FVTI 8-K/A
Fortune Valley Treasures, Inc. (FVTI)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 2)
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 22, 2021 (June 26, 2020)
FORTUNE VALLEY TREASURES, INC.
(Exact name of registrant as specified in its charter)
| Nevada | 000-55555 | 32-0439333 | ||
(State or other jurisdiction of incorporation or organization) |
(Commission File Number) |
(I.R.S. Employer Identification Number) |
13th Floor, Building B1, Wisdom Plaza Qiaoxiang Road, Nanshan District Shenzhen, Guangdong, China |
518000 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (86) 755-86961405
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation to the registrant under any of the following provisions:
| [ ] | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| [ ] | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| [ ] | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| [ ] | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12(b) of the Act: None.
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b–2 of the Securities Exchange Act of 1934 (§ 240.12b–2 of this chapter).
Emerging growth company [X]
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. [ ]
EXPLANATORY NOTE.
On June 26, 2020, Fortune Valley Treasures, Inc. (“FVTI” or the “Company”) filed a Form 8-K (the “Original 8-K”), reporting the entry of an equity interest transfer agreement (“Original Agreement”) with Dongguan Xixingdao Technology Co., Ltd., a company engaged in the business of drinking water distribution and delivery (“Xixingdao”), and Xixingdao’s shareholders for the purchase of 90% of Xixingdao’s equity interest. The Company filed a Current Report on Form 8-K/A on December 28, 2020 to (1) amend and supplement Item 1.01 of the Original 8-K with the disclosure of an amendment to the Original Agreement (the “Amendment”); (2) announce the closing and completion of the equity transfer as contemplated in the Original Agreement and Amendment on December 28, 2020; and (3) provide additional historical financial statements for Xixingdao and pro forma financial information for the Company and Xixingdao.
This Current Report on Form 8-K/A is to include the nine (9) months ended September 30, 2020 and 2019 reviewed financial statements.
Item 1.01 Entry into a Material Definitive Agreement.
The information contained in Item 2.01 below relating to the Original Agreement and Amendment described therein is incorporated herein by reference.
Item 2.01 Completion of Acquisition or Disposition of Assets.
EQUITY INTEREST TRANSFER AGREEMENT
As previously disclosed on the Current Report on Form 8-K, on June 22, 2020, FVTI, along with Qianhai DaXingHuaShang Investment (Shenzhen) Co., Ltd., a company incorporated in China and a wholly-owned subsidiary of FVTI (“QHDX”), entered into the Original Agreement with Dongguan Xixingdao Technology Co., Ltd. (“Xixingdao”), a company incorporated in China, and the two shareholders of Xixingdao, who collectively own 100% equity interest of Xixingdao (the “Sellers”). Xixingdao is engaged in the business of drinking water distribution and delivery in Dongguan City, Guangdong Province, China.
Pursuant to the Original Agreement, QHDX agreed to purchase 90% of Xixingdao’s equity interest (the “Equity Transfer”) from the Sellers in consideration of shares of FVTI’s common stock (“Issuable Shares”). The completion of the registration of the Equity Transfer with local government authorities (the “Closing”) is subject to satisfaction of all the closing conditions (unless waived), including, but not limited to, (a) completion of due diligence review of Xixingdao to the satisfaction of QHDX, (b) completion of the initial draft of the audited financial statements of Xixingdao for the fiscal year ended December 31, 2019, and (c) execution of non-competition agreements and confidentiality agreements with the senior management members of Xixingdao.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our financial statements and related notes thereto. Unless otherwise indicated or the context otherwise requires, references in this report to “we,” “our” “us” and other similar terms refer to Xixingdao.
Results of Operations of Period from May 31, 2019 to December 31, 2019
| 2019 | ||||
| Net revenues | $ | 585,454 | ||
| Cost of revenues | 291,784 | |||
| Gross profit | 293,670 | |||
| Operating expenses: | ||||
| Selling and marketing expenses | 12,812 | |||
| General and administrative expenses | 49,639 | |||
| 62,451 | ||||
| Operating income | 231,219 | |||
| Interest expense | 31 | |||
| Earnings before tax | 231,188 | |||
| Income tax | 16,655 | |||
| Net income | $ | 214,531 | ||
| Other comprehensive income: | ||||
| Foreign currency translation income | (2,516 | ) | ||
| Comprehensive income | $ | 212,017 | ||
Revenue
Net revenues totaled $585,454 for the period from May 31, 2019 to December 31, 2019. The reason for the increase was commencement of sales of water and beverages by the Company.
Cost of revenue
Cost of revenue totaled $291,784 for the period from May 31, 2019 to December 31, 2019. The reason for the increase in cost of revenue was commencement of new business activities and related costs by the Company.
Gross profit
Gross profit was $293,670 for the period from May 31, 2019 to December 31, 2019. This represents approximately a 50% gross profit margin.
Operating expenses
General and administrative expenses totaled $62,451 for the period from May 31, 2019 to December 31, 2019. The main reason was the increase in regular business activities, including sales of water products by the Company.
Net income
Net income totaled $214,531 for the period from May 31, 2019 to December 31, 2019. This was a result of the Company’s commencement of new business activities.
Liquidity and Capital Resources as of December 31, 2019
Working capital
| As of December 31, | ||||||||||||
| 2019 | 2018 | Change | ||||||||||
| Total current assets | $ | 32,634 | $ | - | $ | 32,634 | ||||||
| Total current liabilities | 128,955 | - | 128,955 | |||||||||
| Working capital deficit | (96,321 | ) | - | (96,321 | ) | |||||||
As of December 31, 2019, we had cash and cash equivalents in the amount of $3. We financed our operations primarily though borrowings from related parties. The change in working capital was primarily from an increase in due to related party of $48,593.
Cash Flows for the period from May 31, 2019 to December 31, 2019
| Period ended December 31, | ||||||||||||
| 2019 | 2018 | Change | ||||||||||
| Cash flows generated in operating activities | $ | 233,744 | $ | - | $ | 233,744 | ||||||
| Cash flows used in investing activities | (282,911 | ) | - | (282,911 | ) | |||||||
| Cash flows provided by financing activities | 49,169 | - | 49,169 | |||||||||
| Net increase in cash during period | $ | 2 | $ | - | $ | 2 | ||||||
Cash Flow from Operating Activities
Cash flow generated in operating activities for the period from May 31, 2019 to December 31, 2019 was $233,744. This was the result of the initial recognition of depreciation and amortization of $334, an increase in inventory of $33,019, an increase in accounts payable of $17,215, and an increase in taxes payable $34,290. These increases are the result of the Company’s first year of operations.
Cash Flow in Investing Activities
Cash flow used in investing activities was $282,911 for the period from May 31, 2019 to December 31, 2019. The increase in net cash flow used was for the security deposits for bottles as a requirement set forth by the Company’s suppliers.
Cash Flow from Financing Activities
Cash flow provided by financing activities was $49,169 for period from May 31, 2019 to December 31, 2019. This increase was the result of advances from related parties to finance the business.
Results of Operations for the Six Months ended September 30, 2020 Compared to the Period from May 31, 2019 to September 30, 2019:
2020 (Unaudited) | 2019 (Unaudited) | Change | ||||||||||
| Net revenues | $ | 450,412 | $ | 22,001 | $ | 428,411 | ||||||
| Cost of revenues | 265,485 | 20,830 | 244,655 | |||||||||
| Gross profit | 184,927 | 1,171 | 110,094 | |||||||||
| Selling, general and administrative expenses | 126,541 | 16,504 | 110,037 | |||||||||
| Other Income (Expenses) | 9,299 | - | 9299 | |||||||||
| Profit /Loss before tax | 67,685 | (15,316 | ) | 83,001 | ||||||||
| Income tax | 3,415 | - | 3,415 | |||||||||
| Net Income/loss | $ | 64,270 | $ | (15,316 | ) | $ | 79,586 | |||||
| Other comprehensive income: | ||||||||||||
| Foreign currency translation income | 7,820 | 0 | 7,820 | |||||||||
| Comprehensive Income/loss | $ | 72,090 | $ | (15,316 | ) | $ | 87,406 | |||||
Revenue
Net revenues totaled $450,412 for the nine months ended September 30, 2020 as compared to $22,001 for the period from May 31, 2019 to September 30, 2019, reflecting an increase of $428,411. The increase is the result of the Company’s continued efforts to increase top line sales of water and beverages from the Company’s year of inception to its second year of operation.
