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Fortune Valley Treasures, Inc. - Quarter Report: 2022 March (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 March 31, 2022

 

or

 

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 001-38308

 

Fortune Valley Treasures, Inc.

(Exact name of registrant issuer as specified in its charter)

 

Nevada   32-0439333

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

B1601 Dongfang Yinxiang Building,

No. 139 Liansheng Road, Humen Town

Dongguan, Guangdong, China 523000

(Address of principal executive offices, including zip code)

 

Registrant’s phone number, including area code (86) 769-85729133

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act: Common stock, par value $0.001 per share

 

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 issuer 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 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, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
    Emerging growth company

 

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

 

As of May 16, 2022, there were 15,655,038 shares, par value $0.001, of the registrant’s common stock outstanding.

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
     
PART I FINANCIAL INFORMATION 3
     
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: 3
     
  Condensed Consolidated Balance Sheets as of March 31, 2022 (Unaudited) and December 31, 2021 3
     
  Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2022 and 2021 (Unaudited) 4
     
  Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2022 and 2021 (Unaudited) 5
     
  Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021 (Unaudited) 6
     
  Notes to Condensed Consolidated Financial Statements for the Three Months Ended March 31, 2022 and 2021 (Unaudited) 7
     
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 19
     
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 22
     
ITEM 4. CONTROLS AND PROCEDURES 22
     
PART II OTHER INFORMATION 25
     
ITEM 1 LEGAL PROCEEDINGS 25
     
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 25
     
ITEM 3 DEFAULTS UPON SENIOR SECURITIES 25
     
ITEM 4 MINE SAFETY DISCLOSURES 25
     
ITEM 5 OTHER INFORMATION 25
     
ITEM 6 EXHIBITS 25
     
SIGNATURES 26

 

2

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements.

 

FORTUNE VALLEY TREASURES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2022 AND DECEMBER 31, 2021

 

   March 31,
2022
   December 31,
2021
 
   (Unaudited)     
Assets          
Current assets          
Cash and cash equivalents  $150,613   $123,163 
Accounts receivable (including $19,044 and $43,477 from related parties as of March 31, 2022 and December 31, 2021, respectively)   1,881,892    2,662,168 
Inventories   148,004    81,073 
Prepayments and other current assets (including $1,731,874 and $1,813,904 to related parties as of March 31, 2022 and December 31, 2021, respectively)   2,628,902    2,176,713 
Due from related party   26,255    26,364 
Total current assets   4,835,666    5,069,481 
           
Non-current assets          
Deposits paid (including $1,778,143 and $1,596,075 to related parties as of March 31, 2022 and December 31, 2021, respectively)   2,639,012    2,306,160 
Property and equipment, net   128,224    140,394 
Operating lease right-of-use assets   

341,900

    385,896 
Operating lease right-of-use assets, related parties   

93,923

    98,626 
Intangible assets, net   2,074,630    2,281,790 
Goodwill   1,409,390    1,406,289 
Total Assets  $11,522,745   $11,688,636 
           
Liabilities and Stockholders’ Equity          
Current liabilities          
Operating lease obligations – current  $124,023   $133,586 
Operating lease obligations, related parties - current   18,130    22,666 
Accounts payable (including $29,181 and $17,789 to related parties as of March 31, 2022 and December 31, 2021, respectively)   165,432    239,492 
Accrued liabilities   158,961    128,343 
Bank and other borrowings - current   95,815    101,207 
Income tax payable   -   25,726 
Customer advances   351,412    382,518 
Due to related parties   491,016    683,981 
Total current liabilities   1,404,789    1,717,519 
           
Non-current liabilities          
Operating lease obligations– non-current   216,053    240,611 
Operating lease obligations, related parties– non-current   73,519    77,934 
Bank and other borrowings   177,351    188,218 
Total Liabilities   1,871,712    2,224,282 
           
Stockholders’ Equity          
Common stock (150,000,000 shares authorized, 15,655,038 shares issued and outstanding as of March 31, 2022 and December 31, 2021)  15,655    15,655 
Additional paid in capital  11,061,233    11,061,233 
Accumulated deficit and statutory reserves   (2,413,005)   (2,561,681)
Accumulated other comprehensive income   

553,277

    544,305 
Total Fortune Valley Treasures, Inc. stockholders’ equity   9,217,160    9,059,512 
Noncontrolling interests   

433,873

    404,842 
Total Stockholders’ Equity   9,651,033    9,464,354 
           
Total Liabilities and Stockholders’ Equity  $11,522,745   $11,688,636 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

3

 

 

FORTUNE VALLEY TREASURES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(Unaudited)

 

   2022   2021 
   Three months ended
March 31,
 
   2022   2021 
         
Net Revenues (including $725 and $268,978 from related parties for the three months ended March 31, 2022 and 2021, respectively)  $1,261,810   $1,644,160 
           
Cost of revenues (including $136,912 and $130,600 from related parties for the three months ended March 31, 2022 and 2021, respectively)   518,462    729,743 
Gross profit   743,348    914,417 
           
Operating expenses:          
Selling and distribution expenses   18,155    27,554 
General and administrative expenses   527,286    481,577 
           
Operating income    197,907    405,286 
           
Other income (expense):          
Other income   6,207    31 
Interest income   77    165 
Interest expense   (5,825)   (3,553)
Other income (expense), net   459    (3,357)
           
Income before income tax   198,366    401,929 
           
Income tax expense   22,407    66,355 
           
Net income   $175,959   $335,574 
Less: Net income attributable to noncontrolling interests   27,283    30,320 
Net income attributable to Fortune Valley Treasures, Inc.   148,676    305,254 
           
Other comprehensive income (loss):          
Foreign currency translation income (loss)   

10,720

   (6,670)
           
Total comprehensive income    

186,679

   328,904 
Less: comprehensive income attributable to noncontrolling interests   

29,031

 29,717 
Comprehensive income attributable to Fortune Valley Treasures, Inc.  $

157,648

  $299,187 
           
Earnings per share          
Basic and diluted earnings per share*  $0.01  $0.02 
Basic and diluted weighted average shares outstanding*   15,655,038    15,655,038 

 

* Given effect of the Reverse Stock Split, see Note 10

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

4

 

 

FORTUNE VALLEY TREASURES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(Unaudited)

 

   

Number of

shares

    Amount    

Paid-in

Capital

   

Comprehensive

Income

    Statutory
Reserves
   

controlling

Interests

   

Stockholders’

Equity

 
Three months ended March 31, 2022  
    Common Stock     Additional    

Accumulated

Other

    Accumulated
Deficit and
    Non     Total  
   

Number of

shares

    Amount    

Paid-in

Capital

   

