UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended:
For the transition period from _____________ to _____________
Commission File Number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of
incorporation or organization) |
(I.R.S. Employer
Identification No.) |
(Address of principal executive offices, Zip Code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
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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 past 90 days. Yes ☐
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 registrant was required
to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
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Smaller reporting company
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Emerging growth company
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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 Exchange Act). Yes ☐
The number of shares outstanding of each of the
issuer’s classes of common stock, as of the latest practicable date:
TABLE OF CONTENTS
| Page | ||
| PART I FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements. | F-1 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 1 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | 9 |
| Item 4. | Controls and Procedures. | 9 |
| PART II OTHER INFORMATION | ||
| Item 1. | Legal Proceedings. | 11 |
| Item 1A. | Risk Factors. | 11 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | 11 |
| Item 3. | Defaults Upon Senior Securities. | 11 |
| Item 4. | Mine Safety Disclosures. | 11 |
| Item 5. | Other Information. | 11 |
| Item 6. | Exhibits. | 12 |
i
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MICROALLIANCE GROUP INC.
TABLE OF CONTENTS
F- 1
MICROALLIANCE GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In U.S. Dollars, except share data or otherwise stated)
AS OF SEPTEMBER 30, 2022 (UNAUDITED) AND DECEMBER 31, 2021 (AUDITED)
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September 30,
2022 |
December 31,
2021 |
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| US$ | US$ | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents |
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| Accounts receivable |
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| Other receivables |
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| Inventories |
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| Advance to suppliers |
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| Amount due from related parties |
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| Total current assets |
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| Non-current assets: | ||||||||
| Leasehold improvements and equipment, net |
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| Intangible assets |
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| Operating lease right-of-use assets |
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| Total non-current assets |
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| Total assets |
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| LIABILITIES AND EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable |
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| Income tax payables |
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| Other payables and accruals |
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| Advance from customers |
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| Amount due to related parties | - |
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| Current operating lease liabilities |
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| Total current liabilities |
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| Non-current liabilities: | ||||||||
| Non-current operating lease liabilities |
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| Total non-current liabilities |
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| Total liabilities |
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| COMMITMENTS AND CONTINGENCIES | ||||||||
| EQUITY (DEFICIT) | ||||||||
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Share capital (
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| Series A Preferred Stock |
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| Common Stock |
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| Additional paid in capital |
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| Foreign currency translation reserves |
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| Statutory reserves |
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| Retained earnings |
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| Total equity |
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| Total liabilities and equity |
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The accompanying notes are an integral part of the financial statements.
F- 2
MICROALLIANCE GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In U.S. Dollars, except share data or otherwise stated)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021 (UNAUDITED)
|
Three months ended September 30, |
Nine months ended September 30, |
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| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| US$ | US$ | US$ | US$ | |||||||||||||
| Revenue |
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| Cost of revenue |
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| Gross profit |
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| Selling and marketing expenses |
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| General and administrative expense |
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| Total operating expenses |
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| Operating profit |
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| Other income (expense), net |
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| Profit before income taxes |
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| Income taxes |
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| Net profit for the period |
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| Foreign currency translation differences |
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| Total comprehensive income for the period |
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| Earnings per share: | ||||||||||||||||
| - Basic |
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| - Diluted |
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| Weighted average number of shares used in computation: | ||||||||||||||||
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| - Diluted |
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The accompanying notes are an integral part of the financial statements.
F- 3
MICROALLIANCE GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In U.S. Dollars, except share data or otherwise stated)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021 (UNAUDITED)
| Share Capital | Foreign | Retain Earnings | ||||||||||||||||||||||||||
|
Series A
preferred Stock |
Common
Stock |
Additional
paid in Capital |
Currency
Translation Reserve |
Unrestricted |
Statutory
Reserve |
Total
Equity (Deficit) |
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| US$ | US$ | US$ | US$ | US$ | US$ | US$ | ||||||||||||||||||||||
| Balance at January 1, 2022 (Audited) |
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| Profit for the period |
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| Other comprehensive income |
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| Balance at September 30, 2022 (Unaudited) |
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| Balance at January 1, 2021 (Audited) |
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| Business combination under common control |
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| Profit for the period |
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| Other comprehensive income |
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| Balance at September 30, 2021 (Unaudited) |
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The accompanying notes are an integral part of the financial statements.
