FVTI Fortune Valley Treasures Inc (CE)

Item 1. Business

Overview

We conduct our business through our PRC subsidiaries, which are a food and beverage supply chain company group based in Guangdong province, China. With the mission to improve people’s lives by offering safe and quality foods, we are committed to building a first class food supply chain business in China and in the global markets. Through quality control and sales of selected branded products, we provide a one-stop quality food purchase experience for both businesses and individual customers. Our products are well recognized among consumer groups in the Pearl River Delta region of China.

Our vision is “Safe Foods for the People.” We strive to improve the consumers’ food experience in respect of brand, quality, service and speed. Through online and offline channels, we deliver quality food products to consumers through sales targeting regional wholesalers, major food and beverage chains, supermarkets and other retailers.

We purchase, supply, distribute and sell alcohol and non-alcohol beverages, packaged staple foods, condiments and seasonings, and household drinking water related purification devices. Since our founding in 2011, we have primarily engaged in the wholesale distribution and retail sale of wine and liquor products in Southern China. In the recent years, we have expanded into the non-alcohol beverage and food markets through strategic acquisitions.

We currently mainly purchase and sell four categories of food and beverage and related products. Our offerings have evolved over our history of development. Our current core lines of products include the following four categories:

We manage the entire process of product procurement, warehousing, distribution, logistics, and delivery through our supply chain system. We cultivate long-term cooperation relationships with many high-quality upstream suppliers to secure the supply demand and stable product procurement. We continuously enhance food quality and safety standards through our quality control system and supplier development management system. Through continuous optimization and management of supply planning, logistics management and quality assurance, we have improved product procurement efficiency and order management capabilities.

We advertise and sell products using a hybrid marketing model through our supply chain platform, social media, primarily WeChat, distributor network, key customer channels, product displays at our stores, and community promotions. We promote direct sales to business and individual consumers on our e-commerce supply chain platform – “Fugu Online.” Further, we make online or offline bulk sales through our agents and independent distributors. Prior to the launching of our supply chain platform, the majority of our sales had been made through independent distributors. We believe our distribution network is still an important component of our hybrid sales model. The agent and distributor sales model helps enhance the brand awareness of our products among end customers. Furthermore, we have achieved a substantial portion of our sales through key customer channels. We have established long-term and stable cooperative relations with certain large enterprises. We hold periodic offline promotions, offline anniversary activities, and offer loyalty rewards to key customers. We initiate promotions to expand our customer base and build brand awareness. As we have multiple product lines, there are many opportunities for cross-selling across our platform as we seek to introduce customers to all product offerings. We also believe our strong reputation is a factor in retaining and attracting customers.

We are on path to build a closed-loop industry supply chain system for our products. Through connecting upstream suppliers and downstream enterprises, we have formed a supply chain network, broadened market penetration through the technology driven e-commerce platform and services, and aligned third-party production, supply and marketing with distribution and sale to achieve cost reduction and efficiency.

With our deeply rooted brand image, fast and efficient multi-channel sales model, precise consumer positioning, superior service experience, and an online platform connecting suppliers, core enterprises, and customers in the food supply chain, today we are well positioned to become a competitive leader in the food supply chain market in China.

Corporate History and Structure

FVTI was incorporated under the laws of the State of Nevada on March 21, 2014 under the name Crypto-Services, Inc. The company was originally formed with the purpose of providing users with up-to-date information on digital currencies. On September 22, 2016, the company amended its articles of incorporation to change its name from “Crypto-Services, Inc.” to “Fortune Valley Treasures, Inc.”

On April 11, 2018, FVTI entered into a share exchange agreement with DaXingHuaShang Investment Group Limited, a company incorporated under the laws of the Republic of Seychelles (“DIGLS”), and its shareholders, Yumin Lin, Gaosheng Group Co., Ltd. and China Kaipeng Group Co., Ltd, pursuant to which FVTI issued 15,000,000 shares of common stock (split-adjusted) to the shareholders of DIGLS in exchange for 100% of the issued shares of DIGLS (the “Share Exchange”). Upon the consummation of the Share Exchange on April 19, 2018, DIGLS became our wholly owned subsidiary.

DIGLS is a holding company and owns all of the equity of DaXingHuaShang Investment (Hong Kong) Limited (“DILHK”), a private company limited by shares formed under the laws of Hong Kong. DILHK owns 100% of the equity of Qianhai DaXingHuaShang Investment (Shenzhen) Co., Ltd. (“QHDX”), a wholly foreign owned enterprise organized under the laws of China, which, in turn, owns 100% of the equity of FVT Supply Chain, an operating subsidiary.

On March 1, 2019, FVTI entered into a share purchase agreement to acquire 100% of the shares of Jiujiu Group Stock Co., Ltd. (“JJGS”), a company incorporated under the laws of the Republic of Seychelles, with the shareholders of JJGS in exchange for 5 shares of our common stock (split-adjusted). Following the closing of the acquisition on March 1, 2019, JJGS became our wholly owned subsidiary. JJGS owns all of the equity of Jiujiu (HK) Industry Limited (“JJHK”), a Hong Kong company limited by shares. JJHK owns 100% of the equity of Jiujiu (Shenzhen) Industry Co., Ltd. (“JJSZ”), a PRC operating company engaged in retail and wholesale distribution of alcohol beverage products.

On July 13, 2019, FVTI and QHDX entered into an equity interest transfer agreement, which was amended on September 12, 2019, with the controlling shareholder of Yunnan Makaweng Wine & Spirits Co., Ltd. (“Makaweng”), a PRC limited liability company engaged in the business of distribution of wine and beer. Pursuant to the agreement, QHDX would purchase 51% of Makaweng’s equity interest from the controlling shareholder of Makaweng in exchange for shares of FVTI common stock. On August 28, 2019, the registration of the transfer of the 51% of equity interest of Makaweng to QHDX with local government agencies was completed. On December 3, 2020, QHDX and the controlling shareholder of Makaweng entered into a share transfer agreement, pursuant to which the parties agreed that QHDX would transfer all of the 51% of Makaweng equity interest back to the controlling shareholder. Upon the effectiveness of the agreement, QHDX no longer owned an equity interest in Makaweng. FVTI has not issued any shares to the controlling shareholder and the control of Makaweng has never been transferred to QHDX. However, the registration of the transfer of the 51% interest by QHDX to the controlling shareholder has not been completed as of the date hereof.

On June 22, 2020, FVTI and QHDX entered into a share purchase agreement with Dongguan Xixingdao Technology Co., Ltd. (“Xixingdao”), a PRC company, and the two former shareholders of Xixingdao, who collectively owned all of the equity interest in Xixingdao. Xixingdao is engaged in the business of drinking water distribution and delivery in Dongguan City, Guangdong Province. Pursuant to the agreement, QHDX purchased 90% of Xixingdao’s equity interest from the sellers in exchange for 243,135 shares of FVTI’s common stock (split-adjusted). We obtained the control of Xixingdao and Xixingdao became our subsidiary on August 31, 2020. The shares were issued on December 28, 2020.

On September 28, 2021, FVTI effected a one-for-twenty reverse stock split (referred to herein as “reverse split”) of the issued and outstanding shares of common stock, $0.001 par value, by filing a Certificate of Change with the Secretary of State of the State of Nevada. The reverse split became effective with FINRA and in the OTC marketplace on October 21, 2021 when the common stock began trading on a split-adjusted basis. Prior to the reverse split, FVTI was authorized to issue 3,000,000,000 shares of common stock and there were 313,098,220 shares of common stock outstanding. As a result of the reverse split, FVTI is authorized to issue 150,000,000 shares of common stock, and there are currently 15,655,038 shares of common stock outstanding. Unless otherwise stated, all shares and per share amounts in this report have been retroactively adjusted to give effect to this reverse stock split.

Corporate Structure

The chart below depicts the corporate structure of the Company as of the date of this report.

Business Plan and Recent Development

Coronavirus (COVID-19) Update

In December 2019, a novel strain of coronavirus (COVID-19) was first identified in China and has since spread rapidly globally. The outbreak of COVID-19 has resulted in quarantines, travel restrictions, and the temporary closure of stores and business facilities globally. In March 2020, the World Health Organization declared the COVID-19 a pandemic. In 2020, COVID-19 had a material impact on our business, financial condition, and results of operations. including, but not limited to, the following:

After the second quarter of 2020, the COVID outbreak in China has gradually been controlled. Our business has also returned to normal operations, although management assessed that our results of operations had been negatively impacted for the 2020 fiscal year. COVID-19 could adversely affect our business and results of operations in 2022 if any COVID resurgence causes significant disruptions to our operations or the business of our supply chain, logistics and service providers. We cannot predict the severity and duration of the impact from such resurgence, if any. If any new outbreak of COVID-19 is not effectively and timely controlled, or if government responses to outbreaks or potential outbreaks are severe or long-lasting, our business operations and financial condition may be materially and adversely affected as a result of the deteriorating market outlook, the slowdown in regional and national economic growth, weakened liquidity and financial condition of our customers or other factors that we cannot foresee. Any of these factors and other factors beyond our control could have an adverse effect on the overall business environment, cause uncertainties in the regions where we conduct business, and could materially and adversely impact our business, financial condition and results of operations.

Valley Holdings Acquisition

Our business plan is to extend our market share through acquiring quality businesses in the food and beverage industries, in order to increase our customer base and supply channels, as well as to acquire more skilled employees and business connections in the industries. We plan to further develop our online marketing platform and internal operation management system by engaging an external IT company during 2021. In the past year, we successfully acquired Xixingdao, a drinking water distribution business. We expect to continue to explore new opportunities to acquire additional quality and compatible businesses in our industries. Our management believes that successful acquisitions will bring synergies to our business and enhance our shareholders’ value.

We consider the following factors when evaluating quality acquisition targets: (i) costs involved in an acquisition; (ii) financial performance of the target; (iii) the reputation of the target in its industry; (iv) the target’s existing customer base; (v) the target’s supplier network; (vi) the expertise and experience of the target’s management and employees; and (vii) the inventory condition of the target.

On January 6, 2021, we entered into an equity interest transfer agreement (the “Valley Holdings Agreement”) with Valley Holdings Limited (“Valley Holdings”), a Hong Kong company, and Angel International Investment Holdings Limited (the “Valley Holdings Seller”), a 70% shareholder of Valley Holdings. Valley Holdings owns approximately 88.44% of the equity interest of Valley Foods Holdings (Guangzhou) Co., Ltd. (“Valley Food”), a limited liability company incorporated in China and engaged in the business of food wholesale and production and sale of food additives in China. Pursuant to the agreement, we would purchase 70% of Valley Holdings’ equity interest from the Valley Holdings Seller in consideration of shares of our common stock valued at $10.5 million (subject to certain adjustments). According to the agreement, the total number of issuable shares will be determined based on the average of the closing prices of our common stock for the 30 business days preceding the date of the closing.

The closing of the acquisition has not occurred as of the date of the report as a result of delays in satisfaction of the closing conditions. The closing is subject to certain conditions, including but not limited to (a) completion of due diligence review of Valley Holdings and its subsidiaries to our satisfaction, (b) completion of the audited consolidated financial statements of Valley Holdings as provided in the agreement, (c) execution of non-competition agreements and confidentiality agreements with the senior management members of Valley Holdings and its subsidiaries, and (d) assignment to Valley Holdings of all of the intellectual property related to the operations of Valley Holdings and its subsidiaries.

Our industry and Market

We obtained the industry and market data used throughout industry publications and research, studies and other similar third-party sources, as well as our estimates based on such data. All of the market data and estimates used in this report involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such data and estimates. We believe that the data from these third-party sources is reliable; however, we have not independently verified the data, besides our business and the industry which we are operating is subject to a high degree of risk and uncertainties.

Growth in food and beverage market in China

According to China Economic Vision, a research and consulting company with the research coverage mainly in China, the growth rate of food and beverage market in China reached 6.28% in 2018 and then declined to 4.40% in 2019. The decline was mainly due to the drop in demand of liquor products and dairy products. In 2020, the COVID-19 pandemic led to a sharp decrease in the growth rate of the industry, the market reached RMB4,590.2 billion, and a year-over-year (“YoY”) growth of 0.86%. The decrease in the growth rate was mainly due to the quarantine measures implemented in some areas, store and office closures, lockdown and social gatherings restrictions to control the COVID-19 outbreaks in China.

Food and Beverage Market Scale in China from 2016 to 2020

Source: China Economic Vision

China Economic Vision estimated that, with the orderly recovery of the overall economic and the upgrading of product consumption structure, the food and beverage industry will develop favorably in the future, but the growth rate will slow down. The food and beverage market in China is expected to reach RMB5608.8 billion by 2025, and a YoY growth of 3.45%.

Food and Beverage Market Forecast in China from 2021 to 2025

Source: China Economic Vision

Growth of alcohol beverage market in China

In 2018, the growth rate of alcohol beverage market in China reached 10.68% driven by multiple factors, such as industrial restructure adjustment, consumption upgrading, and the rapidly growth of the Baijiu (Chinese alcohol beverage) industry. In 2019, the growth rate dropped to 2.21% because the market returned to rationality which caused the decrease of Baijiu sales; the downtrend of domestic wine production and sales; and the reduction of imported wines.

In 2020, the alcohol beverage products market scale in China reached RMB 859.6 billion, and the YoY negative growth of 0.22%. It was mainly due to the city lockdown order and the prohibition of social gatherings.

Alcohol Beverage Products Market in China from 2016 to 2020

Source: China Economic Vision

China Economic Vision estimated that, although the pandemic has brought uncertainties to the alcohol beverage products market, the trend of raising quality standard of production for the alcohol beverage products market has never changed. Alcohol consumption has gradually changed from basic consumption to personalized and diversified high-quality consumption. With the orderly recovery of the consumption in China, the market will continue to develop steadily in the future. The alcohol beverage products market in China is expected to reach 997.8 billion in RMB by 2025, and a YoY growth of 2.24%.