Comprehensive

Income

    Statutory
Reserves
   

controlling

Interests

   

Stockholders’

Equity

 
Balance as of December 31, 2021     15,655,038     $ 15,655     $ 11,061,233     $ 544,305     $ (2,561,681 )   $ 404,842     $ 9,464,354  
Net income     -       -       -       -       148,676       27,283       175,959  
Foreign currency translation adjustment     -       -       -       8,972     -       1,748     10,720
Balance as of March 31, 2022     15,655,038     $ 15,655     $ 11,061,233     $ 553,277     $ (2,413,005 )   $ 433,873     $ 9,651,033  

 

  

Number of

shares

   Amount  

Paid-in

Capital*

  

Comprehensive

Income

  

Accumulated

Deficit

  

controlling

Interests

  

Stockholders’

Equity

 
Three months ended March 31, 2021 
   Common Stock*   Additional  

Accumulated

Other

   Accumulated
Deficit and
   Non   Total 
  

Number of

shares

   Amount  

Paid-in

Capital*

  

Comprehensive

Income

  

Statutory
Reserves

  

controlling

Interests

  

Stockholders’

Equity

 
Balance as of December 31, 2020*   15,655,038   $15,655   $11,061,233   $300,265   $(4,341,417)  $195,915   $   7,231,651 
                                    
Net income   -    -    -    -    305,254    30,320    335,574 
Foreign currency translation adjustment   -    -    -    (6,067)   -    (603)   (6,670)
Balance as of March 31, 2021*   15,655,038   $15,655   $11,061,233   $294,198   $(4,036,163)  $225,632   $7,560,555 

 

*Given effect of the Reverse Stock Split, see Note 10

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

5

 

 

FORTUNE VALLEY TREASURES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(Unaudited)

 

   2022   2021 
   Three months ended March 31, 
   2022   2021 
         
Cash flows from operating activities          
Net income   $175,959   $335,574 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:          
Depreciation and amortization expense   224,423    201,529 
Non-cash lease expense   

49,712

    26,524 
Changes in operating assets and liabilities          
Accounts receivable   

785,262

    1,290,704 
Inventories   (66,676)   17,444 
Prepayments and other current assets   

(446,876

)   (1,745,883)
Due from related parties   167    - 
Deposits paid   (327,389)   (316,736)
Accounts payable   (74,504)   (110,697)
Due to related parties   (112,717)    - 
Customer advances   (31,914)   219,610 
Accrued liabilities   27,819   (181,722)
Income tax payable   (25,754)   (209,976)
Operating lease obligations   

(44,070

)   (35,149)
Net cash provided by (used in) operating activities   

133,442

    (508,778)
           
Cash flows from investing activities          
Repayment of advance to related parties   -    2,674,247 
Advance to related parties   -   (1,841,767)
Purchase of intangible asset   -    (23,444)
Net cash provided by investing activities   -    809,036 
           
Cash flows from financing activities          
Borrowings from related parties   -    814,808 
Borrowings from and repayments to bank loans, net   -    (38,560)
Repayments to related parties   (78,761)   (371,843)
Repayments to a third party   (16,877)   - 
Net cash provided by (used in) financing activities   

(95,638

)   404,405 
           
Effect of exchange rate changes on cash and cash equivalents   

(10,354

)   9,835 
Net changes in cash and cash equivalents   27,450    714,498 
Cash and cash equivalents–beginning of the period   123,163    249,837 
           
Cash and cash equivalents–end of the period  $150,613   $964,335 
           
Supplementary cash flow information:          
Interest paid  $5,825   $3,553 
Income taxes paid  $

64,784

   $295,965 
           
Non-cash investing and financing activities          
Expenses paid by related parties on behalf of the Company  $-   $14,487 
Remeasurement of operating lease obligation and right-of-use asset due to lease termination  $-   $40,813 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

6

 

 

FORTUNE VALLEY TREASURES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(Unaudited)

 

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Fortune Valley Treasures, Inc. (formerly Crypto-Services, Inc.) (“FVTI” or the “Company”) was incorporated in the State of Nevada on March 21, 2014. The Company’s current primary business operations of wholesale distribution and retail sales of alcoholic beverages of wine and distilled liquors, and drinking water distribution and delivery are conducted through its subsidiaries in the People’s Republic of China (“PRC”).

 

On April 11, 2018, the Company entered into a share exchange agreement by and among DaXingHuaShang Investment Group Limited (“DIGLS”) and its shareholders: 1.) Yumin Lin, 2.) Gaosheng Group Co., Ltd. and 3.) China Kaipeng Group Co., Ltd whereby the Company newly issued 15,000,000 shares (given effect of the Reserve Stock Split, see Note 10) of its common stock in exchange for all the outstanding shares in DIGLS. This transaction has been accounted for as a reverse takeover transaction and a recapitalization of the Company whereby the Company, the legal acquirer, is the accounting acquiree, and DIGLS, the legal acquiree, is the accounting acquirer; accordingly, the Company’s historical statement of stockholders’ equity has been retroactively restated to the first period presented.

 

On March 1, 2019, the Company entered into a sale and purchase agreement (the “SP Agreement”) to acquire 100% of the equity interest of Jiujiu Group Stock Co., Ltd. (“JJGS”), a company incorporated under the laws of the Republic of Seychelles. The transaction closed on March 1, 2019. Pursuant to the SP Agreement, the Company issued 100 shares of its common stock to JJGS to acquire 100% of the shares of JJGS for a cost of $150. 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, JJHK and JJSZ did not have any material assets or liabilities as of December 31, 2019, and they did not have any substantial operations or active business during the year ended December 31, 2019.

 

7

 

 

On June 22, 2020, the Company entered into a sale and purchase agreement along with Qianhai DaXingHuaShang Investment (Shenzhen) Co., Ltd., a company incorporated in the PRC and a wholly-owned subsidiary of FVTI (“QHDX”), to acquire 90% of the equity interest of Dongguan Xixingdao Technology Co., Ltd. (“Xixingdao”), a company incorporated in the PRC, in exchange for 243,134 shares (given effect of the Reserve Stock Split, see Note 10) of the Company’s common stock. The Company obtained the control of Xixingdao on August 31, 2020, the shares were issued on December 28, 2020. Xixingdao became the Company’s subsidiary since August 31, 2020.

