Future FinTech Group Inc. - Quarter Report: 2020 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission file number: 001-34502

Future FinTech Group Inc.

(Exact name of registrant as specified in its charter)

Room 2302, South Tower T1, Kaisa Plaza

No. 86 Jianguo Avenue, Chaoyang District,

Beijing, China 100025

(Address of principal executive offices including zip code)

86- 10-8353-0888

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes      ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes      ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes      ☒ No

Securities registered pursuant to Section 12(b) of the Act:

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

FUTURE FINTECH GROUP INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

FUTURE FINTECH GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

FUTURE FINTECH GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

FUTURE FINTECH GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

Three Months ended September 30, 2019

Three Months ended September 30, 2020

The accompanying notes are an integral part of these condensed consolidated financial statements.

Nine Months ended September 30, 2019

Nine Months ended September 30, 2020

The accompanying notes are an integral part of these condensed consolidated financial statements.

FUTURE FINTECH GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BUSINESS DESCRIPTION

Future FinTech Group Inc. (together with our direct or indirect subsidiaries, “we,” “us,” “our” or “the Company”) is a holding company incorporated under the laws of the State of Florida. The main business of the Company includes an online shopping platform, Chain Cloud Mall (CCM), which is based on blockchain technology; a cross-border e-commerce platform (NONOGIRL) which started its trial operation in March 2020 and formally launched in July 2020; a blockchain-based application incubator and technical service and support for real name and blockchain based assets and their operating entities (DCON); and the application and development of blockchain-based e-commerce technology and financial technology.

Prior to 2019, the Company engaged in the 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 the drastically increased production cost and tightened environmental law in China, the Company has transformed its business from fruit juice manufacturing and distribution to a real-name blockchain e-commerce platform that integrates blockchain and internet technology from the end of 2018. On February 27, 2020 pursuant to a Share Transfer Agreement entered by the Company’s subsidiary, HeDeTang Holdings (HK) Ltd (“HeDeTang HK”), and New Continent International Co., Ltd. on September 18, 2019, the Company sold HeDeTang HK and all its subsidiaries, which mainly engaged in fruit juice related business, to New Continent International Co., Ltd.

On April 23, 2020, Future FinTech (Hong Kong) Limited registered GuangChengJi (Shanghai) Industrial Co., Ltd. (“Guangchengji”) with a registered capital of $30 million in Shanghai, China, which needs to be paid before April 22, 2049 when the business license will expire. The business scope of Guangchengji includes wholesaling of electronic components and equipment, metal materials, petroleum products, import and export business, computer software development, information technology, technology consulting and services, business management consulting and supply chain management.

On July 22, 2020, the Company established Future Commercial Management (Beijing) Co., Ltd. Its scope of business includes management and consulting services.

The Company’s activities are principally conducted by its subsidiaries operating in the PRC.

2. BASIS OF PRESENTATION

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, 2020 and the results of operations and cash flows for the periods ended September 30, 2020 and 2019. 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 and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for any subsequent periods or for the entire year ending December 31, 2020. The balance sheet at December 31, 2019 has been derived from the audited financial statements at that date.

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 wholly foreign-owned enterprise (“WFOE”) and the contractual arrangements with our VIE, we are regarded as the primary beneficiary of our VIE, and we treat it and its subsidiaries as our consolidated affiliated entities under U.S. GAAP. We have consolidated the financial results of our VIE in our condensed consolidated financial statements in accordance with U.S. GAAP.

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, 2019 as included in our Annual Report on Form 10-K.

Going Concern

The Company’s financial statements are prepared assuming that the Company will continue as a going concern.

The Company incurred operating losses and had negative operating cash flows, which raised substantial doubts about its ability to continue as a going concern. The Company may continue to incur operating losses and generate negative cash flows as the Company implements its future business plan. In order to meet its working capital needs through the next twelve months and to fund the growth of the Company, the Company may consider plans to raise additional funds through the issuance of equity or debt. Although the Company intends to obtain additional financing to meet its cash needs, the Company may be unable to secure any additional financing on terms that are favorable or acceptable to it, if at all.

The ability of the Company to continue as a going concern is dependent upon its ability to successfully execute its new business strategy and eventually attain profitable operations. The accompanying financial statements do not include any adjustments that may be necessary if the Company is unable to continue as a going concern.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

For a detailed discussion about the Company significant accounting policies, refer to Note 2 — “Summary of Significant Accounting Policies,” in the Company’s consolidated financial statements included in Company’s 2019 Form 10-K. During the nine months ended September 30, 2020, there were no significant changes made to the Company’s significant accounting policies.

Uses of Estimates in the Preparation of Financial Statements

The Company’s condensed consolidated financial statements have been prepared in accordance with US GAAP and this requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the 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 not limited to, the allowance for doubtful receivable, estimated useful life and residual value of property, plant and equipment, impairment of long-lived assets 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 those estimates and such differences may be material to our condensed consolidated financial statements.

Recent Accounting Pronouncements

In June 2016, the FASB issued Accounting Standards Update No. 2016-13 (ASU 2016-13) “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition of credit losses. ASU 2016-13 will be effective on January 1, 2023. We are currently evaluating the effect of the adoption of ASU 2016-13 and believe it does not have any material impact on our results of operations or financial.

In August 2020, the FASB issued Accounting Standards Update No. 2020-06 (ASU 2020-06) “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. For public business entities that are not smaller reporting companies, ASU 2020-6 effective fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. We are currently evaluating the effect of the adoption of ASU 2020-06 and believe it does not have any material impact on our results of operations or financial.

We have reviewed all the recently issued, but not yet effective, accounting pronouncements and we do not believe any of these pronouncements will have a material impact on the Company.

4. LOAN RECEIVABLES

As of September 30, 2020, the balance of loan receivables was from Shenzhen Tiantian Haodian Technology Co., Ltd. (“Tiantian Haodian”). On June 28, 2020, Guangchengji, a wholly owned subsidiary of the Company, entered into a “Loan Agreement” with Tiantian Haodian. Pursuant to the Loan Agreement, the Company agrees to lend cash up to but not greater than RMB35 million (approximately $5.14 million) with Tiantian Haodian at the annual interest rate of 10% from June 28, 2020 to June 27, 2021. The interest is paid quarterly. There is no collateral or guarantee provided by Tiantian Haodian. During the nine months ended September 30, 2020, the Company recorded an interest income of $99,027 from the loan receivables, which was not paid by Tiantian Haodian as of the date of this report. Management of the Company believes that the balance of the loan receivables is recoverable as of September 30, 2020.

5. RELATED PARTY TRANSACTION

The amount due to the related parties of September 30, 2020, which consisted of the followings:

The amount due from the related parties as of September 30, 2020, which consisted of the followings:

6. INTANGIBLE ASSETS

On May 1, 2020, the Company launched CCM v3.0, an on-line shopping mall platform, which creates a new value cycle system of online shopping malls with a real-name blockchain system. After the launch of CCM v3.0, the Company reclassified this asset, which the Company prepaid to the software developer in fiscal year 2019, into intangible assets in the second quarter of 2020, which will be amortized over 10 years.

Also included in the intangible assets is accounting software. The accounting software will be amortized over 10 years. The amortization expense was $0.19 million and $0.59 million for the nine months ended September 30, 2020.

The following table sets intangible assets of the Company as of September 30, 2020 and December 31, 2019, respectively.

The following table summarizes the expected amortization expense for the following years (in thousands):

7. LONG TERM INVESTMENT

On June 22, 2018, Digipay Fintech Limited (“Digipay”), a wholly-owned subsidiary of the Company acquired 10% ownership interest in InUnion Chain Ltd. (“InUnion”) for an aggregate purchase price of $15 million (“Purchase Price”), pursuant to a Shares Transfer and IUN Digital Assets Investment Agreement signed with Lake Chenliu, who are the sole owner of InUnion. The Company issued 5 million of its Common Stock to the InUnion on October 19, 2018 as the payment for Purchase Price.

