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.

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: