AIXIN LIFE INTERNATIONAL, INC. The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited financial statements and the notes to those statements included elsewhere in this Form 10-Q and with the audited financial statements and the notes thereto included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 (the "2020 Form 10-K"). This discussion contains forward-looking statements that involve risks and uncertainties. You should specifically consider the various risk factors identified in our 2020 Form 10-K, that could cause actual results to differ materially from those anticipated in these forward-looking statements. Overview We market and sell consumer products inChina by offering premium-quality nutritional products. We also provide advertising and marketing services to clients which engage us to distribute their products. We offer our products and those of our clients through our sales offices, exhibition events we organize and sponsor, and person-to-person marketing. Our business mainly focuses on proactively approaching customers such as by hosting events for clients, which we believe is ideally suited to marketing our products and those of our clients for which we perform advertising services because sales of nutritional products are strengthened by ongoing personal contact and support, coaching and education among the Company and our clients towards how to achieve a healthy and active lifestyle.
We do not independently test products to determine efficacy. Rather we rely upon information we uncover through inquiries in the community and a review of scientific and other literature.
InMarch 2020 , theWorld Health Organization announced that infections caused by the coronavirus disease of 2019 ("COVID-19") had become pandemic and national, provincial and local authorities, including those whose jurisdictions includeChengdu , where our offices are located and our customers reside, adopted various regulations and orders, including "shelter in place" rules, restrictions on travel, mandates on the number of people that may gather in one location and closing non-essential businesses. Many of these measures have been relaxed due to the decrease in the prevalence of Covid-19 inChina . To date, the ongoing operations of the Company have not been materially adversely effected by the measures taken to limit the spread of the disease inChina . Financial impacts related to COVID-19, including the Company's actions and costs incurred in response to the pandemic, were not material to the Company's financial position, results of operations or cash flows for the period endedJune 30, 2021 . The Company has implemented procedures to promote employee and customer safety. These measures will not significantly increase its operating costs. However, the Company cannot predict with certainty what measures may be taken by its suppliers and customers and the impact these measures may have on its 2021 financial position, results of operations or cash flows. In addition to our ongoing operations, we seek to acquire an interest in additional businesses through opportunities found by our management or presented by persons or firms which desire to take advantage of the perceived advantages of an Exchange Act registered corporation. We do not restrict our search to any specific business, industry, or geographical location and may participate in a business venture of virtually any kind or nature.
In response to the current Covid-19 pandemic, we have implemented the following strategies to cope with the situation.
1. Importing products from the
product line. 2. Strengthening our on-line sales capability. 3. Increasing our efforts to find acquisition opportunities. It is the goal of our management, in particular, our Chairman,Quanzhong Lin to grow our business and to modify its capital structure in order to qualify for a listing on NASDAQ or the NYSE-American exchange. As part of this effort, we will continue to seek to acquire more businesses and to modify our capital structure as necessary to meet the requirements of the exchange to which we apply for a listing. As part of this effort. onJune 8, 2020 ,Mr. Lin transferred 35,049,685 shares of our common stock to our Company for cancellation. 23
OnMay 25, 2021 , we entered into an Equity Transfer Agreement withChengdu Aixin Shangyan Hotel Management Co., Ltd ("Aixin Shangyan Hotel "), and its two shareholdersQuanzhong Lin (our Chairman, President and major shareholder) andYirong Shen ("Transferor"). Pursuant to the Agreement (the "Hotel Purchase Agreement "), we agreed to purchase 100% ownership ofAixin Shangyan Hotel fromMr. Lin andMs. Shen . Eighty percent of the equity ofAixin Shangyan Hotel is owned byMr. Lin . The balance is owned byMs. Shen . Under the terms of theHotel Purchase Agreement , we agreed to purchase all of the outstanding equity ofAixin Shangyan Hotel for a purchase price ofRMB 7,598,887 , or approximately$1.16 million ("Transfer Price"). The Transfer Price will be reduced by an amount equal to any amounts paid or distributed byAixin Shangyan Hotel to the Transferor afterDecember 31, 2020 and will be increased by an amount equal to any amounts contributed toAixin Shangyan Hotel by the Transferor afterDecember 31, 2020 . OnJune 2, 2021 , Aixin HK, our wholly owned subsidiary entered into an Equity Transfer Agreement (the "Transfer Agreement") withChengdu Aixintang Pharmacy Co., Ltd. and certain affiliated entities, each of which operates a pharmacy ("Aixintang Pharmacies") and its three shareholders,Quanzhong Lin (our Chairman, President and major shareholder),Ting Li andXiao Ling Li ("Transferor").Mr. Lin owns in excess of 95% of the outstanding equity the Aixintang Pharmacies. The remaining equity interest is owned byTing Li andXiao Ling Li . Pursuant to the Transfer Agreement, Aixin HK agreed to purchase all of the outstanding equity of Aixintang Pharmacies for an aggregate purchase price ofRMB 34,635,845 , or approximatelyUS$5.31 million ("Transfer Price"). The Transfer Price will be reduced by an amount equal to any amounts paid or distributed by any of the Aixintang Pharmacies to the Transferor afterDecember 31, 2020 and increased by an amount contributed to any of the Aixintang Pharmacies by the Transferor after such date. As ofJune 30, 2021 , the governmental procedures to complete these two acquisitions were not yet completed. As a result, the$4,504,418 paid to the sellers is deemed a prepayment of the acquisition prices. DuringAugust 2021 we completed the required governmental procedures and obtained the documents necessary to consider the acquisition of theAixin Shangyan Hotel and certain of the affiliates of Aixintang Pharmacies completed. In the respective Equity Transfer Agreements, the parties agreed that we would get the benefit of all profits and absorb the losses generated from theAixin Shangyang Hotel and Aixintang Pharamcies afterDecember 31, 2020 . Because the acquisitions had not been completed byJune 30, 2021 , the impact of the operations of theAixin Shangyan Hotel and nine pharmacies discussed above is not reflected in the financial statements included in this Report.
Below is our corporate structure prior to the consummation of the acquisition of the hotel and pharmacies discussed above :
100%
100%
100%
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Results of Operations
The following table sets forth the results of our operations for the periods
indicated as a percentage of net revenue, certain columns may not add due to
rounding:
Three Months Ended June 30,
2021 2020
$ % of Revenue $ % of Revenue
Revenue $ 852,768 100 % $ 434,080 100 %
Cost of goods sold 25,021 3 % 21,453 5 %
Gross profit 827,747 97 % 412,627 95 %
Operating expenses 359,243 42 % 328,247 76 %
Income from operations 468,504 55 % 84,380 19 %Non-operating income (expenses), net (3,767 ) (0.4 )%
231,529 53 % Income tax expense 218,052 26 % - - % Net income$ 246,685 29 %$ 315,909 73 % Six Months Ended June 30, 2021 2020 $ % of Revenue $ % of Revenue Revenue$ 1,550,926 100 %$ 1,045,243 100 % Cost of goods sold 160,680 10 % 46,901 4 % Gross profit 1,390,246 90 % 998,342 96 % Operating expenses 699,572 45 % 665,728 64 % Income from operations 690,674 45 % 332,614 32 %
Non-operating income (expenses), net (4,235 ) (0.3 )%
