NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and the rules and regulations of the Securities and Exchange Commission.
In the opinion of management, the unaudited financial statements have been prepared on the same basis as the annual financial
statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial
position as of September 30, 2019 and the results of operations and cash flows for the periods ended September 30, 2019 and 2018.
The financial data and other information disclosed in these notes to the interim financial statements related to these periods
are unaudited. The results for the three months and nine months ended September 30, 2019 are not necessarily indicative of the
results to be expected for any subsequent periods or for the entire year ending December 31, 2019. The balance sheet at December
31, 2018 has been derived from the audited financial statements at that date.
Certain
information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted pursuant to the Securities and Exchange Commission’s
rules and regulations. These unaudited financial statements should be read in conjunction with our audited financial statements
and notes thereto for the year ended December 31, 2018 as included in our Annual Report on Form 10-K.
The
principal activities of Future FinTech Group Inc. (together with our direct or indirect subsidiaries, “we,” “us,”
“our” or “the Company”) consist of production and sales of fruit juice concentrates, fruit juice beverages
and other fruit-related products in the People’s Republic of China (“PRC”, or “China”), and overseas
markets. 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
GlobalKey SharedMall, also known as Chain Cloud Mall (“CCM”) v1.0, the real-name blockchain shared shopping mall platform
that integrates blockchain and internet technology and distinguishes itself by utilizing the automatic value distribution system
of blockchain and sharing the value of the platform with all 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 interactions, and social media sharing. Besides the blockchain-powered features, CCM v2.0 is also fully equipped with the
same functions and services that other Chinese leading traditional e-commerce platforms provide.
On July 30, 2019 the Company announced the
adoption of blockchain-powered unalterable Quick Response One (“QRO”) anti-counterfeiting code to all products under
the Company's Hedetang brand. On August 2, 2019, the Company announced the adoption of the QRO anti-counterfeiting code on its
global shared shopping platform - Chain Cloud Mall (CCM), a blockchain-based shopping platform. By adopting the QRO anti-counterfeiting
code technology, the products will be issued an unalterable anti-counterfeiting code that records every event or transaction on
a distributed ledger, which makes the whole process from manufacturing to delivering traceable. The adoption of QRO anti-counterfeiting
code is an important step to distinguish Chain Cloud Mall from other shopping platforms. With the QRO code, manufacturers can easily
and directly build trust with consumers.
Besides the design, development, testing,
deployment and maintenance of a blockchain-based CCM Shared Shopping Mall, the Company also operates a supply chain, logistics
and trading business for fruit juice products, foods and other consumer and agricultural products as well as a 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.
The
Company’s activities are principally conducted by subsidiaries operating in the PRC.
Organizational
Structure
Our
current organizational structure is set forth in the diagram below:
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(1)
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Xi’an
Qinmei Food Co., Ltd., an entity not affiliated with the Company, owns the remaining 8.85% of the equity interest in Shaanxi Qiyiwangguo.
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(2)
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Formerly
known as Shaanxi Tianren Organic Food Co. Ltd.
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(3)
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Hedetang
Foods Industry (Yidu) Co., Ltd. (“Foods Industry Yidu”), formerly known as SkyPeople Juice Group Yidu Orange Products
Co., Ltd., was established on March 13, 2012. Its scope of business includes deep processing and sales of oranges.
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(4)
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Hedetang
Agricultural Plantations (Yidu) Co., Ltd., formerly known as Hedetang Fruit Juice Beverages (Yidu) Co., Ltd., was established
on March 13, 2012. Its scope of business includes the planting, acquisition and sales of vegetables, fruits, flowers, farm products;
fresh fruit picking; research, training and promotion of planting and breeding technology.
|
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(5)
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SkyPeople
(Suizhong) Fruit and Vegetable Products Co., Ltd. was established on April 26, 2012. Its scope of business includes the initial
processing, quick-freezing and sales of agricultural products and related by-products.
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(6)
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Hedetang
Farm Products Trading Market (Mei County) Co., Ltd., formerly known as SkyPeople Juice Group (Mei County) Kiwi Fruit and Farm
Products Trading Market Co., Ltd. (“Kiwi Fruit & Farm Products”) was established on April 19, 2013. Its scope
of business includes preliminary processing of agricultural and subsidiary products, establishment of trading markets for agriculture
products, and similar activities.
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(7)
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Shaanxi
Guo Wei Mei Kiwi Deep Processing Co., Ltd. was established on April 19, 2013. Its scope of business includes producing kiwi fruit
juice, kiwi puree, cider beverages, and similar products.
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(8)
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Xi’an
Hedetang Fruit Juice Beverages Co., Ltd. (“Xi’an Hedetang”) was established on March 31, 2014. Its scope of
business includes the production and sales of fruit juice beverages. On August 10, 2017, it changed its name to Xi’an Hedetang
Nutritious Food Research Institute Co., Ltd.
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(9)
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Xi’an
Cornucopia International Co., Ltd. (“Cornucopia”) was established on July 2, 2014. Its scope of business includes
the retail and wholesale of pre-packaged food.
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(10)
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Shaanxi
Fruitee Fun Co., Ltd. (“Fruitee Fun”) was established on July 3, 2014. Its scope of business includes retail and wholesale
of pre-packaged food. Shaanxi Fruitee Fun Co., Ltd. (also known as Shaanxi Guoweiduomei Beverage Co., Limited) changed its name
to Hedetang Foods Industry (Xi’an) Co., Ltd. (“Foods Industry Xi’an”) on July 5, 2016. On June 6, 2017,
it again changed its name to HedeJiachuan Foods (Xi’an) Co. Ltd.
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(11)
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Hedetang
Holding Group Co., Ltd., formerly known as Hedetang Holding Co., Ltd., (“Hedetang Holding”) was established on July
21, 2014. Its scope of business includes corporate investment consulting, corporate management consulting, corporate image design
and corporate marketing planning. On June 14, 2017, it changed its name to HedeJiachuan Holding Group Co. Ltd.
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(12)
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The
Company acquired Huludao Wonder Co. Ltd. (“Huludao”) on September 10, 2008. Its scope of business mainly includes
the manufacture and sale of concentrated fruit juice and fruit juice beverages.
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(13)
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The
Company acquired Yingkou Trusty Fruits Co., Ltd. (“Yingkou”) on November 25, 2009. Its scope of business mainly includes
the manufacture of concentrated fruit juice.
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(14)
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Hedetang
Foods Industry (Jingyang) Co., Ltd. (“Foods Industry Jingyang”) was established on September 7, 2016. Its scope of
business includes processing, storage and sales of farm products, fruits, tea and snacks; as well as research and promotion of
processing technology of organic agriculture, fruit industry and agricultural products.
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(15)
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HedeJiachuan
Foods (Yichang) Co. Ltd (“Hedejiachuan Yichang”), formerly known as Hedetang Farm Products Trading Market (Yidu) Co.,
Ltd., and Hedetang Foods Industry (Yichang) Co., Ltd, was established on March 23, 2016. Its scope of business includes construction,
operation, and property management of a farm products trading market; e-commerce services for farm products; and construction
and operation management of an e-commerce information platform.
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(16)
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Yichang
Old Orchard Modern 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 technical training for union members.
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(17)
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The
Company acquired Hedetang Foods (China) Co., Ltd. (“Hedetang Foods China”) on May 18, 2016 through the acquisition
of DigiPay FinTech Limited (formerly known as Belking Foods Holdings Group Co., Ltd.), the 100.00% 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.
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(18)
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Hedetang
Agricultural Plantations (Mei County) Co., Ltd. was established on September 2, 2016. Its scope of business includes the planting,
acquisition and sales of vegetables, fruits, flowers, Chinese herbal medicine, and farm products; fresh fruit picking; research,
training and promotion of planting and breeding technology, development and training for E-commerce and online sales of agricultural
and sideline products. On September 6, 2017, it changed its name to Shaanxi China Agricultural Silk Road Farm Products Trading
Center Co., Ltd. On April 17, 2019, it changed its name to Chain Cloud Mall Logistics Center.
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(19)
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Hedetang
Foods Industry (Zhouzhi) Co., Ltd. (“Foods Industry Zhouzhi”) was established on November 29, 2016. Its scope of business
includes production, processing and sales of kiwifruit wine, juice, puree and beverages; storage and sales of fresh fruits; and
import and export of a variety of products and technology.
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(20)
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Future
FinTech (HongKong) Limited (“FinTech HK”), formerly known as Future World Trading (Hong Kong) and SkyPeople International
Trading (HK) Limited, was first established on July 27, 2016. It mainly engages in the import and export of food products.
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(21)
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GlobalKey
Supply Chain Limited, formerly known as Shaanxi Quangoutong E-commerce Inc., was acquired on May 27, 2017. Its main business scope
includes computer hardware and software development and sales, electronic products and communication equipment, computer network
engineering design, business information consultation, online sales and online marketing, and investment management.
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(22)
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Shaanxi
Heying Trading Co. Ltd was established on December 17, 2009. Its main business scope includes the sales of pre-packaged food and
bulk food; import and export of goods and technology; food technology research and development; business management and consulting,
and corporate planning services.
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(23)
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Zhonglian Hengxin Assets Management Co., Ltd. (“Zhonglian Hengxin”) was established in Xi’an
in 2017. Its main business scope includes asset management (except for financial, securities, futures and other restricted items);
asset acquisition, asset disposal and asset operation (except for financial, securities, futures and other restricted items); planning
and advisory for corporate restructuring and mergers and acquisitions; equity and real estate investments (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 from government agencies shall only operate within the scope of such approval.