Cost of revenue
Cost of revenue totaled $265,485 for the nine months end September 30, 2020, as compared to $20,830 for the period from May 31, 2019 to September 30, 2019. The increase $244,655 is concurrent with the increase top line sale for the same period. The overall increase in cost of revenue was related to the general increase in sales activity.
Gross profit
Gross profit was $184,927 for the nine months ended September 30, 2020 which reflects a 41.06% gross profit margin. Gross profit was $1,171 for the period from May 31, 2019 to September 30, 2019. Gross profit margins increased when the periods are compared to each other, but they have yet to show consistency over time, given the amount time measured is still relatively short.
Operating expenses
Selling, general and administrative expenses totaled $126,541 for the nine months ended September 30, 2020 as compared to $16,504 for the period from May 31, 2019 to September 30, 2019. These expenses increased by $110,037, which primarily reflects the Company continued effort to ramp up operations from year one to year two.
Net Income/Loss
Net Income totaled $64,270 for the nine months ended September 30, 2020 compared to loss of $15,316 for the period from May 31, 2019 to September 30, 2019. The increase loss comes as the result of the increased business activities not yet reaching economies of scale when covering overhead that is included in selling, general and administrative expenses.
Liquidity and Capital Resources
Working capital as September 30, 2020
| September
30, 2020 |
September 30, 2019 | Change | ||||||||||
| Total current assets | $ | 158,620 | $ | 10,048 | $ | 148,572 | ||||||
| Total current liabilities | 190,851 | 28,504 | 162,347 | |||||||||
| Working capital deficit | (32,231 | ) | (18,456 | ) | 13,775 | |||||||
As of September 30, 2020, we had cash and cash equivalents in the amount of $8,903. We financed our operations primarily though borrowings from related parties. The change in working capital was primarily from an increase in due from related party of $95,083 for the nine months ended September 30, 2020.
Cash Flows for the nine months ended September 30, 2020 and for the period from May 31, 2019 to September 30, 2019
| 2020 | 2019 | Change | ||||||||||
| Cash flows generated in operating activities | $ | (35,340 | ) | $ | 74,525 | $ | (42,865 | ) | ||||
| Cash flows used in investing activities | - | (3,249 | ) | 3,249 | ||||||||
| Cash flows provided by financing activities | 43,993 | - | 43,993 | |||||||||
| Net increase in cash during period | $ | 8,652 | $ | 4,226 | $ | 4,426 | ||||||
Cash Flow from Operating Activities
Cash flow used in operating activities for the nine months ended September 30, 2020 was $35,340. This is the result of an increase in advance to suppliers of $29,221, an increase in accounts receivable of $39,816, an increase in inventory of $36,027, an increase in accounts payable of $31,722, a decrease in taxes payable of $26,947, and a decrease in customer deposits of $386. The use of cash reflects the Company efforts to ramp up business by selling on account and holding inventory to meet the future demand of customers.
Cash Flow from Financing Activities
Cash flow provided by financing activities was $43,933 for the nine months ended September 30, 2020. This increase was the result of advances from related parties to finance the business.
Critical Accounting Policy and Estimates
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.
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.
Item 9.01 Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired.
The audited financial statements, including Balance Sheet as of December 31, 2019, the related Statement of Income and Comprehensive Income for the period from May 31, 2019 (inception) to December 31, 2019, the related Statement of Changes Stockholders’ Equity as of and for the period from May 31, 2019 (inception) to December 31, 2019, and the related Statement of Cash Flow for the period from May 31, 2019 (inception) to December 31, 2019, are filed as Exhibit 99.1 to this amendment.
(b) Pro Forma Financial Information.
The unaudited Pro Forma Combined Financial Statements, including Balance Sheet and Statement of Operations and Comprehensive Loss, are filed as Exhibit 99.2 to this amendment.
The unaudited pro forma financial information is provided for informational purposes only and is not necessarily indicative of what the actual results of operations would have been had the transactions taken place on the assumed date; nor is it indicative of the future consolidated results of operations or financial position of the combined companies.
(d) Exhibits
The following exhibits are furnished herewith:
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
Dated: February 22, 2021
| FORTUNE VALLEY TREASURES, INC. | ||
| By: | /s/ Yumin Lin | |
| Name: | Yumin Lin | |
| Title: | Chief Executive Officer, President and Secretary | |
Exhibit 99.1
Dongguan Xixingdao Technology Co., Ltd
Financial Statements
December 31, 2019
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
| To: | The Board of Directors and Stockholders of |
| Dongguan Xixingdao Technology Co., Ltd |
Opinion on the Financial Statements
We have audited the accompanying balance sheet of Dongguan Xixingdao Technology Co., Ltd (the Company) as of December 31, 2019, and the related statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for the period from May 31, 2019 to December 31, 2019, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the period from May 31, 2019 to December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
| /s/ WWC, P.C. | |
| WWC, P.C. | |
| Certified Public Accountants |
We have served as the Company’s auditor since December 26, 2019
San Mateo, California
January 29, 2021
| F-1 |
Dongguan Xixingdao Technology Co., Ltd
Balance Sheet
As of December 31, 2019
| 2019 | ||||
| Assets | ||||
| Current assets | ||||
| Cash and cash equivalents | $ | 3 | ||
| Inventories | 32,631 | |||
| Total current assets | $ | 32,634 | ||
| Non-current assets | ||||
| Equipment, net | 2,970 | |||
| Right of use asset, net | 81,826 | |||
| Security deposits | 276,383 | |||
| Total Assets | $ | 393,814 | ||
| Liabilities and Stockholders’ Equity | ||||
| Current liabilities | ||||
| Accounts payable | 17,013 | |||
| Lease obligation - current | 29,074 | |||
| Taxes payable | 33,888 | |||
| Customers deposits | 387 | |||
| Due to related parties | 48,593 | |||
| Total current liabilities | $ | 128,955 | ||
| Long term liabilities | ||||
| Lease obligations – non-current | 52,842 | |||
| Total Liabilities | $ | 181,797.11 | ||
| Commitments and contingencies | - | |||
| Stockholders’ Equity | ||||
| Paid in capital | - | |||
| Statutory reserves | - | |||
| Retained Earnings | 214,532 | |||
| Accumulated other comprehensive loss | (2,516 | ) | ||
| Total Stockholders’ Equity | 212,017 | |||
| Non-controlling interest | - | |||
| Total Equity | 212,017 | |||
| Total Liabilities and Stockholders’ Equity | $ | 393,814 | ||
See accompanying notes to the financial statements
| F-2 |
Dongguan Xixingdao Technology Co., Ltd.
Statement of Income and Comprehensive Income
For the Period from May 31, 2019 (“Inception”) to December 31, 2019
| 2019 | ||||
| Net revenues | $ | 585,454 | ||
| Cost of revenues | 291,784 | |||
| Gross profit | 293,670 | |||
| Operating expenses: | ||||
| Selling and marketing expenses | 12,812 | |||
| General and administrative expenses | 49,639 | |||
| 62,451 | ||||
| Operating income | 231,219 | |||
| Interest expense | 31 | |||
| Earnings before tax | 231,188 | |||
| Income tax | 16,655 | |||
| Net income | $ | 214,532 | ||
| Other comprehensive income: | ||||
| Foreign currency translation adjustment | (2,516 | ) | ||
| Comprehensive income | $ | 212,017 | ||
See accompanying notes to the financial statements
| F-3 |
Dongguan Xixingdao Technology Co., Ltd.
