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 province, China since 2011. We have eight stores in Dongguan City, Guangdong Province to serve our clients and we have developed our online platform for our wholesaler and other end users. 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. During the year 2020, in order to increase our wine market share, FVTL set up two subsidiaries, namely “Dongguan City Fu La Tu Trade Ltd (FLTT)” and “Dongguan City Fu Xin Gu Trade Ltd (FXGT)” in Dongguan City. On March 1, 2019, we entered into a sale and purchase 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 interest of Jiujiu (HK) Industry Limited (“JJHK”) and Jiujiu (Shenzhen) Industry Co., Ltd. (“JJSZ”). JJGS and JJHK are holding companies and conduct business through their operating subsidiary, JJSZ, which engages in retail and wholesale distribution of our wine products. On June 22, 2020, we entered into a sale and purchase agreement along with Qianhai DaXingHuaShang Investment (Shenzhen) Co., Ltd., a company incorporated in China and a wholly-owned subsidiary of FVTI (“QHDX”), to acquire 90% of the shares of Dongguan Xixingdao Technology Co., Ltd. (“Xixingdao”), a company incorporated in China, in exchange for 4,862,681 shares of our common stock and closed the acquisition of Xixingdao on August 31, 2020. After the closing, Xixingdao became the Company’s subsidiary. The shares were issued to the original owners of Xixingdao on December 28, 2020. Xixingdao’s principal business is drinking water distribution and delivery in Dongguan City, Guangdong Province. To increase its market share, Xixingdao set up eight subsidiaries primarily operating wholesale distribution of our water products to serve the local customers. 4 The following diagram illustrates our corporate structure as of the date of this Annual Report. Recent Developments Coronavirus (COVID-19) Update In December 2019, a novel strain of coronavirus (COVID-19) was first identified in China and has since spread rapidly globally. The outbreak of COVID-19 has resulted in quarantines, travel restrictions, and the temporary closure of stores and business facilities globally. In March 2020, the World Health Organization declared the COVID-19 a pandemic. In 2020, COVID-19 had a material impact on our business, financial condition, and results of operations. including, but not limited to, the following: ● We temporally closed our offices in early 2020, as required by relevant PRC regulatory authorities. Our offices were subsequently reopened pursuant to local guidelines. In 2020, the pandemic caused disruptions in our operations and supply chains, which resulted in delays in the shipment of products to certain of our customers. ● A large number of our employees were in mandatory self-quarantine and the entire business operations of the Company halted for over a month from February to March 2020. ● Our customers were negatively impacted by the pandemic, which reduced the demand of our products. As a result, our revenue and income were negatively impacted in the first half of 2020. After the second quarter of 2020, the COVID outbreak in China has gradually been controlled. Our business has also returned to normal operations, although management assessed that our results of operations had been negatively impacted for the year. COVID-19 could adversely affect our business and results of operations in 2021 if any COVID resurgence causes significant disruptions to our operations or the business of our supply chain, logistics and service providers. We cannot predict the severity and duration of the impact from such resurgence, if any. If any new outbreak of COVID-19 is not effectively and timely controlled, or if government responses to outbreaks or potential outbreaks are severe or long-lasting, 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, and could materially and adversely impact our business, financial condition and results of operations. 5 Business Plan Our business plan is to extend our market share through acquiring quality businesses in the food and beverage 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. We plan to further develop our online marketing platform and internal operation management system by engaging an external IT company during 2021. In the past year, we successfully acquired Xixingdao, a drinking water distribution business. While we terminated proposed acquisitions of two target companies as a result of their inability to meet our performance requirements, as disclosed below, we are in the process of completing the acquisition of Valley Holdings, a food wholesale and food additives business. We expect to continue to explore new opportunities to acquire additional quality and compatible businesses in our industries. We consider the following factors when evaluating quality acquisition targets: (i) costs involved in an acquisition; (ii) financial performance of the target; (iii) the reputation of the target in its industry; (iv) the target’s existing customer base; (v) the target’s supplier network; (vi) the expertise and experience of the target’s management and employees; and (vii) the inventory condition of the target. Our management believes that successful acquisitions will bring synergies to our business and enhance our shareholders’ value. Makaweng Acquisition and Termination 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 interest from Xingwen Wang in exchange for shares of our common stock (“Makaweng Issuable Shares”). On August 28, 2019, the registration of transferring the 51% of equity