MALG 10-Q
Microalliance Group Inc. (MALG)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
(Mark One)
For the quarterly period ended
or
For the transition period from __________ to __________
Commission File Number
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Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
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| ☐ | Smaller reporting company | ||
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TABLE OF CONTENTS
| PART I - FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements | 1 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 2 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 9 |
| Item 4. | Controls and Procedures | 9 |
| PART II - OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 10 |
| Item 1A. | Risk Factors | 10 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 10 |
| Item 3. | Defaults Upon Senior Securities | 10 |
| Item 4. | Mine Safety Disclosures | 10 |
| Item 5. | Other Information | 10 |
| Item 6. | Exhibits | 10 |
| SIGNATURES | 11 | |
i
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FOUNTAIN HEALTHY AGING, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2021 (UNAUDITED)
1
FOUNTAIN HEALTHY AGING, INC.
TABLE OF CONTENTS
F-1
FOUNTAIN HEALTHY AGING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In U.S. Dollars, except share data or otherwise stated)
AS OF JUNE 30, 2021 (UNAUDITED) AND DECEMBER 31, 2020 (AUDITED)
| June 30, 2021 | December 31, 2020 | |||||||
| US$ | US$ | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | ||||||||
| Accounts receivable | - | |||||||
| Other receivables | ||||||||
| Inventory | ||||||||
| Prepayment | ||||||||
| Advance to suppliers | ||||||||
| Amount due from a related party | ||||||||
| Total current assets | ||||||||
| Non-current assets: | ||||||||
| Leasehold improvements and equipment, net | ||||||||
| Intangible assets | ||||||||
| Operating lease right-of-use assets | ||||||||
| Deferred tax assets | ||||||||
| Total non-current assets | ||||||||
| Total assets | ||||||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | ||||||||
| Income tax payables | ||||||||
| Other payables and accruals | ||||||||
| Deferred revenue | ||||||||
| Amount due to related parties | ||||||||
| Current operating lease liabilities | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities: | ||||||||
| Deferred revenue | ||||||||
| Non-current operating lease liabilities | ||||||||
| Total non-current liabilities | ||||||||
| Total liabilities | ||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| EQUITY (DEFICIT) | ||||||||
| Share capital ( | ||||||||
| Series A Preferred Stock | ||||||||
| Common Stock | ||||||||
| Additional paid in capital | ( | ) | ||||||
| Foreign currency translation reserves | ( | ) | ( | ) | ||||
| Retained earnings (Accumulated deficit) | ( | ) | ||||||
| Total equity (deficit) | ( | ) | ||||||
| Total liabilities and equity | ||||||||
The accompanying notes are an integral part of the financial statements.
F-2
FOUNTAIN HEALTHY AGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
(In U.S. Dollars, except share data or otherwise stated)
FOR THE SIX MONTHS ENDED JUNE 30, 2021 AND 2020 (UNAUDITED)
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| US$ | US$ | US$ | US$ | |||||||||||||
| Revenue | ||||||||||||||||
| Cost of revenue | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gross profit | ||||||||||||||||
| Selling and marketing expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| General and administrative expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total operating expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Operating profit (loss) | ( | ) | ( | ) | ||||||||||||
| Other income, net | ||||||||||||||||
| Profit (Loss) before income taxes | ( | ) | ( | ) | ||||||||||||
| Income taxes | ( | ) | ( | ) | - | |||||||||||
| Net profit (loss) for the period | ( | ) | ( | ) | ||||||||||||
| Foreign currency translation differences | ( | ) | ( | ) | ||||||||||||
| Total comprehensive income (loss) for the period | ( | ) | ( | ) | ||||||||||||
| Earnings per share: | ||||||||||||||||
| - Basic | ||||||||||||||||
| - Diluted | ||||||||||||||||
| Weighted average number of shares used in computation: | ||||||||||||||||
| - Basic | ||||||||||||||||
| - Diluted | ||||||||||||||||
The accompanying notes are an integral part of the financial statements.
F-3
FOUNTAIN HEALTHY AGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
(In U.S. Dollars, except share data or otherwise stated)
FOR THE SIX MONTHS ENDED JUNE 30, 2021 AND 2020 (UNAUDITED)
| Share Capital | Foreign | (Accumulated Deficit) Retain Earnings | ||||||||||||||||||||||||||
| Series A preferred Stock | Common Stock | Additional paid in Capital | Currency Translation Reserve | Unrestricted | Statutory Reserve | Total Equity (Deficit) | ||||||||||||||||||||||
| US$ | US$ | US$ | US$ | US$ | US$ | US$ | ||||||||||||||||||||||
| Balance at January 1, 2020 (Audited) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Loss for the period | ( | ) | ( | ) | ||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||||||
| Balance at June 30, 2020 (Unaudited) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance at January 1, 2021 (Audited) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Business combination under common control | ||||||||||||||||||||||||||||
| Profit for the period | ||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balance at June 30, 2021 (Unaudited) | ( | ) | ||||||||||||||||||||||||||
The accompanying notes are an integral part of the financial statements.
F-4
FOUNTAIN HEALTHY AGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In U.S. Dollars, except share data or otherwise stated)
FOR THE SIX MONTHS ENDED JUNE 30, 2021 AND 2020 (UNAUDITED)
| 2021 | 2020 | |||||||
| US$ | US$ | |||||||
| Cash flows from operating activities: | ||||||||
| Net profit (loss) | ( | ) | ||||||
| Adjustments for: | ||||||||
| Depreciation and amortization | ||||||||
| Impairment of intangible assets | - | |||||||
| Changes in: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Other receivables and prepayment | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Advance to suppliers | ( | ) | - | |||||
| Deferred tax assets | ( | ) | - | |||||
| Accounts payable, other payables and accruals | ( | ) | ||||||
| Income tax payables | ||||||||
| Deferred revenue | ( | ) | ||||||
| Amount due from/to related parties | ( | ) | ||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Additions to leasehold improvements and equipment | ( | ) | ( | ) | ||||
| Cash acquired from business combination | - | |||||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ) | ( | ) | ||||
| Net increase (decrease) in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents at the beginning of year | ||||||||
| Cash and cash equivalents at the end of the year | ||||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Income tax paid | - | |||||||
| Right-of-use assets obtained in exchange for operating lease obligations | ||||||||
The accompanying notes are an integral part of the financial statements.