F- 4
MICROALLIANCE GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In U.S. Dollars, except share data or otherwise stated)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021 (UNAUDITED)
| 2022 | 2021 | |||||||
| US$ | US$ | |||||||
| Cash flows from operating activities: | ||||||||
| Net profit |
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| Adjustments for: | ||||||||
| Intangible assets written off |
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| Depreciation and amortization |
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| Changes in: | ||||||||
| Accounts receivable |
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| Other receivables |
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| Advance to suppliers |
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| Inventories |
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| Deferred tax assets |
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| Accounts payable, other payables and accruals |
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| Income tax payables |
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| Deferred revenue |
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| Amount due from/to related parties |
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| Net cash provided by operating activities |
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| Cash flows from investing activities: | ||||||||
| Additions to leasehold improvements and equipment |
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| Additions to intangible assets |
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| Cash acquired from business combination |
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| Net cash used in investing activities |
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| Effect of exchange rate changes on cash and cash equivalents |
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| Net increase in cash and cash equivalents |
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| Cash and cash equivalents at the beginning of period |
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| Cash and cash equivalents at the end of the period |
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The accompanying notes are an integral part of the financial statements.
F- 5
MICROALLIANCE GROUP INC.
CONDENSED CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021 (UNAUDITED)
| 1. | DESCRIPTION OF BUSINESS |
Microalliance Group Inc. and its subsidiaries (the “Company” or “FHAI”) are engaged in the business of wholesale distribution of “coffee tea” and “spirit” products to retail partners and corporate customers, selling “coffee tea” and “spirit” products to individual consumers and providing pre-opening assistance to retail partners to operate coffee stores in the People’s Public of China (“PRC” or “China”).
| 2. | BASIS OF PRESENTATION |
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, 2021 filed with the Securities and Exchange Commission (“SEC”) on March 31, 2022 (“2021 Form 10-K”).
| 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
| (a) | Use of estimates |
The preparation of the condensed 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, 2021.
| (b) | Revenue Recognition |
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 “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
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.
F- 6
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. |
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.
| (c) | Accounts Receivable |
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.
F- 7
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 nine months ended September 30, 2022 and 2021.
The following customers had an accounts
receivable balance greater than
| September 30, 2022 | December 31, 2021 | |||||||||||||||
| Amount | % | Amount | % | |||||||||||||
| Customer A | $ | % | $ |
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% | ||||||||||
| Customer B | % |
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% | ||||||||||||
| Customer C |
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% | % | ||||||||||||
| Customer D |
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% | % | ||||||||||||
| $ |
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| (c) | Recently issued accounting pronouncements |
In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements. This ASU requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. This Accounting Standards Update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual rights to receive cash. For smaller public business entities, the amendments in this Update are effective for fiscal years beginning after January 1, 2023, including interim periods within those fiscal years. All entities may adopt the amendments in this Update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). The Company is in the process of evaluating the impact of the adoption of this pronouncement on its consolidated financial statements.
The Company reviews new accounting standards as issued. Management has not identified any other new standards that it believes will have a significant impact on the Company’s financial statements.
| 4. | RISKS AND UNCERTAINTIES |
| (a) | Economic and Political Risks |
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.
F- 8
| (b) | Foreign Currency Translation |
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.
| (c) | Concentration of credit risk |
Financial instruments that potentially
expose the Company to significant concentration of credit risk consist primarily of cash and cash equivalents, accounts receivable, other
receivables and advance to suppliers. As of September 30, 2022 and December 31, 2021, 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
| 5. | REVENUE |
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For the
three months ended September 30, |
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| Revenue | 2022 | 2021 | ||||||
| Product sales | $ |
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$ |
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| Franchise fees and income |
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| Revenues from transactions with franchisees |
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| $ |
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$ |
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For the
nine months ended September 30, |
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| Revenue | 2022 | 2021 | ||||||
| Product sales | $ |
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$ |
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| Franchise fees and income |
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| Revenues from transactions with franchisees |
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| $ |
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$ |
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F- 9
| Contract liabilities |
As of
September 30, 2022 |
As of
December 31, 2021 |
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| Deferred revenue related to prepaid coffee and liquor products | $ |
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$ |
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| Deferred revenue related to upfront franchise fees |
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| $ |
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$ |
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Contract liabilities primarily consist
of deferred revenue related to prepaid coffee and 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 recognize as revenue in the next
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.
| 6. | OTHER RECEIVABLES |
As of September 30, 2022 and December 31, 2021, 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.
| 7. | INVENTORY |
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Raw materials (1) | $ |
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$ |
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| Finished goods |
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| Goods in transit |
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| $ |
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$ |
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| (1) |
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| 8. | ADVANCE TO SUPPLIERS |
The suppliers require the Company to pay in advance for the purchase of liquor products. Such advance is appropriated against future purchase orders. These advances are interest free, unsecured and short-term in nature.