Statement of Changes Stockholders’ Equity
As of and for the Period from May 31, 2019 (“Inception”) to December 31, 2019
| Accumulated | ||||||||||||||||||||||||
| other | Non- | |||||||||||||||||||||||
| Paid in | Statutory | Retained | comprehensive | controlling | ||||||||||||||||||||
| capital | reserves | earnings | loss | interest | Total | |||||||||||||||||||
| Balance as of May 31, 2019 | $ | $ | $ | $ | - | $ | - | $ | - | |||||||||||||||
| Net income | - | - | 214,532 | - | - | 214,532 | ||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | (2,516 | ) | - | (2,516 | ) | ||||||||||||||||
| Balance as of December 31, 2019 | $ | - | $ | - | $ | 214,532 | $ | (2,516 | ) | $ | - | $ | 212,017 | |||||||||||
See accompanying notes to the financial statements
| F-4 |
Dongguan Xixingdao Technology Co., Ltd.
Statement of Cash Flows
For the Period from May 31, 2019 (“Inception”) to December 31, 2019
| 2019 | ||||
| Cash flows from operating activities | ||||
| Net income | $ | 214,532 | ||
| Depreciation and amortization | 334 | |||
| Increase in inventory | (33,019 | ) | ||
| Increase in security deposits | ||||
| Increase in accounts payable | 17,215 | |||
| Increase in taxes payable | 34,290 | |||
| Increase in customer deposits | 392 | |||
| Net cash used in operating activities | 233,744 | |||
| Cash flows from investing activities | ||||
| Purchase of equipment | (3,249 | ) | ||
| Security deposit for containers | (279,662 | ) | ||
| Net cash used in investing activities | (282,911 | ) | ||
| Cash flows from financing activities | ||||
| Proceeds from related parties, net | 49,169 | |||
| Net cash provided by financing activities | 49,169 | |||
| Net increase of cash and cash equivalents | 2 | |||
| Effect of foreign currency translation on cash and cash equivalents | 1 | |||
| Cash and cash equivalents–at inception | - | |||
| Cash and cash equivalents–end of period | $ | 3 | ||
| Supplementary cash flow information: | ||||
| Interest paid | $ | 31 | ||
| Income taxes paid | $ | 16,655 | ||
| Non-cash activities | ||||
| Recognition of right of use assets | $ | 89,265 | ||
See accompanying notes to the financial statements
| F-5 |
Dongguan Xixingdao Technology Co., Ltd.
Notes to Financial Statements
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Dongguan Xixingdao Technology Co., Ltd. (“the Company”) was incorporated in Dongguan as a private limited company in 2019. The Company is in the business of marketing and selling bottled water and drinking. The Company is located in the People’s Republic of China.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
These statements, accompanying notes, and related disclosures have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). These financial statements have been prepared using the accrual basis of accounting in accordance with the generally accepted accounting principles (“GAAP”) in the United States. The Company’s financial statements are presented in U.S. dollars.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The estimates and judgments will also affect the reported amounts for certain revenues and expenses during the reporting period. Actual results may materially differ from these estimates.
Foreign currency translation and re-measurement
The functional currency of the Company is the Chinese Renminbi (“RMB”).
The Company, whose translates their accounts 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 |
Adjustments arising from such translations are included in accumulated other comprehensive income in stockholders’ equity.
| December 31, | ||||
| 2019 | ||||
| Spot USD: RMB exchange rate | $ | 6.97620 | ||
| Average USD: RMB exchange rate | $ | 6.89440 | ||
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.
Cash and cash equivalents
Cash and cash equivalents include cash on hand and bank deposits. The Company’s bank deposits are located in the PRC. Those deposits are not provided protection under FDIC insurance; however, management has determined that the risk of loss from insolvency by those financial institution at which it has deposited it funds is insignificant. Under the Deposit Insurance System in China, a company’s deposit at one bank is insured for a maximum of approximately $70,000 (RMB500,000). However, management has determined that the risk of loss from insolvency by those financial institutions at which it has deposited its funds is insignificant.
| F-6 |
Inventories
Inventories consisting of finished goods are stated at the lower of cost or market value. The Company used the first in first out method of accounting for inventory. Inventories on hand are evaluated on an on-going basis to determine if any items are obsolete, spoiled, or in excess of future demand. The Company provides impairment that is charged directly to cost of sales when is has been determined the product is obsolete, spoiled, and the Company will not be able to sell it at a normal profit above its carrying cost.
Plant and equipment
Equipment is carried at cost less accumulated depreciation. Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives of the equipment are as follows:
| Office equipment | 7-30 years |
The cost of maintenance and repairs is charged to expenses as incurred, whereas significant renewals and betterments are capitalized.
Right-of-use asset and lease liabilities
In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842).” The new standard requires lessees to recognize lease assets (right of use) and lease obligations (lease liability) for leases previously classified as operating leases under U.S. GAAP on the balance sheet for leases with terms in excess of 12 months. The standard is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years.
Accounting for long-lived assets
The Company annually reviews its long-lived assets for impairment or 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.
Revenue recognition
The Company adopted ASC Topic 606, Revenue from Contracts with Customers, and all subsequent ASUs that modified ASC 606 on April 1, 2017 using the full retrospective method which requires the Company to present the financial statements for all periods as if Topic 606 had been applied to all prior periods. 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. |
In applying ASC 606, the Company recognizes revenue when the Company has negotiated the terms of the transaction, set forth the sales price, transferred of possession of the product to the customer, determined that the customer does not have the right to return the product, determined that the customer is able to further sell or transfer the product onto others for economic benefit without any other obligation to be fulfilled by the Company, and the Company is reasonably assured that funds have been or will be collected from the customer. The Company’s gross revenue consists of the value of goods invoiced, net of any value-added tax (“VAT”).
| F-7 |
Advertising
All advertising costs are expensed as incurred. Advertising expense for the year ended December 31, 2019 was $0.
Shipping and handling
Outbound shipping and handling are expensed as incurred.
Retirement benefits
Retirement benefits in the form of mandatory government sponsored defined contribution plans are charged to either expenses as incurred or allocated to inventory as a part of overhead.
Income taxes
The Company accounts for income tax using an asset and liability approach and allows for recognition of deferred tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future realization is uncertain.
Statutory reserves
Statutory reserves are referring to the amount appropriated from the net income in accordance with laws or regulations, which can be used to recover losses and increase capital, as approved, and are to be used to expand production or operations. PRC laws prescribe that an enterprise operating at a profit must appropriate and reserve, on an annual basis, an amount equal to 10% of its profit. Such an appropriation is necessary until the reserve reaches a maximum that is equal to 50% of the enterprise’s PRC registered capital.
Earnings per share
The Company computes earnings per share (“EPS”) in accordance with ASC Topic 260, “Earnings per share”. Basic EPS is measured as the income or loss available to common shareholders divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options, and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
| F-8 |
Financial instruments
The Company’s accounts for financial instruments in accordance to ASC Topic 820, “Fair Value Measurements and Disclosures,” which requires disclosure of the fair value of financial instruments held by the Company and ASC Topic 825, “Financial Instruments,” which defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
● Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
● Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
● Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
Commitments and contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.
Comprehensive income
Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other financial statements. The Company’s current component of other comprehensive income includes the foreign currency translation adjustment and unrealized gain or loss.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable assets acquired in a business combination. In accordance with FASB ASC Topic 350, “Goodwill and Other Intangible Assets”, goodwill is no longer subject to amortization. Rather, goodwill is subject to at least an annual assessment for impairment, applying a fair-value based test. Fair value is generally determined using a discounted cash flow analysis.
| F-9 |
Recent accounting pronouncements
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). Financial Instruments-Credit Losses (Topic 326) amends guidelines on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available-for-sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. ASU 2016-13 affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this ASU will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of ASU 2016-13 on its financial statements.
