Future FinTech Group Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 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, 2020 (the “2020 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 2020 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 based e-commerce platform and supply chain financing service and trading business. The main business of the Company includes an online shopping platform, Chain Cloud Mall (“CCM”), which is based on blockchain technology; supply chain financing services and trading; a blockchain-based application incubator; and technical service and support for blockchain based assets and their operating entities; and the application and development of blockchain-based e-commerce technology and financial technology services. The Company has also expanded into financial services business. On August 6, 2021, the Company completed acquisition of 90% of the issued and outstanding shares of Nice Talent Asset Management Limited (“NTAM”), a Hong Kong-based asset management company, from Joy Rich Enterprises Limited (“Joy Rich”). NTAM is licensed under the Securities and Futures Commission of Hong Kong (“SFC”) to carry out regulated activities in Type 4: Advising on Securities and Type 9: Asset Management. On September 1, 2021, FTFT UK Limited, a company organized under the laws of United Kingdom and a wholly owned subsidiary of the Company entered into a Share Purchase Agreement with Rahim Shah, a resident of United Kingdom (“Seller”) to acquire 100% of the issued and outstanding shares (the “Sale Shares”) of Khyber Money Exchange Ltd., which is a money transfer company with a platform for transferring money through one of its agent locations or via its online portal, mobile platform or over the phone. Khyber Money Exchange Ltd. is regulated by the UK Financial Conduct Authority (FCA) and the parties are waiting for the approval by the FCA before formal closing of the transaction. We are a holding company incorporated in Florida and we are not a Chinese operating company. As a holding company with no material operations of our own, we conduct a substantial majority of our operations through our subsidiaries and contractual arrangements with a variable interest entity (VIE) – Cloud Chain E-Commerce (Tianjin) Co., Ltd., formerly known as Chain Cloud Mall E-Commerce (Tianjin) Co., Ltd. (“E-Commerce Tianjin”), based in China and this structure involves unique risks. Our shares of common stock are shares of our Florida holding company, and we do not have any equity ownership of our VIE, instead we control and receive the economic benefits of our VIE’s business operations through certain contractual arrangements, which are used to replicate foreign investment in Chinese-based companies where Chinese law prohibits direct foreign investment in value added telecom/e-commerce business. Chinese regulatory authorities could disallow the VIE structure, which would likely result in a material change in our operations and/or value of our shares, including that it could cause the value of shares to significantly decline or become worthless. 28 There are legal and operational risks associated with being based in and having a substantial majority of operations in China and Hong Kong. These risks could result in a material change in our operations and/or the value of our common stock or could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of our shares to significantly decline or be worthless. Recently, the PRC government initiated a series of regulatory actions and statements to regulate business operations in China with little advance notice, including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas using variable interest entity structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement. On July 6, 2021, the General Office of the Communist Party of China Central Committee and the General Office of the State Council jointly issued an announcement to crack down on illegal activities in the securities market and promote the high-quality development of the capital market, which, among other things, requires the relevant governmental authorities to strengthen cross-border oversight of law-enforcement and judicial cooperation, to enhance supervision over China-based companies listed overseas, and to establish and improve the system of extraterritorial application of the PRC securities laws. Recently, the PRC State Internet Information Office issued the Measures of Cybersecurity Review (Revised Draft for Comments, not yet effective), which requires cyberspace operators with personal information of more than 1 million users who want to list abroad to file a cybersecurity review with the Office of Cybersecurity Review. As of the date of this report, these new laws and guidelines have not impacted the Company’s ability to conduct its business, accept foreign investments, or list on a U.S. or other foreign stock exchange; however, there are uncertainties in the interpretation and enforcement of these new laws and guidelines, which could materially and adversely impact our business and financial outlook and may impact our ability to accept foreign investments or continue to list on a U.S. or other foreign stock exchange. Our VIE and certain subsidiaries of the Company are incorporated and operating in mainland China and they have received all required permissions from Chinese authorities to operate their current business in China, including a Business license, Bank Account Open Permits and Value Added Telecom Business License. 