10-Q 1 ewlu_10q.htm FORM 10-Q ewlu_10q.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

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

 

For the quarterly period ended June 30, 2019

 

¨

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

 

For the transition period from ___________ to ___________

 

Commission file number 333-173681

 

Merion, Inc.

(Name of small business issuer in its charter)

 

Nevada

 

5122

 

45-2898504

(State or Other Jurisdiction of

 

(Primary Standard Industrial

 

(I.R.S. Employer

Incorporation or Organization)

 

Classification Code Number)

 

Identification No.)

 

100 N. Barranca St. #1000

West Covina, CA

 

91791

(Address of principal executive offices)

 

(Zip Code)

 

100 N. Barranca St. #1000

West Covina, CA 91791

(626) 331-7570

 (Address and telephone number of principal executive offices and principal place of business)

 

None.

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

 

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 x No ¨

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See 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

¨

Non-accelerated filer

x

Smaller reporting company

x

(Do not check if a smaller reporting company)

Emerging growth company

¨

 

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 ¨ No x

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange

on which registered

None

 

N/A

 

N/A

 

 

As of September 6, 2019, there were 177,264,208 issued and outstanding shares of the registrant’s common stock.

 

 
 
 

 

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

3

Item 2.

Management’s Discussion and Analysis or Plan of Operation

20

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

26

Item 4.

Controls and Procedures

26

 

 

PART II — OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

27

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

27

Item 6.

Exhibits

28

 

 
2
 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

MERION, INC.

 

CONDENSED BALANCE SHEETS

 

 

 

June 30

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(UNAUDITED)

 

 

 

 

ASSETS

CURRENT ASSETS:

 

 

 

 

 

 

Cash

 

$767

 

 

$295,521

 

Accounts receivable, net

 

 

49,414

 

 

 

673

 

Inventories

 

 

161,974

 

 

 

50,339

 

Prepaid expenses

 

 

18,598

 

 

 

69,631

 

TOTAL CURRENT ASSETS

 

 

230,753

 

 

 

416,164

 

 

 

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT, net

 

 

357,331

 

 

 

390,692

 

RIGHT-OF-USE ASSET

 

 

579,024

 

 

 

-

 

DEPOSITS

 

 

15,410

 

 

 

-

 

TOTAL ASSETS

 

$1,182,518

 

 

$806,856

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$1,395,017

 

 

$1,173,546

 

Deferred revenue

 

 

7,436

 

 

 

1,522,280

 

Accrued bonus

 

 

28

 

 

 

679,800

 

Lease liabilities - current

 

 

96,211

 

 

 

-

 

Due to shareholder, interest bearing

 

 

471,603

 

 

 

471,603

 

Due to shareholder, non-interest bearing

 

 

588,863

 

 

 

2,508,051

 

Advances from related parties, interest bearing

 

 

-

 

 

 

30,000

 

Advances from related parties, non-interest bearing

 

 

-

 

 

 

518,839

 

Due to employee

 

 

-

 

 

 

95,000

 

Due to third parties, interest bearing

 

 

-

 

 

 

109,030

 

Due to third parties, non-interest bearing

 

 

-

 

 

 

101,666

 

TOTAL CURRENT LIABILITIES

 

 

2,559,158

 

 

 

7,209,815

 

 

 

 

 

 

 

 

 

 

NON-CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Lease liabilities - non-current

 

 

476,545

 

 

 

-

 

Due to shareholder, non-interest bearing

 

 

2,000,000

 

 

 

-

 

Advances from related parties, interest bearing

 

 

30,000

 

 

 

-

 

Advances from related parties, non-interest bearing

 

 

518,839

 

 

 

-

 

Due to employee

 

 

95,000

 

 

 

-

 

Due to third parties, interest bearing

 

 

20,000

 

 

 

-

 

Due to third parties, non-interest bearing

 

 

50,000

 

 

 

-

 

TOTAL NON-CURRENT LIABILITIES

 

 

3,190,384

 

 

 

-

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

 

5,749,542

 

 

 

7,209,815

 

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' DEFICIT:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, 200,000,000 shares authorized,

 

 

 

 

 

 

 

 

177,264,208 and 174,792,364 shares issued and outstanding,

 

 

 

 

 

 

 

 

as of June 30, 2019 and December 31, 2018, respectively

 

 

177,264

 

 

 

174,792

 

Stock subscription receivable

 

 

(1,110,695)

 

 

(1,200,000)

Additional paid-in capital

 

 

19,054,535

 

 

 

17,573,900

 

Deferred stock compensation

 

 

(1,029,793)

 

 

(738,185)

Deficit

 

 

(21,658,335)

 

 

(22,213,466)

TOTAL SHAREHOLDERS' DEFICIT

 

 

(4,567,024)

 

 

(6,402,959)

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT

 

$1,182,518

 

 

$806,856

 

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

 
3
 
Table of Contents

 

MERION, INC.

 

 

 

 

 

 

 

 

 

CONDENSED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

SALES

 

 

 

 

 

 

 

 

 

 

 

 

Direct Sales

 

$1,359,018

 

 

$130,946

 

 

$1,472,347

 

 

$160,129

 

OEM and Packaging

 

 

118,631

 

 

 

15,963

 

 

 

153,679

 

 

 

51,488

 

TOTAL SALES

 

 

1,477,649

 

 

 

146,909

 

 

 

1,626,026

 

 

 

211,617

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COST OF SALES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Sales

 

 

32,570

 

 

 

22,027

 

 

 

44,552

 

 

 

36,791

 

OEM and Packaging

 

 

41,607

 

 

 

3,615

 

 

 

69,986

 

 

 

16,029

 

Idle Capacity

 

 

-

 

 

 

75,342

 

 

 

-

 

 

 

133,109

 

TOTAL COST OF SALES

 

 

74,177

 

 

 

100,984

 

 

 

114,538

 

 

 

185,929

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

 

1,403,472

 

 

 

45,925

 

 

 

1,511,488

 

 

 

25,688

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling expenses

 

 

15,552

 

 

 

25,915

 

 

 

39,470

 

 

 

257,816

 

General and administrative expenses

 

 

352,239

 

 

 

312,363

 

 

 

742,660

 

 

 

675,231

 

Stock compensation expense

 

 

-

 

 

 

44,000

 

 

 

-

 

 

 

524,000

 

Amortization of deferred stock compensation cost

 

 

253,650

 

 

 

-

 

 

 

428,392

 

 

 

-

 

Total operating expenses

 

 

621,441

 

 

 

382,278

 

 

 

1,210,522

 

 

 

1,457,047

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) FROM OPERATIONS

 

 

782,031

 

 

 

(336,353)

 

 

300,966

 

 

 

(1,431,359)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE), net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

11,346

 

 

 

28,764

 

 

 

44,187

 

 

 

102,083

 

Finance expenses

 

 

(16,122)

 

 

(18,221)

 

 

(31,448)

 

 

(36,298)

Gain on debt settlement

 

 

-

 

 

 

-

 

 

 

241,426

 

 

 

-

 

Total other (expense) income, net

 

 

(4,776)

 

 

10,543

 

 

 

254,165

 

 

 

65,785

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) BEFORE INCOME TAXES

 

 

777,255

 

 

 

(325,810)

 

 

555,131

 

 

 

(1,365,574)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS)

 

$777,255

 

 

$(325,810)

 

$555,131

 

 

$(1,365,574)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF COMMON SHARES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

177,251,571

 

 

 

171,610,812

 

 

 

176,158,993

 

 

 

170,631,039

 

Diluted

 

 

178,291,586

 

 

 

171,610,812

 

 

 

177,451,005

 

 

 

170,631,039

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) PER SHARE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$0.00

 

 

$(0.00)

 

$0.00

 

 

$(0.01)

Diluted

 

$0.00

 

 

$(0.00)

 

$0.00

 

 

$(0.01)

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

 
4
 
Table of Contents

 

MERION, INC.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT

 

 

 

For the Six Months Ended June 30, 2018

 

 

 

Common Stock

 

 

Stock

 

 

Additional

 

 

Deferred

 

 

 

 

 

 

 

 

 

 

 

Subscription

 

 

Paid-in

 

 

Stock

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Receivable

 

 

Capital

 

 

Compensation

 

 

Deficit

 

 

Total

 

BALANCE, January 1, 2018

 

 

169,161,896

 

 

$169,162

 

 

$(123,455)

 

$11,870,808

 

 

$-

 

 

$(19,066,648)

 

$(7,150,133)

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,039,764)

 

 

(1,039,764)

Issuance of common stock for cash

 

 

759,563

 

 

 

760

 

 

 

(57,709)

 

 

682,838

 

 

 

-

 

 

 

-

 

 

 

625,889

 

Issuance of common stock for purchase of machinery and intangible assets

 

 

1,000,000

 

 

 

1,000

 

 

 

-

 

 

 

319,000

 

 

 

-

 

 

 

-

 

 

 

320,000

 

Cancellation of stock subscription

 

 

(111,110)

 

 

(111)

 

 

100,000

 

 

 

(99,889)

 

 

-

 

 

 

-

 

 

 

-

 

Collection of stock subscription

 

 

-

 

 

 

-

 

 

 

23,455

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

23,455

 

Transfer of common stock from major shareholder for services

 

 

-

 

 

 

-

 

 

 

-

 

 

 

480,000

 

 

 

-

 

 

 

-

 

 

 

480,000

 

BALANCE, March 31, 2018 (Unaudited)

 

 

170,810,349

 

 

$170,811

 

 

$(57,709)

 

$13,252,757

 

 

$-

 

 

$(20,106,412)