interest of Makaweng to QHDX with local government authorities was completed. On December 3, 2020, QHDX and Xingwen Wang, an original shareholder of Makaweng, signed a share transfer agreement (the “Share Transfer Agreement”) pursuant to which the parties agreed that QHDX would transfer all of the 51% of equity interest of Makaweng it held to Mr. Wang. Upon the effectiveness of the Share Transfer Agreement, QHDX no longer owned an equity interest in Makaweng. As of the date of the Share Transfer Agreement, the Company has not issued any common shares to Xingwen Wang and the control of Makaweng has never been transferred to QHDX. BTF Acquisition and Termination 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”). On February 28, 2021, FVTI, QHDX and the Original Shareholders of BTF signed a termination agreement pursuant to which the parties mutually agreed to terminate the Agreement. The BTF Agreement was terminated effective as of February 28, 2021 and the parties have no further rights or obligations under the BTF Agreement. The parties further agreed to waive their rights to any claims that may arise under the BTF Agreement. As of the date of the termination agreement, no equity interest of BTF had been transferred to QHDX. 6 Valley Holdings Acquisition On March 16, 2020, the Company, along with JJGS, entered into an equity interest transfer agreement (the “Valley Holdings Original 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. 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). On January 6, 2021, the parties entered into an agreement to terminate the Valley Holdings Original Agreement. Under the termination agreement, there were no termination penalties incurred by FVTI or JJGS. On January 6, 2021, FVTI, along with its Hong Kong subsidiary, DILHK, entered into a new equity interest transfer agreement (the “Valley Holdings Agreement”) with the Seller and Valley Holdings. Pursuant to the agreement, DILHK agreed to purchase 70% of Valley Holdings’ equity interest (the “Equity Transfer”) from the Seller in consideration of shares of FVTI’s common stock (“Issuable Shares”) valued at $12 million (subject to adjustments in the event Valley Holdings’ net profit is more than HK$5 million (approximately US$0.6 million) or less than HK$3 million (approximately US$0.4 million) for the fiscal year ended December 31, 2020). According to the agreement, the total number of Issuable Shares will be determined based on the average of the closing prices of FVTI’s common stock for the 30 business days preceding the date of the Closing (as defined below). The closing of the Equity Transfer (the “Closing”) is intended to occur on or around April 30, 2021. The 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 DILHK, (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 of all of the intellectual property related to the operations of Valley Holdings and its subsidiaries. Pursuant to the agreement, FVTI will issue the Issuable Shares to an escrow account for the beneficiary of the Seller within 30 business days after the Closing. The Issuable Shares shall be released from the escrow account to the Seller within 30 days upon an independent registered accounting firm’s written confirmation that Valley Holdings’ audited net profit is at least HK$3 million (approximately US$0.4 million) for the fiscal year ended December 31, 2020. 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 management members of Valley Holdings and its subsidiaries. The parties further agreed that Valley Holdings will not make any profit distributions within two years after the execution of the Agreement. DILHK or the Seller may terminate this Agreement in writing in the event that any closing condition is not met before April 30, 2021. As of the date of this report, the closing of the Valley Holdings Equity Transfer has not occurred. Our Strategies: ● We plan to diversify our existing product portfolio strategically, and thereby provide our customers with a wider range of choices and broaden our existing customer base. ● We plan to continue to solidify our relationships with our existing suppliers as well as identifying new suppliers. ● We plan to strengthen our corporate image by increasing marketing and promotion efforts. ● We plan to attract, motivate and retain high-quality talent. ● We will continue to expand and explore additional services and products to enrich our one-stop services to our customers. 7 Our Business, Products and Product Distribution 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 sell a variety of water, peanut oil, soybean oil and blended oil. Currently we sell about 30 different brands of water and 3 different brands of oil. 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 and water retail stores, convenience 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 an innovative management model, operating model and franchising model. We have been a member of Guangdong Provincial Liquor Industry Association since 2011. Our wine product operations are based in Humen Town, Dongguan City. We lease a six-floor building with a total floor area of 1,200 square meters. Our wine retail store is located on the first floor which we use exclusively as a retail store and for sample products display. We use the remaining five floors as the Company’s conference room, offices and storage. Our water and oil product management office is also located in Humen Town, Dongguan City. We lease the building which has over 1,300 square meters. It includes sales, customer service, warehouse, delivery and