 

On January 6, 2021, FVTI, JJGS, Valley Holding Limited (“Valley Holdings”) and Angel International Investment Holdings Limited (the “Valley Holdings Seller”) signed a termination agreement, pursuant to which the parties mutually agreed to terminate the original equity interest transfer agreement signed on March 16, 2020. On the same date, FVTI, DILHK, Valley Holdings and the Valley Holdings Seller entered into a new equity interest transfer agreement, pursuant to which DILHK agreed to purchase 70% of Valley Holdings’ equity interest (the “Valley Holdings Equity Transfer”) from the Valley Holdings seller in consideration of FVTI’s common shares valued at $12 million (subject to adjustments in the event Valley Holdings’ net income 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). As of the date of this filing, the closing of the Valley Holdings Equity Transfer has not occurred.

 

On February 28, 2021, FVTI, QHDX and the original shareholders of Foshan BaiTaFeng Beverage Development Co., Ltd. (“BTF”) signed a termination agreement, pursuant to which the parties mutually agreed to terminate the original equity interest transfer agreement signed on December 31, 2019 (“BTF Agreement”). The BTF Agreement was terminated effective 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.

 

Basis of presentation

 

The accompanying unaudited condensed consolidated financial statements as of March 31, 2022 and for the three months ended March 31, 2022 and 2021, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) that permit reduced disclosure for interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. In the opinion of management, all adjustments consisting of normal recurring entries considered necessary for a fair presentation have been included. The results of operations for these periods are not necessarily comparable to, or indicative of, results of any other interim period or for the fiscal year taken as a whole. The condensed consolidated balance sheet information as of December 31, 2021 was derived from the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K, for the year ended December 31, 2021, filed with the SEC on April 1, 2022 (the “report”). These unaudited condensed consolidated financial statements should be read in conjunction with the report.

 

8

 

 

Basis of consolidation

 

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated. The results of subsidiaries acquired during the respective periods are included in the condensed consolidated statements of operations from the effective date of acquisition or up to the effective date of disposal, as appropriate. The portion of the income or loss applicable to noncontrolling interests in subsidiaries is reflected in the condensed consolidated statements of operations.

 

As of March 31, 2022, details of the Company’s major subsidiaries were as follows:

 

Entity Name   Date of Incorporation   Parent Entity   Nature of Operation   Place of Incorporation
DIGLS   July 4, 2016   FVTI   Investment holding   Republic of Seychelles
DILHK   June 22, 2016   DIGLS   Investment holding   Hong Kong, PRC
QHDX   November 3, 2016   DILHK   Investment holding   PRC
FVTL   May 31, 2011   QHDX   Trading of food and platform   PRC
JJGS   August 17, 2017   FVTI   Investment holding   Republic of Seychelles
JJHK   August 24, 2017   JJGS   Investment holding   Hong Kong, PRC
JJSZ   November 16, 2018   JJHK   Trading of food   PRC
Xixingdao   August 28, 2019   QHDX   Drinking water distribution and delivery   PRC
Dongguan City Fu La Tu Trade Ltd (“FLTT”)   September 27, 2020   FVTL   Trading of alcoholic beverages   PRC
Dongguan City Fu Xin Gu Trade Ltd (“FXGT”)   December 2, 2020   FVTL   Trading of alcoholic beverages   PRC
Dongguan City Fu Xin Technology Ltd (“FXTL”)   November 12, 2020   Xixingdao   Drinking water distribution and delivery   PRC
Dongguan City Fu Guan Healthy Industry Technology Ltd (“FGHL”)   December 21, 2020   Xixingdao   Drinking water distribution and delivery   PRC
Dongguan City Fu Jing Technology Ltd (“FJTL”)   November 17, 2020   Xixingdao   Drinking water distribution and delivery   PRC
Dongguan City Fu Xiang Technology Ltd (“FGTL”)   November 16, 2020   Xixingdao   Drinking water distribution and delivery   PRC
Dongguan City Fu Ji Food & Beverage Ltd (“FJFL”)   November 9, 2020   Xixingdao   Drinking water distribution and delivery   PRC
Dongguan City Fu Lai Food Ltd (“FLFL”)   September 27, 2020   Xixingdao   Drinking water distribution and delivery   PRC
Dongguan City Fu Yi Beverage Ltd (“FYBL”)   November 12, 2020   Xixingdao   Drinking water distribution and delivery   PRC
Dongguan City Fu Tai Food Trade Ltd (“FTFL”)   October 23, 2020   Xixingdao   Drinking water distribution and delivery   PRC
Dongguan City Fu Jia Drinking Water Ltd (“FJWL”)   March 29, 2021   Xixingdao   Sales of agriculture products, household electric appliances and food   PRC
Dongguan City Fu Sheng Drinking Water Ltd (“FSWL”)   March 29, 2021   Xixingdao   Sales of agriculture products, household electric appliances and food   PRC
Dongguan City Fu Xi Drinking Water Ltd (“FXWL”)   March 17, 2021   Xixingdao   Sales of agriculture products, household electric appliances and plastic products   PRC
Shenzhen City Fu Jin Trading Technology Ltd (“FJSTL”)   June 7, 2021   Xixingdao   Sales of agriculture products, household electric appliances, plastic products and software development   PRC
Dongguan City Fu Li Trading Ltd (“FLTL”)   September 10, 2021   Xixingdao   Sales of agriculture products, household electric appliances and plastic products   PRC
Guangdong Fu Gu Supply Chain Group Ltd (“FGGC”)   September 13, 2021   QHDX   Supply chain service, sales of food and health products, machinery, plastic products, and investment holding   PRC

 

9

 

 

Use of estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant accounting estimates include certain assumptions related to allowance of doubtful accounts, allowance of deferred tax asset, useful lives and impairment of long-lived assets, and impairment of goodwill. Actual results may differ from these estimates.

 

Reclassification

 

Certain prior year amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact on net earnings and financial position.

 

Foreign currency translation and re-measurement

 

The Company translates its foreign operations to the U.S. dollar in accordance with ASC 830, “Foreign Currency Matters”.

 

The reporting currency for the Company and its subsidiaries is the U.S. dollar. The Company, DIGLS, DILHK, JJGS and JJHK’s functional currency is the U.S. dollar; QHDX, JJSZ and their subsidiaries which are incorporated in PRC use the Chinese Renminbi (“RMB”) as their functional currency.

 

The Company’s subsidiaries, whose records are not maintained in that company’s functional currency, re-measure their records into their functional currency as follows:

 

  Monetary assets and liabilities at exchange rates in effect at the end of each period
  Nonmonetary assets and liabilities at historical rates
  Revenue and expense items at the average rate of exchange prevailing during the period

 

Gains and losses from these re-measurements were not significant and have been included in the Company’s results of operations.

