MICROALLIANCE GROUP INC. - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

or

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number 333-123774

+86 185 6676 1769

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registration statement was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date: 609,316,077 shares as of November 12, 2021.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

FOUNTAIN HEALTHY AGING, INC.

TABLE OF CONTENTS

FOUNTAIN HEALTHY AGING, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In U.S. Dollars, except share data or otherwise stated)

AS OF SEPTEMBER 30, 2021 (UNAUDITED) AND DECEMBER 31, 2020 (AUDITED) 

The accompanying notes are an integral part of the financial statements.

FOUNTAIN HEALTHY AGING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

(In U.S. Dollars, except share data or otherwise stated)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (UNAUDITED)

The accompanying notes are an integral part of the financial statements.

FOUNTAIN HEALTHY AGING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)

(In U.S. Dollars, except share data or otherwise stated)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (UNAUDITED)

The accompanying notes are an integral part of the financial statements.

FOUNTAIN HEALTHY AGING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In U.S. Dollars, except share data or otherwise stated)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (UNAUDITED)

The accompanying notes are an integral part of the financial statements.

FOUNTAIN HEALTHY AGING, INC.

CONDENSED CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 (UNAUDITED)

Fountain Healthy Aging, Inc. and its subsidiaries (the “Company” or “FHAI”) are 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 in the People’s Republic of China (“PRC” or “China”).

On June 2, 2021, FHAI’s wholly-owned subsidiary Shenzhen Wei Lian Jin Meng Electronic Commerce Limited (“Shenzhen Wei Lian”) entered into an equity transfer agreement with the owners (the “Sellers”) of Shenzhen Nainiang Wine Industrial Co., Ltd. (“Nainiang Wine”), under which Shenzhen Wei Lian agreed to acquire 99% ownership of Nainiang Wine in exchange for causing FHAI to issue shares of its common stock to the Sellers at a later date (the “PRC Transaction”). The PRC Transaction closed on June 3, 2021. Among the Sellers is Ms. Zhu Hong, who is the sole officer and director of FHAI and the majority shareholder of FHAI.

On August 16, 2021, FHAI entered into a Share Exchange Agreement with Nainiang Wine and the Sellers pursuant to which FHAI agreed to issue 9,281,577 shares of its common stock (the “Exchange Shares”) to the Sellers (the “US Transaction,” and together with the PRC Transaction, the “Nainiang Wine Transaction”). The US Transaction closed on August 16, 2021, and the Exchange Shares were issued to the Sellers. For more information about the Nainiang Wine Transaction, please refer to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 16, 2021.

In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. All significant intercompany transactions and balances are eliminated in consolidation. However, the results of operations included in such financial statements may not necessarily be indicative of annual results.

The Company uses the same accounting policies in preparing quarterly and annual financial statements. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (“SEC”) on April 15, 2021 (“2020 Form 10-K”).

The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however actual results could differ materially from those estimates.

There is no change on the accounting policies from the year ended December 31, 2020.

The Company’s revenues primarily include Company 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. 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 wine products. The Company sells and delivers 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, 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.

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. The Company assesses the probability of collection from each customer at the outset of the arrangement based on a number of factors, including the customer’s payment history and its current creditworthiness. If in management’s judgment collection is not probable, the Company does not record revenue until the uncertainty is removed.

Management performs ongoing credit evaluations, and the Company maintains an allowance for potential credit losses based upon its loss history and its aging analysis. The allowance for doubtful accounts is the Company’s best estimate of the amount of credit losses in existing accounts receivable. Management reviews the allowance for doubtful accounts each reporting period based on a detailed analysis of trade receivables. In the analysis, management primarily considers the age of the customer’s receivable, and also considers the creditworthiness of the customer, the economic conditions of the customer’s industry, general economic conditions and trends, and the business relationship and history with its customers, among other factors. If any of these factors change, the Company may also change its original estimates, which could impact the level of the Company’s future allowance for doubtful accounts. If judgments regarding the collectability of receivables were incorrect, adjustments to the allowance may be required, which would reduce profitability.

