Future FinTech (FTFT) - 2020 Q4 - Annual Report

Part I Item 1. Business The company transformed from a fruit juice producer to a blockchain e-commerce platform, expanding into financial services, while navigating COVID-19 impacts and PRC regulations via a VIE structure - The company has fundamentally transformed its business from fruit juice manufacturing to a blockchain-based e-commerce platform (Chain Cloud Mall) and is expanding into financial services[9][34][36] - In February 2020, the company completed the sale of its entire fruit juice business segment (HeDeTang HK), which is now treated as a discontinued operation[16][35][226] - The company is actively pursuing expansion into financial services through strategic acquisitions, including a Hong Kong-based asset management company (NTAM) and a supply chain financial services company in China (Ticode)[37][38] - The COVID-19 pandemic significantly impacted operations in 2020, causing office closures, supply chain disruptions, and hindering marketing strategies, leading to decreased sales and new member enrollment[29][30][91] - To comply with PRC regulations restricting foreign ownership in e-commerce, the company operates its Chain Cloud Mall through a Variable Interest Entity (VIE) structure, controlling the entity via contractual agreements[20][21] Item 1A. Risk Factors The company faces significant risks from COVID-19, operational challenges in China due to its VIE structure and unpredictable policies, and internal control weaknesses - The COVID-19 pandemic poses a major risk, having already caused revenue decline, supply chain disruption, and hindrance of marketing efforts, with future outbreaks potentially causing further harm[90][91] - The company's reliance on a Variable Interest Entity (VIE) structure to operate in China is a key risk, as PRC authorities deeming arrangements non-compliant could lead to severe penalties or loss of control[155][156][159] - A material weakness in internal controls over financial reporting has been identified, stemming from a lack of personnel with sufficient U.S. GAAP and SEC reporting experience, which could affect investor confidence[132][133] - The company's common stock has faced multiple delisting warnings from NASDAQ for failing to meet minimum bid price, timely filing, and minimum stockholders' equity requirements, although compliance was regained each time[186][187][189] - There is significant ownership concentration, with the Chairman's son, Zeyao Xue, beneficially owning approximately 19.9% of outstanding common stock, giving him substantial influence over shareholder matters[182] Item 2. Properties The company leases its principal executive office in New York and additional offices in Beijing and Xi'an, China - The company leases its principal executive office in New York and additional offices in Beijing and Xi'an, China[192] Item 3. Legal Proceedings The company is defending a $7 million lawsuit from a former placement agent and addresses other litigation related to divested subsidiaries - The company is currently involved in a lawsuit filed by former placement agent FT Global Capital, Inc., which claims approximately $7 million in damages for an alleged breach of contract, and the company is defending the action[193][194] - Other legal proceedings described in the report involve former subsidiaries that were transferred with the sale of HeDeTang HK on February 27, 2020[195] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under "FTFT", with 65.29 million shares outstanding, and no cash dividends are anticipated - The company's common stock is traded on the Nasdaq Capital Market under the ticker "FTFT"[197] - The company has never declared or paid cash dividends and intends to retain all future earnings for business operations[198] Equity Compensation Plan Information as of Dec 31, 2020 | Plan Category | Securities to be issued upon exercise (shares) | Weighted average exercise price ($) | Securities remaining for future issuance (shares) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by stockholders | 62,500 | $3.57 | 5,000,000 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In 2020, revenue declined 61% to $0.37 million due to COVID-19, while gross margin rose to 90%, but loss from continuing operations widened to $53.48 million due to impairments, despite working capital improving to $10.34 million Revenue by Segment (2020 vs. 2019) | Segment | 2020 Revenue (in thousands) | 2019 Revenue (in thousands) | % Change | | :--- | :--- | :--- | :--- | | CCM Shopping Mall Membership | $338 | $542 | -38% | | Sale of goods | $9 | $371 | -98% | | Others | $23 | $28 | -18% | | Total | $370 | $941 | -61% | Gross Margin by Segment (2020 vs. 2019) | Segment | 2020 Gross Margin % | 2019 Gross Margin % | | :--- | :--- | :--- | | CCM Shopping Mall Membership | 99% | 74% | | Sale of goods | 22% | 13% | | Others | -4% | 7% | | Total | 90% | 48% | - Loss from continuing operations increased significantly to $53.48 million in 2020 from $10.95 million in 2019, driven by impairment losses on investments and intangible assets, and higher stock compensation expenses[257][255][254] - The company's working capital improved dramatically from a deficit of $102.87 million in 2019 to a surplus of $10.34 million in 2020, primarily due to a reduction in liabilities after the sale of its discontinued operations[258] - Cash and cash equivalents increased from $0.19 million at year-end 2019 to $9.79 million at year-end 2020, mainly due to $16.71 million generated from financing activities, including stock and debt issuances[258][260] Item 9A. Controls and Procedures Management concluded disclosure controls were ineffective as of December 31, 2020, due to a material weakness in financial reporting, now being remediated - The CEO and CFO