F-5
FOUNTAIN HEALTHY AGING, INC.
CONDENSED CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2021 (UNAUDITED)
| 1. | DESCRIPTION OF BUSINESS |
Fountain Healthy Aging, Inc. and its subsidiaries (the “Company” or “FHAI”) are engaged in the business of wholesale distribution of “coffee tea” and wine products to retail partners and corporate customers, selling “coffee tea” and wine products to individual consumers and providing pre-opening assistance to retail partners to operate coffee and wine stores in the People’s Republic of China (“PRC” or “China”).
On June 2, 2021, FHAI’s wholly-owned
subsidiary Shenzhen Wei Lian Jin Meng Electronic Commerce Limited (“Shenzhen Wei Lian”) entered into an equity transfer agreement
with the owners (the “Sellers”) of Shenzhen Nainiang Wine Industrial Co,. Ltd. (“Nainiang Wine”), under which
Shenzhen Wei Lian agreed to acquire
On August 16, 2021, FHAI entered
into a Share Exchange Agreement with Nainiang Wine and the Sellers pursuant to which FHAI agreed to issue
| 2. | BASIS OF PRESENTATION |
In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. All significant intercompany transactions and balances are eliminated in consolidation. However, the results of operations included in such financial statements may not necessarily be indicative of annual results.
The Company uses the same accounting policies in preparing quarterly and annual financial statements. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (“SEC”) on April 15, 2021 (“2020 Form 10-K”).
F-6
| 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
| (a) | Use of estimates |
The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however actual results could differ materially from those estimates.
There is no change on the accounting policies from the year ended December 31, 2020.
| (b) | Revenue Recognition |
The Company’s revenues primarily include Company sales, franchise fees and income and revenues from transactions with franchisees.
Product sales
Product sales represents the sale of “coffee tea” and wine products. Such revenue is recognized net of value-added taxes, upon delivery at such time that title passes to the customers.
Franchise fees and income
Franchise fees and income primarily
include upfront franchise fees, such as initial fees, pre-opening assistance to operate wine stores, subsequent training provided to franchisees
and renewal fees. The Company has determined that the services provided in exchange for upfront franchise fees are highly interrelated
with the franchise rights. The franchise rights are accounted for as rights to access the Company’s symbolic intellectual property
in accordance with ASC 606, and the Company recognizes upfront franchise fees received from a franchisee as revenue when performance obligations
are satisfied in accordance with the franchise agreement or the renewal agreement. The franchise agreement term is typically
Revenues from transactions with franchisees
Revenues from transactions with franchisees consist primarily of sales of wine products. The Company sells and delivers wine products to the franchisees. The performance obligations arising from such transactions are considered distinct from the franchise agreement as they are not highly dependent on the franchise agreement and the customer can benefit from the procurement service on its own. Revenue is recognized upon transfer of control over ordered items, generally upon delivery to the franchisees.
In determining the amount and timing of revenue from contracts with customers, the Company exercises significant judgment with respect to collectability of the amount; however, the timing of recognition does not require significant judgment, as it is based on either the franchise term or the date of product shipment, none of which require estimation.
The Company does not incur a significant amount of contract acquisition costs in conducting its franchising activities. The Company believes its franchising arrangements do not contain a significant financing component.
F-7
The Company’s revenue recognition policy is compliant with ASC 606, Revenue from Contracts with Customers, and revenue is recognized when a customer obtains control of promised goods and is recognized in an amount that reflects the consideration that the Company expects to receive in exchange for those goods. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amount of revenue that is recorded reflects the consideration that the Company expects to receive in exchange for those goods. The Company applies the following five-step model in order to determine this amount:
| (i) | identification of the goods and services in the contract; |
| (ii) | determination of whether the goods and services are performance obligations, including whether they are distinct in the context of the contract; |
| (iii) | measurement of the transaction price, including the constraint on variable consideration; |
| (iv) | allocation of the transaction price to the performance obligations; and |
| (v) | recognition of revenue when (or as) the Company satisfies each performance obligation. |
The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. Once a contract is determined to be within the scope of ASC 606 at contract inception, the Company reviews the contract to determine which performance obligations the Company must deliver and which of these performance obligations are distinct. The Company recognizes as revenues the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied. Generally, the Company’s performance obligations are transferred to customers at a point in time, typically upon delivery or service being rendered.
For all reporting periods, the Company has not disclosed the value of unsatisfied performance obligations for all product revenue contracts with an original expected length of one year or less, which is an optional exemption that is permitted under the adopted rules.
| (c) | Accounts Receivable |
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. The Company assesses the probability of collection from each customer at the outset of the arrangement based on a number of factors, including the customer’s payment history and its current creditworthiness. If in management’s judgment collection is not probable, the Company does not record revenue until the uncertainty is removed.
Management performs ongoing credit evaluations, and the Company maintains an allowance for potential credit losses based upon its loss history and its aging analysis. The allowance for doubtful accounts is the Company’s best estimate of the amount of credit losses in existing accounts receivable. Management reviews the allowance for doubtful accounts each reporting period based on a detailed analysis of trade receivables. In the analysis, management primarily considers the age of the customer’s receivable, and also considers the creditworthiness of the customer, the economic conditions of the customer’s industry, general economic conditions and trends, and the business relationship and history with its customers, among other factors. If any of these factors change, the Company may also change its original estimates, which could impact the level of the Company’s future allowance for doubtful accounts. If judgments regarding the collectability of receivables were incorrect, adjustments to the allowance may be required, which would reduce profitability.