| 9. | LEASEHOLD IMPROVEMENT AND EQUIPMENT, NET |
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Leasehold improvement | $ |
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$ |
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| Equipment |
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| Machinery |
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| Computer equipment and software |
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| Motor vehicle |
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| $ |
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$ |
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| Less: Accumulated depreciation |
(
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(
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| $ |
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$ |
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Depreciation expense for the three
and nine months ended September 30, 2022 and 2021 was $
F- 10
| 10. | INTANGIBLE ASSETS |
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| APP Platform (1) | $ |
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$ |
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| Trademarks |
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| Less: accumulated amortization |
(
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(
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| $ |
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$ |
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Amortization expense for the three
and nine months ended September 30, 2022 and 2021 was $
| (1) |
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| 11. | OTHER PAYABLES AND ACCRUALS |
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Accrued payroll and welfare payable | $ |
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$ |
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| VAT and other taxes payable |
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| Others (1) |
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| $ |
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$ |
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| (1) |
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| 12. | ADVANCE FROM CUSTOMERS |
The Company requires retail partners to sign cooperative agreement and to pay in advance for the supply of goods. Such advance is appropriated against future sales orders. These advances are interest free, unsecured and short-term in nature.
| 13. | INCOME TAXES |
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 reporting periods.
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 of dividends by WLJM Cayman to its shareholders, no Cayman Islands withholding tax will be imposed.
WLJM HK was incorporated in Hong Kong
and is subject to an income tax rate of
JYWM WFOE, Shenzhen Wei Lian, Dongguan
Dishi, Shenzhen Nainiang and Nainiang Liquor were incorporated in the PRC and they are subject to profits tax rate at
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.
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.
F- 11
The Company did not record deferred tax assets as of September 30, 2022 and December 31, 2021.
A reconciliation of tax expense from
|
For the
three months ended September 30, |
||||||||
| 2022 | 2021 | |||||||
| Profit before tax | $ |
|
$ |
|
||||
| Tax expense calculated at statutory tax rate |
|
% |
|
% | ||||
| Computed expected tax expense |
|
|
||||||
| Movement in valuation allowance |
(
|
) |
|
|||||
| Others |
(
|
) |
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|||||
| $ |
|
$ |
|
|||||
|
For the
nine months ended September 30, |
||||||||
| 2022 | 2021 | |||||||
| Profit before tax | $ |
|
$ |
|
||||
| Tax expense calculated at statutory tax rate |
|
% |
|
% | ||||
| Computed expected tax expense |
|
|
||||||
| Utilization of tax loss |
(
|
) | ||||||
| Movement in valuation allowance |
|
(
|
) | |||||
| Others |
|
(
|
) | |||||
| $ |
|
$ |
|
|||||
| 14. | LEASES |
The Company has leases for the offices,
factory and warehouse in the PRC, under operating leases expiring on various dates through June 2027, which is classified as operating
leases. In June 2022, the Company entered into a new lease agreement for a lease term of five years upon the expiration of the lease
term for an office in February 2022. In addition, the Company has entered into various leases with lease terms of 12 months that do not
contain a purchase option in 2022. The Company has elected to apply the exemption on the lessee accounting model for all short-term leases
and therefore the operating lease commitment of $
The Company’s future minimum payments under long-term non-cancelable operating leases are as follows:
|
September 30,
2022 |
||||
| Within 1 year | $ |
|
||
| After 1 year but within 5 years |
|
|||
| Total lease payments | $ |
|
||
| Less: imputed interest |
(
|
) | ||
| Total lease obligations |
|
|||
| Less: current obligations |
(
|
) | ||
| Long-term lease obligations | $ |
|
||
F- 12
Other information:
|
For the
nine months ended September 30, |
||||||||
| 2022 | 2021 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flow from operating leases | $ |
|
$ |
|
||||
| Right-of-use assets obtained in exchange for operating lease liabilities |
|
|
||||||
| Remaining lease term for operating leases (years) |
|
|
||||||
| Weighted average discount rate for operating leases |
|
% |
|
% | ||||
| 15. | RELATED PARTIES TRANSACTIONS |
The Company had the following balances with related parties:
| (a) | Amount due from related parties |
| September 30, | December 31, | |||||||||
| Relationship | 2022 | 2021 | ||||||||
| Shenzhen Weilian Jin Meng Culture Spreading Limited |
|
$ |
|
$ |
|
|||||
| Zhu Hong |
|
|
||||||||
| Zhu Jian Yong |
|
|
- | |||||||
| Total | $ |
|
$ |
|
||||||
The balances represent cash advance to the related parties. The balances are unsecured, non-interest bearing and repayable on demand. The Company made cash advance to the related parties during the nine months ended September 30, 2022. for the payment of future business expenses incurred. The Company expects the balance will be fully utilized at the year-end.
| (b) | Amount due to related parties |
| September 30, | December 31, | |||||||||
| Relationship | 2022 | 2021 | ||||||||
| Zhu Hong |
|
$ | $ |
|
||||||
| Total | $ | $ |
|
|||||||
The balances represent Company’s expenses paid on behalf by a related party. The balances are unsecured, non-interest bearing and repayable on demand.
| 16. | COMMITMENTS AND CONTINGENCIES |
Commitments consist of a non-cancelable
consultancy service agreement entered into with a third-party for the provision of services related to the US listing with a contract
sum of $
Except the above commitments and the operating lease commitment as disclosed at Note 14, there are no material commitments.
| 17. | SUBSEQUENT EVENTS |
There are no subsequent events have occurred that would require recognition or disclosure in the financial statements.