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 users 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. Such business model creates a completely new source of data traffic for enterprises on our platform. 29 The Company started its trial operation of NONOGIRL, a cross-border e-commerce platform, in March 2020 and formally launched it in July 2020. The cross-border e-commerce platform aimed to build a new s2b2c (supplier to business and consumer) outsourcing sales platform dominated by social media influencers. It was aimed at the growing female consumer market, with the ability to broadcast, short video, and all forms communication through the platform. It could also create a sales oriented sharing ecosystem with other major social media used by customers, etc. The Company’s promotion strategy previously mainly relied on the training of members and distributors through meetings and conferences. Due to the outbreak of COVID-19, the Chinese government put a restriction on large gatherings. These restrictions made the promotion strategy for our online e-commerce platforms difficult to implement and the Company has experienced difficulties to subscribe new members for its online e-commerce platforms. Due to the lack of new subscribers, in June 2021, the Company suspended its cross-border e-commerce platform (NONOGIRL). Also, since the second quarter of 2021, the Company has transformed its member-based business model of Chain Cloud Mall to sales agent based business model and began to provide supply chain financing services and trading for coal mines and power generation plants as well as aluminum ingots. The Company currently has seven direct wholly-owned subsidiaries: DigiPay FinTech Limited (“DigiPay”), a company incorporated under the laws of the British Virgin Islands, Future FinTech (Hong Kong) Limited, a company incorporated under the laws of Hong Kong, GlobalKey Shared Mall Limited, a company incorporated under the laws of Cayman Islands (“GlobalKey Shared Mall”), Tianjin Future Private Equity Fund Management Partnership( Limited Partnership), a company incorporated under the laws of China, FTFT UK Limited, a company incorporated under the laws of United Kingdom, Future Fintech Digital Capital Management, LLC, a company incorporated under the laws of Connecticut and Future FinTech Labs Inc., a company incorporated under the laws of New York. CCM Shopping Mall Due to the lack of new member subscriptions caused by restrictions on our promotion strategy for the control of spread of COVID-19, we have transformed the CCM shopping mall to an “Enterprise Communication as A Service” or eCAAS platform. The eCAAS platform is entrusted by the 315 Consumer Protection Foundation to run its Responsible Brand Program. 315 Consumer Protection Foundation (the “Foundation”) will review and accept the companies to join its Responsible Brand Program. After acceptance, these companies are authorized to use 315 anti-counterfeiting labels on their products and sell them on our eCAAS platform. The companies can also use sales agents to sell their products on our eCAAS platform and parties can negotiate the commission percentages for the products sold. Any new sales agent must be recommended by existing agents and pay a one-time fee to the eCAAS platform to be admitted as the authorized agent to provide sales agent services on the platform. Sales of Goods We have a unique real-name 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 eCAAC platform has a value cycle system of online shopping mall with the real-name blockchain system with following characteristics: 1. Blockchain anti-counterfeiting 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. 30 2. Blockchain points settlement leads to secondary data traffic Blockchain points are also discount coupons for merchants, guiding customers to the platform of the merchants, and provide them with discounts when purchasing. This process is called secondary data traffic. 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. 3. Points promotion system 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 merchant’s coupons. With a high level of user stickiness, customers are likely to purchase products again and collect more blockchain points. 