Accounts receivable are recognized and carried at the original invoice amount less an allowance for any uncollectible amounts. An estimate for doubtful accounts receivable is made when collection of the full amount is no longer probable. Bad debts are written off as incurred. No allowance for doubtful accounts was made for the three and six months ended June 30, 2021.
F-8
The following customers had an accounts
receivable balance greater than
| Amount | % | |||||||
| Customer A | $ | % | ||||||
| Customer B | % | |||||||
| $ | % | |||||||
| (d) | Advance to suppliers |
Advance to suppliers relate to refundable deposits paid to suppliers under secured supplies agreements in exchange for timely and sufficient supplies of products.
| (e) | Recently issued accounting pronouncements |
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments.” This pronouncement, along with subsequent ASUs issued to clarify provisions of ASU 2016-13, changes the impairment model for most financial assets and will require the use of an “expected loss” model for instruments measured at amortized cost. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. In developing the estimate for lifetime expected credit loss, entities must incorporate historical experience, current conditions, and reasonable and supportable forecasts. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. On November 19, 2019, the FASB issued ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), finalized various effective date delays for private companies, not-for-profit organizations, and certain smaller reporting companies applying the credit losses (CECL), the revised effective date is January 2023.
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. ASU 2019-12 is effective for fiscal years beginning after December 15, 2021. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company is currently evaluating the impacts of the provisions of ASU 2019-12 on its financial condition, results of operations, and cash flows.
| 4. | RISKS AND UNCERTAINTIES |
| (a) | Economic and Political Risks |
The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.
The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation.
| (b) | Foreign Currency Translation |
The Company’s reporting currency is the U.S. dollar. The functional currency of the parent company is the U.S. dollar and the functional currency of the Company’s operating subsidiaries is the Chinese Renminbi (“RMB”). For the subsidiaries whose functional currencies are the RMB, all assets and liabilities are translated at exchange rates at the balance sheet date and revenue and expenses are translated at the average yearly exchange rates and equity is translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income but are included in foreign exchange adjustments to other comprehensive loss, a component of equity.
| (c) | Concentration of credit risk |
Financial instruments that potentially
expose the Company to significant concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable,
other receivables and amounts due from related parties. As of June 30, 2021 and December 31, 2020, substantially all of the Company’s
cash and cash equivalents were deposited with financial institutions with high-credit ratings and quality. The Company did not have any
customers constituting
F-9
| 5. | BUSINESS COMBINATION |
On June 2, 2021, Shenzhen Wei Lian
entered into an equity transfer agreement relating to the acquisition of
Accordingly, the acquisition has been accounted for in accordance with ASC 805 guidelines, whereby FHAI recognized the assets and liabilities of Nainiang Wine transferred at their carrying amounts with a carry-over basis.
The following represents the purchase price allocation at the dates of the acquisition:
| June 3, 2021 | ||||
| Cash and cash equivalents | $ | |||
| Other current assets | ||||
| Property, plant and equipment | ||||
| Current liabilities | ( | ) | ||
| Total purchase price | $ | |||
| 6. | REVENUE |
| Revenue | For the Three months ended June 30, | |||||||
| 2021 | 2020 | |||||||
| Product sales | $ | $ | ||||||
| Franchise fees and income | ||||||||
| Revenues from transactions with franchisees | ||||||||
| $ | $ | |||||||
| Revenue | For the Six months ended June 30, | |||||||
| 2021 | 2020 | |||||||
| Product sales | $ | $ | ||||||
| Franchise fees and income | ||||||||
| Revenues from transactions with franchisees | ||||||||
| $ | $ | |||||||
| As of June 30, | As of December 31, | |||||||
| Contract liabilities | 2021 | 2020 | ||||||
| Deferred revenue related to prepaid wine products | $ | $ | ||||||
| Deferred revenue related to upfront franchise fees | ||||||||
| $ | $ | |||||||
Contract liabilities
primarily consist of deferred revenue related to prepaid wine products and upfront franchise fees. Deferred revenue related to prepaid
wine products represents advance from franchisees for future supply of products which is expected to recognize as revenue in the next
12 months. Deferred revenue related to upfront franchise fees represents the training service to be delivered over the term of franchise
agreement that as of June 30, 2021, the Company expects to recognize as revenue of $
The Company has elected, as a practical expedient, not to disclose the value of remaining performance obligations associated with the franchise agreement in exchange for franchise right and related training services. The remaining duration of the performance obligation is the remaining contractual term of each franchise agreement. Revenue from training services provided to franchisees is recognized upon the conduct and delivery of training.
| 7. | OTHER RECEIVABLES |
As of June 30, 2021 and December 31, 2020, other receivables mainly consist of employees advance to be spent for company purposes and refundable rental deposits. The balances are unsecured, non-interest bearing and repayable on demand.
F-10
| 8. | INVENTORY |
| As of June 30, | As of December 31, | |||||||
| 2021 | 2020 | |||||||
| Raw materials (1) | $ | $ | ||||||
| Finished goods | ||||||||
| $ | $ | |||||||
| (1) |
| 9. | PREPAYMENT |
As of June 30, 2021 and December 31, 2020, prepayment mainly consists of prepaid administrative expenses that has been utilized subsequently.