F- 13
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management’s discussion and analysis should be read in conjunction with our financial statements and the notes thereto and the other financial information appearing elsewhere in this report. Our financial statements are prepared in U.S. dollars and in accordance with U.S. GAAP.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “pursue,” “expect,” “predict,” “project,” “goals,” “strategy,” “future,” “likely,” “forecast,” “potential,” “continue,” negatives thereof or similar references to future periods. Examples of forward-looking statements include, among others, statements we make regarding business strategies, macro-economic and sector-specific trends, future cash flows, financing plans, plans and objectives of management and any other statements which are not statements of historical facts.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual future results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, legal and regulatory changes in the jurisdictions in which we operate, volatility or decline in our stock price, potential fluctuation of our quarterly and annual financial and operational results, rapid adverse changes in markets, decline in demand for our goods and services, insufficient revenues to cover our operating costs and such other factors as identified in “Item 1A. Risk Factors” described in our most recent annual report on Form 10-K.
Readers are urged to carefully review and consider the various disclosures made by us in this report and our other filings with the SEC. These reports attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements made in this report speak only as of the date hereof and we disclaim any obligation, except as required by law, to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.
Unless otherwise indicated by the context, references to the “Company, “we,” “us,” “our” in this report are to the combined business of Microalliance Group Inc., a Nevada corporation, and its consolidated subsidiaries.
Overview
The Company is primarily engaged in offering two types of products: coffee and liquor. The Company, through its subsidiaries in China, develops, produces, markets and sells flagship “coffee tea” products, which are innovative specialty coffee products with Chinese black tea’s taste, as well as black coffee products and other coffee products. We sell our coffee products wholesale to retail partners and corporate customers, and we also sell directly to consumers in the PRC via our e-commerce channels. We commit to build the first brand of “coffee tea” culture in the PRC. As of the date of this report, we have entered into franchise agreements with a large number of franchisees relating to the distribution, marketing and sale of our coffee products. Our coffee product offerings consist of five different coffee products.
1
Our liquor products are sold across China through sales agents, distributors and franchisees. Our licensed “Nainiang Liquor” retail stores have opened in a dozen of cities in China, such as Beijing, Shanghai, Shenzhen, Xiamen, Chongqing, Chengdu, Kunming, Foshan, Zhaoqing, Huangshan, Jingzhou and Baoding, to mainly market and sell our proprietary brand liquor products to consumers. We supply the licensed retail stores with our liquor products and maintain quality and uniformity throughout the licensed stores by requiring uniform retail prices, providing continual trainings, periodic field visits by our marketing personnel and holding annual and special meetings of franchisees. Such retail stores launch marketing initiatives like tasting events to increase our brand awareness and promote sales. We currently sell six liquor products, including featured “coffee spirit” products and vintage “Baijiu” products. Our “coffee spirit” products are independently innovated by us which we believe are unique in China, with premium quality, good taste and a healthy profit margin. Our “Baijiu” (a type of Chinese liquor made from whole grain with alcohol content of 40-60%) products have excellent quality and we own a large stock of vintage Baijiu whose value grows as they age. As of September 30, 2022, we had RMB114,774,000 (approximately $16.1 million) of such vintage Baijiu in stock based on the historical purchase cost. The liquor market size is massive which generates more revenues than the coffee business.
COVID-19 Impact
Our coffee factory in Dongguan as well as offices, contracted liquor producers and licensed “Nainiang Liquor” retail stores in Shenzhen have been subject to temporary closures from time to time due to COVID-19 resurgences and local containment measures beginning in the first quarter of 2022. Consumer demand for liquor products has dropped during lockdown periods as a result of social distancing policies and reduced gatherings. In addition, our plan to expand internationally has largely stalled due to the COVID-19 pandemic. It remains difficult to predict the full impact of the COVID-19 pandemic on the broader economy and our coffee and liquor businesses in particular.
Critical Accounting Policies and Use of Estimates
We prepare our consolidated financial statements in conformity with U.S. GAAP, which requires management to make certain estimates and to apply judgments. We base our estimates and judgments on historical experience, current trends and other factors that management believes to be important at the time the financial statements are prepared. On a regular basis, we review our accounting policies and how they are applied and disclosed in our condensed consolidated financial statements. Actual results could differ from those estimates made by management.
We believe that of our significant accounting policies, which are described in Note 3 to our consolidated financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.
Revenue Recognition
The Company’s revenues primarily include Company sales, franchise fees and income and revenues from transactions with franchisees.
Product sales
Product sales represent the sale of “coffee tea” and “spirit” products. Such revenue is recognized net of value-added taxes, upon delivery at such time that title passes to the customers.
