FUTURE FINTECH GROUP INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)
The following discussion and analysis of the consolidated financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from the results described in or implied by these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report on Form 10-K, particularly under the heading "Risk Factors."
Overview
Future FinTech is a holding company incorporated under the laws of the State of
Florida and it is not a Chinese operating company. As a holding company with no
material operations of our own, we conduct a substantial majority of our
operations through our subsidiaries and contractual arrangements with a variable
interest entity (VIE) - Cloud Chain E-Commerce (Tianjin) Co., Ltd. ("E-Commerce
Tianjin"), based in China and this structure involves unique risks to investors.
The Company historically engaged in the production and sale of fruit juice
concentrates (including fruit purees and fruit juices), fruit beverages
(including fruit juice beverages and fruit cider beverages) in People's Republic
of China. Due to drastically increased production costs and tightened
environmental laws in China, the Company had transformed its business from fruit
juice manufacturing and distribution to a real-name blockchain based e-commerce
platform, supply chain financing services and trading business and financial
services and technology business. The business operations of the Company include
blockchain based online shopping platform, Chain Cloud Mall ("CCM"), supply
chain financing services and trading, asset management and money transfer
service. The Company is also developing cryptocurrency mining and cryptocurrency
market data services.
On August 6, 2021, the Company completed acquisition of 90% of the issued and
outstanding shares of Nice Talent Asset Management Limited ("NTAM"), a Hong
Kong-based asset management company, from Joy Rich Enterprises Limited ("Joy
Rich"). NTAM is licensed under the Securities and Futures Commission of Hong
Kong ("SFC") to carry out regulated activities in Type 4: Advising on Securities
and Type 9: Asset Management.
In December 2021, FTFT Capital Investments, LLC officially launched FTFTX, a
cryptocurrency market data platform that provides investors with real-time
cryptocurrency market data and trading information from a large number of
cryptocurrency exchanges. The market data is available for Bitcoin, ETH, EOS,
Litecoin, TRON and other cryptocurrencies at and via the
FTFTX App on iOS and Android devices. The FTFTX app is free to download on
Google Play and the Apple Store.
In March 2022, FTFT UK Limited received has received approval to operate as an
Electronic Money Directive ("EMD") Agent and has been registered as such with
the Financial Conduct Authority (FCA), a UK regulator. This status grants FTFT
UK Limited the ability to distribute or redeem e-money and provide certain
financial services on behalf of an e-money institution (registration number
903050).
On April 18, 2022, the Company and Future Fintech (Hong Kong) Limited, a wholly
owned subsidiary of the Company jointly acquired 100% equity interest of KAZAN
S.A., a company incorporated in Republic of Paraguay for $288. The Company
owns 90% and FTFT HK owns 10% of Kazan S.A., respectively. Kazan S.A. has no
operation before the acquisition. The Company plans to develop bitcoin and other
cryptocurrency mining and related services in Paraguay. The Company has changed
its name from KAZAN S.A to FTFT Paraguay S.A. on July 28, 2022.
On September 29, 2022, FTFT UK Limited completed its acquisition of 100% of the
issued and outstanding shares of Khyber Money Exchange Ltd., a company
incorporated in England and Wales, from Rahim Shah, a resident of United Kingdom
for a total of Euros €685,000 ("Purchase Price"), pursuant to a Share Purchase
Agreement (the "Agreement") dated September 1, 2021. Khyber Money Exchange Ltd.
is a money transfer company with a platform for transferring money through one
of its agent locations or via its online portal, mobile platform or over the
phone. Khyber Money Exchange Ltd. is regulated by the UK Financial Conduct
Authority (FCA) and the parties received approval by the FCA before the formal
closing of the transaction. On October 11, 2022, the Company changed the name of
Khyber Money Exchange Ltd. to FTFT Finance UK Limited.
On February 27, 2023, Future FinTech (Hong Kong) Limited ("Buyer"), a company
incorporated in Hong Kong and a wholly owned subsidiary of Future FinTech Group
Inc. (the "Company") entered into a Share Transfer Agreement (the "Agreement")
with Alpha Financial Limited, a company incorporated in Hong Kong ("Seller") and
sole owner and shareholder of Alpha International Securities (Hong Kong)
Limited, a company incorporated in Hong Kong ("Alpha HK") and Alpha Information
Service (Shenzhen) Co., Ltd., a company incorporated in China ("Alpha SZ").
Alpha HK holds Type 1 'Securities Trading', Type 2 'Futures Contract Trading'
and Type 4 'Securities Consulting' financial licenses issued by the Hong Kong
Securities and Futures Commission. Alpha SZ provides technical support services
to Alpha HK.
We are a holding company incorporated in Florida and we are not a Chinese
operating company. As a holding company with no material operations of our own,
we conduct a substantial majority of our operations through our subsidiaries and
the VIE E-Commerce Tianjin in China and this structure involves unique risks.
Our shares of common stock are shares of our Florida holding company, and we do
not have any equity ownership of the VIE, instead we control and is the primary
beneficiary of the VIE for accounting purposes through certain contractual
arrangements, which are used to provide investors with exposure foreign
investment in Chinese-based companies where Chinese law prohibits or restricts
direct foreign investment in value added telecom/e-commerce business. Chinese
regulatory authorities could disallow the VIE structure, which would likely
result in a material change in our operations and/or value of our securities,
including that it could cause the value of our securities to significantly
decline or worthless. See "Risk Factors- If the PRC government deems that the
contractual arrangements in relation to the consolidated variable interest
entity do not comply with PRC regulatory restrictions on foreign investment in
the relevant industries, or if these regulations or the interpretation of
existing regulations change in the future, we could be subject to severe
penalties or be forced to relinquish our interests in those operations."