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this standard will remove, modify and add certain disclosures under ASC Topic 820, Fair Value Measurement, with the objective of improving disclosure effectiveness. ASU 2018-13 will be effective for the Company’s fiscal year beginning April 1, 2020, with early adoption permitted. The transition requirements are dependent upon each amendment within this update and will be applied either prospectively or retrospectively. The Company does not expect ASU 2018-13 to have a material impact to the Company’s financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. The amendments in this Update related to separate financial statements of legal entities that are not subject to tax should be applied on a retrospective basis for all periods presented. The amendments related to changes in ownership of foreign equity method investments or foreign subsidiaries should be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The amendments related to franchise taxes that are partially based on income should be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. All other amendments should be applied on a prospective basis. The Company does not expect the adoption of ASU 2019-12 to have a material impact on its financial statements.
| F-10 |
NOTE 3 – INVENTORIES
Inventories consisted of the following as of December 31, 2019:
| 2019 | ||||
| Finished goods | 32,631 | |||
| $ | 32,631 | |||
NOTE 4 – EQUIPMENT
Equipment consisted of the following as of December 31, 2019:
| 2019 | ||||
| At Cost: | ||||
| Equipment | 3,211 | |||
| 3,211 | ||||
| Less: Accumulated depreciation | (241 | ) | ||
| $ | 2,970 | |||
NOTE 5 – SECURITY DEPOSITS
The Company has made security deposits with various suppliers to secure the use of liquid containers provided to the Company. These containers are typically ten-liter bottles used to store drinking water. The deposits are held indefinitely with the supplier as long as the Company continues to conduct business with the supplier. These deposits are refundable if the Company ceases to conduct business with the supplier. The Company does not believe that there is impairment to the carrying value of this deposit as the Company maintain possession of the bottles, and the sales of water using such bottles has generated profits.
The Company made a security rental deposit for office premises that is accounted for as a right of use asset.
NOTE 6 - INCOME TAXES
The Company’s primary operations are in the PRC, and in accordance with the relevant tax laws and regulations. The corporate income tax rate for each country is as follows:
| ● | PRC tax rate is 25%; |
The following tables provide the reconciliation of the differences between the statutory and effective tax expenses for the period from inception to December 31, 2019:
| 2019 | ||||
| Income attributed to PRC operations | $ | 231,188 | ||
| PRC Statutory tax at 25% rate | 57,797 | |||
| Effect of PRC deductions and other reconciling items | (41,142 | ) | ||
| Income tax | $ | 16,655 | ||
The difference between the U.S. federal statutory income tax rate and the Company’s effective tax rate was as follows for the period from inception to December 31, 2019:
| 2019 | ||||
| U.S. federal statutory income tax rate | 21.0 | % | ||
| Higher rate in PRC, net | 4.0 | % | ||
| Reconciling items, net operating losses in PRC, election to not recognize tax asset | -17.8 | % | ||
| The Company’s effective tax rate | 7.2 | % | ||
| F-11 |
NOTE 7 - RELATED PARTY TRANSACTIONS
Amounts due to related parties as of December 31, 2019 are as follows:
| 2019 | |||||
| Yuwen Li | Chairman | $ | 48,592 | ||
| $ | 48,592 | ||||
The outstanding payables due to Mr. Yuwen Li are comprised of working capital advances and borrowings. These amounts are due on demand and non-interest bearing.
NOTE 8 – RIGHT OF USE ASSETS AND LEASE COMMITMENTS
The Company has two operating lease agreements with Dongguan Humen Grain Co. Ltd, for the premises in Dongguan City, PRC. The agreement covers the period from October 1, 2019 to September 30, 2022. The total monthly rent expense is RMB 15,000 (approximately $2,150). The total rental rent expense for the period from inception to December 31, 2019 was $6,199. As per the agreement, a deposit of 30,000 yuan in total is required.
Future minimum operating lease commitment for the agreement is as follows:
| 2020 | 24,229 | |||
| 2021 | 24,893 | |||
| 2022 | 19,123 | |||
| $ | 68,245 |
The Company has an operating lease agreement with Yuwen Li, a related party, for a vehicle in Dongguan City, PRC. The agreement covers the period from October 1, 2019 to September 30, 2022. The monthly rent expense is RMB 3,000 (approximately $430). The total rental rent expense for the period from inception to December 31, 2019 was $1,240. No deposit is required.
Future minimum operating lease commitment for the agreement is as follows:
| 2020 | 4,844 | |||
| 2021 | 4,979 | |||
| 2022 | 3,425 | |||
| $ | 13,248 |
NOTE 9 - RISKS
Credit risk
The Company is subject to risk borne from credit extended to customers. As of December 31, 2019, there no outstanding receivables from customers.
The Company deposit their funds with banks located in the PRC. They are not FDIC insured but the banking institutions are very creditworthy financial institutions. Management believes the risk of loss on its deposit is negligible.
Economic and political risks
The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by changes in the political, economic, and legal environments in the PRC. The Company’s results of operations may be materially and adversely affected if there is political unrest in the PRC.
| F-12 |
Inflation risk
Management monitors changes in prices levels. Historically inflation has not materially impacted the Company’s financial statements; however, significant increases in the price of drink water that cannot be passed on the Company’s customers could adversely impact the Company’s results of operations.
Concentrations risks
During the year ended December 31, 2019, the Company had a concentration of risk in its supply of goods, as one vendor supplied 20.23% of the Company’s purchases of finished goods.
NOTE 10 - SUBSEQUENT EVENTS
Company evaluates subsequent events that have occurred after the balance sheet date but before the financial statements are issued. There are two types of subsequent events: (1) recognized, or those that provide additional evidence with respect to conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements, and (2) non-recognized, or those that provide evidence with respect to conditions that did not exist at the date of the balance sheet but arose subsequent to that date.
There were no other events that management deemed necessary for disclosure as a material subsequent event.
| F-13 |
Exhibit 99.2
Dongguan Xixingdao Technology Co., Ltd
Financial Statements
September 30, 2020
(Unaudited)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
| To: | The Board of Directors and Stockholders of |
| Dongguan Xixingdao Technology Co., Ltd |
Results of Review of Interim Financial Information
We have reviewed the condensed balance sheet of Dongguan Xixingdao Technology Co., Ltd (the “Company”) as of September 30, 2020, and the related condensed statements of operations and comprehensive income for the three-month and nine-month periods ended September 30, 2020 and the period from May 31, 2019 to September 30, 2019, and the statement of changes in stockholders’ equity from May 31, 2019 to September 30, 2020, and the statements of cash flows for the nine-month period ended September 30, 2020 and the period from May 31, 2019 to September 30, 2019, and the related notes (collectively referred to as the interim financial statements). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the balance sheet of the Company as of December 31, 2019, and the related statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for the period from May 31, 2019 to December 31, 2019 (not presented herein); and in our report dated January 29, 2021, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of December 31, 2019, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.
Basis for Review Results
These interim financial statements are the responsibility of the Company’s management. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
| /s/ WWC, P.C. | |
| WWC, P.C. | |
| Certified Public Accountants |
We have served as the Company’s auditor since December 26, 2019.