2
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. |
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.
3
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 September 30, |
||||||||
| Revenue | 2022 | 2021 | ||||||
| Product sales | $ | 433,931 | $ | 3,641,944 | ||||
| Franchise fees and income | 15,526 | 743,150 | ||||||
| Revenues from transactions with franchisees | 3,326,927 | 10,660,302 | ||||||
| $ | 3,776,384 | $ | 15,045,396 | |||||
|
For the
nine months ended September 30, |
||||||||
| Revenue | 2022 | 2021 | ||||||
| Product sales | $ | 4,760,422 | $ | 9,078,664 | ||||
| Franchise fees and income | 496,831 | 889,296 | ||||||
| Revenues from transactions with franchisees | 9,147,696 | 18,947,081 | ||||||
| $ | 14,404,949 | $ | 28,915,041 | |||||
| Contract liabilities |
As of
September 30, 2022 |
As of
December 31, 2021 |
||||||
| Deferred revenue related to prepaid coffee and liquor products | $ | 9,385 | $ | 20,881 | ||||
| Deferred revenue related to upfront franchise fees | 523,796 | 716,634 | ||||||
| $ | 533,081 | $ | 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 September 30, 2022, we expect to recognize revenue of $183,650 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 and accounts receivable. As of September 30, 2022 and December 31, 2021, substantially all of our cash and cash equivalents were deposited with financial institutions with high-credit ratings and quality. The following customers had an accounts receivable balance greater than 10% of total accounts receivable at September 30, 2022 and December 31, 2021.
| September 30, 2022 | December 31, 2021 | |||||||||||||||
| Amount | % | Amount | % | |||||||||||||
| Customer A | $ | - | - | % | $ | 1,540,197 | 51 | % | ||||||||
| Customer B | - | - | % | 1,472,059 | 49 | % | ||||||||||
| Customer C | 539,851 | 56.7 | % | - | - | % | ||||||||||
| Customer D | 410,693 | 43.2 | % | - | - | % | ||||||||||
| $ | 950,544 | 99.9 | % | $ | 3,012,256 | 100 | % | |||||||||
We did not have customers constituting 10% or more of the net revenues in the nine months ended September 30, 2022 and 2021.
4
Recently Issued and Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements. This ASU requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. This Accounting Standards Update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual rights to receive cash. For smaller public business entities, the amendments in this Update are effective for fiscal years beginning after January 1, 2023, including interim periods within those fiscal years. All entities may adopt the amendments in this Update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). We are currently evaluating the impact of the adoption of this pronouncement on its consolidated financial statements.
We review new accounting standards as issued. We have not identified any other new standards that we believe will have a significant impact on our financial statements.
Results of Operations
The following discussion should be read in conjunction with the condensed consolidated financial statements of Microalliance Group Inc. attached hereto for the three and nine months ended September 30, 2022 and 2021.
Comparison of Three Months Ended September 30, 2022 and 2021
Revenue
We generated $3,776,384 in revenue for the three months ended September 30, 2022 compared to $15,045,396 for the three months ended September 30, 2022, a decrease in total revenues of $11,269,012 or 74.9% compared with the three months ended September 30, 2021.
The decrease was mainly due to the outbreaks of additional variants of COVID-19 which are more transmissible (like the Omicron variant and the two sub-variants: BA.1 and BA.2.) or result in more severe sickness (like the Delta variant) having caused negative impacts to our business since January 2022. The Chinese government has been taking actions to contain COVID-19 such as re-imposing previously lifted measures or putting in place additional restrictions including lockdowns of the Guangdong province which is our largest market and Shanghai municipality which is our second largest market to slow the spread of COVID-19. The full-scale lockdown in Shanghai since the end of March for ‘societal zero-Covid’ pursuit to track every Omicron case has led to the dramatic drop in our revenue in Shanghai. In addition, the outbreaks of Omicron in Shenzhen from time to time have triggered selective lockdowns of compounds and multiple rounds of mass testing, as the Chinese government continues maintaining its strict zero-Covid policy. The district where our office building is located was being locked down, which have banned all persons from entering, and our operations were severely impacted . Our revenue in Guangdong dropped sharply compared to the same period of 2021. The closure of Shanghai and Shenzhen has seen many Chinese are losing their incomes and their lifestyle has changed such that their spending on coffee and liquor products are dramatically reduced. As of the date of this report, China’s daily Covid cases jumped to the highest in more than six months, and the outbreaks have flared across different cities in China. We expect that strict virus controls will be in place, and the Chinese economy and our business will only be gradually recovering from recent surges of COVID-19 cases in 2023.