231,512 22 % Income tax expense 218,052 14 % - - % Net income$ 468,387 30 %$ 564,126 54 % Revenue Revenue was$852,768 in the three months endedJune 30,2021 , compared to$434,080 in the same period of 2020, an increase of$418,688 or 96%. Revenue was$1,550,926 in the first six months of 2021, compared to$1,045,243 in the same period of 2020, an increase of$505,683 or 48%. The increase in revenue was primarily due to the$422,918 and$367,853 increase in advertising revenue in the second quarter and the first six months of 2021, respectively. In 2021, we have developed new advertising customers. For the first six months of 2021, our product sales increased$137,830 as a result of introducing a new product into the Company's product mix. In addition, our business was significantly impacted by Covid-19 during the second quarter and the first six months of 2020. Cost of Goods Sold Cost of goods sold for our products sales was$25,021 and$160,680 in the three and six months endedJune 30, 2021 , respectively, compared to$21,453 and$46,901 for the comparable periods of 2020, an increase of$3,568 or $17% for the three months endedJune 30, 2021 compared with same period of 2020, and an increase of$113,779 or 243% for the six months endedJune 30, 2021 compared with same period of 2020. The increase in our cost of goods sold is attributable to the increase in product sales. The cost of goods sold as a percentage of product sales was 50.1% and 63.4% in the three and six months endedJune 30, 2021 , respectively, compared to 39.6% and 40.6% for the three and six months endedJune 30, 2020 , respectively. The cost of goods sold as a percentage of product sales was higher in the three and six months endedJune 30, 2021 compared with the same period of 2020 due to increased sales volume of lower profit margin products in 2021.The advertising and marketing services we provide do not require us to purchase products and thus have no cost of goods. Gross Profit
Gross profit was$827,747 and$1,390,246 in the three and six months endedJune 30 2021 , respectively, compared to$412,627 and$998,342 in the same periods of 2020, an increase of$415,120 or 101% for the three months endedJune 30, 2021 compared with same period of 2020, and an increase of$391,904 or 39% for the six months endedJune 30, 2021 compared with same period of 2020. The increase in our gross profit was mainly due to increased revenue. Gross profit margin was 97% in the three months endedJune 30, 2021 , compared to 95% in the same period of 2020 as a result of the increase in advertising revenue. Gross profit margin was $90% in the six months endedJune 30, 2021 , compared to 96% in the same period of 2020 as a result of increased sales of lower margin products. 25 Operating Expenses
Operating expenses were$359,243 and$699,572 for the three and six months endedJune 30 2021 , respectively, compared to$328,247 and$665,728 for the comparable periods of 2020, an increase of$30,996 or 9% for the three months endedJune 30, 2021 compared with same period of 2020, and an increase of$33,844 or 5% for the six months endedJune 30, 2021 compared with same period of 2020. Increases in general and administrative expenses resulting from increasing advertising revenue were offset by decreases in selling expenses and provisions for bad
debt. Income tax expense Income tax expense were$218,052 for the three and six months endedJune 30, 2021 , compared to$0 in the same periods of 2020, an increase of$218,052 or 100%. Net Income Our net income for the three and six months endedJune 30, 2021 was$246,685 and$468,387 respectively, compared to$315,909 and$564,126 in the same periods of 2020, a decrease of$69,224 or 22% for the three months endedJune 30, 2021 compared with same period of 2020, and a decrease of$95,739 or 17% for the six months endedJune 30, 2021 compared with same period of 2020. The decrease net income in the six and three months endedJune 30, 2021 was mainly due to an increase in our income tax expense primarily in the 2nd quarter of 2021, and a decrease in interest income also in the 2nd quarter, which offset the increase in our gross profit resulting from the growth in our revenue.