Alcohol Beverage Products Market Forecast in China from 2021 to 2025

Growth of bottled water market in China

The bottled water industry in China has a vigorous development in recent years. More household users have changed their drinking water habits and demanded for high-quality drinking water, especially natural mineral water, which has been the major driver for the growth in bottled water products (with natural mineral). The bottled water market in China reached RMB107.8 billion in 2019, with a YoY growth of 20.58%.

According to China Economic Vision, a large number of companies, which were the main consumers of the bottled water market, stopped the operation and production and reduced their use of bottled water the during the COVID-19 pandemic in 2020. In addition, to avoid the risk of spreading the COVID-19, people are recommended to use the bottled water only without returning buckets and promoted to use one-time disposable packaged water. These measures caused the decline in the demand for bottled water. The bottled water market in China reached RMB113.6 billion in 2020, and the YoY growth of 5.38%.

Bottled Water Market in China from 2016 to 2020

Source: China Economic Vision

Compared with bottled water, disposable medium and large packaged water has better quality and consumption experience, and its cost is lower than the bottled water, which is suitable for the household consumption. Based on China Economic Vision’s estimate, even with the gradual replacement of disposable medium and large packaged water, it will have a limited impact on the bottled water market in the short term, but the growth rate of bottled water market will slow down in the long run. The bottled water market in China is expected to reach RMB223.7 billion by 2025, and the YoY growth was 14.13%.

Bottled Water Market Forecast in China from 2021 to 2025

Source: China Economic Vision

Our Business

We sell a variety of wines, such as dry red wine, dry white wine, rosé wine, and sweet wine. Currently we sell about 40 different brands of wine, most of which are imported from France and Spain.

We sell a variety of water, peanut oil, soybean oil and blended oil. Currently we sell about 30 different brands of water and 3 different brands of oil.

We have put significant efforts in developing and promoting our brand name in different regions of China. Our products are mainly sold to retailers, such as wine and water retail stores, convenience stores and supermarkets. The selling price varies by quantities of products each retailer orders from us.

We have cultivated business relationships and achieved recognitions with different organizations over the years, which have improved our business and management efficacy. Specifically, we have been collaborating with Shenzhen Institute of Tsinghua University since 2011, who has been helping us develop an innovative management model, operating model and franchising model. We have been a member of Guangdong Provincial Liquor Industry Association since 2011.

Our wine product operations are based in Humen Town, Dongguan City. We lease a six-floor building with a total floor area of 1,200 square meters. Our wine retail store is located on the first floor which we use exclusively as a retail store and for sample products display. We use the remaining five floors as the Company’s conference room, offices and storage.

Our water and oil product management office is also located in Humen Town, Dongguan City. We lease the building which has over 1,300 square meters. It includes sales, customer service, warehouse, delivery and finance departments. The office manages one office, seven wholesales stores and one warehouse. We also maintain one registered office for the subsidiary with lease term of three years. As of December 31, 2021, the Company has total three office spaces, one warehouse and thirteen stores in PRC with remaining lease terms of from 21 months to 76 months.

We have developed our WeChat applet “FVTI food safety & healthy supply platform” (short name “Fu Gu Online”). Some of our agents and wholesalers have ordered from this platform.

Our Products

We purchase, distribute and sell a wide range of beverage and foods through our supply chain online platform and offline sales channels. We also develop some of the water products we distribute. We offer the following four categories of food and beverage products:

1． Wine and Liquor Products

We offer a variety of wine products including dry red wine, dry white wine, rose wine and sweet wine. Our liquor products include imported liquor and domestically produced spirits. We currently sell over 30 different types of wine, liquor and spirits products.

We launched our brand “Falantu Art Winery,” with the goal to cultivate a wine-centered food and art culture, advocate healthy living, and bring romance to people’s lives. Our supply chain brings together high-quality wines from most major French producing regions and selected wine production countries. We forge alliance relationship with vineyards at French Burgundy (Bourgogne), Bordeaux (Bordeaux), Chile’s Central Valley, Spanish wineries and other high-quality wine makers. To increase our market share, we have set up multiple branches in Guangdong, China, to promote wine sale and wine culture to Chinese consumers.

2. Bottled Water and Soft Beverage Products

Our drinking water products we sell mainly include bottled water of different sizes. The sources of our bottled water are from tap water or extracted groundwater. In addition to selling on our supply chain platform, these different brands of bottled water are available at supermarkets, grocery stores, other E-commerce platforms, and through the manufacturer’s distributors.

We currently sell 36 different brands of bottled water products. In response to consumer preferences, our water products are packaged in individual containers of difference sizes, ranging from small single serving bottles of 380 milliliter to 750 milliliters, to medium-sized jugs of 1.5 to 5 liter and large 15 to 19 liter carboys. Below are some of branded bottled water products that have generated large sales volume on our supply chain platform.

3. Pre-package Foods

Pre-packaged foods include various brands of edible oils, condiments and seasonings.

We have selected to sell edible oil based on their quality and popularity among the customers

We offer a variety of kitchen condiment products on the platform, and through multiple layers of screening, brands that are widely welcomed by consumers in the Pearl River Delta region are selected.

4. Household drinking water purification products

Xixingdao sells a series drinking household water treatment systems and devices that improve water quality and healthy lifestyle. They include whole house water purification systems and water filtration devices.

New Products

We are continuously seeking new and suitable brands of products for sales to enrich our product varieties. We have recently added several new brands of wine and liquor products to our product portfolio. We aim to offer more high-quality wine and liquor products for our customers. Providing a wide variety of wine and liquor products to the customers will continue to be our alcohol beverage segment operational strategies.

Our Product Distribution / Supply Chain Operations

Our supply chain system manages the entire process of product procurement, warehousing, distribution, logistics and delivery. Through our digital management system, we can fully track our products from upstream suppliers to downstream end customers.

We emphasize to provide products with high standard of food safety and quality, therefore we carefully select high quality products. We conduct market research and supplier information review to select manufacturers and products, and carry out our own and third parties sample testing on their products to ensure the product with high quality and safety. When we completed the selection process with satisfactory results, we will sign a contact with the suppliers to purchase selected products from selected manufactures and seek to maintain a long-term cooperation relationship to secure stable supply and quality control. To maintain the standard of food safety and quality, we conduct sample checking on the products on a regular basis and evaluate the suppliers’ performance annually.

Our Customers

We mainly have two types of customers: retailer customers and wholesale distributors. For the year ended December 31, 2019, sales to one customer accounted for 10% or more of our revenue and approximately 80% of our revenue were generated from that customer. After 2019, we had successfully expanded our customer base and launched more products. As a result, none of our customers accounted for 10% or more of our revenue. We have generated income from a wider range of customers for the years ended December 31, 2021 and 2020.

Competitive Strength

Well recognized brand

We believe that our brand image and reputation give us a distinct competitive advantage among the food and beverage companies in Guangdong Province and the Pearl Delta Region. Since the launch of our wine distribution business in 2011, we have demonstrated a strong brand advantage in the food and beverage industry and become a well-recognized brand among consumers in the geographic areas in which we operate, especially in Guangdong Province. In recent years, our offline sales mainly in Dongguan City, and online sales have covered major online sales channels. With a greater brand influence and revenue growth, we are able to further strengthen our product procurement capacity. Our growing business scale, increasingly diversified sales channels and reliable product supplies have further promoted our company’s brand awareness and influence. The strength of our brands facilitates the organic growth of customer traffic on our platform, enhances buyer loyalty and attracts more sellers to our platform.

Diversified quality product portfolio

We have built a diversified product portfolio spanning primarily from alcohol beverage and drinking water, to pre-packaged staple foods, condiments, and household water purification devices and systems. A diversified product mix enables us to enhance our company’s sales volume and market influence. We strive to create a one-stop shopping experience and become one of the first places for food shopping for consumers.

We independently manage the core links of the food and beverage industry supply chain and achieve product quality control through supplier access, quality inspection and other measures. Leveraging our information technology capability, we utilize our information management platform to effectively control all links in the industry chain to achieve the full traceability of product quality.

Efficient product supply chain system

We manage the entire process of product procurement, distribution, logistics, and delivery through our supply chain system. Our supply chain e-commerce platform is our central control hub that is facilitated by logistics management to ensure product supply and quality management to reinforce safety and quality assurance. We continuously strengthen cooperation with reputable suppliers to form a stable and long-term relationship and optimize procurement costs while ensuring product quality. On product source, our supply planning team, based on the sales history and trend forecasts of various channels, analyzes and forecasts sales and supply, formulate procurement plans, and improve procurement efficiency. We also formulate a complete product quality control system to enhance product quality assurance. Through continuous optimization and management of supply planning, logistics management and quality assurance, we have improved product procurement efficiency and order management capabilities while ensuring high product quality.

Multi-channel marketing and sales model

We have established a multi-channel marketing and sales model consisting of e-commerce supply chain platform, social media, primarily WeChat, distributor network, key customer channels, product displays at our brick and mortar stores, and community promotions. Our Fugu Online platform not only identifies potential customers and market products and services to targeted groups based on data collected through our information systems, it also serves as our O2O management platform, which can provide marketing services to traditional merchants. Our online and offline bulk sales through our agents and independent distributors help enhance the brand awareness of our products among end customers and collect feedback for us to improve our product selection and management. Our key customer and large enterprise sales channels, online and offline promotions, and community activities all offer loyalty rewards to key customers. Our brand reputation and cross-selling across our platform further strengthen our ability to retain customers and drive revenue growth.

Best in class customer services management

As a food industry enterprise, we have been focused on improving the consumer shopping experience since our establishment, have built a customer-oriented corporate culture and best in class customer service capabilities. Combining with our own brand positioning, we promote a corporate culture with a customer first mindset with the highest quality service as our purpose. We are committed to improving customer satisfaction and loyalty. We improve the pre-sales and after-sales service system to enhance consumer stickiness. Further, we have established a membership system to promote customer loyalty. We are able to conduct a more in-depth analysis of customer needs and historical buying habits through the purchase tracking, which provides us with valuable information related to future product procurement and marketing promotion.

Growth Strategies

Diversify our product portfolio and provide our customers with a wider range of choices

We believe continuous expansion of our existing product portfolio and accommodation of evolving demand and customers’ preferences will distinguish us from our competitors, while providing our customers with a wider range of choices will facilitate the broadening of our customer base as well as reinforcing our market presence in wine industry.

Continue to solidify our relationships with supply chain participants

We intend to continue solidifying our relationship with our existing suppliers as well as identifying new suppliers. We intend to increase our market share by diversifying our existing product portfolio and procuring products which we anticipate demand. We believe that our strategic diversification will further complement our existing product portfolio, enhance our product mix and strengthen our market position in the food and beverage industry in China.

Strengthen our corporate image by increasing marketing and promotion efforts.

We believe our brands and reputation are critical to our business development. To further enhance customer awareness of our brands, we will continue our effective and targeted marketing efforts. This may include (i) placing mass media commercials, (ii) advertising in newspapers, magazines, the internet, billboards and banners, and (iii) sponsoring programs. We also utilize innovative multimedia promotional channels such as social media and mobile phone applications.

Attract, motivate and retain high-quality talent.

Our customer-oriented business philosophy emphases on delivering excellent customer service. We believe maintaining a positive working environment will encourage better staff relations and talent retention, as well as enhancing the quality of our customer service by motivating staff. In order to foster a work environment that attracts and inspires our people to achieve excellent performance, we seek to motivate and retain valuable and talented staff by aligning compensation and remuneration with performance. As part of our continuing efforts to enhance our customer service, we will also continue to enhance our employee training programs by developing our orientation program, coaching, on-the-job training to enhance individual staff skills and knowledge of sales and marketing techniques, customer services, product information, quality control and industry knowledge.

Seek opportunities to acquire quality companies in the food and beverage industry for further development of our company.

One of our key corporate strategies has been to expand our market share through acquiring quality businesses in the food and beverage industries, in order to increase our customer base and supply channels, as well as to acquire more skilled employees and business connections in the industries. We have previously successfully acquired Xixingdao, a drinking water distribution and delivery company. We expect to continue to explore new opportunities to acquire additional quality and compatible businesses in our industries. Our management believes that successful acquisitions will bring synergies to our business and increase long term value to our shareholders.

Expand and explore additional services and products to enrich our one-stop services to our customers.

We will continue to strive to provide our customers with the convenience of our one-stop shopping experience and a wide variety of unique, quality products at reasonable and competitive prices. We believe this is one of the keys to differentiating ourselves from our competitors in the food and beverage industry in China. To further strengthen our services, we will continue to refine our product related services to our customers by enhancing our product consultation services, sourcing services, delivery services, and post-sale evaluation with improved customer service and service options. With our continued expansion and dedication to exploring additional product related services to amplify our one-stop services to our customers, we believe we can strengthen and maintain our position in the food and beverage industry in China.

Permission Required from the PRC Authorities to Operate and Securities Listing and Issuance

Permission required for the Operations of Our PRC Subsidiaries

Our PRC subsidiaries are required to obtain certain permits and licenses from the PRC government agencies to operate our business in China, including: (a) business licenses, (b) food business licenses, and (c) Electronic Data Interchange License (“EDI”) license.