Cost of Revenue
Cost of revenue was $1,755,692 for the three months ended September 30, 2022 compared to $4,430,256 for the three months ended September 30, 2021, a decrease in cost of revenue by $2,674,564 or 60.4%. The cost of revenue consists of the cost of raw materials and cost of manufactured goods sold to customers, including labor cost, rental expense, research and development costs, etc. The decrease in the cost of raw materials was relatively in line with the decrease in revenue, whereas the decrease in labor cost and rental expenses was less than the decrease in revenue due to the fixed costs in nature. Depending on the development of the COVID-19 situation in China, we will explore possibilities to streamline our manpower and will evaluate the impact of any redundancy plans.
5
Gross profit
Gross profit for the three months ended September 30, 2022 was $2,020,692 compared with $10,615,140 for the three months ended September 30, 2021. The gross profit margin was 53.5% for the three months ended September 30, 2022 compared to 70.6% for the three months ended September 30, 2021. Such decrease was due to a lower margin for the liquor products, which comprise a larger portion of our sales during the three months ended September 30, 2022 as compared with the same period of 2021.
Operating Expenses
Selling and marketing expenses
Our selling expenses for the three months ended September 30, 2022 and 2021 were $213,220 and $219,006, respectively. The selling and marketing expenses decreased $5,786 or 2.6%. Selling expenses consist primarily of salary and welfare for sales staff, advertising expense and exhibition expense. Although our revenue dropped, the labor costs and other fixed costs were stable due to inflation, which led to the slight decrease of selling and marketing expenses.
General and administrative expenses
By far the most significant component of our operating expenses for both the three months ended September 30, 2022 and 2021 was general and administrative expenses of $233,874 and $525,927, respectively. The following table sets forth the main components of our general and administrative expenses for the three months ended September 30, 2022 and 2021.
| 2022 | 2021 | |||||||||||||||
|
Amount
(US$) |
% of
Total |
Amount
(US$) |
% of
Total |
|||||||||||||
| General and administrative expense: | ||||||||||||||||
| Consultancy fee | $ | 19,743 | 8 | % | $ | 239,582 | 45 | % | ||||||||
| Salary and welfare | 113,496 | 48 | % | 135,404 | 26 | % | ||||||||||
| Rental expenses | 36,441 | 16 | % | 60,756 | 11 | % | ||||||||||
| Research and development costs | - | - | % | - | - | % | ||||||||||
| Office expenses | 25,246 | 11 | % | 25,256 | 5 | % | ||||||||||
| Travel and accommodations | 9,314 | 4 | % | 4,339 | 1 | % | ||||||||||
| Entertainment | 18,761 | 8 | % | 13,326 | - | % | ||||||||||
| Others | 10,873 | 5 | % | 47,204 | 9 | % | ||||||||||
| Total general and administrative expenses | $ | 233,874 | 100 | % | $ | 525,927 | 100 | % | ||||||||
General and administrative expenses decreased by $292,053 or 55.5% from $525,927 for the three months ended September 30, 2021 to $233,874 for the three months ended September 30, 2022. The decrease in consultancy fee for the three months ended September 30, 2022 was mainly due to the absence of legal and professional fees and business consultancy fees incurred during the same period of 2021 in connection with the acquisition of Nainiang Liquor on June 3, 2021, including the filing of the corresponding Form 8-K containing the audited financial statements of Nainiang Liquor on August 16, 2021.
Net Profit
We reported a net profit of $7,319,062 for the three months ended September 30, 2021 compared to a net profit of $1,200,669 for the three months ended September 30, 2022, a decrease of $6,118,393 or 83.6%. The decrease was primarily attributable to the fact that our gross profit has dropped significantly whereas the selling and administrative expenses decreased by only 40.0% due to some costs and expenses being fixed costs in nature.
6
Comparison of Nine Months Ended September 30, 2022 and 2021
Revenue
We generated $14,404,949 in revenue for the nine months ended September 30, 2022 compared to $28,915,041 for the nine months ended September 30, 2021, a decrease in total revenues of $14,510,092 or 50.2% compared with the nine months ended September 30, 2021.
The decrease was mainly due to the outbreaks of additional variants of COVID-19 which are more transmissible (like the Omicron variant and the two sub-variants: BA.1 and BA.2.) or result in more severe sickness (like the Delta variant) having caused negative impacts to our business since January 2022. The Chinese government has been taking actions to contain COVID-19 such as re-imposing previously lifted measures or putting in place additional restrictions including lockdowns of the Guangdong province which is our largest market and Shanghai municipality which is our second largest market to slow the spread of COVID-19. The full-scale lockdown in Shanghai since the end of March for ‘societal zero-Covid’ pursuit to track every Omicron case has led to the dramatic drop in our revenue in Shanghai. In addition, the outbreaks of Omicron in Shenzhen from time to time have triggered selective lockdowns of compounds and multiple rounds of mass testing, as the Chinese government continues maintaining its strict zero-Covid policy. The district where our office building is located was being locked down, which have banned all persons from entering, and our operations were severely impacted . Our revenue in Guangdong dropped sharply compared to the same period of 2021. The closure of Shanghai and Shenzhen has seen many Chinese are losing their incomes and their lifestyle has changed such that their spending on coffee and liquor products are dramatically reduced. As of the date of this report, China’s daily Covid cases jumped to the highest in more than six months, and the outbreaks have flared across different cities in China. We expect that strict virus controls will be in place, and the Chinese economy and our business will only be gradually recovering from recent surges of COVID-19 cases in 2023.