Upon acquiring the InUnion Shares, Digipay has access to, and the use of, certain software, technology and related intellectual property of InUnion without further payment. Digipay also has the right to designate a director nominee to the board of directors of InUnion.  The Company has appointed a director to the Board of Director of InUnion. Pursuant to the agreement, Digipay shall also purchase 20,000,000 of the INU tokens issued by InUnion (the “INU Tokens”) for an aggregate purchase price of $1,000,000, which such amount shall be paid in immediately available funds within 180 days of the date of the agreement. Digipay has reached an agreement with InUnion to waive the purchase of the INU Token. As a result, no INU Token was acquired by Digipay.

As of December 31, 2019, management assessed the value of the above investment, and recorded an impairment loss of $2.75 million.

8. SHARE BASED COMPENSATION

On January 25, 2020, the Company entered into a Consulting Service Agreement (the “Agreement”) with Dragon Investment Holding Limited (Malta) (the “Consultant”), a company incorporated in Malta, pursuant to which Consultant will: (i) help the Company to locate new merger projects globally, develop new merger strategy and provide the Company with at least five (5) merger and acquisition targets that have synergy with the Company’s business and development plans and could clearly contribute to the Company’s strategic goals each year; (ii) help the Company to map out new growth strategies in addition to its current business; (iii) work with the Company to explore new lines of business and associated growth strategies; and (iv) conduct market research and evaluating variable projects and providing feasibility studies per Company’s request from time to time. The term of the Agreement is three years. In consideration of the services to be provided by Consultant to the Company, the Company agrees to pay the Consultant a three-year consulting fee totaling $3 million. The Company shall issue a total of 3,750,000 restricted shares of the Company Common Stock (the “Consultant Shares”) at a price of $0.794 per share, (the closing price of the Agreement date), as the payment for the above mentioned consultant fee to the Consultant. On February 23, 2020, The Company issued the Consultant Shares pursuant to the Agreement, of which 1,500,000 shares were released to the Consultant immediately, 1,125,000 and 1,125,000 shares, respectively, will be held by the Company and released to the Consultant on January 25, 2021 and January 25, 2022 if this Agreement has not been terminated and there has been no breach of the Agreement by the Consultant at such time. If the second and/or third release of the shares mentioned above does not occur, such shares shall be returned to the Company as treasury shares. The shares contemplated in the Agreement were issued pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended. For the nine months ended September 30, 2020, the Company recorded stock related compensation of $1.19 million, based on the stock closing price of $0.794 on the Agreement date, for the 1,500,000 shares which were released to the Consultant immediately upon issuance. The Company will recognize stock related compensation of $1.79 million for the 2,250,000 shares in the future when they are released to the Consultant pursuant to the Agreement. 

On May 13, 2019, the Company issued 500,000 of its Common Stock to two employees granted in December 2018 by the Compensation Committee of the Board pursuant to the Company’s 2017 Omnibus Equity Plan (the “Plan”). On June 5, 2019, the Company issued 150,000 shares of its Common Stock to three employees granted in December 2018 by the Compensation Committee of the Board pursuant to the Plan.

On February 26, 2020, the Company’s shareholders approved the 2019 Omnibus Equity Plan at a Special Meeting of shareholder, 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, officers and directors of up to 3,000,000 shares of Common Stock. The Company has not issued any stock under the 2019 Omnibus Equity Plan.

On October 27, 2020, the Company’s board of directors approved the 2020 Omnibus Equity Plan, 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, officers and directors of up to 5,000,000 shares of Common Stock. The 2020 Omnibus Equity Plan is subject to the shareholders’ approval on the annual shareholders’ meeting, which will be held on December 18, 2020. The Company has not issued any stock under the 2020 Omnibus Equity Plan.

The Company did not grant any stock options during the nine months ended September 30, 2020 and September 30, 2019.

9. OPERATING LEASE

In August 2020, the Company signed an operating lease agreement for its office in Beijing. The Company recognized operating lease liabilities and operating lease right-of-use assets on its balance sheets. Right of use assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. Right of use assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The company has leases with fixed payments for office rental in Beijing, which are classified as operating leases. Options to extend or renew are recognized as part of the lease liabilities and recognized as right of use assets. There are no residual value guarantees and no restrictions or covenants imposed by the leases.

The weighted average remaining lease term is 2 years and the weighted average discount rate is 6%.

In the nine months ended September 30, 2020, the costs of the leases recognized in general administrative expenses are $13,000. Cash paid for the operating leases including in the operating cash flows was $15,038.

Future minimum lease payments for leases with initial or remaining noncancelable lease terms in excess of one year are as follows:

10. CONVERTIBLE LOAN PAYABLE

On December 19, 2019, Company entered into a Note Purchase Agreement with Iliad Research and Trading, L.P., a Utah limited partnership (“Iliad”), pursuant to which the Company sold and issued to Iliad a Secured Promissory Note in the principal amount of $1.06 million. Iliad purchased the Note with an original issue discount of $0.05 million, and the Company agreed to pay to Iliad $0.01 million for fees and costs incurred by Iliad in connection with the consummation of the Purchase Agreement. The Note was sold to Iliad pursuant to an exemption from registration under Regulation D, promulgated under the Securities Act of 1933, as amended. The Note is one-year term with an interest rate of 8%. There was no fixed conversation price to the Company’s Common Stock in the agreement. Iliad has converted all the Note Purchased in fiscal year 2019 to the Company’s Common Stock based on the market date on the conversion date. The Company believes that this Note will also be converted into the Company’s Common Stock in future. The Company received proceeds of $0.53 from Iliad on December 23, 2019, and the balance of $0.53 million on January 17, 2020.

On July 28, 2020, the Company, entered into a Standstill Agreement with the Iliad. Pursuant to the Standstill Agreement, Iliad agreed to refrain and forbear temporarily from making redemptions for the Note that was sold and issued by the Company on December 19, 2019 in the original principal amount of $1.06 million. Iliad agreed not to redeem any portion of the Note (the “Standstill”) for a period beginning on the date of the Agreement and ending on the date that is ninety (90) days from the date of the Agreement. As a material inducement and partial consideration for Iliad’s agreement to enter into the Agreement, the Company agreed that the outstanding balance of the Note shall be increased by nine percent (9%), or $0.10 million, on the date of the Agreement (the “Standstill Fee”). The Company recorded the Standstill Fee of $0.10 million as interest expenses during the third quarter of 2020.

As of September 30, 2020, the balance of the convertible note payable was $1.16 million.

Common stocks issued in connection with the convertible notes

On January 6, 2020, the Company entered into the Eighth Exchange Agreement (the “Eighth Exchange Agreement”) with Iliad. Pursuant to the Eighth Exchange Agreement, the Company and Iliad agreed to partition a new Secured Convertible Promissory Note in the original principal amount of $145,000 (the “Eighth Partitioned Note”) from a Secured Convertible Promissory Note (the “Note”) issued by the Company on March 26, 2019. The outstanding balance of the Note shall be reduced by an amount equal to the outstanding balance of the Partitioned Note. The Company and Iliad further agreed to exchange the Eighth Partitioned Note for the delivery of 193,333 shares of the Company’s Common Stock, according to the terms and conditions of the Exchange Agreement.

