FHAI Fountain Healthy Aging Inc (PK)

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management’s discussion and analysis should be read in conjunction with our financial statements and the notes thereto and the other financial information appearing elsewhere in this report. Our financial statements are prepared in U.S. dollars and in accordance with U.S. GAAP.

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 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, 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 identified in “Item 1A. Risk Factors” described in our most recent annual report on Form 10-K.

Readers are urged to carefully review and consider the various disclosures made by us in this report and our other filings with the SEC. These reports attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements made in this report speak only as of the date hereof and we disclaim any obligation, except as required by law, to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.

Unless otherwise indicated by the context, references to the “Company, “we,” “us,” “our” in this report are to the combined business of Microalliance Group Inc., a Nevada corporation, and its consolidated subsidiaries.

Overview

The Company is primarily engaged in offering two types of products: coffee and liquor. The Company, through its subsidiaries in China, develops, produces, markets and sells flagship “coffee tea” products, which are innovative specialty coffee products with Chinese black tea’s taste, as well as black coffee products and other coffee products. We sell our coffee products wholesale to retail partners and corporate customers, and we also sell directly to consumers in the PRC via our e-commerce channels. We commit to build the first brand of “coffee tea” culture in the PRC. As of the date of this report, we have entered into franchise agreements with a large number of franchisees relating to the distribution, marketing and sale of our coffee products. Our coffee product offerings consist of five different coffee products.

Our liquor products are sold across China through sales agents, distributors and franchisees. Our licensed “Nainiang Liquor” retail stores have opened in a dozen of cities in China, such as Beijing, Shanghai, Shenzhen, Xiamen, Chongqing, Chengdu, Kunming, Foshan, Zhaoqing, Huangshan, Jingzhou and Baoding, to mainly market and sell our proprietary brand liquor products to consumers. We supply the licensed retail stores with our liquor products and maintain quality and uniformity throughout the licensed stores by requiring uniform retail prices, providing continual trainings, periodic field visits by our marketing personnel and holding annual and special meetings of franchisees. Such retail stores launch marketing initiatives like tasting events to increase our brand awareness and promote sales. We currently sell six liquor products, including featured “coffee spirit” products and vintage “Baijiu” products. Our “coffee spirit” products are independently innovated by us and unique in China, with premium quality, good taste and large profit margin. Our “Baijiu” (a type of Chinese liquor made from whole grain with alcohol content from 40-60%) products have excellent quality and we own a large stock of vintage Baijiu whose value grows as they age. As of March 31, 2022, we had RMB114,774,000 (approximately $18.1 million) of such vintage Baijiu in stock based on the historical purchase cost. The liquor market size is massive which generates more revenues than the coffee business.

COVID-19 Impact

Our coffee factory in Dongguan as well as offices, contracted liquor producers and licensed “Nainiang Liquor” retail stores in Shenzhen were temporarily closed due to COVID-19 resurgences and local containment measures in the first quarter of 2022. Consumer demand for liquor products has dropped during lockdown periods as a result of social distancing policies and reduced gatherings. In addition, our plan to expand internationally has largely stalled due to the COVID-19 pandemic. It remains difficult to predict the full impact of the COVID-19 pandemic on the broader economy and our coffee and liquor business in particular.

Critical Accounting Policies and Use of Estimates

We prepare our 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 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

The Company’s revenues primarily include Company sales, franchise fees and income and revenues from transactions with franchisees.

Product sales

Product sales represent the sale of “coffee tea” and “spirit” 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 spirit 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 3 years.

Revenues from transactions with franchisees

Revenues from transactions with franchisees consist primarily of sales of spirit products. The Company sells and delivers spirit 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.

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:

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.

Contract liabilities primarily consist of deferred revenue related to prepaid spirit products and upfront franchise fees. Deferred revenue related to prepaid spirit 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 March 31, 2022, we expect to recognize revenue of $221,085 within the next 12 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 and accounts receivable. As of March 31, 2021 and December 31, 2021, 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 March 31, 2022 and December 31, 2021.

We did not have customers constituting 10% or more of the net revenues in the three months ended March 31, 2022. We had two customers constituting 10% or more of the net revenues in the three months ended March 31, 2021 as follows:

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 Statements. This ASU requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. This Accounting Standards Update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual rights to receive cash. For smaller public business entities, the amendments in this Update are effective for fiscal years beginning after January 1, 2023, including interim periods within those fiscal years. All entities may adopt the amendments in this Update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). We are currently evaluating the impact of the adoption of this pronouncement on its consolidated financial statements.

We review new accounting standards as issued. We have not identified any other new standards that we believe will have a significant impact on our financial statements.

Results of Operations

The following discussion should be read in conjunction with the condensed consolidated financial statements of Microalliance Group Inc. attached hereto for the three months ended March 31, 2022 and 2021.

Comparison of Three Months Ended March 31, 2022 and 2021

Revenue

We generated $6,598,289 in revenue for the three months ended March 31, 2022 compared to $4,411,258 for the three months ended March 31, 2022. There was an increase in total revenues of $2,187,031 or 49.6% compared with the three months ended March 31, 2021, because of acquiring 99% of the equity interests of Shenzhen Nainiang Liquor Industrial Co., Ltd., a company formed under the laws of China (“Nainiang Liquor”), on June 3, 2021, which contributed $4,771,156 to our consolidated revenue for the three months ended March 31, 2022.

Apart from the results consolidated from the acquisition of Nainiang Liquor, revenue for the three months ended March 31, 2022 decreased compared to the same business operations for the three months ended March 31, 2021. Outbreaks of additional variants of COVID-19 which are more transmissible (like the Omicron variant) or result in more severe sickness (like the Delta variant) have caused negative impacts to our business since January 2022. The Chinese government has been taking actions to contain COVID-19 such as re-imposing previously lifted measures or putting in place additional restrictions including the Shenzhen and Shanghai lockdowns to slow the spread of COVID-19. We expect our business will be gradually recovering from recent surges of COVID-19 cases beginning near the end of 2021.

Cost of Revenue

Cost of revenue was $1,830,697 for the three months ended March 31, 2022 compared to $935,165 for the three months ended March 31, 2021, an increase in cost of revenue by $895,532 or 95.8%. 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 Liquor contributed $1,584,866 to our consolidated cost of revenue for the three months ended March 31, 2022.

Gross profit

Gross profit for the three months ended December 31, 2021 was $4,767,592 compared with $3,476,093 for the three months ended March 31, 2021. The gross profit margin was 72.3% for the three months ended March 31, 2022 compared to 78.8% for the three months ended March 31, 2021, which decrease was due to a lower margin for the new liquor products from the acquisition of Nainiang Liquor. The gross profit margin of Nainiang Liquor for the three months ended March 31, 2022 was 66.8%.

Operating Expenses

Selling and marketing expenses

Our selling expenses for the three months ended March 31, 2022 and 2021 were $187,614 and $36,479, respectively. The selling and marketing expenses increased by $151,135 or 414.3%. Selling expenses consist primarily of salary and welfare for sales staff, advertising expense and exhibition expense. The acquisition of Nainiang Liquor contributed $127,658 to our consolidated selling and marketing expenses for the three months ended March 31, 2022.

General and administrative expenses

By far the most significant component of our operating expenses for both the three months ended March 31, 2022 and 2021 was general and administrative expenses of $516,945 and $267,800, respectively. The following table sets forth the main components of our general and administrative expenses for the three months ended March 31, 2022 and 2021.

General and administrative expenses increased by $249,145 or 93.0% from $267,800 for the three months ended March 31, 2021 to $516,945 for the three months ended March 31, 2022. The increase was mainly due to the increase in legal and professional fees. The acquisition of Nainiang Liquor contributed $115,542 to our consolidated general and administrative expenses for the three months ended March 31, 2022. 

Net Profit

We reported a net profit of $3,021,153 for the three months ended March 31, 2021 compared to a net profit of $2,392,263 for the three months ended March 31, 2021, an increase of $628,890 or 26.3%. 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 Liquor contributed $2,208,275 to our consolidated net profit for the three months ended March 31, 2022.

As of March 31, 2022, we had cash and cash equivalents of $59,171. To date, we have financed our operations primarily through our working capital. The following table provides detailed information about our net cash flows for the three months ended March 31, 2022 and 2021: