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 theU.S. Private Securities Litigation Reform Act of 1995. Because they discuss future events or conditions, forward-looking statements may include words such as "anticipate," "believe," "estimate," "intend," "could," "should," "would," "may," "seek," "plan," "might," "will," "pursue," "expect," "predict," "project," "goals," "strategy," "future," "likely," "forecast," "potential," "continue," negatives thereof or similar references to future periods. Examples of forward-looking statements include, among others, statements we make regarding future acquisition or merger targets, business strategies, macro-economic and sector-specific trends, future cash flows, financing plans, plans and objectives of management and any other statements which are not statements of historical facts. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual future results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, inability to successfully conclude acquisitions of target companies or assets which are reasonably capable of generating positive cash flow in the near future, legal and regulatory changes in the jurisdictions in which we operate, volatility or decline in our stock price, potential fluctuation of our quarterly and annual financial and operational results, rapid adverse changes in markets, decline in demand for our goods and services, insufficient revenues to cover our operating costs and such other factors as discussed throughout this section.
Except as required by applicable law, including the securities laws of
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this report. Our consolidated financial statements have been prepared in accordance withU.S. GAAP. The following discussion and analysis contain forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. For additional information regarding these risks and uncertainties, please see this Part I, Item 2 ("Management's Discussion and Analysis of Financial Condition and Results of Operations") of this Quarterly Report on Form 10-Q. Overview The Company is aU.S. holding company incorporated inNevada onFebruary 25, 2004 , and operating through the Company's wholly owned subsidiary,Wei Lian Jin Meng Group Limited ("WLJM Cayman"), a company incorporated under the laws of theCayman Islands onJune 30, 2020 . The Company's entire business, including operations, employees, sales and marketing and research and development, are all conducted through its subsidiaries located within the People's Republic of
China ("PRC").
The following is the organization structure of the Company along with ownership detail of all companies:
WLJM Cayman was incorporated in the
WLJM (Hong Kong ) Limited ("WLJM HK"), was established in theHong Kong Special Administrative Region ("HKSAR") of the PRC onAugust 5, 2020 . It is 100% owned by WLJM Cayman. 2
Shenzhen Wei Lian Jin Meng Electronic Commerce Limited ("Shenzhen Wei Lian") was incorporated onOctober 17, 2017 , under the laws of the PRC. It is 100% owned by JYWM WFOE.
Shenzhen Nainiang Coffee Art Museum Limited ("Nainiang Coffee") was incorporated onJune 20, 2019 , under the laws of the PRC. It is 100% owned by Shenzhen Wei Lian.Shenzhen Nainiang Wine Industrial Co., Ltd. ("Nainiang Wine") was incorporated onJanuary 14, 2020 , under the laws of the PRC. It is 99% owned byShenzhen
Wei Lian.
The Company, through our subsidiaries, engaged in the business of wholesale distribution of "coffee tea" and wine products to retail partners and corporate customers, selling "coffee tea" and wine products to individual consumers and providing pre-opening assistance to retail partners to operate coffee and wine stores inthe People's Republic of China ("PRC" or "China").
Critical Accounting Policies and Use of Estimates
We prepare our condensed consolidated financial statements in conformity withU.S. GAAP, which requires management to make certain estimates and to apply judgments. We base our estimates and judgments on historical experience, current trends and other factors that management believes to be important at the time the financial statements are prepared. On a regular basis, we review our accounting policies and how they are applied and disclosed in our condensed consolidated financial statements. Actual results could differ from those estimates made by management. We believe that of our significant accounting policies, which are described in Note 3 to our condensed consolidated financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations. Revenue Recognition
Our revenues primarily include product sales, franchise fees and income and revenues from transactions with franchisees.
Product sales
Product sales represents the sale of "coffee tea" and wine products. Such revenue is recognized net of value-added taxes, upon delivery at such time that title passes to the customers.
Franchise fees and income
Franchise fees and income primarily include upfront franchise fees, such as initial fees, pre-opening assistance to operate wine stores, subsequent training provided to franchisees and renewal fees. We have determined that the services provided in exchange for upfront franchise fees are highly interrelated with the franchise rights. The franchise rights are accounted for as rights to access our symbolic intellectual property in accordance with ASC 606, and we recognize upfront franchise fees received from a franchisee as revenue when performance obligations are satisfied in accordance with the franchise agreement or the renewal agreement. The franchise agreement term is typically 3 years. 3
Revenues from transactions with franchisees
Revenues from transactions with franchisees consist primarily of sales of wine products. We sell and deliver wine products to the franchisees. The performance obligations arising from such transactions are considered distinct from the franchise agreement as they are not highly dependent on the franchise agreement and the customer can benefit from the procurement service on its own. Revenue is recognized upon transfer of control over ordered items, generally upon delivery to the franchisees. In determining the amount and timing of revenue from contracts with customers, we exercise significant judgment with respect to collectability of the amount; however, the timing of recognition does not require significant judgment, as it is based on either the franchise term or the date of product shipment, none
of which require estimation.
We do not incur a significant amount of contract acquisition costs in conducting its franchising activities. We believe its franchising arrangements do not contain a significant financing component.
Our revenue recognition policy is compliant with ASC 606, Revenue from Contracts with Customers, and revenue is recognized when a customer obtains control of promised goods and is recognized in an amount that reflects the consideration that we expect to receive in exchange for those goods. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amount of revenue that is recorded reflects the consideration that we expect to receive in exchange for those goods. We apply the following five-step model in order to determine this amount: (i) identification of the goods and services in the contract; (ii) determination of whether the goods and services are performance
obligations, including whether they are distinct in the context of the
contract;
(iii) measurement of the transaction price, including the constraint on variable
consideration; (iv) allocation of the transaction price to the performance obligations; and
(v) recognition of revenue when (or as) the Company satisfies each performance
obligation. 4
We only apply the five-step model to contracts when it is probable that we will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. Once a contract is determined to be within the scope of ASC 606 at contract inception, we review the contract to determine which performance obligations we must deliver and which of these performance obligations are distinct. We recognize as revenues the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied. Generally, our performance obligations are transferred to customers at a point in time, typically upon delivery or service being rendered.
For all reporting periods, we have not disclosed the value of unsatisfied performance obligations for all product revenue contracts with an original expected length of one year or less, which is an optional exemption that is permitted under the adopted rules.
For the Three months ended Revenue September 30, 2021 2020 Product sales$ 3,641,944 $ 459,795 Franchise fees and income 743,150 - Revenues from transactions with franchisees 10,660,302 -$ 15,045,396 $ 459,795 5 For the Nine months ended Revenue September 30, 2021 2020 Product sales$ 9,078,664 $ 927,889 Franchise fees and income 889,296 - Revenues from transactions with franchisees 18,947,081 -$ 28,915,041 $ 927,889 As of As of September 30, December 31, Contract liabilities 2021 2020
Deferred revenue related to prepaid coffee and wine products
152,039 -$ 259,260 $ 27,648 Contract liabilities primarily consist of deferred revenue related to prepaid wine products and upfront franchise fees. Deferred revenue related to prepaid wine products represents advance from franchisees for future supply of products which is expected to be recognized as revenue in the next 12 months. Deferred revenue related to upfront franchise fees represents the training service to be delivered over the term of franchise agreement that as ofJune 30, 2021 , we expect to recognize revenue of$152,039 within the next 12 months. We have elected, as a practical expedient, not to disclose the value of remaining performance obligations associated with the franchise agreement in exchange for franchise right and related training services. The remaining duration of the performance obligation is the remaining contractual term of each franchise agreement. Revenue from training services provided to franchisees is recognized upon the conduct and delivery of training. Concentrations of Credit Risk Financial instruments that potentially expose us to significant concentration of credit risk consist primarily of cash and cash equivalents, accounts receivable, other receivables, prepayment and advance to suppliers. As ofSeptember 30, 2021 andDecember 31, 2020 , substantially all of our cash and cash equivalents were deposited with financial institutions with high-credit ratings and quality. The following customers had an accounts receivable balance greater than 10% of total accounts receivable atSeptember 30, 2021 . Amount % Customer A$ 1,196,119 48 % Customer B 1,289,211 52 %$ 2,485,330 100 %
We did not have customers constituting 10% or more of the net revenues in the
three and nine months ended
Recently Issued and Adopted Accounting Pronouncements
InJune 2016 , the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments." This pronouncement, along with subsequent ASUs issued to clarify provisions of ASU 2016-13, changes the impairment model for most financial assets and will require the use of an "expected loss" model for instruments measured at amortized cost. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. In developing the estimate for lifetime expected credit loss, entities must incorporate historical experience, current conditions, and reasonable and supportable forecasts. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning afterDecember 15, 2019 . OnNovember 19, 2019 , the FASB issued ASU No. 2019-10, Financial Instruments-Credit Losses (Topic 326), finalized various effective date delays for private companies, not-for-profit organizations, and certain smaller reporting companies applying the credit losses (CECL), the revised effective date isJanuary 2023 . 6 InDecember 2019 , the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. ASU 2019-12 is effective for fiscal years beginning afterDecember 15, 2021 . Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. We are currently evaluating the impacts of the provisions of ASU 2019-12 on its financial condition, results of operations, and cash flows. Results of Operations
Comparison of Three Months Ended
The following discussion should be read in conjunction with the condensed
consolidated financial statements of