Accounts receivable are recognized and carried at the original invoice amount less an allowance for any uncollectible amounts. An estimate for doubtful accounts receivable is made when collection of the full amount is no longer probable. Bad debts are written off as incurred. No allowance for doubtful accounts was made for the three and nine months ended September 30, 2021.

The following customers had an accounts receivable balance greater than 10% of total accounts receivable at September 30, 2021.

Advance to suppliers relate to refundable deposits paid to suppliers under secured supplies agreements in exchange for timely and sufficient supplies of products.

In June 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 after December 15, 2019. On November 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 is January 2023.

In December 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 after December 15, 2020. 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. The Company adopted this ASU on January 1, 2021 and determined it had no impact on its consolidated financial statements..

The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.

The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation.

The Company’s reporting currency is the U.S. dollar. The functional currency of the parent company is the U.S. dollar and the functional currency of the Company’s operating subsidiaries is the Chinese Renminbi (“RMB”). For the subsidiaries whose functional currencies are the RMB, all assets and liabilities are translated at exchange rates at the balance sheet date and revenue and expenses are translated at the average yearly exchange rates and equity is translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income but are included in foreign exchange adjustments to other comprehensive loss, a component of equity.

Financial instruments that potentially expose the Company to significant concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable, other receivables and amounts due from related parties. As of September 30, 2021 and December 31, 2020, substantially all of the Company’s cash and cash equivalents were deposited with financial institutions with high-credit ratings and quality. The Company did not have any customers constituting 10% or more of the net revenue in the nine months ended September 30, 2021 and 2020.

On June 2, 2021, Shenzhen Wei Lian entered into an equity transfer agreement relating to the acquisition of 99% of the equity of Nainiang Wine in exchange for agreeing to cause the Company to issue 9,281,577 shares of its common stock to the Sellers. To determine the amount of shares that the Company issued to the Sellers, the Company converted the net asset value of Nainiang Wine as of June 3, 2021 to US Dollars, and then used a price per share for the Company’s common stock of US$1.10. The PRC Acquisition closed on June 3, 2021 and the results of operations of Nainiang Wine are included in the Company’s condensed consolidated financial statements beginning on June 3, 2021. The operational control of Nainiang Wine passed to FHAI and all assets of Nainiang Wine were acquired by FHAI effective June 3, 2021, the date that 99% of the outstanding equity of Nainiang Wine was transferred to Shenzhen Wei Lian. FHAI does not account for the remaining 1% non-controlling interest held by Ms. Zhu Hong, as Ms. Zhu Hong is the common controlling shareholder for both the acquirer and the acquiree.

Accordingly, the acquisition has been accounted for in accordance with ASC 805 guidelines, whereby FHAI recognized the assets and liabilities of Nainiang Wine transferred at their carrying amounts with a carry-over basis.

The following represents the purchase price allocation at the dates of the acquisition:

Contract liabilities primarily consist of deferred revenue related to prepaid coffee and 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 recognize 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 September 30, 2021, the Company expects to recognize as revenue of $152,039 within the next 12 months.

The Company has 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.

As of September 30, 2021 and December 31, 2020, other receivables mainly consist of employees advance to be spent for company purposes and refundable rental deposits. The balances are unsecured, non-interest bearing and repayable on demand.

As of September 30, 2021 and December 31, 2020, prepayment mainly consists of prepaid administrative expenses that has been utilized subsequently.

Depreciation expense for the three and nine months ended September 30, 2021 and 2020 was $31,609, $55,833, $3,555 and $17,976 respectively.

Amortization expense for the three and nine months ended September 30, 2021 and 2020 was $12,739, $14,422, $nil and $1,628, respectively. The Company recorded an impairment loss on intangible assets of $76,365 to write off the old APP Platform during the year ended December 31, 2020.

Fountain Healthy Aging, Inc. (“FHAI”) was incorporated in the State of Nevada. FHAI is an U.S. entity and is subject to the United States federal income tax. No provision for income taxes in the United States has been made as FHAI had no United States taxable income for the three and nine months ended September 30, 2021 and 2020.

Wei Lian Jin Meng Group Limited (“WLJM Cayman”) was incorporated in Cayman Islands. Under the current tax laws of Cayman Islands, WLJM Cayman is not subject to tax on their income or capital gains. In addition, upon dividends is being paid by WLJM Cayman to its shareholders, no Cayman Islands withholding tax will be imposed.