We conduct our business in China through our PRC subsidiaries. All of our PRC subsidiaries are required to obtain, and have obtained, the required business licenses from the State Administration for Market Regulation (“SAMR”). The PRC Food Safety Law mandates a licensing system for food production and trade and requires vendors engaging in food production or sale or catering services to obtain a food business license in accordance with the applicable laws. Among our PRC subsidiaries, the following thirteen companies are required to obtain food business licenses and have received such licenses pursuant to the PRC Food Safety Law: Dongguan City FVT Supply Chain Technology Co., Ltd. (“FVTL or FVT Supply Chain”), Dongguan Xixingdao Technology Co., Ltd. (“Xixingdao”), Dongguan City Fu La Tu Trade Co., Ltd. (“FLTT”), Dongguan City Fu Xin Gu Trade Co., Ltd. (“FXGT”), Dongguan City Fu Lai Food Co., Ltd. (“FLFL”), Dongguan City Fu Xin Technology Co., Ltd. (“FXTL”), Dongguan City Fu Xiang Technology Co., Ltd (“FGTL”), Dongguan City Fu Ji Food & Beverage Co., Ltd. (“FJFL”), Dongguan City Fu Yi Beverage Co., Ltd. (“FYBL”), Dongguan City Fu Jing Technology Co., Ltd. (“FJTL”), Dongguan City Fu Sheng Drinking Water Co. Ltd. (“FSWL”), Dongguan City Fu Jia Drinking Water Co., Ltd. (“FJWL”), and Shenzhen Fu Jin Trading Technology Co., Ltd. (“FJSTL”). Therefore, these thirteen subsidiaries have the required government permits to engage in food purchase and sale activities. However, a food business license is not required for the sale of edible agricultural products and prepacked food. Companies engaged in the sale of prepacked food must report to the food safety regulatory agencies of the local government for recordation. Four of our subsidiaries, Dongguan City Fu Guan Healthy Industry Technology Co., Ltd. (“FGHL”), Dongguan City Fu Xi Drinking Water Co., Ltd. (“FXWL”), Dongguan City Fu Li Trading Co., Ltd. (“FLTL”) and Guangdong Fu Gu Supply Chain Group Co., Ltd. (“FGGC” or “FG Supply Chain”), are subject to such reporting requirement and are in the process of completing the recordation procedure. Guangdong provincial government has not issued detailed implementation rules, and as such, changes in rules and regulations may impose additional requirements for our subsidiaries in China.

The relevant PRC Telecommunications Regulations require a telecommunication service provider in China to obtain an operating license from the Ministry of Industry and Information Technology, or MIIT, or its provincial counterparts, prior to commencement of operations. Our subsidiary, FVT Supply Chain, engages in food, beverage and related product purchases and sales via its online platform. As a provider of online data processing and transaction processing services, FVT Supply Chain is required to obtain an Electronic Data Interchange (EDI) license and has obtained the EDI license. The relevant PRC regulations, including the Classification Catalogue of Telecommunications Services, are still evolving, and there have been limited guidance and interpretation with respect to the scope of various types of telecommunication services. We may be subject to additional license requirements if we further expand our online operations and services.

In addition, on November 14, 2021, the CAC published the Regulations of Internet Data Security Management (Draft for Comments) (the “Internet Data Security Regulations”), which further regulate the internet data processing activities and emphasize the supervision and management of network data security, and further stipulate the obligations of internet platform operators, such as to establish a system for disclosure of platform rules, privacy policies and algorithmic strategies related to data. The draft regulations require data processors to (i) adopt immediate remediation measures when finding that network products and services they use or provide have security defects and vulnerabilities, or threaten national security or endanger public interest, and (ii) follow a series of detailed requirements with respect to processing of personal information, management of important data and proposed overseas transfer of data. As of the date of this report, the draft regulations have not been adopted and the final provisions are subject to changes. If the above proposed regulations are adopted as proposed, based on our initial evaluation, while we have implemented some of the data security measures, we would not be in full compliance with the new draft regulations. We are also still evaluating any additional necessary actions we should take pursuant to the proposed regulations to satisfy the personal information protection and internet data security regulatory requirements. Failure to comply with the effective cybersecurity, data privacy and internet data security regulatory requirements in a timely manner may subject us to government enforcement actions and investigations, fines, penalties, suspension or disruption of our operations, among other things.

On December 28, 2021, the CAC, NDRC, and several other agencies jointly issued the Cybersecurity Review Measures, or the Measures, which took effect on February 15, 2022 and replaced the previously issued Revised Measures for Cybersecurity Review. Under the Measures, an “online platform operator” in possession of personal data of more than one million users must apply for a cybersecurity review if it intends to list its securities on a foreign stock exchange. The operators of critical information infrastructure purchasing network products and services, and the online platform operators (together with the operators of critical information infrastructure, the “Operators”) carrying out data processing activities that affect or may affect national security, shall conduct a cybersecurity review, and any online platform operator who controls more than one million users’ personal information must go through a cybersecurity review by the cybersecurity review office if it seeks to be listed in a foreign country. Pursuant to the Measures, we don’t believe we will be subject to the cybersecurity review by the CAC, given that (i) we possess personal information of a relatively small number of users in our business operations as of the date of this report, significantly less than the one million user threshold set for a data processing operator applying for listing on a foreign exchange that is required to pass such cybersecurity review; and (ii) data processed in our business does not have a bearing on national security and thus shall not be classified as core or important data by the authorities. We don’t believe that we are an Operator within the meaning of the Measures, nor do we control more than one million users’ personal information, and as such, we should not be required to apply for a cybersecurity review under the Measures. However, in view of the fact that the Measures was released recently and there is a general lack of guidance and substantial uncertainties exist with respect to their interpretation and implementation. For example, there is still no clear definition of “online platform operator.” Whether the data processing activities carried out by traditional enterprises (such as food, medicine, automobile and other production enterprises) are subject to such review and the scope of the review remain to be further clarified by the regulatory authorities in the subsequent implementation process.

With regard to the current effective data security management regulations, we don’t believe that we are required to conduct data security review for listing overseas. However, according to the Regulations on Network Data Security Management (Draft for Comment), as an overseas listed company, we will be required to conduct an annual data security review and to comply with the relevant reporting obligations. We have been closely monitoring the development in the regulatory landscape in China, particularly regarding the requirement of approvals, including on a retrospective basis, from the CSRC, the CAC or other PRC authorities with respect to this offering, as well as regarding any annual data security review or other procedures that may be imposed on us. If any approval, review or other procedure is in fact required, we cannot assure you that we will be able to obtain such approval or complete such review or other procedure timely or at all. For any approval that we may be able to obtain, it could nevertheless be revoked and the terms of its issuance may impose restrictions on our operations and offerings relating to our securities. The regulatory requirements with respect to cybersecurity and data privacy are constantly evolving and can be subject to varying interpretations, and significant changes, resulting in uncertainties about the scope of our responsibilities in that regard. Failure to comply with the cybersecurity and data privacy requirements in a timely manner, or at all, may subject us to government enforcement actions and investigations, fines, penalties, suspension or disruption of our operations, among other things. See “Risk Factor — The Chinese government may intervene or influence the operations of our PRC subsidiaries and exercise significant oversight and discretion over the conduct of their business and may intervene in or influence their operations at any time, which could result in a material change in operations of our PRC subsidiaries and/or the value of our common stock”;“Risk Factor — Recent regulatory developments in China, including greater oversight and control by the CAC over data security, particularly for companies seeking to list on a foreign exchange, may subject us to additional regulatory review or otherwise restrict our ability to raise capitals outside China; and any actions by the Chinese government to exert more oversight and control over overseas securities offerings could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless.”

Permission Required to Issue Securities

We are subject to PRC rules and regulations relating to overseas listing and securities offering, and a substantial extension of the PRC government’s oversight over our business operations or overseas listings may hinder our ability to offer or continue to offer our securities. Based on PRC laws and regulations effective as of the date of this report and subject to different interpretations of these laws and regulations that may be adopted by PRC authorities, we believe that, as of the date of this report, we or our PRC subsidiaries are not required to obtain any permission from the CSRC, the CAC, or any other PRC authority in connection with this offering. As a result, we have not submitted any application to the CSRC, the CAC or other PRC authorities for the approval of this offering or the Nasdaq listing. As of the date of this report, we and our PRC subsidiaries have not received any inquiry, notice, warning or objection in relation to this offering or Nasdaq listing from the CSRC, the CAC or any other PRC authorities.

On August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, the State-owned Assets Supervision and Administration Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, CSRC and the State Administration for Foreign Exchange (“SAFE”), jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “M&A Rule”), effective on September 8, 2006 and amended on June 22, 2009. The M&A Rule requires that an offshore special purpose vehicle (“SPV”) formed for listing purposes and controlled directly or indirectly by Chinese companies or individuals shall obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published procedures specifying documents and materials required to be submitted to it by an SPV seeking CSRC approval of overseas listings. However, the provisions of the M&A Rule remain ambiguous as to the scope and applicability of the CSRC approval requirement. The CSRC has not issued any definitive rule or interpretations. Based on the current PRC law, rules and regulations, our Chinese legal counsel, Grandall Law Firm, is of the opinion that the M&A Rule and related regulations do not require the Company or PRC subsidiaries to obtain prior approval from CSRC for the listing and trading of our shares on an overseas securities market, given that our wholly foreign-owned enterprise subsidiaries were established by direct investment, rather than by a merger with or an acquisition of any PRC domestic companies as defined under the M&A Rule. However, there remains uncertainty as to how the M&A Rules will be interpreted or implemented, and the opinions of our PRC counsel are subject to any new laws, rules and regulations or detailed implementations and interpretations in any form relating to the M&A Rules. We cannot assure you that the relevant Chinese government agencies, including the CSRC, will reach the same conclusion.

On July 6, 2021, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the Opinions on Severely Cracking Down on Illegal Securities Activities According to Law, or the Opinions. The Opinions emphasize the need to strengthen the administration over illegal securities activities and the supervision over overseas listings by Chinese companies. Effective measures, such as promoting the construction of relevant regulatory systems, will be taken to address risks and incidents of China-based companies that are listed overseas, cybersecurity issues, data privacy protection requirements and other similar matters. As of the date of this report, no official guidance or related implementation rules have been issued, and our PRC counsel is of the opinion that this offering does not constitute illegal securities activities under the Opinions. In addition, the Company has obtained all requisite licenses and operational permits and none of our permits has been denied. Notwithstanding the forgoing, there are still uncertainties as to how the Opinions will be interpreted and implemented by the relevant PRC governmental authorities.

In addition, on December 28, 2021, the CAC, the National Development and Reform Commission (“NDRC”), and several other governmental agencies jointly issued the Revised Measures for Cybersecurity Review, or the Revised Cybersecurity Measures, which took effect on February 15, 2022. Under the Revised Cybersecurity Measures, an “online platform operator” in possession of personal data of more than one million users must apply for a cybersecurity review if it intends to list its securities on a foreign stock exchange. The operators of critical information infrastructure purchasing network products and services, and the online platform operators (together with the operators of critical information infrastructure, the “Operators”) carrying out data processing activities that affect or may affect national security, shall conduct a cybersecurity review, and any online platform operator who controls more than one million users’ personal information must go through a cybersecurity review by the cybersecurity review office if it seeks to be listed in a foreign country.

On December 24, 2021, the CSRC issued the Administrative Provisions of the State Council Regarding the Overseas Issuance and Listing of Securities by Domestic Enterprises (the “Draft Administrative Provisions”) and the Measures for the Overseas Issuance of Securities and Listing Record-Filings by Domestic Enterprises (Draft for Comments) (the “Draft Filing Measures”), collectively, the Draft Overseas Listing Rules, which are currently published for public comments only. The Draft Overseas Listing Rules require that companies applying for overseas securities issuance, listing, and post-listing capital operations, including IPO, multi-listing, spin-off listing, SPAC, refinancing, issuance for asset acquisitions, equity incentives, changes of control and certain other transactions, shall be subject to statutory procedures, such as filing and information reporting requirement. According to the Draft Overseas Listing Rules, among other things, after making initial applications with overseas stock markets for offerings or listings, all China-based companies shall file with the CSRC within three business days. In addition, overseas offerings and listings may be prohibited for such China-based companies when any of the following applies: (a) if the securities offerings and listings are prohibited by applicable PRC laws and rules; (b) if securities offerings and listings may constitute a threat to, or endanger national security as reviewed and determined by PRC authorities; (c) if there are material ownership disputes over applicants’ equity interests, major assets, core technologies or other items; (d) if a PRC company or its controlling shareholders or de facto controllers have committed certain crimes, under investigation for suspicion of major violations in the prior three years; (e) if any directors, supervisors, or senior executives of applicants have been subject to administrative punishments for severe violations, or are under investigations for crimes or major violations; or (f) other circumstances as provided. The Draft Administrative Provisions further stipulate that a fine between RMB 1 million and RMB 10 million may be imposed if a company fails to fulfill the filing requirements with the CSRC or conducts an overseas offering or listing in violation of the Draft Overseas Listing Rules. In the case of severe violations, an order to suspend relevant businesses or halt operations for rectification may be issued, and relevant business permits or operational license revoked.

Overseas issuance and listings subject to the Draft Overseas Listing Rules include direct and indirect issuance and listings. Where an enterprise whose principal business activities are conducted in PRC seeks to issue and list its shares in the name of an overseas enterprise based on equity ownership, assets, income or other similar rights and interests of an PRC domestic enterprise, such activities are deemed an indirect overseas issuance and listing (the “Indirect Overseas Issuance and Listing”) under the Draft Overseas Listing Rules. Our PRC counsel has advised us that this offering and the proposed listing of our shares on Nasdaq Capital Market would be deemed an Indirect Overseas Issuance and Listing under the Draft Overseas Listing Rules and will be required to complete the filing procedures and submit the relevant information to CSRC after the Draft Overseas Listing Rules become effective. As of the date hereof, the rules have not become effective and we are not required to complete the filing procedures if we complete the offering and transferring the trading of our securities on the Nasdaq before the rules take effect. In addition, our PRC counsel advised us that, even if the filing procedures are implemented, we would only submit the filing materials as provided by the rules and no CSRC approve is required under the rules. Because we are relying on an opinion of counsel, there is uncertainty inherent in relying on an opinion of counsel in connection with whether we are required to obtain permissions from a governmental agency that is required to approve of our operations and/or listings.