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(24)
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Shenzhen
Hedetang Industrial Co., Ltd. (“Shenzhen Hedetang”) was established on September 29, 2017. Its main business scope
includes industrial projects (specific items to be declared separately); domestic trade; and import and export businesses.
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(25)
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DigiPay
FinTech Limited (“DigiPay”), formerly known as Belking Foods Holdings Group Co., Ltd., was established on
May 3, 2016.
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(26)
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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 the import and export of food products.
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(27)
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DCON
DigiPay Limited (“DCON DigiPay”) was established on February 5, 2018 in Tokyo, Japan. Its main business scope includes
the development and marketing of a blockchain based payment system, computer software, asset management consulting, and business
consulting.
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(28)
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Future
Digital FinTech (Xi’an) Co., Ltd. (“FinTech (Xi’an)”) was established on February 9, 2018 in Xi’an.
Its main business scope includes software development and marketing, information consulting services, and financial information
technology development.
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(29)
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GlobalKey
SharedMall Limited (“GlobalKey SharedMall”) was established on March 6, 2018 in the Cayman Islands. Its main business
scope includes an online trading and shopping platform for fresh fruits, juices and other products and services, using blockchain
technology.
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(30)
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Chain
Future Digital Tech (Beijing) Co., Ltd, (“Chain Future”) was established on July 10, 2018. Its main business scope
includes technical services and technology transfer, development, promotion and consultation; wholesale of computers, software
and auxiliary equipment, electronic products, and other related products. This company focuses its business on acting as an accelerator
for blockchain projects and it provides basic support including technical support, whitepaper editing, solution design and financial
management services for its clients. Its business also includes training and cultivating technicians for blockchain projects,
providing consultation services regarding cryptocurrency exchanges and token listing matters, as well as marketing-related services.
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(31)
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Chain
Future Digital Tech (Tianjin) Co. Ltd, (“Chain Future Tianjin”) was established on November 12, 2018. Its main business
scope includes digital technology development, technology transfer, technical consultation and technical services; business incubation
services; development and sales of software technology; computer system integration services; company management consulting; financial
information consulting; computer system technology services, 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 token listing matters, as well as marketing-related services.
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(32)
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The
company acquired 19.88% of the shares of Hedetang Holdings (Shenzhen) Co., Limited which is a NEEQ listed company, through Shenzhen
Hedetang Industrial Co., Ltd on March 26, 2018. The business scope of Hedetang Holdings (Shenzhen) Limited is information consultation
(excluding restricted projects and talent intermediary services); import and export business (except for the items prohibited
by law or administrative regulations of the state council; and 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).
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(33)
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SkyPeople Foods Holdings Limited was established in the British Virgin Islands in 2011. Its main business scope includes trading, and import and export of food products.
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(34)
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HeDeTang Holdings (HK) Ltd. was incorporated in Hong Kong, China in 2007. Its main business scope includes the research and development of food packages and food production techniques; and the research and development of technique consultancy and transferring.
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(35)
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Digital Online Marketing Limited was established in the British Virgin Islands in 2011. Its main business scope includes trading consultancy, corporation management, software development and marketing, and information consulting services.
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(36)
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GlobalKey Network Technology (Tianjin) Co., Ltd., which name 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 and services, consultation and transfer; encryption technology, digital integral system technology, e-commerce platform technology development, and similar services.
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(37)
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GloblalKey
Network and Technology (Beijing) Co., Ltd was established on March 20, 2018. Its main business scope is technology services, development,
consultation, transfer and technology popularization; technology import and export, serving as agent for import and export, and
import and export of goods.
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(38)
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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.
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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 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. Mr.
Xu’s spouse agreed not to assert any rights over the equity interest in Chain Cloud Mall E-commerce (Tianjin) Co., Ltd.
held by the shareholder
Principles
of Consolidation
Our
consolidated financial statements include the accounts of the Company, its subsidiaries and VIEs. All material intercompany accounts
and transactions have been eliminated in consolidation.
The condensed consolidated financial statements
are prepared in accordance with U.S. GAAP. This basis differs from that used in the statutory accounts of SkyPeople (China), Food
Industry Yidu,, Agriculture Plantation Yidu, Yingkou, Huludao Wonder, Yichang Odd Orchard, Xi’an Cornucopia, Shaanxi Qiyiwangguo,
Shaanxi Heying, Food Industry Jingyang,, Foods Industry Zhouzhi, Hedetang Holding, Hedetang Research,, SkyPeople Suizhong, Hedejiachuan
Yichang, Guo Wei Mei, HeDeJiaChuan Foods Xi’an,Shenzhen Hedetang, Dcon Digipay, FinTech HK, Hedetang Foods China, Agricultural
Silkroad, Agricultural Plantation Mei County Trading Market Yidu, Trading Market Mei County, Hedetang Plantations, GlobalKey Supply
Chain Limited, Zhonglian Hengxin, FinTech (Xi’an), and Chain Future (Tianjin), China Future (Beijing), and Chain Cloud Mall
(Tianjin), all of which were prepared in accordance with the accounting principles and relevant financial regulations applicable
to enterprises in the PRC. All necessary adjustments have been made to present the financial statements in accordance with U.S.
GAAP. All significant inter-company accounts and transactions have been eliminated.
Uses
of Estimates in the Preparation of Financial Statements
The
Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America, which requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated
financial statements and reported amounts of revenue and expenses during the reporting period. The significant areas requiring
the use of management estimates include, but are not limited to, the allowance for doubtful accounts receivable, estimated useful
life and residual value of property, plant and equipment, provision for staff benefit, 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 these estimates.
Going Concern
The
Company’s financial statements are prepared using accounting principles generally accepted in the United States of America
applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course
of business for the foreseeable future.
Under
the going concern assumption, an entity is ordinarily viewed as continuing in business for the foreseeable future with neither
the intention nor the necessity of liquidation, ceasing trading, or seeking protection from creditors pursuant to laws or regulations.
Accordingly, assets and liabilities are recorded on the basis that the entity will be able to realize its assets and discharge
its liabilities in the normal course of business.
The
accompanying financial statements do not include any adjustments related to the recoverability and classification of assets or
the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
The
ability of the Company to continue as a going concern is dependent upon its ability to successfully execute its new business strategy
and eventually attain profitable operations. The accompanying financial statements do not include any adjustments that may be
necessary if the Company is unable to continue as a going concern.
The Company had advanced receipts from
its customers for the new business section of blockchain based e-commerce platform since December 2018, and started to recognize
those advanced receipts as revenue from January 2019. The amount of recognized revenue and advanced payments received from its
customers had been increasing for the nine months ended September 30, 2019.
Shipping
and Handling Costs
Shipping
and handling amounts billed to customers in related sales transactions are included in sales revenues and shipping expenses incurred
by the Company are reported as a component of selling expenses. The shipping and handling expenses of $5,865 and $13,523 for the
three months ended September 30, 2019 and 2018, respectively; and $16,459 and $156,729 for the nine months ended September 30,
2019 and 2018, respectively; are reported in the Consolidated Statements of Income and Comprehensive Income (Loss) as a component
of selling expenses. The decrease in shipping and handling costs compared to the same period in year 2018 was mainly due to a
decrease in sales of our fruit related products.
Leases
Leases
are reviewed and classified as capital or operating at their inception in accordance with ASC Topic 840, Accounting for Leases.
For leases that contain rent escalations, the Company records monthly rent expense equal to the total amount of the payments due
in the reporting period over the lease term. The difference between rent expense recorded and amount paid is credited or charged
to a deferred rent account.
Earnings
Per Share (“EPS”)
The
Company adopted ASC Topic 215, Statement of Shareholder Equity. Basic EPS are computed by dividing net income available
to common shareholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period.
Diluted EPS give effect to all dilutive potential common shares outstanding during a period. In computing diluted EPS, the average
price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options and
warrants.
Recent
Accounting Pronouncements
In
August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-use Software (Subtopic 350-40): Customer's
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." The standard requires
implementation costs incurred by customers in cloud computing arrangements to be capitalized and amortized under the same premises
of authoritative guidance for internal-use software. Adoption of ASU 2018-15 did not have any other material effect on the results
of operations, financial position or cash flows of the Company.
In
June 2018, the FASB issued Accounting Standards Update “ASU No. 2018-07 – Compensation – Stock Compensation”. The
ASU expands the scope of current guidance to include all share-based payment arrangements related to the acquisition of goods
and services from both non-employees and employees. The guidance in the ASU is effective for the Company in all fiscal
years beginning after December 15, 2018. Adoption of ASU 2018-07 did not have any other material effect on the results
of operations, financial position or cash flows of the Company.
February 2018, the FASB issued ASU 2018-02,
Income Statement-Reporting Comprehensive Income (Topic 220), “Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income.” ASU 2018-02 was issued to allow the reclassification from accumulated other comprehensive income to
retained earnings for the stranded tax effect resulting from the Tax Cuts and Jobs Act enacted on December 22, 2017. The Tax Cuts
and Jobs Act, among other things, reduced the corporate tax rate from 35.00% to 21.00%, which required the re-evaluation of any
deferred tax assets or liabilities at the lowered tax rate which potentially could leave disproportionate tax effects in accumulated
other comprehensive income. ASU 2018-02 allows for the election to reclassify these stranded tax effects to retained earnings.
ASU 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those
fiscal years. Early adoption is permitted, including adoption in any interim period for public business entities for reporting
periods for which financial statements have not yet been issued. Adoption of ASU 2018-02 did not have any other material effect
on the results of operations, financial position or cash flows of the Company.
There
were no other recent accounting pronouncements or changes in accounting pronouncements during the three months ended September
30, 2019 compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2018 that are of significance or potential significance to us.
