Fortune Valley Treasures, Inc. 10-K

Item 1. Business Overview We have been engaged in the retail and wholesale distribution of a wide spectrum of food and beverage products in Guangdong, China since 2011. In addition, we are actively seeking quality target companies in the food, beverage and alcohol industries for mergers and acquisition for further development of our company. Corporate History and Structure Fortune Valley Treasures, Inc., formerly Crypto-Services, Inc., was incorporated in the State of Nevada on March 21, 2014. We were initially incorporated to offer users with up-to-date information on digital currencies. On July 22, 2015, we filed an amendment to its Articles of Incorporation with the Nevada Secretary of State to change our name from Crypto-Services, Inc. to Fortune Valley Treasures, Inc. On December 14, 2016, we entered into a sale and purchase agreement (the “Original Agreement”) with DaXingHuaShang Investment Group Limited, a company incorporated under the laws of the Republic of Seychelles (“DIGLS”), and its shareholders. DIGLS is engaged in the business of retail and wholesale of imported wine products in China and owns all of the equity capital of DaXingHuaShang Investment (Hong Kong) Limited (“DILHK”), Qianhai DaXingHuaShang Investment (Shenzhen) Co., Ltd. (“QHDX”) and Dongguan City France Vin Tout Ltd. (“FVTL”). Pursuant to the Original Agreement, we agreed to issue 300,000,000 shares of our common stock to the stockholders of DIGLS in exchange for 100% of the shares of DIGLS. On April 11, 2018, we entered into a termination agreement with DIGLS, terminating the Original Agreement and all transactions contemplated under the Original Agreement. On April 6, 2018, we entered into a share exchange agreement by and among DIGLS, and each of the shareholders of DIGLS, pursuant to which we issued 300,000,000 shares of common stock in exchange for 100% of the issued shares of DIGLS. The share exchange closed on April 19, 2018 and DIGLS became our wholly-owned subsidiary. On March 1, 2019, we entered into a sale and purchase agreement (the “SP Agreement”) to acquire 100% of the shares of Jiujiu Group Stock Co., Ltd. (“JJGS”), a company incorporated under the laws of the Republic of Seychelles, in exchange for 100 shares of our common stock and closed the acquisition of JJGS on March 1, 2019. After the closing, JJGS became the Company’s wholly owned subsidiary. JJGS owns all of the equity interests of Jiujiu (HK) Industry Limited (“JJHK”) and Jiujiu (Shenzhen) Industry Co., Ltd. (“JJSZ”). None of JJGS, JJHK and JJSZ have any operations or active business, nor do they have any assets. The following diagram illustrates our corporate structure as of the date of this Annual Report. 4 Recent Developments Coronavirus (COVID-19) Update Recently, there is an ongoing outbreak of a novel strain of coronavirus (COVID-19) first identified in China and has since spread rapidly globally. The pandemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and business facilities globally for the past few months. In March 2020, the World Health Organization declared the COVID-19 as a pandemic. Given the rapidly expanding nature of the COVID-19 pandemic, and because substantially all of our business operations and our workforce are concentrated in China, our business, results of operations and financial condition have been and will continue to be adversely affected. Potential impact to our results of operations will also depend on 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 mitigate its impact, almost all of which are beyond our control. The impacts of COVID-19 on our business, financial condition, and results of operations include, but are not limited to, the following: ● We temporally closed our offices to adhere to the policy for approximately one month from late January 2020, as required by relevant PRC regulatory authorities. Our offices are slowly reopening pursuant to local guidelines. In the first quarter of 2020, the COVID-19 outbreak has caused disruptions in our operations and supply chains, which have resulted in delays in the shipment of products to certain of our customers. ● A large number of our employees have been or are in mandatory self-quarantine and the entire business operations of the Company has been restricted since January 2020. ● Our customers have been negatively impacted by the outbreak, which reduced the demand of our products. As a result, our revenue and income may be negatively impacted in 2020. ● The situation may worsen if the COVID-19 pandemic continues. We will continue to closely monitor our collections throughout 2020. A prolonged disruption or any further unforeseen delay in our operations and supply chains could continue to result in delays in the shipment of products to our customers, increased costs and reduced revenue. We cannot foresee whether the outbreak of COVID-19 will be effectively contained, nor can we predict the severity and duration of its impact. If the outbreak of COVID-19 is not effectively and timely controlled, our business operations and financial condition may be materially and adversely affected as a result of the deteriorating market outlook, the slowdown in regional and national economic growth, weakened liquidity