WLJM (Hong Kong) Limited (“WLJM HK”) was incorporated in Hong Kong and is subject to an income tax rate of 16.5% for taxable income generated from operations in Hong Kong.

Jin You Wei Meng (Shenzhen) Consulting Co., Ltd. (“JYWM WFOE”), Shenzhen Wei Lian Jin Meng Electronic Commerce Limited (“Shenzhen Wei Lian”), Dongguan Dishi Coffee Limited (“Dongguan Dishi”), Shenzhen Nainiang Coffee Art Museum Limited (“Nainiang Coffee”) and Nainiang Wine were incorporated in the PRC and they are subject to profits tax rate at 25% for income generated and operation in the country.

The full realization of the tax benefit associated with the losses carried forward depends predominantly upon the Company’s ability to generate taxable income during the carry forward period. The Company recognized deferred tax assets of $108,633 relating to tax losses carried forward as of September 30, 2021.

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.

The Company recorded deferred tax assets of $108,633 and $nil as of September 30, 2021 and December 31, 2020.

Income tax benefits

A reconciliation of tax expense from 25% statutory tax rates for the three and nine months ended September 30, 2021 and 2020 is as follows:

The Company has leases for the office, factory and warehouse in the PRC, under operating leases expiring on various dates through September 2023, which is classified as operating leases. There are no residual value guarantees and no restrictions or covenants imposed by the leases. Lease liabilities are measured at present value of the sum of remaining rental payments as of September 30, 2021, with discounted rate of 4.75%. A single lease cost is recognized over the lease term on a generally straight-line basis. All cash payments of operating lease cost are classified within operating activities in the statement of cash flows. Rent expense for the three and nine months ended September 30, 2021 and 2020 were $81,135, $240,973, $66,870 and $196,005, respectively.

The Company’s future minimum payments under long-term non-cancelable operating leases are as follows:

Other information:

The Company had the following balances with related parties:

Amount due from a related parties represents cash advance to related parties. The balance is unsecured, non-interest bearing and repayable on demand.

The balances represent cash advances to related parties, which were offset with the Company’s assets and expenses paid on behalf by the related parties. The balances with related parties are unsecured, non-interest bearing and repayable on demand.

Commitment consists of a non-cancelable consultancy service agreement entered with a third-party for the provision of services related to the US listing with a contract sum of $1,200,000. The outstanding committed contract amount is $120,000. The terms of the agreement are for various milestones stages to be completed within two years through 2021. Future commitments within one year as of September 30, 2021 was $120,000. No future commitments more than one year as of September 30, 2021.

There are no other material commitments except for the above and the lease commitment as disclosed at Note 14.

No significant subsequent events have occurred that would require recognition or disclosure in the financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

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 with U.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 a U.S. holding company incorporated in Nevada on February 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 the Cayman Islands on June 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 Cayman Islands on June 30, 2020. It is 100% owned by Fountain Healthy Aging, Inc.

WLJM (Hong Kong) Limited (“WLJM HK”), was established in the Hong Kong Special Administrative Region (“HKSAR”) of the PRC on August 5, 2020. It is 100% owned by WLJM Cayman.

Jin You Wei Meng (Shenzhen) Consulting Company Limited (“JYWM WFOE”) was established as a wholly foreign-owned enterprise on November 24, 2020, under the laws of the PRC. It is 100% owned by WLJM HK.

Shenzhen Wei Lian Jin Meng Electronic Commerce Limited (“Shenzhen Wei Lian”) was incorporated on October 17, 2017, under the laws of the PRC. It is 100% owned by JYWM WFOE.

Dongguan Dishi Coffee Limited (“Dongguan Dishi”) was incorporated on October 25, 2018, under the laws of the PRC. It is 100% owned by Shenzhen Wei Lian.

Shenzhen Nainiang Coffee Art Museum Limited (“Nainiang Coffee”) was incorporated on June 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 on January 14, 2020, under the laws of the PRC. It is 99% owned by Shenzhen 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 in the People’s Republic of China (“PRC” or “China”).

Critical Accounting Policies and Use of Estimates

We prepare our condensed 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 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.

