“SAIC”) to conduct business in the following areas: financial
leasing; the purchase of assets domestically or internationally for leasing; leasing consultation and guarantee; and related services.
Zhonglian Hengxin has approval from SAIC to conduct business in the following areas: 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 for corporate restructure and merger and acquisition; equity and real estate
investment (no public offerings, restricted to investment through assets of the company itself). GlobalKey Supply Chain has approval
from SAIC to conduct business in the following areas: all types of commodities and technology import and export; sales of health
products, food additives, pre-packed foods, fruit juice; dairy products (including infant formula) distribution; alcohol distribution;
retail and sales of related products online; and software and hardware development and sales.
On September 4, 2017, the People’s Bank
of China, the Office of the Central Cyberspace Affairs Commission, the Ministry of Industry and Information Technology, the State
Administration of Industry and Commerce, the China Banking Regulatory Commission, the China Securities Regulatory Commission,
and the China Insurance Regulatory Commission jointly issued the rules of Prevention of Token Financing Risk, pursuant to which
“initial coin offerings” are defined as illegal financing activities without approval, involving illegal issuance
of tokens and notes, illegal issuances of securities and illegal crowdfunding and financial fraud and pyramid sales. These rules
require the cessation of token and cryptocurrency financing and refunds to the investors. Currently, the Chinese government has
prohibited initial coin offerings in China, but the use of blockchain and its applications are not prohibited. Financing leasing
companies are regulated by China Banking and Insurance Regulatory Commission. The Company plans to issue and trade cryptocurrencies
in the countries in which such businesses are allowed, such as Japan, and the software coding and structural design work will
be done in China by Chinese technicians. On May 25, 2016, the Congress of Japan passed an Amendment to its Capital Settlement
Law, which became effective on April 1, 2017. The law formally recognizes cryptocurrency as a lawful payment method and put it
under legal system of Japan. DCON complies with this law. Currently, there are no cryptocurrency or blockchain laws or regulations
in China, but the adoption, implementation and enforcement of any such laws and regulations could impede the development of our
business lines, require increased operating costs associated with compliance, and negatively affect our results of operations.
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. NRC uses
real name registration and transaction information that can be traced, which reduces the risk of manipulation. 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, cryptocurrency exchanges 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.
The
further development and acceptance of blockchain trading platforms, which are part of a new and rapidly changing industry, are
subject to a variety of factors that are difficult to evaluate. The slowing or stopping of the development or acceptance of blockchain
trading platforms would have a material adverse effect on our business plans and could have a material adverse effect on us.
The
growth of the blockchain industry in general is subject to a high degree of uncertainty. The factors affecting the further development
of the cryptocurrency and cryptosecurity industry, as well as blockchain trading platforms, include, without limitation:
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worldwide
growth in the adoption and use of cryptocurrencies, cryptosecurities, and other blockchain technologies;
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government
and quasi-government regulation of cryptocurrencies, cryptosecurities, and other blockchain assets and their use, or restrictions
on or regulation of access to and operation of blockchain networks or similar systems;
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the
maintenance and development of the open-source software protocol of cryptocurrency or cryptosecurities networks;
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changes
in consumer demographics and public tastes and preferences;
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the
availability and popularity of other forms or methods of buying and selling goods and services, or trading assets including
new means of using government-backed currencies or existing networks;
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general
economic conditions and the regulatory environment relating to cryptocurrencies and cryptosecurities; and
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a
decline in the popularity or acceptance of cryptocurrencies or other blockchain-based tokens.
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The
cryptocurrency and cryptosecurities industries as a whole have been characterized by rapid changes and innovations and are constantly
evolving. Although it has experienced significant growth in recent years, the slowing or stopping of the development, general
acceptance and adoption and usage of blockchain networks and blockchain assets may materially adversely affect our business plans.
Intellectual
property infringement claims may adversely impact our results of operations.
As
we develop and introduce new products, 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, 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.
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
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
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
Inflation
in the PRC could negatively affect our profitability and growth.
The
rapid growth of China’s economy has been uneven among economic sectors and geographic regions of the country. China’s
economy grew at an annual rate of 6.6% in 2018 as measured by the year-over-year change in gross domestic product, or GDP, according
to the National Bureau of Statistics of China. Rapid economic growth can lead to growth in the money supply and rising inflation.
The inflation rate in China was approximately 2.1% in 2018 as reported by National Bureau of Statistics, and is expected to increase.
If prices for our products and services fail to rise at a rate sufficient to compensate for the increased costs of supplies, such
as raw materials, due to inflation, it may have an adverse effect on our profitability.
Furthermore,
in order to control inflation in the past, the PRC government has imposed controls on bank credits, limits on loans for property,
plant and equipment and restrictions on state bank lending. The implementation of such policies may impede future economic growth.
If the central bank raises interest rates from current levels, economic activity in China could further slow and, in turn, materially
increase our costs and reduce demand for our products and services.
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:
(i)
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
(ii)
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.