concluded that disclosure controls and procedures were not effective as of December 31, 2020[263] - A material weakness was identified in internal control over financial reporting due to a lack of sufficient accounting personnel with expertise in U.S. GAAP and SEC reporting[263][266] - Remediation efforts include engaging U.S. GAAP consultants and hiring a new CFO with more relevant experience[266] Part III Item 10. Directors, Executive Officers and Corporate Governance The section lists directors and executive officers, including Chairman Yongke Xue and CEO Shanchun Huang, and details the company's governance structure - The leadership team includes Yongke Xue as Chairman of the Board and Shanchun Huang as Chief Executive Officer[270][271][272] - The Board has an audit committee and a compensation committee, both comprised of independent directors, with Mr. Johnson Lau identified as the "audit committee financial expert"[286][288] - The company reported several late filings of Section 16(a) beneficial ownership reports for its officers and directors during the fiscal year ended December 31, 2020[283] Item 11. Executive Compensation Executive compensation in 2020 primarily involved salaries and stock awards, with 3 million shares granted under the 2019 Omnibus Equity Plan - On December 28, 2020, the company granted 3,000,000 shares under its 2019 Omnibus Equity Plan to nine officers, employees, and a director[292] 2020 Compensation for Key Personnel | Name and Position | Salary ($) | Stock Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | | Yongke Xue (Chairman) | - | 500,000 shares | $990,000 (value) | | Shanchun Huang (CEO) | 1 | - | 1 | | Kai Xu (Former COO) | 13,642 | 400,000 shares | 805,642 (incl. value) | | Yang Liu (COO) | 1 | - | 1 | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of April 12, 2021, 65.29 million shares were outstanding, with Chairman's son, Zeyao Xue, being the largest beneficial owner at 19.9% Security Ownership of 5% or Greater Shareholders (as of April 12, 2021) | Name of Beneficial Owner | Percentage Owned | | :--- | :--- | | Zeyao Xue | 19.9% | | Sincerity Group Enterprises Ltd. | 5.1% | | Mengyao Chen | 5.1% | | Shuiliang Xiao | 5.2% | - Zeyao Xue, the son of Chairman Yongke Xue, is the largest beneficial owner with 19.9% of the company's outstanding common stock[310] Item 14. Principal Accounting Fees and Services Total audit fees were $211,000 in 2020, and the company changed its independent registered public accounting firm multiple times in 2019 and 2020 Principal Accountant Fees | Fee Category | 2020 ($) | 2019 ($) | | :--- | :--- | :--- | | Audit Fees | $211,000 | $235,000 | | Tax Fees | — | — | | All Other Fees | — | — | | Total | $211,000 | $235,000 | - The company changed its independent registered public accounting firm multiple times in 2019 and 2020, dismissing Wang CPA in April 2020 and engaging BF Borgers CPA PC[317][321] Part IV Item 15. Exhibits and Financial Statement Schedules This section provides an index of all exhibits filed as part of the Form 10-K, including corporate governance documents and material contracts Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm The auditor issued a fair opinion but highlighted a "Going Concern Uncertainty" due to recurring losses and identified two Critical Audit Matters - The auditor's report includes a "Going Concern Uncertainty" paragraph, citing recurring losses and a net capital deficiency that raise substantial doubt about the company's ability to continue operations[349] - Critical Audit Matters identified were the valuation and collectability of a new $5.36 million loan receivable and the assessment of legal proceeding contingencies[354][356][357] Consolidated Financial Statements Following divestiture, total assets decreased to $15.9 million in 2020, liabilities to $7.2 million, and stockholders' equity turned positive to $8.7 million, with a net income of $88.9 million due to a gain on disposal Consolidated Balance Sheet Highlights (in millions) | Account | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Current Assets | $15.5 | $100.3 | | Total Assets | $15.9 | $116.0 | | Total Current Liabilities | $5.2 | $203.2 | | Total Liabilities | $7.2 | $204.1 | | Total Stockholders' Equity (Deficit) | $8.7 | $(88.1) | Consolidated Statement of Operations Highlights (in millions) | Account | 2020 | 2019 | | :--- | :--- | :--- | | Revenue | $0.37 | $0.94 | | Loss from Continuing Operations | $(30.0) | $(11.1) | | Gain on disposal of discontinued operations | $119.4 | $0 | | Net Income (Loss) | $88.9 | $(27.1) | - Net cash from operating activities was $3.98 million in 2020, a significant improvement from $26.32 million used in 2019, partly due to the removal of the cash-losing fruit juice business[259] Notes to Consolidated Financial Statements Notes detail the company's transformation, reiterate the "Going Concern" issue, disclose a $123.69 million gain on discontinued operations, and outline $62 million in subsequent financing activities - The sale of the HeDeTang HK business on Feb 27, 2020, resulted in a gain on disposal of $123.69 million, which is the primary reason for the company's reported net income in 2020[226][469] - The company has significant related party transactions, including loans payable to the Chairman and other key personnel, and loans receivable from entities related to management[439][440] - Subsequent to year-end 2020, the company conducted three registered direct offerings in January, February, and April 2021, raising aggregate gross proceeds of approximately $62 million[517][518][522] - In February 2021, the company entered into a Share Exchange Agreement to acquire 60% of Sichuan Ticode Supply Chain Management Co., Ltd. in exchange for approximately 7.8 million shares of its common stock[520]