4. Building a high value community We believe anti-counterfeiting technology plus the Company’s secondary data traffic platform will create great value for the merchants that have stores on our platform. By gathering all loyal customers to a merchant’s store, we can build a standard value community. With the common interest, the value community of merchants can form a self-organizing system with customer groups to maximize the interests of such merchants and customers. Coal and Aluminum Ingots Supply Chain Financing Service and Trading Since the sconed quarter of 2021, we started coal supply chain financing service and trading business. Since the third quarter of 2021, we started aluminum ingots supply chain financing service and trading business. We signed purchase and sale agreements with suppliers and buyers. The suppliers are responsible for the supply and transportation of coal to the end users’ designated freight yard or transfer the title of aluminum ingots to us in certain warehouses. We select the customers and suppliers that have good credit and reputation. NTAM engages assets management and advisory services. NTAM’s main revenue is generated from providing professional advices to customers and management fees for managing the investment of the clients. 31 Results of Operations Comparison of Three Months ended September 30, 2021 and 2020: Revenue The following table presents our consolidated revenues for the three months ended September 30, 2021 and 2020, respectively: Three months ended September 30, Change 2021 2020 Amount % CCM Shopping Mall Membership - 29,779 (29,779 ) (100 )% Coal and Aluminum Ingots Supply Chain Financing/Trading 9,643,977 - 9,643,977 - Sales of goods - 4,264 (4,264 ) 100 % Asset management service 2,101,050 - 2,101,050 - Others - 9,407 (9,407 ) (100 )% Total $ 11,745,027 $ 43,450 $ 11,701,577 26931 % CCM Shopping Mall Membership fees decreased from $29,779 for the three months ended September 30, 2020 to $0 for the three months ended September 30, 2021 because there was no new member enrollment during the third quarter of 2021 and the Company has transformed its business model of CCM Shopping Mall from a member-based platform to a sales agent based eCAAC platform. Due to COVID-19 related restriction on large gathering for meetings and conference which primarily used by us before the pandemic for marketing and business development of new members, we were unable to attract new member enrollment during the three months ended September 30, 2021. Coal and Aluminum Ingots Supply Chain Financing Service and Trading business increased from $0 for the three months ended September 30, 2020 to $9.64 million for the three months ended September 30, 2021. This is a new business we started during the second quarter this year which did not exist last year. Sale of goods decreased from $4,264 for the three months ended September 30, 2020 to $0 for the three months ended September 30, 2021 as no sale of goods during the same period of 2021. Asset management service increased from $0 for the three months ended September 30, 2020 to $2.1 million for the three months ended September 30, 2021. This is a new business we acquired during the third quarter 2021 which did not exist last year. Other revenues decreased from $9,407 from three months ended September 30, 2020 to $0 for the three months ended September 30, 2021, mainly due to the service fee income during the three months ended September 30, 2020 and no such income during the same period of 2021. Gross Margin The following table presents the consolidated gross profit of each of our main products and services and the consolidated gross profit margin, which is gross profit as a percentage of the related revenues, for the three months ended September 30, 2021 and 2020, respectively: Three months ended September 30, 2021 2020 Gross profit Gross margin Gross profit Gross margin CCM Shopping Mall Membership - - 24,561 82.48 % Coal and Aluminum Ingots Supply Chain Financing/Trading 296,173 3.07 % - - Sales of goods - - 2,012 47.19 % Asset management service 686,910 32.69 % - - Others - - 3,483 37.02 % Total $ 983,084 8.37 % $ 30,056 69.17 % Overall gross margin as a percentage of revenue was 8.37% for the three months ended September 30, 2021, a decrease of 60.8% compared to 69.17% for the same period of last fiscal year, mainly due to less revenues from the membership fee which has a much higher margin than that of coals and aluminum ingots financial service and trading business. 32 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, 2021 and 2020, respectively: (in thousands) September 30, 2021 September 30, 2020 Amount % of revenue Amount % of revenue General and administrative $ 2,243 19.10 % $ 643 1480.72 % Stock compensation expense 5,488 46.73 % Selling expenses 112 0.96 % 26 59.37 % Bad debt provision - - 53 121.3 % Total operating expenses $ 7,844 66.78 % $ 722 1661.39 % General and administrative expenses increased by $1.60 million, or 248.66%, from $0.64 million to $2.24 million for the three months ended September 30, 2021, compared to the same period of last fiscal year. The increase in general and administrative expenses was mainly due to new business development and new subsidiaries established by the Company during the three months ended September 30, 2021 comparing to the same period of 2020. Stock compensation expense increased by $5.49 million during the three months ended September 30, 2021, compared to the same period of last fiscal year as the Compensation Committee of the Board of Directors (the “Board”) of the Company granted certain shares of common stock of the Company to certain officers and employees in July 2021 which we didn’t have such grant in the same period of 2020. Selling expenses increased by $0.09 million during the three months ended September 30, 2021, compared to the same period of last fiscal year. Other (Expense) Income, Net Other expenses, net increased by $1.93 million to positive $0.23 million for the three months ended September 30, 2021 from negative $1.7 million in the same period of the last fiscal year, mainly due to debt repayment with shares during the three months ended September 30, 2020 and no such expense in the same period of 2021. 