On January 15, 2020, the Company entered into the Ninth Exchange Agreement (the “Ninth Exchange Agreement”) with the Iliad. Pursuant to the Exchange Agreement, the Company and Iliad agreed to partition a new Secured Convertible Promissory Note in the original principal amount of $140,000 (the “Ninth Partitioned Note”) from the Note issued by the Company on March 26, 2019. The outstanding balance of the Note shall be reduced by an amount equal to the outstanding balance of the Ninth Partitioned Note. The Company and Iliad further agreed to exchange the Partitioned Note for the delivery of 186,666 shares of the Company’s Common Stock, according to the terms and conditions of the Exchange Agreement.

On March 11, 2020, the Company entered into the Tenth Exchange Agreement (the “Tenth Exchange Agreement”) with the Iliad. Pursuant to the Tenth Exchange Agreement, the Company and Iliad agreed to partition a new Secured Convertible Promissory Note in the original principal amount of $150,000 (the “Tenth Partitioned Note”) from the Note issued by the Company on March 26, 2019. The outstanding balance of the Note shall be reduced by an amount equal to the outstanding balance of the Partitioned Note. The Company and Iliad further agreed to exchange the Partitioned Note for the delivery of 200,000 shares of the Company’s Common Stock, according to the terms and conditions of the Exchange Agreement.

On April 17, 2020, the Company entered into the Eleventh Exchange Agreement (the “Eleventh Exchange Agreement”) with Iliad. Pursuant to Eleventh Exchange Agreement, the Company and Iliad agreed to partition a new Secured Convertible Promissory Note in the original principal amount of $153,750 (the “Eleventh 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 Eleventh Partitioned Note. The Company and Iliad further agreed to exchange the Eleventh Partitioned Note for the delivery of 205,000 shares of the Company’s Common Stock, according to the terms and conditions of the Eleventh Exchange Agreement.

On June 10, 2020, the Company entered into the Twelfth Exchange Agreement (the “Twelfth Exchange Agreement”) with the Iliad. Pursuant to the Twelfth Exchange Agreement, the Company and Iliad agreed to partition a new Secured Convertible Promissory Note in the original principal amount of $111,486 (the “Twelfth Partitioned Note”) from the Note issued by the Company on March 26, 2019. The outstanding balance of the Note shall be reduced by an amount equal to the outstanding balance of the Partitioned Note. The Company and Iliad further agreed to exchange the Twelfth Partitioned Note for the delivery of 148,648 shares of the Company’s Common Stock, according to the terms and conditions of the Twelfth Exchange Agreement.

11. COMMON STOCKS ISSUED

Debt Repayment Agreement

In July 2020, the Company entered a series of loan agreements with fourteen individuals for a total amount of $4.96 million. On August 4, 2020, the Company entered into a Debt Repayment Agreement with these individuals (the “Creditors”), pursuant to which the Company agreed to repay $4,961,000 debt owed to the Creditors in the form of shares of Common Stock of the Company for an aggregate of 2,740,883 shares at a price of $1.81 per share (the “Debt Repayment”). As the closing price of the Company stock was $2.52 on August 4, 2020, the Company recognized loss of $1.95 million in loss on debt settlement during the third quarter of 2020. The Debt Repayment will be completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended. The Company issued 2,740,883 shares of its Common Stock to the Creditors on August 12, 2020.

Securities Purchase Agreement

On June 16, 2020, the Company entered into a Securities Purchase Agreement with Qun Xie, pursuant to which the Company agreed to sell to the Qun Xie in a private placement 500,000 shares of the Company’s Common Stock, purchase price of $1.00 per share for an aggregate offering price of $500,000. The Private Placement will be completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended. On June 30, 2020, Qun Xie paid $500,000, and on August 7, 2020, the Company issued 500,000 Shares pursuant to this Agreement.

On September 16, 2020, the Company entered into a Securities Purchase Agreement with Houwu Huang, pursuant to which the Company agreed to sell to Houwu Huang in a private placement 224,599 shares of the Company’s common stock, at a purchase price of $1.87 per share for an aggregate offering price of $420,000. The Private Placement will be completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended. The Company issued 224,599 shares of its Common Stock to the Purchaser on September 24, 2020.

12. DISCONTINUED OPERATIONS 

The following table listed the total assets and liabilities of the discontinued operation as of September 30, 2020 and December 31, 2019:

(1) On March 11, 2020, the Company’s Board of Directors passed a resolution to sell the operation of Zhonglian Hengxin Assets Management Co., Ltd (“Zhonglian Hengxin”) and close the operation of Digital Online Marketing Limited, and SkyPeople Foods Holding Ltd.

On July 24, 2020, the Company’s Board of Directors passed a resolution to close the operation of Chain Cloud Mall Logistics Center (Shaanxi) Co., Limited (“CCM Logistics”), a subsidiary located in the national kiwifruit Industrial Park of Baoji City and Hedetang Farm Products Trading Markets (Mei County) Co., Ltd. (“Hedetang Farm”).

The Company has established a winding-down plan to close these operations. Based on the restructuring plan and in accordance with ASC 205-20, the Company presented the operating results from these operations. as a discontinued operation, as the Company believed that no continued cash flow would be generated by these operations. and that the Company would have no significant continuing involvement in the discontinued entity.

In the second quarter of 2020, the Company signed an Equity Transfer Agreement with Shaanxi Yinlian Huijin Asset Management Co. Ltd. to transfer 65% of the equity shares of Zhonglian Hengxin at zero consideration. The net liabilities of Zhonglian Hengxin are $0.15 million. The Company recorded a gain on sale of subsidiary of $0.15 million in the third quarter of 2020.

On November 12, 2020, CCM Tianjin, a wholly owned subsidiary of the Company entered into an Equity Transfer Agreement with Xi’an Yishengkang Information Technology, Ltd. (“Xi’an Yishengkang”), an unrelated third party, pursuant to which the Company agreed to sell 90% of total issued and outstanding capital stock of Hedetang Farm that it owns to Xi’an Yishengkang at RMB9,000 (approximately $1,324). On the same date, CCM Logistics  entered into another Equity Transfer Agreement with an individual and unrelated third party, Liyuan Ying, pursuant to which the Company agreed to sell 10% of its shares of total issued and outstanding capital stock of Hedetang Farm that it owns to Liyuan Ying for RMB1,000 (approximately $147).

(2) HeDeTang HK

On September 18, 2019, HeDeTang HK entered into a Share Transfer Agreement (the “Agreement”) with New Continent International Co., Ltd., (the “Buyer”) a company incorporated in the British Virgin Islands. Pursuant to the terms of the Agreement, the Buyer purchased 100% ownership of HeDeTang HK, which value is primarily derived from HeDeTang HK’s wholly-owned subsidiary HeDeJiaChuan Holdings Co., Ltd. and 73.41% owned subsidiary SkyPeople Juice Group Co., Ltd., for a total price of RMB 600,000 (approximately $85,714) (the “Sale Transaction”). The Sale Transaction was closed on February 27, 2020. In accordance with ASC Topic 205, Presentation of Financial Statement Discontinued Operations (“ASC Topic 205”), the Company presented the operation results from HeDeTang HK and its subsidiaries as a discontinued operation, as the Company believed that no continued cash flow would be generated by the discontinued component and that the Company would have no significant continuing involvement in the operations of the discontinued component. The total assets of HeDeTang HK were $106.85 million as of February 27, 2020 and the total liabilities of HeDeTang HK were $231.21 million as of February 27, 2020, resulting in a gain on disposal of $123.69 million. There was no income or loss from HeDeTang HK from January 1, 2020 to the sale.