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:

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.

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 $152,039 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, accounts receivable, other receivables, prepayment and advance to suppliers. As of September 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 September 30, 2021.

We did not have customers constituting 10% or more of the net revenues in the three and nine months ended September 30, 2021 and 2020.

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 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 after December 15, 2019. On November 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 is January 2023.

In December 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 after December 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 September 30, 2021 and 2020

The following discussion should be read in conjunction with the condensed consolidated financial statements of Fountain Healthy Aging, Inc. attached hereto for the three months ended September 30, 2021 and 2020.

Revenue

We generated $15,045,396 in revenue for the three months ended September 30, 2021 compared to $459,795 for the three months ended September 30, 2020. There was an increase in total revenues of $14,585,601 or 3172% compared with the three months ended September 30, 2021.

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 in January 2021. In addition, we acquired Nainiang Wine on June 3, 2021, which contributed $10,893,592 to our consolidated revenue for the three months ended September 30, 2021.

Cost of Revenue

Cost of revenue was $4,430,256 for the three months ended September 30, 2021 compared to $24,943 for the three months ended September 30, 2020. The increase of cost of revenue by $4,405,313 or 17662% 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 $3,828,364 to our consolidated cost of revenue for the three months ended September 30, 2021.

Gross profit

Gross profit for the three months ended September 30, 2021 was $10,615,140 compared with $373,552 for the three months ended September 30, 2020. The decrease in gross profit margin of 71% for the three months ended September 30, 2021 compared to 81% for the three months ended September 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 for the three months ended September 30, 2021 was 65%.

Operating Expenses

Selling and marketing expenses

Our selling expenses for the three months ended September 30, 2021 and 2020 was $219,006 and $24,943, 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 $194,063 or 778% was relatively in line with the increase in revenue. In addition, the acquisition of Nainiang Wine contributed $140,708 to our consolidated selling and marketing expenses.

General and administrative expense

By far the most significant component of our operating expenses for both the three months ended September 30, 2021 and 2020 was general and administrative expenses of $525,927 and $700,095, respectively. The following table sets forth the main components of our general and administrative expenses for the three months ended September 30, 2021 and 2020.

The $174,168, or 25%, decrease in general and administrative expenses, from $700,095 for the three months ended September 30, 2020 to $525,927 for the three months ended September 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 $111,644 to our consolidated general and administrative expenses.

Net Profit

We reported a net profit of $7,319,062 for the three months ended September 30, 2021 compared to a net loss of $(351,435) for the three months ended September 30, 2020, an increase of $7,670,497 or 2183%. 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 $5,097,498 to our consolidated net profit for the three months ended September 30, 2021.

Comparison of Nine Months Ended September 30, 2021 and 2020

The following discussion should be read in conjunction with the condensed consolidated financial statements of Fountain Healthy Aging, Inc. attached hereto for the nine months ended September 30, 2021 and 2020.

Revenue

We generated $28,915,041 in revenue for the nine months ended September 30, 2021 compared to $927,889 for the nine months ended September 30, 2020. There was an increase in total revenues of $27,987,152 or 3016% compared with the nine months ended September 30, 2020.

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 in January 2021. In addition, we acquired Nainiang Wine on June 3, 2021, which contributed $15,537,182 to our consolidated revenue for the nine months ended September 30, 2021.

Cost of Revenue

Cost of revenue was $8,141,174 for the nine months ended September 30, 2021 compared to $155,541 for the nine months ended September 30, 2020. The increase of cost of revenue by $7,985,633 or 5134% 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 $5,522,914 to our consolidated cost of revenue for the nine months ended September 30, 2021.

Gross profit

Gross profit for the nine months ended September 30, 2021 was $20,773,867 compared with $772,348 for the nine months ended September 30, 2020. The decrease in gross profit margin of 72% for the nine months ended September 30, 2021 compared to 83% for the nine months ended September 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 for the nine months ended September 30, 2021 was 64%.

Operating Expenses

Selling and marketing expenses

Our selling expenses for the nine months ended September 30, 2021 and 2020 was $392,350 and $84,087, 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 $308,263 or 367% was relatively in line with the increase in revenue. In addition, the acquisition of Nainiang Wine contributed $168,956 to our consolidated selling and marketing expenses for the nine months ended September 30, 2021.

