UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20182019
| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from _____________ to _____________
Commission file number 333-173681
Merion, Inc. |
(Name of small business issuer in its charter) |
Nevada |
| 5122 |
|
|
(State or Other Jurisdiction of |
| (Primary Standard Industrial |
| (I.R.S. Employer |
Incorporation or Organization) |
| Classification Code Number) |
| Identification No.) |
|
|
|
(Address of principal executive offices) |
| (Zip Code) |
9550 Flair Dr, Suite 302100 N. Barranca St. #1000
El MonteWest Covina, CA 9173191791
(626) 448-3737331-7570
(Address (Address and telephone number of principal executive offices and principal place of business)
None.
(Former name, former address and former fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). xYes x No ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “acceleratedaccelerated filer” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.Act:
Large accelerated filer | ¨ | Accelerated filer | ¨ |
Non-accelerated filer |
| Smaller reporting company | x |
(Do not check if a smaller reporting company) | Emerging growth company | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
None | N/A | N/A |
As of November 9, 2018,8, 2019, there were 172,539,364177,264,208 issued and outstanding shares of the registrant’s common stock.
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2 |
Table of Contents |
PART I — FINANCIAL INFORMATION
MERION, INC.
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CONDENSED BALANCE SHEETS | CONDENSED BALANCE SHEETS |
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| September 30, |
| December 31, |
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| September 30 |
| December 31, |
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| 2018 |
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| 2017 |
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| 2019 |
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| 2018 |
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| (UNAUDITED) |
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| (UNAUDITED) |
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ASSETS | ASSETS |
| ASSETS |
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CURRENT ASSETS: |
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Cash |
| $ | 3,017 |
| $ | 5,038 |
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| $ | 744,734 |
| $ | 295,521 |
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Accounts receivable, net |
| 14,072 |
| 50,864 |
|
| 41,219 |
| 673 |
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Inventories |
| 57,093 |
| 80,769 |
|
| 166,236 |
| 50,339 |
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Prepaid expenses |
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| 20,522 |
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| 29,068 |
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| 35,795 |
| 69,631 |
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TOTAL CURRENT ASSETS |
| 94,704 |
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| 165,739 |
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| 987,984 |
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| 416,164 |
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PROPERTY AND EQUIPMENT, net |
| 407,904 |
| 41,249 |
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| 346,568 |
| 390,692 |
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INTANGIBLE ASSETS, net |
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| 832,500 |
|
|
| - |
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RIGHT-OF-USE ASSET |
| 551,110 |
| - |
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DEPOSITS |
| 15,410 |
| - |
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TOTAL ASSETS |
| $ | 1,335,108 |
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| $ | 206,988 |
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| $ | 1,901,072 |
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| $ | 806,856 |
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LIABILITIES AND SHAREHOLDERS' DEFICIT | LIABILITIES AND SHAREHOLDERS' DEFICIT | LIABILITIES AND SHAREHOLDERS' DEFICIT | ||||||||||||||||
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CURRENT LIABILITIES: |
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Accounts payable and accrued expenses |
| $ | 1,332,314 |
| $ | 297,164 |
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| $ | 1,121,231 |
| $ | 1,173,546 |
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Deferred revenue |
| 1,522,660 |
| 1,610,236 |
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| 8,105 |
| 1,522,280 |
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Accrued bonus |
| 679,800 |
| 679,800 |
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| 28 |
| 679,800 |
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Lease liabilities - current |
| 98,485 |
| - |
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Due to shareholder, interest bearing |
| 471,603 |
| - |
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| 471,603 |
| 471,603 |
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Due to shareholder, non-interest bearing |
| 2,660,190 |
| 2,790,946 |
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| 418,248 |
| 2,508,051 |
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Advances from related parties, interest bearing |