 

 

(6,740,553)

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(325,810)

 

 

(325,810)

Issuance of common stock for cash

 

 

715,011

 

 

 

714

 

 

 

-

 

 

 

642,786

 

 

 

-

 

 

 

-

 

 

 

643,500

 

Issuance of common stock for financing related services

 

 

46,668

 

 

 

47

 

 

 

-

 

 

 

(47)

 

 

-

 

 

 

-

 

 

 

-

 

Issuance of common stock for debt settlement

 

 

400,000

 

 

 

400

 

 

 

-

 

 

 

359,600

 

 

 

-

 

 

 

-

 

 

 

360,000

 

Issuance of common stock for consulting services

 

 

200,000

 

 

 

200

 

 

 

-

 

 

 

43,800

 

 

 

-

 

 

 

-

 

 

 

44,000

 

Collection of stock subscription

 

 

-

 

 

 

-

 

 

 

57,709

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

57,709

 

BALANCE, June 30, 2018 (Unaudited)

 

 

172,172,028

 

 

$172,172

 

 

$-

 

 

$14,298,896

 

 

$-

 

 

$(20,432,222)

 

$(5,961,154)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30, 2019

 

 

 

 

 

 

Stock

 

 

Additional

 

 

Deferred

 

 

 

 

 

 

 

 

Common Stock

 

 

Subscription

 

 

Paid-in

 

 

Stock

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Receivable

 

 

Capital

 

 

Compensation

 

 

Deficit

 

 

Total

 

BALANCE, January 1, 2019

 

 

174,792,364

 

 

$174,792

 

 

$(1,200,000)

 

$17,573,900

 

 

$(738,185)

 

$(22,213,466)

 

$(6,402,959)

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(222,124)

 

 

(222,124)

Issuance of common stock for consulting services

 

 

1,150,000

 

 

 

1,150

 

 

 

-

 

 

 

1,078,850

 

 

 

(1,080,000)

 

 

-

 

 

 

-

 

Amortization of deferred stock compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

174,742

 

 

 

-

 

 

 

174,742

 

Issuance of common stock for debt settlement

 

 

1,271,844

 

 

 

1,272

 

 

 

-

 

 

 

761,835

 

 

 

-

 

 

 

-

 

 

 

763,107

 

Collection of stock subscription

 

 

-

 

 

 

-

 

 

 

62,500

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

62,500

 

BALANCE, March 31, 2019 (Unaudited)

 

 

177,214,208

 

 

 

177,214

 

 

 

(1,137,500)

 

 

19,414,585

 

 

 

(1,643,443)

 

 

(22,435,590)

 

 

(5,624,734)

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

777,255

 

 

 

777,255

 

Issuance of common stock for consulting services

 

 

50,000

 

 

 

50

 

 

 

-

 

 

 

(50)

 

 

-

 

 

 

-

 

 

 

-

 

Cancellation of common stock for consulting services

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(360,000)

 

 

360,000

 

 

 

-

 

 

 

-

 

Amortization of deferred stock compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

253,650

 

 

 

-

 

 

 

253,650

 

Collection of stock subscription

 

 

-

 

 

 

-

 

 

 

26,805

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

26,805

 

BALANCE, June 30, 2019 (Unaudited)

 

 

177,264,208

 

 

$177,264

 

 

$(1,110,695)

 

$19,054,535

 

 

$(1,029,793)

 

$(21,658,335)

 

$(4,567,024)
 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

 
5
 
Table of Contents

 

MERION, INC.

 

 

 

 

 

 

 

CONDENSED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018

(UNAUDITED)

 

 

 

For the Six Months Ended

June 30,

 

 

 

2019

 

 

2018

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

Net income (loss)

 

$555,131

 

 

$(1,365,574)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

33,361

 

 

 

81,056

 

Stock compensation expense

 

 

-

 

 

 

524,000

 

Gain on debt settlement

 

 

(241,426)

 

 

-

 

Amortization of deferred stock compensation

 

 

428,392

 

 

 

-

 

Amortization of right-of-use asset

 

 

46,382

 

 

 

-

 

Bad debt expense

 

 

11,134

 

 

 

23,418

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(59,875)

 

 

4,028

 

Inventories

 

 

(111,635)

 

 

17,304

 

Prepaid expenses

 

 

51,033

 

 

 

(13,399)

Deposits and other assets

 

 

(15,410)

 

 

-

 

Accounts payable and accrued expenses

 

 

329,334

 

 

 

(78,167)

Deferred revenue

 

 

(1,418,976)

 

 

(127,903)

Lease liabilities

 

 

(52,650)

 

 

-

 

Net Cash Used in Operating Activities

 

 

(445,205)

 

 

(935,237)

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock and stock subscription

 

 

89,305

 

 

 

1,350,553

 

Advances from shareholder, non-interest bearing

 

 

142,860

 

 

 

62,316

 

Repayment of shareholder loan, non-interest bearing

 

 

(62,048)

 

 

(211,025)

Repayment of advances from third parties, non-interest bearing

 

 

(19,666)

 

 

(239,318)

Principal payments of debt

 

 

-

 

 

 

(6,468)

Net Cash Provided by Financing Activities

 

 

150,451

 

 

 

956,058

 

 

 

 

 

 

 

 

 

 

Net Change in Cash

 

 

(294,754)

 

 

20,821

 

 

 

 

 

 

 

 

 

 

Cash, beginning of period

 

 

295,521

 

 

 

5,038

 

 

 

 

 

 

 

 

 

 

Cash, end of period

 

$767

 

 

$25,859

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$-

 

 

$31,566

 

Cash paid for income tax

 

$-

 

 

$-

 

 

 

.

 

 

 

 

 

Non-cash transactions of investing and financing activities

 

 

 

 

 

 

 

 

Purchase of machinery and intangible assets

 

$-

 

 

$1,000,000

 

Stock issued for purchase of machinery and intangible assets

 

$-

 

 

$320,000

 

Stock issued for debt settlement

 

$763,107

 

 

$360,000

 

Stock issued on deferred stock compensation

 

$720,000

 

 

$-

 

Initial recognition of right-of-use assets and lease liabilities

 

$618,226

 

 

$-

 

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

  
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MERION, INC.

 

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

Note 1 – Organization

 

Merion, Inc. (the “Company”), a Nevada corporation, was formed on February 4, 2011. Its predecessor, E-World USA Holding, Inc., was a California company incorporated in 2007 (“E-World CA”). In April 2011, E-World CA entered into a merger agreement with its wholly-owned subsidiary, E-World USA Holding, Inc., a Nevada corporation (“E-World NV”) that was the survivor of the merger and became the Company. Under the Merger Agreement, the Company issued 90,000,000 shares of its common stock on a one for one basis for each share of E-World CA’s common stock issued and outstanding at the date of the merger. In addition, the Company issued Type A Warrants and Type B Warrants in exchange for comparable warrants issued and outstanding of E-World CA at the date of the merger. On June 27, 2017, the Company filed an amendment to its Articles of Incorporation with the Secretary of State for the State of Nevada to change its name from E-World NV to Merion, Inc.

 

The Company is a provider of health and nutritional supplements and personal care products currently sold on the internet through our websites, www.dailynu.com and www.merionus.com, and to wholesale distributors.

 

On January 1, 2018, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with SUSS Technology Corporation, (the “Seller”), pursuant to which the Seller agreed to sell to the Company substantially all of the assets associated with the manufacture of dietary supplements (the “Asset Sale”) for an aggregate purchase price (the “Purchase Price”) of $1,000,000 and 1,000,000 shares of the Company’s common stock (the “Purchase Shares”) valued at $320,000. The Company has evaluated this transaction to determine whether it is considered to be an asset purchase or business purchase and concluded such transaction was an asset purchase in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) section 805-10-55.

 

The Seller was one of our major suppliers during the years ended December 31, 2017 and 2016. These assets meet all industry nutritional and dietary supplement manufacturing standards, including U.S. Food and Drug Administration and Good Manufacturing Practice compliance and Current Good Manufacturing Practice regulations. In addition to manufacturing the nutritional supplements that it sells, the Company also began production of hard capsules, tablets, solid beverage (sachet packaging), teabags, powder, granules, dietary supplements for export, softgel capsules and health food from these assets for any potential new customers who need these products, similar to our Original Equipment Manufacturer (“OEM”) business. In May 2018, the Company began manufacturing certain of the nutritional supplements that it sells.

 

Note 2 – Going Concern

 

Management has determined there is substantial doubt about our ability to continue as a going concern as a result of our lack of significant revenues, significant recurring losses and negative working capital. If we are unable to generate significant revenue or secure additional financing, we may be required to cease or curtail our operations. Our financial statements do not include adjustments that might result from the outcome of this uncertainty.

 

Management is trying to alleviate the going concern risk by: engaging external sales representatives to sell the Company’s products, investigating and securing various financing resources, including but not limited to, borrowing from the Company’s major shareholder, private placements and the possibility of raising funds through a future public offering.

 

Note 3 – Summary of Significant Accounting Policies

 

Basis of Presentation

 

These unaudited condensed financial statements have been presented by the Company in accordance with the accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation of the financial statements, have been included. Interim results are not necessarily indicative of results to be expected for the full year. The information included in this Form 10-Q should be read in conjunction with information included in the Company’s annual report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission on March 28, 2019.

 

  
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Use of Estimates

 

The preparation of financial statements in conformity with the generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant accounting estimates reflected in the Company’s financial statements include the useful lives of property and equipment, the collectability of receivables and impairment on long-live assets. Actual results could differ from those estimates.

 

Cash and cash equivalents

 

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are comprised primarily of money market accounts and foreign and domestic bank accounts. To reduce its credit risk, the Company monitors the credit standing of the financial institutions that hold the Company’s cash and cash equivalents.

 

Accounts Receivable

 

Trade accounts receivable are periodically evaluated for collectability based on credit history with customers and their current financial condition. Bad debt expense or write-offs of receivables are determined on the basis of loss experience, known and inherent risks in the receivable portfolio and current economic conditions.

 

The accounts receivable balance and allowance for doubtful accounts are as follows:

 

 

 

June 30,

2019

 

 

December 31,

2018

 

 

 

 

 

 

 

 

Accounts receivable

 

$60,548

 

 

$673

 

Allowance for doubtful accounts

 

 

(11,134)

 

 

-

 

Accounts receivable, net

 

$49,414

 

 

$673

 

 

Movement of allowance for doubtful accounts is as follows:

 

 

 

Six months ended

June 30,

2019

 

 

Year ended

December 31,

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$-

 

 

$43,276

 

Provision for doubtful accounts

 

 

11,134

 

 

 

46,836

 

Less: write-offs

 

 

-

 

 

 

(90,112)

Ending balance

 

$11,134

 

 

$-

 

 

Inventories

 

Inventories are valued at the lower of cost (determined on a first-in, first-out basis) or net realizable value. Inventory consists of nutritional, beauty products and raw materials in our manufacturing facility. Management reviews inventory on hand for estimated obsolescence or unmarketable items, as compared to future demand requirements and the shelf life of the various products. Based on the review, the Company records inventory write-downs when costs exceed expected net realizable value. The inventories’ shelf lives are approximately 3 years.

 

  
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Property and Equipment, net

 

Property and equipment are stated at cost, net of accumulated depreciation. Upon disposition, the cost and related accumulated depreciation and amortization is removed from the books, and any resulting gain or loss is included in operations. The Company provides depreciation and amortization using the straight-line method over the estimated useful lives of various classes as follow:

 

Machinery

 

10 years

Computer and software

 

3 to 5 years

Furniture and fixtures

 

5 to 10 years

Vehicles

 

5 to 7 years

Leasehold improvements

 

over the lesser of the remaining lease term or the expected life of the improvement

 

Repairs and maintenance are charged to operations when incurred while betterments and renewals are capitalized.

 

Right-of-use Asset and Lease Liabilities

 

In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842).” The new standard requires lessees to recognize lease assets (“right of use”) and lease obligations (“lease liabilities”) for leases previously classified as operating leases under generally accepted accounting principles on the balance sheet for leases with terms in excess of 12 months. The standard is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years.

 

Impairment of Long-Lived Assets

 

Long-lived assets, including property, equipment and intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flows the assets are expected to generate and recognizes an impairment loss when estimated discounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When the Company identifies an impairment, the Company reduces the carrying amount of the asset to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, to comparable market values.

 

Deferred Revenue

 

Deferred revenue represents product deposits advanced by customers on specified product orders or on future orders that have not been shipped as of the balance sheet date. Deferred revenue also represents shipping fee deposits advanced by customers in relation to the unshipped product orders. Deferred revenue is reduced when the related sale is recognized in accordance with the Company’s revenue recognition policy.

 

Accrued Bonus

 

Accrued bonus represents amounts earned by the Company’s affiliate members (the “Affiliated Members”) for successful product sales. These bonuses are in the form of rebate credits that can be used to order the Company’s products, or the Affiliate Members can request a rebate in cash.

 

Fair Value of Financial Instruments

 

The Financial Accounting Standard Board (“FASB”) accounting standards codification (“ASC”), FASB ASC 825 Financial Instruments, requires that the Company discloses estimated fair values of financial instruments.

 

As defined in ASC 820 Fair Value Measurement, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes the market data of similar entities in its industry or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).

 

 
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The three levels of the fair value hierarchy are as follows:

 

Level 1 –

Quoted prices that are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

 

 

Level 2 –

Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reporting date and includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

 

 

Level 3 –

Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

 

Revenue Recognition

 

On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (ASC 606) using the modified retrospective method for contracts that were not completed as of January 1, 2018. This did not result in an adjustment to retained earnings upon adoption of this new guidance, as the Company’s revenue was recognized based on the amount of consideration we expect to receive in exchange for satisfying the performance obligations.

 

The core principle underlying the revenue recognition ASU is that the Company will recognize revenue to represent the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This will require the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer. The Company’s revenue streams are recognized at a point in time, based on when control of goods and services transfers to a customer.

 

The ASU requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies each performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result in significant changes in the way the Company records its revenue. Upon adoption, the Company evaluated its revenue recognition policy for all revenue streams within the scope of the ASU under previous standards and using the five-step model under the new guidance and confirmed that there were no differences in the pattern of revenue recognition.

 

The Company continues to derive its revenues from sales contracts with its customers with revenues being recognized upon delivery of products. Persuasive evidence of an arrangement is demonstrated via sales contracts and invoices; and the sales price to the customer is fixed upon acceptance of the sales contract. Sales rebates or discounts are recognized as a reduction of revenue. The Company recognizes revenue when control of the goods is transferred upon shipment to the customer by the Company and collectability of payment is reasonably assured. These revenues are recognized at a point in time after all performance obligations are satisfied.

 

 
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The Company also recognizes revenue on shipping and handling fees charged to the Company’s customers. Shipping and handling fee revenue is recognized when products have been delivered at a point in time. Shipping and handling fee revenues totaled $23,615 and $703 for the three months ended June 30, 2019 and 2018, respectively, and totaled $26,424 and $3,163 for the six months ended June 30, 2019 and 2018, respectively.

 

Product returns are allowed for unopened products purchased under regular sales terms within 60 days. Allowances for product returns are provided at the time the sale is recorded using historic return rates for each country and the relevant return pattern. Historically the Company has a return rate of nearly zero. Hence, the allowance as of June 30, 2019 and December 31, 2018 is estimated at $0.

 

In addition to the Company’s 60-day return policy, the Company, at its discretion, may accept a customer’s application for a buy-back of products previously sold within one year at 90% of the original product’s cost less commissions and shipping costs. The Company implemented its buy-back policy on January 1, 2012. To date, the Company has not received any buy-back applications. As a result, no allowance for buy-backs had been recorded as of June 30, 2019 and December 31, 2018.

 

The majority of the Company’s product sales are generated from China. Product sales generated from other countries or within the United States are immaterial to our financial statements. Currently, all of the Company’s OEM and packaging sales are generated from the United States. While all products are priced in U.S. currency, the Company accepts payments in both U.S. dollars and Hong Kong dollars.

 

Shipping and Handling Expenses

 

Shipping and handling costs incurred by the Company are included in selling expenses and totaled $9,261and $11,072 for the three months ended June 30, 2019 and 2018, respectively, and totaled $19,963 and $15,898 for the six months ended June 30, 2019 and 2018, respectively.

 

Research and Development (“R&D”) Expenses

 

Research and development expenses include salaries and other compensation-related expenses paid to the Company’s research and product development personnel while they are working on R&D projects, as well as raw materials used for the R&D projects. R&D expenses incurred by the Company are included in the general and administrative expenses and totaled $0 and $34 for the three months ended June 30, 2019 and 2018, respectively, and totaled $904 and $382 for the six months ended June 30, 2019 and 2018, respectively.

 

Income Taxes

 

The Company utilizes ASC 740 Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Deferred taxes are also recognized for net operating losses that can be carried forward. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

Basic and Diluted Earnings (Loss) Per Share

 

Generally accepted accounting principles regarding earnings per share (“EPS”) require presentation of basic and diluted earnings (loss) per share in conjunction with the disclosure of the methodology used in computing such earnings (loss) per share.

 

Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average of common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. These common stock equivalents are not included when the Company has a loss because they would be anti-dilutive.

 

 
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The following table presents basis net (loss) income per share for the periods indicated:

 

 

 

Three months ended June 30, 2019

 

 

Three months ended June 30, 2018

 

 

Six months ended June 30, 2019

 

 

Six months ended June 30, 2018

 

Basic earnings per share calculation:

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

777,255

 

 

 

(325,810)

 

 

555,131

 

 

 

(1,365,574)

Weighted average of common stock outstanding

 

 

177,251,571

 

 

 

171,610,812

 

 

 

176,158,993

 

 

 

170,631,039

 

Basic net (loss) income per share

 

 

0.00

 

 

 

(0.00)

 

 

0.00

 

 

 

(0.01)

 

The following table presents basis net (loss) income per share for the periods indicated:

 

 

 

Three months ended June 30, 2019

 

 

Three months ended June 30, 2018

 

 

Six months ended June 30, 2019

 

 

Six months ended June 30, 2018

 

Basic earnings per share calculation:

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

777,255

 

 

 

(325,810)

 

 

555,131

 

 

 

(1,365,574)

Weighted average of common stock outstanding

 

 

178,291,586

 

 

 

171,610,812

 

 

 

177,451,005

 

 

 

170,631,039

 

Basic net (loss) income per share

 

 

0.00

 

 

 

(0.00)

 

 

0.00

 

 

 

(0.01)

 

2,300,000 shares of restricted common stock with weighted average effect of 1,040,015 and 1,292,012 diluted shares are included in the diluted EPS calculation for the three and six months ended June 30, 2019, respectively. There were no other potential dilutive securities outstanding for the three and six months ended June 30, 2019 and 2018.

 

Concentration of Credit Risk

 

-    Financial instruments

 

Financial instruments that potentially subject the Company to concentrations of credit risk are cash, accounts receivable and other receivables arising from its normal business activities. The Company maintains balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation (FDIC) insured limits for the banks located in the United States, or may exceed Hong Kong Deposit Protection Board (HKDPB) insured limits for the banks located in Hong Kong. The Company had approximately less than $1,000 and $104,000 uninsured balances as June 30, 2019 and December 31, 2018, respectively.

 

-    Major Customers and Suppliers

 

For the three months ended June 30, 2019, no customer accounted for more than 10% of the Company’s sales and for the three months ended June 30, 2018, one customer accounted for approximately 71% of the Company’s sales.

 

For the six months ended June 30, 2019, no customer accounted for more than 10% of the Company’s sales and for the six months ended June 30, 2018, two customers accounted for approximately 60% (49% and 11%) of the Company’s sales.

 

As of June 30, 2019, three customers accounted for 100% (74%, 13% and 13%) of the Company’s accounts receivables. As of December 31, 2018, one customer accounted for 100% of the Company’s accounts receivables.

 

 
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For the three months ended June 30, 2019, two suppliers accounted for approximately 81% (64% and 17%) of the Company’s product purchases and for the three months ended June 30, 2018, three suppliers accounted for approximately 57% (35%, 11% and 11%) of the Company’s product purchases.

 

For the six months ended June 30, 2019, four suppliers accounted for approximately 69% (23%, 19%, 17% and 10%) of the Company’s product purchases and for the six months ended June 30, 2018, two suppliers accounted for approximately 40% (30% and 10%) of the Company’s product purchases.

 

Related Parties

 

A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.

 

New Accounting Pronouncements

 

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, or ASU 2018-07. ASU 2018-07 simplifies the accounting for share-based payments made to nonemployees so the accounting for such payments is substantially the same as those made to employees. Under this ASU, share based awards to nonemployees will be measured at fair value on the grant date of the awards, entities will need to assess the probability of satisfying performance conditions if any are present, and awards will continue to be classified according to Accounting Standards Codification (“ASC”) 718 upon vesting which eliminates the need to reassess classification upon vesting, consistent with awards granted to employees. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of this ASU did not have any material effect on the Company’s unaudited condensed consolidated financial statements.

 

The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s unaudited condensed consolidated financial statements.

 

Reclassifications

 

Certain prior period amounts have been reclassified to conform to the current year presentation. These reclassifications have no effect on the accompanying statements of operations and cash flows.

 

Note 4 – Inventories

 

Inventories consist of the following:

 

 

 

June 30,

2019

 

 

December 31,

2018

 

 

 

(Unaudited)

 

 

 

Raw materials

 

$90,667

 

 

$31,957

 

Work-in-progress

 

 

10,768

 

 

 

2,775

 

Finished goods

 

 

60,539

 

 

 

15,607

 

Inventories

 

$161,974

 

 

$50,339

 

 

 
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Note 5 – Property and Equipment

 

Property and equipment consist of the following:

 

 

 

June 30,

2019

 

 

December 31,

2018

 

 

 

(Unaudited)

 

 

 

 

Computer equipment and software

 

$114,953

 

 

$114,953

 

Furniture and fixtures

 

 

26,686

 

 

 

26,686

 

Automobiles

 

 

179,677

 

 

 

179,677

 

Leasehold improvements

 

 

40,053

 

 

 

40,053

 

Machinery

 

 

420,000

 

 

 

420,000

 

Total

 

 

781,369

 

 

 

781,369

 

Less: accumulated depreciation and amortization

 

 

(424,038)

 

 

(390,677)

Property and equipment, net

 

$357,331

 

 

$390,692

 

 

Depreciation expense totaled $16,150 and $17,727 for the three months ended June 30, 2019 and 2018, respectively.

 

Depreciation expense totaled $33,361 and $36,056 for the six months ended June 30, 2019 and 2018, respectively.

 

Note 6 – Debt

 

Due to third parties, interest bearing

 

The Company has borrowed money from third parties to fund operations. These third parties consist of the Chief Executive and Financial Officer’s friends and the spouse of a former board member of the Company. These advances have an annual interest rate of 6%, are unsecured, and are due on demand. As of June 30, 2019 and December 31, 2018, the Company owed $20,000 and $109,030 to these third parties, respectively. In March 2019, the Company settled $89,030 of the debt owed to some of these third parties and converted the debt into the Company’s common stock (See Note 10 - Equity).

 

Interest expense for the three months ended June 30, 2019 and 2018 for the above loans amounted to $299 and $1,631, respectively.

 

Interest expense for the six months ended June 30, 2019 and 2018 for the above loans amounted to $1,722 and $3,244, respectively.

 

In March 2019, the repayment terms related to the remaining balance of $20,000 were changed by the third party creditor from due on demand to due on March 20, 2024.

 

Due to third parties, non-interest bearing

 

The Company has borrowed money from third parties to fund operations. These third parties consist of the Chief Executive and Financial Officer’s friends and a former board member of the Company. These advances do not bear interest, are unsecured, and are due on demand. As of June 30, 2019 and December 31, 2018, the Company owed $50,000 and $101,666 to these third parties, respectively. In March 2019, the Company settled $32,000 of the debt owed to a third party and converted the debt into the Company’s common stock (See Note 10 - Equity). The Company also repaid $19,666 to a third party during the six months ended June 30, 2019.

 

In March 2019, the repayment terms related to the remaining balance of $50,000 was changed by the third party creditor from due on demand to due on March 20, 2024.

  

 
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Note 7 – Related Party Transactions

 

Due to shareholder, interest bearing

 

In January 2016, Mr. Dinghua Wang, a major shareholder, director, Chief Executive and Financial Officer of the Company, pledged certain of his personal assets and obtained a personal loan from which he provided funds for the operations of the Company. In consideration for the funds the Company received, the Company agreed to pay the interest on this loan on Mr. Wang’s behalf. This loan has an annual borrowing rate of 9.99%. As of June 30, 2019 and December 31, 2018, the balance due to Mr. Wang, interest bearing, amounted to $471,603. The full balance of $471,603 was to be repaid on February 1, 2019 and was extended to May 1, 2019. This loan has been converted to be due on demand.

 

Interest expense for each of the three month periods ended June 30, 2019 and 2018 for the above loan amounted to $12,487.

 

Interest expense for each of the six month periods ended June 30, 2019 and 2018 for the above loan amounted to $24,975.

 

Due to shareholder, non-interest bearing

 

From time to time, Mr. Dinghua Wang, a major shareholder, director, Chief Executive and Financial Officer of the Company, advances monies to the Company and the Company repays such advances. Such business transactions are recorded as due to or from Mr. Wang at the time of the transaction. During the six months ended June 30, 2019 and 2018, advances totaled $142,860 and $62,316, respectively, and payments to Mr. Wang totaled $62,048 and $211,025, respectively. As of June 30, 2019 and December 31, 2018, the balance due to Mr. Wang, non-interest bearing, amounted to $2,588,863 and $2,508,051, respectively. This balance is unsecured and is due on demand.

 

In March 2019, the repayment terms related to $2,000,000 of the total balance was changed by Mr. Wang from due on demand to due on March 20, 2024.

 

Due to employee

 

The Company has borrowed money from Vickie Ho, Executive Vice President of the Company, to fund operations. These advances do not bear interest, are unsecured and are due on demand. As of June 30, 2019 and December 31, 2018, the Company owed $95,000 to such employee.

 

In March 2019, the repayment terms related to the balance of $95,000 was changed by the employee from due on demand to due on March 20, 2024.

 

Advances from related parties, interest bearing

 

The Company has borrowed $30,000 from a related party to fund operations since July 2016. This related party is the son of the Company’s Chief Executive and Financial Officer. These advances have an annual interest rate of 10%, are unsecured and are due on demand. As of June 30, 2019 and December 31, 2018, the Company owed $30,000 to this related party.

 

Interest expense for the three months ended June 30, 2019 and 2018 for the above loans amounted to $748.

 

Interest expense for the six months ended June 30, 2019 and 2018 for the above loans amounted to $1,488.

 

In March 2019, the repayment terms were changed by the related party from due on demand to due on March 20, 2024.

 

Advances from related parties, non-interest bearing

 

The Company has borrowed money from certain related parties to fund operations. The related parties consist of the Chief Executive and Financial Officer’s immediate family members and relatives. These advances do not bear interest, are unsecured and are due on demand. As of June 30, 2019 and December 31, 2018, the Company owed $518,839 to these related parties.

 

In March 2019, the repayment terms for the $518,839 was changed by these related parties from due on demand to due on March 20, 2024.

 

 
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Note 8 – Income Taxes

 

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the three months ended June 30, 2019 and 2018:

 

 

 

Three months ended June 30, 2019

 

 

Three months ended June 30, 2018

 

 

Six months ended June 30, 2019

 

 

Six months ended June 30, 2018

 

Federal statutory rate

 

 

21.0%

 

 

21.0%

 

 

21.0%

 

 

21.0%

State statutory rate

 

 

7.0%

 

 

7.0%

 

 

7.0%

 

 

7.0%

Valuation allowance

 

 

(37.7)%

 

 

(15.0)%

 

 

(51.0)%

 

 

(17.1)%

Permanent difference *

 

 

9.7%

 

 

(13.0)%

 

 

23.0%

 

 

(10.9)%

Effective tax rate

 

 

0.0%

 

 

0.0%

 

 

0.0%

 

 

0.0%

 

*Represents 50% of meal and entertainment expenses and stock compensation expenses that are not deductible.

 

The Company uses the asset and liability method, where deferred tax assets and liabilities are determined based on the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes. Deferred taxes are also recognized for net operating loss carry forwards which can be utilized to offset taxable income in the future. The cumulative net operating loss carryforwards that may be applied against future taxable income is approximately $6,805,000 for Federal and state income taxes as of June 30, 2019. The cumulative net operating loss carryforward that may be applied against future taxable income is approximately $7,817,000 for Federal and state as of December 31, 2018, and will expire in the years 2031 to 2038. As deferred tax assets may not be fully realizable due to potential recurring losses, management has provided 100% valuation allowance for the deferred tax assets.

 

The components of the deferred tax assets is as follows:

 

 

 

June 30,

2019

 

 

December 31,

2018

 

 

 

(Unaudited)

 

 

 

 

Allowance for doubtful accounts

 

$3,116

 

 

$-

 

Amortization of intangible assets

 

 

204,000

 

 

 

211,556

 

Net operating losses

 

 

1,697,071

 

 

 

1,975,889

 

Deferred tax assets

 

 

1,904,187

 

 

 

2,187,445

 

Valuation allowance

 

 

(1,904,187)

 

 

(2,187,445)

Deferred tax assets, net

 

$-

 

 

$-

 

 

Changes in the value allowance for deferred tax assets decreased by $283,258 from $2,187,445 at December 31, 2018 to $1,904,187 at June 30, 2019. During the six months ended June 30, 2019, the Company utilized $278,818 deferred tax assets from prior period.

 

As of June 30, 2019, federal tax returns filed for 2016 and 2017 remain subject to examination by the taxing authorities. As of June 30, 2019, California tax returns filed for 2015, 2016 and 2017 remain subject to examination by the taxing authorities.

 

Note 9 – Leases

 

Effective January 1, 2019, the Company adopted ASU 2016-02, “Leases” (Topic 842), and elected the practical expedients that does not require us to reassess: (1) whether any expired or existing contracts are, or contain, leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases. The Company adopted the practical expedient that allows lessees to treat the lease and non-lease components of a lease as a single lease component. There is no impact from the adoption of ASC 842, as of January 1, 2019 as the Company did not have any existing leases with a lease term in excess of twelve months on January 1, 2019.

 

 
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In January 2019, the Company entered a new office lease agreement with a 5-year lease term starting in March 2019 and terminating in February 2024. Upon adoption of ASU 2016-02, the Company recognized lease labilities of approximately $618,000, with corresponding right-of-use (“ROU”) asset in the same amount based on the present value of the future minimum rental payments of the new lease, using an effective interest rate of 4.78%, which is determined using an incremental borrowing rate. The remaining lease term of the lease is 4.67 years.

 

The Company also leases a factory space on a month-to-month basis, which it classifies as an operating lease. Leases with an initial term of 12 months or less are not recorded on the balance sheet.

 

The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

For the three months ended June 30, 2019 and 2018, lease expenses amounted to $45,287 and $22,318, respectively, of which, $10,500 and $0 are short-term lease expenses, respectively.

 

For the six months ended June 30, 2019 and 2018, lease expenses amounted to $67,382 and $41,974, respectively, of which, $21,000 and $0 are short-term lease expenses, respectively.

 

The five-year maturity of the Company’s lease obligations is presented below:

 

Twelve months ended June 30,

 

Operating lease amount

 

2020

 

$121,806

 

2021

 

 

136,740

 

2022

 

 

140,844

 

2023

 

 

145,064

 

2024

 

 

98,624

 

Total lease payments

 

 

643,078

 

Less: interest

 

 

(70,322)

Present value of lease liabilities

 

$572,756

 

 

Note 10 – Equity

 

Share Distribution Plans

 

1) On July 15, 2017, the Board approved Mr. Dinghua Wang, the Chairman and CEO of the Company, to distribute up to thirty million of his own shares to certain persons outside of the United States who have previously worked with the Company as an incentive for these individuals to assist the Company to develop its international market. Accordingly, special legends regarding restrictions on resale of the securities and no-hedging transactions would need to be included on the securities.

 

As of the date of this report, Mr. Wang had distributed 1,500,000 shares pursuant to this plan. All of these 1,500,000 shares were distributed on February 14, 2018 pursuant to Regulation S under the Securities Act of 1933. The Company determined that these shares distributed by Mr. Wang were related to the Company’s operations in accordance to ASC 220-10-S99-4. The fair value of these shares were valued at $480,000 and recorded as stock-based compensation expenses in the Company’s six months ended June 30, 2018 consolidated statements of operations.

 

2) On July 28, 2017, the Company’s Board of Directors approved Mr. Dinghua Wang, the Chairman and CEO of the Company, to distribute up to 5 million of his own shares to the people who, directly or indirectly, loaned funds or referred customers to the Company or purchased products from the Company as the Company faces financial difficulty. To the extent that these share distributions are being made to anyone outside of the U.S., those distributions will be made under Regulation S and must contain appropriate Regulation S subscription agreements and legends. If anyone within U.S. is to receive those shares, the Company will consult with the Company counsel to comply with U.S. securities laws.

 

 
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As of the date of this report, Mr. Wang had distributed 4,181,592 shares pursuant to this plan. All of these 4,181,592 shares were distributed on February 14, 2018. The Company determined that these 4,181,592 shares distributed by Mr. Wang were at his own discretion and the recipients of the shares did not expect such distribution at the time when they, directly or indirectly, loaned funds or referred customers to the Company or purchased products from the Company as the Company faces financial difficulty.

 

3) On June 30, 2017, the Company’s Board of Directors approved the grant of up to twenty million shares (from authorized but unissued shares of the Company’s common stock) to persons outside the U.S. who sell Company products based on their sales performance in the future. The Company must determine that this type of incentive compensation is legal and appropriate for each country in which it is utilized. For ease of administration, this plan has been, and will continue to be solely for persons outside of the United States pursuant to Regulation S under the Securities Act of 1933. No shares have been issued during the six months ended June 30, 2019 and 2018.

 

Private placements

 

During the six months ended June 30, 2018, the Company entered into a series of Securities Purchase Agreements with various unrelated third party purchasers, pursuant to which the Company sold to these purchasers in private placements an aggregate of 1,474,574 shares of the Company’s common stock, par value $0.001 per share, at a purchase price of $0.90 per share for an aggregate offering price of $1,327,098. The sales were completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.

 

As of June 30, 2019 and December 31, 2018, $1,110,695 and $1,200,000, respectively, were unpaid and recognized as stock subscription receivable in the accompanying statements of changes in shareholders’ deficit. During the six months ended June 30, 2019, the Company received $89,305 of the stock subscription receivable.

 

Purchase of assets

 

On January 1, 2018, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with SUSS Technology Corporation, a Nevada corporation (the “Seller”), pursuant to which the Company purchased the assets associated with the Seller’s manufacture of dietary supplements (the “Asset Sale”) for an aggregate purchase price (the “Purchase Price”) of $1,000,000 and 1,000,000 shares of the Company’s common stock (the “Purchase Shares”) valued at $320,000. No other assets were included with this purchase and the Company assumed the Seller’s obligations under a lease of real property used in the Seller’s business.

 

The issuance of the Purchase Shares was completed pursuant to the exemption from registration provided by Regulation D promulgated under the Securities Act of 1933, as amended. The payment of the cash portion of the Purchase Price was to occur in two distributions: (i) the first, in the amount of $600,000, was to occur within six months of the date of the Purchase Agreement, and (ii) the second, in the amount of $400,000, was to occur within twelve months of the date of the Purchase Agreement. The second distribution may be reduced by any indemnification claims against the Seller under the terms of the Agreement. The distribution of the Purchase Shares was completed in March 2018. The payment date for the $1,000,000 cash portion of the Purchase Price was extended to December 31, 2019.

 

Settlement of debt

 

On March 19, 2019, the Company entered into two Debt Repayment Agreements with two creditors of the Company (the “Creditors”), pursuant to which the Company agreed to repay $135,851 owed to the Creditors in the form of 295,480 shares of Company’s common stock at an average debt conversion rate of $0.46 per share (the “Debt Repayment”). The Debt Repayment was completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended. The closing price of the Company’s common stock on March 19, 2019 was $0.60 per share, which resulted in a loss on settlement of debt of $41,437.

 

 
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On March 30, 2019, the Company entered into Debt Repayment Agreements with four creditors of the Company (the “Creditors”), pursuant to which the Company agreed to repay $868,682 owed to the Creditors in the form of 976,364 shares of Company’s common stock at an average debt conversion rate of $0.89 per share (the “Debt Repayment”). The Debt Repayment was completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended. The closing price of the Company’s common stock on March 30, 2019 was $0.60 per share, which resulted in a gain on settlement of debt of $282,863.

 

Common stock issued for consulting services

 

On August 30, 2018, the Company entered into two advisory agreements with two advisors (the “Financial Advisors”), pursuant to which the Company engaged the Financial Advisors to provide certain financial advisory services for a service period of six months. As compensation for the services, the Company agreed to issue the Financial Advisors an aggregate of 67,916 shares of its common stock, par value $0.001. These shares are valued at $20,375, determined using the closing price of the Company’s common stock on August 30, 2018 of $0.30 per share. For the three and six months ended June 30, 2019, amortization of deferred stock compensation of these shares amounted to $0, and $6,792, respectively.

 

On January 23, 2019, the Company entered into a consulting agreement with Redfield Management Service limited for business, finance and investor relations services. The consultant is due a monthly consulting fee of $7,000 and 50,000 shares, to be paid every three months. The term of the agreement is one year. The service agreement was terminated at the end of April and the Company issued a total of 200,000 shares of its common stock during the six months ended June 30, 2019. For the three and six months ended June 30, 2019, amortization of deferred stock compensation of these shares amounted to $40,000 and $120,000, respectively.