Inventories
by major categories are summarized as follows: (in thousands)
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
|
|
|
|
Raw materials and packaging
|
|
$
|
163
|
|
|
$
|
25
|
|
Finished goods
|
|
|
256
|
|
|
|
38
|
|
Inventories
|
|
$
|
419
|
|
|
$
|
63
|
|
|
4.
|
Related
Party Transaction
|
Sales
to Related Party
The
Company did not have any sales to related parties for the nine months ended September 30, 2019 and 2018, respectively. The accounts
receivable balances for such transactions were nil as of September 30, 2019 and December 31, 2018, respectively
|
(1)
|
Concentration
of Customers
|
Sales to our five largest customers accounted
for an aggregate of approximately 2.20% and 9.00% of our net sales during the three months ended September 30, 2019 and 2018, respectively.
Since our new business sections mainly targets individuals, resulting in a dramatic decrease in customer concentration, there was
no single customer representing over 10.00% of total sales for the three months ended September 30, 2019 and September 30, 2018,
respectively.
|
(2)
|
Concentration
of Suppliers
|
During the three months ended September 30,
2019, no supplier accounted for over 10.00% of our purchases, and only one supplier accounted for 10.00% for the same period of
year 2018, respectively.
|
6.
|
Issuance
of Common Stock and Warrants
|
On
April 12, 2017, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain purchasers
identified on the signature pages thereto (the “Purchasers”), pursuant to which the Company offered to the Purchasers,
in a registered direct offering, an aggregate of 862,097 shares (the “Shares”) of common stock, par value $0.001 per
share (“Common Stock”). The Shares were sold to the Purchasers at a negotiated purchase price of $3.10 per share,
for aggregate gross proceeds to the Company of $2,672,500, before deducting fees to the placement agent and other estimated offering
expenses payable by the Company. The Shares were offered by the Company pursuant to an effective shelf registration statement
on Form S-3, which was originally filed with the Securities and Exchange Commission on August 3, 2015, amended on February 17,
2017, and was declared effective on February 23, 2017 (File No. 333-206353) (the “Registration Statement”).
In
a concurrent private placement, the Company also issued to each of the Purchasers a warrant to purchase one (1) share of the Company’s
Common Stock for each share purchased under the Purchase Agreement, pursuant to that certain Common Stock Purchase Warrant, by
and between the Company and each Purchaser (each, a “Warrant”, and collectively, the “Warrants”). The
Warrants are exercisable beginning on the six month anniversary of the date of issuance at an initial exercise price of $5.20
per share and will expire on the five and a half year anniversary of the date of issuance.
The
Warrants and the shares of the Company’s Common Stock issuable upon the exercise of the Warrants (the “Warrant Shares”)
are not being registered under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to the Company’s
Registration Statement, and were instead offered pursuant to the exemption provided in Section 4(a)(2) under the Securities Act.
Each Purchaser was either (i) an “accredited investor” as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7) or (a)(8)
under the Securities Act or (ii) a “qualified institutional buyer” as defined in Rule 144A(a) under the Securities
Act.
In
connection with the private placement and in accordance with the Purchase Agreement, the Company was required to file a registration
statement on Form S-1 within 45 calendar days after the date of the Purchase Agreement to provide for the resale of the Warrant
Shares. The Company filed a registration statement on Form S-1 (File No. 333-218276) on May 26, 2017, which was declared effective
on June 12, 2017.
Rodman & Renshaw, a unit of H.C. Wainwright
& Co., served as our placement agent in connection with the offering under the Purchase Agreement and received warrants to
purchase our Common Stock in an amount equal to 4.00% of our Shares sold to the Purchasers in the offering on substantially the
same terms as the Warrants, with an initial exercise price of $5.20 per share, except that the termination date shall be April
12, 2022 and the warrants have certain transfer restrictions pursuant to FINRA Rule 5110 (the “Placement Agent Warrants”).
On November 2, 2017 (the “Agreement
Date”), a wholly-owned indirect subsidiary of the Company, Hedetang Foods (China) Co., Ltd. (“Hedetang”), entered
into a series of Creditor’s Rights Transfer Agreements (collectively, the “Acquisition Agreements”) with each
of Shaanxi Chunlv Ecological Agriculture Co. Ltd., Shaanxi Boai Medical Technology Development Co., Ltd., and Shaanxi Fu Chen
Venture Capital Management Co. Ltd. (collectively, the “Sellers”). Pursuant to the Acquisition Agreements, Hedetang
agreed to purchase certain creditor’s rights associated with companies located in the PRC, for an aggregate purchase price
of RMB 181,006,980 (approximately $27,344,096), of which RMB 108,604,188 (approximately $16,437,249) was paid in cash and RMB
72,402,792 (approximately $10,937,639) was paid in shares of common stock of the Company based on the average of the closing prices
of Future FinTech’s common stock over the five trading days preceding the date of the Acquisition Agreements.
A
summary of the Acquisition Agreements is as follows:
1)
Shaanxi Chunlv Ecological Agriculture Co. Ltd. agreed to transfer all its credit rights of principal and interest owed by Xi’an
Tongji Department Store Co., Ltd. to Hedetang. As of the Agreement Date, the book balance of the principal was RMB 23,625,000,
the interest was RMB 38,281,900, and the total credit balance, including the principal and the interest, was RMB 61,906,900, of
which the RMB 19,757,800 credit was guaranteed by a third party company.
2)
Shaanxi Chunlv Ecological Agriculture Co. Ltd. agreed to transfer all its credit rights of principal and interest owed by Shaanxi
Youyi Co., Ltd. to Hedetang. As of the Agreement Date, the book balance for the principal was RMB 45,345,000, the interest was
RMB 71,224,300, and the total credit balance including the principal and the interest was RMB 116,569,300, all of which was guaranteed
by a third party company.
3)
Shaanxi Fu Chen Venture Capital Management Co., Ltd. agreed to transfer all its credit rights of principal and interest owed by
State Owned Shaanxi No. 8 Cotton and Textile Mill to Hedetang. As of the Agreement Date, the book balance for the principal was
RMB 72,370,000, the interest was RMB 138,037,700, the total of credit including the principal and the interest was RMB 210,407,700,
and there was no effective guarantee or pledged assets to secure this debt.
4)
Shaanxi Boai Medical Technology Development Co., Ltd. agreed to transfer all its credit rights of principal and interest owed
by Xi’an Yanliang Economic Development Co., Ltd. to Hedetang. As of the Agreement Date, the book balance for the principal
was RMB 6,350,000, the interest was RMB 9,834,300, and the total of credit including the principal and the interest was RMB 16,184,300,
which is secured by certain land use rights.
In connection with the Acquisition Agreements
and to provide funding for their consummation, on November 3, 2017, the Company entered into a Share Purchase Agreement (the “Share
Purchase Agreement”) with Mr. Zeyao Xue (“Xue”) pursuant to which Future FinTech agreed to sell 11,362,159 shares
of its common stock (the “Shares”) to Xue for an aggregate purchase price of $16,437,249. The per share price for the
Shares was determined using the average closing price quoted on the NASDAQ Global Market for the common stock of the Company over
the three (3) trading days prior to the date of the Share Purchase Agreement (the “Purchase Price”), subject to potential
upward adjustment. The consummation of the Share Purchase Agreement was contingent on Future FinTech receiving shareholder approval
at a Special Shareholders Meeting for an amendment to its articles of incorporation and the approval of Share issuance under the
Share Purchase Agreement by the shareholders of the Company.
On
April 6, 2018, the Company issued an aggregate 7,111,599 shares of the Company’s common stock to three individuals designated
by the Sellers in the respective amounts of 3,409,466, 3,323,225 and 378,908 shares, pursuant to the Acquisition Agreements, and
11,362,159 shares of the Company’s common stock pursuant to the Share Purchase Agreement, which such issuances were approved
by the Company’s shareholders at a special meeting held on March 13, 2018.
On January 23, 2018, DigiPay FinTech Limited
(“DigiPay”), a limited liability company incorporated in the British Virgin Islands and a wholly-owned subsidiary of
the Company, and Peng Youwang (“Peng”), a Chinese citizen, entered into a DCON Digital Assets Transfer Agreement (the
“DCON Agreement”).
Under the terms of the Agreement, Peng transferred
to DigiPay a 60.00% ownership interest in certain digital assets of DCON, a blockchain platform for cryptocurrency conversion,
payment and other services (“DCON”), including but not limited to its business plan and white papers, business models,
software, codes, architectures, applications, technologies, patents, copyrights, trade secrets, customer lists, business points,
trading platforms, digital rights, authentication systems, agreements and contracts, intellectual property, tokens, and the DCON
communities established on Nova Realm City (the “Transfer Assets”) for an aggregate purchase price of $9,600,000 (the
“Purchase Price”). The Company paid the Purchase Price by issuing to Peng 1,200,000 shares of the Company’s common
stock, par value $0.001 per share (the “Common Stock”), equaling a per share sale price of $8.00 (the “Share
Payment”). Half of the shares of Common Stock subject to the Share Payment were issued within 30 days of the date of the
Agreement, and the remaining Share Payment shares were issued within 90 days of the date of the Agreement. On May 3, 2018, the
Company issued the remaining 600,000 shares of its common stock to Mr. Peng and his designee according to the Agreement.
The Agreement also contains customary representations
and warranties regarding the Transfer Assets and the ownership thereof, and covenants regarding the parties’ cooperation.
DigiPay and Peng further agreed to establish a Japanese operating company for the Transfer Assets, of which DigiPay holds a 60.00%
ownership interest and Peng’s designee holds a 40.00% ownership interest.