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There are legal and operational risks associated with being based in and having
majority of our operations in Hong Kong and China. Recently, the PRC government
initiated a series of regulatory actions and statements to regulate business
operations in China with little advance notice, including cracking down on
illegal activities in the securities market, enhancing supervision over
China-based companies listed overseas using variable interest entity structure,
adopting new measures to extend the scope of cybersecurity reviews, and
expanding the efforts in anti-monopoly enforcement. On July 6, 2021, the General
Office of the Communist Party of China Central Committee and the General Office
of the State Council jointly issued an announcement to crack down on illegal
activities in the securities market and promote the high-quality development of
the capital market, which, among other things, requires the relevant
governmental authorities to strengthen cross-border oversight of law-enforcement
and judicial cooperation, to enhance supervision over China-based companies
listed overseas, and to establish and improve the system of extraterritorial
application of the PRC securities laws. On December 28, 2021, Cybersecurity
Review Measures was published by Cyberspace Administration of China or the CAC,
National Development and Reform Commission, Ministry of Industry and Information
Technology, Ministry of Public Security, Ministry of State Security, Ministry of
Finance, Ministry of Commerce, People's Bank of China, State Administration of
Radio and Television, China Securities Regulatory Commission, State Secrecy
Administration and State Cryptography Administration, effective on February 15,
2022, which provides that, Critical Information Infrastructure Operators
("CIIOs") that purchase internet products and services and Online Platform
Operators engaging in data processing activities that affect or may affect
national security shall be subject to the cybersecurity review by the
Cybersecurity Review Office. On November 14, 2021, CAC published the
Administration Measures for Cyber Data Security (Draft for Public Comments), or
the "Cyber Data Security Measure (Draft)", which requires cyberspace operators
with personal information of more than 1 million users who want to list abroad
to file a cybersecurity review with the Office of Cybersecurity Review. On April
2, 2022, the CSRC released the Provisions on Strengthening Confidentiality and
Archives Administration of Overseas Securities Offering and Listing by Domestic
Companies (Draft for Comments), which provide that a domestic company that seeks
to offer and list its securities in a overseas market shall strictly abide by
applicable PRC laws and regulations, enhance legal awareness of keeping state
secrets and strengthening archives administration, institute a sound
confidentiality and archives administration system, and take necessary measures
to fulfill confidentiality and archives administration obligations. On July 7,
2022, CAC promulgated the Measures for the Security Assessment of Data
Cross-border Transfer, effective on September 1, 2022, which requires the data
processors to apply for data cross-border security assessment coordinated by the
CAC under the following circumstances: (i) any data processor transfers
important data to overseas; (ii) any critical information infrastructure
operator or data processor who processes personal information of over 1 million
people provides personal information to overseas; (iii) any data processor who
provides personal information to overseas and has already provided personal
information of more than 100,000 people or sensitive personal information of
more than 10,000 people to overseas since January 1st of the previous year; and
(iv) other circumstances under which the data cross-border transfer security
assessment is required as prescribed by the CAC. On February 17, 2023, the CSRC
released the Trial Administrative Measures of Overseas Securities Offering and
Listing by Domestic Enterprises (the "New Overseas Listing Rules") with five
interpretive guidelines, which took effect on March 31, 2023. The New Overseas
Listing Rules require Chinese domestic enterprises to complete filings with
relevant governmental authorities and report related information under certain
circumstances. The required filing scope is not limited to the initial public
offering, but also includes subsequent overseas securities offering, single or
multiple acquisition(s), share swap, transfer of shares or other means to seek
an overseas direct or indirect listing and a secondary listing or dual major
listing of issuers already listed overseas. According to the Notice on
Arrangements for Overseas Securities Offering and Listing by Domestic
Enterprises, published by the CSRC on February 17, 2023, a company that (i) has
already completed overseas listing or (ii) has already obtained the approval for
the offering or listing from overseas securities regulators or exchanges but has
not completed such offering or listing before effective date of the new rules
and also completes the offering or listing before September 30, 2023 will be
considered as an existing listed company and is not required to make any filing
until it conducts a new offering in the future. Furthermore, upon the occurrence
of any of the material events specified below after an issuer has completed its
offering and listed its securities on an overseas stock exchange, the issuer
shall submit a report thereof to the CSRC within 3 working days after the
occurrence and public disclosure of the event: (i) change of control; (ii)
investigations or sanctions imposed by overseas securities regulatory agencies
or other competent authorities; (iii) change of listing status or transfer of
listing segment; or (iv) voluntary or mandatory delisting. On February 24, 2023,
the CSRC revised the Provisions on Strengthening the Management of
Confidentiality and Archives Related to the Overseas Issuance of Securities and
Overseas Listing by Domestic Companies which were issued in 2009 (the "Archives
Rules"). The revised Archives Rules took effect on March 31, 2023. The revised
Archives Rules expands their application to cover indirect overseas offering and
listing, stipulating that a domestic company which plans to publicly disclose
any documents and materials containing state secrets or working secrets of
government agencies, shall first obtain approval from competent authorities
according to law, and file with the secrecy administrative department at the
same level. As of the date of this report, these new laws and guidelines have
not impacted the Company's ability to conduct its business, accept foreign