 

On March 13, 2019, the Company entered into a consulting agreement with Global Merchants Union (“GMU”), a company incorporated in California, pursuant to which GMU will provide business and financial operation and planning consultation services to the Company for consideration of $7,500 per month and a one-time stock payment of 1,000,000 shares of common stock of the Company (the “Share Payment”). Shares subject to the Share Payment will be issued to GMU within 30 days after the agreement is signed. The term of the agreement was for one year but was terminated in May, 2019. For the three and six months ended June 30, 2019, amortization of deferred compensation of these shares amounted to $150,000 and $175,000, respectively. Deferred stock compensation of $425,000 has been recognized as a reduction of shareholders’ deficit as the services had not been performed as of June 30, 2019.

 

Issuance of restricted common stock

 

On July 13, 2018, the Board of Directors of the Company approved the grant of 2,300,000 restricted stock units (the “RSUs”) to three employees of the Company, pursuant to the Merion, Inc. 2018 Omnibus Equity Plan. Thirty percent of the RSUs will vest on July 13, 2019, thirty percent of the RSUs will vest on July 13, 2020, and the remaining forty percent of the RSUs will vest on July 13, 2021, in each case provided that the employee remains employed, in good standing, by the Company. These shares are valued at $851,000, determined using the closing price of the Company’s common stock on July 13, 2018 of $0.37 per share, and will be amortized ratably over the term of the vesting periods of three years on a straight line basis. The Company accounts for the restricted common stock as equity-settled awards in accordance with ASC 718. For the three and six months ended June 30, 2019, amortization of deferred stock compensation of these shares amounted to $63,650 and $126,601, respectively. Deferred stock compensation of $604,792 and $731,394 has been recognized as a reduction of shareholders’ deficit as the services have not been performed as of June 30, 2019 and December 31, 2018, respectively.

 

The following table summarizes unvested restricted common stock activity for the six months ended June 30, 2019 and for the year ended December 31, 2018:

 

 

 

Number of

shares

 

 

Weighted

average

grant-date

fair value

per share

 

Outstanding as of December 31, 2017

 

 

-

 

 

$-

 

Granted

 

 

2,300,000

 

 

 

0.37

 

Vested

 

 

-

 

 

 

-

 

Forfeited

 

 

-

 

 

 

-

 

Outstanding as of December 31, 2018

 

 

2,300,000

 

 

$0.37

 

Granted

 

 

-

 

 

 

-

 

Vested

 

 

-

 

 

 

-

 

Forfeited

 

 

-

 

 

 

-

 

Outstanding as of June 30, 2019

 

 

2,300,000

 

 

$0.37

 

 

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

 

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes, and other financial information included in this Form 10-Q and our financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended December 31, 2018 (the “2018 Form 10-K”).

 

Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking. Words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “potential,” “believes,” “seeks,” “hopes,” “estimates,” “should,” “may,” “will,” “with a view to” and variations of these words or similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national, and local general economic and market conditions; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; change in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; the risk of foreign currency exchange rates; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission. For more information, see our discussion of risk factors located at Part I, Item 1A of our 2018 Form 10-K.

 

Although the forward-looking statements in this Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.

 

Overview

 

Our Company is a provider of health and nutritional supplements and personal care products. Currently, we are mainly selling our products over the Internet directly to end-user customers through our websites, www.dailynu.com and www.merionus.com, and to wholesale distributors through phone and electronic communication. Our major customers of our nutritional and beauty products are located in the Asian market, predominantly in the People’s Republic of China. Our major customers of our OEM and packaging products are located in the United States.

 

Since June 2014, we have sold our products primarily over the Internet directly to end-user customers and by phone/email orders directly to our wholesale distributors. Certain miscellaneous sales are made directly to customers who walk into the Company offices and customers who call the Company directly for products. We are now focusing on selling health and nutritional supplements and personal care products directly on the Internet through our websites, www.dailynu.com and www.merionus.com. As of the date of filing of this report, we market thirteen individual nutritional supplement products, three and five of which were introduced in 2018 and 2019 respectively, and one beauty product, which was also introduced in 2018, on our websites. We are no longer selling similar products of third parties on our websites.

 

In January 2018, we entered into an Asset Purchase Agreement (the “Purchase Agreement”) with SUSS Technology Corporation, a Nevada corporation (the “Seller”), pursuant to which the Seller agreed to sell to the Company substantially all of the assets associated with the Seller’s manufacture of dietary supplements (the “Asset Sale”) for an aggregate purchase price (the “Purchase Price”) of $1,000,000 and 1,000,000 shares of the Company’s common stock (the “Purchase Shares”) valued at $320,000. The Seller was one of our major suppliers during the year ended December 31, 2017. Upon purchasing these assets from the Seller, we started to manufacture some of the nutritional supplements that we sell. These assets meet all industry nutritional and dietary supplement manufacturing standards, including U.S. Food and Drug Administration and Good Manufacturing Practice compliance and Current Good Manufacturing Practice regulations. In addition to manufacturing the nutritional supplements that we sell, we produce hard capsules, tablets, solid beverages (sachet packaging), teabags, powder, granules, dietary supplements, softgel capsules and health foods from these assets for any potential new customers who need such products. These are the products that were added to our existing products, similar to our OEM and packaging businesses.

 

 
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In January 2018, we introduced a new beauty product, Noir Naturel, a gentle formula for grey coverage from the first application into hair care.

 

In September 2018, we introduced three different types of natural aphrodisiac supplements, Viwooba (1-3) for men that may support kidney health, improve immunity, enhance physical fitness, eliminate fatigue, improve sexual desire and enhance body energy, strength and sexual ability.

 

In March 2019, we introduced 1) Lady-S, a female dietary supplement that may assist with weight loss, 2) Gold King, a nutritional supplement that may provide antioxidant support and liver health, 3) New Power, a nutritional supplement that may support heart health, and 4) Taibao, a nutritional supplement that may enhance physical performance and energy metabolism.

 

In May 2019, we introduced M-Power, a nutritional supplement that may provide anti-aging support.

 

Principal Factors Affecting Our Financial Performance

 

We believe consumers have become more confident in ordering products like ours over the Internet. However, the nutritional supplement and skin care products e-business markets have been, and continue to be, increasingly competitive and are rapidly evolving due to the reasons discussed below.

 

Barriers to entry are minimal in the nutritional supplement and skin care businesses, and current and new competitors can launch new websites at a relatively low cost. Many competitors in this area have greater financial, technical and marketing resources than we do. Continued advancement in technology, and increased access to that technology, is paving the way for growth in direct marketing. We also face competition for consumers from retailers, duty-free retailers, specialty stores, department stores and specialty and general merchandise catalogs, many of which have greater financial and marketing resources than we have. Notwithstanding the foregoing, we believe that we are well-positioned within the Asian consumer market with our current plan of supplying American merchandise brands to consumers in Asia. There can be no assurance that we will maintain or increase our competitive position or that we will continue to provide only American-made merchandise.

 

Our products are sensitive to business and personal discretionary spending levels, and demand tends to decline or grow more slowly during economic downturns, including downturns in any of our major markets. The global economy is currently undergoing a period of volatility, and the future economic environment, while improving, continues to remain uncertain. This has led, and could further lead, to reduced consumer spending, which may include spending on nutritional and beauty products and other discretionary items. Also, the increase of trade tensions between US and China might have negative impacts on our business.  In addition, reduced consumer spending may force us and our competitors to lower prices. These conditions may adversely affect our revenues and results of operations.

 

Results of Operations

 

Comparison of the three months ended June 30, 2019 and 2018

 

 

 

For the three months ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

Percentage

 

 

 

2019

 

 

2018

 

 

Change

 

 

Change

 

Total sales

 

$1,477,649

 

 

$146,909

 

 

$1,330,740

 

 

 

905.8%

Total cost of sales

 

 

74,177

 

 

 

100,984

 

 

 

(26,807)

 

(26.5

%)

Gross profit

 

 

1,403,472

 

 

 

45,925

 

 

 

1,357,547

 

 

 

2,956.0%

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling

 

 

15,552

 

 

 

25,915

 

 

 

(10,363)

 

(40.0

%)

General and administrative

 

 

352,239

 

 

 

312,363

 

 

 

39,876

 

 

 

12.8%

Stock compensation expense

 

 

-

 

 

 

44,000

 

 

 

(44,000)

 

(100.0

%)

Amortization of deferred stock compensation

 

 

253,650

 

 

 

-

 

 

 

253,650

 

 

 

100.0%

Total operating expenses

 

 

621,441

 

 

 

382,278

 

 

 

239,163

 

 

 

62.6%

Income (loss) from operations

 

 

782,031

 

 

 

(336,353)

 

 

1,118,384

 

 

 

332.5%

Other income (expenses), net

 

 

(4,776)

 

 

10,543

 

 

 

(15,319)

 

(145.3

%)

Net income (loss)

 

$777,255

 

 

$(325,810)

 

$1,103,065

 

 

 

338.6%

 

 
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Total sales increased by approximately $1.3 million, or 905.8%, from approximately $147,000 in the three months ended June 30, 2018 to approximately $1.5 million in the three months ended June 30, 2019. The increase of sales was mainly due to the shipping of our backlog of 544 orders of Auxia and 2,917 orders of Cell Power products from members who had previously paid for their purchases. The increase is also attributable to the introduction of our new products: 123 orders of Viwooba (1-3), which we introduced in September 2018, 734 orders of Lady-S, 47 orders of Gold King, 36 orders of Heart Power, and 42 orders of Taibao, which we introduced in March 2019. These products were not available during the three months ended June 30, 2018. The increase in sales is also attributable to the increase of 1,324 orders of Noir Naturel sales as we had more products available for sale during the three months ended June 30, 2019 as compared to the same period in 2018 when we first introduced the product (in March 2018).