Cost of Revenue
Cost of revenue was $4,936,469 for the nine months ended September 30, 2022 compared to $8,141,174 for the nine months ended September 30, 2021. The decrease of cost of revenue was $3,204,705 or 39.4%. The cost of revenue consists of the cost of raw materials and cost of manufactured goods sold to customers, including labor cost, rental expense, research and development costs, etc. The decrease in the cost of raw materials was relatively in line with the decrease in revenue, whereas the decrease in labor cost and rental expenses was less than the decrease in revenue due to the fixed costs in nature. In addition, we completed the acquisition of Nainiang Liquor on June 3, 2021 and thus, since the third quarter of 2021, we incurred significant labor costs due to the increase of headcount through the business acquisition. Depending on the development of the COVID-19 situation in China, we will explore possibilities to streamline our manpower and will evaluate the impact of any redundancy plans.
Gross profit
Gross profit for the nine months ended September 30, 2022 was $9,468,480 compared with $20,773,867 for the nine months ended September 30, 2021. The decrease in gross profit margin from 71.8% for the nine months ended September 30, 2021 to 65.7% for the nine months ended September 30, 2022 was due to a lower margin for the liquor products, which comprise a larger portion of our sales during the nine months ended September 30, 2022 as compared with the same period of 2021.
Operating Expenses
Selling and marketing expenses
Our selling expenses for the nine months ended September 30, 2022 and 2021 was $576,917 and $392,350, respectively. Selling expenses consist primarily of salary and welfare for sales staff, advertising expense and exhibition expense. The increase in selling and marketing expenses was $184,567 or 47.0%. Although our revenue dropped, the labor costs and other fixed costs have been rising due to inflation, which led to the increase of selling and marketing expenses. In addition, we incurred more expenses since the third quarter of 2021 as a result of the consolidation of the results of Nainiang Liquor through the business acquisition on June 3, 2021.
7
General and administrative expense
By far the most significant component of our operating expenses for both the nine months ended September 30, 2022 and 2021 was general and administrative expenses of $1,178,206 and $1,087,491, respectively. The following table sets forth the main components of our general and administrative expenses for the nine months ended September 30, 2022 and 2021.
| For the nine months ended September 30, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
|
Amount
(US$) |
% of
Total |
Amount
(US$) |
% of
Total |
|||||||||||||
| General and administrative expense: | ||||||||||||||||
| Consultancy fee | $ | 449,183 | 38 | % | $ | 456,433 | 42 | % | ||||||||
| Salary and welfare | 323,697 | 27 | % | 223,541 | 21 | % | ||||||||||
| Rental expenses | 197,327 | 17 | % | 220,594 | 20 | % | ||||||||||
| Research and development costs | - | - | % | 44,263 | 4 | % | ||||||||||
| Office expenses | 42,876 | 4 | % | 38,467 | 4 | % | ||||||||||
| Travel and accommodations | 40,649 | 3 | % | 17,016 | 1 | % | ||||||||||
| Entertainment | 45,169 | 4 | % | 20,297 | 2 | % | ||||||||||
| Others | 79,305 | 7 | % | 66,880 | 6 | % | ||||||||||
| Total general and administrative expenses | $ | 1,178,206 | 100 | % | $ | 1,087,491 | 100 | % | ||||||||
Increase in general and administrative expenses by $90,715 or 8.3% from $1,087,491 for the nine months ended September 30, 2021 to $1,178,206 for the nine months ended September 30, 2022. Our general and administrative expenses remained constant over the comparable financial periods as most of these business costs were fixed costs that did not fluctuate despite a negative financial impact on our revenues of the COVID-19 pandemic.
Net Profit
We recorded a net profit of $5,748,299 for the nine months ended September 30, 2022 compared to $14,606,745 for the nine months ended September 30, 2021, a decrease of $8,858,446 or 60.6%. The decrease was primarily attributable to the fact that our revenue has decreased significantly, whereas the selling and administrative expenses increased due to some expenses being fixed costs in nature.