Liquidity and Capital Resources
During 2019 and 2020, we depended upon advances from our major shareholder and capital raised in private placements to support our operations. During the first half of 2021, we generated$439,801 from operations. As ofJune 30, 2021 , cash and cash equivalents were$3,248,619 , compared to$7,676,689 as ofDecember 31, 2020 . AtJune 30, 2021 , we had working capital of$7,528,169 compared to$6,753,486 atDecember 31, 2020 . The reduction in our cash fromDecember 30, 2020 , toJune 30, 2021 , was the result of the payments made to acquire theAixin Shangyan Hotel and Aixintang Pharmacies. The following is a summary of cash provided by or used in each of the indicated types of activities during the six months endedJune 30, 2021 and 2020, respectively.June 30 ,June 30, 2021 2020
Net cash provided by operating activities$ 439,801 $
630,790
Net cash used in investing activities$ (4,494,966 ) $
(3,141,940 )
Net cash (used in) provided by financing activities
Net cash provided by operating activities
For the six months endedJune 30, 2021 , net cash provided by operating activities was$439,801 . This was primarily due to our net income of$468,387 , adjusted by non-cash related expenses including depreciation of$10,870 and stock-based compensation of$185,770 , and then decreased by changes in working capital of$225,226 . The cash outflow from changes in working capital mainly resulted from inventory purchase of$88,863 ; payment of advances to suppliers of$113,556 ; and tax payments of$47,058 . For the six months endedJune 30, 2020 , net cash provided by operating activities was$630,790 . This was primarily due to our net income of$564,126 , adjusted by non-cash related expenses and interest income, including depreciation of$24,811 , provision for bad debt of$13,376 , stock-based compensation of$185,770 , and interest income of$231,506 from a loan to a third party, and then increased by changes in working capital of$74,213 . The cash inflow from changes in working capital mainly resulted from a payment received from unearned revenue of$85,453 , decreased payment for advances to suppliers of$60,747 , but partly offset by payments on inventory purchases of$28,193 , and tax payments of$47,109 . 26
Net cash used in investing activities
For the six months endedJune 30, 2021 , net cash used in investing activities was$4,494,966 , was mainly for the prepayment for the acquisition of a hotel and pharmacies from our major shareholder. For the six months endedJune 30, 2020 , net cash used in investing activities was$3,141,940 , was mainly due to a loan to third party of$7,152,812 , offset by the return of prepayments made for acquisitions of$4,013,005 .
Net cash (used in) provided by financing activities
For the six months ended
For the six months ended
Impact of Inflation
Our results of operations may be affected by inflation, particularly rising prices for products and other operating costs if we cannot pass such increases along to our customers in the form of higher prices for our products and services. Generally, our inventory turns multiple times per year and we anticipate that we will be able to increase prices on products to reflect increases in the cost of inventory.
Contractual Obligations
We have no long-term fixed contractual obligations or commitments.
Off-Balance Sheet Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder's equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any uncombined entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us. Contingencies The Company's operations are conducted in the PRC and are subject to specific considerations and significant risks not typically associated with companies inNorth America andWestern Europe . These include risks associated with, among others, the political, economic and legal environments inChina and foreign currency exchange. The Company's results may be adversely affected by changes in PRC government policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad and rates and methods of taxation, among other things. The Company's sales, purchases and expense transactions inChina are denominated in RMB and all of the Company's assets and liabilities inChina are also denominated in RMB. The RMB is not freely convertible into foreign currencies under the current PRC law. InChina , foreign exchange transactions are required by law to be transacted only by authorized financial institutions. Remittances in currencies other than RMB may require certain supporting documentation in order to affect the remittance. 27
Significant Accounting Policies
Our management's discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which were prepared in accordance with accounting principles generally accepted inthe United States of America ("US GAAP"). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements, we believe the following accounting policies are the most critical to assist you in fully understanding and evaluating this management discussion and analysis.