investments, or list on a U.S. or other foreign stock exchange; however, there
are uncertainties in the interpretation and enforcement of these new laws and
guidelines, which could materially and adversely impact our business and
financial outlook and may impact our ability to accept foreign investments or
continue to list on a U.S. or other foreign stock exchange. In the opinion of
our PRC counsel Fengdong Law Firm, the VIE and certain subsidiaries of the
Company are incorporated and operating in mainland China and they have received
all required permissions from Chinese authorities to operate their current
business in China, including a Business license, Bank Account Open Permits and
Value Added Telecom Business License. As of the date of this report, in the
opinion of our PRC counsel Fengdong Law Firm, we, our subsidiaries and the VIE
in China are not subject to permission requirements from the China Securities
Regulatory Commission ("CSRC"), Cyberspace Administration of China ("CAC") or
any other entity that is required to approve of the VIE's operations and have
not received or were denied such permissions by any PRC authorities. However,
given the current PRC regulatory environment, it is uncertain whether we, our
subsidiaries or the VIE, will be able to obtain permission from the PRC
government to offer our securities to foreign investors, and even when such
permission is obtained, whether it will be denied or rescinded. If we or any of
our subsidiaries or the VIE do not receive or maintain such permissions or
approvals, inadvertently conclude that such permissions or approvals are not
required, or applicable laws, regulations, or interpretations change and we or
our subsidiaries are required to obtain such permissions or approvals, it could
significantly limit or completely hinder our ability to offer or continue to
offer our securities to investors and cause the value of our securities to
significantly decline or become worthless. If applicable laws, regulations, or
interpretations change and the VIE is required to obtain permissions or
approvals in the future, we may face substantial uncertainties as to whether we
can obtain such permissions or approvals in a timely manner, or at all. Failure
to take timely and appropriate measures to adapt to any of these or similar
regulatory compliance challenges could materially and adversely affect our
current corporate structure and business operations.
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Chain Cloud Mall is a unique real-name based blockchain e-commerce shopping
platform that integrates blockchain, internet technology. The CCM shared
shopping mall platform is designed to be a block-chain based shopping mall for
merchants and goods, not the exchange of digital currencies, and it currently
only accepts payment from credit cards, Alipay and WeChat.
The Company started its trial operation of NONOGIRL, a cross-border e-commerce
platform, in March 2020 and formally launched it in July 2020. The cross-border
e-commerce platform aimed to build a new s2b2c (supplier to business and
consumer) outsourcing sales platform dominated by social media influencers. It
was aimed at the growing female consumer market, with the ability to broadcast,
short video, and all forms communication through the platform. It could also
create a sales oriented sharing ecosystem with other major social media used by
customers, etc. The Company's promotion strategy previously mainly relied on the
training of members and distributors through meetings and conferences. Due to
the outbreak of COVID-19, the Chinese government put a restriction on large
gatherings. These restrictions made the promotion strategy for our online
e-commerce platforms difficult to be implemented and the Company has experienced
difficulties to subscribe new members for its online e-commerce platforms. Due
to the lack of new subscribers, in June 2021, the Company suspended its
cross-border e-commerce platform (NONOGIRL) which has been closed now. Also,
since the second quarter of 2021, the Company has transformed its member-based
business model of Chain Cloud Mall to a sale agent based eCAAS platform and
began to provide supply chain financing services and trading of coal for coal
mines and power generation plants as well as aluminum ingots.
The Company currently has ten directly controlled subsidiaries: DigiPay FinTech
Limited ("DigiPay"), a company incorporated under the laws of the British Virgin
Islands, Future FinTech (Hong Kong) Limited, a company incorporated under the
laws of Hong Kong, GlobalKey Shared Mall Limited, a company incorporated under
the laws of Cayman Islands ("GlobalKey Shared Mall"), Tianjin Future Private
Equity Fund Management Partnership, a Limited Partnership under the laws of
China, FTFT UK Limited, a company incorporated under the laws of United Kingdom,
Future Fintech Digital Capital Management, LLC, a company incorporated under the
laws of Connecticut, Future Fintech Digital Number One GP, LLC, a company
incorporated under the laws of Connecticut, Future FinTech Labs Inc., a company
incorporated under the laws of New York, FTFT SuperComputing Inc. a company
incorporated under the laws of Ohio and FTFT Paraguay S.A., a company
incorporated under the laws of Paraguay.
SkyPeople Foods Holdings Limited ("SkyPeople BVI") was a wholly owned subsidiary
of the Company and a company organized under the laws of the British Virgin
Islands, which held 100% of the equity interest of HeDeTang Holdings (HK) Ltd.
("HeDeTang HK"), a company organized under the laws of the Hong Kong Special
Administrative Region of the People's Republic of China ("Hong Kong"), and
HeDeTang HK held 73.42% of the equity interest of SkyPeople Juice Group Co.,
Ltd., ("SkyPeople (China)"), a company incorporated under the laws of the PRC.
SkyPeople (China) had eleven subsidiaries in the PRC, which were mainly involved
in the production and sales of fruit juice concentrates, fruit juice beverages
and other fruit-related products in the PRC and overseas markets. On February
27, 2020, SkyPeople BVI (the "Seller") completed the transfer of its ownership
of HeDeTang HK to New Continent International Co., Ltd. (the "Buyer"), an
unrelated third party and a company incorporated in the British Virgin Islands
for a total price of RMB 0.6 million (approximately $85,714), pursuant to a
Share Transfer Agreement entered into by the Seller and the Buyer on September
18, 2019 and approved at the special shareholders meeting of the Company on
February 26, 2020 (the "Sale Transaction"). SkyPeople BVI had no operational
assets or business after the transfer and the Company dissolved SkyPeople BVI on
July 27, 2020.