If the CSRC requires that we obtain its approval prior to the completion of this offering, the offering would be delayed until we have obtained CSRC approval, which may take several months. There is also the possibility that we may not be able to obtain or maintain such approval or that we inadvertently concluded that such approval was not required. If prior CSRC approval was required while we inadvertently concluded that such approval was not required or if applicable laws and regulations or the interpretation of such were modified to require us to obtain the CSRC approval in the future, we may face regulatory actions or other sanctions from the CSRC or other Chinese regulatory authorities. These authorities may impose fines and penalties upon our subsidiaries’ operations in China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from this offering into China, or take other actions that could have a material adverse effect upon our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our common stock. The CSRC or other Chinese regulatory agencies may also take actions requiring us, or making it advisable for us, to terminate this offering prior to closing. Any failure of us to fully comply with new regulatory requirements may significantly limit or completely hinder our ability to offer or continue to offer the common stock, causing significant disruption to our business operations, severely damage our reputation, materially and adversely affect our financial condition and results of operations and cause the common stock to significantly decline in value or become worthless. See “Risk Factor — “China Securities Regulatory Commission and other government agencies may exert more oversight and control over offerings that are conducted overseas and foreign investment in China-based issuers, and we face uncertainty with respect to future actions by the PRC government that could significantly affect our ability to offer or continue to offer securities to investors and cause the value of our securities to significantly decline or be worthless.” “Risk Factor — The Chinese government may intervene or influence the operations of our PRC subsidiaries and exercise significant oversight and discretion over the conduct of their business and may intervene in or influence their operations at any time, which could result in a material change in operations of our PRC subsidiaries and/or the value of our common stock”; “Risk Factor — Recent regulatory developments in China, including greater oversight and control by the CAC over data security, may subject us to additional regulatory review, and any actions by the Chinese government to exert more oversight and control over foreign investment in China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless.”

Marketing and Sales

China is a country with both an ancient wine tradition and a new and an emerging wine-consuming market. Wine production in China has thousands of years of history. Today, China is also an emerging wine-producing nation in its own right with brands such as Great Wall, Changyu and Dynasty. Local wines account for 80 percent of wine consumed in China. According to The International Wine and Spirit Record (the “IWSR”), China is one of the fastest-growing wine markets in the world, with rising personal incomes driving an enhancement of tastes and consumption levels. In 2017, the wine consumption per capita was only about 1.2 liters accounting for less than 1/3 of the global total as well as 1/10 of the U.S. consumption. Therefore, we believe there are great potential for growth in the Chinese wine market.

We use a hybrid marketing model through our supply chain platform, social media (primarily WeChat), distributor network, key customer channels, product displays at our physical stores, and community promotions.

We promote direct sales to businesses and individual consumers on our e-commerce supply chain platform, “Fugu Online”. Fugu Online platform identifies the customers ‘consumption habits and present relevant products to targeted customers through the information system.

Fugu Online is also served as our O2O management platform, which can provide marketing services to traditional merchants such as supermarkets, retail stores, hotels and restaurants. Fugu Online provides weekly sales flyers, highlight our products offering and special deals.

Furthermore, Fugu Online platform enable the users to become our suppliers which encourage suppliers initiatively to join us and enlarge our supplier base. To ensure the safety and quality of food, we request the suppliers provide qualified certification for their products. We also have our own supply chain system and quality control to verify the safety of product for our customers. Through the operation of online platform, we diversify the product type on our platform and strengthen the customers ‘confidence to our products.

We also maintain a “Fugu Online” WeChat mini-program through which we include mobile coupons and customized offers based on the user’s preferences. The WeChat platform serves a wide variety of business types of different sizes, such as B2C and B2B companies, in addition to individual consumers.

The following showcases the programming interfaces of our Fugu Online WeChat mini-program:

We launched our Fugu Online on WeChat in April 2021. For the first five months from April to September 2021, we recorded 1,768 sales orders through the Fugu Online platform with an average sales amount of RMB8,465 per order. Although the Fugu Online platform is still being developed, the first five months’ sales amount already indicated a high revenue growth potential of the Fugu Online platform.

We make online or offline bulk sales through our agents and independent distributors. Prior to the launch of our supply chain platform, the majority of sales had been made through independent distributors. We believe our distribution network is an important component of our hybrid sales model because it utilizes the resources and personal connections among our independent distributors and their retail customers. Such a sales model helps to enhance the brand awareness of our products among end-customers and collect feedbacks to improve our merchandise selection process and management method.

Further, we have achieved a substantial portion of sales through key customer channels. We have established long-term and stable cooperative relations with certain large enterprises by carry out offline promotions, offline anniversary activities, and offer loyalty rewards to key customers. We initiate promotions to expand our customer base and build brand awareness. As we have multiple product lines, there are many opportunities for cross-selling across our platform as we seek to introduce customers to other offerings. We also believe our strong reputation is a factor in retaining and attracting customers.

We also seek to expand our sales into the international food supply chain markets and are in the process of establishing our online store on the Amazon platform targeting the food supply and distribution markets outside of China. We engaged a third-party consultant to assist with marketing and sales strategies to further increase our sales. In addition to other online sales channels, we have also begun to promote our product sales on major e-commerce platforms in China, such as Tao.1688.com and Pinduoduo.

Competition

France still dominates the Chinese wine market with a share of 48 per cent according to Euromonitor International. The best sales in Chinese supermarkets are imported wines from RMB60-180, or approximately $9.00 - $27.00 per bottle. One major challenge is that Chinese consumers switch from one brand to another rather quickly, exhibiting little brand loyalty. Online sales particularly enable the consumers to source and purchase budget wines. Management believes that wineries will most benefit from growth in China will be those that demonstrate patience, professional service while building brand awareness and a long-term strategy to develop the market with their Chinese partners.

For our Company, there are two major competitors in our market, Aussino Liquor and ASC Fine Wines. These companies are well established, more recognized and well accepted by consumers in China.

Food and Beverage Supply Chains

We compete with two types of food supply chain companies, including those carrying all-inclusive food products and those focusing on certain categories of product offerings. Some of our major competitors in supply chain industry are ShuHai Supply Chain Solutions, Wujiu.com, Meicai.com, Kuailujinhuo and Shenzhen Farmgirl Supply Chain.

ShuHai Supply Chain Solutions provides comprehensive food supply chain services for food enterprises and retail customers. Shuhai has modern cooling logistics centers, food processing factories and other operation bases. With its strengths in the areas of clean vegetable production industry standardization, Shuhai is recognized by the industry and customers as a benchmark enterprise in the food supply chain industry.

Wajiu.com is a subsidiary of Beijing Wajiu E-Commerce Co., Ltd., a cross-border B2B trading website for beverages. It operates a B2B platform for foreign wineries and China domestic wine distribution channels based on an “overseas direct procurement + cross-border supply chain + warehousing lo business is to connect the upstream global winery suppliers with the downstream Chinese and foreign small and medium wholesalers and retailers.

Meicai.com is an F2B (farm-to-business) fresh produce supply chain company providing one-stop food ingredient procurement services to restaurants throughout China. Built on a self-serving model and a cooling logistics network, the company provides restaurants with an all-category raw material and ingredient procurement service. It shortens the circulation of agricultural products, reduces prices from the source to the end user, lower the supply chain costs of merchants, and reduces the risk of farmers’ losses.

Kuailujinhuo is a matching platform that provides catering merchants with the purchase service with regards to rice, noodles, grains, edible oils, tableware, tissues and other commodities. Kuailu cooperates with local warehousing companies to utilize their warehousing facilities. The suppliers deliver merchandise to the front-end warehouse, and after sorting and loading the order, they cooperate with local logistics or distribution service providers to deliver the orders to the restaurant.

Founded in December 2014, Shenzhen Farmgirl Supply Chain is a nationwide agricultural B2B trading platform. Mainly serving Shenzhen and Guangzhou, its main products include vegetables, fruits, meat, frozen products, aquatic seafood, dry foods and seasoning ingredients. It h marketing teams, and cooperates with food production bases and large wholesale markets to ensure the quality of the vegetables exported.

Cash Flows, Dividends and Other Asset Transfers between the U.S. Holding Company and Our Subsidiaries

Cash may be transferred within our organization in the following manners: (i) we may transfer funds to our PRC subsidiaries by way of capital contributions or loans, through intermediate holding companies, such as our Hong Kong subsidiaries; (ii) we or our intermediate holding companies may provide loans to our PRC operating subsidiaries directly and vice versa ; and (iii) our PRC subsidiaries may make dividends or other distributions to us through our intermediate holding subsidiaries.

The following table describes transfers among us and our subsidiaries made during the periods presented:

As of the date of this report, none of our subsidiaries have made any dividends or other distributions to us or their respective shareholders, nor have we ever made a dividend or distribution to our shareholders. Our PRC subsidiaries presently intend to retain all earnings to fund their operations and business expansions.

As a result of PRC laws and regulations (noted below) that require annual appropriations of 10% of after-tax income to be set aside in a general reserve fund prior to payment of dividends, our WFOE subsidiary, QHDX, is restricted in that respect, as well as in other respects noted below, in its ability to transfer a portion of their net assets to our Hong Kong subsidiary as a dividend. We note the following:

1. PRC regulations currently permit the payment of dividends only out of accumulated profits, as determined in accordance with accounting standards and PRC regulations;

2. Our PRC subsidiaries, including QHDX, are required to set aside, at a minimum, 10% of their net income after taxes, based on PRC accounting standards, each year as statutory surplus reserves until the cumulative amount of such reserves reaches 50% of their registered capital; in addition, they may, subject to a resolution of their shareholder, draw a discretionary common reserve from its after-tax profits;

3. Those reserves may not be distributed as cash dividends and may be used to cover losses made in past years, to enhance the company’s productivity and expand its business or to increase its registered capital; and;

4. The incurrence of debt, specifically the instruments governing such debt, may restrict a PRC subsidiary’s ability to pay shareholder dividends or make other cash distributions.

Under the PRC laws and regulations, our PRC subsidiaries, as wholly foreign-owned enterprises in China, may pay dividends only out of their respective accumulated after-tax profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise is required to set aside at least 10% of its accumulated after-tax profits each year, if any, to fund certain statutory reserve funds, until the aggregate amount of such funds reaches 50% of its registered capital. At its discretion, a wholly foreign-owned enterprise may allocate a portion of its after-tax profits based on PRC accounting standards to discretional funds. These reserve funds and discretional funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by SAFE and declaration and payment of withholding tax. Additionally, if our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends or make other distributions or payments to us. As a holding company, we may rely on dividends and other distributions on equity paid by our subsidiaries, including our PRC subsidiaries, for our cash and financing requirements. However, our PRC subsidiaries will not be able to pay dividends until they generate accumulated profits and meet the requirements described above. Please see “Risk Factor — PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this Offering to make loans or additional capital contributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business”; “Risk Factor — Payment of dividends is subject to restrictions under Nevada and the PRC laws; and “Risk Factor — Governmental control of currency conversion may affect the value of your investment.”

If we are deemed by the PRC tax authorities as a PRC tax resident enterprise for tax purposes, any dividends we pay to our non-PRC resident shareholders may be regarded as China-sourced income and as a result, may be subject to PRC withholding tax at a rate of up to 10.0%. Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or the Double Tax Avoidance Arrangement, the 10% withholding tax rate may be reduced to 5% if a Hong Kong resident enterprise owns no less than 25% of a PRC entity. However, the 5% withholding tax rate does not automatically apply and certain requirements must be satisfied, including, without limitation, that (a) the Hong Kong entity must be the beneficial owner of the relevant dividends; and (b) the Hong Kong entity must directly hold no less than 25% share ownership in the PRC entity during the 12 consecutive months preceding its receipt of the dividends. In practice, a Hong Kong entity must obtain a tax resident certificate from the Hong Kong tax authority to apply for the 5% lower PRC withholding tax rate. As the Hong Kong tax authority will issue such a tax resident certificate on a case-by-case basis, we cannot be certain that we will be able to obtain the tax resident certificate from the relevant Hong Kong tax authority and enjoy the preferential withholding tax rate of 5% under the Double Taxation Arrangement with respect to any dividends to be paid by our WFOE, QHDX, to our Hong Kong subsidiary. Our WFOE currently does not have any plan to declare and pay dividends, and we have not applied for the tax resident certificate from the relevant Hong Kong tax authority. Our Hong Kong subsidiary will apply for the tax resident certificate when our WFOE plans to declare and pay dividends.

The following discussions illustrate taxes we would hypothetically be required to pay in China, assuming that: (i) our PRC subsidiaries have taxable earnings, and (ii) they determine to pay dividends in the future:

Notes:

Regulations

We operate our business in China under a legal regime consisting of the National People’s Congress, which is the country’s highest legislative body; the State Council, which is the highest authority of the executive branch of the PRC central government; and several ministries and agencies under its authority, including the Ministry of Industry and Information Technology, State Administration for Industry & Commerce, State Administration of Taxation and their respective local offices. This section summarizes the principal PRC regulations related to our business.

Regulations Relating to Food Business Operations

The PRC laws and regulations governing food business activities and operations primarily consist of the Food Safety Law of the PRC, effective as of April 29, 2021 (the “Food Safety Law”); the Regulations on the Implementation of the Food Safety Law, effective as of December 1, 2019 (the “Food Safety Regulations”); the Product Quality Law, effective as of December 29, 2018; the Administrative Measures for Food Recalls, as amended in October 23, 2020; the Special Rules of the State Council on Strengthening the Supervision and Management of the Safety of Food and Other Products, effective as of July 26, 2007; the Administrative Measures for Food Distribution Licensing, effective as of November 17, 2017; and the Law of the People’s Republic of China on the Protection of Consumer Rights and Interests, effective as of November 17, 2017. Other laws and regulations relevant to our business include, among others, the E-Commerce Law of the People’s Republic of China, effective as of January 1, 2019; the Law of the People’s Republic of China on Import and Export Commodity Inspection, effective as of April 29, 2021; Foreign Trade Law of the People’s Republic of China, effective as of November 7, 2016; and Measures of the People’s Republic of China for the Administration of Safety of Imported and Exported Food, effective as of January 1, 2022.

The Food Safety Law of the People’s Republic of China, as most recently amended and effective on April 29, 2021, governs activities with respect to food manufacturing and processing (hereinafter referred to as “food manufacturing”) and circulation of foods and food and beverage services (hereinafter referred to as “food business operations”). the PRC adopts a system of supervision, monitoring and appraisal on the food safety risks, compulsory adoption of food safety standards. To engage in food production, sale or catering services, the business operators shall obtain a license in accordance with the laws and regulations. However, the sale of edible agricultural products and the sale of pre-packaged food only are not subject to a permit. The sale of prepacked food shall be reported to the food safety regulatory department of the local government at or above the county level for recordation. As the date of this report, all of our PRC subsidiaries have obtained the required business licenses from the SAMR, and thirteen of our PRC subsidiaries are required to obtain food business licenses and have received such licenses pursuant to the Food Safety Law. Therefore, these subsidiaries are qualified to engage in food purchase and sale activities. Four of our subsidiaries are subject to the reporting requirement but have not completed the required recordation procedure. We intend to fully comply with such recordation requirement as soon as practicable. Guangdong provincial government has not issued detailed implementation rules, and as such, changes in rules and regulations may impose additional requirements for our subsidiaries in China.

Regulation on the Implementation of the Food Safety Law stipulate that, food manufacturers purchasing food ingredients, food additives and food-related products shall check the supplier’s license and product quality certificate; and inspect food ingredients without a product quality certificate pursuant to food safety standards; and shall not purchase or use food ingredients, food additives and food-related products which do not comply with food safety standards. In the contracts we signed with the suppliers, we require them to provide a laboratory qualification report on the products issued by authoritative institutions at the time when the product is delivered to certify product quality. The contract provides that the supplier shall bear the responsibility for product quality and safety. We strictly control the safety of the food purchased.

With a view to strengthening the administration of food production and operation, reducing and avoiding the harm of unsafe food so as to ensure the health and life safety of the general public, the Administrative Measures for Food Recalls are formulated according to the Food Safety Law of the People’s Republic of China and its implementation regulations. The food manufacturing is exposed to the foodstuffs recall system, food manufacturers shall, upon discovery that the foodstuffs manufactured do not comply with food safety standards or based on the evidence that the foodstuffs may endanger human health, forthwith cease manufacturing, recall foodstuffs from the market, notify the relevant food business operators and consumers, and record information of the recall and notification. Where the food manufacturer or business operator failed to recall foodstuffs or cease business operation pursuant to the provisions of this Article, the food safety supervision and administration department of the local government may order the food manufacturer or business operator to recall foods or cease business operations. We have not had an emergency food recall.

The Standing Committee of the National People’s Congress promulgated the Product Quality Law of the PRC, released and effective on December 29, 2018, which provides the producers and sellers should bear liability for product quality. Pursuant to the Regulations on the Implementation of the Food Safety Law, issued on October 11, 2019, and effective on December 1, 2019, as a food seller, we should abide by the Product Quality Law, which stipulates product quality liability and obligations of food sellers. Sellers shall adopt measures to maintain the quality of products sold, and shall not counterfeit or imitate quality marks such as certification marks, shall not adulterate or mix improper elements with the products, shall not use fake products as genuine products or products of poor quality as high quality products, shall not falsify the place of origin of products and shall not falsify or imitate the name or address of another factory, among other things.

If a product does not comply with the national or industry standards for the protection of health or personal safety or the safety of property, the product manufacturer or seller will be ordered to cease their production or sale. Products that have been illegally produced or sold shall be confiscated. A fine shall be imposed equal to an amount greater than the value of the products that have been illegally produced or sold (hereafter including products already sold and goods not yet sold) but less than three (3) times the value of the products; where there is illegal income, the illegal income shall be confiscated; where the circumstances are serious, the business license shall be revoked; where the case constitutes a crime, criminal liability shall be pursued in accordance with law.

In the case of damage to consumers due to defects in the product, the Product Quality Law of the PRC stipulates the corresponding responsible party. If a defect in a product causes physical injury or damage to third party property, the party which was injured or incurred damage may claim compensation against the producer or may claim compensation against the seller. If the producer of the product is liable and compensation is made by the seller of the product, the seller of the product shall have the right of recovery against the producer of the product; if the seller of the product is liable and compensation is made by the producer of the product, the producer of the product shall have the right of recovery against the seller of the product. Where a product is defective due to a mistake made by the seller and such defect causes physical injury or damage to third party property, the seller shall bear liability for compensation. If a seller is unable to identify the producer of a defective product and is also unable to identify the supplier thereof, the seller shall bear liability for compensation. All the products we sell are sourced from upstream suppliers. In the event that we are held liable for product defects as a seller, we have the right to recover compensation or damages paid to consumers from the supplier in accordance with applicable law.

Special Rules of the State Council on Strengthening the Supervision and Management of the Safety of Food and Other Products were promulgated and came into force on July 26, 2007. The products as mentioned in these Rules shall include edible agricultural products, and other products related to the human health and life safety, in addition to food. A business operator shall be responsible for the safety of products sold by it, and shall not sell products that do not conform to the statutory requirements. A seller must establish and implement a product supply inspection and acceptance system, examine the business qualifications of suppliers, verify the certificates of qualified products and product labels, and establish a product supply account to truly record the names, specifications, quantities, suppliers and their contacts, time of supply of products. The product supply account and sale account shall be kept for at least two years. By the production lot of products, a seller shall ask for an inspection report issued by an inspection agency in conformity with the statutory conditions or a photocopy of an inspection report signed or sealed by the suppler from the supplier; and where such an inspection report or a photocopy of an inspection report cannot be provided, the products shall not be sold.

Measures for the Supervision and Administration of the Sanitation of Domestic Drinking Water shall apply to the supervision and administration of the sanitation of central water supply and secondary water supply entities and products involving the sanitation and safety of drinking water. The PRC adopts a sanitary licensing system for products involving the sanitation and safety of drinking water. The entities and individuals that produce products involving the sanitation and safety of drinking water shall apply for the sanitary licensing approval documents for their products to the competent departments of health and family planning of governments as required, and may not produce or sell those products until they have obtained the approval documents. No entity or individual may produce, sell or use the products as mentioned in the preceding paragraph without approval documents. Products involving the sanitation and safety of drinking water shall be subject to sanitation and safety evaluation in accordance with relevant provisions and shall conform to the requirements of sanitary standards and specifications. Products involving the sanitation and safety of drinking water that are produced by using new materials, new processes and new chemical substances shall obtain the sanitary licensing approval documents issued by the competent department of health and family planning of the State Council; and products involving the sanitation and safety of drinking water other than those produced by using new materials, new processes and new chemical substances shall obtain the sanitary licensing approval documents issued by the competent departments of health and family planning of the provincial people’s governments.

E-Commerce Law of the People’s Republic of China was promulgated on August 31, 2018 and came into force on January 1, 2019. “E-commerce businesses” means natural persons, legal persons or organizations without the status of legal person that engage in the business activities of selling commodities, or providing services, through the Internet or any other information network, including e-commerce platform businesses, in-platform businesses, and e-commerce businesses that sell commodities or provide services through a self-built website or any other network services. “E-commerce platform business” means a legal person, or an organization without the status of legal person, which, in e-commerce, provides both or multiple parties to trading with services We are both an e-commerce businesses and an e-commerce platform business. E-commerce business operators shall complete market entity registration formalities pursuant to the law, except for individuals selling self-produced agricultural products and home-made handicraft products, and individuals using their own skills to engage in convenient labor activities and sporadic small transactions for which licensing is not required, as well as e-commerce business operators who are not required to register pursuant to the laws and administrative regulations. The E-commerce platform businesses are required to develop commodities and service quality assurance mechanism favorable to e-commerce development and protection of consumer rights and interests. As an e-commerce business, we shall sell commodities or provide services meeting the requirements for guaranteeing personal and property safety and for environmental protection and shall not sell or provide commodities or services the trading of which is prohibited by any law or administrative regulation. As an e-commerce platform business, we shall request a business applying for selling commodities or providing services in our platform to submit authentic information including its identity, address, contact information, and administrative licensing, make verification and registration, establish a register, and make regular updates and verification, submit the identity information of in-platform businesses to the administrative authorities and taxation authorities, and remind a business that has not made market participant registration to make registration as legally required.

The Consumer Rights and Interests Protection Law of the PRC, or the Consumer Protection Law, promulgated on October 31, 1993 and most recently amended on October 25, 2013 (effective as of March 15, 2014), provides that consumers shall be entitled to the protection of their personal safety and property security at the time of purchase and use of goods and receipt of services. Consumers shall have the right to require that the goods and services provided by business operators satisfy the requirements for protection of consumers’ personal safety and property security. Consumers shall be entitled to the knowledge of actual information of the goods they purchase or use and the services they receive. Consumers shall have the right to require business operators to provide, based on different situations of the goods or services, the relevant information pertaining to the price, place of manufacturing, manufacturer, purpose, function, specifications, grade, main ingredients, manufacturing date, shelf life, inspection certificate, user manual, after-sale services of goods or the contents, specifications and fees and charges of services, etc. In the sales contract, we guarantee the specifications, quality and safety, origin and price of the products consistent with the contract.

The Law sets out the obligations of business operators and the rights and interests of the customers. For example, business operators must guarantee the quality, function, usage, term of validity, personal or property safety requirement of the goods and services and provide customers with authentic information about the goods and services. Consumer whose legitimate rights and interests are harmed in the purchase of goods or receipt of services rendered through an online trading platform may seek compensation from the seller or the service provider.

Additionally, Internet information service providers, under the Civil Code of the PRC, which became effective on January 1, 2021, shall bear tortious liabilities in the event they infringe upon other person’s rights and interests due to providing false or inaccurate content through the internet. Where an internet service provider conducts tortious acts through internet services, the infringed person has the right to request the internet service provider take necessary actions such as deleting contents, screening and de-linking. Failing to take necessary actions after being informed, the internet service provider will be subject to its liabilities with regard to the additional damages incurred. Where an internet service provider knows that an internet user is infringing upon other persons’ rights and interests through its internet service but fails to take necessary actions, it is jointly and severally liable with the internet user.

Regulations Relating to M&A Rules and Overseas Listings

On August 8, 2006, six PRC regulatory agencies, including the China Securities Regulatory Commission, or the CSRC, adopted the Regulations on Mergers of Domestic Enterprises by Foreign Investors, or the M&A Rules, which became effective on September 8, 2006 and was amended on June 22, 2009. Foreign investors shall comply with the M&A Rules when they purchase equity interests of a domestic company or subscribe the increased capital of a domestic company, thus changing the nature of the domestic company into a foreign-invested enterprise; or when the foreign investors establish a foreign-invested enterprise in the PRC, purchase the assets of a domestic company and operate the assets; or when the foreign investors purchase the asset of a domestic company, establish a foreign-invested enterprise by injecting such assets and operate the assets. The M&A Rules purport, among other things, to require offshore special purpose vehicles formed for overseas listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange.

According to the Anti-Monopoly Law which took effect as at August 1, 2008, where the concentration of business operators reaches the filing thresholds stipulated by the State Council, business operators shall file a declaration with the SAMR, and no concentration shall be implemented until the SAMR clears the anti-monopoly filing. Pursuant to the Notice of the General Office of the State Council on the Establishment of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors and the Security Review Rules issued by the General Office of the State Council on February 3, 2011 and became effective on March 3, 2011, mergers and acquisitions by foreign investors that raise “national defense and security” concerns, and mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise “national security” concerns, are subject to strict review by the PRC government authorities. On August 25, 2011, the MOFCOM issued the Provisions of the Ministry of Commerce for the Implementation of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, which provides that if a foreign investor’s merger or acquisition of a domestic enterprise falls within the scope of security review specified in the Notice of the General Office of the State Council on the Establishment of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, the foreign investor shall file an application with MOFCOM for security review. Whether a foreign investor’s merger or acquisition of a domestic enterprise falls within the scope of security review or not shall be determined based on the substance and actual influence of the merger or acquisition transaction. No foreign investor is allowed to substantially avoid the security review in any way, including but not limited to, holding shares on behalf of others, trust arrangements, multi-level reinvestment, leasing, loans, contractual control, or overseas transactions.

On December 24, 2021, the CSRC issued the Administrative Provisions of the State Council Regarding the Overseas Issuance and Listing of Securities by Domestic Enterprises (the “Draft Administrative Provisions”) and the Measures for the Overseas Issuance of Securities and Listing Record-Filings by Domestic Enterprises (Draft for Comments) (the “Draft Filing Measures”), collectively, the “Draft Overseas Listing Regulations,” which are currently published for public comments only. The Draft Overseas Listing Regulations require that companies applying for overseas issuance, listing and post-listing capital operations, including IPO, multi-listing, spin-off listing, SPAC, refinancing, issuance for asset acquisitions, equity incentives, and changes of control and other stipulated transactions, shall be subject to statutory procedures, such as filing and information reporting requirement. Overseas issuance and listings include direct and indirect issuance and listings. Where an enterprise whose principal business activities are conducted in PRC seeks to issue and list its shares in the name of an overseas enterprise based on equity, assets, income or other similar rights and interests of the relevant PRC domestic enterprise, such activities are deemed an indirect overseas issuance and listing under the Draft Overseas Listing Regulations. According to the Draft Overseas Listing Regulations, among other things, after making initial applications with overseas stock markets for offerings or listings, all China-based companies shall file with the CSRC within three working days. The required filing materials with the CSRC include (without limitation): (i) record-filing reports and related undertakings, (ii) compliance certificates, filing or approval documents from the primary regulator of the applicants’ businesses (if applicable), (iii) security assessment opinions issued by related departments (if applicable), (iv) PRC legal opinions, and (v) prospectus. In addition, overseas offerings and listings may be prohibited for such China-based companies when any of the following applies: (1) if the intended securities offerings and listings are specifically prohibited by the laws, regulations or provision of the PRC; (2) if the intended securities offerings and listings may constitute a threat to, or endanger national security as reviewed and determined by competent authorities under the State Council in accordance with laws; (3) if there are material ownership disputes over applicants’ equity interests, major assets, core technologies, or the others; (4) if, in the past three years, applicants’ domestic enterprises or controlling shareholders, de facto controllers have committed corruption, bribery, embezzlement, misappropriation of property, or other criminal offenses disruptive to the order of the socialist market economy, or are currently under judicial investigation for suspicion of criminal offenses, or are under investigation for suspicion of major violations; (5) if, in the past three years, any directors, supervisors, or senior executives of applicants have been subject to administrative punishments for severe violations, or are currently under judicial investigation for suspicion of criminal offenses, or are under investigation for suspicion of major violations; (6) other circumstances as prescribed by the State Council. The Draft Administrative Provisions further stipulate that a fine between RMB 1 million and RMB 10 million may be imposed if an applicant fails to fulfill the filing requirements with the CSRC or conducts an overseas offering or listing in violation of the Draft Rules Regarding Overseas Listings, and in cases of severe violations, a parallel order to suspend relevant businesses or halt operations for rectification may be issued, and relevant business permits or operational license revoked.