13. VARIABLE INTEREST ENTITIES

On July 31, 2019, Chain Cloud Mall Network and Technology (Tianjin) Co., Limited (“CCM Tianjin”), Chain Cloud Mall E-commerce (Tianjin) Co., Ltd., (“E-commerce Tianjin”), and Mr. Zeyao Xue and Mr. Kai Xu, citizens of China and shareholders of E-commerce Tianjin, entered into the following agreements, or collectively, the “Variable Interest Entity Agreements” or “VIE Agreements,” pursuant to which CCM Tianjin has contractual rights to control and operate the business of E-commerce Tianjin (the “VIE”). Therefore, pursuant to ASC 810, E-Commerce Tianjin is included in the Company’s condensed consolidated financial statements since then.

Pursuant to Chinese law and regulations, a foreign owned enterprise cannot apply for and hold a license for operation of certain e-commerce businesses, and 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, the Chairman of the Board of Directors of the Company. Mr. Kai Xu is the Deputy General Manager of Future Commercial Management (Beijing) Co., Ltd.

For the details about the VIE agreements, refer to Note 15 “Variable Interest Entities,” in the Company’s consolidated financial statements included in Company’s 2019 Form 10-K.

14. ACCRUED EXPENSES AND OTHER PAYABLES

The amount of accrued expenses and other payables as of September 30, 2020 and December 31, 2019 consisted of the followings:  

15. LOAN PAYABLE

As of September 30, 2020, loan payable were $0.86 million, which consisted of the loan payable of $0.17 million to Shaanxi Entai Bio-Technology Co., Ltd., loan payable $5,870 to Shenzhen Wangjv Trading Co., Ltd. and loan payable of $0.68 million to some individuals creditor.

The loan from Shaanxi Entai Bio-Technology Co., Ltd. of $0.17 million was an interest free loan and there is not assets pledged for this loan.

On June 15, 2020, the Company entered into a loan agreement with Shenzhen Wangjv Trading Co., Ltd. Pursuant to the loan agreement, the Company borrowed $0.21 million from Shenzhen Wangjv Trading Co., Ltd. at the annual interest rate of 8% for the use of working capital for a year. On July 6, 2020, the Company returned $0.20 million to Shenzhen Wangjv Trading Co., Ltd. 

During the third quarter of 2020, the Company entered into a series of interest free loan agreements with some individual creditors, borrowing $0.68 million for short-term working capital needs. The repayment term is one year from the borrowing date.

On October 27, 2020, the Company entered into a series of Debt Repayment Agreements with some of the individual creditors, pursuant to which the Company agreed to repay $0.32 million debt owed to these individual creditors in the form of shares of Common Stock of the Company for an aggregate of 160,000 shares at a price of $2.00 per share (the “Debt Repayment”). As the closing price of the Company stock was $2.23 on October 27, the Company recognized loss of $0.04 million in other expenses during the fourth quarter of 2020. The Debt Repayment will be completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.

16. REVENUES

All of our revenues are generated in China. The following table summarizes the Company's revenues disaggregated by revenue source (in thousands). The revenues are recognized as separate performance obligations that are satisfied by transferring control of the product or service to the customer. There was no deferred revenue.

17. COMMITMENTS AND CONTINGENCIES

SEC Subpoena

On February 21, 2020, the Company received a subpoena from the SEC’s Division of Enforcement requiring us to produce documents and detailed information relating to, among other things, the Company’s accounting procedures, management oversight, and the sale of HeDeTang holdings (HK) Ltd. to New Continent International Co., Ltd. The subpoena required the Company to produce all responsive documents created during, or concerning, the period January 1, 2016 to the present, unless otherwise specified.

The Company is cooperating with the SEC’s investigation and has provided responsive documents and information requested in the subpoena. In the event the Company locates additional responsive documents, we expect to produce them promptly to the SEC. We will also make officers or other employees available to be interviewed by the SEC with regard to the subject matters identified in the subpoena.

The Company is unable to predict, what action, if any, might be taken in the future by the SEC or any other governmental authority as a result of the subpoenas. There can be no assurance that the SEC will not commence an enforcement action against us or members of our management, or as to the ultimate resolution of any enforcement action that the SEC may decide to bring. Under applicable law, the SEC has the ability to impose significant sanctions on companies and individuals who are found to have violated the provisions of applicable federal securities laws, including cease and desist orders, civil money penalties, and barring individuals from serving as directors or officers of public companies. We have expended significant financial and managerial resources responding to the SEC subpoena. Defending any enforcement action brought by the SEC against us would involve further significant expenditures and the resolution of any such enforcement action could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Entry into a material Definitive Agreement

On July 13, 2020, the Company and Future FinTech (Hong Kong) Limited, a wholly owned subsidiary of the Company entered into a Share Exchange Agreement with Nice Talent Asset Management Limited, a limited company organized under the laws of Hong Kong (“Nice”), which is licensed under the Security and Futures Commission of Hong Kong for assets management, and Joy Rich Enterprises Limited, a limited company organized under the laws of Hong Kong and 90% shareholder of Nice (“Joy Rich”), pursuant to which the Company agreed to acquire 90% of the issued and outstanding ordinary shares of Nice (the “Nice Shares”) from Joy Rich in exchange for the Company’s Common Stock.

Pursuant to the terms of the Share Exchange Agreement, the parties agreed: (i) the aggregate purchase price for Nice Shares shall be HK$54 million (approximately $6.97 million, the “Purchase Price”) and it shall be paid in the Company’s Common Stock; (ii) 40% of the Purchase Price HK$21.6 million (approximately $2.79 million) shall be paid in the shares of common stock of the Company based on the average closing price of the Company’s Common Stock listed on Nasdaq Stock Exchange for the ten (10) trading days prior to the date of the Agreement and the foreign exchange rate between HK$ and US$ shall be the rate published by Bloomberg on the date of the Agreement; (iii) 30% of Purchase Price shall be paid in the Company Common Stock (the “2020 Earn-Out Shares”) if Nice meets certain earnings goal for 2020 (the “2020 Earnings Goal”); (iv) the 2020 Earn-Out Shares shall be issued based upon the average closing price of the Company’s Common Stock listed on Nasdaq Stock Exchange for the ten (10) trading days prior to December 31, 2020 and the exchange rate between HK$ and US$ shall be the rate published by Bloomberg on December 31, 2020; (v) additional 30% of Purchase Price shall be paid in the shares of common stock the Company (the “2021 Earn-Out Shares”) if Nice meets certain earnings goal for 2021 (the “2021 Earnings Goal”); (vi) the 2021 Earn-Out Shares shall be issued based upon the average closing price of the Company’s Common Stock listed on Nasdaq Stock Exchange for the ten (10) trading days prior to December 31, 2021 and the exchange rate between HK$ and US$ shall be the rate published by Bloomberg on December 31, 2021; (vii) if Nice does not achieve its earnings goal for a given year, the parties agree to have forbearance clause that the amount of such year’s earn-out shares shall not be reduced for that year if Nice achieves at least sixty percent (60%) of its given year earnings goal and if Nice achieves lower than 60% earnings goal for a given year, the amount of such year’s earn-out shares shall be reduced to zero. The Company Shares will be issued pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.

This transaction is subject to the approval of the Security and Futures Commission of Hong Kong. As of the date of this report, the transaction is still pending.

Litigation  

Legal case with Zhongcai

Hedetang Market, a subsidiary of CCM Tianjin, entered into a loan agreement with Shaanxi Zhongcai Pawn Co., Ltd. ("Zhongcai") in February 2015. Pursuant to the loan agreement, Hedetang Market borrowed $1.84 million from Zhongcai at the monthly interest rate of 0.4%. Hedetang Market provided its land use right as a pledge for the loan. Hedetang Market did not return the principal and interest on time pursuant to the loan agreement. Zhongcai filed an enforcement request with Xi’an Intermediate People’s Court in July 2015. In August 2017, Xi’an Intermediate People’s Court issued a verdict to seize the pledged land use rights of Hedetang Market for auction. As of the date of this report, the auction sale was not successful.  The Company recorded the unpaid amount of $1.84 million as loan payable.

Legal case with Shaanxi Zhongkun Construction Co., Ltd.

In May 2015, Hedetang Market and Shaanxi Zhongkun Construction Co., Ltd. (“Zhongkun”) entered into a construction and decoration agreement. On September 5, 2018, Zhongkun filed the lawsuit with Mei County People’s Court (the “Court”) for repayment of construction and decoration fees. The Court issued a civil judgement in November 2018, ordering Hedetang Market to pay project funds of RMB 1.65 million (approximately $0.24 million) to Zhongkun, plus interest. On April 19, 2020, the Court issued a verdict to terminate the enforcement because assets of Hedetang Market had already been seized by Xi’an Yanta District People’s Court and Baoji Intermediate People’s Court, and there were no other assets for enforcement. Currently the Company is still liable for the unpaid amount and the interest.

Legal case with Cinda Capital Financing Co., Ltd.

In August 2017, Cinda Capital Financing Co., Ltd. (“Cinda”) filed a lawsuit with Beijing 2nd Intermediate People’s Court (the “Beijing Intermediate Court”) against the Company’s indirectly wholly-owned subsidiaries Shaanxi Guoweimei Kiwi Deep Processing Company, Ltd. (“Guoweimei”) and Hedetang Market (Hedetang Market and together with Guoweimei, “Lessees”) requested that Lessees repay RMB 50 million (approximately $7.27 million) in capital lease fees, plus interest. Cinda purchased or paid for refrigerant warehouse and trading hall to the suppliers and vendors and agreed to lease them to the Lessees for a leasing fee of RMB 50 million in December 2016. The capital leasing fee became due on its maturity date of June 2017, with certain land use rights of Lessees in Mei County and equity of Guoweimei as a pledge. The Company disputed that the land use rights for the refrigerant warehouse and trading hall were never sold to or transferred to Cinda, and argues that therefore it is a loan agreement and not a capital lease agreement among the parties. Lessees have taken the position that Cinda is not a bank and does not have government permits required to make loans in China, and the agreements including pledge agreement were invalid, void and without legal effect from the beginning. Therefore, the Company only has the obligations to repay principal but not the interest. In November 2017, Beijing Intermediate Court ruled in favor of Cinda and the Lessees appealed the case to the Beijing Supreme Court. The Beijing Supreme Court held a hearing at the end of July 2018. On December 4, 2018, the Beijing Supreme Court upheld the lower court’s decision. On April 8, 2019, Beijing Intermediate Court issued the verdict for enforcement of the judgment and the plaintiff has the priority rights for the repayment for the pledged land use rights of Lessees in Mei County and equity of Guoweimei. The case is under enforcement procedure and Cinda is in the process of sale the land use rights. Before the land use right is sold, the subsidiaries of SkyPeople China still owns the seized properties and the liabilities to Cinda. As of September 30, 2020, SkyPeople China has not repaid the amount. SkyPeople China was one of the subsidiaries transferred along with HeDengTang HK to New Continent International Co., Ltd. on February 27, 2020. The creditors have no recourse to the current Company.

In August 2017, Cinda Capital Financing Co., Ltd. (“Cinda”) filed another lawsuit with Beijing Intermediate Court against the Company’s indirectly wholly-owned subsidiaries Guoweimei and SkyPeople China for repayment of a leasing fee of RMB 84.97 million (approximately $12.35 million) plus interest. In January 2014, Guoweimei and SkyPeople China (the “Equipment Lessees”) signed an Equipment Financial Lease Purchase Agreement with Cinda and an equipment supplier pursuant to which Cinda would provide funds to purchase equipment and the Equipment Lessees would lease the equipment from Cinda. Guoweimei pledged certain land use rights in Mei County to Cinda and Xi’an Hedetang and Hedetang Holding pledged their equities in Guoweimei to Cinda to secure the repayment. Mr. Hongke Xue also provided a personal guarantee for the payment of the leasing fee. Beijing Intermediate Court had two hearings of the case and on March 21, 2018, and it ruled in favor of Cinda to the effect that SkyPeople China and Guoweimei shall pay leasing fees due in the amount of RMB 21.00 million (approximately $3.05 million), as well as leasing fees not yet due in the amount of RMB 63.98 million (approximately $9.30 million), plus attorney’s fees and expenses. Beijing Intermediate Court also ruled that Mr. Hongke Xue is jointly liable for the debt as the guarantor, and that Cinda has priority rights to the pledged land use rights in Mei County and the pledged equities of Guoweimei as well as the ownership of the leasing properties until the leasing fees are paid. SkyPeople China has appealed the decision to the Beijing Supreme Court. The Beijing Supreme Court rejected the appeal and upheld the original verdict on September 7, 2018. The case is under enforcement procedure and Cinda is in the process of sale the seized properties. Before they are sold, the subsidiaries of SkyPeople China still owns the seized properties and the liabilities to Cinda. As of September 30, 2020, SkyPeople China has not repaid the amount. SkyPeople China was one of the subsidiaries transferred along with HeDengTang HK to New Continent International Co., Ltd. on February 27, 2020. The creditors have no recourse to the current Company.

Certain pending legal cases that we previously disclosed are related to the subsidiaries of HeDengTang HK, which was sold to New Continent International Co., Ltd. on February 27, 2020. Accordingly, the Company is no longer a party to these legal cases.

18. RISKS AND UNCERTAINTIES

Impact of COVID 19

In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China, the pandemic quickly spread to many provinces, autonomous regions, and cities all over the China and other parts of the world. Substantially all of our revenues are generated in China. The Company’s results of operations have been materially negatively affected by the outbreak of COVID-19 in China, especially during the first half of 2020. In early 2020, Chinese government took emergency measures to combat the spread of the virus, including quarantines, travel restrictions, and the temporary closure of office buildings and facilities in China, which has materially adversely affected the Company’s business and services and results of operations. Our suppliers have negatively been affected, and could continue to be negatively affected in their ability to supply and ship products to our customers by any further outbreak or resurgence of COVID-19 in China. Our customers that are negatively impacted by the outbreak of COVID-19 may reduce their budgets to purchase products and services from us, which may materially adversely impact our revenue. The business operations of the third parties’ stores on our platform have been and could continue to be negatively impacted by any further outbreak or resurgence of COVID-19, which may negatively impact their operations and business, which may in turn adversely affect the business of our platform as a whole as well as our financial condition and operating results. Some of our customers, contractors, suppliers and other business partners are small and medium-sized enterprises (SMEs), which may not have strong cash flows or be well capitalized, and may be vulnerable to an epidemic outbreak and slowing macroeconomic conditions. Further, as we do not have access to a revolving credit facility, there can be no assurance that we would be able to secure commercial debt financing in the future in the event that we require additional capital. 

The Company’s promotion strategy of the CCM Shopping Mall previously mainly relied on the training of members and distributors through meetings and conferences before the outbreak. Although China has already begun to recover from the outbreak of COVID-19, the Chinese government still put a restriction on large gatherings. These restrictions made the promotion strategy for CCM Shopping Mall difficult to implement.

Consequently, our results of operations have been materially adversely affected. Any potential impact to our results will depend on, to a large extent, future developments and new information that may emerge regarding the duration and severity of the COVID-19 and the actions taken by government authorities and other entities to contain the COVID-19 or treat its impact, almost all of which are beyond our control.

PRC Regulations

We conduct substantially all of our operations and generate most of our revenue in the PRC. Accordingly, economic, political and legal developments in the PRC will significantly affect our business, financial condition, results of operations and prospects. The PRC economy is in transition from a planned economy to a market oriented economy subject to plans adopted by the government that set national economic development goals. Policies of the PRC government can have significant effects on economic conditions in the PRC.