CCM Shopping Mall
Due to the lack of new member subscriptions caused by restrictions on our
promotion strategy for the control of spread of COVID-19, we have transformed
the CCM shopping mall from a member based platform to a sale agent based eCAAS
platform. The eCAAS platform is entrusted by the Anti-Counterfeiting Committee
to run its Responsible Brand Program.
Anti-Counterfeiting Committee will review and accept the companies to join its
Responsible Brand Program. After acceptance, these companies are authorized to
use 315 anti-counterfeiting labels on their products and sell them on our eCAAS
platform. The companies can also use sales agents to sell their products on our
eCAAS platform and parties can negotiate the commission percentages for the
products sold. Any new sales agent must be recommended by existing agents and
pay a one-time fee to the eCAAS platform to be admitted as the authorized agent
to provide sales agent services on the platform.
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Coal and aluminum ingots Supply Chain Financing Service and Trading
Since the second quarter of 2021, we started coal supply chain financing and trading operations. Since the third quarter of 2021, we started supply chain financing services and trading business for aluminum ingots.
Our supply chain finance business mainly serves the receivables and payables of industrial customers, obtains the creditor's rights or commodity goods rights of large state-owned enterprises through trade execution, provides customers with working capital, accelerates capital turnover, and then expands the business scale and improves the industrial value. Through our supply chain service ability and customer resources, we can tap into low-risk assets, flexibly carry out financial services around the actual financial needs of certain industries, and reduce the overall risk of the business by using the control of business flow, goods logistics and capital flow in the process of commodity circulation. We focus on bulk coal and aluminum ingots and take large state-owned or listed companies as the core service targets; We use our own funds as the operation basis, actively uses a variety of channels and products for financing, such as banks, commercial factoring companies, accounts receivable, asset-backed securities, and other innovative financing methods to obtain sufficient funds. We sign purchase and sale agreements with suppliers and buyers. The suppliers are responsible for the supply and transportation of coal to the end users' designated freight yard or transfer the title of aluminum ingots to us in certain warehouses. We also provide trading service as we don't take control over the ownership of the goods and lower margin for the transaction. We select the customers and suppliers that have good credit and reputation. The Company's revenues are substantially reported on a net basis as the supply chain service is primarily responsible for providing the underlying supply chain service and the Company does not control the service provided by the supply chain supplier to the customer. Asset Management Service NTAM engages assets management and advisory services. NTAM's main revenue is generated from providing professional advices to customers and management fees for managing the investment of the clients. NTAM is licensed under the Securities and Futures Commission of Hong Kong (SFC) for carrying out regulated activities in "Advising on Securities" and "Asset Management". NTAM offers diversified asset management portfolio for professional investors. Assets of NTAM's clients are held in banks, where clients gave the banks their authorization allowing NTAM to place trading instructions on behalf of the clients in order to manage the clients' assets. NTAM mainly engages in following asset management services for its clients:
(1) Equity Investment NTAM manages clients' investment portfolio in stocks of the companies listed on the international market with strong liquidity. At the same time, it selects companies that have unique or differentiated businesses, realizing above average profit growth. (2) Debt investment When NTAM manages clients' investment portfolio in bonds that are denominated in major international currencies such as US dollar, euro and sterling, the issuer of debts shall have good credit rating and asset liability ratio. Through active management, NTAM focuses in bonds with higher yield to maturity among bonds with the same maturity and credit rating.
(3) Investment in precious metals and currencies
NTAM also manages clients' investment portfolio in major international currencies and precious metals, including US dollar, euro, British pound, Japanese yen, Australian dollar and offshore Chinese yuan. Precious metals include gold, platinum and silver. With research on the fundamentals of market supply and demand to predict the trend of commodity prices, NTAM endeavors to improve the rate of return for clients through dual currency investment, options and structured products. (4) Derivative Investment
NTAM also manages the customers’ investment portfolio in financial derivatives in various asset classes, such as options and structured products.
(5) External Asset Management Services (EAM)
This business takes customer demand as its service purpose, collaborates with several private banks that offer asset custody services, and innovatively introduces the function of investment banking to provide exclusive private solutions for our customers.
NTAM's main revenue is generated from providing professional advices to clients
and management fees for managing the investment of the clients. As of March 15,
2023, NTAM has approximately US$300 million assets under its management.
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Money Transfer Business
FTFT Finance UK Limited ("FTFT Finance") formerly known as Khyber Money Exchange
Ltd. was acquired by FTFT UK in September 2022. It is regulated by UK Financial
Conduct Authority ("FCA") for its cross-border money transfer systems and
service. FTFT Finance was incorporated in 2009 and is a pioneer in the UK for
money remittance services. FTFT Finance provides money transfer services through
its platform to transfer money around the world via one of its agent locations
or its online portal, mobile platform, or over the phone. FTFT Finance is
headquartered in the UK and it has a trade name of FTFT Pay. FTFT Finance's plan
is to develop products and services across different regions of the world and
become a global name in money remittance services.
