MICROALLIANCE GROUP INC. 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
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 withU.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 aU.S. holding company incorporated inNevada onFebruary 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 theCayman Islands onJune 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
WLJM (Hong Kong ) Limited ("WLJM HK"), was established in theHong Kong Special Administrative Region ("HKSAR") of the PRC onAugust 5, 2020 . It is 100% owned by WLJM Cayman. 2
Shenzhen Wei Lian Jin Meng Electronic Commerce Limited ("Shenzhen Wei Lian") was incorporated onOctober 17, 2017 , under the laws of the PRC. It is 100% owned by JYWM WFOE.
Shenzhen Nainiang Coffee Art Museum Limited ("Nainiang Coffee") was incorporated onJune 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 onJanuary 14, 2020 , under the laws of the PRC. It is 99% owned byShenzhen
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 inthe People's Republic of China ("PRC" or "China").
Critical Accounting Policies and Use of Estimates
We prepare our condensed consolidated financial statements in conformity withU.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.
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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.
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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.
For the Six months ended
Revenue 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 As of June 30, December 31, Contract liabilities 2021 2020
Deferred revenue related to prepaid wine products
-
$ 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
Recently Issued and Adopted Accounting Pronouncements
InJune 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 afterDecember 15, 2019 . OnNovember 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 isJanuary 2023 . 5 InDecember 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 afterDecember 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
The following discussion should be read in conjunction with the condensed
consolidated financial statements of
Revenue
We generated
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 inJanuary 2021 . In addition, we acquired Nainiang Wine onJune 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 endedJune 30, 2021 compared to$20,908 for the three months endedJune 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 endedJune 30, 2021 was$6,682,634 compared with$127,656 for the three months endedJune 30, 2020 . The decrease in gross profit margin of 71% for the three months endedJune 30, 2021 compared to 86% for the three months endedJune 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 endedJune 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 endedJune 30, 2021 and 2020 was general and administrative expenses of$293,764 and$386,035 , respectively. The following table sets forth the main components of our general and administrative expenses for the three months endedJune 30, 2021 and 2020. For the three months ended June 30, 2021 2020 Amount % of Amount % of (US$) Total (US$) Total General and administrative expense: Consultancy fee$ 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 endedJune 30, 2020 to$293,764 for the three months endedJune 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$4,895,420 for the three months endedJune 30, 2021 compared to a net loss of$(276,562) for the three months endedJune 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
The following discussion should be read in conjunction with the condensed
consolidated financial statements of
Revenue
We generated
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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 inJanuary 2021 . In addition, we acquired Nainiang Wine onJune 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 endedJune 30, 2021 compared to$69,298 for the six months endedJune 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 endedJune 30, 2021 was$10,158,727 compared with$398,796 for the six months endedJune 30, 2020 . The decrease in gross profit margin of 73% for the six months endedJune 30, 2021 compared to 85% for the six months endedJune 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 endedJune 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 endedJune 30, 2021 and 2020 was general and administrative expenses of$561,564 and$579,784 , respectively. The following table sets forth the main components of our general and administrative expenses for the six months endedJune 30, 2021 and 2020. For the six months ended June 30, 2021 2020 Amount % of Amount % of (US$) Total (US$) Total General and administrative expense: Consultancy fee$ 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
Decrease in general and administrative expenses by$18,220 or 3% from$579,784 for the six months endedJune 30, 2020 to$561,564 for the six months endedJune 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$7,287,683 for the six months endedJune 30, 2021 compared to a net loss of$(238,912) for the six months endedJune 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)
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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:
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