| 30,000 |
| 30,000 |
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| - |
| 30,000 |
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Advances from related parties, non-interest bearing |
| 518,839 |
| 518,839 |
|
| - |
| 518,839 |
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Due to employee |
| 95,000 |
| 95,000 |
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| - |
| 95,000 |
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Due to third parties, interest bearing |
| 109,030 |
| 109,030 |
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| 1,480,000 |
| 109,030 |
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Due to third parties, non-interest bearing |
| 119,857 |
| 729,175 |
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| 50,000 |
| 101,666 |
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Current portion of long term debt |
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| 12,203 |
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| 11,933 |
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TOTAL CURRENT LIABILITIES |
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| 7,551,496 |
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| 6,872,123 |
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| 3,647,700 |
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| 7,209,815 |
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NON-CURRENT LIABILITIES: |
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Long term debt |
| 3,386 |
| 13,395 |
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Due to shareholder, interest bearing |
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| - |
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| 471,603 |
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Lease liabilities - non-current |
| 448,281 |
| - |
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Due to shareholder, non-interest bearing |
| 2,000,000 |
| - |
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Advances from related parties, interest bearing |
| 30,000 |
| - |
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Advances from related parties, non-interest bearing |
| 518,839 |
| - |
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Due to employee |
| 95,000 |
| - |
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Due to third parties, interest bearing |
| 20,000 |
| - |
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Due to third parties, non-interest bearing |
| 50,000 |
| - |
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TOTAL NON-CURRENT LIABILITIES |
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| 3,386 |
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| 484,998 |
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| 3,162,120 |
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| - |
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TOTAL LIABILITIES |
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| 7,554,882 |
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| 7,357,121 |
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| 6,809,820 |
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| 7,209,815 |
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COMMITMENTS AND CONTINGENCIES |
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SHAREHOLDERS' DEFICIT: |
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Common stock, $0.001 par value, 200,000,000 shares authorized, 172,523,164 and 169,161,896 shares issued and outstanding, as of September 30, 2018 and December 31, 2017, respectively |
| 172,523 |
| 169,162 |
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Common stock, $0.001 par value, 200,000,000 shares authorized, 177,264,208 and 174,792,364 shares issued and outstanding, as of September 30, 2019 and December 31, 2018, respectively |
| 177,264 |
| 174,792 |
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Stock subscription receivable |
| - |
| (123,455 | ) |
| (1,110,695 | ) |
| (1,200,000 | ) | |||||||
Additional paid-in capital |
| 15,433,724 |
| 11,870,808 |
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| 19,054,535 |
| 17,573,900 |
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Deferred stock compensation |
| (812,722 | ) |
| - |
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| (815,443 | ) |
| (738,185 | ) | ||||||
Accumulated deficit |
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| (21,013,299 | ) |
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| (19,066,648 | ) | ||||||||||
Deficit |
| (22,214,409 | ) |
| (22,213,466 | ) | ||||||||||||
TOTAL SHAREHOLDERS' DEFICIT |
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| (6,219,774 | ) |
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| (7,150,133 | ) |
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| (4,908,748 | ) |
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| (6,402,959 | ) | ||
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TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT |
| $ | 1,335,108 |
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| $ | 206,988 |
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| $ | 1,901,072 |
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| $ | 806,856 |
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The accompanying notes are an integral part of these unaudited condensed financial statements.
3 |
Table of Contents |
MERION, INC.