 

The Company’s subsidiaries, whose functional currency is not the U.S. dollar, translate their records into the U.S. dollar as follows:

 

  Assets and liabilities at the rate of exchange in effect at the balance sheet date
  Equities at the historical rate
  Revenue and expense items at the average rate of exchange prevailing during the period

 

Translation of amounts from the local currencies of the Company into US$ has been made at the following exchange rates for the respective periods:

 

   2022    2021 
  

As of and for the three months ended

March 31,

 
    

2022

    

2021

 
Period-end RMB:US$1 exchange rate   0.15770    0.15261 
Period-average RMB:US$1 exchange rate   0.15752    0.15424 

 

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US dollars at the rates used in translation.

 

10

 

 

Impairment of long-lived assets other than goodwill

 

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. Impairment may be the result of becoming obsolete from a change in the industry or new technologies. Impairment is present if the carrying amount of an asset is less than its undiscounted cash flows to be generated.

 

If an asset is considered impaired, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

 

The Company did not recognize any impairment of long-lived assets during the three months ended March 31, 2022 and 2021.

 

Goodwill

 

Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in a business combination. In accordance with FASB ASC Topic 350, “Intangibles-Goodwill and Others”, goodwill is subject to at least an annual assessment for impairment or more frequently if events or changes in circumstances indicate that an impairment may exist, applying a fair-value based test. Fair value is generally determined using a discounted cash flow analysis. The Company would recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value up to the amount of goodwill allocated to that reporting unit.

 

During the three months ended March 31, 2022 and 2021, the Company did not record any impairment of goodwill.

 

Revenue recognition

 

The Company follows the guidance of ASC 606, revenue from contracts with customers is recognized using the following five steps:

 

  1. Identify the contract(s) with a customer;
  2. Identify the performance obligations in the contract;
  3. Determine the transaction price;
  4. Allocate the transaction price to the performance obligations in the contract; and
  5. Recognize revenue when (or as) the entity satisfies a performance obligation.

 

Under Topic 606, revenues are recognized when the promised products have been confirmed of delivery or services have been transferred to the consumers in amounts that reflect the consideration the customer expects to be entitled to in exchange for those services. The Company presents value added taxes (“VAT”) as reductions of revenues. The Company recognizes revenues net of value added taxes (“VAT”) and relevant charges.

 

We generate revenue primarily from the sales of wine, water and oil directly to agents, wholesalers and end users. We recognize product revenue at a point in time when the control of the products has been transferred to customers. The transfer of control is considered complete when products have been picked up by or delivered to our customers. We account for shipping and handling fees as a fulfillment cost.

 

11

 

 

The following table provides information about disaggregated revenue based on revenue by product types:

 

   2022   2021 
   Three months ended
31 March,
 
   2022   2021 
Sales of wine  $630,462   $779,220 
Sales of water   529,444    700,495 
Sales of oil   -    135,997 
Others   101,904    28,448 
Total  $1,261,810   $1,644,160 

 

Contract liabilities

 

Contract liabilities consist mainly of customer advances. On certain occasions, the Company may receive prepayments from downstream retailers or wholesales customers for wines, water and other products prior to them taking possession of the Company’s products. The Company records these receipts as customer advances until the control of the products has been transferred the customers. As of March 31, 2022 and December 31, 2021, the Company had customer advances of $351,412 and $382,518, respectively. During the three months ended March 31, 2022, the Company recognized $272,551 of customer advances in the opening balance.

 

Related party transactions

 

Transactions involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive, free market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations can be substantiated.

 

NOTE 2 - ACCOUNTS RECEIVABLE, NET

 

Accounts receivable consisted of the following as of March 31, 2022 and December 31, 2021:

 

   March 31
2022
   December 31,
2021
 
Accounts receivable (including $19,044 and $43,477 from related parties as of March 31, 2022 and December 31, 2021, respectively)  $1,881,892   $2,662,168 
Less: Allowance for doubtful accounts   -    - 
Accounts receivable, net  $1,881,892   $2,662,168 

 

12

 

 

NOTE 3 – PREPAYMENTS AND OTHER CURRENT ASSETS

 

Prepayments and other current assets consisted of the following as of March 31, 2022 and December 31, 2021:

 

   March 31
2022
   December 31,
2021
 
Prepayments (including $1,731,874 and 1,813,904 to related parties as of March 31, 2022 and December 31, 2021, respectively)  $2,604,463   $2,169,095 
Other current assets   24,439    7,618 
Prepayments and other receivables  $2,628,902   $2,176,713 

 

Balance of prepayments represented the advanced payments to suppliers including related party suppliers.

 

NOTE 4 – PROPERTY AND EQUIPMENT, NET

 

Property and equipment consisted of the following as of March 31, 2022 and December 31, 2021:

 

   March 31,
2022
   December 31,
2021
 
Office equipment  $116,736   $113,995 
Leasehold improvement   129,424    126,386 
Property and equipment   246,160    240,381 
Less: Accumulated depreciation   (117,936)   (99,987)
Property and equipment, net  $128,224   $140,394 

 

Depreciation expense, which was included in general and administrative expenses, for the three months ended March 31, 2022 and 2021 was $12,466 and $4,950, respectively.

 

NOTE 5 – INTANGIBLE ASSETS

 

Intangible assets and related accumulated amortization were as follows:

 

   March 31,
2022
   December 31,
2021
 
Distributor channel  $3,396,880   $3,389,404 
Others   

22,348

    22,299 
Total intangible assets   3,419,228    3,411,703 
Less: Accumulated amortization   (1,344,598)   (1,129,913)
Total  $2,074,630   $2,281,790 

 

Amortization expense for the three months ended March 31, 2022 and 2021 was $211,957 and $196,579, respectively, included in cost of revenues and general and administrative expenses.

