Item 1. Description of Business
Introduction
Merion, Inc. is a provider of health and nutritional supplements and personal care products. Currently, we mainly sell 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 Original Equipment Manufacturer (“OEM”) and packaging products are located in the United States.
Company History
Merion, Inc., 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 with the same name, 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 its 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 effective immediately, from E-World NV, to Merion, Inc.
Products
In June 2014, we suspended our direct marketing model in China in response to the legal action taken by the Chinese authorities. 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 twelves individual nutritional supplement products, four of which were introduced in 2018, and one beauty product, which was also introduced in 2018, on these 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 years ended December 31, 2017 and 2016. With the purchase of these assets, 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 have the ability to 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.
Company Products
Our nutritional supplement products are made according to a micro molecular nutrition formula. To achieve the maximum effect of products, micro molecular health foods were designed to be absorbed by cells directly with minimum chemical conversion, which we believe promotes faster absorption. We believe our company is one of only a few companies in the market which are using a micro molecular nutrition formula.
In November and December 2016, our Dibeier Granules & Oral products successfully passed inspection by the Shenzhen Academy of Metrology & Quality Inspection and the Guangdong Quality Supervision and Inspection Institution for Food (Shenzhen). Copies of these two inspection reports were filed as exhibits to the Company’s Form 10-K for 2015 filed on February 7, 2017. As a result, we were able to directly export these products to the China market and sell them at nutritional supplement stores in China as food, rather than only through our website. However, we are still exploring potential wholesale distributors to import these products.
In June and July 2017, we introduced three new nutritional supplement products: Hepaticia, Auxia, and Capsule of Beauty. In October 2017, we introduced two nutritional supplement products: AntiGrey and Cell Vitality. Hepacticia is a nutritional supplement product that may support liver health. Auxia is a nutritional supplement that may support kidney health. Capsule of Beauty is a nutritional supplement that may prevent wrinkles and support nail health. AntiGrey is a nutritional supplement that may prevent grey hair. Cell Vitality is a nutritional supplement that may support eye health. As of the date of filing of this report, we are no longer selling Hepaticia, Auxia, Capsule of Beauty, AntiGrey and Cell Vitality, as the market demands for these products were not up to our expectations.
In January 2018, we introduced a new beauty product, Noir Naturel, a gentle formula for grey coverage from the first application into hair.
In September 2018, we introduced three different types of natural aphrodisiac supplements 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 2019, we anticipate introducing 1) Lady-S, a female dietary supplement that may assist on 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, 4) Taibao, a nutritional supplement that may enhance physical performance and energy metabolism, and 5) M-Power, a nutritional supplement that may provide anti-aging support.
The nutritional supplements’ and beauty products’ formulas do not have patent protection.
Sales breakdown
Currently, the Company does not have plans to expand its business beyond the nutritional products and beauty sector and the OEM and packaging sector.
All nutrition and beauty products are sold in China and all OEM and packaging products are sold in the U.S.
Return and Refund Policy for Our Products
Merion guarantees the quality of its products, and will exchange any product found to be defective. Additionally, customers can apply for a 90% refund of the original purchase price of purchased products within 60 days of purchase. When products are returned, they must be unopened and resalable. All shipping fees for product exchanges or returns must be fully paid by customers. All of the returned products must not be damaged and must be within the valid shelf-life period specified on the product label. 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 costs less commissions and shipping costs.
For the years ended December 31, 2018 and 2017, there were no return of products.
Sourcing and Production
Our Products
During the years ended December 31, 2018 and 2017, we acquired our ingredients from the suppliers and contracted for production of our proprietary products from manufacturers that we believe are reliable, reputable and deliver high quality materials, products and services. During the year ended December 31, 2018, we also acquired our ingredients from suppliers for direct production in our Nevada factory. In 2018, three suppliers accounted for approximately 47.4% of our purchases: Sunland Nutrition Inc. (12.6%), Pure Valley Nutrition (12.1%), and McGoGene, LLC (22.7%). In 2017, three suppliers accounted for approximately 94.0% of our purchases: SUSS Technology Corp. (29.3%), Oxyultra Inc. (25.1%), and McGoGene, LLC (39.6%). The loss of one or more of these suppliers could result in a potential loss of our sales and revenues if we cannot find a substitute quickly or upon favorable terms.
The Company does not have a written or contractual agreement with our other suppliers or manufacturers. Our product ingredient sourcing and other manufacturing requirements are conducted on a purchase-order basis. If one or more of our current suppliers stopped selling us ingredients and/or if one or more of our current manufacturers stopped manufacturing our products, we would be forced to find other suppliers and manufacturers. The time needed to find other suppliers or manufacturers could outlast the inventory on hand and result in loss of sales.
We maintain good relationships with our suppliers and do not anticipate that any of our suppliers will terminate such relationships in the near term. We also have ongoing relationships with secondary and tertiary suppliers. In the event that we become unable to source any products or ingredients from our major suppliers, we believe that we would be able to produce or replace those products or substitute source these ingredients from our secondary and tertiary suppliers without great difficulty or significant increases to our cost of goods sold.
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 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”). The Seller was one of our major suppliers during the years ended December 31, 2017 and 2016. Having purchased these assets from the Seller, we have begun manufacturing some of the nutritional supplements that we sell. These assets meet all industry nutritional and dietary supplements manufacturing standards, including FDA and GMP compliance and cGMP regulations. In addition to manufacturing the nutritional supplements that we sell, we also anticipate starting production of hard capsules, tablets, solid beverage (sachet packaging), teabags, powder, granules, dietary supplements for export, softgel capsules and healthy food from these assets for any potential new customers who need this product.
For nutritional products and beauty products, we purchase our ingredients from third parties and contract with a third-party manufacturer for further processing the raw materials into final products to be sold. We did not own a manufacturing plant for product processing prior to January 1, 2018. We only provided self-developed formulas to be manufactured. Our company is able to obtain the ingredients necessary for production of our nutritional supplements.
We also maintain good relationships with our manufacturers and do not anticipate that any of our manufacturers will terminate such relationships in the near term. In the event we become unable have our products manufactured by our major manufacturers, we believe that we would be able to reallocate production to our other manufacturers or locate other manufacturers without great difficulty or significant increases to our cost of goods sold.
In addition, we maintain good relationships with our wholesale distributors in China and our OCM and packing customers and do not anticipate that any of those parties will terminate such relationships in the near term. In 2018, two customers accounted for approximately 39.5% of our sales: Nanyu Zhu (27.4%) and Yan Zhu. (12.1 %). In 2017, two customers accounted for approximately 51.2% of our sales: Nanyu Zhu (36.4%) and Meiwen Yu (14.8%). The loss of one or more customers could result in a potential loss of our sales and a negative effect on our operations if we cannot find one or more substitutes.
Order Backlog
We have no current order backlog.
Industry Analysis
The nutrition industry includes many small and medium sized companies that manufacture and distribute products generally intended to enhance the body’s performance and wellness. The four major product categories within the nutrition industry are:
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Nutritional Supplements - products such as vitamins, minerals, nutritional supplements, herbs and botanicals and compounds derived from these substances.
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Natural and Organic Foods - products such as cereals, milk, non-diary beverages and frozen entrees.
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Functional Foods - products with added ingredients or fortification specifically for health or performance purposes.
The nutritional supplement market is characterized by:
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Large selections of essentially similar products that are difficult to differentiate.
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Retail consumers’ emphasis on value pricing.
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Constantly changing formulations based on evolving scientific research.
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Low entry barriers resulting from low brand loyalty, rapid change, widely available manufacturing, low regulatory requirements and ready access to large distribution channels, such as the Internet and retail stores selling nutritional supplements and other direct marketing companies.
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A lack of uniform standards regarding product ingredient sources, potency, purity, absorption rate and form.
Competition
The market for nutritional products is large and intensely competitive. The Company competes directly with companies that manufacture and market nutritional products. The Company competes with other companies in the nutritional products industry by emphasizing the uniqueness, value and premium quality of the Company’s products and convenience of the Company’s Internet sales system. Many of the Company’s competitors have much greater name recognition and financial resources than the Company. In addition, nutritional products can be purchased in a wide variety of channels of distribution. While the Company believes that consumers appreciate the convenience of ordering products from home through the Internet, the buying habits of many consumers accustomed to purchasing products through traditional retail channels are difficult to change. The Company’s product offerings are also relatively small compared to the wide variety of products offered by many other nutritional product companies.
Marketing Plan
The Company promotes its products through its websites and newspaper advertisements. During the early stages of website implementation, the Company offered coupon codes for certain products to generate sales and website traffic, but has since discontinued this practice.
The majority of the Company’s sales on nutritional and beauty products were generated from China for the years ended December 31, 2018 and 2017.
Since June 2014, we mainly sold our products over the Internet directly to end-user customers through our websites, www.dailynu.com and www.merionus.com, and to wholesale distributors. In March 2016, we launched an Affiliate Marketing Program, which has already been terminated.
We believe that consumers have become more confident in ordering products like ours over the Internet. However, the nutritional supplement and skin care product e-business markets have been, and continue to be, increasingly competitive, and are rapidly evolving.
The Company’s marketing approach also use the Company’s CEO sales network and relationships to approach distributors to purchase the Company’s products in fiscal year 2018 and 2017.
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 year ended December 31, 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 five 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 must consult with the Company counsel to comply with U.S. securities laws.
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, implemented solely for persons outside of the United States pursuant to Regulation S under the Securities Act of 1933.