finance departments. The office manages one office, seven wholesales stores and one warehouse. We also maintain one registered office for the subsidiary with lease term of three years. As of December 31, 2020, the Company has total twelve separate operating lease agreements for three office spaces, one warehouse and eight stores in PRC with remaining lease terms of from 21 months to 76 months. We have developed our WeChat applet “FVTI food safety & healthy supply platform” (short name “Fu Gu Online”). Some of our agents and wholesalers have ordered from this platform. Market China is a country with both an ancient wine tradition and a new and an emerging wine-consuming market. Wine production in China has thousands of year of history. Today, China is also an emerging wine-producing nation in its own right with brands such as Great Wall, Changyu and Dynasty. Local wines account for 80 percent of wine consumed in China. According to The International Wine and Spirit Record (the “IWSR”), China is one of the fastest-growing wine markets in the world, with rising personal incomes driving an enhancement of tastes and consumption levels. In 2017, the wine consumption per capita was only about 1.2 liters accounting for less than 1/3 of the global total as well as 1/10 of the U.S. consumption. Therefore, we believe there are great potential for growth in the Chinese wine market. Competition France still dominates the Chinese wine market with a share of 48 per cent according to Euromonitor International. The best sales in Chinese supermarkets are imported wines from RMB60-180, or approximately $9.00 - $27.00 per bottle. One major challenge is that Chinese consumers switch from one brand to another rather quickly, exhibiting little brand loyalty. Online sales particularly enable the consumers to source and purchase budget wines. Management believes that wineries will most benefit from growth in China will be those that demonstrate patience, professional service while building brand awareness and a long term strategy to develop the market with their Chinese partners. For our Company, there are two major competitors in our market, Aussino Liquor and ASC Fine Wines. These companies are well established, more recognized and well accepted by consumers in China. 8 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. 9 AQSIQ Notice on December 23, 2004 Rules for Inspection on Production Licensing of Wines and Fruit Wines January 1, 2005 This rule sets forth inspection procedures on production licensing of wines and fruit wines. AQSIQ Order 78 of 2005 Geographical Indication Product Protection Regulation July 15, 2005 This regulation regulates the use of geographical indication product names and trademarks while safeguarding the quality of geographical indication products. Drinking Natural Mineral Water（GB8537-2018） Drinking water June 21, 2019 This standard specifies the product classification, requirements, inspection methods, inspection rules, marks, packaging, transportation and storage of drinking natural mineral water. Measure for the Supervision and Administration of the Sanitation of Drinking Water Quality and Safety June 1, 2016 The measure ensures the safety of drinking water, protect human health, and strengthen supervision and management. Packaged Drinking Water（GB19298-2014） Drinking water May 25, 2015 This standard specifies the product scope, requirements, inspection methods, label identification and name of packaged drinking water Notice on further strengthening the supervision and management of the quality and safety of “Big Buckets of Water” Quality and Safety March 31, 2014 The notice emphasizes the strict implementation of the main responsibility of production enterprises, the strict implementation of production license, the strict implementation of supervision and inspection, the strict supervision and random inspection of products, and the strict investigation and punishment of illegal acts. Notice on urging drinking water production enterprises to strengthen safety management of added substances Quality and Safety August 3, 2009 The notice protects human health, standardizes production, and further strengthens the supervision of drinking water production enterprises. 10 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 April 13, 2021, the Company had 56 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 April 13, 2021: Function Number of Employees Finance 5 Sales and Marketing 28 IT and Engineering 1 General and Administrative 13 Warehouse and delivery 8 Customer service 1 Total 56 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, 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 believe that we maintain a good working relationship with our employees, and we have not experienced any major labor disputes. 11 Available Information Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are filed with the Securities and Exchange Commission (the “SEC”). Such reports and other information filed by the Company with the SEC are available free of charge on our corporate website (http://www.fvti.show/ as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. The foregoing website addresses are provided as inactive textual references only. We periodically provide other information for investors on our corporate website. This includes press releases and other information about financial performance and information on corporate governance. The information contained on the websites referenced in this Form 10-K is not part of this report and is not incorporated by reference into this filing.