  

As of March 31, 2022, the future estimated amortization costs for intangible assets are as follows:

 

      
Year ending December 31,     
2022 (remaining)  $636,705 
2023   849,220 
2024   588,705 
Thereafter   - 
Total  $

2,074,630

 

 

13

 

 

NOTE 6- RELATED PARTY TRANSACTIONS

 

Amounts due from related parties as of March 31, 2022 and December 31, 2021 are as follows:

 

      March 31,
2022
   December 31,
2021
 
Mr. Deqin Ke  Manager of a subsidiary  $-  

$

26,364 
Mr. Yuwen Li  Vice President   26,255    - 
Due from related parties     $26,255   $26,364 

 

Amounts due to related parties as of March 31, 2022 and December 31, 2021 are as follows:

 

      March 31,
2022
   December 31,
2021
 
Mr. Yumin Lin  President, Chief Executive Officer, Secretary, Director  $300,114   $344,218 
Ms. Xiulan Zhou  Manager of a subsidiary   1,160    1,157 
Mr. Huagen Li  Manager of a subsidiary   

2,523

    2,518 
Mr. Guodong Jia  Manager of a subsidiary   946    944 
Mr. Minghua Cheng  Former director and majority shareholder   78,851    157,353 
Mr. Hongwei Ye  Manager of a subsidiary, Shareholder   17    17 
Mr. Anping Chen  Manager of a subsidiary   8,516    6,924 
Mr. Jiangwei Jia  Manager of a subsidiary   -    787 
Ms. Xiuyun Wang  Manager of a subsidiary   -    6,020 
Mr. Yuwen Li  Vice President   -    70,745 
Shenzhen DaXingHuaShang Industry Development Ltd.  Mr. Yumin Lin is the supervisor of Shenzhen DaXingHuaShang Industry Development Ltd.   94,620    93,298 
Mr. Deqin Ke  Manager of a subsidiary   789    - 
Mr. Zhihua Liao  Manager of a subsidiary   325    - 
Ms. Chunxiang Zhang  Manager of a subsidiary   1,577    - 
Mr. Xue Meng  Manager of a subsidiary   789    - 
Ms. Shuqin Chen  Manager of a subsidiary   789    - 
Due to related parties     $491,016   $683,981 

 

14

 

 

Revenues generated from related parties during the three months ended March 31, 2022 and 2021 are as follows:

 

      2022   2021 
     

For the three months ended March 31,

 
      2022   2021 
Mr. Kaihong Lin  Chief Financial Officer and Treasurer  $241   $51 
Mr. Yumin Lin  President, Chief Executive Officer, Secretary, Director   222    109 
Mr. Zihao Ye  Manager of a subsidiary   262    76 
Mr. Naiyong Luo  Manager of a subsidiary   -    5,115 
Mr. Hongwei Ye  Manager of a subsidiary, Shareholder   -    5,922 
Dongguan Zhengui Reality Co., Ltd.  Mr. Naiyong Luo, a manager of a subsidiary, is the controlling shareholder of Dongguan Zhengui Reality Co., Ltd.   -    132,099 
Dongguan Huanhai Trading Co., Ltd.  Mr. Weihong Ye, a manager of a subsidiary, is the controlling shareholder of Dongguan Huanhai Trading Co., Ltd.   -    13,781 
Guangdong Yuexin Jiaotong Construction Co., Ltd.  Mr. Naiyong Luo, a manager of a subsidiary, is the controlling shareholder of Guangdong Yuexin Jiaotong Construction Co., Ltd.   -    98,643 
Dongguan Tailai Trading Co., Ltd.  Significantly influenced by the Company   -    13,182 
Revenues generated from related parties     $725   $268,978 

 

Cost of revenues from related parties during the three months ended March 31, 2022 and 2021 is as follows:

 

      2022   2021 
      For the three months ended March 31, 
      2022   2021 
Dongguan Baxi Food Distribution Co., Ltd.  Significantly influenced by the Company  $8,178   $31,424 
Dongguan Dalingshan Xinwenhua Drinking Water Store  Significantly influenced by the Company   14,648    19,307 
Dongguan Pengqin Drinking Water Co., Ltd.  Significantly influenced by the Company   9,555    16,283 
Dongguan Dengqinghu Drinking Water Store  Significantly influenced by the Company   1,082    6,472 
Dongguan Tailai Trading Co., Ltd.  Significantly influenced by the Company   9,736    14,615 
Dongguan Anxiang Technology Co., Ltd.  Significantly influenced by the Company   46,721    35,826 
Guangdong Jiaduonuo Shengshi Trading Co., Ltd.  Significantly influenced by the Company   39,765    3,157 
Dongguan Dalingshan Runxin Drinking Water Store  Significantly influenced by the Company   7,227    3,516 
Cost of revenues from related parties     $136,912   $130,600 

 

Purchases from related parties during the three months ended March 31, 2022 and 2021 are as follows:

 

      2022   2021 
      For the three months ended March 31, 
      2022   2021 
Dongguan Baxi Food Distribution Co., Ltd.  Significantly influenced by the Company  $8,178   $31,424 
Dongguan Dalingshan Xinwenhua Drinking Water Store  Significantly influenced by the Company   14,648    18,319 
Dongguan Pengqin Drinking Water Co., Ltd.  Significantly influenced by the Company   9,555    15,450 
Dongguan Dengqinghu Drinking Water Store  Significantly influenced by the Company   1,082    6,141 
Dongguan Tailai Trading Co., Ltd.  Significantly influenced by the Company   9,736    13,868 
Dongguan Anxiang Technology Co., Ltd.  Significantly influenced by the Company   46,721    33,993 
Guangdong Jiaduonuo Shengshi Trading Co., Ltd.  Significantly influenced by the Company   39,765    2,996 
Dongguan Dalingshan Runxin Drinking Water Store  Significantly influenced by the Company   7,227    3,336 
Purchase from related party     $136,912   $125,527 

 

Due from related parties mainly consists of funds advanced to related parties as borrowings or funds advanced to pay off the Company’s expenses. The balances are unsecured, non-interest bearing.

 

Due to related parties mainly consists of borrowings for working capital purpose, the balances are unsecured, non-interest bearing and due on demand.

 

In addition, during the three months ended March 31, 2022 and 2021, these related parties paid expenses on the Company’s behalf in an amount of nil and $14,487, respectively.

 

Mr. Yuwen Li, the Vice President of the Company, authorized the Company to use trademarks that were owned by him for ten years from October 5, 2019 to October 4, 2029 at no cost.

 

Also see Note 2, 3 and 8 for more transactions with related parties.

 

15

 

 

NOTE 7 - INCOME TAXES

 

United States of America

 

The Company is registered in the State of Nevada and is subject to United States of America tax law. The U.S federal income tax rate is 21%.

 

Seychelles

 

Under the current laws of the Seychelles, DIGLS and JJGS are registered as an international business company which governed by the International Business Companies Act of Seychelles and there is no income tax charged in Seychelles.

 

Hong Kong

 

From year of assessment of 2018/2019 onwards, Hong Kong profit tax rates are 8.25% on assessable profits up to HK$2,000,000 (approximately $289,855), and 16.5% on any part of assessable profits over HK$2,000,000. For the three months ended March 31, 2022 and 2021, the Company did not have any assessable profits arising in or derived from Hong Kong, therefore no provision for Hong Kong profits tax was made in the periods reported.