| 10. | LEASEHOLD IMPROVEMENT AND EQUIPMENT, NET |
| As of June 30, | As of December 31, | |||||||
| 2021 | 2020 | |||||||
| Leasehold improvement | $ | $ | ||||||
| Equipment | ||||||||
| Machinery | ||||||||
| Computer equipment and software | ||||||||
| Motor vehicle | ||||||||
| $ | $ | |||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| $ | $ | |||||||
Depreciation expense for the three
and six months ended June 30, 2021 and 2020 was $
| 11. | INTANGIBLE ASSETS |
| As of June 30, | As of December 31, | |||||||
| 2021 | 2020 | |||||||
| APP Platform | $ | $ | ||||||
| Less: accumulated amortization | ( | ) | ||||||
| $ | $ | |||||||
Amortization expense for the three
and six months ended June 30, 2021 and 2020 was $
F-11
| 12. | OTHER PAYABLES AND ACCRUALS |
| As of June 30, | As of December 31, | |||||||
| 2021 | 2020 | |||||||
| Accrued payroll and welfare payable | $ | $ | ||||||
| VAT and other taxes payable | ||||||||
| Others (1) | ||||||||
| $ | $ | |||||||
| (1) |
| 13. | INCOME TAXES |
Fountain Healthy Aging, Inc. (“FHAI”) was incorporated in the State of Nevada. FHAI is an U.S. entity and is subject to the United States federal income tax. No provision for income taxes in the United States has been made as FHAI had no United States taxable income for the three and six months ended June 30, 2021 and 2020.
Wei Lian Jin Meng Group Limited (“WLJM Cayman”) was incorporated in Cayman Islands. Under the current tax laws of Cayman Islands, WLJM Cayman is not subject to tax on their income or capital gains. In addition, upon dividends being paid by WLJM Cayman to its shareholders, no Cayman Islands withholding tax will be imposed.
WLJM (Hong Kong) Limited (“WLJM
HK”) was incorporated in Hong Kong and is subject to an income tax rate of
Jin You Wei Meng (Shenzhen) Consulting Co., Ltd. (“JYWM WFOE”),
Shenzhen Wei Lian Jin Meng Electronic Commerce Limited (“Shenzhen Wei Lian”), Dongguan Dishi Coffee Limited (“Dongguan
Dishi”), Shenzhen Nainiang Coffee Art Museum Limited (“Nainiang Coffee”) and Nainiang Wine were incorporated in the
PRC and they are subject to profits tax rate at
The full realization of the tax benefit associated with the losses carried forward depends predominantly upon the Company’s ability to generate taxable income during the carry forward period.
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.
The Company
recorded deferred tax assets of $
Income tax benefits
| For the three months ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Current tax expense | $ | $ | ||||||
| Deferred tax benefits | ( | ) | ( | ) | ||||
| $ | $ | ( | ) | |||||
F-12
| For the six months ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Current tax expense | $ | $ | ||||||
| Deferred tax benefits | ( | ) | ||||||
| $ | $ | |||||||
A reconciliation of tax expense from
| For the three months ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Profit (Loss) before tax | $ | $ | ( | ) | ||||
| Tax expense (benefit) calculated at statutory tax rate | % | % | ||||||
| Computed expected tax expense (benefit) | ||||||||
| Utilization of tax loss | ( | ) | ||||||
| Movement in valuation allowance | ( | ) | ||||||
| Others | ( | ) | ( | ) | ||||
| $ | $ | |||||||
| For the six months ended June 30, |
||||||||
| 2021 | 2020 | |||||||
| Profit (Loss) before tax | $ | $ | ( |
) | ||||
| Tax benefit calculated at statutory tax rate | % | % | ||||||
| Computed expected tax expense (benefit) | ( |
) | ||||||
| Utilization of tax loss | ( |
) | ||||||
| Movement in valuation allowance | ( |
) | ||||||
| Others | ( |
) | ||||||
| $ | $ | |||||||
| 14. | LEASES |
The Company has leases for the office,
factory and warehouse in the PRC, under operating leases expiring on various dates through September 2023, which is classified as operating
leases. There are no residual value guarantees and no restrictions or covenants imposed by the leases. Lease liabilities are measured
at present value of the sum of remaining rental payments as of June 30, 2021, with discounted rate of
The Company’s future minimum payments under long-term non-cancelable operating leases are as follows:
| As of June 30, 2021 | ||||
| Within 1 year | $ | |||
| After 1 year but within 5 years | ||||
| Total lease payments | $ | |||
| Less: imputed interest | ( | ) | ||
| Total lease obligations | ||||
| Less: current obligations | ( | ) | ||
| Long-term lease obligations | $ | |||
Other information:
F-13
| For the six months ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flow from operating leases | $ | $ | ||||||
| Right-of-use assets obtained in exchange for operating lease liabilities | ||||||||
| Remaining lease term for operating leases (years) | ||||||||
| Weighted average discount rate for operating leases | % | % | ||||||
| 15. | RELATED PARTIES TRANSACTIONS |
The Company had the following balances with related parties:
| (a) | Amount due from a related party |
| As of June 30, | As of December 31, | |||||||||
| Relationship | 2021 | 2020 | ||||||||
| Ye Aiyun | $ | $ | ||||||||
Amount due from a related party represents cash advance to Ye Aiyun, shareholder of the Company. The balance is unsecured, non-interest bearing and repayable on demand.
| (b) | Amount due to related parties |
| As of June, | As of December 31, | |||||||||
| Relationship | 2021 | 2020 | ||||||||
| Zhu Hong | $ | $ | ||||||||
| Zhu Jian Yong | ||||||||||
| Shenzhen Weilian Jin Meng Culture Spreading Limited | ||||||||||
| Shenzhen Nainiang Wine Limited | ||||||||||
| Total | $ | $ | ||||||||
The balances represent cash advances to related parties, which were offset with the Company’s assets and expenses paid on behalf by the related parties. The balances with related parties are unsecured, non-interest bearing and repayable on demand.
| 16. | COMMITMENTS AND CONTINGENCIES |
Commitment
consists of a non-cancelable consultancy service agreement entered with a third-party for the provision of services related to
There are no other material commitments except for the above and the lease commitment as disclosed at Note 14.
| 17. | SUBSEQUENT EVENTS |
No significant subsequent events have occurred that would require recognition or disclosure in the financial statements.