 

The cost of sales decreased by approximately $27,000, or 26.5%, from approximately $101,000 in the three months ended June 30, 2018 to approximately $74,000 in the three months ended June 30, 2019. The major reason for the decrease was the decease of our idle capacity cost of approximately $75,000 incurred in our Nevada factory during the three months ended June 30, 2018, where we were operating at full capacity in the same period in 2019, and approximately $14,000 of our overhead costs incurred in our Nevada factory were being allocated to our finished goods and work-in-progress inventories. Furthermore, we wrote down $810,000 of intangible assets due to impairment at December 31, 2018, for which we were no longer incurring amortization expense of $22,500 per quarter or $90,000 per year in our manufacturing costs in 2019.

 

Our overall gross margin percentage increased from approximately 31.3% in the three months ended June 30, 2018 to a gross profit of approximately 95.0% in the three months ended June 30, 2019, mainly due to the sales of our high profit margin products of Auxia and Cell Power and the reduction of the idle capacity cost incurred in the three months ended June 30, 2018 as described above.

 

Our product sales gross margin percentage increased from approximately 83.2% in the three months ended June 30, 2018 to approximately 97.6% in the three months ended June 30, 2019. For the three months ended June 30, 2019, the majority of our product sales were attributable to our Auxia, Cell Power, Viwooba (1-3), Lady-S, Gold King, New Power, and Taibao products, which were all manufactured by us. The major reasons for the increase of sales gross margin percentage were that we were no longer incurring any amortization of the intangible assets that we wrote off in 2018. As a result, our product sales gross margin percentage increased accordingly during the three months ended June 30, 2019 as compared to the same period in 2018.

 

Our OEM and packaging sales gross margin percentage decreased from approximately 77.4% in the three months ended June 30, 2018 to approximately 64.9% in the three months ended June 30, 2019. For the three months ended June 30, 2019, we incurred more manufacturing overhead cost for our OEM and packaging sales as we incurred increased labor hours allocated to such production due to certain specified production procedures which required additional labor hours as compared to the same period in June 30, 2018. As a result, our OEM and packaging sales gross margin percentage decreased by 12.5% during the three months ended June 30, 2019 as compared to the same period in 2018.

 

Selling expenses decreased from approximately $26,000 in the three months ended June 30, 2018 to approximately $16,000 in the three months ended June 30, 2019. The decrease of approximately $10,000, or 40.0%, was mainly due to the decrease of approximately $5,000 of marketing expenses and the decrease of approximately $5,000 of shipping expenses.

 

General and administrative (“G&A”) expenses increased by approximately $40,000 from approximately $312,000 in the three months ended June 30, 2018 to approximately $352,000 in the three months ended June 30, 2019. The increase was mainly attributable to the increase of approximately $22,000 of rental expenses, the increase of approximately $11,000 of professional fees, such as attorney fees, auditor fees and consulting fees, the increase of approximately $16,000 of payroll expenses, offset by the decrease of approximately $9,000 of other miscellaneous G&A expenses, such as travel and lab test expenses.

 

 
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Stock compensation expenses decreased by $44,000 during the three months ended June 30, 2019 compared to the same period in 2018 because we incurred $44,000 in stock compensation expense as we issued 200,000 shares to a consultant for research and strategic planning consulting services during the three months ended June 30, 2018. We did not incur such stock compensation expense for the three months ended June 30, 2019.

 

Amortization of deferred stock compensation increased by approximately $254,000 in the three months ended June 30, 2019 as compared to 2018, of which, approximately $64,000 related to the amortization of the value of 2,300,000 shares of restricted shares of common stock to three employees, which all have a vesting period of three years. In addition, in January and March 2019, we issued 1,150,000 shares of our common stock with an additional 450,000 shares of our common stock to be issued in each of the next three quarters of 2019 valued at $1,080,000 to two advisors to provide certain financial advisory services, and amortized such cost, approximately $190,000. These two service contracts were terminated in April and May of 2019 due to non-performance. We did not incur any amortization of deferred stock compensation during the same period in 2018.

 

Other expenses increased by approximately $15,000 from approximately $11,000 of other income in the three months ended June 30, 2018 to approximately $5,000 of other expenses in the three months ended June 30, 2019, mainly due to approximately $18,000 of fees charged to our shareholders in assisting them to obtain electronic stock certificates and $11,000 other miscellaneous income during the three months ended June 30, 2018. We did not enter into such transactions during the same period in 2019. During the three months ended June 30, 2019, we generated approximately $11,000 from sales of our sample products.

 

Net income increased by approximately $1.1 million from approximately $0.3 million of net loss in the three months ended June 30, 2018 to approximately $0.8 million of net income in the three months ended June 30, 2019, mainly due to the reasons discussed above.

 

Comparison of the six months ended June 30, 2019 and 2018 

 

 

 

For the six months ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

Percentage

 

 

 

2019

 

 

2018

 

 

Change

 

 

Change

 

Total sales

 

$1,626,026

 

 

$211,617

 

 

$1,414,409

 

 

 

668.4%

Total cost of sales

 

 

114,538

 

 

 

185,929

 

 

 

(71,391)

 

(38.4

%)

Gross profit

 

 

1,511,488

 

 

 

25,688

 

 

 

1,485,800

 

 

 

5,784.0%

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling

 

 

39,470

 

 

 

257,816

 

 

 

(218,346)

 

(84.7

%)

General and administrative

 

 

742,660

 

 

 

675,231

 

 

 

67,429

 

 

 

10.0%

Stock compensation expense

 

 

-

 

 

 

524,000

 

 

 

(524,000)

 

(100.0

%)

Amortization of deferred stock compensation

 

 

428,392

 

 

 

-

 

 

 

428,392

 

 

 

100.0%

Total operating expenses

 

 

1,210,522

 

 

 

1,457,047

 

 

 

(246,525)

 

(16.9

%)

Income (loss) from operations

 

 

300,966

 

 

 

(1,431,359)

 

 

1,732,325

 

 

 

121.0%

Other income, net

 

 

254,165

 

 

 

65,785

 

 

 

188,380

 

 

 

286.4%

Net income (loss)

 

$555,131

 

 

$(1,365,574)

 

$1,920,705

 

 

 

140.7%

 

Total sales increased by approximately $1.4 million or 668.4%, from approximately $212,000 in the six months ended June 30, 2018 to approximately $1.6 million in the six months ended June 30, 2019. The increase of sales was mainly due to the shipping of our backlog of 1,329 orders of Auxia and 3,124 orders of Cell Power products from our members which they have previously paid for their purchases. The increase is also attributable to the introduction of our new products, 157 orders of Viwooba (1-3), which we introduced in September 2018, and 833 orders of Lady-S, 100 orders of Gold King, 78 orders of Heart Power, and 59 orders of Taibao, which we newly introduced in March 2019. These products were not available during the six months ended June 30, 2018. The increase of sales is also attributable to the increase of Noir Naturel sales as we had more products available for sales during the six months ended June 30, 2019 as compared to the same period in 2018 when we first introduced the product. The increase was partially offset by the decrease of sales of 1,195 orders of our Longevity product made during the six months ended June 30, 2018, as we did not generate any sales during the six months ended June 30, 2019.

 

 
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The cost of sales decreased by approximately $71,000, or 38.4%, from approximately $186,000 in the six months ended June 30, 2018 to approximately $115,000 in the six months ended June 30, 2019. The major reason was the decease of our idle capacity cost of approximately $133,000 incurred in the our Nevada factory during the six months ended June 30, 2018, where we were operating at full capacity in the same period in 2019, and approximately $14,000 of our overhead costs incurred in our Nevada factory was allocated to our finished goods and work-in-progress. The decrease is also attributable to the decrease of our cost of sales of our Longevity products, which normally has a higher unit cost as compared to our other products. Furthermore, we wrote down $810,000 of intangible assets due to impairment at December 31, 2018, for which we were no longer incurring amortization of $22,500 per quarter or $90,000 per year in our manufacturing cost in 2019.

 

Our overall gross margin percentage increased from approximately of 12.1% in the six months ended June 30, 2018 to approximately 93.0% in the six months ended June 30, 2019, mainly due to the reduction of the idle capacity cost incurred in the six months ended June 30, 2018 as described above.

 

Our product sales gross margin percentage increased from approximately 77.0% in the six months ended June 30, 2018 to approximately 97.0% in the six months ended June 30, 2019. For the six months ended June 30, 2019, the majority of our product sales were attributable to our Auxia, Cell Power, Viwooba (1-3), Lady-S, Gold King, New Power, and Taibao products, which were all manufactured by us and have a higher profit margin compared to our Longevity product, which comprised the majority of our product sales in the six months ended June 30, 2018. As a result, our product sales gross margin percentage increased accordingly during the six months ended June 30, 2019 as compared to the same period in 2018.

 

Our OEM and packaging sales gross margin percentage decreased from approximately 68.9% in the six months ended June 30, 2018 to approximately 54.5% in the six months ended June 30, 2019. For the six months ended June 30, 2019, we incurred more manufacturing overhead cost for our OEM and packaging sales as we incurred increased labor hours allocated to such production due to certain specified production procedures which required additional labor hours as compared to the same period in June 30, 2018. As a result, our OEM and packaging sales gross margin percentage decreased by 14.4% during the six months ended June 30, 2019 as compared to the same period in 2018.