Regulations Relating to Foreign Investment

Investment activities in the PRC by foreign investors are principally governed by the Industry Guidelines of Encouraged Foreign Investment, or the Industry Guidelines, effective on January 27, 2021, and the Special Administrative Measures for Entrance of Foreign Investment (Negative List), or the Negative List, effective on July 23, 2020, and together with the PRC Foreign Investment Law, which took effect on January 1, 2020, and its respective implementation rules and ancillary regulations. The Industry Guidelines and the Negative List lay out the basic framework for foreign investments in China, classifying businesses into three categories with regard to foreign investments: “encouraged”, “restricted” and “prohibited”. Industries not listed in the Industry Guidelines or the Negative List are generally deemed as falling into a fourth category “permitted” unless specifically restricted by other PRC laws. The Negative List specifies that Investment in Internet news service, Internet publishing service, Internet audio-visual program service, cyber culture operation (except for music) and Internet information dissemination service (except for contents opened up in China’s WTO commitments) shall be prohibited.

According to the PRC Foreign Investment Law, foreign investments shall enjoy pre-entry national treatment, except for those foreign-invested entities that operate in industries deemed to be either “restricted” or “prohibited” in the “negative list.” While foreign investors shall refrain from investing in any of the foreign “prohibited” industries, foreign-invested entities operating in foreign “restricted” industries shall require market entry clearance and other approvals from relevant PRC governmental authorities. Furthermore, the PRC Foreign Investment Law provides that foreign-invested enterprises that have been established before the implementation of PRC Foreign Investment Law according to the then existing laws regulating foreign investments may maintain their structure and corporate governance within five years after the implementation of the PRC Foreign Investment Law.

On December 19, 2020, MOFCOM and NDRC released the Measures for the Security Review of Foreign Investments, which took effect on January 18, 2021.For foreign investments within the following scope, foreign investors or the relevant parties in China (hereinafter referred to collectively as the “parties concerned”) shall take the initiative to declare to the office of the working mechanism prior to implementation of the investments:…(II) investments in important agricultural products, important energy and resources, important equipment manufacturing, important infrastructure, important transport services, important cultural products and services, important information technology and Internet products and services, important financial services, key technologies and other important fields relating to national security, and obtaining the actual controlling stake in the investee enterprise. Prior to a decision made by the office of the working mechanism, the parties concerned shall not make the investment. The parties concerned shall not make the investment unless the office of the working mechanism decides that security review is not required. Where the declared foreign investment affects national security, a decision on prohibiting the investment shall be made. Foreign-invested entities of the group have businesses that conduct Internet services, but not related to national security within the scope of the regulations above.

On December 26, 2019, the State Council promulgated the Regulations for Implementing the PRC Foreign Investment Law, which took effect on January 1, 2020. The implementation regulations further clarified that the State encourages and promotes foreign investments, protects the lawful rights and interests of foreign investors, regulates foreign investment administration, continues to optimize foreign investment environment, and advances a higher-level opening.

On December 30, 2019, MOFCOM and SAMR jointly promulgated the Measures for Information Reporting on Foreign Investment, which became effective on January 1, 2020. Pursuant to the Measures for Information Reporting on Foreign Investment, where a foreign investor carries out investment activities in China directly or indirectly, the foreign investor or the foreign-invested enterprise shall submit the investment information to the competent commerce department.

Regulations related to Anti-Monopoly and Competition

On August 17, 2021, the State Administration for Market Regulation, or the SAMR, issued a discussion draft of Provisions on the Prohibition of Unfair Competition on the Internet, under which business operators should not use data or algorithms to hijack traffic or influence users’ choices, or use technical means to illegally capture or use other business operators’ data. Furthermore, business operators are not allowed to (i) fabricate or spread misleading information to damage the reputation of competitors, or (ii) employ marketing practices such as fake reviews or use coupons or “red envelopes” to entice positive ratings.

On September 11, 2020, the Anti-Monopoly Commission of the State Council issued Anti-Monopoly Compliance Guideline for Operators, which requires operators to establish anti-monopoly compliance management systems under the PRC Anti-Monopoly Law to manage anti-monopoly compliance risks. On February 7, 2021, the Anti-Monopoly Commission of the State Council published Anti-Monopoly Guidelines for the Internet Platform Economy Sector that specified circumstances where an activity of an internet platform will be identified as monopolistic act as well as concentration filing procedures for business operators, including those involving variable interest entities, or the VIEs. According to the PRC Anti-Monopoly Law, if a business operator carries out a concentration in violation of the law, the relevant authority shall order the business operator to terminate the concentration, dispose of the shares or assets or transfer the business within a specified time limit, or take other measures to restore the pre-concentration status, and impose a fine of up to RMB500,000.

On October 23, 2021, the Standing Committee of the National People’s Congress issued a discussion draft of the amended Anti-Monopoly Law, which proposes to increase the fines for illegal concentration of business operators to no more than ten percent of its last year’s sales revenue if the concentration of business operator has or may have an effect of excluding or limiting competitions; or a fine of up to RMB5 million if the concentration of business operator does not have an effect of excluding or limiting competition. The draft also proposes that the relevant authority shall investigate a transaction where there is any evidence that the concentration has or may have the effect of eliminating or restricting competitions, even if such concentration does not reach the filing threshold.

Regulations Relating to Value-added Telecommunications Services

Pursuant to the Provisions on Administration of Foreign-Invested Telecommunications Enterprises which was promulgated by the State Council on December 11, 2001 and amended on September 10, 2008 and February 6, 2016, or the FITE Regulations, and the Telecommunications Regulations of the PRC, or the Telecom Regulations, promulgated by the PRC State Council on September 25, 2000 and most recently amended on February 6, 2016, telecom operators shall apply for a telecommunications business permit pursuant to the provisions of these Regulations. No organization or individual shall engage in telecommunications business without obtaining a telecommunications business permit. In addition, the ultimate foreign equity ownership in a value-added telecommunications services provider shall not exceed 50%. Moreover, for a foreign investor to acquire any equity interest in value-added telecommunication business in China, it must satisfy a number of stringent performance and operational experience requirements, including demonstrating good track records and experience in operating value-added telecommunication business overseas.

On June 19, 2015, the Ministry of Industry and Information Technology, or the MIIT, issued the Circular on Removing the Restrictions on Equity Ratio Held by Foreign Investors in Online Data Processing and Transaction Processing (Operating E-Commerce) Business, allowing foreign investors to own 100% of equity interest in an operator of “operating e-commerce” business. The latest Negative List further provides that foreign investors are allowed to hold more than 50% equity interests in a value-added telecommunications service provider engaging in e-commerce, domestic multiparty communication, storage-and-forward and call center businesses, while other requirements with respect to track record and experience provided by the FITE Regulations shall still apply and foreign investors are still prohibited from holding more than 50% of equity interest in a provider of other subcategories of value-added telecommunications services.

Regulations Relating to Cybersecurity and Privacy Protection

The PRC Constitution states that PRC law protects the freedom and privacy of communications of citizens and prohibits infringement of these rights. In recent years, PRC government authorities have enacted legislation on the Internet use to protect personal information from any unauthorized disclosure. Under the Several Provisions on Regulating the Market Order of Internet Information Services which was promulgated by MIIT on December 29, 2011, an Internet content service operator may not collect any user personal information or provide any such information to third parties without the consent of a user, unless otherwise stipulated by laws and administrative regulations. An Internet content service operator must expressly inform the users of the method, content and purpose of the collection and processing of such user personal information and may only collect such information necessary for the provision of its services. An Internet content service operator is also required to properly keep the user personal information, and in case of any leak or likely leak of the user personal information, the Internet content service operator must take immediate remedial measures and, in severe circumstances, to make an immediate report to the telecommunication regulatory authority.

In addition, the Decision on Strengthening Network Information Protection, which was promulgated by the Standing Committee of NPC on December 28, 2012, provides that electronic information that is able to identify personal identities of citizens or is concerned with personal privacy of citizens is protected by law and shall not be unlawfully obtained or provided. Internet content service operators collecting or using personal electronic information of citizens shall specify purposes, manners and scopes of information collection and use, obtain the consent of citizens concerned, and strictly keep confidential personal information collected. Internet content service operators are prohibited from disclosing, tampering with, damaging, selling or illegally providing others with personal information collected. Technical and other measures are required to be taken by Internet content service operators to prevent personal information collected from unauthorized disclosure, damage or being lost. Internet content service operators are subject to legal liability, including warnings, fines, confiscation of illegal gains, revocation of licenses or filings, closing of websites concerned, public security administration punishment, criminal liabilities, or civil liabilities, if they violate relevant provisions on Internet privacy.

Pursuant to the Order for the Protection of Telecommunication and Internet User Personal Information which was promulgated by MIIT on July 16, 2013, any collection and use of users’ personal information must be subject to the consent of the users, abide by the principles of legality, rationality and necessity and be within the specified purposes, methods and scopes. Pursuant to the Ninth Amendment to the Criminal Law which was issued by the Standing Committee of NPC on August 29, 2015 and became effective on November 1, 2015, any Internet service provider that fails to fulfill obligations to manage information and network security as required by applicable laws and refuses to rectify upon orders from government authorities, will be subject to the criminal penalty if such failure (i) causes dissemination of illegal information in large scale; (ii) causes user information leaks resulting in severe consequences; (iii) causes serious loss of evidence to criminal investigations; or (iv) implicates other severe circumstances. Moreover, any individual or entity that (i) sells or provides personal information to others in violation of applicable laws, or (ii) steals or illegally obtains any personal information, in either case implicating severe circumstances, will be subject to the criminal penalty. The PRC government, however, has the power and authority to order Internet content service operators to turn over personal information if an Internet user posts any prohibited content or engages in illegal activities on the Internet.

To further regulate cybersecurity and privacy protection, the PRC Cybersecurity Law which was promulgated by the Standing Committee of NPC on November 7, 2016 and took effect on June 1, 2017, provides that: subject to certain exceptions, (i) to collect and use personal information, network operators must follow the principles of legitimacy, rightfulness, and necessity, disclose their rules of data collection and use, clearly express the purposes, means, and scope of collecting and using the information, and obtain the consent of the persons whose data is gathered; (ii) network operators can neither gather personal information unrelated to the services they provide, nor gather or use personal information in violation of the provisions of laws and administrative regulations or the scopes of consent given by the persons whose data is gathered, and must dispose of personal information they have saved in accordance with the provisions of laws and administrative regulations and agreements reached with users; (iii) network operators cannot divulge, tamper with, or damage the personal information they have collected, and cannot provide the personal information to others without the consent of persons whose data is collected. According to the PRC Cybersecurity Law, personal information refers to all kinds of information that are recorded electronically or that can otherwise be used to independently identify or be combined with other information to identify natural persons’ personal information, including but not limited to natural persons’ names, dates of birth, identification numbers, biologically identified personal information, addresses, and telephone numbers. Any Internet information services provider that violates these privacy protection requirements under the PRC Cybersecurity Law and related laws and regulations may be ordered to turn in illegal gains generated from unlawful operations and pay a fine of no less than one but no more than ten times of the illegal gains and may be ordered to cease the relevant business operations when the violation is serious.

On June 28, 2016, the CAC issued the Administrative Provisions on Mobile Internet Applications Information Services, which became effective on August 1, 2016, to further strengthen the regulation of the mobile app information services. Pursuant to these provisions, owners or operators of mobile apps that provide information services are required to be responsible for information security management, establish and improve the protective mechanism for user information, observe the principles of legality, rightfulness and necessity, and expressly state the purpose, method and scope of, and obtain user consent to, the collection and use of users’ personal information.

On May 8, 2017, the Supreme People’s Court and the Supreme People’s Procuratorate issued the Interpretations of the Supreme People’s Court and the Supreme People’s Procuratorate on Several Issues Concerning the Application of Law in the Handling of Criminal Cases Involving Infringement of Citizens’ Personal Information, or the Personal Information Interpretations, which became effective on June 1, 2017. The Personal Information Interpretations provides more practical conviction and sentencing criteria for the infringement of citizens’ personal information.

On January 23, 2019, the PRC Office of the Central Cyberspace Affairs Commission and other three authorities jointly issued the Circular on the Special Campaign of Correcting Unlawful Collection and Usage of Personal Information via Apps. Pursuant to this circular, (i) app operators are prohibited from collecting any personal information irrelevant to their services; (ii) information collection and usage policy should be presented in a simple and clear way, and such policy should be consented by the users voluntarily, and; (iii) authorization from users should not be obtained by coercing users with default or bundling clauses or making consent a condition of service. App operators violating these rules can be ordered by authorities to correct their noncompliance within a given period of time, be publicly reported, or ordered to quit its operation or cancel its business license or operational permits.

On April 10, 2019, the Ministry of Public Security promulgated the Guidelines for Internet Personal Information Security Protection, which establishes the management mechanism, security technical measures and business workflows for personal information security protection. On August 22, 2019, the CAC promulgated the Provisions on the Cyber Protection of Children’s Personal Information which requires, among others, that network operators who collect, store, use, transfer and disclose personal information of children under the age of 14 shall establish special rules and user agreements for the protection of children’s personal information, inform the children’s guardians in a noticeable and clear manner, and shall obtain the consent of the children’s guardians.

On November 28, 2019, the CAC, MIIT, the Ministry of Public Security and SAMR jointly promulgated the Measures for the Determination of the Collection and Use of Personal Information by Apps in Violation of Laws and Regulations, which provides guidance for the regulatory authorities to identify the illegal collection and use of personal information through mobile apps, and for the app operators to conduct self-examination and self-correction and social supervision by citizens.