and financial condition of our customers or other factors that we cannot foresee. Any of these factors and other factors beyond our control could have an adverse effect on the overall business environment, cause uncertainties in the regions where we conduct business, cause our business to suffer in ways that we cannot predict and materially and adversely impact our business, financial condition and results of operations. Business Plan Our business plan is to extend our market shares through acquiring quality businesses in the food, beverage and alcohol industries, in order to increase our customer base and supply channels, as well as to acquire more skilled employees and business connections in the industries. In the past year, the Company has acquired and is in the process of acquiring a few companies in those industries. We consider the following factors when evaluating quality acquisition targets: (i) costs involved in an acquisition; (ii) financial performance of target; (iii) the reputation of the target in its industry; (iv) target’s existing customer base; (v) target’s supplier network; (vi) the expertise and experience of target’s management and employees; and (vii) the inventory condition of target. Our management believes that successful acquisitions will bring synergies to our business and enhance our shareholders’ value. Makaweng Acquisition On July 13, 2019, the Company and QHDX entered into an equity interest transfer agreement, which was later amended on September 12, 2019 (“Makaweng Agreement”), with Xingwen Wang, a shareholder and legal representative of Yunnan Makaweng Wine & Spirits Co., Ltd. (“Makaweng”), a PRC limited liability company engaged in the business of distribution of wine and beer. Pursuant to the Makaweng Agreement, QHDX purchased 51% of Makaweng’s equity interests from Xingwen Wang in exchange for shares of our common stock (“Makaweng Issuable Shares”), the number of which is determined according to the following formula: Number of Makaweng Issuable Shares = A x 51% x 20 x B ÷ C For the purpose of the foregoing formula: A = Audited net annual profit of Makaweng in fiscal year 2020. B = The daily average middle exchange rate of U.S. Dollars to Chinese Yuan published by the State Administration of Foreign Exchange of the People’s Republic of China on December 31, 2020. 5 C = The closing price of our common stock on December 31, 2020. Mr. Wang has agreed not to transfer the Makaweng Issuable Shares for at least three years after delivery of the Makaweng Issuable Shares (the “Delivery”). He may only transfer up to 30% of his FVTI common stock during the fourth year after the Delivery and cumulatively no more than 60% of his common stock during the fifth year after the Delivery. The 51% of equity interest of Makaweng was transferred to QHDX and the registration of such transfer with local government authorities was completed on August 28, 2019. BTF Acquisition On December 30, 2019, the Company, along with QHDX, entered into an equity interest transfer agreement (the “BTF Agreement”) with shareholders (the “BTF Original Shareholders”) of Foshan BaiTaFeng Beverage Development Co., Ltd. (“BTF”), who collectively owned 100% equity interest of BTF, a limited liability company engaged in the business of bottling and distributing of drinking water in China. Pursuant to the BTF Agreement, QHDX agreed to purchase 80% of BTF’s equity interest (the “BTF Equity Transfer”) from Mr. Chunbin Li, the legal representative and one of the BTF Original Shareholders of BTF (the “BTF Seller”), in exchange for shares of our common stock (“BTF Issuable Shares”). The completion of the registration of the BTF Equity Transfer with local government authorities (the “BTF Closing”) is subject to satisfaction of all the closing conditions (unless waived), including but not limited to, the approval of the BTF Equity Transfer by BTF shareholders, completion of due diligence review of BTF to the satisfaction of QHDX, waiver from the BTF Original Shareholders to the right of first refusal to purchase the equity interest subject to the BTF Equity Transfer. It is agreed that the BTF Closing shall be conducted prior to the completion of an initial draft of the audited financial statements of BTF. According to the BTF Agreement, the total number of BTF Issuable Shares will be determined according to the following formula: Number of BTF Issuable Shares = X x 80% x 15 ÷ 3.02 ÷ Y For the purpose of the foregoing formula: X = Net profit of BTF during the period from October 1, 2019 to September 30, 2020. Y = 7:1, which is the exchange rate of U.S. Dollars to Chinese Yuan mutually agreed by the parties. Pursuant to the BTF Agreement, we will issue the BTF Issuable Shares to the BTF Seller within 30 business days after September 30, 2020 pursuant to a separate subscription agreement to be entered into by the Company and the BTF Seller or his designee. BTF and the BTF Original Shareholders have agreed to achieve certain operation objectives of BTF, including a net profit of RMB 9 million (approximately $1.29 million) for the period from October 1, 2019 to September 30, 2020 and a net profit of RMB 3 million (approximately $0.14 million) for the fiscal year ended December 31, 2019. Pursuant to