Revenue We generated$15,045,396 in revenue for the three months endedSeptember 30, 2021 compared to$459,795 for the three months endedSeptember 30, 2020 . There was an increase in total revenues of$14,585,601 or 3172% compared with the three months endedSeptember 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 inJanuary 2021 . In addition, we acquired Nainiang Wine onJune 3, 2021 , which contributed$10,893,592 to our consolidated revenue for the three months endedSeptember 30, 2021 . Cost of Revenue Cost of revenue was$4,430,256 for the three months endedSeptember 30, 2021 compared to$24,943 for the three months endedSeptember 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 endedSeptember 30, 2021 . Gross profit
Gross profit for the three months endedSeptember 30, 2021 was$10,615,140 compared with$373,552 for the three months endedSeptember 30, 2020 . The decrease in gross profit margin of 71% for the three months endedSeptember 30, 2021 compared to 81% for the three months endedSeptember 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 endedSeptember 30, 2021 was 65%. Operating Expenses
Selling and marketing expenses
Our selling expenses for the three months endedSeptember 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. 7
General and administrative expense
By far the most significant component of our operating expenses for both the three months endedSeptember 30, 2021 and 2020 was general and administrative expenses of$525,927 and$700,095 , respectively. The following table sets forth the main components of our general and administrative expenses for the three months endedSeptember 30, 2021 and 2020. For the three months ended September 30, 2021 2020 Amount % of Amount % of (US$) Total (US$) Total General and administrative expense: Consultancy fee$ 239,582 45 %$ 250,454 36 % Salary and welfare 135,404 26 % 132,871 19 % Rental expenses 60,756 11 % 66,870 10 %
Research and development costs - -
% 1,689 0 % Office expenses 25,256 5 % 29,532 4 % Travel and accommodations 4,339 1 % 8,720 1 % Entertainment 13,326 3 % 7,104 1 %
Impairment losses on long-lived assets - - % 76,199 11 % Others 47,204 9 % 126,656 18 % Total general and administrative expenses$ 525,927 100
%$ 700,095 100 %
The$174,168 , or 25%, decrease in general and administrative expenses, from$700,095 for the three months endedSeptember 30, 2020 to$525,927 for the three months endedSeptember 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$7,319,062 for the three months endedSeptember 30, 2021 compared to a net loss of$(351,435) for the three months endedSeptember 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 endedSeptember 30, 2021 .
Comparison of Nine Months Ended
The following discussion should be read in conjunction with the condensed
consolidated financial statements of
Revenue
We generated$28,915,041 in revenue for the nine months endedSeptember 30, 2021 compared to$927,889 for the nine months endedSeptember 30, 2020 . There was an increase in total revenues of$27,987,152 or 3016% compared with the nine months endedSeptember 30, 2020 . 8
Our business is gradually recovering from the COVID-19 pandemic, which has been less severe than in 2020. The measures taken by the Chinese government to contain the virus have been effective, business has returned to normal and the market has substantially regained confidence. The recovery of the economy has positively affected our results, and we earned a significant portion of revenue from our new wine products that was launched inJanuary 2021 . In addition, we acquired Nainiang Wine onJune 3, 2021 , which contributed$15,537,182 to our consolidated revenue for the nine months endedSeptember 30, 2021 . Cost of Revenue
Cost of revenue was$8,141,174 for the nine months endedSeptember 30, 2021 compared to$155,541 for the nine months endedSeptember 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 endedSeptember 30, 2021 . Gross profit Gross profit for the nine months endedSeptember 30, 2021 was$20,773,867 compared with$772,348 for the nine months endedSeptember 30, 2020 . The decrease in gross profit margin of 72% for the nine months endedSeptember 30, 2021 compared to 83% for the nine months endedSeptember 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 endedSeptember 30, 2021 was 64%. Operating Expenses
Selling and marketing expenses
Our selling expenses for the nine months endedSeptember 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 endedSeptember 30, 2021 .
General and administrative expense
By far the most significant component of our operating expenses for both the nine months endedSeptember 30, 2021 and 2020 was general and administrative expenses of$1,087,491 and$1,279,879 , respectively. The following table sets forth the main components of our general and administrative expenses for the nine months endedSeptember 30, 2021 and 2020. For the nine months ended September 30, 2021 2020 Amount % of Amount % of (US$) Total (US$) Total General and administrative expense: Consultancy fee$ 456,433 42 %$ 447,375 35 % Salary and welfare 223,541 21 % 269,339 21 % Rental expenses 220,594 20 % 196,005 15 %
Research and development costs 44,263 4
% 49,986 4 % Office expenses 38,467 4 % 36,633 3 % Travel and accommodations 17,016 1 % 17,560 1 % Entertainment 20,297 2 % 10,833 1 %
Impairment losses on long-lived assets - - 76,199 6 % Others 66,880 6 % 175,949 14 % Total general and administrative expenses$ 1,087,491 100
%$ 1,279,879 100 % 9 Decrease in general and administrative expenses by$192,388 or 15% from$1,279,879 for the nine months endedSeptember 30, 2020 to$1,087,491 for the nine months endedSeptember 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 endedSeptember 30, 2021 . Net Profit
We incurred a net profit of$14,606,745 for the nine months endedSeptember 30, 2021 compared to a net loss of$(590,347) for the nine months endedSeptember 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$7,278,228 to our consolidated net profit for the nine months endedSeptember 30, 2021 .
Liquidity and Capital Resources
September 30, December 31, 2021 2020 Working capital: Total current assets$ 27,300,723 $ 505,082 Total current liabilities (4,224,475 ) (1,947,717 )
Working capital surplus (deficiency)
As ofSeptember 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 endedSeptember 30, 2021 and 2020:
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