 

The PRC

 

The Company’s subsidiaries are incorporated in the PRC, and are subject to the PRC Enterprise Income Tax Laws (“EIT Laws”) with the statutory income tax rate of 25% with the following exceptions.

 

On January 17, 2019, the State Taxation Administration issued the notice on the scope of small-scale and low-profit corporate income tax preferential policies of the Ministry of Finance and the State Administration of Taxation (“MOF and SAT”), [2019] No. 13 for small-scale and low-profit enterprises whose annual taxable income is less than RMB1,000,000 (including RMB1,000,000), approximately $142,209, pursuant to which the qualified enterprises’ income is reduced by 25% to the taxable income, and enterprise income tax is paid at 20% tax rate, which is essentially resulting in a favorable income tax rate of 5%. While for the portion of annual taxable income exceeding RMB1,000,000, approximately $142,209, but not more than RMB3,000,000, approximately $426,627, the income is reduced by 50% to the taxable income, and enterprise income tax is paid at 20% tax rate, which is essentially resulting in a favorable income tax rate of 10%. MOF and SAT [2021] No.12 provides an enterprise income tax rate of 2.5% on small-scale and low-profit enterprises whose annual taxable income is less than RMB1,000,000, approximately $142,209, from January 1, 2021 to December 31, 2022. MOF and SAT [2022] No.13 also provides an enterprise income tax rate of 5% on small-scale and low-profit enterprises whose annual taxable income is more than RMB1,000,000, approximately $142,209, but less than RMB3,000,000, approximately $426,627, from January 1, 2022 to December 31, 2024. The qualifications of small-scale and low-profit enterprises were examined annually by the Tax Bureau. All of the Company’s PRC subsidiaries met the criteria of small-scale and low-profit enterprises.

 

The components of the income tax provision are as follows:

 

   Three Months Ended
March 31, 2022
   Three Months Ended
March 31, 2021
 
Current:          
– United States of America  $

-

   $43,096 
– Seychelles   -    - 
– Hong Kong   -    - 
– The PRC   22,407    23,259 
Deferred          
– United States of America   -    - 
– Seychelles   -    - 
– Hong Kong   -    - 
– The PRC   -    - 
Total  $

22,407

   $66,355 

 

The effective tax rate was 11.3% and 16.5% for the three months ended March 31, 2022 and 2021, respectively.

 

16

 

 

NOTE 8 - OPERATING LEASES

 

As of March 31, 2022, the Company has seventeen separate operating lease agreements for three office spaces, one warehouse and thirteen stores in PRC with remaining lease terms of from 6 months to 61 months.

 

Two of the leases described above were entered with related parties. The operating lease entered with Ms. Qingmei Lin, a related party, is for the premises in Dongguan City, PRC. The agreement covers the period from January 1, 2019 to April 30, 2027 with the monthly rent expense of RMB10,000 (approximately $1,450). The operating lease agreement entered with Mr. Hongwei Ye, another related party, is for the premises in Dongguan City, PRC. The agreement covers the period from September 27, 2020 to September 30, 2023 with the monthly rent expense of RMB960 (approximately $139).

 

The Company terminated an operating lease agreement with a subsidiary of Shenzhen DaXingHuaShang Industry Development Ltd., a related party, for the premise in Shenzhen City, PRC on February 28, 2021. The monthly rent expense for this lease was RMB30,000 (approximately $4,349).

 

The components of lease expense and supplemental cash flow information related to leases for the three months ended March 31, 2022 and 2021 are as follows:

 

 
2022
  
2021
 
  

For the three months ended

March 31,

Operating lease cost (included in general and administrative expenses in the Company’s condensed consolidated statements of operations) 
2022
  
2021
 
         
Related parties  $4,726   $18,490 
Non-related parties   37,773    18,200 

 

Other information for the three months ended 

March 31, 2022

  

March 31, 2021

 
Cash paid for amounts included in the measurement of lease obligations  $51,477   $41,336 
Weighted average remaining lease term (in years)   3.66    3.77 
Weighted average discount rate   3.23%   3.23%

 

Maturities of the Company’s lease obligations as of March 31, 2022 are as follows:

 

Year ending December 31,    
2022 (remaining)  $121,292 
2023   

114,117

 
2024   86,720 
2025   82,664 
2026   46,528 
Thereafter   6,308 
Total lease payment   457,629 
Less: Imputed interest   (25,905)
Operating lease obligations  $431,724 

 

17

 

 

NOTE 9 – BANK AND OTHER BORROWINGS

 

In August 2020, the Company obtained a revolving credit line in the principal amount of RMB910,000 (approximately $139,000) from China Construction Bank, which bears interest at the base Loan Prime Rate of 3.85% plus 0.4%. The credit line is guaranteed by Xiulan Zhou, a related party, and pledged by her property. The maturity date is on July 21, 2023.

 

In December 2020, the Company obtained a loan in the principal amount of RMB750,000 (approximately $115,000) from Huaneng Guicheng Trust Co., Ltd, a financial institution in PRC, which bears interest at the base Loan Prime Rate of 3.85% plus 8.75%. The credit line is guaranteed by Yumin Lin. The maturity date is on December 21, 2022.

 

In November 2021, the Company obtained a bank loan in the principal amount of RMB500,000 (approximately $79,000) from Shenzhen Qianhai Webank Co., Ltd. (“WeBank”), which bears interest at 3.6%. The maturity date is on December 11, 2021. On December 11, 2021, the Company and WeBank agreed to extend the maturity date of the loan to December 21, 2023 and increase the principal amount to RMB500,750 (approximately $79,000) reflecting the accrued interest. The loan is guaranteed by Yumin Lin and bears interest at 10.71%.

 

The balance of the loans borrowed as of March 31, 2022 and December 31, 2021 were as follows:

 

    March 31, 2022     December 31, 2021  
Loan from a trust in PRC   $ 50,690     $ 67,438  
China Construction Bank     143,508       143,192  
WeBank     78,968       78,795  
Aggregate outstanding principal balances   $ 273,166     $ 289,425  
Less: current portion    

95,815

      101,207  
Non-current portion   $

177,351

    $ 188,218  

 

The total interest expense was $5,825 and $3,553 for the three months ended March 31, 2022 and 2021, respectively.