On
January 5, 2018, the Company issued 880,580 shares of its common stock to Reits (Beijing) Technology Co. Ltd., a limited liability
company incorporated in China (“Reits”) pursuant to the Technology Development Service Contract (the “Service
Agreement”) signed on December 18, 2017 by Reits and GlobalKey Supply Chain Ltd. (“GlobalKey”), a limited liability
company incorporated in China and a wholly owned subsidiary of the Company.
Under
the Service Agreement, Reits shall provide services to GlobalKey relating to the design, development, testing, deployment and
maintenance of a blockchain-based Globally Shared Shopping Mall and other software systems (the “System”). Following
the completion and delivery of the System by Reits, (i) GlobalKey shall provide the hardware and network requirements for the
trial deployment of the System, (ii) Reits shall provide training of GlobalKey’s staff in the use and operation of the System,
and (iii) for a period of one year from the System delivery date and for no additional charge, Reits shall provide ongoing System
maintenance and technical support (the “Free Maintenance Period”). Following the completion of the Free Maintenance
Period, GlobalKey may elect to engage Reits for ongoing maintenance and technical support. Under the Service Agreement, GlobalKey
shall pay Reits aggregate consideration of RMB 13,000,000 ($2,067,397), of which RMB 9,100,000 ($1,447,178) may be paid in shares
of the Company’s common stock, par value $0.001 per share (the “Common Stock”), at a per share price equal to
the average of the Common Stock’s closing prices over the 5 trading days prior to the date of the Agreement, or $1.554 per
share (the “Share Payment”). The exchange rate between US dollar and RMB for the payment is 1:6.65. The Share Payment
was made within 15 business days of the date of the Service Agreement, and the remaining Service Agreement consideration shall
be paid by GlobalKey in accordance with the schedule described in the Service Agreement. The Company paid RMB 876,663 ($139,416)
and RMB 788,353 ($115,459) in cash to Reits in the first and second quarters of 2018, respectively.
On
January 5, 2018, the Company issued 30,000 shares of the Company’s common stock to a certain warrant holder for the exercise
of Warrants.
On
February 28, 2017, the Company issued options to purchase 62,500 shares of the Company’s common stock with an exercise price
equal to the fair market value of the Company’s Common Stock (as defined under the 2011 Stock Incentive Plan in conformity
with Regulation 409A of the Internal Revenue Code of 1986, as amended) at the date of grant to three of the Company’s employees
pursuant to the 2011 Stock Incentive Plan, which was approved by the Company’s shareholders at annual stockholders meeting
on August 18, 2011. These options vested immediately on the grant date with a fair market value of $223,375 based on the fair
value of $3.57 per share, which was determined by using the Black Scholes option pricing model. The Company recognized stock-based
compensation expense of $223,375 in the first quarter of fiscal 2017 under the 2011 Stock Incentive Plan. On January 5, 2018,
the Company issued 62,500 shares of the Company’s common stock to three of its employees for the exercise of such stock
options.
As
of September 30, 2019, there were no shares of stock available for awards under the 2011 Stock Incentive Plan.
On
March 29, 2017, the Company issued 250,000 shares of the Company’s unrestricted common stock to six of the Company’s
employees pursuant to our 2015 Omnibus Equity Plan, which was approved by the Company’s shareholders at the annual stockholders
meeting on November 19, 2015. The Company recorded an expense of $250 in the first quarter of fiscal 2017 under the 2015 Omnibus
Equity Plan, reflecting a par value of $0.001 per share of the Company’s common stock.
The
Company’s 2015 Omnibus Equity Plan permits the grant of incentive stock options (“ISOs”), nonqualified stock
options (“NQSOs”), stock appreciation rights (“SARs”), restricted stock, unrestricted stock and restricted
stock units (“RSUs”) to its employees of up to 250,000 shares of Common Stock. As of September 30, 2019, there were
no shares of stock available for awards under the 2015 Stock Incentive Plan.
On
March 13, 2018, the Company’s shareholders approved the 2017 Omnibus Equity Plan at the annual shareholders meeting, which
permits the grant of incentive stock options (“ISOs”), nonqualified stock options (“NQSOs”), stock appreciation
rights (“SARs”), restricted stock, unrestricted stock and restricted stock units (“RSUs”) to its employees
of up to1,300,000 shares of Common Stock. On December 21, 2018, the Company granted 1,300,000 shares of the Company’s unrestricted
common stock to seven of the Company’s employees pursuant to our 2017 Omnibus Equity Plan, which was approved by the Company’s
shareholders at the annual shareholders meeting on December 6, 2018.
The
Company recorded an expense of $13,000 in the fourth quarter of fiscal year 2018 under the 2017 Omnibus Equity Plan, reflecting
a par value of $0.001 per share of the Company’s common stock. As of September 30, 2019, there were no shares of stock available
for awards under the 2017 Omnibus Equity Plan.
On October 19, 2018, the Company issued 5 million
shares of its Common Stock to Mr. Chenliu pursuant to the InUnion Chain Ltd. Shares Transfer and IUN Digital Assets Investment
Agreement entered into on June 22, 2018 between Digipay, Mr. Chenliu, an individual resident of Costa Rica, and InUnion Chain Ltd.
(“InUnion”), a British Virgin Islands company wholly owned by Mr. Chenliu.
On January 23, 2018, DigiPay and Peng entered
into the DCON Agreement . Under the terms of the DCON Agreement, Peng transferred to DigiPay a 60.00% ownership interest in certain
digital assets of DCON, a blockchain platform for cryptocurrency conversion, payment and other services (“DCON”), including
but not limited to its business plan and white papers, business models, software, codes, architectures, codes, software, applications,
technologies, patents, copyrights, trade secrets, customer lists, business points, trading platforms, digital rights, authentication
systems, agreements and contracts, intellectual property, token, and the DCON communities established on Nova Realm City (the “Transfer
Assets”) for an aggregate purchase price of $9,600,000 (the “Purchase Price”).
DCON DigiPay Limited was incorporated in Japan
and 60.00% owned by the Company. The Company has recognized this digital asset as an intangible asset at a total amount of the
purchase price of $9,600,000, and amortized over 5 years, with amortization of $1,440,000 for the nine months ended September 30,
2019.
In
April 2016, the Company signed a letter of intent with Mei County Kiwifruits Investment and Development Corporation to purchase
833.5 mu (approximately 137 acres) of kiwifruits orchard in Mei County. The purchase price will be determined by a third party
valuation company appointed by both parties. As of the date of this report, the valuation has not been completed and the purchase
price has not been settled. The Company paid RMB 200 million (approximately $30 million) as a deposit in the second quarter of
2016. The purchase is subject to government approval, approval by the Company’s Board of Directors and a definitive agreement
negotiated and signed by the parties. Pursuant to the letter of intent, the Deposit shall be returned to the Company within 10
working days upon the request of the Company if the kiwifruits orchard cannot be transferred to the Company according to the schedule.
The Company expects to complete the purchase process in 2020.
On
August 3, 2016, Shaanxi Guoweimei Kiwi Deep Processing Company, an indirectly wholly-owned subsidiary of the Company, signed a
lease agreement for 20,000 mu (approximately 3,292 square acres) of a kiwifruits orchard located in Mei County, Shaanxi Province,
with the Di’erpo Committe of Jinqu Village, Mei County, Shaanxi for a term of 30 years, from August 5, 2016 to August 4,
2046. The annual leasing fee is RMB 1,250 (approximately $189) per mu, and payment of 10 years of leasing fees shall be made on
each of September 25, 2016, 2026 and 2036. The Company made a payment of RMB 250 million (approximately $37.4 million) for the
first 10 years’ leasing fees on August 15, 2016, which is recorded as deposits in the Company’s balance sheet.
On
August 15, 2016, Hedetang Agricultural Plantations (Yidu) Co., Ltd., an indirectly wholly-owned subsidiary of the Company, signed
a lease agreement for 8,000 mu (approximately 1,317 square acres) of an orange orchard located in city of Yidu, Hubei Province,
with the Yidu Sichang Farmers Association, Hubei Province, for a term of 20 years, from September 22, 2016 to September 21, 2036.
The annual leasing fee is RMB 2,000 (approximately $306) per mu, and payment of 10 years of leasing fees shall be made on each
of September 25, 2016 and 2026. The Company made a payment of RMB 160 million (approximately $24.0 million) for the first 10 years’
of leasing fees on September 20, 2016, which is recorded as deposits in the Company’s balance sheet.
|
10.
|
Discontinued
Operations
|
The
Company’s Huludao Wonder operation, a subsidiary which produces concentrated apple juice, has suffered continued operating
losses since year 2014. In December 2016, the Company established a winding-down plan to close this operation. Based on the restructuring
plan and in accordance with EITF 03-13, the Company presented the operating results from Huludao Wonder as a discontinued operation,
as the Company believed that no continued cash flow would be generated by the disposed component (Huludao Wonder) and that the
Company would have no significant continuing involvement in the operation of the discontinued component. Management of the Company
initiated a plan to sell the property located in Huludao in December 2016, and ceased the depreciation of the property in accordance
with SFAS No. 144. Huludao Wonder additionally stopped payment of interest on the loan it borrowed during year 2016. The bank
sued Huludao Wonder, the result was that according to the enforcement of the court, Huludao Wonder paid off its all owed long-term
debt principal and interest due at the time of the settlement with its fixed assets in year 2018.
As
of September 30, 2019, Huludao Wonder no longer incurred any income or expenses, and the Company believes there will not be any
future significant cash flows from the discontinued operation, as the outstanding accounts receivable and accounts payable are
immaterial to the Company’s financial position and liquidity.