San Mateo, California
January 29, 2021
| F-1 |
Dongguan Xixingdao Technology Co., Ltd
Condensed Balance Sheets
As of September 30, 2020 and December 31, 2019
| September 30 | December 31, | |||||||
| 2020 | 2019 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 8,903 | $ | 3 | ||||
| Accounts and other receivable, net | 40,945 | - | ||||||
| Inventories | 70,519 | 32,631 | ||||||
| Advances and prepayment | 30,049 | - | ||||||
| Due from related parties | 8,204 | - | ||||||
| Total current assets | 158,620 | 32,634 | ||||||
| Non-current assets | ||||||||
| Plant and equipment, net | 2,554 | 2,970 | ||||||
| Right of use asset | 61,041 | 81,826 | ||||||
| Security deposits | 283,491 | 276,383 | ||||||
| Total Assets | $ | 505,706 | $ | 393,814 | ||||
| Liabilities | ||||||||
| Current liabilities | ||||||||
| Lease obligation - current | 30,443 | 17,013 | ||||||
| Accounts, and other payables and accruals | 50,072 | 29,074 | ||||||
| Taxes payable | 7,049 | 33,888 | ||||||
| Customer deposits | - | 387 | ||||||
| Due to related parties | 103,287 | 48,593 | ||||||
| Total current liabilities | 190,851 | 128,955 | ||||||
| Long term liabilities | ||||||||
| Lease obligations - non-current | 31,291 | 52,842 | ||||||
| Total liabilities | $ | 222,142 | $ | 181,797 | ||||
| Stockholders’ Equity | ||||||||
| Paid in capital | - | - | ||||||
| Retained earnings | 283,564 | 214,532 | ||||||
| Accumulated other comprehensive loss | - | (2,516 | ) | |||||
| Total Stockholders’ Equity | 283,564 | 212,017 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 505,706 | $ | 393,814 | ||||
See accompanying notes to the financial statements
| F-2 |
Dongguan Xixingdao Technology Co., Ltd
Condensed Statements of Operations and Comprehensive Loss
For the Three and Nine Months Ended September 30, 2020 and from May 31, 2019 (“Inception”) to September 30, 2019
| Three Months Ended | Three Months Ended | Nine Months Ended | May 31,2019 to | |||||||||||||
| September 30, 2020 | September 30, 2019 | Sep 30,
2020 | September 30, 2019 | |||||||||||||
| Revenue | $ | 329,379 | $ | 3,246 | $ | 450,412 | $ | 22,001 | ||||||||
| Cost of revenues | 229,601 | 3,068 | 265,485 | 20,829 | ||||||||||||
| Gross profit | 99,778 | 178 | 184,927 | 1,171 | ||||||||||||
| Selling, general and administrative expenses | 81,710 | 7,978 | 126,541 | 16,504 | ||||||||||||
| Other income (expenses) | (64 | ) | - | 9,299 | - | |||||||||||
| Income (loss) before tax | 18,004 | (7,800 | ) | 67,685 | (15,316 | ) | ||||||||||
| Income tax | - | - | 3,415 | - | ||||||||||||
| Net income (loss) | $ | 38,471 | $ | (7,800 | ) | $ | 64,270 | $ | (15,316 | ) | ||||||
| Other comprehensive income: | ||||||||||||||||
| Foreign currency translation adjustment: | ||||||||||||||||
Comprehensive income (loss) | $ | 38,471 | $ | (7,800 | ) | $ | 64,270 | $ | (15,316 | ) | ||||||
See accompanying notes to the financial statements
| F-3 |
Dongguan Xixingdao Technology Co., Ltd
Condensed Statements of Changes in Stockholders’ Equity
From May 31, 2019 (“Inception”) to September 30, 2020
| Paid in capital | Statutory reserves | Retained earnings | Accumulated other comprehensive loss | Total | ||||||||||||||||
| Balance as of May 31, 2019 | - | - | - | - | - | |||||||||||||||
| Net income | 214,532 | 214,532 | ||||||||||||||||||
| Foreign currency translation adjustment | (2,516 | ) | (2,516 | ) | ||||||||||||||||
| Balance as of December 31, 2019 | - | - | 214,532 | (2,516 | ) | 212,016 | ||||||||||||||
| Net income | 64,270 | 64,270 | ||||||||||||||||||
| Foreign currency translation adjustment | 7,278 | 7,278 | ||||||||||||||||||
| Balance as of Sep 30, 2020 | - | - | 278,802 | 4,762 | 283,564 | |||||||||||||||
See accompanying notes to the financial statements
| F-4 |
Dongguan Xixingdao Technology Co., Ltd
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2020 and from May 31, 2019 (“Inception”) to September 30, 2019
(Unaudited)
| Nine
Months Ended | May
31, 2019 to | |||||||
| September 30, 2020 (Unaudited) | September
30, 2019 (Unaudited) | |||||||
| Cash flows from operating activities | ||||||||
| Net Income/Loss | $ | 64,270 | $ | (15,853 | ) | |||
| Depreciation and amortization | 1,064 | - | ||||||
| Increase/(Decrease) in accounts and other receivables | (39,816 | ) | (3,994 | ) | ||||
| Increase/(Decrease) in inventories | (36,027 | ) | (2,130 | ) | ||||
| Increase/(Decrease) in advances and prepayments to suppliers | (29,221 | ) | - | |||||
| Increase/(Decrease) in accounts and other payables | 31,722 | 1,378 | ||||||
| Increase/(Decrease) in customer deposits | (386 | ) | - | |||||
| Increase/(Decrease) in taxes payable | (26,947 | ) | ||||||
| Net cash used in operating activities | (35,340 | ) | 7,525 | |||||
| Cash flows from investing activities | ||||||||
| Acquisitions of PPE | - | (3,249 | ) | |||||
| Net cash used by investing activities | - | (3,249 | ) | |||||
| Cash flows from financing activities | ||||||||
| Borrowings from related parties | 43,993 | - | ||||||
| Net cash provided by financing activities | 43,993 | - | ||||||
| Net increase of cash and cash equivalents | 8,652 | 4,276 | ||||||
| Effect of foreign currency translation on cash and cash equivalents | 248 | (50 | ) | |||||
| Cash and cash equivalents-beginning of period | 3 | - | ||||||
| Cash and cash equivalents-end of period | $ | 8,903 | $ | 4,226 | ||||
| Supplementary cash flow information: | ||||||||
| Interest received | $ | - | $ | - | ||||
| Interest paid | $ | 78 | $ | - | ||||
| Income taxes paid | $ | 3,415 | $ | - | ||||
See accompanying notes to the financial statements
| F-5 |
Dongguan Xixingdao Technology Co., Ltd
Notes to Financial Statements
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Dongguan Xixingdao Technology Co., Ltd. (“the Company”) was incorporated in Dongguan as a private limited company in 2019. The Company is in the business of marketing and selling bottled water and drinking. The Company also in the People’s Republic of China.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
These statements, accompanying notes, and related disclosures have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). These financial statements have been prepared using the accrual basis of accounting in accordance with the generally accepted accounting principles (“GAAP”) in the United States. The Company’s financial statements are presented in U.S. dollars.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The estimates and judgments will also affect the reported amounts for certain revenues and expenses during the reporting period. Actual results may materially differ from these estimates.
Foreign currency translation and re-measurement
The functional currency of the Company is the Chinese Renminbi (“RMB”).
The Company, 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 |
Adjustments arising from such translations are included in accumulated other comprehensive income in stockholders’ equity.
| F-6 |
| Sep 30 | June 30, | December 31, | ||||||||||
| 2020 | 2019 | 2019 | ||||||||||
| Spot USD: RMB exchange rate | $ | 6.80126 | $ | 6.86555 | $ | 6.97620 | ||||||
| Average USD: RMB exchange rate | $ | 6.99409 | $ | 6.89440 | $ | 6.89440 | ||||||
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.
Cash and cash equivalents
Cash and cash equivalents include cash on hand, deposits in banks, and any investments with maturities with less three months from inception to maturity. The Company’s primary bank deposits are located in the PRC; those deposits are not provided protection under FDIC insurance; however, management has determined that the risk of loss from insolvency by those financial institution at which it has deposited it funds is insignificant.
Under the Deposit Insurance System in China, a company’s deposits at one bank is insured for a maximum of approximately $70,000 (RMB500,000). However, management has determined that the risk of loss from insolvency by those financial institutions at which it has deposited its funds is insignificant.