 

NOTE 10COMMON STOCK

 

Effective on October 21, 2021, the Company has approved a reverse stock split of the Company’s authorized and issued and outstanding shares of common stock, par value $0.001 per share, at a ratio of 1-for-20 (the “Reverse Stock Split”). As a result of the Reverse Stock Split, the Company’s authorized shares of common stock became 150,000,000 shares. As of March 31, 2021, and immediately prior to the Reverse Stock Split, there were 313,098,220 shares of common stock issued and outstanding. As a result of the Reverse Stock Split, the Company has 15,655,038 shares of common stock issued and outstanding. The par value remains unchanged at $0.001 per share, which resulted in a reclassification of capital from par value to additional paid-in capital in excess of par value. All share and per share amount in the accompanying financial statement for the prior period have been retroactively adjusted to reflect the Reverse Stock Split.

 

18

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The information contained in this Form 10-Q is intended to update the information contained in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission on April 1, 2022 (the “Form 10-K”) and presumes that readers have access to, and will have read, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other information contained in such Form 10-K. The following discussion and analysis also should be read together with our financial statements and the notes to the financial statements included elsewhere in this Form 10-Q.

 

The following discussion contains certain statements that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements appear in a number of places in this Report, including, without limitation, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements are not guaranteed of future performance and involve risks, uncertainties and requirements that are difficult to predict or are beyond our control. Forward-looking statements speak only as of the date of this quarterly report. You should not put undue reliance on any forward-looking statements. We strongly encourage investors to carefully read the factors described in our Form 10-K in the section entitled “Risk Factors” for a description of certain risks that could, among other things, cause actual results to differ from these forward-looking statements. We assume no responsibility to update the forward-looking statements contained in this quarterly report on Form 10-Q. The following should also be read in conjunction with the unaudited Financial Statements and notes thereto that appear elsewhere in this report.

 

Overview

 

Fortune Valley Treasures, Inc. (the “Company,” “we,” “our” or “us”) 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. The Company, as a holding company, does not conduct substantial business operations. We, through our operating subsidiaries, engage in the food supply chain operations and management via a service platform. Through various acquisitions of high-quality upstream and downstream companies in the industry, the Company seeks to create a complete industrial chain to reduce costs and enhance competitiveness. The Company mainly focuses on online and offline sales targeting regional wholesalers, retailers, supermarkets and major food and beverage (“F&B”) chains.

 

During the three months ended March 31, 2022, the Company conducted its business in one revenue stream: product sales – wine, water and other F&B products.

 

Results of Operations

 

Three Months Ended March 31, 2022 and 2021

 

   Three Months Ended March 31,     
   2022   2021   Change 
Net revenues  $1,261,810   $1,644,160   $(382,350)
Cost of revenues   (518,462)   (729,743)   211,281 
Gross profit   743,348    914,417    (171,069)
Operating expense   (545,441)   (509,131)   (36,310)
Interest income   77    

165

    

(88

)
Other income   6,207    31    6,176 
Interest expense   (5,825)   (3,553)   (2,272)
Income taxes   (22,407)   (66,355)   43,948
Net income    175,959    335,574   

(159,615

)
Net income attributable to noncontrolling interests   27,283    30,320   

(3,037

)
Net income attributable to Fortune Valley Treasures, Inc.  $148,676   $305,254  $

(156,578

)

 

 

19

 

 

Net Revenues

 

Revenue was $1,261,810 for three months ended March 31, 2022, reflecting a decrease of $382,350 from $1,644,160 for the three months ended March 31, 2021 as the Company did not generated any revenues from sales of oil during the three months ended March 31, 2022. The Company adjusted its product mix and stopped selling oil from this quarter due to low profits.

 

Cost of Revenues

 

Cost of revenue was $518,462 for the three months ended March 31, 2022, reflecting a decrease of $211,281 from $729,743 for the three months ended March 31, 2021. The cost of revenues fluctuated in line with our net revenues.

 

Gross Profit

 

Gross profit was $743,348 and $914,417 for the three months ended March 31, 2022 and 2021, respectively, reflecting a decrease of 171,069, which was mainly attributable to the quarantine requirement imposed by the local government in response to the sporadic outbreaks of new COVID-19 variants in Dongguan City during the three months ended March 31, 2022.

 

Operating Expenses

 

Operating expense was $545,441 for the three months ended March 31, 2022, reflecting an increase of $36,310, from $509,131 for the three months ended March 31, 2021 due to the increase in professional service fees and employee salary.

 

Net Income

 

For the three months ended March 31, 2022, net income was $175,959, compared to net income of $335,574 for the three months ended March 31, 2021.

 

Net income attributable to noncontrolling interests

 

The Company records net income attributable to noncontrolling interests in the condensed consolidated statements of operations for any noncontrolling interests of consolidated subsidiaries.

 

For the three months ended March 31, 2022 and 2021, the Company recorded net income attributable to noncontrolling interests of $27,283 and $30,320, respectively.

 

Liquidity and Capital Resources

 

Working Capital

 

    March 31,     December 31,        
    2022     2021     Change  
Total current assets   $ 4,835,666     $ 5,069,481     $ (233,815 )
Total current liabilities     1,404,789       1,717,519       (312,730
Working capital   $ 3,430,877     $ 3,351,962     $ 78,915  

  

20

 

 

As of March 31, 2022, we had working capital of $3,430,877, as compared to working capital of $3,351,962 as of December 31, 2021. We had total current assets of $4,835,666, consisting of cash and cash equivalents of $150,613, inventories of $148,004, prepayments and other current assets of $2,628,902, accounts receivable of $1,881,892 and amount due from related party of $26,255, compared to total current assets of $5,069,481 as of December 31, 2021. The decrease was mainly due to the decrease in accounts receivable and offset by the increase in prepayments and other current assets. We had current liabilities of $1,404,789, consisting of operating lease obligations $142,153, accounts payable of $165,432, customer advances $351,412, due to related parties of $491,016, current portion of bank and other borrowings of $95,815 and accrued liabilities of $158,961.

 

Our cash and cash equivalents balance at March 31, 2022 increased to $150,613, as compared to $123,163 at December 31, 2021. We estimate the Company currently has sufficient cash available to meet its anticipated working capital for the next twelve months, without raising additional capital. The Company is continuing to look for different financing opportunities in order to increase sufficient working capital and improve liquidity.

 

Despite the increased working capital of the Company, no assurance can be given that any future financing, if needed, will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, if needed, it may contain undue restrictions on its operations, in the case of debt financing, or cause substantial dilution for its shareholders, in the case of equity financing.