 

Selling expenses decreased from approximately $258,000 in the six months ended June 30, 2018 to approximately $40,000 in the six months ended June 30, 2019. The decrease of approximately $218,000, or 84.7%, was mainly due to the decrease of approximately $198,000 of marketing expenses as we held a conference in Hong Kong to promote our products costing $131,000 during the six months ended June 30, 2018 and we did not hold any conference during the same period in 2019. In addition, we gave out approximately $54,000 worth of promotional products during the six months ended June 30, 2018 and we did not give out any promotional products in the same period in 2019.

 

General and administrative (“G&A”) expenses increased by approximately $67,000 from approximately $675,000 in the six months ended June 30, 2018 to approximately $742,000 in the six months ended June 30, 2019. The increase was mainly attributable to the increase of approximately $33,000 of payroll related expenses, the increase of approximately $31,000 of rental expenses, the increase of approximately $13,000 of insurance expenses, the increase of approximately $8,000 of printing expenses, and the increase of approximately $12,000 of our Nevada factory general G&A expenses, such as office and travel expenses, offset by the decrease of approximately $12,000 of bad debt expenses, the decrease of approximately $4,000 of computer expenses, the decrease of approximately $4,000 of custom inspection fees, and the decrease of approximately $10,000 of other miscellaneous G&A expenses, such as office and travel expenses.

 

Stock compensation expenses decreased by $524,000 during the six months ended June 30, 2019 compared to the same period in 2018 because Mr. Wang, our CEO and CFO, distributed 1,500,000 shares of his own stock to certain persons outside of the United States who had previously worked with the Company as an incentive for these individuals to assist the Company in developing its international market during the 2018 period. The Company determined that these 1,500,000 shares distributed by Mr. Wang were related to the Company’s operations in accordance to ASC 225-10-S99-4. As a result, we incurred $480,000 stock compensation expense for the six months ended June 30, 2018. In addition, we incurred $44,000 stock compensation expense as we issued 200,000 shares to a consultant for research and strategic planning consulting services during the six months ended June 30, 2018. We did not incur such stock compensation expenses for the six months ended June 30, 2019.

 

 
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Amortization of deferred stock compensation increased by approximately $428,000 in the six months ended June 30, 2019 as compared to 2018, of which $126,000 related to the amortization of the value of 2,300,000 shares of restricted shares of common stock to three employees, which all have a vesting period of three years. In addition, we also issued 67,916 shares of our common stock valued at $20,375 during the year ended December 31, 2018 to two financial advisors to provide certain financial advisory services for a period of six months and amortized such cost of approximately $7,000. In January and March 2019, we issued 1,150,000 shares of our common stock with additional 450,000 shares of our common stock to be issued in each of the next three quarters of 2019 valued at $1,080,000 to two advisors to provide certain financial advisory services and amortized such cost of approximately $295,000. These two service contracts were terminated in April and May of 2019 due to non-performance. We did not incur any amortization of deferred stock compensation during the same period in 2018.

 

Other income increased by approximately $188,000 from approximately $66,000 of other expense in the six months ended June 30, 2018 to approximately $254,000 of other income in the six months ended June 30, 2019, mainly due to approximately $241,000 of gain on debt settlement which we issued stock with a fair value approximately $763,000 in exchange for the settlement of debt of approximately $1.0 million during the six months ended June 30, 2019. In addition, during the six months ended June 30, 2019, we generated approximately $11,000 from sales of our sample products. We did not enter into such transactions during the same period in 2018. During the six months ended June 30, 2018, we had approximately $102,000 of fees charged to our shareholders in assisting them to obtain electronic stock certificates.

 

Net income increased by approximately $1.9 million from approximately $1.4 million of net loss in the six months ended June 30, 2018 to approximately $0.5 million of net income in the six months ended June 30, 2019 mainly due to the reasons discussed above.

 

Liquidity and Capital Resources

 

As of June 30, 2019, we had a cash balance of approximately $1,000, compared to a cash balance of approximately $296,000 at December 31, 2018.

 

In assessing our liquidity, we monitor and analyze our cash on-hand and our operating and capital expenditure commitments. Our liquidity needs are to meet our working capital requirements, operating expenses and capital expenditure obligations. Other than operating expenses and an outstanding commitment of $1.0 million in relation to the purchase of assets associated with the manufacture of dietary supplements, the Company does not have significant cash commitments. Cash requirements include cash needed for purchase of inventory, payroll, payroll taxes, rent, and other operating expenses. However, in response to the reduced liquidity factors described above, the Company has continued to find ways to reduce its operating expenses. In addition, should our Company need additional capital, our principal shareholder and Chief Executive and Financial Officer may lend additional money to the Company from time to time to the extent he is in a position and willing to do so. No assurance can be provided that he will continue to lend funds to the Company in the future. As of September 6, 2019, we have a cash balance of approximately $9,000.

 

Management has concluded under U.S. GAAP that there is substantial doubt about our ability to continue as a going concern as a result of our lack of significant revenue and working capital. If we are unable to generate significant revenue or secure financing, we may be required to cease or limit our operations. Our financial statements do not include adjustments that might result from the outcome of this uncertainty.

 

For the six months ended June 30, 2019, cash used in operating activities amounted to approximately $445,000 as compared to approximately $935,000 used in operating activities in the same period in 2018. Cash used in operating activities for the six months ended June 30, 2019 mainly included non-cash transactions of approximately $241,000 from gain on debt settlement, the increase of accounts receivable of approximately $60,000 as we have incurred some credit sales from our packing and OEM business, the increase of inventory of approximately $111,000 as we had started production in full capacity during the six months ended June 30, 2019 and stocked up our inventory at June 30, 2019, the decrease of deferred revenue of approximately $1.4 million from shipping our backlog orders of Auxia and Cell Power products for which our members had previously paid , and the decrease of lease liability of approximately $53,000 as we paid off our lease obligations that were undertaken in March 2019. This amount was partially offset by approximately $555,000 of net income, the non-cash expense of approximately $428,000 in stock based compensation, approximately $33,000 of depreciation and amortization expenses, approximately $46,000 in amortization of a lease right-of-use asset, the decrease of prepaid expenses of approximately $51,000, and the increase of accounts payable and accrued expenses of approximately $329,000, as we were behind on our payment schedule.

 

 
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For the six months ended June 30, 2019, financing activities provided approximately $150,000 as compared to approximately $956,000 during the six months ended June 30, 2018. Net cash received in the six months ended June 30, 2019 includes approximately $89,000 from the collection of our stock subscription receivable and approximately $143,000 from a loan from our principal shareholder and Chief Executive and Financial Officer. These amounts were partially offset by our repayment of principal amounts on various loans of approximately $82,000, of which approximately $62,000 was repaid to our principal shareholder and Chief Executive and Financial Officer, and approximately $20,000 was paid to the unaffiliated third parties.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The Company has established disclosure controls and procedures to ensure that information required to be disclosed in this quarterly report on Form 10-Q was properly recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. The Company’s controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers to allow timely decisions regarding required disclosure.

 

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) at June 30, 2019 based on the evaluation of these controls and procedures required by paragraph (b) of Rule 13a-15 or Rule 15d-15 under the Exchange Act. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer/Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer/Chief Financial Officer concluded that, at June 30, 2019, our disclosure controls and procedures are not effective due to the following material weakness that we have identified:

  

1. Lack of Accounting and Finance Expertise – Our current accounting staff is relatively small, and we do not have the required infrastructure of meeting the higher demands of being a U.S. public company. This material weakness also relates to a lack of personnel with expertise in preparing financial statements in accordance with U.S. GAAP.

 

We have taken certain actions to remediate the material weakness related to our lack of U.S. GAAP experience. We have engaged an outside CPA with U.S. GAAP knowledge and SEC reporting experience to supplement our current internal accounting personnel and assist us in the preparation of our financial statements to ensure that our financial statements are prepared in accordance with U.S. GAAP.

 

The Company’s operations are relatively small and uncomplicated, and as our operations grow and become more complex, we intend to hire additional personnel in financial reporting and other areas. However, there can be no assurance of when, if ever, we will be able to remediate the identified material weaknesses.

 

Changes in Internal Controls over Financial Reporting

 

Except as disclosed above, there have been no changes in the Company’s internal controls over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

 
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PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings 

 

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We are not currently a party to any material legal proceedings, and to our knowledge none is threatened. There can be no assurance that future legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on our financial position, results of operations or cash flows.

 

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

 

None.

 

 
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Item 6. Exhibits. 

 

(a) Exhibits.

 

The following exhibits are filed herewith and this list is intended to constitute the exhibit index.

 

Exhibit No.

 

Document Description

 

 

 

31.1

CERTIFICATION of CEO/CFO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002.

 

 

 

32.1*

CERTIFICATION of CEO/CFO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

 

 

Exhibit 101

 

Interactive data files formatted in XBRL (eXtensible Business Reporting Language): (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Cash Flows, and (iv) the Notes to the Financial Statements.

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

_______________

* This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 of the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

 

 
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SIGNATURE

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Merion, Inc.

 

Title

Name

Date

Signature

President, CEO and CFO

Ding Hua Wang

September 9, 2019

/s/ Ding Hua Wang

 

Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.

 

SIGNATURE

NAME

TITLE

DATE

/s/ Ding Hua Wang

Ding Hua Wang

President, Chief Executive Officer,

September 9, 2019

 

 

 

 

Principal Financial and

Principal Accounting Officer,

Director

 

 

 

 

29