CONDENSED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER, 2018 AND 2017
(UNAUDITED)
MERION, INC. | MERION, INC. | |||||||||||||||||||||||||||||||
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CONDENSED STATEMENTS OF OPERATIONS | CONDENSED STATEMENTS OF OPERATIONS | |||||||||||||||||||||||||||||||
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018 | FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018 | |||||||||||||||||||||||||||||||
(UNAUDITED) | (UNAUDITED) | |||||||||||||||||||||||||||||||
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| For the Three Months Ended September 30, |
| For the Nine Months Ended September 30, |
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| For the Three Months Ended September 30, |
| For the Nine Months Ended September 30, |
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| 2018 |
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| 2017 |
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| 2018 |
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| 2017 |
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| 2019 |
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| 2018 |
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| 2019 |
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| 2018 |
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SALES |
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Product Sales |
| $ | 24,484 |
| $ | 469,806 |
| $ | 169,742 |
| $ | 589,803 |
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Direct Sales |
| $ | 21,770 |
| $ | 24,484 |
| $ | 1,494,117 |
| $ | 169,742 |
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OEM and Packaging |
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| 29,076 |
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| - |
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| 80,564 |
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| - |
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| 76,041 |
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| 29,076 |
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| 229,720 |
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| 80,564 |
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TOTAL SALES |
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| 53,560 |
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| 469,806 |
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| 250,306 |
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| 589,803 |
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| 97,811 |
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| 53,560 |
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| 1,723,837 |
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| 250,306 |
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COST OF SALES |
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Product Sales |
| 24,115 |
| 83,735 |
| 60,906 |
| 123,228 |
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Direct Sales |
| 8,309 |
| 24,115 |
| 52,861 |
| 60,906 |
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OEM and Packaging |
| 22,079 |
| - |
| 38,108 |
| - |
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| 36,289 |
| 22,079 |
| 106,275 |
| 38,108 |
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Idle Capacity |
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| 45,852 |
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| - |
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| 178,961 |
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| - |
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| 4,349 |
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| 45,852 |
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| 4,349 |
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| 178,961 |
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TOTAL COST OF SALES |
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| 92,046 |
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| 83,735 |
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| 277,975 |
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| 123,228 |
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| 48,947 |
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| 92,046 |
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| 163,485 |
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| 277,975 |
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GROSS (LOSS) PROFIT |
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| (38,486 | ) |
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| 386,071 |
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| (27,669 | ) |
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| 466,575 |
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GROSS PROFIT |
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| 48,864 |
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| (38,486 | ) |
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| 1,560,352 |
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| (27,669 | ) | ||||||||||||||||
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OPERATING EXPENSES |
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Selling expenses |
| 28,548 |
| 14,130 |
| 271,493 |
| 71,334 |
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| 18,531 |
| 28,548 |
| 58,001 |
| 271,493 |
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General and administrative expenses |
| 290,700 |
| 305,228 |
| 965,931 |
| 971,371 |
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| 350,301 |
| 290,700 |
| 1,092,961 |
| 965,931 |
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Stock compensation expense |
| 150,000 |