During the year ended December 31, 2018, the Company issued 64,500 shares to the Company’s sales agents outside the U.S. The shares are valued at $32,249, determined using the monthly closing price of the Company’s common stock on the applicable issuance dates, and recognized in the captioned “selling expenses” in the accompanying statements of operations and other comprehensive income (loss) for the year ended December 31, 2018.
Intellectual Property
We have no registered trademarks or patents in the United States. We have common law ownership rights under U.S. trade secret law for the formulations for eleven of our twelve Nutritional Supplements (all except O2 Cell Power). We also have common law ownership rights for the formulation of our Noir Naturel product.
The formulation of the O2 Cell Power product is owned by Oxygen America, Inc., which manufactures this product and packages it with Company designed packaging under an oral agreement with us. We are authorized by this supplier under oral agreement to sell this product worldwide under our brand name without infringing any rights of Oxygen America, Inc.
The Company has obtained a Trademark Registration in China for the name of “Dibeier” (or Mandarin pinyin: “Nuo Lin”) with trademark application number 20669799. Under Chinese law, this trademark is valid for an indefinite period, as there is no expiration date.
The Company has obtained a Trademark Registration in China for the name of “DailyNu” with trademark application number 20683305. Under Chinese law, this trademark is valid for an indefinite period, as there is no expiration date.
Other than the aforementioned trademarks, we do not own any other registered trademarks, trade names or other governmentally approved intellectual property rights for those products.
Research and Development
In 2018, we continued our efforts to internally develop an online platform called “E-Hospital”. We anticipate that E-Hospital will provide the latest and the most advanced U.S. health care information and products, including legally exported nutrition supplements and newly-released medication for local hospitals and other medical institutes, in China through the Internet. We are in the process of contacting doctors who will be partnering with our E-Hospital platform to provide periodic video consultation and overseas medical lectures to promote the exchange of medical information and developments. The collaboration of E-Hospital with overseas local hospitals will strengthen the recognition, popularity and reputation of overseas local hospitals, as well as expand the market share and increase the competitiveness of these hospitals.
We expect that the E-Hospital Services will eventually provide the following benefits:
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High quality remote treatment anywhere, to suit individual lifestyles;
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Coordinate medication delivered directly to patients;
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Facilitate access to the latest US medical treatments;
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Provide an internet forum for communication and sharing between doctors and doctors, doctors and patients, or patient to patient; and
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Facilitate access to safe and high quality nutritional supplements, which are becoming increasingly difficult to obtain in polluted countries such as China.
The E-Hospital Services will also include the following:
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Facilitate access to effective advanced medication, therapeutic nutritional supplements and health products;
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Facilitate access to cutting-edge medical health knowledge;
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Coordinate prescriptions, legally issued by all E-Hospital affiliated doctors;
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Feature services and new medications promoted by our local hospital partners;
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Provide access to live video consultations with U.S. doctors, medical lectures, and product shipping and customer service;
As we are currently developing the E-Hospital platform, we do not have an estimate for when we will ready to launch the platform. There can be no assurance that we will be able to successfully to launch the platform. The Company has currently put the project on hold in 2019.
Research and development expenses for the years ended December 31, 2018 and 2017 were $7,549 and $1,310, respectively.
Government Regulation
Given uncertainties relating to our compliance with personal network marketing laws in foreign jurisdictions, the Company discontinued sales through the network marketing model in 2014, and began selling directly to end-user customers from our website.
We believe we are no longer subject to personal network marketing regulations. Nonetheless, we are still subject to federal, state, local and foreign regulations. Various governmental agencies have an impact on our business, including but not limited to the U.S. Food and Drug Administration. Regulations promulgated by the FDA cover product ingredients, manufacturing, distribution, marketing, sales, compensation and taxation, to name a few. All of our products have certificates of free sales issued by the FDA Center for Food Safety and Applied Nutrition. If the Company were to fail to meet standards required by these regulations, then the Company could be prohibited from selling its products.
The Company plans to export its Dibeier Products into China to be sold over-the-counter in retail locations such as nutritional product stores, rather than only through our websites. Under Chinese law, to import these products into China, the Company must provide the Inspection Report from the Provincial Quality Supervision and Inspection Institution. In November and December 2016, our Dibeier Granules & Oral products successfully passed inspection by the Shenzhen Academy of Metrology & Quality Inspection and the Guangdong Quality Supervision and Inspection Institution for Food (Shenzhen). The Company also obtained the Product Chinese Name registration from local SAIC and the trademark registration in September 2016 from the Trademark Office of State Administration for Industry & Commerce of China (“SAIC”). The Company currently has no binding contracts or agreements with any person or entity in China to purchase and import the Dibeier Products. The Company is currently reviewing U.S. and Chinese import/export regulations regarding the sale of Dibeier Products and will not commence the export and sale of Dibeier Products until it believes that it is fully in compliance with these regulations.
Employees
We have the following employees:
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Full time: 11
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Operations - 6
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Administrative - 2
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Management - 2
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Sales - 1
We have no collective bargaining agreement with our employees. We consider our relationships with our employees to be excellent.
Item 1A.
Item 1A. Risk Factors.
The Company operates in an environment that involves a number of risks and uncertainties. The risks and uncertainties described in this Annual Report on Form 10-K are not the only risks and uncertainties that we face. Additional risks and uncertainties that presently are not considered material or are not known to us, and therefore are not mentioned herein, may impair our business operations. If any of the risks described in this Annual Report on Form 10-K actually occur, our business, operating results and financial position could be adversely affected.
We have had a history of losses since inception.
For the years ended December 31, 2018 and 2017, we had net losses of approximately $3.1 million and $1.0 million, respectively. We can offer no assurance that we will ever operate profitably or that we will generate positive cash flow in the future. Our management expects the business to continue to experience negative cash flow for the foreseeable future and cannot predict when, if ever, our business might become profitable. With our cash on hand as of December 31, 2018, management has concluded under generally accepted accounting principles that there is substantial doubt about our ability to continue as a going concern for the next twelve months from the date of this filing. Until we can generate significant revenues, if ever, we expect to satisfy our future cash needs through equity or debt financing. We will need to raise additional funds, and such funds may not be available on commercially acceptable terms, if at all. If we are unable to raise funds on acceptable terms, we may not be able to execute our business plan, take advantage of future opportunities, or respond to competitive pressures or unanticipated requirements. This may seriously harm our business, financial condition and results of operations. In the event we are not able to continue operations our shareholders will likely suffer a complete loss of their investments in our securities.
If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market, or our competitors. If any of the analysts who may cover us change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, our stock price would likely decline. If any analysts who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
The market price of our common stock may be highly volatile.
The market for our common stock will likely be characterized by significant price volatility when compared to more established issuers and we expect that it will continue to be so for the foreseeable future. The market price of our common stock is likely to be volatile for a number of reasons. First, our common stock is likely to be sporadically and/or thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of common stock by our stockholders may disproportionately influence the price of the common stock in either direction. The price of the common stock could, for example, decline precipitously if even a relatively small number of shares are sold on the market without commensurate demand, as compared to a market for shares of an established issuer which could better absorb those sales without adverse impact on its share price. Secondly, we are a speculative investment due to our lack of profits to date. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the shares of an established issuer. We cannot make any predictions or projections as to what the prevailing market price for our common stock will be at any time or as to what effect the sale of common stock or the availability of common stock for sale at any time will have on the prevailing market price.
Because the principal trading markets for our shares is the OTC Market, the corporate governance rules of the major U.S. stock exchanges do not apply to us. As a result, our governance practices may differ from those of a company listed on such U.S. exchanges.
Our governance practices need not comply with certain New York Stock Exchange and NASDAQ corporate governance standards, including:
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the requirements that a majority of our board of directors consists of independent directors;
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the requirement that we have an audit committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and
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the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.
There can be no assurance that we will voluntarily comply with any of the foregoing requirements. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to such corporate governance requirements.
The requirements of being a public company may strain our resources, divert management’s attention and require us to disclose information that is helpful to competitors, make us more vulnerable to litigation and make it more difficult to attract and retain qualified personnel.
As a public company, we are subject to the reporting requirements of the Securities Act, the Securities Exchange Act of 1934, as amended (Exchange Act), the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Compliance with these rules and regulations requires significant legal and financial compliance costs and makes some activities difficult, time-consuming or costly.
Our future growth and stability depends, in part, on our ability to diversify our sales. Our efforts to establish new sales from existing customers and new customers could require significant initial investments, which may or may not result in higher sales and improved financial results.
Our business strategy depends in large part on our ability to develop new product sales from current and new customer relationships. These activities often require a significant up-front investment including, among others, customized formulations, regulatory compliance, product registrations, package design, product testing, pilot production runs, and the build-up of initial inventory. We may experience significant delays from the time we increase our operating expenses and make investments in inventory until the time we generate net sales from new products or customers, and it is possible that we may not generate material revenue from new products or customers after incurring such expenditures. If we incur significant expenses and investments in creating and purchase inventory that we are not able to recover our cost, and we are not able to compensate for those expenses, our operating results could be adversely affected.
We are affected by extensive laws, governmental regulations, administrative determinations, court decisions and similar constraints, which can make compliance costly and subject us to enforcement actions by governmental agencies.