FTFT Finance is a financial platform that enables its customers to send their
hard-earned money to their country of origin, or any other country of their
liking, with ease and at a reasonable cost, transparent exchange rate and
without any hidden charges. We believe that it is our understanding of our
customers and their diverse backgrounds that has helped FTFT Finance to become a
credible and trustworthy money remittance business. The FTFT Pay platform and
system support direct connections to over 130 countries and their local banks,
targeting customers with transfer destinations based in prominent countries
across the Middle East and Southeast Asia.
Remittance service is a highly saturated market in the United Kingdom. There are
many companies that offer remittance services however FTFT Finance only sees Ace
Money Transfer, Wise (formerly known as Transfer Wise), Remitly and Remit World
as its main competitors.
FTFT Finance has an edge over companies like wise in many different ways, for
example, FTFT Finance offers competitive rates for our services and does not
charge customer fees for remittance to Pakistan as it receives its rebate from
local banks is Free of Cost. This approach provides gives us an advantage over
our competitors.
In the Year 2022, the total UK Remittance Market was estimated to be valued at $49.55 billion with a growth rate of 6.0% according to a report of Remittance Brave Global Headwinds of World Bank in November 2022. It is also estimate that by the year 2027 the UK's remittance market will be $66.5 billion according to the UK remittance statistics from Finder.com. Expats living in the United Kingdom often send money to their relatives either to support them, or for emergency uses or weddings. The UK has a large migrant population of Indians, Pakistanis and Bangladeshis. FTFT Finance has been in money remittance business since 2009 and has over 500,000 customers. FTFT Finance advertises through Instagram, Twitter, Facebook and LinkedIn in order to reach out to new customers. FTFT Finance implemented email marketing, in which they email customers daily to keep them updated on their account, transactions as well as marketing and promotions.
The management of FTFT Finance is currently engaged in talks with various PR companies to launch a new campaign under the brand name FTFT Finance, as all previous campaigns were under the Khyber Money Exchange brand.
Recent developments related to the COVID-19 outbreak
In December 2019, a novel strain of coronavirus was reported and has spread
throughout China and other parts of the world. On March 11, 2020, the World
Health Organization characterized the outbreak as a "pandemic". In early 2020,
Chinese government took emergency measures to combat the spread of the virus,
including quarantines, travel restrictions, and the temporary closure of office
buildings and facilities in China. In response to the evolving dynamics related
to the COVID-19 outbreak, the Company followed the guidelines of local
authorities as it prioritizes the health and safety of its employees,
contractors, suppliers and business partners. Our offices in China were closed
and the employees worked from home at the end of January 2020 until late March
2020. The quarantines, travel restrictions, and the temporary closure of office
buildings have materially negatively impacted our business. Our suppliers were
negatively affected, and could continue to be negatively affected in their
ability to supply and ship products to our customers in case of any resurgence
of COVID-19. Our customers that have been negatively impacted by the outbreak of
COVID-19 may reduce their budgets to purchase products and services from us,
which may materially adversely impact our revenue. The business operations of
the third parties' stores on our e-commerce platform have been and continue to
be negatively impacted by the outbreak, which in turn adversely affects the
business of our platform as a whole as well as our financial condition and
operating results. The outbreak has had and continues to have disruption to our
supply chain, logistics providers, customers or our marketing activities with
the new variants of COVID-19, which could materially adversely impact our
business and results of operations, especially to our supply chain financing and
trading business during the first quarter of 2022. There was outbreak in various
cities and provinces due to Omicron variant in Xi'an city, Hong Kong, Shanghai
and Beijing in 2022, which have resulted quarantines, travel restrictions, and
temporary closure of office buildings and facilities in these cities. In
December 2022, the Chinese government eased its strict zero COVID-19 policy
which resulted in a surge of new COVID-19 cases during December 2022 and January
2023, which has disrupted our business operations in China. The Company's
promotion strategy of CCM Shopping Mall previously mainly relied on the training
of members and distributors through meetings and conferences. Chinese government
put a restriction on large gatherings in 2020 and 2021, which made the promotion
strategy for our online e-commerce platforms difficult to implement and the
Company experienced difficulties to subscribe new members for its online
e-commerce platforms. Due to the lack of new subscribers, in June 2021, the
Company suspended its cross-border e-commerce platform NONOGIRL which has been
closed now. Also, since the second quarter of 2021, the Company has transformed
its member-based Chain Cloud Mall to a sale agent based eCAAS platform and began
to provide supply chain financing services.
The global economy has also been materially negatively affected by the COVID-19
and there is continued uncertainty about the duration and intensity of its
impacts. The Chinese and global growth forecast is extremely uncertain, which
would seriously affect our business.
While the potential economic impact brought by, and the duration of COVID-19 and
its new variants may be difficult to assess or predict, a widespread pandemic
could result in significant disruption of global financial markets, reducing our
ability to access capital, which could negatively affect our liquidity. In
addition, a recession or market correction resulting from the spread of COVID-19
and its new variants could materially negatively affect our business and the
value of our common stock.
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Further, as we do not have access to a revolving credit facility, there can be
no assurance that we would be able to secure commercial debt financing in the
future in the event that we require additional capital. We currently believe
that our financial resources will be adequate to see us through the outbreak.
However, in the event that we do need to raise capital in the future,
outbreak-related instability in the securities markets could adversely affect
our ability to raise additional capital.
Consequently, our results of operations have been materially and adversely
affected by COVID-19 pandemic. Any potential further impact to our results will
depend on, to a large extent, future developments and new information that may
emerge regarding the duration and severity of the COVID-19, new variants of
COVID-19, the efficacy and distribution of COVID-19 vaccines and the actions
taken by government authorities and other entities to contain the COVID-19 or
treat its impact, almost all of which are beyond our control.