On May 28, 2020, the NPC approved the Civil Code of the PRC or the Civil Code, which came into effect on January 1, 2021. Pursuant to the Civil Code, the personal information of a natural person shall be protected by the law. Any organization or individual that needs to obtain personal information of others shall obtain such information legally and ensure the safety of such information, and shall not illegally collect, use, process or transmit personal information of others, or illegally purchase or sell, provide or make public personal information of others. Furthermore, information processors shall not divulge or tamper with personal information collected or stored by them; without the consent of a natural person, information processors shall not illegally provide personal information of such person to others, except for information that has been processed so that specific persons cannot be identified and that cannot be restored. In addition, an information processor shall take technical measures and other necessary measures to ensure the security of the personal information that is collected and stored and to prevent the information from being divulged, tampered with or lost; where personal information has been or may be divulged, tampered with or lost, the information processor shall take remedial measures in a timely manner, inform the natural person concerned in accordance with the provisions and report the case to the relevant competent department.

On August 20, 2021, the SCNPC adopted the Personal Information Security Law, which took effect on November 1, 2021. The Personal Information Protection Law includes the basic rules for personal information processing, the rules for cross-border provision of personal information, the rights of individuals in personal information processing activities, the obligations of personal information processors, and the legal responsibilities for illegal collection, processing, and use of personal information. As the first systematic and comprehensive law specifically for the protection of personal information in the PRC, the Personal Information Protection Law provides, among others, that (i) an individual’s consent shall be obtained to use sensitive personal information, such as biometric characteristics and individual location tracking, (ii) personal information operators using sensitive personal information shall notify individuals of the necessity of such use and impact on the individual’s rights, and (iii) where personal information operators reject an individual’s request to exercise his or her rights, the individual may file a lawsuit with a People’s Court.

On November 14, 2021, the CAC published the Regulations of Internet Data Security Management (Draft for Comments), which further regulate the internet data processing activities and emphasize the supervision and management of network data security, and further stipulate the obligations of internet platform operators, such as to establish a system for disclosure of platform rules, privacy policies and algorithmic strategies related to data. Specifically, the draft regulations require data processors to, among others, (i) adopt immediate remediation measures when finding that network products and services they use or provide have security defects and vulnerabilities, or threaten national security or endanger public interest, and (ii) follow a series of detailed requirements with respect to processing of personal information, management of important data and proposed overseas transfer of data. In addition, the draft regulations require data processors handling important data or the data processors to be listed overseas to complete an annual data security assessment and file a data security assessment report to applicable regulators. Such annual assessment, as required by the draft regulations, would encompass areas including, but not limited to, the status of important data processing, data security risks identified and the measures adopted, the effectiveness of data protection measures, the implementation of national data security laws and regulations, data security incidents that occurred and their handling, and a security assessment with respect to sharing and provision of important data overseas. As of the date of this report, the draft regulations have been released for public comment only and have not been formally adopted. The final provisions and the timeline for its adoption are subject to changes and uncertainties.

We currently operate an online trading platform, primarily engaged in sales of products to our customers in China, where our customers can register as members first, and then search for, purchase or sell any desired food and beverage products. Our online platform collects and transmits product, supplier and customer information and data. Since our online trading platform has only been in operation for about a year, we are in the process of studying the newly issued rules and regulations governing cybersecurity and data protection and the industry best practice, as well as assessing the extent to which our information and data system is not in full compliance with the various requirements under the newly proposed regulations.

We are committed to taking the necessary actions to satisfy the effective personal information protection and internet data security regulatory requirements. We have designed a user information protection mechanism, which includes the following measures: (i) adopt data security technical measures by the introduction of an extended verification (EV) SSL certificate at the user information security technology implementation level, offering strong encryption technology and extended verification function, and providing security guarantee for online transactions; (ii) improve the technical level protection and the monitoring mechanism for data use, and for the data modules related to user information in the e-commerce platform system, use MD5 irreversible encryption for storage and display of information security sensitive fields; (iii) develop a complete personal information operation process and system, and designate responsible personnel system for information security work; (iv) develop a user information collection, storage and user rules and privacy agreement, following the “inform + express consent” model, informing users of the purpose, method and scope of information collection and use, as well as the channels for inquiring and correcting inaccuracies in information and data; (v) conduct assessments on technology, operational risks and system common issues, and data security governance; (vi) voluntarily engage a data security service organization to conduct an annual data security assessment and fulfil reporting obligations if required by applicable rules and regulations; (vii) establish an emergency plan for personal information security incidents, which includes, among other things, an emergency response mechanism for security incidents, incident impact assessment and mitigation measures, and emergency response training and drills; (viii) provide training to employees; and (ix) promote consumer data protection awareness and education engagement. We have implemented most of above measures and plan to put in place the remaining measures by mid-2022. We are committed to taking the necessary actions to satisfy the effective personal information protection and internet data security regulatory requirements in accordance with the applicable laws.

Regulations Relating to Intellectual Property Rights

Patent

Patents in the PRC are principally protected under the Patent Law of the PRC. The duration of a patent right is either 10 years or 15 year or 20 years from the date of application, depending on the type of patent right. The Patent Law of the PRC and its implementation rules provide for three types of patents, namely, “invention”, “utility model” and “design”. Invention patents are valid for twenty years, utility model patents are valid for fifteen years, while design patents are valid for ten years, from the date of application. The Chinese patent system adopts a “first-to-file” principle, which means that where more than one person files a patent application for the same invention, a patent will be granted to the person who files the application first. To be patentable, invention or utility models must meet three criteria: novelty, inventiveness and practicability. A third party must obtain consent or a proper license from the patent owner to use the patent. Otherwise, the use constitutes an infringement of the patent rights.

Copyright

Copyright in the PRC, including copyrighted software, is principally protected under the Copyright Law of the PRC and related rules and regulations. Under the Copyright Law, promulgated in September 1990, implemented in June 1991, amended in October 2001, February 2010 and November 2020, and effective on June 1, 2021 the term of protection for copyrighted software is 50 years. The Regulation on the Protection of the Right to Communicate Works to the Public over Information Networks, as most recently amended on January 30, 2013, provides specific rules on fair use, statutory license, and a safe harbor for use of copyrights and copyright management technology and specifies the liabilities of various entities for violations, including copyright holders, libraries and Internet service providers.

Trademark

Registered Trademarks are protected by the PRC Trademark Law which was adopted by the Standing Committee of NPC on August 23, 1982 and most recently amended on April 23, 2019 as well as the Implementation Regulation of the PRC Trademark Law which was adopted by the State Council on August 3, 2002 and amended on April 29, 2014. The Trademark Office of the National Intellectual Property Administration under SAMR handles trademark registrations and grants a term of ten years to registered trademarks which may be renewed for consecutive ten-year periods upon request by the trademark owner. For licensed use of a registered trademark, the licensor shall file record of the licensing of the said trademark with the Trademark Office, otherwise it may not defend against a bona fide third party. The PRC Trademark Law has adopted a “first-to-file” principle with respect to trademark registration. Where a trademark for which a registration has been made is identical or similar to another trademark which has already been registered or been subject to a preliminary examination and approval for use on the same kind of or similar commodities or services, the application for registration of such trademark may be rejected. Any person applying for the registration of a trademark may not prejudice the existing right first obtained by others, nor may any person register in advance a trademark that has already been used by another party and has already gained a “sufficient degree of reputation” through such party’s use.

Under PRC law, any of the following acts will be deemed as an infringement to the exclusive right to use a registered trademark: (i) use of a trademark that is the same as or similar to a registered trademark for identical or similar goods without the permission of the trademark registrant; (ii) sale of any goods that have infringed the exclusive right to use any registered trademark; (iii) counterfeit or unauthorized production of the label of another’s registered trademark, or sale of any such label that is counterfeited or produced without authorization; (iv) change of any trademark of a registrant without the registrant’s consent, and selling goods bearing such replaced trademark on the market; or (v) other acts that have caused any other damage to another’s exclusive right to use a registered trademark.

According to the PRC Trademark Law, in the event of any of the foregoing acts, the infringing party will be ordered to stop the infringement immediately and may be imposed a fine; the counterfeit goods will be confiscated. The infringing party may also be held liable for the right holder’s damages, which will be equal to the losses suffered by the right holder as a result of the infringement, including reasonable expenses incurred by the right holder for stopping the infringement, or the gains obtained by the infringing party if the losses are difficult to be ascertained. If both gains and losses are difficult to be ascertained, the damages may be determined by referring to the amount of royalties for the license of such trademarks, which will be one to five times of the royalties in the case of any serious infringement with malicious intent. If the gains, losses and royalties are all difficult to be ascertained, the court may render a judgment awarding damages no more than RMB5 million. Notwithstanding the above, if a distributor does not know that the goods it sells infringe another’s registered trademark, it will not be liable for infringement provided that the seller shall prove that the goods are lawfully obtained and identify its supplier.

Domain Name

Domain names are protected under the Administrative Measures on Internet Domain Names promulgated by the MIIT on August 24, 2017 and effective as of November 1, 2017. Domain name registrations are handled through domain name service agencies established under the relevant regulations, and applicants become domain name holders upon successful registration.

Regulations Relating to Foreign Exchange

Regulations on Foreign Currency Exchange

The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, most recently amended on August 5, 2008. Under PRC foreign exchange regulations, payments of current account items, such as profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from the State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. By contrast, approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital account items, such as direct investments, repayment of foreign currency-denominated loans, repatriation of investments and investments in securities outside of China.

On November 19, 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, or Circular 59, which substantially amends and simplifies the current foreign exchange procedure. Pursuant to Circular 59, the opening of various special purpose foreign exchange accounts, such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts, the reinvestment of RMB proceeds derived by foreign investors in the PRC, and remittance of foreign exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders no longer require the approval or verification of SAFE, and multiple capital accounts for the same entity may be opened in different provinces, which was not possible previously. In 2013, SAFE specified that the administration by SAFE or its local branches over direct investment by foreign investors in the PRC must be conducted by way of registration and banks must process foreign exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE and its branches. In February 2015, SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment, or SAFE Notice 13. Instead of applying for approvals regarding foreign exchange registrations of foreign direct investment and overseas direct investment from SAFE, entities and individuals may apply for such foreign exchange registrations from qualified banks. The qualified banks, under the supervision of SAFE, may directly review the applications and conduct the registration.

In March 2015, SAFE promulgated the Circular of the SAFE on Reforming the Management Approach regarding the Settlement of Foreign Capital of Foreign-invested Enterprise, or Circular 19, which expands a pilot reform of the administration of the settlement of the foreign exchange capitals of foreign-invested enterprises nationwide. Circular 19 replaced both the Circular of the SAFE on Issues Relating to the Improvement of Business Operations with Respect to the Administration of Foreign Exchange Capital Payment and Settlement of Foreign-invested Enterprises, or Circular 142, and the Circular of the SAFE on Issues concerning the Pilot Reform of the Administrative Approach Regarding the Settlement of the Foreign Exchange Capitals of Foreign-invested Enterprises in Certain Areas, or Circular 36. Circular 19 allows all foreign-invested enterprises established in the PRC to settle their foreign exchange capital on a discretionary basis according to the actual needs of their business operation, provides the procedures for foreign invested companies to use Renminbi converted from foreign currency-denominated capital for equity investments and removes certain other restrictions that had been provided in Circular 142. However, Circular 19 continues to prohibit foreign-invested enterprises from, among other things, using RMB funds converted from their foreign exchange capital for expenditure beyond their business scope and providing entrusted loans or repaying loans between non-financial enterprises. SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or Circular 16, effective June 2016, which reiterates some of the rules set forth in Circular 19. Circular 16 provides that discretionary foreign exchange settlement applies to foreign exchange capital, foreign debt offering proceeds and remitted foreign listing proceeds, and the corresponding RMB capital converted from foreign exchange may be used to extend loans to related parties or repay inter-company loans (including advances by third parties). However, there are substantial uncertainties with respect to Circular 16’s interpretation and implementation in practice. Circular 19 or Circular 16 may delay or limit us from using the proceeds of offshore offerings to make additional capital contributions to our PRC subsidiaries and any violations of these circulars could result in severe monetary or other penalties.

In January 2017, SAFE promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing Genuineness and Compliance Verification, or Circular 3, which stipulates several capital control measures with respect to the outbound remittance of profits from domestic entities to offshore entities, including (i) banks must check whether the transaction is genuine by reviewing board resolutions regarding profit distribution, original copies of tax filing records and audited financial statements, and (ii) domestic entities must retain income to account for previous years’ losses before remitting any profits. Moreover, pursuant to Circular 3, domestic entities must explain in detail the sources of capital and how the capital will be used, and provide board resolutions, contracts and other proof as a part of the registration procedure for outbound investment.

On October 23, 2019, SAFE issued Circular of the State Administration of Foreign Exchange on Further Promoting the Facilitation of Cross-border Trade and Investment, or the Circular 28, which took effect on the same day. Circular 28 allows non-investment foreign-invested enterprises to use their capital funds to make equity investments in China, provided that such investments do not violate the effective special entry management measures for foreign investment (negative list) and the target investment projects are genuine and in compliance with laws.

Regulation on Foreign Debt

A loan made by a foreign entity as direct or indirect shareholder in a FIE is considered to be foreign debt in China and is regulated by various laws and regulations, including the Regulation of the People’s Republic of China on Foreign Exchange Administration, the Interim Provisions on the Management of Foreign Debts, the Statistical Monitoring of Foreign Debts Tentative Provisions, the Detailed Rules for the Implementation of Provisional Regulations on Statistics and Supervision of External Debt, and the Administrative Measures for Registration of Foreign Debts. Under these rules and regulations, a shareholder loan in the form of foreign debt made to a PRC entity does not require the prior approval of SAFE. However, such foreign debt must be registered with and recorded by SAFE or its local branches within fifteen (15) business days after entering into the foreign debt contract. Pursuant to these rules and regulations, the maximum amount of the aggregate of (i) the outstanding balance of foreign debts with a term not longer than one year, and (ii) the accumulated amount of foreign debts with a term longer than one year, of a FIE shall not exceed the difference between its registered total investment and its registered capital, or Total Investment and Registered Capital Balance.