The formulation, manufacturing, packaging, labeling, holding, storage, distribution, advertising and sale of our products are affected by extensive laws, governmental regulations and policies, administrative determinations, court decisions and similar constraints at the federal, state and local levels, both within the United States and China and in any country where we conduct business. There can be no assurance that we or our independent distributors will be in compliance with all of these regulations. A failure by us or our distributors to comply with these laws and regulations could lead to governmental investigations, civil and criminal prosecutions, administrative hearings and court proceedings, civil and criminal penalties, injunctions against product sales or advertising, civil and criminal liability for the Company and/or its principals, bad publicity, and tort claims arising out of governmental or judicial findings of fact or conclusions of law adverse to the Company or its principals. In addition, the adoption of new regulations and policies or changes in the interpretations of existing regulations and policies may result in significant new compliance costs or discontinuation of product sales, and may adversely affect the marketing of our products, resulting in decreases in revenues.
We are currently dependent on a limited number of independent suppliers and manufacturers of our products that cannot be manufactured in our Nevada factory, which may affect our ability to deliver our products in a timely manner. If we are not able to ensure timely product deliveries, potential distributors and customers may not order our products, and our revenues may decrease.
We currently rely entirely on a limited number of third parties to supply and manufacture our products that cannot be manufactured in our Nevada factory. Our products are manufactured on a purchase order basis only and manufacturers can terminate their relationships with us at will. These third party manufacturers may be unable to satisfy our supply requirements, manufacture our products on a timely basis, fill and ship our orders promptly, provide services at competitive costs or offer reliable products and services. The failure to meet any of these critical needs would delay or reduce product shipment and adversely affect our revenues, as well as jeopardize our relationships with our distributors and customers. In the event any of our third party manufacturers were to become unable or unwilling to continue to provide us with products in required volumes and at suitable quality levels, we would be required to identify and obtain acceptable replacement manufacturing sources. There is no assurance that we would be able to obtain alternative manufacturing sources on a timely basis. Additionally, all our third party manufacturers source the raw materials for our products, and if we were to use alternative manufacturers we may not be able to duplicate the exact profile of the product from the original manufacturer. An extended interruption in the supply of our products would result in decreased product sales and our revenues would likely decline. We believe that we can meet our current supply and manufacturing requirements with our current suppliers and manufacturers or with available substitute suppliers and manufacturers. Historically, we have not experienced any delays or disruptions to our business caused by difficulties in obtaining supplies.
We face significant competition from existing suppliers of products similar to ours. If we are not able to compete with these companies effectively, we may not be able to achieve and maintain profitability.
We face intense competition from numerous resellers, manufacturers and wholesalers of health and nutritional supplements and personal care products similar to ours, including retail, online and mail order providers. Many of our competitors have longer operating histories, established brands in the marketplace, revenues significantly greater than ours and better access to capital than us. We expect that these competitors may use their resources to engage in various business activities that could result in reduced sales of our products. Companies with greater capital and research capabilities could re-formulate existing products or formulate new products that could gain wide marketplace acceptance, which could have a depressive effect on our future sales. In addition, aggressive advertising and promotion by our competitors may require us to compete by lowering prices because we do not have the resources to engage in marketing campaigns against these competitors, and the economic viability of our operations likely would be diminished.
Adverse publicity associated with our products, ingredients, or those of similar companies, could adversely affect our sales and revenue.
Our customers’ perception of the safety and quality of our products or even similar products distributed by others can be significantly influenced by national media attention, publicized scientific research or findings, product liability claims and other publicity concerning our products or similar products distributed by others. Adverse publicity, whether or not accurate, that associates consumption of our products or any similar products with illness or other adverse effects, will likely diminish the public’s perception of our products. Claims that any products are ineffective, inappropriately labeled or have inaccurate instructions as to their use, could have a material adverse effect on the market demand for our products, including reducing our sales and revenues.
The efficiency of nutritional supplement products is supported by limited conclusive clinical studies, which could result in less market acceptance of these products and lower revenues or lower growth rates in revenues.
Our nutritional supplement products are made from various ingredients including vitamins, minerals, amino acids, herbs, botanicals, fruits, berries and other substances for which there is a long history of human consumption. However, there is little long-term experience with human consumption of certain product ingredients or combinations of ingredients in concentrated form. Although we believe all of our products fall within the generally known safe limits for daily doses of each ingredient contained within them, nutrition science is imperfect. Moreover, some people have peculiar sensitivities or reactions to nutrients commonly found in foods, and may have similar sensitivities or reactions to nutrients contained in our products. Furthermore, nutritional science is subject to change based on new research. New scientific evidence may disprove the efficacy of our products or prove our products to have effects not previously known. We could be adversely affected by studies that may assert that our products are ineffective or harmful to consumers, or if adverse effects are associated with a competitor’s similar products.
Our products may not meet health and safety standards or could become contaminated.
We do not have control over all of the third parties involved in the manufacturing of our products and their compliance with government health and safety standards. Even if our products meet these standards they could otherwise become contaminated. A failure to meet these standards or contamination could occur in our operations or those of our distributors or suppliers. This could result in expensive production interruptions, recalls and liability claims. Moreover, negative publicity could be generated from false, unfounded or nominal liability claims or limited recalls. Any of these failures or occurrences could negatively affect our business and financial performance.
Compliance with new and existing laws and governmental regulations could increase our costs significantly and adversely affect our results of operations.
The processing, formulation, safety, manufacturing, packaging, labeling, advertising and distribution of our products are subject to federal laws and regulation by one or more federal agencies, including the FDA. These activities are also regulated by various state, local and international laws and agencies of the states and localities in which our products are sold. Government regulations may prevent or delay the introduction, or require the reformulation, of our products, which could result in lost revenues and increased costs to us. For example, the FDA regulates, among other things, the composition, safety, manufacture, labeling and marketing of dietary ingredients and dietary supplements (including vitamins, minerals, herbs, and other dietary ingredients for human use). Dietary supplements and dietary ingredients that do not comply with FDA’s regulations and/or the Dietary Supplement Health and Education Act of 1994 (“DSHEA”) will be deemed adulterated or misbranded. Manufacturers and distributors of dietary supplements and dietary ingredients are prohibited from marketing products that are adulterated or misbranded, and the FDA may take enforcement action against any adulterated or misbranded dietary supplement on the market. The FDA has broad enforcement powers. If we violate applicable regulatory requirements, the FDA may bring enforcement actions against us, which could have a material adverse effect on our business, prospects, financial condition, and results of operations.
The FDA may not accept the evidence of safety for any new dietary ingredient that we may wish to market, may determine that a particular dietary supplement or ingredient presents an unacceptable health risk based on the required submission of serious adverse events or other information, and may determine that a particular claim or statement of nutritional value that we use to support the marketing of a dietary supplement is an impermissible drug claim, is not substantiated, or is an unauthorized version of a “health claim.” Any of these actions could prevent us from marketing particular dietary supplement products or making certain claims or statements with respect to those products. The FDA could also require us to remove a particular product from the market. Any future recall or removal would result in additional costs to us, including lost revenues from any products that we are required to remove from the market, any of which could be material. Any product recalls or removals could also lead to an increased risk of litigation and liability, substantial costs, and reduced growth prospects.
We could be exposed to product liability claims or other litigation, which may be costly and could materially adversely affect our operations.
We could face financial liability due to product liability claims if the use of our products results in significant loss or injury. Additionally, the manufacture and sale of our products involves the risk of injury to consumers from tampering by unauthorized third parties or product contamination. We could be exposed to future product liability claims that, among others: our products contain contaminants; we provide consumers with inadequate instructions about product use; or we provide inadequate warning about side effects or interactions of our products with other substances. Even if we were to prevail in any such claims, the cost of litigation and settlement could be significant. We do not maintain product liability insurance, and could experience significant losses from any litigation relating to our products.
Our business could be adversely affected by legal challenges to our business model or by actions restricting our ability to provide the full range of our services in certain jurisdictions.
Our future ability to operate a platform for e-Hospital and expert medical services in a particular jurisdiction is directly dependent upon the applicable laws governing remote healthcare, the practice of medicine and healthcare delivery in general in such location, which are subject to changing political, regulatory and other influences. Accordingly, if the e-Hospital platform becomes operations, we will be required to monitor our compliance with laws in every jurisdiction in which we operate, on an ongoing basis, and we cannot provide assurance that our activities and arrangements, if challenged, would be found to be in compliance with the law. Additionally, it is possible that the laws and rules governing the practice of medicine, including remote healthcare, in one or more jurisdictions may change in a manner that is harmful to our business. If a successful legal challenge or an adverse change in the relevant laws were to occur, and we were unable to adapt our business model accordingly, our operations in the affected jurisdictions would be disrupted, which could have a material adverse effect on our business, financial condition and results of operations.
A severe and prolonged downturn in the Chinese or global economy or disruptions in the financial markets may adversely impact our business and results of operations and may limit our access to additional financing.
The nutritional supplement and personal care industry can be affected by macroeconomic factors, including changes in national, regional, and local economic conditions, employment levels and consumer spending patterns. A prolonged slowdown in the Chinese or global economy could erode consumer confidence which could result in changes to consumer spending patterns, which could be harmful to our financial position and results of operations.
In addition, if the capital and credit markets experience volatility and the availability of funds remains limited, we will incur increased costs associated with equity and/or debt financing. It is possible that our ability to access the capital and credit markets may be limited by these or other factors at a time when we would like, or need, to do so, which could have an adverse impact on our ability to refinance maturing debt and/or react to changing economic and business conditions. In addition, fluctuations in interest rates could impact our floating rate debt negatively and increase our debt obligations.
Loss of key personnel could impair our ability to operate.