33 Income Tax We did not have tax provision for the three months ended September 30, 2021 and 2020, as the Company incurred losses in the third quarter of 2021 and 2020. Non-controlling Interests As of September 30, 2021, Joy Rich Enterprises Limited (“Joy Rich”) holds 10% interest in Nice Talent Asset Management Limited, Nature Worldwide Resources Ltd. holds 40% interest in DCON DigiPay Limited (“DCON Digipay”), Bin Wu and Lixiong Huang holds 25% and 20% interest in FTFT Capital Investments L.L.C. Loss from Continuing Operations Loss from continuing operations increased by $4.2 million from $2.4 million for the three months ended September 30, 2020 to $6.6 million for the same period of 2021 mainly due to increase in operating expenses, as discussed above. Loss on disposal of discontinued operations Loss on disposal of discontinued operation was $3,679,447 for the three months ended September 30, 2021, which was related to the disposal of Guagnchengji (Guangdong) Industrial Co., Ltd during the third quarter of 2021. Comparison of Nine Months Ended September 30, 2021 and 2020 Revenue The following table presents our consolidated revenues for the nine months ended September 30, 2021 and 2020, respectively: Nine months ended September 30, Change 2021 2020 Amount % CCM Shopping Mall Membership 85 333,425 (333,340 ) (99.97 )% Coal and Aluminum Ingots Supply Chain Financing/Trading 10,402,760 - 10,402,760 - Sales of goods - 6,399 (6,399 ) 100 % Asset management service 2,101,049 - 2,101,049 - Others - 15,876 (15,876 ) (100 )% Total $ 12,503,894 $ 355,700 $ 12,148,194 3415 % CCM Shopping Mall Membership fees decreased from $333,425 for the nine months ended September 30, 2020 to $85 for the nine months ended September 30, 2021 because the Company had difficulties to enroll new members during the first half of 2021 and the Company has transformed its business model of CCM Shopping Mall from member-based platform to a sales agent based eCAAC platform during the second quarter of 2021. Due to the COVID-19 related restriction on large gathering for meetings and conference which primarily used by us before the pandemic for marketing and business development of new members, we were unable to attract more new members in 2021. 34 Coal and Aluminum Ingots Supply Chain Financing Service and Trading business increased from $0 for the nine months ended September 30, 2020 to $10.4 million for the nine months ended September 30, 2021. This is a new business we started during the second quarter this year which did not exist last year. Sale of goods decreased from $6,399 for the nine months ended September 30, 2020 to $0 for the nine months ended September 30, 2021 as no sale of goods during the same period of 2021. Asset management service increased from $0 for the nine months ended September 30, 2020 to $2.1 million for the nine months ended September 30, 2021. This is a new business we acquired during the third quarter 2021 which did not exist last year. Other revenues decreased from $15,876 for the nine months ended September 30, 2020 to $0 for the nine months ended September 30, 2021, mainly due to the service fee income during the three months ended September 30, 2020 and no such income during the same period of 2021. Gross Margin The following table presents the consolidated gross profit of each of our main products and services and the consolidated gross profit margin, which is gross profit as a percentage of the related revenues, for the nine months ended September 30, 2021 and 2020, respectively: Nine months ended September 30, 2021 2020 Gross profit Gross margin Gross profit Gross margin CCM Shopping Mall Membership 85 100 % 323,972 97.16 % Coal and Aluminum Ingots Supply Chain Financing/Trading (247,611 ) (2.38 )% - - Sales of goods - 3,006 46.98 % Asset management service 686,909 32.69 % Others - - 5,270 33.20 % Total $ 439,383 3.51 % $ 332,249 93.41 % Overall gross margin as a percentage of revenue was 3.51% for the nine months ended September 30, 2021, a decrease of 89.9% compared to 93.41% for the same period of last fiscal year, mainly due to less revenues from the membership fee which has a much higher margin than that of coals and aluminum ingots financing service and trading. 