The
Company operates in four segments starting from fiscal 2019: shared shopping mall membership fee, fruit related products, sales
of goods and others. Our concentrated juice and juice beverages are primarily produced by the Company’s Jingyang factory.
In compliance with the Company’s
business transformation strategy, membership fee from shared shopping mall, sales of goods through shared shopping mall platform
started to generate the main revenues for the Company and became more and more important business sections of the Company since
fiscal 2019, while its traditional business section of seasonal fruit related products continued to shrink in the third quarter
of 2019.
For
the three months ended September 30, 2019, the Company sold its fruit related products and other products still mainly to domestic
customers in the PRC.
Some
of these product segments might not individually meet the quantitative thresholds for determining reportable segments and we determine
the reportable segments based on the discrete financial information provided to the chief operating decision maker. The chief
operating decision maker evaluates the results of each segment in assessing performance and allocating resources among the segments.
Since there is an overlap of services provided and products manufactured between different subsidiaries of the Company, the Company
does not allocate operating expenses and assets based on the product segments. Therefore, operating expenses and asset information
by segment are not presented. Segment profit represents the gross profit of each reportable segment.
For
the three months ended September 30, 2019 (in thousands):
|
|
Fruit Related Products
|
|
|
CCM Shopping Mall Membership
|
|
|
Sales of Goods
|
|
|
Others
|
|
|
Total
|
|
Reportable segment revenue
|
|
$
|
61
|
|
|
$
|
205
|
|
|
$
|
181
|
|
|
$
|
-
|
|
|
$
|
447
|
|
Inter-segment loss
|
|
|
(45
|
)
|
|
|
-
|
|
|
|
(60
|
)
|
|
|
-
|
|
|
|
(105
|
)
|
Revenue from external customers
|
|
|
16
|
|
|
|
205
|
|
|
|
121
|
|
|
|
-
|
|
|
|
342
|
|
Segment gross profit
|
|
$
|
-
|
|
|
$
|
185
|
|
|
$
|
64
|
|
|
$
|
-
|
|
|
$
|
249
|
|
For
the three months ended September 30, 2018 (in thousands):
|
|
Fruit Related Products
|
|
|
CCM Shopping Mall Membership
|
|
|
Sales of
Goods
|
|
|
Others
|
|
|
Total
|
|
Reportable segment revenue
|
|
$
|
302
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7
|
|
|
$
|
309
|
|
Inter-segment loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Revenue from external customers
|
|
|
302
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
309
|
|
Segment gross loss
|
|
$
|
(140
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(11
|
)
|
|
$
|
(151
|
)
|
For
the nine months ended September 30, 2019 (in thousands)
|
|
Fruit Related Products
|
|
|
CCM Shopping Mall Membership
|
|
|
Sales of Goods
|
|
|
Others
|
|
|
Total
|
|
Reportable segment revenue
|
|
$
|
308
|
|
|
$
|
339
|
|
|
$
|
644
|
|
|
$
|
14
|
|
|
$
|
1,305
|
|
Inter-segment loss
|
|
|
(248
|
)
|
|
|
-
|
|
|
|
(238
|
)
|
|
|
-
|
|
|
|
(486
|
)
|
Revenue from external customers
|
|
|
60
|
|
|
|
339
|
|
|
|
406
|
|
|
|
14
|
|
|
|
819
|
|
Segment gross profit
|
|
$
|
1
|
|
|
$
|
305
|
|
|
$
|
117
|
|
|
$
|
14
|
|
|
$
|
437
|
|
For
the nine months ended September 30, 2018 (in thousands)
|
|
Fruit Related Products
|
|
|
CCM Shopping Mall Membership
|
|
|
Sales of
Goods
|
|
|
Others
|
|
|
Total
|
|
Reportable segment revenue
|
|
$
|
1,993
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
100
|
|
|
$
|
2,093
|
|
Inter-segment loss
|
|
|
(432
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
(434
|
)
|
Revenue from external customers
|
|
|
1,561
|
|
|
|
-
|
|
|
|
-
|
|
|
|
98
|
|
|
|
1,659
|
|
Segment gross profit
|
|
$
|
62
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
22
|
|
|
$
|
84
|
|
The
following table reconciles reportable segment profit to the Company’s condensed consolidated income before income tax provision
for the three months ended September 30, 2019 and 2018: (in thousands)
|
|
2019
|
|
|
2018
|
|
Segment profit
|
|
$
|
249
|
|
|
$
|
(151
|
)
|
Unallocated amounts:
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
(1,597
|
)
|
|
|
(4,971
|
)
|
Other income (expenses)
|
|
|
(62
|
)
|
|
|
(390
|
)
|
Loss before tax provision
|
|
$
|
(1,410
|
)
|
|
$
|
(5,512
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)
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12.
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Entry
into a Material Definitive Agreement
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On July 31, 2019, CCM TianjinE-commerce Tianjin,
and Mr. Zeyao Xue and Mr. Kai Xu, citizens of China and shareholders of E-commerce Tianjin, entered into the following agreements,
or collectively, the “Variable Interest Entity Agreements” or “VIE Agreements,” pursuant to which CCM Tianjin
has contractual rights to control and operate the business of E-commerce Tianjin (the “VIE”).
Pursuant
to Chinese law and regulations, a foreign owned enterprise cannot apply for and hold a license for operation of certain e-commerce
businesses, the category of business which the Company plans to expand in China. CCM Tianjin is an indirectly wholly foreign owned
enterprise of the Company. In order to comply with Chinese law and regulations, CCM Tianjin agreed to provide E-commerce Tianjin
an Exclusive Operation and Use Rights Authorization to operate and use the Chain Cloud Mall System owned by CCM Tianjin.
E-commerce
Tianjin was incorporated by Mr. Zeyao Xue and Mr. Kai Xu solely for the purpose of holding the operation license of the Chain
Cloud Mall System. Mr. Zeyao Xue is a major shareholder of the Company and the son of Mr. Yongke Xue, our Chairman and Chief Executive
Officer. Mr. Kai Xu is the Chief Operating Officer of the Company.
The
VIE Agreements are as follows:
1)
Exclusive Technology Consulting and Service Agreement by and between CCM Tianjin and E-commerce Tianjin. Pursuant to the Exclusive
Technology Consulting and Service Agreement, CCM Tianjin agreed to act as the exclusive consultant of E-commerce Tianjin and provide
technology consulting and services to E-commerce Tianjin. In exchange, E-commerce Tianjin agreed to pay CCM Tianjin a technology
consulting and service fee, the amount of which is to be equivalent to the amount of net profit before tax of E-commerce Tianjin,
payable on a quarterly basis after making up losses of previous years (if necessary) and deducting necessary costs, expenses and
taxes related to the business operations of E-commerce Tianjin. Without the prior written consent of CCM Tianjin, E-commerce Tianjin
may not accept the same or similar technology consulting and services provided by any third party during the term of the agreement.
All the benefits and interests generated from the agreement, including but not limited to intellectual property rights, know-how
and trade secrets, will be CCM Tianjin’s sole and exclusive property. This agreement has a term of 10 years and may be extended
unilaterally by CCM Tianjin with CCM Tianjin's written confirmation prior to the expiration date. E-commerce Tianjin cannot terminate
the agreement early unless CCM Tianjin commits fraud, gross negligence or illegal acts, or becomes bankrupt or winds up.
2)
Exclusive Purchase Option Agreement by and among CCM Tianjin, E-commerce Tianjin, Mr. Zeyao Xue and Mr. Kai Xu. Pursuant to the
Exclusive Purchase Option Agreement, Mr. Zeyao Xue and Mr. Kai Xu granted to CCM Tianjin and any party designated by CCM Tianjin
the exclusive right to purchase, at any time during the term of this agreement, all or part of the equity interests in E-commerce
Tianjin, or the “Equity Interests,” at a purchase price equal to the registered capital paid by Mr. Zeyao Xue and
Mr. Kai Xu for the Equity Interests, or, in the event that applicable law requires an appraisal of the Equity Interests, the lowest
price permitted under applicable law. Pursuant to powers of attorney executed by Mr. Zeyao Xue and Mr. Kai Xu, they irrevocably
authorized any person appointed by CCM Tianjin to exercise all shareholder rights, including but not limited to voting on their
behalf on all matters requiring approval of E-commerce Tianjin’s shareholder, disposing of all or part of the shareholder's
equity interest in E-commerce Tianjin, and electing, appointing or removing directors and executive officers. The person designated
by CCM Tianjin is entitled to dispose of dividends and profits on the equity interest without reliance on any oral or written
instructions of Mr. Zeyao Xue and Mr. Kai Xu. The powers of attorney will remain in force for so long as Mr. Zeyao Xue and Mr.
Kai Xu remain the shareholders of E-commerce Tianjin. Mr. Zeyao Xue and Mr. Kai Xu have waived all the rights which have been
authorized to CCM Tianjin’s designated person under the powers of attorney.
3)
Equity Pledge Agreements by and among CCM Tianjin, E-commerce Tianjin, Mr. Zeyao Xue and Mr. Kai Xu. Pursuant to the Equity Pledge
Agreements, Mr. Zeyao Xue and Mr. Kai Xu pledged all of the Equity Interests to CCM Tianjin to secure the full and complete performance
of the obligations and liabilities on the part of E-commerce Tianjin and them under this and the above contractual arrangements.