Liquidity and Capital Resources
| September 30, | December 31, | |||||||
| Working capital: | 2022 | 2021 | ||||||
| Total current assets | $ | 31,915,895 | $ | 30,383,395 | ||||
| Total current liabilities | (1,049,849 | ) | (2,731,608 | ) | ||||
| Working capital surplus | $ | 30,866,046 | $ | 27,651,787 | ||||
As of September 30, 2022, we had cash and cash equivalents of $3,685,863. To date, we have financed our operations primarily through our working capital. The following table provides detailed information about our net cash flows for the nine months ended September 30, 2022 and 2021:
| Cash flows: | 2022 | 2021 | ||||||
| Net cash provided by operating activities | $ | 2,848,318 | 1,272,046 | |||||
| Net cash used in investing activities | (16,524 | ) | (117,859 | ) | ||||
| Effect of exchange rate changes on cash and cash equivalents | (336,396 | ) | 4,470 | |||||
| Net increase in cash and cash equivalents | 2,495,398 | 1,158,657 | ||||||
| Cash and cash equivalents at the beginning of year | 1,190,465 | 61,517 | ||||||
| Cash and cash equivalents at the end of the three-month period | $ | 3,685,863 | 1,220,174 | |||||
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Operating Activities
Net cash provided by operating activities was $2,848,318 for the nine months ended September 30, 2022. The difference between our net profit of $5,748,299 and net cash used in operating activities was mainly attributable to the depreciation and amortization of non-current assets of $132,426, and the decrease in other operating assets and liabilities of $3,047,581 which was generally due to the increase in purchase of inventories of $5,615,566 and the decrease in income tax payables balance of $1,049,389 which offset with the decrease in accounts receivable of $1,878,115 and the decrease in advance to suppliers of $2,223,736.
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 $13,334,499 which was generally due to the decrease accounts receivables of $1,205,866, the increase in advance to suppliers of $3,953,044, the increase in purchase of inventories of $7,092,718 and the decrease in accounts payables, other payables and accruals of $1,029,640.
Investing Activities
Cash used in investing activities for the nine months ended September 30, 2022 was $16,524, as compared to cash used in investing activities of $117,859 for the nine months ended September 30, 2021. The cash used in investing activities during the nine months ended September 30, 2022 represents the acquisition of leasehold improvements and equipment and intangible assets. The cash used in investing activities during the nine months ended September 30, 2021 was mainly attributable to acquisition of leasehold improvements and equipment and intangible assets, which offset by the cash acquired from the acquisition of Nainiang Liquor. We have been controlling our spending in investing activities due to the uncertainty of the COVID-19 pandemic’s impact on our business, and we will continue evaluating and assessing the impact to determine our plan for increasing our capital expenditures in the future periods.
Financing Activities
There were no cash flow movements from financing activities during the nine months ended September 30, 2022 and 2021.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our senior management, including our Chief Executive and Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of September 30, 2022. Based on this evaluation, our Chief Executive and Financial Officer concluded as of September 30, 2022 that our disclosure controls and procedures were not effective such that the information relating to us required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive and Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The Company’s former management abandoned all operations for several years, and only in 2019 did the Company appoint new management to make filings with the SEC on behalf of the Company. Additionally, our Chief Executive and Financial Officer and the Company’s employees do not have deep experience operating companies which are required to make periodic disclosures with the SEC, which we believe negatively impacts our ability to provide timely disclosure.
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As we disclosed in our most recent Annual Report on Form 10-K, during our assessment of the effectiveness of internal control over financial reporting as of December 31, 2021, management identified the following material weaknesses in our internal control over financial reporting: (1) lack of a functioning audit committee, (2) lack of a majority of outside directors on our Board, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; (3) inadequate segregation of duties consistent with control objectives; (4) the management of subsidiary companies who do not possess a mature understanding of U.S. GAAP or U.S. securities laws; and (5) management dominated by a small group of individuals without adequate compensating controls.
Our management has hired outside consultants experienced in US GAAP financial reporting to assist us and is committed to taking further action and implementing additional improvements.
Our management does not believe that the foregoing material weaknesses had a material effect on our financial condition or results of operations or caused our unaudited condensed consolidated financial statements as of and for the period ended September 30, 2022 to contain a material misstatement.
Changes in Internal Control over Financial Reporting
Except for the matters described above, there were no changes in our internal controls over financial reporting during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. We are currently not aware of any legal proceedings or claims that would require disclosure under Item 103 of Regulation S-K. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
ITEM 1A. RISK FACTORS.
There are no material changes from the risk factors previously disclosed in Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Other than as previously disclosed in current reports on Form 8-K, there were no unregistered sales of equity securities or repurchase of common stock during the period covered by this report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
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ITEM 6. EXHIBITS.
The following exhibits are filed as part of this report or incorporated by reference:
| Exhibit No. | Description | |
| 31.1 | Certifications of Principal Executive Officer and Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certifications of Principal Executive Officer and Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (the cover page XBRL tags are embedded within the iXBRL document). |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| MICROALLIANCE GROUP INC. | ||
| (Registrant) | ||
| Dated: November 14, 2022 | By: | /s/ Hong Zhu |
| Hong Zhu | ||
|
Chief Executive Officer
and
Chief Financial Officer |
||
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