On January 12, 2017, the People’s Bank of China, or PBOC, promulgated the Notice of the People’s Bank of China on Matters concerning the Macro-Prudential Management of Full-Covered Cross-Border Financing, or PBOC Circular 9, which sets forth an upper limit for PRC entities, including FIEs and domestic enterprises, regarding their foreign debts. Pursuant to PBOC Circular 9, the outstanding cross-border financing of an enterprise (the outstanding balance drawn, here and below) shall be calculated using a risk-weighted approach, or Risk-Weighted Approach, and shall not exceed the specified upper limit, namely: risk-weighted outstanding cross-border financing £ the upper limit of risk-weighted outstanding cross-border financing. Risk-weighted outstanding cross-border financing =∑ outstanding amount of RMB and foreign currency denominated cross-border financing * maturity risk conversion factor * type risk conversion factor +∑ outstanding foreign currency denominated cross-border financing * exchange rate risk conversion factor. Maturity risk conversion factor shall be 1 for medium- and long-term cross-border financing with a term of more than one year and 1.5 for short-term cross-border financing with a term of one year or less than one year. Type risk conversion factor shall be 1 for on-balance-sheet financing and 1 for off-balance-sheet financing (contingent liabilities) for the time being. Exchange rate risk conversion factor shall be 0.5. The PBOC Circular 9 further provides that the upper limit of risk-weighted outstanding cross-border financing for enterprises, or Net Asset Limits, shall be 200% of its net assets. The PBOC Circular 9 does not supersede the Interim Provisions on the Management of Foreign Debts, but rather serves as a supplement to it. PBOC Circular 9 provided for a one-year transitional period, or the Transitional Period, from its promulgation date for FIEs, during which period FIEs could choose to calculate their maximum amount of foreign debt based on either (i) the Total Investment and Registered Capital Balance, or (ii) the Risk-Weighted Approach and the Net Asset Limits. Under the PBOC Circular 9, after the Transitional Period ends on January 11, 2018, the PBOC and SAFE will determine the cross-border financing administration mechanism for the foreign-invested enterprises after evaluating the overall implementation of PBOC Circular 9. In addition, according to PBOC Circular 9, a foreign loan must be filed with SAFE through the online filing system of SAFE after the loan agreement is signed and at least three business days prior to the borrower withdraws any amount from such foreign loan.

Regulation on Foreign Exchange Registration of Overseas Investment by PRC Residents

On July 4, 2014, SAFE issued Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment Through Special Purpose Vehicles, or SAFE Circular 37, that requires PRC residents, including PRC resident natural persons or PRC entities, to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. The term “control” under SAFE Circular 37 is broadly defined as the operation rights, beneficiary rights or decision-making rights acquired by the PRC residents in the offshore special purpose vehicles by such means as acquisition, trust, proxy, voting rights, repurchase, convertible bonds or other arrangements. In addition, such PRC residents must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions. SAFE further enacted the Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13, which allows PRC residents to register with qualified banks in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. However, remedial registration applications made by PRC residents that previously failed to comply with the SAFE Circular 37 continue to fall under the jurisdiction of the relevant local branch of SAFE. Few remedial registration applications have in fact been approved by the SAFE or its local branch.

In the event that a PRC resident holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from distributing profits to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls.

Regulations Relating to Employment, Social Insurance and housing fund

The Labor Law and The Labor Contract Law provide requirements concerning employment contracts between an employer and its employees. If an employer fails to enter into a written employment contract with an employee within one year from the date on which the employment relationship is established, the employer must rectify the situation by entering into a written employment contract with the employee and pay the employee twice the employee’s salary for the period from the day following the lapse of one month from the date of establishment of the employment relationship to the day prior to the execution of the written employment contract. All employers must comply with local minimum wage standards. The Labor Contract Law and its implementation rules also require compensation to be paid upon certain terminations, which significantly affects the cost of reducing workforce for employers. In addition, if an employer intends to enforce a non-compete provision with an employee in an employment contract or non-competition agreement, it has to compensate the employee on a monthly basis during the term of the restriction period after the termination or ending of the labor contract. Employers in most cases are also required to provide a severance payment to their employees after their employment relationship are terminated. Violations of the PRC Labor Contract Law and the PRC Labor Law may result in the imposition of fines and other administrative and criminal liability in the case of serious violations.

Enterprises in China are required by PRC laws and regulations to participate in certain employee benefit plans, including social insurance funds, namely a pension plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a maternity insurance plan, and a housing provident fund, and contribute to the plans or funds in amounts equal to certain percentages of salaries, including bonuses and allowances, of the employees as specified by the local government from time to time at locations where they operate their businesses or where they are located. According to the Social Insurance Law, an employer that fails to make social insurance contributions may be ordered to pay the required contributions within a stipulated deadline and be subject to a late fee. If the employer still fails to rectify the failure to make social insurance contributions within the stipulated deadline, it may be subject to a fine ranging from one to three times the amount overdue. According to the Regulations on Management of Housing Fund, an enterprise that fails to make housing fund contributions may be ordered to rectify the noncompliance and pay the required contributions within a stipulated deadline; otherwise, an application may be made to a local court for compulsory enforcement.

Regulations on Taxes

Enterprise Income Tax

Under the Enterprise Income Tax Law of the PRC, or the EIT Law, which became effective on January 1, 2008 and was subsequently amended on February 24, 2017 and December 29, 2018, and its implementing rules, enterprises are classified as resident enterprises and non-resident enterprises. PRC resident enterprises typically pay an enterprise income tax at the rate of 25% while non-PRC resident enterprises without any branches in the PRC should pay an enterprise income tax in connection with their income from the PRC at the tax rate of 10%. An enterprise established outside of the PRC with its “de facto management bodies” located within the PRC is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a PRC domestic enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define a de facto management body as a managing body that in practice exercises “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. Enterprises qualified as “High and New Technology Enterprises” are entitled to a 15% enterprise income tax rate rather than the 25% uniform statutory tax rate. The preferential tax treatment continues as long as an enterprise can retain its “High and New Technology Enterprise” status.

The EIT Law and the implementation rules provide that an income tax rate of 10% should normally be applicable to dividends payable to investors that are “non-resident enterprises,” and gains derived by such investors, which (a) do not have an establishment or place of business in the PRC or (b) have an establishment or place of business in the PRC, but the relevant income is not effectively connected with the establishment or place of business to the extent such dividends and gains are derived from sources within the PRC. Such income tax on the dividends may be reduced pursuant to a tax treaty between China and other jurisdictions. Pursuant to the Arrangement Between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation on Income, or the Double Tax Avoidance Arrangement, and other applicable PRC laws, if a Hong Kong resident enterprise is determined by the competent PRC tax authority to have satisfied the relevant conditions and requirements under such Double Tax Avoidance Arrangement and other applicable laws, the 10% withholding tax on the dividends the Hong Kong resident enterprise receives from a PRC resident enterprise may be reduced to 5% upon receiving approval from in-charge tax authority. However, based on the Notice on Certain Issues with Respect to the Enforcement of Dividend Provisions in Tax Treaties issued on February 20, 2009 by the SAT, if the relevant PRC tax authorities determine, in their discretion, that a company benefits from such reduced income tax rate due to a structure or arrangement that is primarily tax-driven, such PRC tax authorities may adjust the preferential tax treatment; and based on the Announcement on Relevant Issues Concerning the “Beneficial Owners” in Tax Treaties issued on February 3, 2018 by the SAT and effective from April 1, 2018, which replaces the Notice on the Interpretation and Recognition of Beneficial Owners in Tax Treaties and the Announcement on the Recognition of Beneficial Owners in Tax Treaties by the SAT, comprehensive analysis based on the stipulated factor therein and actual circumstances shall be adopted when recognizing the “beneficial owner” and agents and designated wire beneficiaries are specifically excluded from being recognized as “beneficial owners.”

Value-added Tax

Pursuant to applicable PRC tax regulations, any entity or individual conducting business in the service industry used to be generally required to pay a business tax at the rate of 5% on the revenues generated from providing such services. However, if the services provided are related to technology development and transfer, such business tax may be exempted subject to approval by the relevant tax authorities. Whereas, pursuant to the Provisional Regulations on Value-Added Tax of the PRC and its implementation regulations, unless otherwise specified by relevant laws and regulations, any entity or individual engaged in the sales of goods, provision of processing, repairs and replacement services and importation of goods into China is generally required to pay a value-added tax, or VAT, for revenues generated from sales of products, while qualified input VAT paid on taxable purchase can be offset against such output VAT.

In November 2011, the Ministry of Finance and the State Administration of Taxation promulgated the Pilot Plan for Imposition of Value-Added Tax to Replace Business Tax. In March 2016, the Ministry of Finance and the State Administration of Taxation further promulgated the Notice on Fully Promoting the Pilot Plan for Replacing Business Tax by Value-Added Tax, which became effective on May 1, 2016. Pursuant to the pilot plan and relevant notices, VAT is generally imposed in lieu of business tax in the modern service industries, including the VATS, on a nationwide basis. VAT of a rate of 6% applies to revenue derived from the provision of some modern services. Certain small taxpayers under PRC law are subject to reduced value-added tax at a rate of 3%. Unlike business tax, a taxpayer is allowed to offset the qualified input VAT paid on taxable purchases against the output VAT chargeable on the modern services provided.

On April 4, 2018, the Ministry of Finance and the State Administration of Taxation issued the Notice on Adjustment of VAT Rates, which came into effect on May 1, 2018. According to the abovementioned notice, the taxable goods previously subject to VAT rates of 17% and 11%, respectively, become subject to lower VAT rates of 16% and 10%, respectively, starting from May 1, 2018. Furthermore, according to the Announcement on Relevant Policies for Deepening Value-added Tax Reform jointly promulgated by the Ministry of Finance, the State Administration of Taxation and the General Administration of Customs, which became effective on April 1, 2019, the taxable goods previously subject to VAT rates of 16% and 10%, respectively, become subject to lower VAT rates of 13% and 9%, respectively, starting from April 1, 2019. Under Provisional Regulations of the People’s Republic of China on Value-added Tax, amended and effective on November 19, 2017, for entities that are VAT small taxpayers, VAT is levied at a levy rate of 3%. On February 29, 2020, the State Administration of Taxation issued the Announcement on Taxation Matters to Support Individual Businesses in Resumption of Business, during the COVID-19, the small taxpayers are allowed to enjoy the preferred tax policy, tax rate from 3% to 1% for the period from March 1, 2020 to December 31, 2021.

Intellectual Property

Protection of our intellectual property is a strategic priority for our business. We rely primarily on a combination of trademark and trade secret laws to establish and protect our proprietary rights.

We currently have seven registered trademarks in China as follows:

Trademark Number		Issue Date		Expiration Date		Trademark Title
9680266		August 21, 2012		August 20, 2032		法蓝图
9680456		August 21, 2012		August 20, 2032
49535965		August 14, 2012		August 13, 2032
9680892		August 14, 2012		August 13, 2032
9680140		August 13, 2012		August 13, 2032
37266704		December 21, 2019		December 20, 2029
37258329		December 21, 2019		December 20, 2029

Some of our products and services bear the registered trademarks of “ ” (“水宜家”) or “Shui Yi Jia.” These trademarks are owned by Yuwen Li, one of our shareholders. Yuwen Li has signed a license agreement with Xixingdao to authorize Xixingdao to use those trademarks at no cost to us. Pursuant to the agreement with Mr. Li, titles to those trademarks will be transferred to Xixingdao upon the completion of the registration transfer.

We currently have the following three registered works copyrights in China:

We currently have the following eighteen registered software copyrights in China

We currently have the following registered Internet domain names in China:

All of our employees are based in the cities of Shenzhen and Dongguan, where our operations are located.

Our board of directors provides oversight on certain human capital matters, including diversity, and our employee rewards and benefits program. Under the board’s oversight, the Company conducts employee retention reviews to attract, retain and develop a workforce that aligns with our values and strategies.

Corporate Culture and People Philosophy

We believe that employees with strong people philosophy and people-based corporate culture are likely to develop a strong sense of belonging in the organization. We care about employees’ interests and personal preferences and offer each employee with the best job suitable for their skillset and career interest. We support a transparent and accessible corporate culture to make management and team leaders accessible to employees. We value the benefits of two-ways communications (top-down and bottom-up) to hear the voices from the employees to promote the strong sense of belonging in our Company.

Employee Training and Talent Development

Training and self-development programs are provided to employees periodically which include customer service training, financial controller training, delivery procedures training, compliance training on industry related government rules and regulations, as well as informal training. Employees are encouraged to participate in different training programs to enhance their problem-solving skills, advancement and continuous self-development.

We support employee involvement and personal and professional development in our Company. We engage employees and offer continued opportunities for growth.

Diversity, Inclusion and Equal Opportunities

We are committed to gender equality by providing fair recruitment, training and promotion opportunities for all employees. At the year-end of 2021, female employees represented approximately 40% of the total workforce. We aim to invest in developing talented leaders across all management levels including increased women members of management at our company and subsidiaries.

In addition to gender equality, we also seek to hire employees from different educational background, profession, demographics and regions. We have hired employees from different ethnicities, backgrounds and regions all across mainland China. In order to retain the best available candidates, we evaluate the qualifications and experience of the employees through interviews and professional references to recruit the right persons from a wide range of sources. We aim to create an inclusive workplace, further promote a diverse workforce, and bring in new cultures and energy.

Employment Benefits

As required by PRC regulations, we participate in various government statutory employee benefit plans, including social insurance funds, namely a pension contribution plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan, a maternity insurance plan and a housing provident fund. We are required under PRC law to make contributions to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local government from time to time. We previously had not made all employee benefit payments, and may be required to make up the contributions for these plans as well as to pay late fees and fines.

We believe that we maintain a good working relationship with our employees, and we have not experienced any major labor disputes.

Available Information

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are filed with the Securities and Exchange Commission (the “SEC”). Such reports and other information filed by the Company with the SEC are available free of charge on our corporate website (http://www.fvti.show/ as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. The foregoing website addresses are provided as inactive textual references only. We periodically provide other information for investors on our corporate website. This includes press releases and other information about financial performance and information on corporate governance. The information contained on the websites referenced in this Form 10-K is not part of this report and is not incorporated by reference into this filing.