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
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
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
Unless otherwise indicated by the context, references to the "Company, "we,"
"us," "our" in this report are to the combined business of
Overview
The Company is primarily engaged in offering two types of products: coffee and
liquor. The Company, through its subsidiaries in
Our liquor products are sold across
COVID-19 Impact
Our coffee factory in
2
Critical Accounting Policies and Use of Estimates
We prepare our consolidated financial statements in conformity with
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. 3
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 March 31, Revenue 2022 2021 Product sales$ 2,432,537 $ 4,363,917 Franchise fees and income 458,626 47,341 Revenues from transactions with franchisees 3,707,126 -$ 6,598,289 $ 4,411,258 As of As of March 31, December 31, Contract liabilities 2022 2021
Deferred revenue related to prepaid coffee and liquor products
549,427 716,634$ 553,440 $ 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
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, 2022 December 31, 2021 Amount % Amount % Customer A $ - - %$ 1,540,197 51 % Customer B - - % 1,472,059 49 % Customer C 1,330,653 61 % - - % Customer D 840,190 39 % - - %$ 2,170,843 100 %$ 3,012,256 100 %
We did not have customers constituting 10% or more of the net revenues in the
three months ended
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
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
Comparison of Three Months Ended
Revenue
We generated
Apart from the results consolidated from the acquisition of Nainiang Liquor,
revenue for the three months ended
Cost of Revenue
Cost of revenue was
Gross profit
Gross profit for the three months ended
Operating Expenses
Selling and marketing expenses
Our selling expenses for the three months ended
5
General and administrative expenses
By far the most significant component of our operating expenses for both the
three months ended
2022 2021 Amount % of Amount % of (US$) Total (US$) Total General and administrative expense: Consultancy fee$ 253,108 49.0 %$ 91,730 34.3 % Salary and welfare 100,557 19.5 % 50,484 18.9 % Rental expenses 104,399 20.2 % 78,596 29.3 % Research and development costs - 0.0 % 21,996 8.2 % Office expenses 6,468 1.3 % 8,875 3.3 % Travel and accommodations 13,105 2.5 % 5,218 1.9 % Entertainment 3,579 0.7 % 4,585 1.7 % Others 35,729 6.8 % 6,316 2.4 %
Total general and administrative expenses
General and administrative expenses increased by
Net Profit
We reported a net profit of
Liquidity and Capital Resources
March 31, December 31, Working capital: 2022 2021 Total current assets$ 33,083,354 $ 30,383,395 Total current liabilities (2,274,038 ) (2,731,608 ) Working capital surplus$ 30,809,316 $ 27,651,787
As of
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