General and administrative expense

By far the most significant component of our operating expenses for both the nine months ended September 30, 2021 and 2020 was general and administrative expenses of $1,087,491 and $1,279,879, respectively. The following table sets forth the main components of our general and administrative expenses for the nine months ended September 30, 2021 and 2020.

Decrease in general and administrative expenses by $192,388 or 15% from $1,279,879 for the nine months ended September 30, 2020 to $1,087,491 for the nine months ended September 30, 2021. The general and administrative expenses remained stable due to their fixed costs in nature. The acquisition of Nainiang Wine contributed $125,500 to our consolidated general and administrative expenses for the nine months ended September 30, 2021.

Net Profit

We incurred a net profit of $14,606,745 for the nine months ended September 30, 2021 compared to a net loss of $(590,347) for the nine months ended September 30, 2020, an increase of $19,887,897 or 3369%. 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 $7,278,228 to our consolidated net profit for the nine months ended September 30, 2021.

Liquidity and Capital Resources

As of September 30, 2021, we had cash and cash equivalents of $1,220,174. 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 nine months ended September 30, 2021 and 2020:

Operating Activities

Net cash provided by operating activities was $1,272,046 for the nine months ended September 30, 2021. The difference between our net profit of $14,606,745 and net cash provided by operating activities was mainly attributable to the depreciation of fixed assets and amortization of intangible assets of $70,255, and the decrease in other operating assets and liabilities of $837,810 which was generally due to the increase in income tax payables which offset with decrease in advance to suppliers, inventory, accounts payables, other payables and accruals and amount due from/to related parties.

Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2021 was $118,637, as compared to nil for the nine months ended September 30, 2020. The increase in cash provided by investing activities was mainly attributable to cash acquired from the acquisition of Nainiang Wine, which was offset by the decrease in cash from the acquisition of leasehold improvements and equipment and intangible assets during the nine months ended September 30, 2021. We will evaluate and assess the COVID-19 pandemic impact to our business to determine the plan for increasing our capital expenditures in the future periods.

Contractual Obligations and Commercial Commitments

We had the following contractual obligations and commercial commitments as of September 30, 2021:

For the nine months ended June 30, 2021 and 2020, we entered into various operating lease agreement during the fiscal year 2018 and 2019, and expiring on varying dates through September 2023. The average monthly lease expense is approximately $26,184. The outstanding lease commitment as of September 30, 2021 was $185,644.

During 2019, we entered into a non-cancelable consultancy service agreement with a third-party for the provision of services related to the US listing with the contract amount of $1,200,000. The outstanding commitment as of September 30, 2021 was $120,000.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As a “smaller reporting company,” we are not required to provide the information required by this Item.

Item 4. Controls and Procedures

Management’s Report on Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our president (our principal executive officer and principal financial officer) to allow for timely decisions regarding required disclosure.

As of the end of the quarter covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our president (our principal executive officer, principal financial officer and principle accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures. Our management’s relative inexperience with the reporting requirements of public companies under the Exchange Act, as recently evidenced by the long delay we experienced in reporting the acquisition of Nainiang Wine by Shenzhen Wei Lian, which closed on June 3, 2021 and which was reported in the Current Report on Form 8-K filed with the Securities and Exchange Commission on August 16, 2021, is a source of substantial concern and risk, and considering all components of our assessment, our president (our principal executive officer and principal financial officer) concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

Changes in Internal Controls

There have been no changes in our internal controls over financial reporting that occurred during the quarter ended September 30, 2021, that have materially or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We know of no material, existing or pending legal proceedings against our Company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered beneficial shareholder, is an adverse party or has a material interest adverse to our interest.

Item 1A. Risk Factors

As a “smaller reporting company,” we are not required to provide the information required by this Item.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On August 16, 2021, the Company issued 9,281,577 shares of the Company’s common stock to the owners (the “Sellers”) of Nainiang Wine, in exchange for the transfer by the Sellers of 99% of the equity ownership interests in Nainiang Wine (the “Acquisition”). The Company reported the Acquisition in its Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 16, 2021.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Item 6. Exhibits

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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