Our success depends on hiring, retaining and integrating senior management and skilled employees. We are currently dependent on certain current key employees, including Mr. Ding Hua Wang, our Chief Executive Officer, Chief Financial Officer, and director, who is vital to our ability to grow our business and achieve profitability. As with all personal service providers, our officers can terminate their relationship with us at will. Our inability to retain these individuals may result in our reduced ability to operate our business.
Ding Hua Wang has control over key decision making as a result of his control of a majority of our voting stock.
Ding Hua Wang, a member of the Board of Directors and our Chief Executive and Financial Officer, beneficially owns 101,469,512 shares, or 57.6%, of our outstanding common stock. Mr. Wang will be able to exercise voting rights with respect to these shares of common stock, and has the ability to control the outcome of matters submitted to our shareholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets. This concentrated control could delay, defer, or prevent a change of control, merger, consolidation, or sale of all or substantially all of our assets that our other shareholders support, or conversely this concentrated control could result in the consummation of such a transaction that our other shareholders do not support. This concentrated control could also discourage a potential investor from acquiring our common stock due to the limited voting power of such stock. As a board member and officer, Mr. Wang owes a fiduciary duty to our shareholders and must act in good faith in a manner he reasonably believes to be in the best interests of our shareholders. As a shareholder, even a controlling shareholder, Mr. Wang is entitled to vote his shares, and shares over which he has voting control, in his own interests, which may not always be in the interests of our shareholders.
Failure to adequately protect our intellectual property rights may undermine our competitive position, and litigation to protect our intellectual property rights may be costly.
We rely primarily on trade secrets and other contractual restrictions to protect our intellectual property. We have not registered or applied for protections for most of our intellectual property or proprietary technologies relating to the formulations of nutritional supplements that we produce. To protect our proprietary technology and processes, we also rely in part on nondisclosure agreements with our employees, licensing partners, third-party producers, consultants, agents and other organizations to which we disclose our proprietary information. The actions we have taken to protect our intellectual property rights may not be adequate to provide us with meaningful protection or commercial advantage. As a result, third parties may use the intellectual property or proprietary technologies that we have developed and compete with us, which could have a material adverse effect on our business, financial condition and operating results.
PRC intellectual property-related laws and their implementation are still under development. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or many other countries. In addition, policing unauthorized use of proprietary technology can be difficult and expensive. Litigation may be necessary to enforce our intellectual property rights and the outcome of any such litigation may not be in our favor. Given the relative unpredictability of China’s legal system and potential difficulties enforcing a court judgment in China, there is no guarantee that we would be able to halt the unauthorized use of our intellectual property through litigation in a timely manner or at all. Furthermore, any such litigation may be costly and may divert management attention away from our business and cause us to expend significant resources. An adverse determination in any such litigation will impair our intellectual property rights and may harm our business, prospects and reputation. In addition, we have no insurance coverage against litigation costs and would have to bear all costs arising from such litigation to the extent we are unable to recover them from other parties. The occurrence of any of the foregoing could have a material adverse impact on our business, financial condition and results of operations.
We may be exposed to infringement or misappropriation claims by third parties, which, if determined adversely against us, could disrupt our business and subject us to significant liability to third parties.
Our success largely depends on our ability to use and develop our know-how and product formulations without infringing upon the intellectual property rights of third parties. We may be subject to litigation involving claims of infringement or violation of other intellectual property rights of third parties. The holders of patents and other intellectual property rights potentially relevant to our product offerings may be unknown to us or may otherwise make it difficult for us to acquire a license on commercially acceptable terms.
There may also be technologies licensed to and relied on by us that are subject to infringement or other corresponding allegations or claims by others which could damage our ability to rely on such technologies. In addition, although we endeavor to ensure that companies that work with us possess appropriate intellectual property rights or licenses, we cannot fully avoid the risks of intellectual property rights infringement created by suppliers of raw materials used in our products, our third-party producers, or by companies with which we work in cooperative research and development activities. Our current or potential competitors, many of which have substantial resources and have made substantial investments in competing technologies, may have obtained or may obtain patents that will prevent, limit or interfere with our ability to make, use or sell our products in China or other countries. The defense of intellectual property claims, including patent infringement suits, and related legal and administrative proceedings can be both costly and time-consuming, and may significantly divert the efforts and resources of our technical and management personnel. Furthermore, an adverse determination in any such litigation or proceeding to which we may become a party could cause us to:
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pay damage awards;
·
seek licenses from third parties, which may not be available on reasonable terms or at all;
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pay additional ongoing royalties, which could decrease our profit margins;
·
redesign our products, which may be costly, if possible at all; or
·
be restricted by injunctions.
These factors could effectively prevent us from pursuing some or all of our business and result in our customers or potential customers deferring, canceling or limiting their purchase or use of our products, which could have a material adverse effect on our financial condition and results of operations.
Risks Related to Doing Business in China
Adverse changes in political and economic policies of the PRC government could impede the overall economic growth of China, which could reduce the demand for our products and damage our business.
We generate most of our revenues in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The PRC economy differs from the economies of most developed countries in many respects, including:
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the higher level of government involvement and regulation;
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the early stage of development of the market-oriented sector of the economy;
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the rapid growth rate;
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the higher rate of inflation;
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the higher level of control over foreign exchange; and
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government control over the allocation of many resources.
As the PRC economy has been transitioning from a planned economy to a more market-oriented economy, the PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. While these measures may benefit the overall PRC economy, they may also have a negative effect on us.
Although the PRC government has in recent years implemented measures emphasizing the utilization of market forces for economic reform, the PRC government continues to exercise substantial control over virtually every sector of the PRC economy through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and imposing policies that impact particular industries or companies in different ways. Our ability to operate in China may be harmed by changes in PRC laws and regulations, including those relating to how we conduct our business, taxation, import and export tariffs, environmental regulations, land use rights, property and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations. Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant adverse effect on economic conditions in China or particular regions thereof and could require us to divest ourselves of any interest we then hold in PRC properties or joint ventures.
If we are found to have failed to comply with applicable laws, we may incur additional expenditures or be subject to significant fines and penalties.
Our sales in the PRC are subject to certain PRC laws and regulations applicable to us. However, many PRC laws and regulations are uncertain in their scope, and the implementation of such laws and regulations in different localities could have significant differences. In certain instances, local implementation rules and/or the actual implementation are not necessarily consistent with the regulations at the national level. Although we strive to comply with all the applicable PRC laws and regulations, we cannot assure you that the relevant PRC government authorities will not later determine that we have not been in compliance with certain laws or regulations.
Inflation in China and measures to contain inflation could negatively affect our operations and growth.
While the PRC economy has experienced rapid growth, such growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in the money supply and rising inflation. If prices for our products rise at a rate that is insufficient to compensate for the rise in our costs, our business may be materially and adversely affected. In order to control inflation in the past, the PRC government has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state bank lending. If imposed in the future, such austerity measures or other measures could lead to a slowing of economic growth. A slowdown in the PRC economy could also materially and adversely affect our business and prospects.
Item 1B.
Item 1B. Unresolved Staff Comments.
None.
Item 2.
Item 2. Description of Property
We rent the following properties:
California offices and warehouses
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Address/Size:
9550 Flair Dr., #302, El Monte, CA 91731 (Terminated in March 2019)
9550 Flair Dr., #306, El Monte, CA 91731(Terminated in March 2019)
100 N Barranca Street #1000, West Covina, CA 91791 with 5,216 square feet
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Term of Lease:
#302 & 306 - From March 2015 through October 2018, month to month thereafter (Terminated in March 2019)
#1000 - From March 2019 through February 2024
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Monthly Rental:
#302 & 306 - $3,000 from March 2015 to March 2017 and $3,100 from April 2017 to October 2018. (Terminated in March 2019)
#1000
o
$10,954 from March 2019 to February 2020
o
$11,282 from March 2020 to February 2021
o
$11,621 from March 2021 to February 2022
o
$11,969 from March 2022 to February 2023
o
$12,328 from March 2023 to February 2024
Nevada manufacturing facility
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Address/Size:
1883 Whitney Mesa Drive, Henderson, NV 89014
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Term of Lease:
Month to month with 2 months’ advance notice for termination.
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Monthly Rental:
$3,500
We believe our current facilities, including warehousing facilities, are fully suitable and adequate for our business, and that our facilities in Nevada are not currently used at full capacity.
We do not intend to renovate, improve, or develop properties. We are not subject to competitive conditions for property. We have no policy with respect to investments in real estate or interests in real estate, and no policy with respect to investments in real estate mortgages. Further, we have no policy with respect to investments in securities of or interests in persons primarily engaged in real estate activities.
Item 3.
Item 3. 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 4.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is qualified for quotation on the OTCQB Market under the symbol “EWLU.”
There were no trades in our Common Stock prior to August 9, 2017, as we were not current in our SEC filings. On August 9, 2017, we resumed trading on the OTC Pink Open Market. On February 28, 2018, we up-listed our trading market from the OTC Pink Open Market to the OTCQB Market. The following table sets forth the quarterly high and low sales prices of a share of our common stock as reported by OTC Pink Open Market and OTCQB Market for the periods indicated. These over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
Holders of Common Stock
As of March 26, 2019, there were 176,237,844 shares of our common stock issued and outstanding and there were approximately 5,132 shareholders of record of our common stock.
Dividends
We have never declared or paid any cash dividends on our common stock. For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our common stock. Any future determination to pay dividends will be at the discretion of the Board of Directors and will be dependent upon then existing conditions, including our financial condition and results of operations, capital requirements, contractual restrictions, business prospects and other factors that the Board of Directors considers relevant.