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 $0.16 million and $0.19 million in
government subsidies for fiscal years 2018 and 2017, 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 Chines 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, 2018 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
13,034,114 shares, or approximately 40.3%, of our outstanding common stock as of the date of this report. Mr. Zeyao Xue’s
beneficial ownership of 40.3% of Future FinTech’s issued and outstanding common stock will 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
the past, 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 current 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. The Determination Letter further noted that unless the Company requested an appeal of the Staff’s determination
no later than 4:00 pm Eastern Time on October 19, 2016, trading of the Company’s common stock on the NASDAQ Global Market
would be suspended at the opening of business on October 21, 2016, and a Form 25-NSE would be filed with the Securities and Exchange
Commission (the “SEC”) removing the Company’s securities from listing and registration on 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 notice had no immediate effect on the listing of the Company’s
common stock, and its common stock continued to trade on the NASDAQ Global Market under the symbol “FTFT”. In accordance
with NASDAQ Listing Rule 5810(c)(3)(D), the Company had a grace period of 180 calendar days, or until May 30, 2018, to regain
compliance with the minimum MVPHS requirement. To regain compliance, the minimum MVPHS of the Company’s common stock needed
to meet or exceed $5,000,000 for at least ten consecutive business days during this 180-day grace period. The Company received
notice that it had regained compliance on January 4, 2018.
On
January 4, 2018, the Company received a written notification from the NASDAQ Stock Market Listing Qualifications staff indicating
that the Company had regained compliance with the minimum market value of publicly held shares (“MVPHS”) of $5,000,000
requirement for continued listing on the NASDAQ Global Market pursuant to NASDAQ Listing Rule 5450(b)(1)(C) (the “MVPHS
Requirement”) and that the matter was now closed. The minimum market value of publicly held shares of the Company’s
common stock had been at $5,000,000 or greater for at least 10 consecutive business days. Accordingly, the Company had regained
compliance with the MVPHS Requirement.
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). The notice had no immediate effect on the listing of the Company’s common stock, and its common
stock continued to trade on the NASDAQ Global Market under the symbol “FTFT”. Under NASDAQ Rules, the Company had
45 calendar days to submit a plan to regain compliance. If the plan were accepted, NASDAQ could grant the Company an extension
up to 180 calendars from the date of the NASDAQ letter. 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), which requires a minimum bid price of $1.00 per share (the “Minimum
Bid Price Requirement”). The notification had no immediate effect on the listing of the Company’s common stock. In
accordance with NASDAQ Marketplace Rule 5810(c)(3)(A), the Company had a period of 180 calendar days from the date of notification,
until August 27, 2019 (the “Compliance Period”), to regain compliance with the Minimum Bid Price Requirement. If at
any time before the expiration of the Compliance Period the bid price of the Company’s common stock closed at or above $1.00
per share for a minimum of 10 consecutive business days, NASDAQ would provide written notification that the Company had achieved
compliance with the Minimum Bid Price Requirement. If the Company did not regain compliance by the end of the Compliance Period,
the Company may have been eligible for an additional 180 calendar day period to regain compliance. To qualify, the Company would
be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards
for the NASDAQ Capital Market, with the exception of the bid price requirement, and would need to provide written notice of its
intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary. However,
if it appeared to NASDAQ that the Company would not be able to cure the deficiency, or if the Company were otherwise not eligible,
NASDAQ would provide notice that the Company’s securities were subject to delisting.
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 for continued listing on the NASDAQ Capital Market pursuant to NASDAQ Listing
Rule 5550(a)(2) (the “Minimum Bid Price Requirement”) and that the matter is now closed. The closing bid price of
the Company’s common stock has been at $1.00 per share or greater for at least 10 consecutive business days. Accordingly,
the Company has regained compliance with the Minimum Bid Price Requirement. On May 8, 2019, the Company issued a press release
announcing that the Company has regained compliance with Minimum Bid Price Requirement.
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”). The NASDAQ notification
letter provided the Company 60 calendar days from the date of the notification, or until June 17, 2019, to submit a plan to NASDAQ
to regain compliance with the NASDAQ’s continued listing requirements. If the plan were accepted, NASDAQ could grant an
exception of up to 180 calendar days, or until October 14, 2019, for the Company to regain compliance. The Company may regain
compliance at any time during this 180-day period upon filing its 2018 10-K, as well as all subsequent required periodic reports
that are due within that period. If NASDAQ did not accept the Company’s compliance plan, the Company would have the opportunity
to appeal that decision to a Hearing Panel under Listing Rule 5815(a).
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 and its remaining delinquent in the filing of its
Annual Report on Form 10-K for the year ended December 31, 2018 (the “Initial Delinquent Filing”). The NASDAQ notification
letter provided the Company until June 17, 2019, to submit a plan to NASDAQ to regain compliance with the NASDAQ’s continued
listing requirements. If the plan were accepted, NASDAQ could grant an exception of up to 180 calendar days from the due date
of the Initial Delinquent Filing, or until October 14, 2019, for the Company to regain compliance. If NASDAQ did not accept the
Company’s compliance plan, the Company would have the opportunity to appeal that decision to a Hearing Panel under Listing
Rule 5815(a).
On June 14, 2019, the Company submitted its
plan of compliance in connection with its failure to timely file the annual report on Form 10-K for the period ended December
31, 2018 and the quarterly report on Form 10-Q for the period ended March 31, 2019 (the “Delinquent Filings”) to NASDAQ.
In a notification letter dated July 29, 2019, NASDAQ granted the Company an exception until August 31, 2019 to file its delinquent
Form 10-K for the period ended December 31, 2018 and until September 30, 2019 to file the Forms 10-Q for the periods ended March
31 and June 30, 2019, based upon the initial plans of compliance submitted by the Company to NASDAQ.