Accounts receivable
Accounts receivable are carried at the amounts invoiced to customers less allowance for doubtful accounts. The allowance is an estimate based on a review of individual customer accounts on a regular basis. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received.
The Company reviews the collectability of accounts receivable based on an assessment of historical experience, current economic conditions, and other collection indicators.
Inventories
Inventories consisting of finished goods are stated at the lower of cost or market value. The Company used the first in first out method of accounting for inventory. Inventories on hand are evaluated on an on-going basis to determine if any items are obsolete, spoiled, or in excess of future demand. The Company provides impairment that is charged directly to cost of sales when is has been determined the product is obsolete, spoiled, and the Company will not be able to sell it at a normal profit above its carrying cost.
Property, plant and equipment
Equipment is carried at cost less accumulated depreciation. Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives of the equipment are as follows:
| Manufacturing equipment | 3-10 years | |
| Office equipment | 7-30 years | |
| Vehicles | 4-8 years |
The cost of maintenance and repairs is charged to expenses as incurred, whereas significant renewals and betterments are capitalized.
Right-of-use asset and lease liabilities
In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842).” The new standard requires lessees to recognize lease assets (right of use) and lease obligations (lease liability) for leases previously classified as operating leases under U.S. GAAP on the balance sheet for leases with terms in excess of 12 months. The standard is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years.
| F-7 |
Accounting for long-lived assets
The Company annually reviews its long-lived assets for impairment or 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.
Revenue recognition
The Company adopted ASC Topic 606, Revenue from Contracts with Customers, and all subsequent ASUs that modified ASC 606 on April 1, 2017 using the full retrospective method which requires the Company to present the financial statements for all periods as if Topic 606 had been applied to all prior periods. 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. |
In applying ASC 606, the Company recognizes revenue when the Company has negotiated the terms of the transaction, set forth the sales price, transferred of possession of the product to the customer, determined that the customer does not have the right to return the product, determined that the customer is able to further sell or transfer the product onto others for economic benefit without any other obligation to be fulfilled by the Company, and the Company is reasonably assured that funds have been or will be collected from the customer. The Company’s gross revenue consists of the value of goods invoiced, net of any value-added tax (“VAT”).
Advertising
All advertising costs are expensed as incurred. Advertising expense for the six months ended June 30, 2020 was $0.
Shipping and handling
Outbound shipping and handling are expensed as incurred.
Retirement benefits
Retirement benefits in the form of mandatory government sponsored defined contribution plans are charged to either expenses as incurred or allocated to inventory as a part of overhead.
Income taxes
The Company accounts for income tax using an asset and liability approach and allows for recognition of deferred tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future realization is uncertain.
| F-8 |
Statutory reserves
Statutory reserves are referring to the amount appropriated from the net income in accordance with laws or regulations, which can be used to recover losses and increase capital, as approved, and are to be used to expand production or operations. PRC laws prescribe that an enterprise operating at a profit must appropriate and reserve, on an annual basis, an amount equal to 10% of its profit. Such an appropriation is necessary until the reserve reaches a maximum that is equal to 50% of the enterprise’s PRC registered capital.
Earnings per share
The Company computes earnings per share (“EPS”) in accordance with ASC Topic 260, “Earnings per share”. Basic EPS is measured as the income or loss available to common shareholders divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options, and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
Financial instruments
The Company’s accounts for financial instruments in accordance to ASC Topic 820, “Fair Value Measurements and Disclosures,” which requires disclosure of the fair value of financial instruments held by the Company and ASC Topic 825, “Financial Instruments,” which defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
● Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
● Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
● Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
Commitments and contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.
Comprehensive income
Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other financial statements. The Company’s current component of other comprehensive income includes the foreign currency translation adjustment and unrealized gain or loss.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable assets acquired in a business combination. In accordance with FASB ASC Topic 350, “Goodwill and Other Intangible Assets”, goodwill is no longer subject to amortization. Rather, goodwill is subject to at least an annual assessment for impairment, applying a fair-value based test. Fair value is generally determined using a discounted cash flow analysis.
| F-9 |
Recent accounting pronouncements
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). Financial Instruments-Credit Losses (Topic 326) amends guidelines on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available-for-sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. ASU 2016-13 affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this ASU will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of ASU 2016-13 on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this standard will remove, modify and add certain disclosures under ASC Topic 820, Fair Value Measurement, with the objective of improving disclosure effectiveness. ASU 2018-13 will be effective for the Company’s fiscal year beginning April 1, 2020, with early adoption permitted. The transition requirements are dependent upon each amendment within this update and will be applied either prospectively or retrospectively. The Company does not expect ASU 2018-13 to have a material impact to the Company’s consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. The amendments in this Update related to separate financial statements of legal entities that are not subject to tax should be applied on a retrospective basis for all periods presented. The amendments related to changes in ownership of foreign equity method investments or foreign subsidiaries should be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The amendments related to franchise taxes that are partially based on income should be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. All other amendments should be applied on a prospective basis. The Company does not expect the adoption of ASU 2019-12 to have a material impact on its consolidated financial statements.
| F-10 |
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivables consisted of the following as of September 30, 2020 and December 31, 2019:
| 2020 | 2019 | |||||||
| Gross accounts receivable | $ | 40,945 | $ | - | ||||
| Less: Allowance for doubtful accounts | - | - | ||||||
| $ | 40,945 | $ | - | |||||
NOTE 4 – INVENTORIES
Inventories consisted of the following as of September 30, 2020 and December 31, 2019:
| 2020 | 2019 | |||||||
| Finished goods | 70,519 | 32,631 | ||||||
| $ | 70,519 | $ | 32,631 | |||||
NOTE 5 – EQUIPMENT
Equipment consisted of the following as of September 30, 2020 and December 31, 2019:
| 2020 | 2019 | |||||||
| At Cost: | ||||||||
| Equipment | 3,294 | 3,211 | ||||||
| 3,294 | 3,211 | |||||||
| Less: Accumulated depreciation | (740 | ) | (724 | ) | ||||
| 2,554 | $ | 2,970 | ||||||
| F-11 |
NOTE 6 – SECURITY DEPOSITS
The Company has made security deposits with various suppliers to secure the use of liquid containers provided to the Company. These containers are typically ten-liter bottles used to store drinking water. The deposits are held indefinitely with the supplier as long as the Company continues to conduct business with the supplier. These deposits are refundable if the Company ceases to conduct business with the supplier. The Company does not believe that there is impairment to the carrying value of this deposit as the Company maintain possession of the bottles, and the sales of beverages and water using such bottles has generated profits.
The Company has made security rental deposit for office premises that are accounted for as right of use assets.
NOTE 7 - INCOME TAXES
The Company’s primary operations are in the PRC, and in accordance with the relevant tax laws and regulations. The corporate income tax rate for the PRC is as follows:
| ● | PRC tax rate is 25%; |
The following tables provide the reconciliation of the differences between the statutory and effective tax expenses for the nine months ended September 30, 2020 and the period from May 31, 2019 to September 30, 2019:
| 2020 | 2019 | |||||||
| (Loss) income attributed to PRC operations | $ | 67,685 | (7,783 | ) | ||||
| PRC Statutory Tax at 25% Rate | 16,921 | (1,946 | ) | |||||
| Effect of PRC deductions and other reconciling items, and election to not recognize certain tax benefits | (13,506 | ) | 1,946 | |||||
| Income tax | $ | 3,415 | $ | - | ||||
The difference between the U.S. federal statutory income tax rate and the Company’s effective tax rate was as follows for the period from inception to December 31, 2019:
| 2020 | 2019 | |||||||
| U.S. federal statutory income tax rate | 21.0 | % | 21.0 | % | ||||
| Higher rate in PRC, net | 4.0 | % | 4.0 | % | ||||
| Reconciling items, net operating losses in PRC, election to not recognize tax asset | -20.0 | % | -25.0 | % | ||||
| The Company’s effective tax rate | 5.0 | % | 0.0 | % | ||||
| F-12 |
NOTE 8 - RELATED PARTY TRANSACTIONS
Amounts due from related parties as of September 30, 2020 are as follows:
| 2020 | 2019 | |||||||||
| Lihua Li | Chairman’s wife | $ | 8,205 | $ | - | |||||
| $ | 8,205 | $ | - | |||||||
The outstanding receivable due from Ms. Lihua Li are advances made to her by the Company. These amounts are due on demand and non-interest bearing.