F-14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “pursue,” “expect,” “predict,” “project,” “goals,” “strategy,” “future,” “likely,” “forecast,” “potential,” “continue,” negatives thereof or similar references to future periods. Examples of forward-looking statements include, among others, statements we make regarding future acquisition or merger targets, business strategies, macro-economic and sector-specific trends, future cash flows, financing plans, plans and objectives of management and any other statements which are not statements of historical facts.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual future results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, inability to successfully conclude acquisitions of target companies or assets which are reasonably capable of generating positive cash flow in the near future, legal and regulatory changes in the jurisdictions in which we operate, volatility or decline in our stock price, potential fluctuation of our quarterly and annual financial and operational results, rapid adverse changes in markets, decline in demand for our goods and services, insufficient revenues to cover our operating costs and such other factors as discussed throughout this section.
Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this report. Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The following discussion and analysis contain forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. For additional information regarding these risks and uncertainties, please see this Part I, Item 2 (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”) of this Quarterly Report on Form 10-Q.
Overview
The Company is a U.S. holding company incorporated in Nevada on February 25, 2004, and operating through the Company’s wholly owned subsidiary, Wei Lian Jin Meng Group Limited (“WLJM Cayman”), a company incorporated under the laws of the Cayman Islands on June 30, 2020. The Company’s entire business, including operations, employees, sales and marketing and research and development, are all conducted through its subsidiaries located within the People’s Republic of China (“PRC”).
The following is the organization structure of the Company along with ownership detail of all companies:
WLJM Cayman was incorporated in the Cayman Islands on June 30, 2020. It is 100% owned by Fountain Healthy Aging, Inc.
WLJM (Hong Kong) Limited (“WLJM HK”), was established in the Hong Kong Special Administrative Region (“HKSAR”) of the PRC on August 5, 2020. It is 100% owned by WLJM Cayman.
2
Jin You Wei Meng (Shenzhen) Consulting Company Limited (“JYWM WFOE”) was established as a wholly foreign-owned enterprise on November 24, 2020, under the laws of the PRC. It is 100% owned by WLJM HK.
Shenzhen Wei Lian Jin Meng Electronic Commerce Limited (“Shenzhen Wei Lian”) was incorporated on October 17, 2017, under the laws of the PRC. It is 100% owned by JYWM WFOE.
Dongguan Dishi Coffee Limited (“Dongguan Dishi”) was incorporated on October 25, 2018, under the laws of the PRC. It is 100% owned by Shenzhen Wei Lian.
Shenzhen Nainiang Coffee Art Museum Limited (“Nainiang Coffee”) was incorporated on June 20, 2019, under the laws of the PRC. It is 100% owned by Shenzhen Wei Lian.
Shenzhen Nainiang Wine Industrial Co., Ltd. (“Nainiang Wine”) was incorporated on January 14, 2020, under the laws of the PRC. It is 99% owned by Shenzhen Wei Lian.
The Company, through our subsidiaries, engaged in the business of wholesale distribution of “coffee tea” and wine products to retail partners and corporate customers, selling “coffee tea” and wine products to individual consumers and providing pre-opening assistance to retail partners to operate coffee and wine stores in the People’s Republic of China (“PRC” or “China”).
Critical Accounting Policies and Use of Estimates
We prepare our condensed consolidated financial statements in conformity with U.S. GAAP, which requires management to make certain estimates and to apply judgments. We base our estimates and judgments on historical experience, current trends and other factors that management believes to be important at the time the financial statements are prepared. On a regular basis, we review our accounting policies and how they are applied and disclosed in our condensed consolidated financial statements. Actual results could differ from those estimates made by management.
We believe that of our significant accounting policies, which are described in Note 3 to our condensed consolidated financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.
Revenue Recognition
Our revenues primarily include product sales, franchise fees and income and revenues from transactions with franchisees.
Product sales
Product sales represents the sale of “coffee tea” and wine products. Such revenue is recognized net of value-added taxes, upon delivery at such time that title passes to the customers.
Franchise fees and income
Franchise fees and income primarily include upfront franchise fees, such as initial fees, pre-opening assistance to operate wine stores, subsequent training provided to franchisees and renewal fees. We have determined that the services provided in exchange for upfront franchise fees are highly interrelated with the franchise rights. The franchise rights are accounted for as rights to access our symbolic intellectual property in accordance with ASC 606, and we recognize upfront franchise fees received from a franchisee as revenue when performance obligations are satisfied in accordance with the franchise agreement or the renewal agreement. The franchise agreement term is typically 3 years.
3
Revenues from transactions with franchisees
Revenues from transactions with franchisees consist primarily of sales of wine products. We sell and deliver wine products to the franchisees. The performance obligations arising from such transactions are considered distinct from the franchise agreement as they are not highly dependent on the franchise agreement and the customer can benefit from the procurement service on its own. Revenue is recognized upon transfer of control over ordered items, generally upon delivery to the franchisees.
In determining the amount and timing of revenue from contracts with customers, we exercise significant judgment with respect to collectability of the amount; however, the timing of recognition does not require significant judgment, as it is based on either the franchise term or the date of product shipment, none of which require estimation.
We do not incur a significant amount of contract acquisition costs in conducting its franchising activities. We believe its franchising arrangements do not contain a significant financing component.
Our revenue recognition policy is compliant with ASC 606, Revenue from Contracts with Customers, and revenue is recognized when a customer obtains control of promised goods and is recognized in an amount that reflects the consideration that we expect to receive in exchange for those goods. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amount of revenue that is recorded reflects the consideration that we expect to receive in exchange for those goods. We apply the following five-step model in order to determine this amount:
| (i) | identification of the goods and services in the contract; | |
| (ii) | determination of whether the goods and services are performance obligations, including whether they are distinct in the context of the contract; | |
| (iii) | measurement of the transaction price, including the constraint on variable consideration; | |
| (iv) | allocation of the transaction price to the performance obligations; and | |
| (v) | recognition of revenue when (or as) the Company satisfies each performance obligation. |
4
We only apply the five-step model to contracts when it is probable that we will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. Once a contract is determined to be within the scope of ASC 606 at contract inception, we review the contract to determine which performance obligations we must deliver and which of these performance obligations are distinct. We recognize as revenues the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied. Generally, our performance obligations are transferred to customers at a point in time, typically upon delivery or service being rendered.
For all reporting periods, we have not disclosed the value of unsatisfied performance obligations for all product revenue contracts with an original expected length of one year or less, which is an optional exemption that is permitted under the adopted rules.
| Revenue | For the Six months ended June 30, | |||||||
| 2021 | 2020 | |||||||
| Product sales | $ | 5,436,720 | $ | 468,094 | ||||
| Franchise fees and income | 146,146 | - | ||||||
| Revenues from transactions with franchisees | 8,286,779 | - | ||||||
| $ | 13,869,645 | $ | 468,094 | |||||
| As of June 30, | As of December 31, | |||||||
| Contract liabilities | 2021 | 2020 | ||||||
| Deferred revenue related to prepaid wine products | $ | 163,408 | $ | 27,648 | ||||
| Deferred revenue related to upfront franchise fees | 244,345 | - | ||||||
| $ | 407,753 | $ | 27,648 | |||||
Contract liabilities primarily consist of deferred revenue related to prepaid wine products and upfront franchise fees. Deferred revenue related to prepaid wine products represents advance from franchisees for future supply of products which is expected to be recognized as revenue in the next 12 months. Deferred revenue related to upfront franchise fees represents the training service to be delivered over the term of franchise agreement that as of June 30, 2021, we expect to recognize revenue of $114,446 within the next 12 months and of $129,899 after the next 12 months to 24 months.
We have elected, as a practical expedient, not to disclose the value of remaining performance obligations associated with the franchise agreement in exchange for franchise right and related training services. The remaining duration of the performance obligation is the remaining contractual term of each franchise agreement. Revenue from training services provided to franchisees is recognized upon the conduct and delivery of training.
Concentrations of Credit Risk
Financial instruments that potentially expose us to significant concentration of credit risk consist primarily of cash and cash equivalents, accounts receivable, other receivables, prepayment and advance to suppliers. As of June 30, 2021 and December 31, 2020, substantially all of our cash and cash equivalents were deposited with financial institutions with high-credit ratings and quality. The following customers had an accounts receivable balance greater than 10% of total accounts receivable at June 30, 2021.
| Amount | % | |||||||
| Customer A | $ | 546,379 | 11 | % | ||||
| Customer B | 749,902 | 15 | % | |||||
| $ | 1,296,281 | 26 | % | |||||
We did not have customers constituting 10% or more of the net revenues in the three and six months ended June 30, 2021 and 2020.
Recently Issued and Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments.” This pronouncement, along with subsequent ASUs issued to clarify provisions of ASU 2016-13, changes the impairment model for most financial assets and will require the use of an “expected loss” model for instruments measured at amortized cost. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. In developing the estimate for lifetime expected credit loss, entities must incorporate historical experience, current conditions, and reasonable and supportable forecasts. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. On November 19, 2019, the FASB issued ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), finalized various effective date delays for private companies, not-for-profit organizations, and certain smaller reporting companies applying the credit losses (CECL), the revised effective date is January 2023.
5
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. ASU 2019-12 is effective for fiscal years beginning after December 15, 2021. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. We are currently evaluating the impacts of the provisions of ASU 2019-12 on its financial condition, results of operations, and cash flows.
Results of Operations
Comparison of Three Months Ended June 30, 2021 and 2020
The following discussion should be read in conjunction with the condensed consolidated financial statements of Fountain Healthy Aging, Inc. attached hereto for the three months ended June 30, 2021 and 2020.
Revenue
We generated $9,458,387 in revenue for the three months ended June 30, 2021 compared to $148,564 for the three months ended June 30, 2020. There was an increase in total revenues of $9,309,823 or 6,267% compared with the three months ended June 30, 2020.
Our business is gradually recovering from the COVID-19 pandemic which has been less severe than in 2020. The measures taken by the Chinese government to contain the virus have been effective, business has returned to normal and the market has substantially regained confidence. The recovery of the economy has positively affected our results, and we earned a significant portion of revenue from our new wine products that were launched in January 2021. In addition, we acquired Nainiang Wine on June 3, 2021, which contributed $4,643,590 to our consolidated revenue.
Cost of Revenue
Cost of revenue was $2,775,753 for the three months ended June 30, 2021 compared to $20,908 for the three months ended June 30, 2020. The increase of cost of revenue by $2,754,845 or 13,176% was relatively in line with the increase in revenue. The cost of revenue consists of the cost of raw materials and cost of manufactured goods sold to customers, including labor cost, rental expense, research, and development costs, etc.. The acquisition of Nainiang Wine contributed $1,694,550 to our consolidated cost of revenue.
Gross profit
Gross profit for the three months ended June 30, 2021 was $6,682,634 compared with $127,656 for the three months ended June 30, 2020. The decrease in gross profit margin of 71% for the three months ended June 30, 2021 compared to 86% for the three months ended June 30, 2020 was due to a lower margin for the new wine products and the lower gross profit margin from the acquisition of Nainiang Wine. The gross profit margin of Nainiang Wine was 62%.
Operating Expenses
Selling and marketing expenses
Our selling expenses for the three months ended June 30, 2021 and 2020 was $136,865 and $36,864, respectively. Selling expenses consist primarily of salary and welfare for sales staff, advertising expense and exhibition expense. The increase of selling and marketing expenses by $100,001 or 271% was relatively in line with the increase in revenue. In addition, the acquisition of Nainiang Wine contributed $28,248 to our consolidated general and administrative expenses.
6
General and administrative expense
By far the most significant component of our operating expenses for both the three months ended June 30, 2021 and 2020 was general and administrative expenses of $293,764 and $386,035, respectively. The following table sets forth the main components of our general and administrative expenses for the three months ended June 30, 2021 and 2020.
| For the three months ended June 30, | ||||||||||||||||
| 2021 | 2020 | |||||||||||||||
| Amount (US$) | % of Total | Amount (US$) | % of Total | |||||||||||||
| General and administrative expense: | ||||||||||||||||
| Consultancy fee | $ | 125,121 | 42 | % | $ | 177,812 | 45 | % | ||||||||
| Salary and welfare | 37,653 | 13 | % | 58,349 | 15 | % | ||||||||||
| Rental expenses | 81,242 | 27 | % | 67,014 | 17 | % | ||||||||||
| Research and development costs | 22,265 | 8 | % | 26,039 | 7 | % | ||||||||||
| Office expenses | 4,336 | 1 | % | 4,739 | 1 | % | ||||||||||
| Travel and accommodations | 7,399 | 3 | % | 7,475 | 2 | % | ||||||||||
| Entertainment | 2,386 | 1 | % | 1,809 | 0 | % | ||||||||||
| Others | 13,362 | 5 | % | 42,798 | 11 | % | ||||||||||
| Total general and administrative expenses | $ | 293,764 | 100 | % | $ | 386,035 | 100 | % | ||||||||
The $92,271, or 24%, decrease in general and administrative expenses, from $386,035 for the three months ended June 30, 2020 to $293,764 for the three months ended June 30, 2021, was mainly due to the decrease in consultant fees that was significantly incurred during the year of 2020 for the services provided by the Company’s consultants in connection with the reverse acquisition of WLJM Cayman. The acquisition of Nainiang Wine contributed $13,856 to our consolidated general and administrative expenses.
Net Profit
We reported a net profit of $4,895,420 for the three months ended June 30, 2021 compared to a net loss of $(276,562) for the three months ended June 30, 2020, an increase of $5,171,982 or 1,870%. The increase was primarily attributable to the fact that our revenue has increased significantly, whereas the increase in administrative expenses is lower than the increase of revenue, because the decrease in consultant fees and some expenses are fixed costs in nature. In addition, the acquisition of Nainiang Wine contributed $2,180,730 to our consolidated net profit.
Comparison of Six Months Ended June 30, 2021 and 2020
The following discussion should be read in conjunction with the condensed consolidated financial statements of Fountain Healthy Aging, Inc. attached hereto for the six months ended June 30, 2021 and 2020.
Revenue
We generated $13,869,645 in revenue for the six months ended June 30, 2021 compared to $468,094 for the six months ended June 30, 2020. There was an increase in total revenues of $13,401,551 or 2,862% compared with the six months ended June 30, 2020.
7
Our business is gradually recovering from the COVID-19 pandemic, which has been less severe than in 2020. The measures taken by the Chinese government to contain the virus have been effective, business has returned to normal and the market has substantially regained confidence. The recovery of the economy has positively affected our results, and we earned a significant portion of revenue from our new wine products that was launched in January 2021. In addition, we acquired Nainiang Wine on June 3, 2021, which contributed $4,643,590 to our consolidated revenue.
Cost of Revenue
Cost of revenue was $3,710,918 for the six months ended June 30, 2021 compared to $69,298 for the six months ended June 30, 2020. The increase of cost of revenue by $3,641,620 or 5,255% was relatively in line with the increase in revenue. The cost of revenue consists of the cost of raw materials and cost of manufactured goods sold to customers, including labor cost, rental expense, research, and development costs, etc.. The acquisition of Nainiang Wine contributed $1,694,550 to our consolidated cost of revenue.
Gross profit
Gross profit for the six months ended June 30, 2021 was $10,158,727 compared with $398,796 for the six months ended June 30, 2020. The decrease in gross profit margin of 73% for the six months ended June 30, 2021 compared to 85% for the six months ended June 30, 2020 was due to a lower margin for the new wine products and the lower gross profit margin from the acquisition of Nainiang Wine. The gross profit margin of Nainiang Wine was 62%.
Operating Expenses
Selling and marketing expenses
Our selling expenses for the six months ended June 30, 2021 and 2020 was $173,344 and $59,144, respectively. Selling expenses consist primarily of salary and welfare for sales staff, advertising expense and exhibition expense. The increase of selling and marketing expenses by $114,200 or 193% was relatively in line with the increase in revenue. In addition, the acquisition of Nainiang Wine contributed $28,248 to our consolidated general and administrative expenses.
General and administrative expense
By far the most significant component of our operating expenses for both the six months ended June 30, 2021 and 2020 was general and administrative expenses of $561,564 and $579,784, respectively. The following table sets forth the main components of our general and administrative expenses for the six months ended June 30, 2021 and 2020.
| For the six months ended June 30, | ||||||||||||||||
| 2021 | 2020 | |||||||||||||||
| Amount (US$) | % of Total | Amount (US$) | % of Total | |||||||||||||
| General and administrative expense: | ||||||||||||||||
| Consultancy fee | $ | 216,851 | 39 | % | $ | 196,921 | 33 | % | ||||||||
| Salary and welfare | 88,137 | 16 | % | 136,468 | 24 | % | ||||||||||
| Rental expenses | 159,838 | 28 | % | 129,135 | 22 | % | ||||||||||
| Research and development costs | 44,261 | 8 | % | 48,297 | 8 | % | ||||||||||
| Office expenses | 13,211 | 2 | % | 7,101 | 1 | % | ||||||||||
| Travel and accommodations | 12,617 | 2 | % | 8,840 | 2 | % | ||||||||||
| Entertainment | 6,971 | 1 | % | 3,729 | 1 | % | ||||||||||
| Others | 19,678 | 4 | % | 49,293 | 9 | % | ||||||||||
| Total general and administrative expenses | $ | 561,564 | 100 | % | $ | 579,784 | 100 | % | ||||||||
Decrease in general and administrative expenses by $18,220 or 3% from $579,784 for the six months ended June 30, 2020 to $561,564 for the six months ended June 30, 2021. The general and administrative expenses remained stable due to their fixed costs in nature. The acquisition of Nainiang Wine contributed $13,856 to our consolidated general and administrative expenses.