Basis of Presentation
The accompanying financial statements are prepared in conformity withU.S. Generally Accepted Accounting Principles ("US GAAP"). The functional currency of Aixin is Chinese Renminbi (''RMB''). The accompanying financial statements are translated from RMB and presented inU.S. dollars ("USD"). Use of Estimates In preparing financial statements in conformity with US GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates, required by management, include the recoverability of long-lived assets, allowance for doubtful accounts, and the reserve for obsolete and slow-moving inventories. Actual results could differ from those estimates. Accounts Receivable
The Company maintains an allowance for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. During the six months ended inJune 30, 2021 and 2020, bad debt expense was$0 and$13,376 , respectively. During the three months endedJune 30, 2021 and 2020, bad debt expense was$0 and$848 , respectively. As ofJune 30, 2021 , andDecember 31, 2020 , the bad debt allowance was$150,093 and$148,520 , respectively. Revenue Recognition ASU No. 2014-09, Revenue from Contracts with Customers ("Topic 606"), became effective for the CompanyJanuary 1, 2018 . The Company's revenue recognition disclosure reflects its updated accounting policies that are affected by this new standard. The Company applied the "modified retrospective" transition method for open contracts for the implementation of Topic 606. As revenues are and have been primarily from the delivery of health supplements and the performance of related advertising services, and the Company has no significant post-delivery obligations, this did not result in a material recognition of revenue on the Company's accompanying consolidated financial statements for the cumulative impact of applying this new standard. The Company made no adjustments to its previously-reported total revenues, as those periods continue to be presented in accordance with its historical accounting practices under Topic 605, Revenue Recognition. 28
Revenue from sales of goods and provision of services under Topic 606 is recognized in a manner that reasonably reflects the delivery of the Company's products and services to customers in return for expected consideration and includes the following elements:
? executed contract(s) with customers that the Company believes is legally
enforceable;
? identification of performance obligation in the respective contract;
? determination of the transaction price for each performance obligation in
the respective contract;
? allocation of the transaction price to each performance obligation; and
? recognition of revenue only when the Company satisfies each performance
obligation.
These five elements, as applied to each of the Company's revenue categories, is summarized below:
? Revenue from sale of goods is recognized when goods are shipped to thecustomer and no other obligation exits. The Company does not provide
unconditional return or other concessions to the customer. The Company's
sales policy allows for the return of unopened products for cash after
deducting certain service and transaction fees. As an alternative to the
product return option, the customers have the option of asking for an
exchange for products with the same value.
? As part of the Company's sales incentive program, the Company occasionally
provides free travel to its customers whose prepayments to purchase the
Company's products reaches a certain amount. There are different travelincentives offered to customers based on the amount the received from each
customer. The Company records the to-be-provided free travel cost when
cash is collected from customers as a debit deferred travel cost withcorresponding credit to accrued travel cost. Once the customer utilizes
the travel incentive, the cost of travel is recorded as selling expenses
and reduces deferred travel cost.
Sales revenue represents the invoiced value of goods, net of value-added taxes
("VAT"). All of the Company's products sold in China are subject to the PRC VAT
of 17% of the gross sales price prior to May 1, 2018 , 16% since May 1, 2018 and
13% since April 1, 2019 . This VAT may be offset by VAT paid by the Company on
raw materials and other materials purchased in China . The Company records VAT
payable and VAT receivable net of payments in the financial statements. The VAT
tax return is filed offsetting the payables against the receivables. Sales and
purchases are recorded net of VAT collected and paid as the Company acts asan agent for the government.
Commencing in the third quarter of 2019, we generated revenue by providing advertising services. Advertising contracts are signed to establish the price and advertising services to be provided. Pursuant to the advertising contracts, we provide advertising and marketing services through exhibition events, conferences, and person-to-person marketing. We perform a credit assessment of the customer to assess the collectability of the contract price prior to entering into contracts. Most of the advertisement contracts designated that the Company perform such advertising services to its clients through exhibition events, conferences, and person-to-person marketing during the contracted period, regardless of the number of such events. As such, we estimate that the performance obligation is satisfied over time during the contracted period and revenue is recognized accordingly
Foreign Currency Translation and Comprehensive Income (Loss)
The functional currency of the Company is RMB. For financial reporting purposes, RMB is translated into USD as the reporting currency. Assets and liabilities are translated at the exchange rate in effect at the balance sheet dates. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders' equity as "Accumulated other comprehensive income". Gains and losses resulting from foreign currency transactions are included in income. There was no significant fluctuation in the exchange rate for the conversion of RMB to USD after the balance sheet date. We use FASB ASC Topic 220, "Comprehensive Income". Comprehensive income (loss) is comprised of net income (loss) and all changes to the statements of stockholders' equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. Comprehensive loss for six and three months endedJune 30, 2021 and 2020 consisted of net loss and foreign currency translation adjustments.
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