Currency risks

A majority of the Company’s operating transactions are denominated in RMB and a significant portion of the Company’s assets and liabilities is denominated in RMB. RMB is not freely convertible into foreign currencies. The value of the RMB is subject to changes in the central government policies and to international economic and political developments. In the PRC, certain foreign exchange transactions are required by laws to be transacted only by authorized financial institutions at exchange rates set by the People’s Bank of China (“PBOC”). Remittances in currencies other than RMB by the Company in China must be processed through PBOC or other China foreign exchange regulatory bodies which require certain supporting documentation in order to complete the remittance.

19. SUBSEQUENT EVENTS

On November 2, 2020, the Company entered into a Securities Purchase Agreement with certain investors pursuant to which the Company agreed to sell to these investors in a private placement 167,034 shares of the Company’s common stock, at a purchase price of $1.87 per share for an aggregate offering price of $312,352. This private placement will be completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.

This quarterly report on Form 10-Q and other reports filed by the Company from time to time with the SEC (collectively the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the filings, the words “may”, “will”, “should”, “would”, “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”, or the negative of these terms and similar expressions as they relate to Company or Company’s management identify forward-looking statements. Such statements reflect the current view of Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors (including the statements in the section “results of operations” below), and any businesses that Company may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those listed under the heading “Risk Factors” and those listed in our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”) and in this Form 10-Q. The following discussion should be read in conjunction with our Financial Statements and related Notes thereto included elsewhere in this report and in our 2019 Form 10-K.

Although the Company believes the expectations reflected in the forward-looking statements are based on reasonable assumptions, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this report, which attempts to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations, and prospects.

Overview of Our Business  

Future FinTech is a holding company incorporated under the laws of the State of Florida. The Company historically engaged in the production and sale of fruit juice concentrates (including fruit purees and fruit juices), fruit beverages (including fruit juice beverages and fruit cider beverages) in the PRC. Due to drastically increased production costs and tightened environmental laws in China, the Company had transformed its business from fruit juice manufacturing and distribution to a real-name blockchain technology and e-commerce platform that integrates blockchain and internet technology business. The main business of the Company includes an online shopping platform, Chain Cloud Mall (CCM), which is based on blockchain technology; a cross-border e-commerce platform (NONOGIRL) which started its trial operation in March 2020 and formally launched in July 2020; a blockchain-based application incubator and technical service and support for real name and blockchain based assets and their operating entities (DCON); and the application and development of blockchain-based e-commerce technology and financial technology.

Currently, the Android version app of the NONOGIRL platform has been launched on Googleplay, Tencent Application Treasure, Xiaomi, OPPO, and VIVO application stores, and the IOS version app of the platform has been launched on Apple App Store. As of September 30, 2020, there were 10,450 registered users of the NONOGIRL platform, of which 1,210 were in China and 9,240 were outside of China

The Company is also expanding into financial service business. On July 13, 2020, the Company entered into a Share Exchange Agreement with Joy Rich Enterprises Limited (“Joy Rich”) to acquire 90% of the issued and outstanding shares of Nice Talent Asset Management Limited (“NTAM”), a Hong Kong-based asset management company, from Joy Rich. NTAM is licensed under the Securities and Futures Commission of Hong Kong (“SFC”) to carry out regulated activities in Type 4: Advising on Securities and Type 9: Asset Management. The transaction is expected to close by the end of November 2020.

In August 2020, the Company announced that it plans to enter the challenger bank and digital payment sector. The challenger banks distinguish themselves from the historic banks by modern financial technology practices, such as online-only operations without physical retail stores, which reduce the banking costs and avoid the complexities of traditional banking. In recent years, challenger banks and third-party payment systems have grown rapidly worldwide, rising to the top of the financial services industry, with personalized banking services that have reinvented the customer experience. Countries around the globe have enforced lockdowns recently and have advised their citizens to socially distance during the COVID-19 pandemic leading to traditional physical banking services declining due to health and safety concerns. This has expedited innovation in financial banking industries. FTFT has already recruited certain professionals from this industry, and has been in frequent contact with companies in this sector in Southeast Asia and Europe, in order to find M&A targets.

Chain Cloud Mall adopts a “multi-vendor hosted stores + platform self-hosted stores” model. The platform supports various marketing methods, including point rewards programs, coupons, live webcasts, game interaction, and social media sharing. Besides the blockchain-powered features, CCM is also fully equipped with the same functions and services that other Chinese leading traditional e-commerce platforms provide.

Based on blockchain technology, CCM is established to transform the relationship between companies and consumers from traditional selling and buying relationships to a value-sharing relationship. The platform will fairly distribute the benefit of the entire mall to users who engaged in the promotion, development, and consumption based on their contributions to the platform. The members of CCM are not only consumers and entrepreneurs but also participants, promoters and beneficiaries. The CCM shared shopping mall platform is designed to be a block-chain based shopping mall for merchants and goods, not the exchange of digital currencies, and it currently only accepts payment from credit cards, Alipay and WeChat.

Chain Cloud Mall is an enterprise and customer interactive and comprehensive shopping and sales service platform. It is an open network promotion system with a blockchain based anti-counterfeit system including referral point and discount points issuance and settlement. The new business model creates a completely new source of data traffic for enterprises on our platform.

Merchants on the Chain Cloud Mall issue their own blockchain points and anti-counterfeiting QR codes. Every product comes with unique anti-counterfeiting QR codes on the label. Customers collect the points issued by the merchants by scanning products with their mobile phones on the anti-counterfeiting QR code. These QR codes are generated by blockchain system of Chain Cloud Mall and provided to merchants. The successful collection of the merchant points confirms that the authentication of product from such enterprise. The Chain Cloud Mall records and provides Chain Cloud Mall points to its members upon a successful new member and/or product referral, which can be used as credit when making purchases on CCM. It incentivizes its members to promote the platform and share the products with their social contacts, which in turn increases the sales through Chain Cloud Mall and helps the Company generate greater value.

CCM shopping mall membership

Members are the key participants on CCM and drivers of its growth. Our members typically pay to gain access to a dedicated app that provides access to a curated selection of products, exclusive membership benefits, and features, including discounted prices and point rewards. Members can refer others to become members and are rewarded for doing so. Members can also promote products on various social platforms and are rewarded if those users purchase our products.

Sales of Goods

We have a unique real-name and membership–based blockchain e-commerce shopping platform that integrates blockchain, internet technology and distinguishes itself by utilizing the automatic value distribution system of the blockchain and sharing the value of the platform to all the participants in the system.

Our latest CCM v3.0 creates a new value cycle system of online shopping mall with the real-name blockchain system with following characteristics:

Using real-name blockchain technology to carry out anti-counterfeiting for products produced by the enterprises. The essence of anti-counterfeiting is to determine the person responsible for the product. Using real-name blockchain system, it provides the assurance to our customers to the authentication of the products they purchase and solve the problem of counterfeiting products in online shopping mall.

Blockchain points are also discount coupons for merchants, guiding customers to the platform of the merchants, and provide them discounts when purchasing. This process is called secondary data traffic. Every company is aware of the importance of maintaining old customers. Blockchain anti-counterfeiting technology through scanning of QR codes by the customers helps companies identify such customers and allows them to systematically maintain contacts with such customers.

Points promotion system brings secondary data traffic comes with volume and high turnover ratio. All such sales are directed to the merchants’ stores when customers possess and use merchants coupons. With a high level of user stickiness, customers are likely to purchase products again and collect more blockchain points.

Anti-counterfeiting technology plus the Company’s secondary data traffic platform have created great value for the merchants that have stores on our platform. By gathering all loyal customers to a merchant’s store, it can build a community of people with the common interest. Through the community, the merchant can form a self-organizing system with customer groups to maximize the interests of such merchant.

Approximately $8,000 and $406,000 were recognized as revenues from orders on sales of the Company’s own products on the platform for the nine months ended September 30, 2020 and September, 2019, respectively.

During the third quarter of 2020, the Company’s Board of Directors passed a resolution to close the operation of CCM Logistics, a subsidiary located in the national kiwifruit Industrial Park of Baoji City. In July 2020, the Company established a winding-down plan to close this operation.

On November 12, 2020, CCM Tianjin, a wholly owned subsidiary of the Company entered into an Equity Transfer Agreement with Xi’an Yishengkang Information Technology, Ltd. (“Xi’an Yishengkang”), an unrelated third party, pursuant to which CCM Tianjin agreed to sell 90% of total issued and outstanding capital stock of Hedetang Market that it owns to Xi’an Yishengkang for RMB9,000 (approximately $1,324). On the same date, CCM Logistics  entered into another Equity Transfer Agreement with an individual and unrelated third party, Liyuan Ying, pursuant to which CCM Tianjin agreed to sell 10% of total issued and outstanding capital stock of Hedetang Market that it owns to Liyuan Ying for RMB1,000 (approximately $147).

Impact of COVID-19 on our Business

In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China, the pandemic quickly spread to many provinces, autonomous regions, and cities all over the China and other parts of the world.COVID-19 has materially and adversely affected our business, especially during the first six months of 2020. In early 2020, Chinese government took emergency measures to combat the spread of the virus, including quarantines, travel restrictions, and the temporary closure of office buildings and facilities in China.

Substantially all of our revenues are generated in China. In response to the evolving dynamics related to the COVID-19 outbreak, the Company is following the guidelines of local authorities as it prioritizes the health and safety of its employees, contractors, suppliers and business partners. Our offices in China was closed and all of the Company’s employees worked from home from Chinese New Year at the end of January until late March 2020. Other businesses in China started reopening around the end of the first quarter as well, and more and more businesses, transportation, logistic and marketing activities have gradually resumed since then. Our offices currently are in normal operation. However, quarantines, travel restrictions, and the temporary closure of office buildings have negatively impacted our business during the outbreak. Our suppliers have negatively been affected, and could continue to be negatively affected in their ability to supply and ship products to our customers by any further outbreak or resurgence of COVID-19 in China. Our customers that are negatively impacted by the outbreak of COVID-19 may reduce their budgets to purchase products and services from us, which may materially adversely impact our revenue. The business operations of the third parties’ stores on our platform have been and could continue to be negatively impacted by any further outbreak or resurgence of COVID-19, which may negatively impact their operations and business, which may in turn adversely affect the business of our platform as a whole as well as our financial condition and operating results. The outbreak has had and might continue to have disruption to our supply chain, logistics providers, customers or our marketing activities if there is a resurgence of COVID-19 in China, which could materially adversely impact our business and results of operations, including causing our suppliers to cease manufacturing products for a period of time or materially delay delivery to us and customers, which may also lead to loss of customers, as well as reputational, competitive and business harm to us. Some of our customers, contractors, suppliers and other business partners are small and medium-sized enterprises (SMEs), which may not have strong cash flows or be well capitalized, and may be vulnerable to an epidemic outbreak and slowing macroeconomic conditions. If the SMEs that we work with cannot weather the COVID-19 and the resulting economic impact, or cannot resume business as usual after a prolonged outbreak, our revenues and business operations may be materially and adversely impacted.

The global economy has also been materially negatively affected by the COVID-19 and there is continued severe uncertainty about the duration and intensity of its impacts. The Chinese and global growth forecast is extremely uncertain, which would seriously affect customer spending on our shopping mall.

While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing our ability to access capital, which could negatively affect our liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of the Company’s Common Stock.

Further, as we do not have access to a revolving credit facility, there can be no assurance that we would be able to secure commercial debt financing in the future in the event that we require additional capital. We currently believe that our financial resources will be adequate to see us through the outbreak. However, in the event that we do need to raise capital in the future, outbreak-related instability in the securities markets could adversely affect our ability to raise additional capital.

Consequently, our results of operations have been materially adversely affected. Any potential impact to our results will depend on, to a large extent, future developments and new information that may emerge regarding the duration and severity of the COVID-19 and the actions taken by government authorities and other entities to contain the COVID-19 or treat its impact, almost all of which are beyond our control. 

SEC Subpoena

On February 21, 2020, the Company received a subpoena from the SEC’s Division of Enforcement requiring us to produce documents and detailed information relating to, among other things, the Company’s accounting procedures, management oversight, and the sale of HeDeTang holdings (HK) Ltd. to New Continent International Co., Ltd. The subpoena required the Company to produce all responsive documents created during, or concerning, the period January 1, 2016 to the present, unless otherwise specified.

The Company is cooperating with the SEC’s investigation and has provided responsive documents and information requested in the subpoena. In the event the Company locates additional responsive documents, we expect to produce them promptly to the SEC. We will also make officers or other employees available to be interviewed by the SEC with regard to the subject matters identified in the subpoena.

The Company is unable to predict, what action, if any, might be taken in the future by the SEC or any other governmental authority as a result of the subpoenas. There can be no assurance that the SEC will not commence an enforcement action against us or members of our management, or as to the ultimate resolution of any enforcement action that the SEC may decide to bring. Under applicable law, the SEC has the ability to impose significant sanctions on companies and individuals who are found to have violated the provisions of applicable federal securities laws, including cease and desist orders, civil money penalties, and barring individuals from serving as directors or officers of public companies. We have expended significant financial and managerial resources responding to the SEC subpoena. Defending any enforcement action brought by the SEC against us would involve further significant expenditures and the resolution of any such enforcement action could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Results of Operations

Comparison of Three Months ended September 30, 2020 and 2019: 

Revenue

The following table presents our consolidated revenues for each of our main services and products for the three months ended September 30, 2020 and 2019, respectively (in thousands):

The Company’s promotion strategy previously mainly relied on the training of members and distributors through meetings and conferences. Due to the outbreak of COVID-19, the Chinese government put a restriction on large gatherings and these restrictions made the promotion strategy for CCM Shopping Mall and NONOGIR difficult to implement. As a result, there was a decrease in the sales of good due to the lack of ability to promote the use of our CCM shopping mall and NONOGIR to purchase our products through existing marketing strategies.

Revenue from service fees includes CCM Shopping Mall and NONOGIRL membership, agent fees, commission on sales, service fees, etc. In the second quarter of 2020, the Company launched CCM v3.0. With the new application, the Company charges RMB 1,000 (approximately $142) per year to the suppliers, who agree to adopt the QRO anti-counterfeiting code for their products, which they sell in CCM and NONOGIR. Members that serve as agents to sell products for CCM and NONOGIR suppliers are charged a one-time agent fee of RMB 3,820 (approximately $543) by CCM and NONOGIR. CCM and NONOGIR also charges commission from products sold on the platform, and service fee from the agent, who receive commission from the suppliers.

As there was no promotion of the CCM shopping mall and NONOGIR, revenue from service fees also decreased in the third quarter of fiscal year 2020, compared to the same period of 2019.

Gross Margin

The following table presents the consolidated gross profit of each of our main services and products and the consolidated gross profit margins for the three months ended September 30, 2020 and 2019, respectively (in thousands):

The decrease in gross margin as a percentage of revenue for the nine months ended September 30, 2020 as compared to the same period of last year was due to a decrease in gross margin from services fees, which accounts for 89.7% of total revenue for the three months ended September 30, 2020.

The decrease in gross profit from service fees for the nine months ended September 30, 2020 as compared to the same period of last year in dollar amount was mainly due to a decrease in revenue.