| - |
| 674,000 |
| - |
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| 214,350 |
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| 208,653 |
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| 642,742 |
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| 732,653 |
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Amortization of deferred stock compensation cost |
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| 58,653 |
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| - |
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| 58,653 |
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| - |
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Total operating expenses |
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| 527,901 |
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| 319,358 |
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| 1,970,077 |
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| 1,042,705 |
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| 583,182 |
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| 527,901 |
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| 1,793,704 |
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| 1,970,077 |
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INCOME (LOSS) FROM OPERATIONS |
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| (566,387 | ) |
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| 66,713 |
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| (1,997,746 | ) |
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| (576,130 | ) | ||||||||||||||||
LOSS FROM OPERATIONS |
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| (534,318 | ) |
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| (566,387 | ) |
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| (233,352 | ) |
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| (1,997,746 | ) | ||||||||||||||||
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OTHER INCOME (EXPENSE), net |
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Other income |
| 3,601 |
| - |
| 105,684 |
| - |
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Other income (expense) |
| 1,035 |
| 3,601 |
| 45,222 |
| 105,684 |
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Finance expenses |
| (18,291 | ) |
| (18,406 | ) |
| (54,589 | ) |
| (54,453 | ) |
| (22,791 | ) |
| (18,291 | ) |
| (54,239 | ) |
| (54,589 | ) | ||||||||
Change in fair value of Rescission Liability - Type B Warrants |
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| - |
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| (372,316 | ) |
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| - |
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| (372,316 | ) | ||||||||||||||||
Total other income (expense), net |
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| (14,690 | ) |
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| (390,722 | ) |
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| 51,095 |
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| (426,769 | ) | ||||||||||||||||
Gain on debt settlement |
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| - |
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| - |
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| 241,426 |
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| - |
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Total other (expense) income, net |
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| (21,756 | ) |
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| (14,690 | ) |
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| 232,409 |
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| 51,095 |
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LOSS BEFORE INCOME TAXES |
| (581,077 | ) |
| (324,009 | ) |
| (1,946,651 | ) |
| (1,002,899 | ) |
| (556,074 | ) |
| (581,077 | ) |
| (943 | ) |
| (1,946,651 | ) | ||||||||
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PROVISION FOR INCOME TAXES |
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| - |
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| - |
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| - |
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| - |
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| - |
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| - |
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| - |
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| - |
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NET LOSS |
| $ | (581,077 | ) |
| $ | (324,009 | ) |
| $ | (1,946,651 | ) |
| $ | (1,002,899 | ) |
| $ | (556,074 | ) |
| $ | (581,077 | ) |
| $ | (943 | ) |
| $ | (1,946,651 | ) |
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LOSS PER SHARE |
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Basic |
| $ | (0.00 | ) |
| $ | (0.00 | ) |
| $ | (0.00 | ) |
| $ | (0.01 | ) | ||||||||||||||||
Diluted |
| $ | (0.00 | ) |
| $ | (0.00 | ) |
| $ | (0.00 | ) |
| $ | (0.01 | ) | ||||||||||||||||
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES |
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Basic and diluted |
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| 172,402,389 |
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| 142,863,681 |
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| 171,227,977 |
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| 142,840,683 |
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LOSS PER SHARE |
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Basic and diluted |
| $ | (0.00 | ) |
| $ | (0.00 | ) |
| $ | (0.00 | ) |
| $ | (0.01 | ) | ||||||||||||||||
Basic |
|
| 177,264,208 |