Discontinued Operations
On September 18, 2019, SkyPeople Foods Holdings Limited, entered into a Share
Transfer Agreement (the "Agreement") with New Continent International Co., Ltd.,
(the "Buyer") a company incorporated in the British Virgin Islands. Pursuant to
the terms of the Agreement, the Buyer purchased 100% ownership of HeDeTang HK
from SkyPeople Foods Holdings Limited, which value is primarily derived from
HeDeTang HK's wholly-owned subsidiary HeDeJiaChuan Holdings Co., Ltd. and 73.41%
owned subsidiary SkyPeople Juice Group Co., Ltd., for a total price of RMB
600,000 (approximately $85,714) (the "Sale Transaction"). The Sale Transaction
was closed on February 27, 2020. In accordance with ASC Topic 205, Presentation
of Financial Statement Discontinued Operations ("ASC Topic 205"), the Company
presented the operation results of HeDeTang HK and its subsidiaries as a
discontinued operation, as the Company believed that no continued cash flow
would be generated by the discontinued component and that the Company would have
no significant continuing involvement in the operations of the discontinued
component. The total assets of HeDeTang HK were $106.85 million as of February
27, 2020 and the total liabilities of HeDeTang HK were $231.21 million as of
February 27, 2020, resulting in a gain on disposal of $123.69 million. There was
no income or loss from HeDeTang HK from January 1, 2020 to the close of Sale
Transaction.
On March 11, 2020, the Company's Board of Directors passed a resolution to sell
the operation of Globalkey Supply Chain Limited and Zhonglian Hengxin Assets
Management Co., Ltd ("Zhonglian Hengxin") and close the operation of Digital
Online Marketing Limited, SkyPeople Foods Holdings Limited and Chain Future
Digital Tech (Beijing) Co., Ltd. Based on the disposal plan and in accordance
with ASC 205-20, the Company presented the operating results from these
operations as a discontinued operation.
On May 7, 2020, Future Business Management Co., Ltd. completed the transfer of
its ownership of Zhonglian Hengxin to an individual third party. On July 24,
2020, the Company's Board of Directors passed a resolution to sale the operation
of Hedetang Farm Products Trading Markets (Mei County) Co., Ltd. and close the
operation of Chain Cloud Mall Logistics Center (Shaanxi) Co., Ltd, which was
dissolved and deregistered in June 2022. On July 27, 2020, Skypeople Foods
Holdings Limited was dissolved; On July 28, 2020, Digital Online Marketing
Limited was dissolved;
On November 12, 2020, CCM Tianjin, a wholly owned subsidiary of the Company
entered into an Equity Transfer Agreement with Xi'an Yishengkang Information
Technology, Ltd. ("Xi'an Yishengkang"), an unrelated third party, pursuant to
which CCM Tianjin agreed to sell 90% of total issued and outstanding capital
stock of in Hedetang Farm Products Trading Markets (Mei county) Co., Ltd. that
it owns to Xi'an Yishengkang for RMB9,000 (approximately $1,324). On the same
date, CCM Logistics entered into another Equity Transfer Agreement with an
individual and unrelated third party, Liyuan Ying, pursuant to which CCM Tianjin
agreed to sell 10% of total issued and outstanding capital stock of in Hedetang
Farm Products Trading Markets (Mei county) Co., Ltd. that it owns to Liyuan Ying
for RMB1,000 (approximately $147).
On April 9, 2021, FT Commercial Management (Beijing) Co., Ltd. dissolved and deregistered.
On August 2, 2021, the company sold Guangchengji (Guangdong) Industrial Co., Ltd. to an unrelated third party.
63
On September 2, 2021, Future Supply Chain Co., Ltd. discontinued its operations,
and on November 4, 2021, it completed the transfer of its ownership to Shaanxi
Fu Chen Venture Capital Management Co. Ltd.
On June 27, 2022, Chain Cloud Mall Logistics Center (Shaanxi) Co., Limited was dissolved and deregistered.
Reclassification of segment information
The company’s businesses are mainly CCM Shopping Mall, Coal and Aluminum Ingots Supply Chain Financing Service and Trading and Asset Management Services.
Use of Estimates The Company's consolidated financial statements have been prepared in accordance with U.S. GAAP and this requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure at contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting period. The significant areas requiring the use of management estimates include the allowance for doubtful accounts receivable, estimated useful life and residual value of property, plant and equipment, impairment of long-lived assets, provision for staff benefit, valuation of change in fair value of warrant liability, recognition and measurement of deferred income taxes and valuation allowance for deferred tax assets. Although these estimates are based on management's knowledge of current events and actions management may undertake in the future, actual results may ultimately differ from those estimates.
Fair value of financial instruments
On January 1, 2009, the Company adopted FASB Accounting Standard Codification
Topic on Fair Value Measurements and Disclosures ("ASC 820"), which defines fair
value, establishes a framework for measuring fair value in GAAP, and expands
disclosures about fair value measurements. ASC 820 does not require any new fair
value measurements, but provides guidance on how to measure fair value by
providing a fair value hierarchy used to classify the source of the information.
In February 2008, FASB deferred the effective date of ASC 820 by one year for
certain non-financial assets and non-financial liabilities, except those that
are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). The Company adopted the provisions of ASC
820, except as it applies to those non-financial assets and non-financial
liabilities for which the effective date has been delayed by one year.