Operating Expenses

The following table presents our consolidated operating expenses and operating expenses as a percentage of revenue for the three months ended September 30, 2020 and 2019, respectively (in thousands): 

The decrease in general and administrative expenses for the nine months ended September 30, 2020 as compared to the same period of last year was mainly due to the decrease in payroll related expenses as a result of the Company’s cost control efforts.

The decrease in selling expenses for the nine months ended September 30, 2020 as compared to the same period of last year was mainly due to a decrease in payroll related expenses for the sales staff, which staffs, who now are mainly based on performance-based commission. In addition, the shipping expenses decreased as a result of a decreased in the sales volume in the third quarter of 2020, compared to the same period of 2019.

Bad debt provision for the three months ended September 30, 2020 was mainly for the other receivables, which are more than three months past due.

Other Income (Expense), Net

Other expenses, net increased by $1.44 million to $1.42 million for the three months ended September 30, 2020 from other expenses of $0.02 million in the same period of the last fiscal year, primarily due to an increase in loss of $1.95 million recorded in the third quarter of 2020 for the issuance of common stock for the Debt Repayment Agreement that the Company entered during fiscal year 2020.

Income Tax

There were no provisions for income taxes, as the company suffered a loss.

Non-controlling Interests

As of September 30, 2020, Shaanxi Chunlv Ecological Agriculture Co., Ltd. holds 20.0% interest in Chain Cloud Mall Logistics Center (Shaanxi) Co., Limited (“CCM Logistics”), CCM Logistics holds 10% interest in ) Hedetang Farm Products Trading Market (Mei County) Co., Ltd., Nature Worldwide Resources Ltd. held a 40% interest in DCON Digipay, and Shaanxi Yinlian holds 45% interest in Zhonglian Hengxin.

Comparison of Nine Months ended September 30, 2020 and 2019:

Revenue

The following table presents our consolidated revenues for each of our main services and products for the nine months ended September 30, 2020 and 2019, respectively (in thousands):

The decrease in revenue for the nine months ended September 30, 2020 as compared to the same period of last year was due to a decrease in sales of goods.

The decrease in sale of goods was mainly due to the negative impact of COVID-19 during this period, as the staff could not work in the office and shipments stopped during the first quarter. In addition, the Company is lack of ability to promote the use of our CCM shopping mall and NONOGIRL to purchase our products through existing marketing strategies.

As a percentage of total revenue, revenue from service fees was 97.8% and 45.5% for the nine months ended September 30, 2020 and September 30, 2019, respectively. 

In the second quarter of 2020, the Company launched CCM v3.0. With the new application, the Company charges RMB 1,000 (approximately $142) per year to the suppliers, who agree to adopt the QRO anti-counterfeiting code for their products, which they sell in CCM. Members that serve as agents to sell products from CCM suppliers are charged a one-time agent fee of RMB 3,820 (approximately $543) by CCM. CCM also charges commission from products sold on the platform, and service fee from the agent, who receive commission from the suppliers.

Gross Margin

The following table presents the consolidated gross profit of each of our main services and products and the consolidated gross profit margin, which is gross profit as a percentage of the related revenues, for the nine months ended September 30, 2020 and 2019, respectively (in thousands):

The increase in gross margin as a percentage of revenue for the nine months ended September 30, 2020 as compared to the same period of last year was mainly attributable to the decrease in the revenue percentage of sales of goods relative to the total revenue. Sale of goods has a lower margin. The decrease in the dollar value of overall gross margin for the nine months ended September 30, 2020 as compared to the same period of last year was mainly due to the decrease in revenue from the sales of goods.

Operating Expenses

The following table presents our consolidated operating expenses and operating expenses as a percentage of revenue for the nine months ended September 30, 2020 and 2019, respectively (in thousands):

The increase in general and administrative expenses for the nine months ended September 30, 2020 as compared to the same period of the last fiscal year was mainly due to stock related expenses of $1,191 thousand that the Company recorded during first quarter of 2020, for a Consulting Service Agreement that the Company entered into on January 25, 2020 with Dragon Investment Holding Limited (Malta), which was partially offset by the decrease in payroll related expenses as a result of the Company’s cost control efforts.

The decrease in selling expenses thousand for the nine months ended September 30, 2020, compared to the same period of the last fiscal year was mainly due to a decrease in  payroll related expenses for the sales staffs, who now are mainly on performance based compensation. In addition, the shipping expenses decreased as a result of a decreased in the sales volume during the nine months ended September 30, 2020.

Bad debt provision incurred during the period ended September 30, 2020 was mainly for the other receivables, which are more than three months past due.

Other Income (Expense), Net

Other expenses, net increased by $2.04 million to $2.17 million for the nine months ended September 30, 2020 from other expenses of $0.13 million in the same period of the last fiscal year, primarily due to the increase of loss of $1.95 million related with the issuance of common stock for the Debt Repayment Agreement that the Company entered during the nine months ended September 30, 2020.

Non-controlling Interests

As of September 30, 2020, Shaanxi Chunlv Ecological Agriculture Co., Ltd. holds 20.0% interest in Chain Cloud Mall Logistics Center (Shaanxi) Co., Limited (“CCM Logistics”), CCM Logistics holds 10% interest in Hedetang Farm Products Trading Market (Mei County) Co., Ltd., Nature Worldwide Resources Ltd. held a 40% interest in DCON Digipay, and Shaanxi Yinlian holds 45% interest in Zhonglian Hengxin.

Liquidity and Capital Resources

As of September 30, 2020, we had cash and cash equivalents of $0.96 million, as compared to $0.53 million as of December 31, 2019.

Our working capital has historically been generated from our operating cash flows, advances from our customers and loans from bank facilities and issuance of stock. Our working capital was $4.0 million, as of September 30, 2020, an increase of $106 million from working capital of negative $102 million  as of September 30, 2019, mainly due to a decrease in current liabilities. 

Net cash used in operating activities decreased by $6.5 million to $0.8 million for the nine months ended September 30, 2020 from $7.3 million for the same period of the last fiscal year. The decrease in net cash used in operating activities was primarily due to an increase in net income.

Net cash used in investing activities was $5.1 million for the nine months ended September 30, 2020. Net cash used in investing activities was mainly for the payment in short-term loan investment of $5.1 million and the purchase of accounting software of $1,259 for the nine months ended September 30, 2020.

Net cash provided in financing activities for the nine months ended September 30, 2020 was $7.2 million representing an increase of $6.2 million, as compared to cash provided by financing activities of $1.0 million during the nine months ended September 30, 2019. The increase in cash provided by financing activities was mainly attributable to the proceeds of $5.5 million from loan payables that the Company received during the nine months ended September 30, 2020.

Off-balance Sheet Arrangements

As of September 30, 2020, we did not have any off-balance sheet arrangements.

Not applicable.

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, our principal executive officer and principal interim financial officer, respectively, evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2020, our disclosure controls and procedures were not effective due to a material weakness in our internal control over financial reporting. Specifically, we currently lack sufficient accounting personnel with the appropriate level of knowledge, experience and training in U.S. GAAP and SEC reporting requirements.

Changes to Internal Control over Financial Reporting

We have taken, and are taking, certain actions to remediate the material weakness related to our lack of U.S. GAAP experience. We have engaged consultants with U.S. GAAP knowledge and experience to supplement our current internal accounting personnel and assist us in the preparation of our financial statements to ensure that our financial statements are prepared in accordance with U.S. GAAP.

Other than discussed above, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

As described in our Annual Report for the year ended December 31, 2019 and the footnotes of this Quarterly Report, we are party to a number of legal proceedings. There have been no material developments in those proceedings during the three months ended September 30, 2020.

Not applicable.

None.

None. 

Not applicable.

None.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.