If E-commerce Tianjin, Mr. Zeyao Xue, or Mr. Kai Xu breaches their contractual obligations under these agreements, then CCM Tianjin,
as pledgee, will have the right to dispose of the pledged equity interests. Mr. Zeyao Xue and Mr. Kai Xu agree that, during the
term of the Equity Pledge Agreements, they will not dispose of the pledged equity interests or create or allow any encumbrance
on the pledged equity interests, and they also agree that CCM Tianjin’s rights relating to the equity pledge should not
be interfered with or impaired by the legal actions of the shareholders of E-commerce Tianjin, their successors or designees.
During the term of the equity pledge, CCM Tianjin has the right to receive all of the dividends and profits distributed on the
pledged equity. The Equity Pledge Agreements will terminate on the second anniversary of the date when E-commerce Tianjin, Mr.
Zeyao Xue and Mr. Kai Xu have completed all their obligations under the contractual agreements described above.
As
a result of the above contractual arrangements, CCM Tianjin has substantial control over E-commerce Tianjin’s daily operations
and financial affairs, election of its senior executives and all matters requiring shareholder approval. Furthermore, as the primary
beneficiary of E-commerce Tianjin, the Company, via CCM Tianjin, is entitled to consolidate the financial results of E-commerce
Tianjin in its own consolidated financial statements.
On September 18, 2019, SkyPeople Foods Holdings
Limited, a company incorporated in the British Virgin Islands (“SkyPeople Foods”) and a wholly owned subsidiary of
the Company, entered into a Share Transfer Agreement (the “Agreement”) with New Continent International Co., Ltd.,
a company incorporated in the British Virgin Islands (the “Buyer”). Pursuant to the terms of the Agreement, SkyPeople
Foods will sell all of the issued and outstanding shares of HeDeTang Holdings (HK) Ltd. (“HeDeTang HK”), a wholly owned
subsidiary of SkyPeople Foods, to the Buyer for a total of RMB 600,000, or approximately US$85,714 (the “Purchase Price”),
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. (“SkyPeople China”). The Purchase Price was based upon the preliminary evaluation
of HeDeTang HK and its subsidiaries by Shanxi Delixin Assets Evaluation Co., Ltd.(“ Shanxi Delixin”) If the final evaluation
amount of HeDeTang HK and its subsidiaries by Shanxi Delixin is lower than or no more than 10.00% higher than the Purchase Price,
the Parties agree there will be no change to the Purchase Price. If the final evaluation amount of HeDeTang HK and its subsidiaries
by Shanxi Delixin is more than 10.00% higher than the Purchase Price, the Parties agree the final evaluation amount shall be the
final purchase price. The closing of the above mentioned share transfer is subject to the approval by the shareholders of both
parties and the approval by the shareholders of the Company.
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13.
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Commitments
And Contingencies
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Litigation
On
June 29, 2015, SkyPeople China entered into a loan agreement with Beijing Bank. Pursuant to the loan agreement, SkyPeople China
borrowed RMB 30 million (approximately $4.36 million) from Beijing Bank. Hongke Xue, Yongke Xue and Xiujun Wang provided guarantees
for the loan and Shaanxi Boai Medical Technology Development Co., Ltd. (“Shaanxi Boai”) provided certain real estate
property as a pledge for the loan. SkyPeople China did not repay the loan on time and Beijing Bank filed an enforcement request
with Xi’an Intermediate People's Court in June 2017. The Xi’an Intermediate People’s Court seized real estate
properties pledged by Shaanxi Boai and Xiujun Wang. In November, 2018, the Court sold the real estate property pledged by Xiujun
Wang for RMB1,170,180. Because the real estate property is Xiujun Wang’s primary home, the Court allocated RMB 117,000 to
Xiujun Wang as transition home leasing fee and deducted outstanding mortgage payments, and the remaining amount was delivered
to Beijing Bank as the repayment. The Court has also made inquiries to Beijing Bank as to whether it is willing to accept the
pledged real estate property of Shaanxi Boai as the repayment of the outstanding loan for the amount of RMB 27,932,300 (approximately
$4.06 million) but Beijing Bank has refused to take the real property as repayment of the loan and the enforcement has been terminated
by the Court.
On March 8, 2016, SkyPeople China entered into
a loan agreement with Ningxia Bank. Pursuant to the loan agreement, SkyPeople China borrowed RMB 25 million (approximately $3.63
million) from Ningxia Bank. Hongke Xue, Yongke Xue, Lake Chen, Shaanxi Boai Medical Technology Development Co., Ltd. and Shaanxi
Qiyiwangguo provided guarantees for the loan. SkyPeople China also pledged 37 pieces of equipment and the related trademarks to
Ningxia Bank for the loan. SkyPeople China has not repaid the loan and Ningxia Bank filed an enforcement action with Xi’an
Intermediate people’s court in August 2017. The Court has frozen the assets of SkyPeople China that were pledged as guarantee
for the loan from being transferred to any third-party, but the freeze does not limit or affect the use of these properties by
SkyPeople China for its business. In July 2018, Shaanxi Qiyiwangguo filed a petition to the Court and requested the termination
of the enforcement action on the basis that its guarantee of the loan was not valid because the seal used on the guarantee agreement
was not authentic and the guarantee was not approved by the shareholders of Shaanxi Qiyiwangguo. On November 27, 2018 Shaanxi Qiyiwangguo
withdrew its petition and the Court agreed to such withdrawal and there has been no other progress of this case.
On
December 23, 2015, SkyPeople China entered into two loan agreements with China Construction Bank. Pursuant to the loan agreements,
SkyPeople China borrowed RMB 13.90 million (approximately $2.13 million), and RMB 30 million (approximately $4.59 million) from
China Construction Bank, respectively. Shaanxi Boai Medical Technology Development Co., Ltd. (“Boai”), Hongke Xue,
Yongke Xue, Xiujun Wang and Yingkou Trusty Fruits Co., Ltd. (“Yingkou”) provided pledges for the loans. SkyPeople
China has not repaid the loans and China Construction Bank filed an enforcement action with Xi’an Intermediate People's
Court in March 2017. In December, 2017, SkyPeople China received the enforcement notice from the Court. The Court has seized certain
parking space and land use rights pledged by Xiujun Wang and Boai and sold the land use right pledged by Boai in auction for approximately
RMB 24,835,790 as repayment to China Construction Bank. The Court also seized certain land use rights pledged by Yingkou Trusty
Fruits Co., Ltd., but the auction sale for those rights was not successful. SkyPeople China currently is in discussions with China
Construction Bank on the payment terms and the final amount.
On
May 9, 2016, SkyPeople China entered into loan agreements with China Construction Bank. Pursuant to the loan agreements, SkyPeople
China borrowed RMB 22.9 million (approximately $3.50 million) from China Construction Bank. Shaanxi Province Credit Reassurance
Company (“Credit Reassurance Company”) provided a guarantee to China Construction Bank for the loan, Hongke Xue and
Yongke Xue provided their guarantees, and SkyPeople China provided an office space that it owned to Credit Reassurance Company
as a pledge. SkyPeople China has not repaid the loan and Credit Reassurance Company repaid the loan for SkyPeople China. In June
2017, Credit Reassurance filed an enforcement action request with Xi’an Intermediate People’s Court (the “Court”)
in June 2017. In December 2017, SkyPeople China received the enforcement notice from the Court. The Court issued a verdict to
seize the office space of SkyPeople China for auction sale on December 26, 2017. In February 2018, the auction sale was conducted
but not successful. In June 2018, the Court decided to use the pledge property as the repayment for the outstanding loan of RMB
12.21million (approximately $1.78 million).
In
April 2015, China Cinda Asset Management Co., Ltd. Shaanxi Branch (“Cinda Shaanxi Branch”) filed two enforcement proceedings
with Xi’an Intermediate People’s Court (the “Court”) against the Company for alleged defaults pursuant
to guarantees by the Company to its suppliers for a total amount of RMB 39,596,250 or approximately $5.80 million.
In
September 2014, two long term suppliers of pear, mulberry, and kiwi fruits to the Company requested that the Company provide guarantees
for their loans with Cinda Shaanxi Branch. Considering the long term business relationship and to ensure the timely supply of
raw materials, the Company agreed to provide guarantees on the value of the raw materials supplied to the Company. Because Cinda
Shaanxi Branch is not a bank authorized to provide loans, it eventually provided financing to the two suppliers through the purchase
of accounts receivables of the two suppliers with the Company. In July 2014, the parties entered into two agreements – an
Accounts Receivables Purchase and Debt Restructure Agreement, and Guarantee Agreements for Accounts Receivables Purchase and Debt
Restructure. Pursuant to the agreements, Cinda Shaanxi Branch agreed to provide a RMB 100 million credit line on a rolling basis
to the two suppliers and the Company agreed to pay its accounts payables to the two suppliers directly to Cinda Shaanxi Branch
and provided guarantees for the two suppliers. In April 2015, Cinda Shaanxi Branch stopped providing financing to the two suppliers
and the two suppliers were unable to continue the supply of raw materials to the Company. Consequently, the Company stopped making
any payment to Cinda Shaanxi Branch.
The
Company has responded to the Court and taken the position that the financings under the agreements are essentially the loans from
Cinda Shaanxi Branch to the two suppliers, and because Cinda Shaanxi Branch does not have permits to make loans in China, the
agreements are invalid, void and had no legal effect from the beginning. Therefore, the Company has no obligation to repay the
debts owed by the two suppliers to Cinda Shaanxi Branch.
Upon
the Court’s suggestion, the parties agreed to a settlement discussion in April 2017. As a part of the settlement discussion,
on April 18, 2017, the Company withdrew its non-enforcement request from the Court without prejudice. Both parties are still in
the process of settlement negotiations. If the parties cannot reach a settlement agreement, the Company has the right to refile
the non-enforcement request with the Court. As th e
Company may still be liable for this loan, the Company recorded expenses and liability of $5.80 million as the result of these
two enforcement proceedings in the third quarter of 2018.