Amounts due to related parties as of September 30, 2020 and December 31, 2019 are as follows:
| 2020 | 2019 | |||||||||
| Yuwen Li | Chairman | $ | 103,306 | $ | 48,593 | |||||
| $ | 103,306 | $ | 48,593 | |||||||
The outstanding payables due to Mr. Yuwen Li are comprised of working capital advances and borrowings. These amounts are due on demand and non-interest bearing.
NOTE 9 – RIGHT OF USE ASSETS AND LEASE COMMITMENTS
The Company has two operating lease agreements with Dongguan Humen Grain Co. Ltd, for the premises in Dongguan City, PRC. The agreement covers the period from October 1, 2019 to September 30, 2022. The total monthly rent expense is RMB 15,000 (approximately $2,150). The total rental rent expense for the period from inception to December 31, 2019 was $6,199. As per the agreement, a deposit of 30,000 yuan in total is required.
Future minimum operating lease commitment for the agreement is as follows:
| 2020 | 24,229 | |||
| 2021 | 24,893 | |||
| 2022 | 19,123 | |||
| $ | 68,245 |
The Company has an operating lease agreement with Yuwen Li, a related party, for a vehicle in Dongguan City, PRC. The agreement covers the period from October 1, 2019 to September 30, 2022. The monthly rent expense is RMB 3,000 (approximately $430). The total rental rent expense for the period from inception to December 31, 2019 was $1,240. No deposit is required.
Future minimum operating lease commitment for the agreement is as follows:
| 2020 | 4,844 | |||
| 2021 | 4,979 | |||
| 2022 | 3,425 | |||
| $ | 13,248 |
| F-13 |
NOTE 10 - RISKS
Credit risk
The Company is subject to risk borne from credit extended to customers. At December 31, 2019, there no outstanding receivables from customers. At September 30, 2020, there was $40,945 outstanding from customers.
The Company deposit their funds with banks located in the PRC. They are not FDIC insured but the banking institutions are very creditworthy financial institutions. Management believes the risk of loss on its deposit is negligible.
Economic and political risks
The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by changes in the political, economic, and legal environments in the PRC. The Company’s results of operations may be materially and adversely affected if there is political unrest in the PRC.
Inflation risk
Management monitors changes in prices levels. Historically inflation has not materially impacted the Company’s financial statements; however, significant increases in the price of drink water that cannot be passed on the Company’s customers could adversely impact the Company’s results of operations.
NOTE 11 - SUBSEQUENT EVENTS
Company evaluates subsequent events that have occurred after the balance sheet date but before the financial statements are issued. There are two types of subsequent events: (1) recognized, or those that provide additional evidence with respect to conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements, and (2) non-recognized, or those that provide evidence with respect to conditions that did not exist at the date of the balance sheet but arose subsequent to that date.
There were no other events that management deemed necessary for disclosure as a material subsequent event.
| F-14 |
Exhibit 99.3
Fortune Valley Treasures, Inc.
Proforma Combined Financial Statements
June 30, 2020
| Contents | Page | |
| Proforma Combined Balance Sheet | F-2 | |
| Proforma Combined Statement of Operations and Comprehensive Loss | F-3 | |
| Notes to Financial Statements | F-4 to F-6 |
Fortune Valley Treasures, Inc.
Proforma Combined Balance Sheet
As of September 30, 2020
| FTVI | XXD | Adjustments | Combined | |||||||||||||
| Assets | ||||||||||||||||
| Current assets | ||||||||||||||||
| Cash and cash equivalents | $ | 14,194 | 8,903 | $ | 23,097 | |||||||||||
| Accounts and other receivable, net | 80,371 | 40,945 | 121,316 | |||||||||||||
| Inventories | 50,787 | 70,519 | 121,306 | |||||||||||||
| Advances and prepayments to suppliers | 7,801 | 30,049 | 37,850 | |||||||||||||
| Prepaid expenses | 11,000 | - | 11,000 | |||||||||||||
| Prepaid taxes and taxes recoverable | 97,827 | - | 97,827 | |||||||||||||
| Due from related parties | 8,066 | 8,204 | 16,270 | |||||||||||||
| Total current assets | 270,046 | 158,620 | - | 428,666 | ||||||||||||
| Property, plant and equipment, net | 48,442 | 2,554 | 50,996 | |||||||||||||
| Right of use assets, net | 101,710 | 61,041 | 162,751 | |||||||||||||
| Security deposits | - | 283,491 | 283,491 | |||||||||||||
| Goodwill | - | - | 8,535,403 | 8,535,403 | ||||||||||||
| Total Non-current assets | 150,152 | 347,086 | 8,535,403 | 9,032,641 | ||||||||||||
| Total Assets | $ | 420,198 | 505,706 | 8,535,403 | $ | 9,461,307 | ||||||||||
| Liabilities and Stockholders’ Equity | ||||||||||||||||
| Short term loans | 197,934 | - | 197,934 | |||||||||||||
| Lease obligations - current | 14,419 | 30,443 | 44,862 | |||||||||||||
| Accounts payable | 37,172 | 50,072 | 87,244 | |||||||||||||
| Taxes payable | 32,407 | 7,049 | 39,456 | |||||||||||||
| Other payable | 17,644 | - | 17,644 | |||||||||||||
| Customers advances and deposits | 8,629 | - | 8,629 | |||||||||||||
| Due to related parties | 878,100 | 103,287 | 981,387 | |||||||||||||
| Total current liabilities | 1,186,305 | 190,851 | 1,377,156 | |||||||||||||
| Lease obligations - non-current | 89,856 | 31,291 | 121,147 | |||||||||||||
| Other long-term liabilities | 99,981 | 99,981 | ||||||||||||||
| Total Non-Current Liabilities | 189,837 | 31,291 | 222,128 | |||||||||||||
| Total Liabilities | $ | 1,376,142 | 222,142 | - | $ | 1,598,284 | ||||||||||
| Stockholders’ Equity | ||||||||||||||||
| Common stock (3,000,000,000 shares authorized, 312,126,942 issued and outstanding as of June 30, 2020) | 307,750 | - | 4,377 | 312,127 | ||||||||||||
| Additional paid in capital | - | - | 7,677,486 | 7,677,486 | ||||||||||||
| Accumulated deficit | (1,287,830 | ) | 254,431 | (27,740 | ) | (1,061,139 | ) | |||||||||
| Accumulated other comprehensive income (loss) | 7,285 | 7,820 | - | 15,105 | ||||||||||||
| Non-controlling interest | 16,851 | 21,313 | 881,280 | 919,894 | ||||||||||||
| Total Stockholders’ (Deficit) Equity | (955,944 | ) | 283,564 | 8,535,403 | 7,863,023 | |||||||||||
| Total Liabilities and Stockholders’ Equity | $ | 420,198 | 505,706 | 8,535,403 | $ | 9,461,307 | ||||||||||
See accompanying notes to the financial statements
| F-2 |
Fortune Valley Treasures, Inc.