the BTF Agreement, as long as the BTF Seller continues to serve as the general manager and legal representative of BTF, the BTF Original Shareholders and BTF shall ensure BTF achieves an increase in annual net profit of no less than 10% during each year of the five years after September 30, 2020. Pursuant to the BTF Agreement, BTF will establish a board of directors consisting of three individuals, two of which will be designated by QHDX and one by the BTF Original Shareholders, and appoint a person designated by the BTF Original Shareholders as general manager. To ensure the continuous operations of BTF, the parties agreed that BTF will retain its existing employees and all the management members of BTF shall sign employment agreements and non-compete agreements with BTF. The parties further agreed that BTF will not make any profit distribution within three years after the execution of the BTF Agreement. Any subsequent share transfer or share pledge of QHDX’s equity interest in BTF is subject to the prior written consent of the BTF Original Shareholders. In the event of a late payment of the consideration by QHDX or any delay in the registration of the BTF Equity Transfer with local government caused by the BTF Seller, a daily penalty of 0.05% of the outstanding payment is assessed. Valley Holdings Acquisition On March 16, 2020, the Company, along with JJGS, entered into an equity interest transfer agreement (the “Valley Holdings Agreement”) with Valley Holdings Limited (“Valley Holdings”), a Hong Kong company, and Angel International Investment Holdings Limited (the “Valley Holdings Seller”), a 70% shareholder of Valley Holdings. Valley Holdings owns approximately 88.44% of the equity interest of Valley Foods Holdings (Guangzhou) Co., Ltd. (“Valley Food”), which is a limited liability company incorporated in China and engaged in the business of food wholesale and production and sale of food additives in China. 6 Pursuant to the Valley Holdings Agreement, JJGS agreed to purchase 70% of Valley Holdings’ equity interest (the “Valley Holdings Equity Transfer”) from the Valley Holdings Seller in consideration of shares of FVTI’s common stock (“Valley Holdings Issuable Shares”) valued at $14 million (subject to adjustments in the event of Valley Holdings failing to meet a net profit of HK$5 million (approximately US$0.6 million) for the fiscal year ended December 31, 2019). According to the Valley Holdings Agreement, the total number of Valley Holdings Issuable Shares will be determined based on the closing price of FVTI’s common stock as of the business day immediately preceding the date of the Valley Holdings Closing (as defined below). As of the date of this Annual Report, the closing of the Valley Holdings Equity Transfer (the “Valley Holdings Closing”) has not occurred. The Valley Holdings Closing is subject to certain conditions, including, but not limited to, (a) completion of due diligence review of Valley Holdings and its subsidiaries to the satisfaction of JJGS, (b) completion of the initial draft of the audited consolidated financial statements of Valley Holdings for the fiscal year ended December 31, 2019, (c) execution of non-competition agreements and confidentiality agreements with the senior management members of Valley Holdings and its subsidiaries, and (d) assignment to Valley Holdings all of the intellectual properties related to the operations of Valley Holdings and its subsidiaries. Pursuant to the Valley Holdings Agreement, FVTI will issue the Valley Holdings Issuable Shares to the Valley Holdings Seller within 30 business days after the later of the Valley Holdings Closing and the issuance of audit report of Valley Holdings for the fiscal year ended December 31, 2019, pursuant to a separate subscription agreement to be entered into by FVTI and the Valley Holdings Seller or its designee. To ensure the continuous operations of Valley Holdings and its subsidiaries, the parties agreed that Valley Holdings and its subsidiaries will retain their existing employees and will enter into non-competition and employment agreements with all the management members of Valley Holdings and its subsidiaries. The parties further agreed that Valley Holdings will not make any profit distribution within three years after the execution of the Valley Holdings Agreement. JJGS or the Valley Holdings Seller may terminate Valley Holdings Agreement in writing in the event that any closing condition is not met before April 30, 2020. Our Business We sell a variety of wines, such as dry red wine, dry white wine, rosé wine, and sweet wine. Currently we sell about 40 different brands of wine, most of which are imported from France and Spain. We have put significant efforts in developing and promoting our brand name in different regions of China. Our products are mainly sold to retailers, such as wine shops, convenient stores and supermarkets. The selling price varies by quantities of products each retailer orders from us. We have cultivated business relationships and achieved recognitions with different organizations over the years, which have improved our business and management efficacy. Specifically, we have been collaborating with Shenzhen Institute of Tsinghua University since 2011, who has been helping us develop innovative management model, operating model and franchising model. We have been a member of Guangdong Provincial Liquor Industry Association since 2011. Our retail store is located in Humen Town, Dongguan City. It is a six-floor building with a total floor area of 1,200 square meters. We use the first floor exclusively for sample products display. We use the remaining five floors as the Company’s conference room, offices and storage. 