ASC 820 establishes a three-level valuation hierarchy of valuation techniques
based on observable and unobservable input, which may be used to measure fair
value and include the following:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 - Input other than Level 1 that is observable, either directly or
indirectly, such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other input that is observable or can
be corroborated by observable market data for substantially the full term of the
assets or liabilities.
Level 3 - Unobservable input that is supported by little or no market activity
and that is significant to the fair value of the assets or liabilities.
Classification within the hierarchy is determined based on the lowest level of
input that is significant to the fair value measurement.
Revenue Recognition
The Company adopted ASC 606, Revenue from Contracts with Customers, from January
1, 2018. The adoption had no impact on the Company's retained earnings as of
January 1, 2018 as well as the Company's financial statements for the year ended
December 31, 2019. To achieve that core principle, we apply the five steps
defined under Topic 606: (i) identify the contract(s) with a customer, (ii)
identify the performance obligations in the contract, (iii) determine the
transaction price, (iv) allocate the transaction price to the performance
obligations in the contract, and (v) recognize revenue when (or as) the entity
satisfies a performance obligation. We assess its revenue arrangements against
specific criteria in order to determine if it is acting as principal or agent.
Revenue is recognized upon the transfer of control of promised goods or services
to a customer. Historically, the Company has not had any returned products.
Accordingly, no provision has been made for returnable goods. The Company is not
required to rebate or credit a portion of the original fee if it subsequently
reduces the price of its products.
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Foreign currency and other total income
The financial statements of the Company's foreign subsidiaries are measured
using the local currency as the functional currency; however, the reporting
currency of the Company is the United States dollar ("USD"). Assets and
liabilities of the Company's foreign subsidiaries have been translated into USD
using the exchange rate at the balance sheet date, while equity accounts are
translated using historical exchange rate. The average exchange rate for the
period has been used to translate revenues and expenses. Translation adjustments
are reported separately and accumulated in a separate component of equity
(cumulative translation adjustment).
Other comprehensive income for the years ended December 31, 2022 and 2021 represented currency translation adjustments and was included in consolidated comprehensive income.
There is no guarantee that the RMB amounts could have been, or could be, converted to USD at rates used in the translation.
Income Taxes
Income taxes are provided on an asset and liability approach for financial accounting and reporting of income taxes. Any tax paid by subsidiaries during the year is recorded. Current tax is based on the profit or loss from ordinary activities adjusted for items that are non-assessable or disallowable for income tax purpose and is calculated using tax rates that have been enacted at the balance sheet date. Deferred income tax liabilities or assets are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and the financial reporting amounts at each period end. A valuation allowance is recognized if it is more likely than not that some portion, or all, of a deferred tax asset will not be realized. ASC 740 provides guidance for recognizing and measuring uncertain tax positions, and it prescribes a threshold condition that a tax position must meet for any of the benefits of the uncertain tax position to be recognized in the financial statements. ASC 740 also provides accounting guidance on derecognizing, classification and disclosure of these uncertain tax positions.
Impairment of long-lived assets
In accordance with the FASB ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets, such as property, plant and equipment and purchased intangibles subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. It is reasonably possible that these assets could become impaired as a result of technological or other industrial changes. Determination of recoverability of assets to be held and used is by comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Recent financial statements
We have reviewed all the recently issued, but not yet effective, accounting
pronouncements and we do not believe any of these pronouncements will have a
material impact on the Company. See Note 2. Summary of Significant Accounting
Policies, to our Consolidated Financial Statements for a description of
applicable recent accounting pronouncements.
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Comparison of operating results for years ended December 31, 2022 and 2021
Revenue
The table below shows our consolidated revenues for our principal products and services for fiscal years 2022 and 2021, respectively (in thousands):
Year ended
December 31, Change
2022 2021 Amount %
CCM Shopping Mall Membership $ - $ 0.09 $ (0.09 ) (100.00 )%
Coal and Aluminum Ingots Supply Chain
Financing/Trading 10,108 19,728 (9,620 ) (48.76 )%
Asset management service 13,631 5,316 8,315 156.41 %
Others 142 7 135 1928.57 %
Total $ 23,881 $ 25,051 $ (1,170 ) (4.67 )%
Revenue decreased from $25.05 million in 2021 to $23.88 million in 2022,
decrease of $1.17million or 4.67%. The decrease in overall revenue was mainly
due to decrease in revenues generated from asset management services and supply
chain financing service and trading business.
The Company has transformed its business model of CCM Shopping Mall from a
member-based platform to a sales agent based eCAAS platform. Due to COVID-19
related restriction and slow-down of economy in China, we were unable to revenue
for the sales agent based eCAAS platform during the year ended 2022.
Revenues from coal and aluminum ingots supply chain financing service and
trading business decreased from $19.73 million for year ended 2021 to $10.11
million for the year ended 2022. The COVID-19 outbreak in Xi'an and other cities
in China where we had our supply chain services and related control measures by
local government in 2022 has had negative impact on the coal and aluminum ingot
business and we also had more business in sales agent type trading service mode
which we did not take ownership of the goods but receive lower margin for the
transactions in the third and fourth quarters of 2022, which resulted the
decrease in revenue in the year 2022 comparing to the same period of 2021.
Asset management service fee increased from $5.32 million for the year ended
2021 to $13.63 million for the year ended 2022. We acquire this new business on
August 6, 2021 and only consolidated partial of its revenues for the five months
revenues for the year ended December 31, 2021, comparing to full year revenues
for 2022.