In
August 2017, Cinda Capital Financing Co. Ltd. (“Cinda”) filed a lawsuit with Beijing 2nd Intermediate People’s
Court (the “Beijing Intermediate Court”) against the Company’s indirectly wholly-owned subsidiaries Shaanxi
Guoweimei Kiwi Deep Processing Company, Ltd. (“Guoweimei”) and Hedetang Farm Products Trading Market (Mei County)
Co., Ltd. (“Trading Market Mei County Co”, and together with Guoweimei, “Lessees”) requested that Lessees
repay RMB 50 million (approximately $7.27 million) in capital lease fees, plus interest. Cinda has purchased or paid for refrigerant
warehouse and trading hall to the suppliers and vendors and agreed to lease them to the Lessees for a leasing fee of RMB 50 million
in December 2016. The capital leasing fee became due on its maturity date of June 2017, with certain land use rights of Lessees
in Mei County and equity of Guoweimei as a pledge. The Company has disputed that the land use rights for the refrigerant warehouse
and trading hall were never sold to or transferred to Cinda, therefore it is loan agreement and not capital lease agreement among
the parties. Lessees have taken the position that Cinda is not a bank and does not have government permits required to make loans
in China, and the agreements including pledge agreement were invalid, void and without legal effect from the beginning. Therefore,
the Company only has the obligations to repay principal but not the interest. In November 2017, Beijing Intermediate Court ruled
in favor of Cinda and the Lessees appealed the case to the Beijing Supreme Court. The Beijing Supreme Court held a hearing at
the end of July 2018. On December 4, 2018, the Beijing Supreme Court upheld the lower court’s decision. Currently, the case
is under enforcement procedure and Cinda is in the process of evaluating the value of the land use rights. Currently, the seized
properties are still owned by subsidiaries of SkyPeople China.
In
August 2017, Cinda Capital Financing Co. Ltd. (“Cinda”) filed another lawsuit with Beijing Intermediate Court against
the Company’s indirectly wholly-owned subsidiaries Guoweimei and SkyPeople China for repayment of leasing fee of RMB 84,970,959
(approximately $12.35 million) plus interest. In January 2014, Guoweimei and SkyPeople China (the “Equipment Lessees”)
signed an Equipment Financial Lease Purchase Agreement with Cinda and an equipment supplier pursuant to which Cinda would provide
funds to purchase equipment and the Equipment Lessees would lease the equipment from Cinda. Guoweimei pledged certain land use
rights in Mei County to Cinda and Xi’an Hedetang and Hedetang Holding pledged their equities in Guoweimei to Cinda to secure
the repayment. Mr. Hongke Xue also provided a personal guarantee for the payment of the leasing fee. Beijing Intermediate Court
had two hearings of the case and on March 21, 2018 it ruled in favor of Cinda to the effect that SkyPeople China and Guoweimei
shall pay leasing fees due in the amount of RMB 20,994,048 (approximately $3.05 million), as well as leasing fees not yet due
in the amount of RMB 63,975,910 (approximately $9.30 million), plus attorney’s fees and expenses. Beijing Intermediate Court
also ruled that Mr. Hongke Xue is jointly liable for the debt as the guarantor, and that Cinda has priority rights to the pledged
land use rights in Mei County and the pledged equities of Guoweimei as well as the ownership of the leasing properties until the
leasing fees are paid. SkyPeople China has appealed the decision to the Beijing Supreme Court. The Beijing Supreme Court rejected
the appeal and upheld the original verdict on September 7, 2018. Currently, the case is under enforcement procedure and the seized
properties are still owned by subsidiaries of SkyPeople China.
In
April 2015, SkyPeople China entered into a loan agreement with Shaanxi Fangtian Decoration Co. Ltd. (“Fangtian”).
Pursuant to the loan agreement, SkyPeople China borrowed RMB 3.50 million (approximately $508,780) from Fangtian. SkyPeople China
has not repaid the loan and Fangtian filed a lawsuit with Xi’an Yanta District People’s Court (“Yanta District
Court”). On August 10, 2017, Yanta District Court ruled against SkyPeople China and determined that SkyPeople China must
repay the loan of RMB 3.50 million plus interest RMB of 402,500 (approximately $585,098). Fangtian has requested that the Yanta
District Court enter into enforcement procedures for the case.
On
May 4, 2015, SkyPeople China and Xi’an Branch of Shanghai Pudong Development Bank (SPD Bank Xi’an Branch) renewed
a Working Capital Loan Contract and Repayment Schedule, according to which both parties agreed that SPD Bank Xi’an Branch
loaned RMB 26.90 million (approximately $3.92 million) to SkyPeople China with a term of one year. On the signing date of the Loan
Contract, Hongke Xue, Yongke Xue, Xiujun Wang and SPD Bank Xi’an Branch signed a Contract of Guaranty, guaranteeing the
repayment of loan and undertaking joint liability. According to a Mortgage Contract of Maximum Amount signed between SkyPeople
China and SPD Bank Xi’an Branch on April 2, 2013, SkyPeople China provided one of its real properties and land use rights
as the pledge. But SkyPeople China failed to repay after SPD Bank Xi’an Branch issued the loan.
In
October 2015, SPD Bank Xi’an Branch filed the enforcement request with the Intermediate Court of Xi’an and the Court
has seized pledge real property and land use rights and equity ownership of SkyPeople China in Wonder Fruit and SkyPeople Suizhong.
During the enforcement procedure, SPD Bank Xi’an Branch has transferred its creditor’s rights to China Huarong Asset
Management Co., Ltd. (“China Huarong”). The Court changed the execution applicant to China Huarong on December 12,
2018. China Huarong had applied to the Court to evaluate the seized real property and land use rights. The valuation process has
not yet been completed.
Shaanxi Guoweimei Kiwi Deep Processing Co.
Ltd (“Guoweimei”), entered into a construction agreement with Shaanxi Fangyuan construction co., Ltd. (“Fangyuan”)
in July, 2013. On October 8, 2018, Fangyuan filed a lawsuit and requested that Guoweimei pay a project construction fee plus penalty
of RMB 56,323,404 (approximately $8.22 million). On June 10, 2019, Baoji Intermediate People's Court issued a verdict that Guoweimei
just pay RMB41, 576,833 (approximately $6.07 million) plus penalty to Fangyuan, and Fangyuan will enjoy preferential right for
the projects in processing zone of National Wholesale and Trading Center in Mei County for Kiwi Fruits developed by Guoweimei.
In May 2015, Hedetang Farm Products Trading
Markets (Mei County) Co., Ltd. (“Hedetang”) and Shaanxi Zhongkun Construction Co., Ltd. (“Zhongkun”) entered
into a construction and decoration agreement. On September 5, 2018, Zhongkun filed the lawsuit with Shaanxi Provincial People’s
Court (the “Court”) for repayment of construction and decoration fees. The Court issued a civil judgement in November
2018, ordering Hedetang to pay project funds of RMB 1,632,972 (approximately $238,389) to Zhongkun, plus interest. After entering
into the enforcement phase, the Court found assets of Hedetang had been seized by Xi’an Yanta District People’s Court
and Baoji Intermediate People's Court, and there were no other assets for enforcement, so the enforcement procedure has been terminated
by the Court.
On
October 31, 2017, Xi’an Shanmei Food Co. Ltd. filed a lawsuit against Shaanxi Qiyiwangguo, a majority-owned subsidiary of
the Company, with Zhouzhi County People’s Court in connection with a Land Lease Agreement entered into by the parties on
October 1, 2013. On March 2, 2018, Zhouzhi County People’s Court issued a verdict that: (i) the Land Lease Agreement was
thereby terminated; (ii) Shaanxi Qiyiwangguo shall pay Xi’an Shanmei the outstanding leasing fee RMB 211,621 (approximately
$30,762) and (iii) Shaanxi Qiyiwangguo shall return the 29.30 mu industrial use land to Xi’an Shanmei. Shaanxi Qiyiwangguo
has appealed the decision to the Xi’an Intermediate People’s Court on the basis that: (x) the land use right was a
capital contribution by Xi’an Shanmei for a shareholder of Shaanxi Qiyiwangguo who is also the sole shareholder of Xi’an
Shanmei and the Land Lease Agreement was invalid and has no legal effect; (y) Zhouzhi Court did not schedule the hearing for the
count claims filed by Shaanxi Qiyiwangguo; and (z) Zhouzhi Court violated certain civil procedures during the trial of the case.
Due to the late notice to Zhouzhi Court, the case file was not timely transferred to Xi’an Intermediate Court and no appeal
hearing was scheduled. Zhouzhi Court has issued verdict for enforcement procedure and Qiyiwangguo has filed petition of disagreement
for the enforcement which is still under Zhouzhi Court’s review .
In
January 2016 Shaanxi Qiyiwangguo Modern Organic Agriculture Co., Ltd (“Qiyiwangguo”) and Nanjing Bailuotong Logistics
Services Co., Ltd (“Bailutong”) entered into a transportation agreement to ship fruit juices. Bailutong failed to deliver
the juice products and held them after their expiration date. Qiyiwangguo filed a lawsuit against Bailutong with Zhouzhi county
People’s Court, and the Court issue the verdict in February 2018 that: (1) the transportation contract between Qiyiwangguo
and Bailutong was terminated; and (2) Bailutong owed RMB 203, 551 (approximately $29,715) to Qiyiwangguo for the loss of Qiyiwangguo.