7 Government Regulations We operate our business in China under a legal regime consisting of the National People’s Congress, which is the country’s highest legislative body, the State Council, which is the highest authority of the executive branch of the PRC central government, and several ministries and agencies under its authority, including the Ministry of Industry and Information Technology, State Administration For Industry & Commerce, State Administration of Taxation and their respective local offices. This section summarizes the principal PRC regulations related to our business. Type Name Effective Date Content Updates President Order 21 of 2015 Food Safety Law October 1, 2015 The Food Safety Law is the foundational law and the most important food safety law for alcoholic products in China. A great majority of wine regulations are drafted in conformity to the requirements of this law. Revised on December 29, 2018 AQSIQ Order 144 of 2011 Measures for Administration of Imported/Exported Food Safety March 1, 2012 This rule oversees the safety of imported and exported food. Revised on 11/23/2018 CFDA Order 16 of 2015 Measures for Administration of Food Production Licensing October 1, 2015 This rule requires all food producers in China to procure a production license. Replaced by the State Administration for Market Regulation Order 24 in 2020 AQSIQ Order 27 of 2012 Administrative Provisions on Inspections and Supervisions of Labelling of Imported/Exported Pre-packaged Foods June 1, 2012 This rule provides guidelines that governs all pre-packaged foods. AQSIQ Order 55 of 2012 Administrative Provisions on Filing of Importers and Exporters of Imported Foods October 1, 2012 This rule provides the guidelines for imported food inspection procedures, including investigation of food importers and exporters, tracking of the source and flow of imported foods and handling of imported food safety inspections. AQSIQ Order 55 of 2012 Measures for Administration of Imported Alcohol in Domestic Market October 1, 2012 This rule governs the administrative procedure involved in regulating imported alcohol in Chinese market, promulgated by a variety of Chinese agencies such as the State Economic and Trade Commission, the State Administration for Industry and Commerce, and the Customs General Administration Abolished on October 1, 2019 8 AQSIQ Notice on December 23, 2004 Rules for Inspection on Production Licensing of Wines and Fruit Wines January 1, 2005 This is a rule setting up the inspection procedures on production licensing of wines and fruit wines. AQSIQ Order 78 of 2005 Geographical Indication Product Protection Regulation July 15, 2005 This is a regulation that protects China’s geographical indication products. It regulates the use of geographical indication product names and trademarks while safeguarding the quality of geographical indication products. Intellectual Property Protection of our intellectual property is a strategic priority for our business. We rely primarily on a combination of trademark and trade secret laws to establish and protect our proprietary rights. We currently have three registered trademarks in China. Trademark Number Issue Date Expiration Date Trademark Title 9680266 August 21, 2012 August 20, 2022 法蓝图 9680456 August 21, 2012 August 20, 2022 9848821 June 21, 2017 June 20, 2027 Employees As of May 13, 2020, the Company had 10 employees, all of which were on a full-time basis. The following table sets forth the number of our full-time employees categorized by function as of May 13, 2020: Function Number of Employees Finance 3 Sales and Marketing 3 IT and Engineering 1 General and Administrative 3 Total 10 9 All of our employees are based in the cities of Shenzhen and Dongguan, where our operations are located. As required by PRC regulations, we participate in various government statutory employee benefit plans, including social insurance funds, namely a pension contribution plan, a medical insurance plan, an unemployment insurance plan,· a work-related injury insurance plan and a maternity insurance plan and a housing provident fund. We are required under PRC law to make contributions to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local government from time to time. We have not made adequate employee benefit payments, and may be required to make up the contributions for these plans as well as to pay late fees and fines. We enter into standard labor and confidentiality agreements with each of our employees. We believe that we maintain a good working relationship with our employees, and we have not experienced any major labor disputes. Item 1A. Risk Factors As a smaller reporting company, we are not required to provide the information required by this item. Item 1B. Unresolved Staff Comments Not applicable.