Gross Margin
(in thousands)
2022 2021
Gross profit Gross margin Gross profit Gross margin
CCM Shopping Mall Membership $ - - 0.09 98.95 %
Coal and Aluminum Ingots Supply Chain
Financing/Trading 339 3.35 % 510 2.58 %
Asset management service 4,948 36.31 % 1,291 24.29 %
Other 108 76.06 % 0.5 7.88 %
Total $ 5,395 22.59 % $ 1,802 7.19 %
Overall gross margin as a percentage of revenue was 22.59% for the year ended
2022, an increase of 15.4% compared to 7.19% for the same period of last fiscal
year, mainly due to more revenues from the asset management service which had a
higher gross margin.
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Operating Expenses
The following table presents consolidated operating expenses and operating
expenses as a percentage of revenue for 2022 and 2021, respectively, (in
thousands):
2022 2021
% of % of
Amount revenue Amount revenue
General and administrative $ 14,474 60.61 % $ 7,678 30.65 %
Research and development expenses 2,672 11.19 % 698
2.79 % Stock compensation expense 1,280 5.36 % 5,488 21.91 % Selling expenses 808 3.38 % 366 1.46 % Bad debt provision 26 0.11 % (2 ) (0.01 )% Impairment Loss 3,249 13.6 % 782 3.12 % Total operating expenses $ 22,509 94.26 % $ 15,010 59.92 % General and administrative expenses increased by $6.8 million, or 88.51%, from $7.7million to $14.47 million for the year ended 2022, compared to the same period of last fiscal year. The increase in general and administrative expenses was mainly due to increased professional service fees for acquisition projects and certain training and consulting fees for the acquired and newly established companies during the year ended December 31, 2022. Selling expenses increased by $0.44 million to $0.81 million in 2022 as compared to $0.37 million in 2021, the increase in selling expenses was mainly due to increased salary and advertising fees. Stock compensation expense was $1.28 million during the year ended December 31, 2022, as the Compensation Committee of the Board of Directors (the "Board") of the Company granted certain shares of common stock of the Company to certain officers and employees in July 2022. Stock compensation expense was decreased 76.68% from $5.49 million in the year ended December 30, 2021 to $1.28 million in same period of 2022, mainly due to our stock price was lower in 2022 than in 2021. The Company recorded $0.91 million of impairment loss in the year ended December 31, 2022 relating to short term investment which mainly due to Future Private Equity Fund Management (Hainan) Co., Ltd. invested $1.87 million (RMB13,000,000) to entrust Shanghai Yuli Enterprise Management Consulting Firm to invest in various types of investment portfolios. The impairment loss relating to the short term investment is due to that overall economic environment has worsened in China with Covid-19 outbreak and related lockdown in various cities in China in 2022, Ukraine war, inflation, looming recession worldwide. According to the market value, the Company's balance of the short term investment was $0.91 million on December 31, 2022. Loss from Operations
Loss from operations increased by $1.57 million to $14.77 million for 2022 from $13.21 million for 2021, mainly due to a decrease in revenue.
Noncontrolling Interests
Shaanxi Chunlv Ecological Agriculture Co., Ltd. ("Shaanxi Chunlv") holds 20.0%
interest in Chain Cloud Mall Logistics Center (Shaanxi) Co., Limited, which was
dissolved and deregistered on June 27, 2022. Nature Worldwide Resources Ltd.
holds 40% interest in DCON DigiPay Limited ("DCON Digipay"). Each of Bin Wu and
Lixiong Huang holds 25% and 20% interest in FTFT Capital Investments L.L.C.,
respectively. Aspenwood Capital Partner Limited holds 5%, Cheung Hiu Tung holds
2.22% and Choi Tsz Leung holds 2.78% of equity interest of NATM. Yaohua Dai
holds 20% equity interest of Future Fintech Digital Capital.
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Loss per Share
Basic and diluted loss per share from continuing operations were $0.19 and $0.19 in fiscal 2022, as compared to $0.17 and $0.17 in fiscal 2021, respectively. Basic and diluted loss per share attributable to discontinued operations was nil and nil for fiscal year 2022 as compared to basic and diluted income per share $0.04 and $0.04 for fiscal year 2021 respectively.
Liquidity and capital resources
As of December 31, 2022, we had cash and cash equivalents of $26.15 million, a decrease of $24.12 million, from $50.27 million as of December 31, 2021. The decrease in cash, cash equivalents was mainly due the loss in operations and the Company did not issue shares of common stock to raise money for the year ended December 31, 2022 comparing to the same period of 2021. Our working capital has historically been generated from our operating cash flows, advances from our customers and loans from bank facilities. Our working capital was $46.42 million as of December 31, 2022, an increase of $19.07 million from $65.49 million as of December 31, 2021, mainly due to an increase in current assets. In 2022, net cash used in our operating activities was $2.69 million compared to net cash used in operating activities of $18.74 million in 2021. The decrease in net cash used by operating activities was primarily due to an increase in accounts payable and notes payable during the year ended December 31, 2022. In 2022, net cash used in our investing activities was $14.18 million compared to net cash used in operating activities of $11.18 million in 2021 mainly due to payment for loan receivable and repayment for loan receivable. In 2022, cash provided by financing activities was negative $0.25 million as compared to cash used in financing activities positive $69.27 million in 2021. The decrease in cash provided by financing activities was mainly due to financing from the issuance of shares of common stock.
Off-balance sheet events
As of 31 December 2022, we had no off-balance sheet arrangements.
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