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, 2021 and 2020, respectively: (in thousands) September 30, 2021 September 30, 2020 Amount % of revenue Amount % of revenue General and administrative $ 4,568 36.53 % $ 2,818 791.57 % Stock compensation expense 5,488 43.89 % - - Selling expenses 135 1.08 % 44 12.43 % Bad debt provision (15 ) (0.12 )% 243 68.32 % Total operating expenses $ 10,176 81.38 % $ 3,105 872.89 % General and administrative expenses increased by $1.75 million, or 62.11%, from $2.82 million for the nine months ended September 30, 2020 to $4.57 million for the nine months ended September 30, 2021. It is mainly due to new business development and new subsidiaries established by the Company during the nine months ended September 30, 2021 comparing to the same period of 2020. Stock compensation expense increased by $5.49 million during the nine months ended September 30, 2021, compared to the same period of last fiscal year as the Compensation Committee of the Board granted certain shares of common stock of the Company to certain officers and employees in July 2021 which we didn’t have such grant in the same period of 2020. 35 Selling expenses increased by $91,248 during the nine months ended September 30, 2021, compared to the same period of last fiscal year. Write back of provision of doubtful debt was $15,255 for the nine months ended September 30, 2021, decreased by $0.26 million comparing to the same period of the last fiscal year. Other (Expense) Income, Net Other expenses, net, increased by $3.57 million to positive $0.69 million for the nine months ended September 30, 2021 from negative $2.88 million in the same period of the last fiscal year, mainly due to debt repayment with shares during the nine months ended September 30, 2020 and no such expense in the same period of 2021. Income Tax We did not have tax provision for the nine months ended September 30, 2021 and 2020, as the Company incurred losses in the nine months ended September 30, 2021 and 2020. Non-controlling Interests As of September 30, 2021, Joy Rich Enterprises Limited (“Joy Rich”) holds 10% interest in Nice Talent Asset Management Limited, Nature Worldwide Resources Ltd. holds 40% interest in DCON DigiPay Limited (“DCON Digipay”), Bin Wu and Lixiong Huang holds 25% and 20% interest in FTFT Capital Investments L.L.C. Loss from Continuing Operations Loss from continuing operations increased by $3.4 million from $5.65 million for the nine months ended September 30, 2020 to $9.05 million for the same period of 2021 mainly due to increase in operating expenses, as discussed above. Loss on disposal of discontinued operations Loss on disposal of discontinued operation was $3.52 million for the nine months ended September 30, 2021, which was related to the dissolution and deregistration of FT Commercial Management (Beijing) Co., Ltd . and Chain Future Digital Tech (Beijing) Co., Ltd., which was partially offset by the loss on disposal of Guagnchengji (Guangdong) Industrial Co., Ltd., during the nine months ended September 30, 2021. Loss per Share Basic and diluted loss per share from continuing operations was $0.14 and $0.14 for the nine months ended September 30, 2021, respectively, as compared to a loss of $0.15 and $0.15 for the same periods of 2020, respectively. Basic and diluted income per share attributable to discontinued operations was $0.04 and $0.04 for the nine months ended September 30, 2021 respectively. Basic and diluted loss per share attributable to discontinued operations was $3.22 and $3.17 for the nine months ended September 30, 2020 respectively. Liquidity and Capital Resources As of September 30, 2021, we had cash and cash equivalents of $52.97 million, as compared to $9.43 million as of December 31, 2020. The increase in cash, cash equivalents and restricted cash was mainly due to financing from the issuance of shares of common stock. Our working capital has mainly been generated from financing activities of issuance of shares of common stock of the Company. Our working capital was positive $73.14 million, as of September 30, 2021, an increase of $67.31 million from working capital of $5.83 million, as of September 30, 2020, mainly due to an increase in current assets and a decrease in current liabilities. 36 Net cash used in operating activities decreased by $20.37 million to $19.81 million for the nine months ended September 30, 2021 from a cash inflow of $0.56 million for the same period of the last fiscal year. The decrease in net cash used by operating activities was primarily due to a decrease in accounts receivable during the nine months ended September 30, 2021. Net cash used in investing activities decreased by $4.84 million comparing the nine months ended September 30, 2021 and September 30, 2020, mainly due to payment for Loan receivable. Net cash provided in financing activities for the nine months ended September 30, 2021 was $68.27 million representing an increase of $58.17 million, as compared to cash provided by financing activities of $10.1 million during the nine months ended September 30, 2020. The increase in cash provided by financing activities was mainly due to financing from the issuance of shares of common stock. Off-balance sheet arrangements As of September 30, 2021, we did not have any off-balance sheet arrangements. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable.