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 June 30, 2022, we had RMB125,285,000 (approximately $18.7
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 beginning 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.
1
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:
(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.
2
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.
For the
three months ended
June 30,
Revenue 2022 2021
Product sales $ 1,893,954 $ 5,290,589
Franchise fees and income 22,679 98,805
Revenues from transactions with franchisees 2,113,643 4,068,993
$ 4,030,276 $ 9,458,387
For the
six months ended
June 30,
Revenue 2022 2021
Product sales $ 4,326,491 $ 5,436,720
Franchise fees and income 481,305 146,146
Revenues from transactions with franchisees 5,820,769 8,286,779
$ 10,628,565 $ 13,869,645
As of As of
June 30, December 31,
Contract liabilities 2022 2021
Deferred revenue related to prepaid coffee and liquor products $ 43,982 $ 20,881
Deferred revenue related to upfront franchise fees
740,130 716,634
$ 784,112 $ 737,515
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 June 30,
2022, we expect to recognize revenue of $211,259 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.
3
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 June 30, 2022 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 June 30,
2022 and December 31, 2021.
March 31, 2022 December 31, 2021
Amount % Amount %
Customer A $ - - % $ 1,540,197 51 %
Customer B - - % 1,472,059 49 %
Customer C 1,115,791 68.4 % - - %
Customer D 512,397 31.5 % - - %
$ 1,628,188 99.9 % $ 3,012,256 100 %
We did not have customers constituting 10% or more of the net revenues in the
six months ended June 30, 2022. We had two customers constituting 10% or more of
the net revenues in the six months ended June 30, 2021 as follows:
2022 2021
Amount % Amount %
Customer A $ - - % $ 867,850 20 %
Customer B - - % 435,070 10 %
$ - - % $ 1,302,920 30 %
4
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 and six months ended June 30, 2022 and 2021.
Comparison of Three Months Ended June 30, 2022 and 2021
Revenue
We generated $4,030,276 in revenue for the three months ended June 30, 2022
compared to $9,458,387 for the three months ended June 30, 2022. There was a
decrease in total revenues of $5,428,111 or 57.4% compared with the three months
ended June 30, 2021, mainly due to the outbreaks of additional variants of
COVID-19 which are more transmissible (like the Omicron variant and the two
sub-variants: BA.1 and BA.2.) or result in more severe sickness (like the Delta
variant) having 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. Especially the full-scale lockdown in Shanghai since the end of March
for 'societal zero-Covid' pursuit to track every Omicron case has led to the
dramatic drop in our revenue as Shanghai is our major market which represents
around 30%-40% of our total revenue. In addition, the closure of Shanghai has
seen many Chinese are losing their incomes and their lifestyle has changed such
that their spending on tea and liquor products are dramatically reduced. We
expect the Chinese economy and our business will only be gradually recovering
from recent surges of COVID-19 cases near the end of 2022.
Cost of Revenue
Cost of revenue was $1,350,080 for the three months ended June 30, 2022 compared
to $2,775,753 for the three months ended June 30, 2021, a decrease in cost of
revenue by $1,425,673 or 51.4%. 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 decrease was
relatively in line with the decrease in revenue.
Gross profit
Gross profit for the three months ended June 30, 2022 was $2,680,196 compared
with $6,682,634 for the three months ended June 30, 2021. The gross profit
margin was 66.5% for the three months ended June 30, 2022 compared to 70.7% for
the three months ended June 30, 2021. Such decrease was due to a lower margin
for the liquor products, which comprise a larger portion of our sales during the
three months ended June 30, 2022 as compared with the same period of 2021.
Operating Expenses
Selling and marketing expenses
Our selling expenses for the three months ended June 30, 2022 and 2021 were
$176,083 and $136,865, respectively. The selling and marketing expenses
increased was $39,218 or 28.7%. Selling expenses consist primarily of salary and
welfare for sales staff, advertising expense and exhibition expense. Although
our revenue dropped, the labor costs and other fixed costs have been rising due
to inflation, which led to the increase of selling and marketing expenses.
5
General and administrative expenses
By far the most significant component of our operating expenses for both the
three months ended June 30, 2022 and 2021 was general and administrative
expenses of $427,388 and $293,764, respectively. The following table sets forth
the main components of our general and administrative expenses for the three
months ended June 30, 2022 and 2021.
2022 2021
Amount % of Amount % of
(US$) Total (US$) Total
General and administrative expense:
Consultancy fee $ 176,332 41 % $ 125,121 42 %
Salary and welfare 109,644 26 % 37,653 13 %
Rental expenses 56,487 13 % 81,242 27 %
Research and development costs - - % 22,265 8 %
Office expenses 11,162 3 % 4,336 1 %
Travel and accommodations 18,230 4 % 7,399 3 %
Entertainment 22,829 5 % 2,386 1 %
Others 32,704 8 % 13,362 5 %
Total general and administrative expenses $ 427,388 100 % $ 293,764 100 %
General and administrative expenses increased by $133,624 or 45.5% from $293,764
for the three months ended June 30, 2021 to $427,388 for the three months ended
June 30, 2022. The increase was mainly due to the increase in legal and
professional fees and the increase in labor costs. We have more headcount since
we acquired Nainiang Liquor on June 3, 2021.
Net Profit
We reported a net profit of $4,895,420 for the three months ended June 30, 2021
compared to a net profit of $1,526,476 for the three months ended June 30, 2022,
a decrease of $3,368,944 or 68.8%. The decrease was primarily attributable to
the fact that our revenue has decreased significantly, whereas the selling and
administrative expenses increase due to some expenses being fixed costs in
nature.
Comparison of Six Months Ended June 30, 2022 and 2021
Revenue
We generated $10,628,565 in revenue for the six months ended June 30, 2022
compared to $13,869,645 for the six months ended June 30, 2021. There was a
decrease in total revenues of $3,241,080 or 23.4% compared with the six months
ended June 30, 2021.
The decrease was mainly due to the outbreaks of additional variants of COVID-19
which are more transmissible (like the Omicron variant and the two sub-variants:
BA.1 and BA.2.) or result in more severe sickness (like the Delta variant)
having 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. Especially
the full-scale lockdown in Shanghai since the end of March for 'societal
zero-Covid' pursuit to track every Omicron case has led to the dramatic drop in
our revenue as Shanghai is our major market which represents around 30%-40% of
our total revenue. In addition, the closure of Shanghai has seen many Chinese
are losing their incomes and their lifestyle has changed such that their
spending on tea and liquor products are dramatically reduced. We expect the
Chinese economy and our business will only be gradually recovering from recent
surges of COVID-19 cases near the end of 2022.
Cost of Revenue
Cost of revenue was $3,180,777 for the six months ended June 30, 2022 compared
to $3,710,918 for the six months ended June 30, 2021. The decrease of cost of
revenue was $530,141 or 14.3%. 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 decrease was not
in line with the decrease in revenue because of the acquisition of Nainiang
Liquor on June 3, 2021 such that we incurred significant labor costs for the six
months ended June 30, 2022 due to the increase of headcount through the business
acquisition. Depending on the development of the COVID-19 situation in China, we
will explore possibilities to streamline our manpower and will evaluate the
impact of any redundancy plans.
Gross profit
Gross profit for the six months ended June 30, 2022 was $7,447,788 compared with
$10,158,727 for the six months ended June 30, 2021. The decrease in gross profit
margin from 70.1% for the six months ended June 30, 2022 to 73.2% for the six
months ended June 30, 2021 was due to a lower margin for the liquor products,
which comprise a larger portion of our sales during the six months ended June
30, 2022 as compared with the same period of 2021.
6
Operating Expenses
Selling and marketing expenses
Our selling expenses for the six months ended June 30, 2022 and 2021 was
$363,697 and $173,344, respectively. Selling expenses consist primarily of
salary and welfare for sales staff, advertising expense and exhibition expense.
The increase of selling and marketing expenses was $190,353 or 109.8%. Although
our revenue dropped, the labor costs and other fixed costs have been rising due
to inflation, which led to the increase of selling and marketing expenses. In
addition, more expenses incurred during the six months ended June 30, 2022 as a
result of the consolidation of the results of Nainiang Liquor through the
business acquisition on June 3, 2021.
General and administrative expense
By far the most significant component of our operating expenses for both the six
months ended June 30, 2022 and 2021 was general and administrative expenses of
$944,333 and $561,564, respectively. The following table sets forth the main
components of our general and administrative expenses for the six months ended
June 30, 2022 and 2021.
For the six months ended June 30,
2022 2021
Amount % of Amount % of
(US$) Total (US$) Total
General and administrative expense:
Consultancy fee $ 429,440 46 % $ 216,851 39 %
Salary and welfare 210,201 22 % 88,137 16 %
Rental expenses 160,886 17 % 159,838 28 %
Research and development costs - - % 44,261 8 %
Office expenses 17,630 2 % 13,211 2 %
Travel and accommodations 31,335 3 % 12,617 2 %
Entertainment 26,408 3 % 6,971 1 %
Others 68,433 7 % 19,678 4 %
Total general and administrative expenses $ 944,333 100 % $ 561,564 100 %
Increase in general and administrative expenses by $382,769 or 68.2% from
$561,564 for the six months ended June 30, 2021 to $944,333 for the six months
ended June 30, 2022. The increase was mainly due to the increase in legal and
professional fees and the increase in labor costs. We have more headcount since
we acquired Nainiang Liquor on June 3, 2021.
Net Profit
We incurred a net profit of $4,547,629 for the six months ended June 30, 2022
compared to $7,287,683 for the six months ended June 30, 2021, a decrease of
$2,740,054 or 37.6%. The decrease was primarily attributable to the fact that
our revenue has decreased significantly, whereas the selling and administrative
expenses increase due to some expenses being fixed costs in nature.
Liquidity and Capital Resources
June 30, December 31,
Working capital: 2022 2021
Total current assets $ 32,123,859 $ 30,383,395
Total current liabilities (1,454,534 ) (2,731,608 )
Working capital surplus $ 30,669,325 $ 27,651,787
As of June 30, 2022, we had cash and cash equivalents of $470,727. 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
six months ended June 30, 2022 and 2021:
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