Net Profit
We incurred a net profit of $7,287,683 for the six months ended June 30, 2021 compared to a net loss of $(238,912) for the six months ended June 30, 2020, an increase of $7,526,595 or 3,150%. The increase was primarily attributable to the fact that our revenue has increased significantly, whereas the increase in administrative expenses is lower than the increase of revenue, because some expenses are fixed costs in nature. In addition, the acquisition of Nainiang Wine contributed $2,180,730 to our consolidated net profit.
Liquidity and Capital Resources
| June 30, | December 31, | |||||||
| Working capital: | 2021 | 2020 | ||||||
| Total current assets | $ | 21,298,987 | $ | 505,082 | ||||
| Total current liabilities | (5,514,195 | ) | (1,947,717 | ) | ||||
| Working capital surplus (deficiency) | $ | 15,784,792 | $ | (1,442,635 | ) | |||
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As of June 30, 2021, we had cash and cash equivalents of $1,193,010. To date, we have financed our operations primarily through working capital generated from our profitable business. The following table provides detailed information about our net cash flows for the six months ended June 30, 2021 and 2020:
| Cash flows: | 2021 | 2020 | ||||||
| Net cash provided by (used in) operating activities | $ | 1,126,290 | (3,699 | ) | ||||
| Net cash provided by (used in) investing activities | 34,170 | (670 | ) | |||||
| Effect of exchange rate changes on cash and cash equivalents | (28,967 | ) | (312 | ) | ||||
| Net increase (decrease) in cash and cash equivalents | 1,131,493 | (4,681 | ) | |||||
| Cash and cash equivalents at the beginning of year | 61,517 | 23,046 | ||||||
| Cash and cash equivalents at the end of the six-month period | $ | 1,193,010 | 18,365 | |||||
Operating Activities
Net cash provided by operating activities was $1,126,290 for the six months ended June 30, 2021. The difference between our net profit of $7,287,683 and net cash provided by operating activities was mainly attributable to the depreciation of fixed assets and amortization of intangible assets of $25,907, and the decrease in other operating assets and liabilities of $6,187,300 which was generally due to the increase in income tax payables which offset with decrease in accounts receivables, advance to suppliers and amount due from/to related parties.
Investing Activities
Net cash provided by investing activities for the six months ended June 30, 2021 was $34,170, as compared net cash used in investing activities to $(670) for the six months ended June 30, 2020. The increase in cash provided by investing activities was mainly attributable to cash acquired from the acquisition of Nainiang Wine, which was offset by the decrease in cash from the acquisition of leasehold improvements and equipment during the six months ended June 30, 2021. We will evaluate and assess the COVID-19 pandemic impact to our business to determine the plan for increasing our capital expenditures in the future periods.
Contractual Obligations and Commercial Commitments
We had the following contractual obligations and commercial commitments as of June 30, 2021:
| Total | Less than 1 year | 1-5 years | More than 5 years | |||||||||||||
| Operating lease | $ | 273,406 | $ | 243,879 | $ | 29,527 | $ | - | ||||||||
| Consultancy service | 120,000 | 120,000 | - | - | ||||||||||||
| 393,406 | 363,879 | 29,527 | - | |||||||||||||
For the six months ended June 30, 2021 and 2020, we entered into various operating lease agreement during the fiscal year 2018 and 2019, and expiring on varying dates through September 2023. The average monthly lease expense is approximately $26,640. The outstanding lease commitment as of June 30, 2021 was $273,406.
During 2019, we entered into a non-cancelable consultancy service agreement with a third-party for the provision of services related to the US listing with the contract amount of $1,200,000. The outstanding commitment as of June 30, 2021 was $120,000.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a “smaller reporting company,” we are not required to provide the information required by this Item.
Item 4. Controls and Procedures
Management’s Report on Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our president (our principal executive officer and principal financial officer) to allow for timely decisions regarding required disclosure.
As of the end of the quarter covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our president (our principal executive officer, principal financial officer and principle accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures. Our management’s relative inexperience with the reporting requirements of public companies under the Exchange Act, as recently evidenced by the long delay we experienced in reporting the acquisition of Nainiang Wine by Shenzhen Wei Lian, which closed on June 3, 2021 and which was reported in the Current Report on Form 8-K filed with the Securities and Exchange Commission on August 16, 2021, is a source of substantial concern and risk, and considering all components of our assessment, our president (our principal executive officer and principal financial officer) concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this Quarterly Report on Form 10-Q.
Changes in Internal Controls
There have been no changes in our internal controls over financial reporting that occurred during the quarter ended June 30, 2021, that have materially or are reasonably likely to materially affect, our internal controls over financial reporting.
9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We know of no material, existing or pending legal proceedings against our Company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered beneficial shareholder, is an adverse party or has a material interest adverse to our interest.
Item 1A. Risk Factors
As a “smaller reporting company,” we are not required to provide the information required by this Item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On August 16, 2021, the Company issued 9,281,577 shares of the Company’s common stock to the owners (the “Sellers”) of Nainiang Wine, in exchange for the transfer by the Sellers of 99% of the equity ownership interests in Nainiang Wine (the “Acquisition”). The Company reported the Acquisition in its Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 16, 2021.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
Item 6. Exhibits
|
Exhibit |
Description | |
| 31.1* | Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2* | Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1** | Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2** | Certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS* | Inline XBRL Instance Document | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
| * | Filed herewith. |
| ** | Deemed furnished and not filed. |
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Fountain healthy aging, inc. | |
| (Registrant) | |
| Dated: August 23, 2021 | /s/ Zhu Hong |
| Zhu Hong | |
| President, Chief Executive Officer and Director | |
| (Principal Executive Officer) |
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