Bailutong appealed the case to Xi’an Intermediate People's Court. Xi’an Intermediate People's Court rejected the appeal
and upheld the original verdict .
Qiyiwangguo
entered into an agreement with Henan Huaxing Glass Co., Ltd. (“Huaxing”) in May 2014 for Huaxing to supply glass bottles
to Qiyiwangguo. However, due to the disputes regarding the quality of products supplied by Huaxing, Qiyiwangguo did not pay the
prices for certain glass bottles. In August 2017, Huaxing filed a lawsuit and the court ruled Qiyiwangguo was required to pay Huaxing
RMB 203,742 (approximately $29,743) in July 2018. During the enforcement process, the parties reached a settlement agreement but
Qiyiwangguo failed to pay the amount due and now the case is still in the court enforcement process .
In September 2016, the Suizhong Branch of Huludao
Banking Co. Ltd. (“Suizhong Branch”) filed a lawsuit with Huludao Intermediate People’s Court (the “Huludao
Court”) against the Company’s indirectly wholly-owned subsidiary Huludao Wonder Fruit Co., Ltd. (“Wonder Fruit”)
and requested that Wonder Fruit repay a RMB 40 million (approximately $5.81 million) bank loan, plus interest. The loan became
due on its maturity date of December 9, 2016. On December 19, 2016, the Huludao Court accepted the case. The Company has been disputing
the interest rate of the loan with Suizhong Branch, and has not repaid the loan to date. Wonder Fruit believes that the interest
charged by Suizhong Branch is 100.00% higher than the base rate set by People’s Bank of China and is not consistent with
the China People’s Bank’s base interest and floating rate. The Huludao Court has seized land use rights, buildings
and equipment of Wonder Fruit that were pledged as guarantee for the loan and has organized two auction sales for these assets
in January and February of 2018, but both auction sales have been unsuccessful in finding a buyer. On July 19, 2018, the Court
issued a verdict ordering Huludao Wonder to transfer its land use rights, building, equipment, electronic and transportation assets
to Zuizhong Branch as payment of the outstanding principal, auction and evaluation fees and some interest of the loan for RMB 42,639,264
(approximately $6.22 million).
In September 2017, Andrew Chien, a former consultant
of SkyPeople China, brought a lawsuit against the Company and Mr. Hongke Xue in the District Court of Connecticut (the “Court”).
The complaint was not properly served and the Company learned of the litigation in December 2017. In the complaint, Mr. Chien has
made several claims, most of which attempt to hold the Company liable under novel legal theories that relate back to an alleged
breach of a consulting agreement between SkyPeople China and Chien from August 2006. Mr. Chien claimed approximately $257,000 damages
and interest plus 2.00% of the Company’s then-outstanding shares. Mr. Chien has unsuccessfully attempted to sue the Company
on the breach of the same consulting agreement several times in the courts of Connecticut and New York, and these cases have been
dismissed. The Company has filed a motion to dismiss (“MTD”) and all proceedings are stayed pending determination of
the MTD. On August 31, 2018, the Court granted our MTD. On September 10, 2018, Mr. Chien filed a motion for reconsideration. On
September 28, 2018, the Court denied Mr. Chien’s motion for reconsideration. On October 26, 2018, Mr. Chien appealed the
case to the United States Court of Appeals for the Second Circuit. The appeal is fully briefed and presently awaiting
decision. The Company will vigorously defend this lawsuit and expects to obtain early dismissal of Mr. Chien’s claims.
On October 15, 2019, the Company entered into
an Exchange Agreement (the “First Exchange Agreement”) with Iliad Research and Trading, L.P., a Utah limited partnership
(the “Lender”).
Pursuant
to the First Exchange Agreement, the Company and Lender agreed to partition a new Promissory Note in the original principal amount
of $100,000 (the “First Partitioned Note”) from a Secured Convertible Promissory Note (the “Note”) issued
by the Company on March 26, 2019. The outstanding balance of the Note shall be reduced by an amount equal to the outstanding balance
of the First Partitioned Note. The Company and Lender further agreed to exchange the First Partitioned Note for the delivery of
133,333 shares of the Company’s Common Stock, par value $0.001, according to the terms and conditions of the First Exchange
Agreement.
On
October 17, 2019, the Company entered into a second Exchange Agreement (the “Second Exchange Agreement”) with the
Lender.
Pursuant
to the Second Exchange Agreement, the Company and Lender agreed to partition a new Promissory Note in the original principal
amount of $300,000 (the “Second Partitioned Note”) from the Note. The outstanding balance of the Note shall be
reduced by an amount equal to the outstanding balance of the Second Partitioned Note. The Company and Lender further agreed
to exchange the Second Partitioned Note for the delivery of 400,000 shares of the Company’s Common Stock, par value
$0.001, according to the terms and conditions of the Second Exchange Agreement.
On October 23, 2019, the Company entered into
a Forbearance Agreement (the “Agreement”) with Iliad Research and Trading, L.P., a Utah limited partnership (the “Lender”).
Pursuant to the Agreement, Lender agreed to
withdraw a Redemption Notice delivered by the Lender to the Company on September 30, 2019 which was issued pursuant to a Secured
Convertible Promissory Note issued by the Company to the Lender dated March 26, 2019 (the “Note”). Lender agreed not
to make any redemptions pursuant to the Note before October 25, 2019. The parties agreed, in the event Lender delivers a Redemption
Notice to the Company and the redemption amount set forth therein is not paid in cash to Lender within three (3) trading days,
then the applicable redemption amount shall be increased by 25.00% (the “First Adjustment,” and such increase to the
redemption amount, the “First Adjusted Redemption Amount”). In the event the First Adjusted Redemption Amount is not
paid within three (3) trading days after the date of First Adjustment, then the First Adjusted Redemption Amount shall be increased
in accordance with the following formula: $0.75 divided by the lowest closing trade price of the Common Stock of the Company during
the twenty (20) trading days prior to the date of the Second Adjustment and the resulting quotient multiplied by the First Adjusted
Redemption Amount (the “Second Adjustment,” and such increase to the First Adjusted Redemption Amount, the “Second
Adjusted Redemption Amount”), provided, however, that such formula shall only be applied if the resulting quotient is greater
than one (1) and such formula shall in no event be used to reduce the First Adjusted Redemption Amount. Upon payment in cash of
the First Adjusted Redemption Amount or Second Adjusted Redemption Amount, the outstanding balance of the Note will be reduced
by the original amount set forth in the Redemption Notice. The Company also agreed that during each calendar month, beginning in
the month of October 2019, it will reduce the outstanding balance of the Note by at least $100,000 and if the outstanding balance
is reduced by more than $100,000 in a given month, then the portion of the balance reduction amount that exceeds $100,000 may be
counted toward the minimum balance reduction requirement in the next month or months.
On October 25, 2019, the Company
entered into the third Exchange Agreement (the “Third Exchange Agreement”) with Iliad Research and Trading, L.P.,
a Utah limited partnership (the “Lender”).
Pursuant to the Third Exchange
Agreement, the Company and Lender agreed to partition a new Promissory Note in the original principal amount of $145,000
(the “Partitioned Note”) from a Secured Convertible Promissory Note (the “Note”) issued by the
Company on March 26, 2019. The outstanding balance of the Note shall be reduced by an amount equal to the outstanding balance
of the Partitioned Note. The Company and Lender further agreed to exchange the Partitioned Note for the delivery of 193,333
shares of the Company’s Common Stock, par value $0.001, according to the terms and conditions of the Third Exchange
Agreement.
On November 1, 2019, the Company entered
into the Fourth Exchange Agreement (the “Fourth Exchange Agreement”) with Iliad Research and Trading, L.P., a
Utah limited partnership (the “Lender”).
Pursuant
to the Fourth Exchange Agreement, the Company and Lender agreed to partition a new Promissory Note in the original principal
amount of $175,000 (the “Partitioned Note”) from a Secured Convertible Promissory Note (the “Note”)
issued by the Company on March 26, 2019. The outstanding balance of the Note shall be reduced by an amount equal to the
outstanding balance of the Partitioned Note. The Company and Lender further agreed to exchange the Partitioned Note for the
delivery of 233,333 shares of the Company’s Common Stock, par value $0.001, according to the terms and conditions of
the Fourth Exchange Agreement.
On November 8, 2019, GlobalKey SharedMall
Limited, a wholly owned subsidiary of Future FinTech Group Inc. (the “Company”), entered into a Three Party Cooperation
Agreement (the “Agreement”) with Fan Zhang, a citizen of China, and Caixia Wang, a citizen of China.
Pursuant to the Agreement, the three parties agreed to make cash contributions totaling RMB 1,000,000
(approximately $142,857) to QR(HK) Limited (“QR HK”), a wholly owned subsidiary of GlobalKey SharedMall Limited (“GlobalKey”).
Of this total, GlobalKey shall contribute RMB 510,000 (approximately $72,857); Fan Zhang shall contribute RMB 300,000 (approximately
$42,857); and Caixia Wang shall contribute RMB 190,000 (approximately $27,143). GlobalKey agreed to loan Fan Zhang RMB 300,000
for his cash contribution obligation, which shall be repaid from dividends of QR HK in the future. If QR HK is terminated by the
parties before the loan is paid off from the dividends or by liquidation of Fan Zhang’s ownership of QR HK, Fan Zhang shall
repay the loan to GlobalKey in two years. Fan Zhang shall be responsible for the operations and daily management of QR HK’s
cross-border e-commerce platform and shall be paid RMB 12,000 per month. GlobalKey is responsible for accounting, supervision
of Fan Zhang’s management, and auditing the financials of QR HK, and additionally has the right to veto material business
decisions of QR HK.