Proforma Combined Statement of Operations
For the Nine months ended September 30, 2020
| FVTI | XXD | Adjustments | Combined | |||||||||||||
| Net revenues | 247,567 | 450,412 | $ | - | $ | 697,979 | ||||||||||
| Cost of revenues | 172,797 | 265,486 | - | 438,283 | ||||||||||||
| Gross profit | 74,770 | 184,926 | - | 259,696 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling and marketing expenses | 12,527 | 18,613 | - | 31,140 | ||||||||||||
| General and administrative expenses | 328.077 | 107,928 | - | 436,005 | ||||||||||||
| Operating income/loss | (265,834 | ) | 58,385 | - | (207,449 | ) | ||||||||||
| Other income (expenses): | 73,947 | 9,377 | - | 83,324 | ||||||||||||
| Interest income | 96 | - | - | 96 | ||||||||||||
| Interest expense | (10,186 | ) | (78 | ) | - | (10,264 | ) | |||||||||
| Earnings before tax | (201,977 | ) | 67,684 | - | (134,293 | ) | ||||||||||
| Income tax | - | 3,415 | - | 3,415 | ||||||||||||
| Net Income/loss: | ||||||||||||||||
| attributable to non-controlling interest | (15,920 | ) | 6,427 | - | (9,493 | ) | ||||||||||
| attributable to FVTI | (186,057 | ) | 57,842 | - | (128,215 | ) | ||||||||||
| (201,977 | ) | 64,269 | $ | - | $ | (137,708 | ) | |||||||||
| Other comprehensive income (loss): | ||||||||||||||||
| Foreign currency translation adjustment | ||||||||||||||||
| attributable to non-controlling interest | (191 | ) | (782 | ) | - | (191 | ) | |||||||||
| attributable to FVTI | (3,276 | ) | (7,038 | ) | - | (10,314 | ) | |||||||||
| (2,685 | ) | (7,820 | ) | - | (10,505 | ) | ||||||||||
| Comprehensive loss: | ||||||||||||||||
| attributable to non-controlling interest | (16,111 | ) | 5,645 | - | (9,684 | ) | ||||||||||
| attributable to FVTI | (189,333 | ) | 50,804 | - | (138,529 | ) | ||||||||||
| Comprehensive loss | (204,662 | ) | 56,449 | $ | - | $ | (148,213 | ) | ||||||||
| Loss per share | ||||||||||||||||
| Basic and diluted earnings per share | $ | (0.00 | ) | |||||||||||||
| Basic and diluted weighted average
shares outstanding | 312,126,942 | |||||||||||||||
See accompanying notes to the financial statements
| F-3 |
Fortune Valley Treasures, Inc.
Notes to Financial Statements
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Fortune Valley Treasures, Inc. (formerly Crypto-Services, Inc.) 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 are conducted through its subsidiaries in the People’s Republic of China (“PRC”).
Xixingdao Acquisition
On June 22, 2020, FVTI and QHDX entered into an equity interest transfer agreement (the “Xixingdao Agreement”) with Dongguan Xixingdao Technology Co., Ltd. (“Xixingdao” or “XXD”), a company incorporated in China, and the two shareholders of Xixingdao, who collectively own 100% equity interest of Xixingdao (the “Xixingdao Sellers”). Xixingdao is engaged in the business of drinking water distribution and delivery in Dongguan City, Guangdong Province, China.
Pursuant to the Xixingdao Agreement, QHDX agreed to purchase 90% of Xixingdao’s equity interest (the “Xixingdao Equity Transfer”) from the Xixingdao Sellers in consideration of shares of FVTI’s common stock (“Xixingdao Issuable Shares”). The completion of the registration of the Xixingdao Equity Transfer with local government authorities (the “Xixingdao Closing”) is subject to satisfaction of all the closing conditions (unless waived), including, but not limited to, (a) completion of due diligence review of Xixingdao to the satisfaction of QHDX, (b) completion of the initial draft of the audited financial statements of Xixingdao for the fiscal year ended December 31, 2019, and (c) execution of non-competition agreements and confidentiality agreements with the senior management members of Xixingdao.
According to the Xixingdao Agreement, the total number of Xixingdao Issuable Shares will be determined according to the following formula:
Number of Issuable Shares = A x 15 ÷ B ÷ C
For the purpose of the foregoing formula:
A = Expected audit net profit of Xixingdao during the period from January 1, 2020 to December 31, 2020.
B = The average of the closing prices of FVTI’s common stock for the 30 business days before the date the Issuable Shares are issued.
C = The central parity rate of Chinese Yuan against U.S. Dollars on the date the Xixingdao Issuable Shares are issued as reported by China Foreign Exchange Trading Center.
Xixingdao and Xixingdao Sellers have agreed to achieve certain operation objectives of Xixingdao, including a net profit of RMB 4 million (approximately $565,155) for the period from January 1, 2020 to December 31, 2020. Pursuant to the Agreement, as long as Yuwen Li, one of the Sellers, continues to serve as the general manager and legal representative of Xixingdao, Xixingdao and Xixingdao Sellers shall ensure Xixingdao achieves an increase in annual net profit of no less than 10% during its fiscal years between 2022 to 2025.
To ensure the continuous operations of Xixingdao, the parties agreed that Xixingdao will retain their existing employees and will enter into non-competition and employment agreements with the management team of Xixingdao.
Pursuant to the Xixingdao Agreement, Xixingdao will establish a board of directors consisting of three individuals, two of which will be designated by QHDX and one by the Xixingdao Sellers, and appoint a person designated by the Sellers as general manager.
| F-4 |
Fortune Valley Treasures, Inc.
Notes to Financial Statements
The parties further agreed that Xixingdao will not make any profit distribution within four years after the execution of the Xixingdao Agreement.
The transaction is expected to be closed on or about October 8, 2020. The Company will issue 4,376,942 shares of common stock valued at $2.01 per share. The total transaction value was $8,797,654. XXD net assets as of September 30, 2020 were $262,251. The goodwill resulting from the transition was $8,535,403.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
These proforma combined financial statements, accompanying notes, and related disclosures have been prepared on an as-if basis assuming that the reverse takeover transaction between the Company, QHDX and XXD has been in effect since the beginning of the period presented. The financial position and results of operations are combined using historical financial statements of the entities and eliminating any intercompany balances. Goodwill was recognized in this transaction, and the carrying values of the Company and DIGLS are their respective historical values as those values approximated their current fair market value. Actual combined results may have differed from those presented herein.
These financial statements have been prepared using the accrual basis of accounting in accordance with the generally accepted accounting principles (“GAAP”) in the United States.
Basis of proforma combined financial statements
These proforma combined financial statements include the accounts of the Company and the entities listed below. All intercompany accounts and transactions have been eliminated.
| 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 wine | 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 | No operations | PRC | ||||
| MKW | August 28, 2019 | QHDX | Trading of alcohol | PRC | ||||
| LJRB | June 9, 2015 | MKW | No operations | PRC | ||||
| XXD | May 31, 2019 | QHDX | Trading of beverages | PRC |
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The estimates and judgments will also affect the reported amounts for certain revenues and expenses during the reporting period. Actual results may materially differ from these estimates.
| F-5 |
Fortune Valley Treasures, Inc.
Notes to Financial Statements
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 US dollar. The Company, DIGLS, and DILH’s functional currency is the U.S. dollar; QHDX and FVTL 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 |
Adjustments arising from such translations are included in accumulated other comprehensive income in shareholders’ equity.
| September 30, | ||||
| 2020 | ||||
| Spot RMB:USD exchange rate | 6.80127 | |||
| Average RMB:USD exchange rate | 6.99409 | |||
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.
NOTE 3 – PROFORMA ADJUSTMENTS
| Entry No. | Description | Dr. | Cr. | |||
| 1 | Goodwill | 8,535,403 | ||||
| Common stock | 4,377 | |||||
| Additional paid in capital | 7,677,486 | |||||
| Retained earnings | 27,740 | |||||
| Non-controlling interest | 881,280 |
| Issuance of shares under share exchange agreement for business combination. |
| F-6 |