 

Cash Flows

 

   Three Months Ended March 31,     
   2022   2021   Change 
Cash Flows provided by (used in) Operating Activities  $133,442   $(508,778)  $642,220 
Cash Flows provided by Investing Activities   -    809,036    (809,036)
Cash Flows provided by (used in) Financing Activities   (95,638)   404,405    (500,043)
Effect of change rate changes in cash and cash equivalents   (10,354)   9,835    (20,189)
Net Changes in Cash During the Period  $27,450   $714,498   $(687,048)

 

Cash Flow from Operating Activities

 

Net cash provided by operating activities for the three months ended March 31, 2022 was $133,442, as compared to the amount of $508,778 used in operating activities for the three months ended March 31, 2021, reflecting an increase of $642,220, which was mainly resulted from net income of $175,959, depreciation and amortization expense of $224,423, decrease in accounts receivable of $785,262, and offset by increase in the prepayments and other current assets of $446,876, increase in deposits paid to vendors of $327,389 and decrease in due to related parties in $112,717.

 

21

 

 

Cash Flow from Investing Activities

 

Net cash used in investing activities was nil for the three months ended March 31, 2022, compared to net cash provided by investing activities of $809,036 for the three months ended March 31, 2021.

 

Cash Flow from Financing Activities

 

Net cash used in financing activities was $95,638 for the three months ended March 31, 2022, compared to net cash provided by financing activities of $404,405 for the three months ended March 31, 2021. The decrease in net cash provided by financing activities was mainly due to the decrease in borrowings from related parties and offset by the decrease in repayments to related parties.

 

Critical Accounting Policy

 

In the ordinary course of business, we make a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with U.S. generally accepted accounting principles. We base our estimates on historical experience, when available, and on other various assumptions that are believed to be reasonable under the circumstances. Actual results could differ significantly from those estimates under different assumptions and conditions.

 

Revenue Recognition

 

The Company follows the guidance of ASC 606, revenue from contracts with customers is recognized using the following five steps:

 

  1. Identify the contract(s) with a customer;
  2. Identify the performance obligations in the contract;
  3. Determine the transaction price;
  4. Allocate the transaction price to the performance obligations in the contract; and
  5. Recognize revenue when (or as) the entity satisfies a performance obligation.

 

Under Topic 606, revenues are recognized when the promised products have been confirmed of delivery or services have been transferred to the consumers in amounts that reflect the consideration the customer expects to be entitled to in exchange for those services. The Company presents value added taxes (“VAT”) as reductions of revenues. The Company recognizes revenues net of value added taxes (“VAT”) and relevant charges.

 

We generate revenue primarily from the sales of wine, water and oil directly to agents, wholesalers and end users. We recognize product revenue at a point in time when the control of the products has been transferred to customers. The transfer of control is considered complete when products have been picked up by or delivered to our customers. We account for shipping and handling fees as a fulfillment cost.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.

 

Related Party Transactions

 

As of March 31, 2022 and December 31, 2021, the Company had accounts receivable from related parties in amounts of $19,044 and $43,477, prepayments to related parties in the amounts of $1,731,874 and $1,813,904, deposits to related parties in the amounts of $1,778,143 and $1,596,075, and accounts payable to related parties in amounts of $29,181 and $17,789, respectively.

 

As of March 31, 2022 and December 31, 2021, the Company had outstanding receivables due from its related parties in the amounts of $26,255 and $26,364, respectively, which mainly consisted of funds advanced to related parties as borrowings or funds advances to pay off the Company’s expenses. The balances were unsecured and non-interest bearing.

 

As of March 31, 2022 and December 31, 2021, the Company had outstanding payables due to its related parties in the amounts of $491,016 and $683,981, respectively, which mainly consisted of borrowings for working capital purpose. The balances were unsecured, non-interest bearing and due on demand.

 

During the three months ended March 31, 2022 and 2021, the Company’s related parties paid expenses on behalf of the Company in the amounts of nil and $14,487, respectively.

 

During the three months ended March 31, 2022 and 2021, the Company sold products to its related parties in the amounts of $725 and $268,978, respectively, purchased goods from its related parties in the amounts of $136,912 and $125,527, and incurred cost of revenues from related parties in the amounts of $136,912 and $130,600, respectively.

 

During the three months ended March 31, 2022 and 2021, the rental expenses to related parties were $4,726 and $18,490, respectively.

 

Our related parties are primarily those persons who can significantly influence based on our common business relationships. Refer to Note 6 to the unaudited condensed consolidated financial statements for additional details regarding the related party transactions.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

As a “smaller reporting company” as defined by Rule 12b-2 of the Securities Exchange Act of 1934, the Company is not required to provide the information under this item.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures”, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of March 31, 2022, that our disclosure controls and procedures were not effective.

 

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The matter involving internal controls and procedures that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board was lack of well-established procedures to identify, approve and review related party transactions.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the board of directors (the “Board”), management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and includes those policies and procedures that:

 

  Apply to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
     
  Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
     
  Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

 

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We carried out an assessment, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our internal controls over financial reporting, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of March 31, 2022. Management based the assessment on criteria for effective internal control over financial reporting described in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Based on this assessment, management has concluded that as of March 31, 2022, our internal control over financial reporting was not effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we have initiated, or plan to initiate, the following series of measures:

 

  We have increased our personnel resources and technical accounting expertise within the accounting function and intend to hire one or more additional personnel for the function due to turnover.
     
  We will create a position to segregate duties consistent with control objectives.
     
  We plan to prepare written policies and procedures for operating, accounting and financial reporting to establish a formal process to close our books monthly on an accrual basis and account for all transactions, including equity and debt transactions.
     
  We plan to test our updated controls and remediate our deficiencies in the year 2022.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal controls over financial reporting that occurred during the period covered by this Report, which has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

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PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

We know of no material, active or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceedings or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any beneficial shareholder are an adverse party or has a material interest adverse to us.

 

Item 1A. Risk Factors.

 

Not applicable to a smaller reporting company

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits

 

Exhibit No.   Description
31.1   Rule 13(a)-14(a)/15(d)-14(a) Certification of principal executive officer
31.2   Rule 13(a)-14(a)/15(d)-14(a) Certification of principal financial officer
32.1   Section 1350 Certification of principal executive officer
32.2   Section 1350 Certification of principal financial officer and principal accounting officer
101.INS   Inline XBRL Instance Document
101.SCH   Inline XBRL Taxonomy Extension Schema Document
101.CAL   Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE   Inline XBRL Taxonomy Extension Presentation Linkbase Document
104   Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

  Fortune Valley Treasures, Inc.
     
Date: May 16, 2022 By: /s/ Yumin Lin
    Yumin Lin
    President and Chief Executive Officer
    (Principal Executive Officer)
     
Date: May 16, 2022 By: /s/ Kaihong Lin
    Kaihong Lin
    Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

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