There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends. The Nevada Revised Statutes, however, prohibit us from declaring dividends where, after giving effect to the distribution of the dividend:
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we would not be able to pay our debts as they become due in the usual course of business; or
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our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of stockholders who have preferential rights superior to those receiving the distribution, unless otherwise permitted under our articles of incorporation.
Equity Compensation Plan Information
The following table provides information about our equity compensation plan as of December 31, 2018:
Recent Sales of Unregistered Securities
None.
Item 6.
Item 6. Selected Consolidated Financial Data
Not applicable.
Item 7.
Item 7. 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-K.
Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking. 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 rate; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.
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.
In June 2014, we suspended our direct marketing model in China in response to the legal action taken by the Chinese authorities. 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 twelves individual nutritional supplement products, four of which were introduced in 2018, and one beauty product, which was also introduced in 2018, on these 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 have the ability to 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.
In January 2018, we introduced a new beauty product, Noir Naturel, a gentle formula for grey coverage from the first application into hair.
In September 2018, we introduced three different types of natural aphrodisiac supplements for men that may support kidney health, improve human immunity, enhance physical fitness, eliminate fatigue, improve sexual desire and enhance body energy, strength and sexual ability.
In 2019, we anticipate introducing a female dietary supplement that may assist with weight loss.
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. 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 years ended December 31, 2018 and 2017
Total sales decreased by approximately $381,000, or 50.1%, from approximately $760,000 in the year ended December 31, 2017 to approximately $379,000 in the year ended December 31, 2018. The decrease of sales was mainly due to decreases in sales of three of our products, Auxia, Capsule of Beauty and Hepatica, which we newly introduced in June and July 2017, as well as the decrease in sales of our nutritional supplement products, Dibeier Granules & Oral, which were introduced in March 2016. During the year ended December 31, 2018, the market for Auxia, Capsule of Beauty, Hepatica and Dibeier Granules & Oral started to become saturated by our products. The decrease was partially offset by the increase of sales of our natural aphrodisiac supplement for men, which we initially introduced in September 2018. As a result, our sales decreased significantly during the year ended December 31, 2018 as compared to the prior year.
The cost of sales increased by approximately $201,000, or 128.2%, from approximately $157,000 in the year ended December 31, 2017 to approximately $358,000 in the year ended December 31, 2018. For the year ended December 31, 2018, we wrote down approximately $7,000 of our Dibeier Granules & Oral products, they experienced some issues during the shipping process with abnormal temperature conditions that led to us dispose of the products. We do not expect to incur such costs going forward, as we are fully aware of this situation and believe such issues will not recur. In addition, we incurred approximately $196,000 of idle capacity cost in our Nevada factory, as we have been operating under capacity in the factory. As a result, our cost of sales increased while our sales went down during the year ended December 31, 2018 as compared to the prior year.
Our overall gross margin percentage decreased from approximately 79.4% in the year ended December 31, 2017 to approximately 5.5% in the year ended December 31, 2018, mainly due to the quality issues with our Dibeier Granules & Oral products described above and the idle capacity cost.
Our product sales gross margin percentage decreased from approximately 79.4% in the year ended December 31, 2017 to approximately 70.6% in the year ended December 31, 2018. For the year ended December 31, 2018, the majority of our product sales were attributable to our beauty product, Noir Naturel, which has a lower profit margin compared to our Auxia, Capsule of Beauty, Hepatica and Dibeier Granules & Oral products, which comprised the majority of our product sales in the year ended December 31, 2017. As a result, our product sales gross margin percentage decreased significantly during the year ended December 31, 2018 as compared to the prior year.
Selling expenses increased from approximately $82,000 in the year ended December 31, 2017 to approximately $336,000 in the year ended December 31, 2018. The increase of approximately $254,000, or 308.8%, was mainly due to the increase of approximately $131,000 of marketing expenses relating to a conference we held in Hong Kong to promote our products in March 2018, an increase in other marking expenses of approximately $63,000 as we worked to expand our sales channels, as well as approximately $54,000 in promotional expenses for our products that expired in May 2018 and which we gave out as gifts to our customers in March 2018, and the increase of commission expense of approximately $32,000 in relation to the share-based compensation to our sales agents. The increase was partially offset by the decrease of the one-time marketing development expense of approximately $41,000 that we incurred for an agent to assist us in developing our PRC market and promoting our products during the year ended December 31, 2017, which we did not incur again during 2018.
General and administrative (“G&A”) expenses increased by approximately $13,000 from approximately $1,235,000 in the year ended December 31, 2017 to approximately $1,248,000 in the year ended December 31, 2018. General and administrative expenses increased mainly due to the increase of approximately $106,000 related to various other miscellaneous G&A expenses in our Nevada factory, the increase of approximately $7,000 for computer and internet expenses, the increase of approximately $9,000 in travel expenses, the increase of approximately $7,000 related to other miscellaneous G&A expenses in our headquarters, and an increase of bad debt provision of approximately $47,000. The increase was partially offset by the decrease in professional expenses of approximately $163,000, mostly due to lower professional expenses from our attorneys, auditors and consultants during the year ended December 31, 2018 as we completed our outstanding periodic filings with the SEC and became current as of May 2017. As a result, our operating expenses increased slightly during the year ended December 31, 2018 as compared to the same period in 2017.
Stock compensation expenses increased by $674,000 during the year ended December 31, 2018 compared to the same period in 2017 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 have previously worked with the Company as an incentive for these individuals to assist the Company with developing its international market. The Company determined that these 1,500,000 shares, valued at $480,000 and distributed by Mr. Wang, were related to the Company’s operations in accordance to ASC 220-10-S99-4. In addition, we issued 200,000 shares of our common stock valued at $44,000 to a consultant for research and strategic planning consulting services during the year ended December 31, 2018, and comparatively we did not incur any stock compensation expenses during 2017. Furthermore, we issued 150,000 shares of our common stock valued at $150,000 to an investor relations consulting firm to provide up-listing consulting services during the year ended December 31, 2018, and we did not incur any stock compensation expenses during 2017. As a result, we incurred $674,000 in stock compensation expense for the year ended December 31, 2018.
Amortization of deferred stock compensation increased by approximately $133,000 in the year ended December 31, 2018 as compared to 2017, of which $119,000 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 $14,000. We did not incur any amortization of deferred stock compensation during 2017.
Other income increased by approximately $355,000 from approximately $321,000 of other expense in the year ended December 31, 2017 to approximately $34,000 of other income in the year ended December 31, 2018, mainly due to approximately $248,000 of loss in change in fair value of our Warrant Recession Liability - Type B warrants during the year ended December 31, 2017 and approximately $109,000 of income for fees charged to our shareholders in assisting them to obtain electronic stock certificates and lab testing fees charged to our customers during the year ended December 31, 2018.
Net loss from operations increased by approximately $2.1 million from approximately $1.0 million in the year ended December 31, 2017 to approximately $3.1 million in the year ended December 31, 2018 mainly due to the reasons discussed above.
Liquidity and Capital Resources
As of December 31, 2018, we had a cash balance of approximately $296,000, compared to a cash balance of approximately $5,000 at December 31, 2017.
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 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.
Management has concluded under U.S. generally accepted accounting principles 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 year ended December 31, 2018, cash used in operating activities amounted to approximately $1.5 million as compared to approximately $669,000 used in operating activities in the year ended December 31, 2017. Cash used in operating activities for the year ended December 31, 2018 mainly included approximately $3.1 million net loss, the increase of prepaid expenses of approximately $41,000 as we prepaid certain professional fee retainers, the decrease of accounts payable and accrued expenses of approximately $124,000 as we have caught up on our payments, and the decrease of deferred revenue of approximately $88,000 as we have shipped out some of our 2017 back orders in 2018. This amount was partially offset by the decrease of inventories of approximately $30,000 as we have better managed our inventory turnover, the non-cash expense of $161,000 of depreciation and amortization, the non-cash expense of approximately $706,000 in stock based compensation, the non-cash expense of approximately $133,000 in amortization of deferred stock compensation, the non-cash expense of approximately $810,000 in impairment loss of long-lived assets and approximately $47,000 in bad debt expense.
For the year ended December 31, 2018, financing activities provided approximately $1.8 million as compared to approximately $672,000 during the year ended December 31, 2017. Net cash received in the year ended December 31, 2018 includes approximately $2.3 million from the sale of our common stock through several private placements and collection of approximately $23,000 of stock subscription receivable, and approximately $157,000 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 $732,000, of which approximately $440,000 was repaid to our principal shareholder and Chief Executive and Financial Officer, approximately $268,000 was paid to the unaffiliated third parties, and approximately $25,000 was paid on our bank loan.
The material terms of the loans from our principal shareholder and Chief Executive and Financial Officer, certain related parties and certain unaffiliated third parties are set forth in Note 6 and Note 7 of the accompanying notes to financial statements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our stockholders.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not required.
Item 8.
Item 8. Financial Statements
Insert Auditor Report
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
MERION, INC.
NOTES TO 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.
Recent developments
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 is 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. Upon purchasing these assets from the Seller, the Company intends to manufacture some of the nutritional supplements that it sells. 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 anticipates starting 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 financial statements have been presented by the Company in accordance with U.S. generally accepted accounting principles . 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.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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:
Movement of allowance for doubtful accounts is as follows:
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, skin-care and 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.
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 for depreciation using the straight-line method over the estimated useful lives of various classes as follow:
Repairs and maintenance is charged to operations when incurred while betterments and renewals are capitalized.
Intangible Assets, net
Intangible assets represent the technological know-how associated with the machinery that the Company has purchased. The technological know-how has a finite useful life and is amortized using a straight-line method that reflects the estimated pattern in which the economic benefits of the intangible asset is to be consumed. The estimated useful life for the technological know-how is 10 years, which is associated with the economic benefits of the useful lives of the machinery that the Company purchased. The Company also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful life.
Amortization expense totaled $90,000 and $0 for the years ended December 31, 2018 and 2017, respectively. As of December 31, 2018, the Company determined the intangible asset was impaired, as the estimated discounted future cash flows expected to result from the use of the assets as being less than the carrying value of the asset. As a result, the Company recognized $810,000 of impairment loss for the year ended December 31, 2018.
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 affiliates (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).
The three levels of the fair value hierarchy are as follows:
Level 1
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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
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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
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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.
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 $4,956 and $10,978 for the years ended December 31, 2018 and 2017, 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 nearly zero return rate. Hence, the allowance as of December 31, 2018 and December 31, 2017 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 has been recorded as of December 31, 2018 and 2017.
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 $29,476 and $28,318 for the years ended December 31, 2018 and 2017, 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 $7,549 and $1,310 for the years ended December 31, 2018 and 2017, 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. There were no potential dilutive securities for the years ended December 31, 2018 and 2017.
Concentration of Credit Risk
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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 $104,000 uninsured balances as December 31, 2018.
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Major Customers and Suppliers
For the year ended December 31, 2018, two customers accounted for approximately 39% (27% and 12%) of the Company’s sales and for the year ended December 31, 2017, two customers accounted for approximately 51% (36% and 15%) of the Company’s sales.
For the year ended December 31, 2018, three suppliers accounted for approximately 48% (23%, 13% and 12%, respectively) of the Company’s product purchases and for the year ended December 31, 2017, three suppliers accounted for approximately 94% (40%, 29% and 25%, respectively) 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 February 2016, the FASB issued ASU 2016-02, Amendments to the Accounting Standards Codification (“ASC”) 842 Leases. This update requires lessees to recognize a right of use (“ROU”) asset and liability (the lease liability) arising from operating leases on the balance sheet for the lease term. When measuring assets and liabilities arising from a lease, a lessee should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. For lease terms of twelve months or fewer, a lessee is permitted to make an accounting policy election not to recognize lease assets and liabilities. If a lessee makes this election, it should recognize lease expense on a straight-line basis over the lease term. In transition, this update will be effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. This ASU will be effective for the Company on January 1, 2019. The Company does not have a lease agreement with a term longer than 12 months as of December 31, 2018. We adopted ASU 2016-02 on January 1, 2019. In January 2019, the Company entered a new office lease agreement with a 5-year lease term starting in March 2019, until February 2024. Upon adoption of ASU 2016-02, the Company recognized lease labilities of approximately $622,000, with corresponding ROU assets of 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%.
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 Company does not believe the adoption of this ASU will have a material effect on the Company’s 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 consolidated financial statements.
Note 4 - Inventories
Inventories consist of raw materials for production and finished goods available for resale, and can be categorized as:
Note 5 - Property and Equipment
Property and equipment consist of the following:
Depreciation expense totaled $70,557 and $31,779 for the years ended December 31, 2018 and 2017, 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 each of December 31, 2018 and December 31, 2017, the Company owed $109,030 to these third parties.
Interest expense for the years ended December 31, 2018 and 2017 for the above loans amounted to $6,542 and $6,333, respectively.
In March 2019, $20,000 of the $109,030 balance has been extended by a third party creditor from due on demand to 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 December 31, 2018 and 2017, the Company owed $101,666 and $729,175 to these third parties, respectively.
In March 2019, $50,000 of the $101,666 balance has been extended by a third party creditor from due on demand to March 20, 2024.
Long term loan
In December 2015, the Company refinanced a loan balance of $51,263 with an annual interest rate of 2.99% to be repaid over 48 months. During the years ended December 31, 2018 and 2017, the Company paid principal of $25,328 and $12,651, respectively, for the loan. The loan was paid off in December 2018.
Interest expense for the years ended December 31, 2018 and 2017 for the above loan amounted to $564 and $995, respectively.
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%. During the year ended December 31, 2017, advances totaled $471,603. As of December 31, 2018 and 2017, 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.
Interest expense for the years ended December 31, 2018 and 2017 for the above loan amounted to $49,950.
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 years ended December 31, 2018 and 2017, advances totaled $156,692 and $65,402, respectively, and payments to Mr. Wang totaled $439,587 and $221,626, respectively. As of December 31, 2018 and 2017, the balance due to Mr. Wang, non-interest bearing, amounted to $2,508,051 and $2,790,946, respectively. This balance does not bear interest, is unsecured and is due on demand.
In March 2019, $2,400,000 of the $2,508,051 balance has been extended by Mr. Wang from due on demand to 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 each of December 31, 2018 and December 31, 2017, the Company owed $95,000 to such employee.
In March 2019, the full balance of $95,000 has been extended by the employee from due on demand to 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. No repayments have been made during either of the years ended December 31, 2018 and 2017. As of each of December 31, 2018 and December 31, 2017, the Company owed $30,000 to this related party.
Interest expense for the years ended December 31, 2018 and 2017 for the above loans amounted to $3,000.
In March 2019, the full balance of $30,000 has been extended by the related party from due on demand to 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 each of December 31, 2018 and December 31, 2017, the Company owed $518,839 to these related parties.
In March 2019, the full balance of $518,839 has been extended by these related parties from due on demand to March 20, 2024.
Note 8 - Income Taxes
The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the years ended December 31, 2018 and 2017:
*Represents 50% of meal and entertainment expenses and stock compensation expense that are not deductible in the Company’s U.S. tax returns.
The Company uses the 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 $7,817,000 for Federal income taxes and $7,817,000 for California income taxes as of December 31, 2018. The cumulative net operating loss carryforward that may be applied against future taxable income is approximately $6,386,000 for Federal and is approximately $5,338,000 for California as of December 31, 2017, and will expire in the years 2031 to 2038. During the years ended December 31, 2018 and 2017, the Company incurred net losses. 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.
On December 22, 2017, the “Tax Cuts and Jobs Act” (the “Act”) was enacted. Under the provisions of the Act, the U.S. corporate tax rate decreased from 34% to 21% beginning in 2018. Accordingly, we have re-measured our deferred tax assets as of December 31, 2017. However, this re-measurement had no effect on the Company’s income tax expense as the Company provides a 100% valuation allowance on its deferred tax assets.
The components of the deferred tax assets is as follows:
Changes in the value allowance for deferred tax assets increased by $473,631 from $1,713,814 at December 31, 2017 to $2,187,445 at December 31, 2018.
As of December 31, 2018, federal tax returns filed for 2015, 2016 and 2017 remain subject to examination by the taxing authorities. As of December 31, 2018, California tax returns filed for 2014, 2015, 2016 and 2017 remain subject to examination by the taxing authorities.
Note 9 - Commitments
Operating lease
The Company previously contracted to rent office and warehouse space for its main corporate office through October 2018 and thereafter on a month-to-month basis of $3,100 per month without future commitment. The lease was terminated in March 2019. In addition, the Company has contracted to rent a factory in Nevada on a month-to-month basis with a two-month notice before termination. As of December 31, 2018, there are no minimum lease payments because all of the existing operating leases are on a month-to-month basis.
The Company incurred rent expense of $82,043 and $36,046 for the years ended December 31, 2018 and 2017, respectively.
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 year ended December 31, 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.
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, implemented solely for persons outside of the United States pursuant to Regulation S under the Securities Act of 1933.
During the year ended December 31, 2018, the Company issued 64,500 shares to the Company’s sales agents outside the U.S. The shares are valued at $32,249, determined using the monthly closing price of the Company’s common stock on the applicable issuance dates, and recognized in the captioned “selling expenses” in the accompanying statements of operations and other comprehensive income (loss) for the year ended December 31, 2018.
Private placements
During the year ended December 31, 2017, 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 640,307 shares of the Company’s common stock, par value $0.001 per share (“Common Stock”), at a purchase price of $0.90 per share for an aggregate offering price of $576,637. The sales were completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.
During the year ended December 31, 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 3,698,574 shares of the Common Stock at an average purchase price of $0.96 per share for an aggregate offering price of $3,551,098. 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 December 31, 2018, $1,200,000 were unpaid and recognized as stock subscription receivable in the accompanying statements of changes in shareholders’ deficit. In January to March 2019, the Company has received $62,500 of the stock subscription receivable.
In connection with the private placements, the Company issued an aggregate of 160,588 shares of Common Stock to various unrelated third-party individuals located outside the United States as compensation for introducing private placement investors to the Company. These shares were valued at $155,921, which was determined by using the associated average private placement purchase price of $0.97 per share. The value of the shares was accounted for as a reduction of additional paid-in capital because the issuances were made as compensation for financing-related services in connection with the Company’s private placement.
On December 23, 2017, the Company entered into a Securities Purchase Agreement with Changqian Liu, an unrelated third party, pursuant to which the Company sold to him in a private placement 111,110 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 $100,000. The sale was intended to be completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended. Under the terms of the Purchase Agreement, the Private Placement was to close no later than January 30, 2018. Given that the closing had not yet occurred, the Company delivered a notice to Mr. Liu on March 21, 2018, terminating the Agreement with immediate effectiveness.
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 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. 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 June 30, 2019.
Common stock to be issued for consulting services
On November 9, 2017, the Company entered into a Planning and Establishing Services Agreement (the “Agreement”) with Fuzhou Wingo Brand Management LTD., a company incorporated in China (the “Consultant”), pursuant to which the Company engaged the Consultant to provide certain research and strategic planning services and to introduce investors to the Company (the “Services”). As compensation for the Services, the Company agreed to pay the Consultant RMB 50,000 (approximately $7,541) and issue to the Consultant 500,000 shares of its common stock, par value $0.001 (the “Shares”), in two installments. The first installment of 200,000 Shares was to be issued within twenty (20) days of the delivery of a report and investment strategy to the Company, and the second installment of 300,000 Shares shall be delivered following the completion of an investment of at least $3,000,000 in proceeds to the Company. The term of the Agreement for providing the investment strategy report was three months and could be extended for an additional one-month period. The term of the Agreement was extended to May 31, 2018. On May 4, 2018, the report of the investment strategy was completed and the first installment of 200,000 shares was issued to the Consultant. These shares are valued at $44,000, determined using the closing price of the Company’s common stock on November 9, 2017 of $0.22 per share. The Company’s obligation to issue the second installment of 300,000 Shares shall remain effective indefinitely until the completion of an investment of at least $3,000,000 in proceeds to the Company and the issuance of such Shares.
Debt repayment
On May 1, 2018, the Company entered into a Debt Repayment Agreement (the “Repayment Agreement”) with certain creditors of the Company (the “Creditors”), pursuant to which the Company agreed to repay $360,000 debt owed to the Creditors in the form of 400,000 shares of Company’s common stock at a debt conversion rate of $0.90 per share (the “Debt Repayment”), which was determined by using the latest private placement purchase price of $0.90 per share. As a result, there was no gain/loss on being recorded in these transactions. The Debt Repayment was completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.
Common stock issued for consulting services
On July 1, 2018, the Company entered into an Investor Relations Agreement with an investor relations firm (the “IR Consultant”), pursuant to which the Company engaged the IR Consultant to provide up-listing consulting services. As compensation for the services, the Company agreed to issue to the IR Consultant 300,000 shares of its common stock, par value $0.001, in two installments. The first installment of 150,000 shares was issued on July 1, 2018, and the second installment of 150,000 shares shall be delivered on the first day on which the Company’s capital stock is listed on the NYSE or NASDAQ. The first installment of shares are valued at $150,000, determined using the closing price of the Company’s common stock on July 1, 2018 of $1.00 per share. For the year ended December 31, 2018, stock compensation expenses of these shares amounted to $150,000.
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 year ended December 31, 2018, amortization of deferred stock compensation of these shares amounted to $13,583. Deferred stock compensation of $6,792 has been recognized as a reduction of shareholders’ deficit as the services had not been performed as of December 31, 2018.
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, 30% 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 year ended December 31, 2018, amortization of deferred stock compensation of these shares amounted to $119,607. Deferred stock compensation of $731,393 has been recognized as a reduction of shareholders’ deficit as the services have not been performed as of December 31, 2018.
The following table summarizes unvested restricted common stock activity for the year ended December 31, 2018:
Note 11- Other Income (Expense), net
Change in fair value of Rescission Liability - Type B Warrants
During 2009 and 2010, the Company’s predecessor, E-World CA, issued a total of 2,491,108 type B warrants as sales incentive compensation to sales members. The type B warrants entitled the holders to collectively receive 2,491,108 common shares upon a going public event in the U.S. as specified in the warrant. No additional consideration for the common shares was required upon exercise. Upon the merger of E-World CA with and into the Company in 2011, the Company issued to those sales members replacement type B warrants with substantially similar terms and conditions (the “Type B Warrants”). During 2012, 2,485,708 of the Company’s Type B Warrants were exercised for shares of common stock. The Type B Warrants may have been issued and exercised in violation of United States federal securities laws. The Company recorded “Rescission Liabilities - Type B Warrants” at the fair value of the shares issued upon exercise of these warrants. The fair value of the common shares was initially estimated using comparable sales of common stock prior to August 9, 2017. The Company determined that comparable sales of stock is more reliable as the fair value because goods or services received cannot be reliably measured. The fair value of the Type B warrants as of December 31, 2016 was $249,111.
On October 21, 2017, the Company determined that the statute of limitations for the redemption rights had lapsed and, for recording purpose, converted these Type B warrants into common stock.
On August 9, 2017, the Company’s common stock was resumed trading in the OTC market. As a result, the Company began valuing the fair value of the common shares using the closing price of the Company’s common stock. The fair value of the Type B warrants as of October 21, 2017 was $497,142. As a result, the Company recorded a loss of $248,031 of change in fair value of Rescission Liabilities for the year ended December 31, 2017 and converted fair value of $497,142 from rescission liability into equity.
Note 12 - Subsequent Events
Strategic cooperation
On January 8, 2019, the Company entered into a Strategic Cooperation Agreement (the “Agreement”) with Alitaitai Industrial Holding Group (the “Alitaitai”), a company incorporated in Hong Kong, pursuant to which the parties agreed to cooperate with the each other in connection with the sales of the Company’s products through Alitaitai’s sales platform, and the Company agreed to provide awards to Alitaitai with ten percent (10%) of the total sale revenues generated by Alitaitai in the form of the Company’s shares of common stock at a price of $2.00 per share. The Company also agreed to provide Alitaitai with a one-time award of 60,000 shares of common stock of the Company, to be issued upon Alitaitai making the first deposit payment of $300,000 for the purchase of the Company’s products. The shares contemplated in the Agreement will be issued pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.
Office leases
On January 25, 2019, the Company entered into a 5-year lease starting from March 1, 2019 to February 29, 2024 with a base rent of $10,954 per month with an annual 3% of incremental rent increase. Upon adoption of ASU 2016-02, the Company recognized the lease labilities of approximately $622,000, with corresponding right of use (“ROU”) assets of 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%. The future minimum rental payments for this 5-year lease is as follows:
Consulting agreements
On January 23, 2019, the Company entered into a consulting agreement with a consultant to enhance and develop the business interests and welfare of the Company. The consultant is due in cash for $7,000 monthly consulting fee and 50,000 shares a month to be paid by the Company every three months. The term of the Agreement is one year. The shares contemplated in the Agreement will be issued pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.
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”). One million shares will be issued to GMU within 30 days after the Agreement is signed. The term of the Agreement is one year. The shares contemplated in the Agreement will be issued pursuant to the exemption from registration provided by Regulation D promulgated under the Securities Act of 1933, as amended.
Debt repayment
On March 19, 2018, the Company entered into a Debt Repayment Agreement with certain creditors of the Company (the “Creditors”), pursuant to which the Company agreed to repay $135,851 debt 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.
Loans extension
On March 21, 2019, the Company entered into a series of Loan Agreement from Short Term to Long Term (collectively, the “Agreements”) pursuant to which certain creditors of the Company agreed to amend the term of their respective loans (the “Loans”) to a five-year term, effective as of the date of the Agreements. Prior to the effectiveness of the Agreements, the Loans were payable upon demand and had an aggregate outstanding principal amount of approximately $2,713,839 (Also see Note 6 and 7). No other terms of the Loans were changed.
Item 9.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosures
None.
Item 9A.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Office/Chief Financial Officer has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2018. Based upon such evaluation, the Chief Executive Officer/Chief Financial Officer concluded that, as of December 31, 2018, the Company’s disclosure controls and procedures were not effective. This conclusion by the Company’s Chief Executive Officer/Chief Financial Officer does not relate to reporting periods after December 31, 2018.
Management’s Report on Internal Control over Financial Reporting
Under the supervision of our Chief Executive Officer/ Chief Financial Officer, and with the participation of our management, we conducted an evaluation of the effectiveness of our internal controls over financial reporting as of December 31, 2018, based on the framework stated by the Committee of Sponsoring Organizations of the Treadway Commission.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes, in accordance with generally accepted accounting principles. Because of inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to change in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on its evaluation as of December 31, 2018, our management concluded that our internal controls over financial reporting were not effective as of December 31, 2018. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
The material weakness relates to the following:
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.
Remediation
Our management has dedicated resources to correcting the control deficiencies and to ensuring that we take proper steps to improve our internal control over financial reporting in the area of financial statement preparation and disclosure.
We have taken a number of remediation actions that we believe will improve the effectiveness of our internal control over financial reporting, including the following:
·
Hired a consulting firm with expertise in U.S. GAAP financial reporting and accounting.
·
Implemented an internal review process over financial reporting to continue to improve our ongoing review and supervision of our internal control over financial reporting;
This annual report does not and is not required to include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting.
Changes in Internal Control over Financial Reporting
No change in the Company’s internal controls over financial reporting occurred during the quarter ended December 31, 2018, that materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Directors and Executive Officers
The board of directors appoints our executive officers. A majority vote of the directors who are in office is required to fill vacancies. Each director is elected by the Company’s shareholders, to serve until his successor is elected and qualified, or until his earlier resignation or removal. Our directors and executive officers are as follows:
Ding Hua Wang joined our predecessor company in January 2007 as Product Consultant. In November 2007, he became CEO, CFO, President and Chairman of our predecessor company and has been CEO, CFO, President, Chairman and Director of our company since March 2011. From August 2005 to December 2006, he was CEO of Ansheng Company International Products, a nutrition products manufacturing and wholesale company. From January 1999 to August 2005, he was CEO of Ansheng Company, a Chinese herbal medicine imports and store sales company. He studied at Zhejiang University of Traditional Chinese Medicine from January 1986 to February 1991. He attended American Global University in alternative medicine from August 2001 to September 2003 but did not receive a degree. As a member of the board, Mr. Wang contributes significant industry-specific experience and expertise on our products and services. Mr. Wang also contributes his knowledge of the Company and a deep understanding of all aspects of our business, products and markets, as well as substantial experience developing corporate strategy, assessing emerging industry trends, and business operations.
Xun Zhang joined us as Director in March 2011. From 2003 to date, he has been Assistant Professor at Harvard Medical School in Boston, Massachusetts. From 1988 to date, he has been Assistant in Biochemistry as well as Director, Neuroendocrine Research Laboratory Massachusetts General Hospital Boston, Massachusetts. He received a PhD in 1994 from the State University of New York at Albany. With responsibility for product development guidance, he brings his educational and research knowledge and experience to the Board.
Vickie Ho has served as the Company’s Executive Vice President since May 2017. From September 2010 until her appointment as Executive Vice President, Ms. Ho served as Assistant to the Company’s President, Public Relations Manager and Human Resources Director. From April 2009 to August 2010, Ms. Ho was Assistant to the Company’s President and provided English interpretation services. She originally joined the Company in March 2008 in the Company’s stock department. Ms. Ho received her Bachelor’s degree in English with International Business from Shenyang Engineering Institution in 2006.
Family Relationships
There are no family relationships between our officers and directors.
Legal Proceedings
No officer, director, or persons nominated for such positions or significant employee has been involved in the last ten years in any of the following, except as noted below:
·
Any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time,
·
Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses),
·
Being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities.
·
Being found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
·
Having any government agency, administrative agency, or administrative court impose an administrative finding, order, decree, or sanction against them as a result of their involvement in any type of business, securities, or banking activity.
·
Being the subject of a pending administrative proceeding related to their involvement in any type of business, securities, or banking activity.
·
Having any administrative proceeding been threatened against them related to their involvement in any type of business, securities, or banking activity.
Because the Chinese legal system is different from that in the U.S., please refer to the Complaint filed as noted in “Legal Proceedings” and filed as an Exhibit 10.1 to our Annual Report on Form 10-K for the year ended December 31, 2014 as it affects Dinghua Wang. Although not being named a defendant personally, the Complaint discussed Mr. Wang’s activities and indicated that the following order had been issued against Mr. Wang: “After the case was discovered, Dinghua Wang’s special accounts for sales under the Company’s DSA model in China were blocked and the funds in the amount of RMB 22,848,737.5 and $1,320.87 in the accounts were frozen.” At the date of filing of this report, the status of this Order was still open. Accordingly, Mr. Wang may be considered to have been involved in one or more of the above named activities in the last 10 years.
Code of Ethics
We do not currently have a Code of Ethics applicable to our principal executive, financial or accounting officer given the limited scope of our operations.
Section 16(a) Beneficial Ownership Reporting Compliance
The Company’s officers and directors are not subject to Section 16(a) reporting requirements.
Item 11.
Item 11. Executive Compensation
Summary Compensation Table
The table below summarizes all compensation awarded to, earned by, or paid to our Principal Executive Officer, our two most highly compensated executive officers other than our PEO, who occupied such position at the end of our latest fiscal year and up to two additional executive officers who would have been included in the table below except for the fact that they were not executive officers at the end of our latest fiscal year, by us, or by any third-party where the purpose of a transaction was to furnish compensation, for all services rendered in all capacities to us or our subsidiary for the latest two fiscal years ended December 31, 2018, and 2017.
Executive Compensation
________
*Ms. Ho was appointed as our Executive Vice President in May 2017.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END DECEMBER 31, 2018
No option awards, unexercised options, unvested stock awards or equity incentive plan awards were granted to our named executive officers during fiscal year ended at December 31, 2018.
Director Compensation
The following table summarizes the compensation paid to our directors for the fiscal year ended December 31, 2018:
No director was paid any form of compensation for acting as a Director for year ended December 31, 2018. See Executive Compensation table above for salaries paid to these Directors for their role as officers.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following tables set forth the ownership of our common stock by each person known by us to be the beneficial owner of more than 5% of our outstanding common stock, our directors, and our executive officers and directors as a group as of March 26, 2019. To the best of our knowledge, the persons named have sole voting and investment power with respect to such shares, except as otherwise noted. There are not any pending or anticipated arrangements that may cause a change in control.
The information presented below regarding beneficial ownership of our voting securities has been presented in accordance with the rules of the Securities and Exchange Commission and is not necessarily indicative of ownership for any other purpose. Under these rules, a person is deemed to be a “beneficial owner” of a security if that person has or shares the power to vote or direct the voting of the security or the power to dispose or direct the disposition of the security. A person is deemed to own beneficially any security as to which such person has the right to acquire sole or shared voting or investment power within 60 days of March 26, 2019 through the conversion or exercise of any convertible security, warrant, option or other right. More than one person may be deemed to be a beneficial owner of the same securities. The percentage of beneficial ownership by any person as of a particular date is calculated by dividing the number of shares beneficially owned by such person, which includes the number of shares as to which such person has the right to acquire voting or investment power within 60 days of March 26, 2019, by the sum of the number of shares outstanding as of such date plus the number of shares as to which such person has the right to acquire voting or investment power within 60 days of March 26, 2019. Consequently, the denominator used for calculating such percentage may be different for each beneficial owner. Except as otherwise indicated below and under applicable community property laws, we believe that the beneficial owners of our common stock listed below have sole voting and investment power with respect to the shares shown. The business address for these shareholders is 100 N Barranca Street #1000, West Covina, CA 91791.
This table is based upon information derived from our stock records. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, each of the shareholders named in this table has sole or shared voting and investment power with respect to the shares indicated as beneficially owned. Except as set forth above, applicable percentages are based upon 176,237,844 shares of common stock outstanding as of March 26, 2019.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
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 of this loan on Mr. Wang’s behalf. This loan has an annual borrowing rate of 9.99%. During the year ended December 31, 2017, advances totaled $471,603. As of December 31, 2018 and 2017, 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 has been extended to May 1, 2019.
Interest expense for the years ended December 31, 2018 and 2017 for the above loan amounted to $49,950.
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 years ended December 31, 2018 and 2017, advances totaled $156,692 and $65,402, respectively, and payments to Mr. Wang totaled $439,587 and $221,626, respectively. As of December 31, 2018 and 2017, the balance due to Mr. Wang, non-interest bearing, amounted to $2,508,051 and $2,790,946, respectively. This balance does not bear interest, is unsecured and is due on demand.
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 each of December 31, 2018 and December 31, 2017, the Company owed $95,000 to such employee.
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. No repayments have been made during either of the years ended December 31, 2018 and 2017. As of each of December 31, 2018 and December 31, 2017, the Company owed $30,000 to this related party.
Interest expense for the years ended December 31, 2018 and 2017 for the above loans amounted to $3,000.
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 each of December 31, 2018 and December 31, 2017, the Company owed $518,839 to these related parties.
Share Distribution of Mr. Dinghua Wang, CEO,
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 year ended December 31, 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 five 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 must consult with the Company counsel to comply with U.S. securities laws.
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.
Director Independence
Our board of directors has determined that Mr. Xun Zhang is qualifies as “independent” as the term is used in Item 7(d)(3)(iv)(B) of Schedule 14A under the Securities Exchange Act of 1934, as amended, and as defined by Rule 4200(a)(15) of the NASDAQ Marketplace Rules.
Item 14.
Item 14. Principal Accountant Fees and Services
The Pun Group LLP was our independent auditor for part of the year ended December 31, 2017 and billed a total of $30,000 in 2017. Wei & Wei Co., LLP was our independent auditor for the year ended December 31, 2017 and billed a total of $79,000. The Company incurred audit fees in the total of $115,000 and $109,000 for fiscal years 2018 and 2017, respectively.
The following table shows the aggregate fees paid or accrued by us for the audit and other services provided by our auditors for fiscal 2018 and 2017.
As defined by the SEC, (i) “audit fees” are fees for professional services rendered by our principal accountant for the audit of our annual financial statements and review of financial statements included in our Form 10-K, Form 10-Q, or for services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years; (ii) “audit-related fees” are fees for assurance and related services by our principal accountant that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “audit fees;” (iii) “tax fees” are fees for professional services rendered by our principal accountant for tax compliance, tax advice, and tax planning; and (iv) “all other fees” are fees for products and services provided by our principal accountant, other than the services reported under “audit fees,” “audit-related fees,” and “tax fees.”
Under applicable SEC rules, the Audit Committee is required to pre-approve the audit and non-audit services performed by the independent auditors in order to ensure that they do not impair the auditors’ independence. The SEC’s rules specify the types of non-audit services that an independent auditor may not provide to its audit client and establish the Audit Committee’s responsibility for administration of the engagement of the independent auditors. Until such time as we have an Audit Committee in place, the Board of Directors will pre-approve the audit and non-audit services performed by the independent auditors.
Item 15.
Item 15. Exhibits
__________ * 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.
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Merion, Inc.,
a Nevada corporation
Title
Name
Date
Signature
Principal Executive Officer
Ding Hua Wang
March 28, 2019
/s/ Ding Hua Wang
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
SIGNATURE
NAME
TITLE
DATE
/s/ Ding Hua Wang
Ding Hua Wang
Principal Executive Officer,
March 28, 2019
Principal Financial Officer,
Principal Accounting Officer
and Director
/s/ Xun Zhang
Xun Zhang
Director
March 28, 2019
EXHIBIT INDEX
____________
* 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.
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.