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| 172,402,389 |
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| 176,531,447 |
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| 171,227,977 |
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Diluted |
|
| 177,264,208 |
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| 172,402,389 |
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| 176,531,447 |
|
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| 171,227,977 |
|
The accompanying notes are an integral part of these unaudited condensed financial statements.
4 |
Table of Contents |
MERION, INC. CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT For the Nine Months Ended September 30, 2018 Common Stock Stock Additional Deferred Subscription Paid-in Stock Shares Amount Receivable Capital Compensation Deficit Total BALANCE, January 1, 2018 Net loss Issuance of common stock for cash Issuance of common stock for purchase of machinery and intangible assets Cancellation of stock subscription Collection of stock subscription Transfer of common stock from major shareholder for services BALANCE, March 31, 2018 (Unaudited) Net loss Issuance of common stock for cash Issuance of common stock for financing related services Issuance of common stock for debt settlement Issuance of common stock for consulting services Collection of stock subscription BALANCE, June 30, 2018 (Unaudited) Net loss Issuance of common stock for cash Issuance of common stock for financing related services Issuance of common stock for consulting services Issuance of common stock for financial advisory services Issuance of common stock for sales commission Issuance of unvested restricted common stock to employees Amortization of deferred stock compensation BALANCE, September 30, 2018 (Unaudited) MERION, INC.169,161,896 $ 169,162 $ (123,455 ) $ 11,870,808 $ - $ (19,066,648 ) $ (7,150,133 ) - - - - - (1,039,764 ) (1,039,764 ) 759,563 760 (57,709 ) 682,838 - - 625,889 1,000,000 1,000 - 319,000 - - 320,000 (111,110 ) (111 ) 100,000 (99,889 ) - - - - - 23,455 - - - 23,455 - - - 480,000 - - 480,000 170,810,349 170,811 (57,709 ) 13,252,757 - (20,106,412 ) (6,740,553 ) - - - - - (325,810 ) (325,810 ) 715,011 714 - 642,786 - - 643,500 46,668 47 - (47 ) - - - 400,000 400 - 359,600 - - 360,000 200,000 200 - 43,800 - - 44,000 - - 57,709 - - - 57,709 172,172,028 172,172 - 14,298,896 - (20,432,222 ) (5,961,154 ) - - - - - (581,077 ) (581,077 ) 109,000 110 - 108,890 - - 109,000 8,720 8 - (8 ) - - - 150,000 150 - 149,850 - - 150,000 67,916 68 - 20,307 (20,375 ) - - 15,500 15 - 4,789 - - 4,804 - - - 851,000 (851,000 ) - - - - - 58,653 - 58,653 172,523,164 $ 172,523 $ - $ 15,433,724 $ (812,722 ) $ (21,013,299 ) $ (6,219,774 )
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
(UNAUDITED)
For the Nine Months Ended September 30, 2018 2017 Cash Flows from Operating Activities: Net loss Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization Stock compensation expense Stock compensation expense - sales commission Amortization of deferred stock compensation Bad debt expense Change in fair value of Rescission Liability - Type B Warrants Changes in operating assets and liabilities Accounts receivable Inventories Prepaid expenses Deposits and other assets Accounts payable and accrued expenses Deferred revenue Accrued bonus Net Cash Used in Operating Activities Cash Flows from Financing Activities: Proceeds from issuance of common stock and stock subscription Advances from shareholder, non-interest bearing Repayment of shareholder loan, non-interest bearing Repayment of advances from related parties, interest bearing Advances from third parties, non-interest bearing Repayment of advances from third parties, non-interest bearing Principal payments of debt Net Cash Provided by Financing Activities Net Change in Cash Cash, beginning of period Cash, end of period Supplemental Disclosure of Cash Flow Information: Cash paid for interest Non-cash transactions of investing and operating activities Purchase of machinery and intangible assets - Unpaid Stock issued for purchase of machinery and intangible assets Stock issued for debt settlement Stock issued on deferred stock compensation $ (1,946,651 ) $ (1,002,899 ) 120,846 23,950 674,000 - 4,804 - 58,653 - 35,127 - - 372,316 1,665 77,931 23,676 (5,862 ) 8,546 (38,588 ) - 3,850 35,149 18,906 (87,576 ) 120,609 - (2,556 ) (1,071,761 ) (432,343 ) 1,459,553 99,400 84,041 34,937 (214,797 ) (106,380 ) - (15,000 ) - 472,000 (249,318 ) (42,117 ) (9,739 ) (9,453 ) 1,069,740 433,387 (2,021 ) 1,044 5,038 2,054 $ 3,017 $ 3,098 $ 47,452 $ 47,525 $ 1,000,000 $ - $ 320,000 $ - $ 360,000 $ - $ 20,375 $ -
|
| For the Nine Months Ended September 30, 2019 |
| |||||||||||||||||||||||||
|
| Common Stock |
|
| Stock |
|
| Additional |
|
| Deferred |
|
|
| ||||||||||||||
|
|
|
|
|
| Subscription |
|
| Paid-in |
|
| Stock |
|
|
|
|
| |||||||||||
|
| Shares |
|
| Amount |
|
| Receivable |
|
| Capital |
|
| Compensation |
|
| Deficit |
|
| Total |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
BALANCE, January 1, 2019 |
|
| 174,792,364 |
|
| $ | 174,792 |
|
| $ | (1,200,000 | ) |
| $ | 17,573,900 |
|
| $ | (738,185 | ) |
| $ | (22,213,466 | ) |
| $ | (6,402,959 | ) |
Net loss |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (222,124 | ) |
|
| (222,124 | ) |
Issuance of common stock for consulting services |
|
| 1,150,000 |
|
|
| 1,150 |
|
|
| - |
|
|
| 1,078,850 |
|
|
| (1,080,000 | ) |
|
| - |
|
|
| - |
|
Amortization of deferred stock compensation |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 174,742 |
|
|
| - |
|
|
| 174,742 |
|
Issuance of common stock for debt settlement |
|
| 1,271,844 |
|
|
| 1,272 |
|
|
| - |
|
|
| 761,835 |
|
|
| - |
|
|
| - |
|
|
| 763,107 |
|
Collection of stock subscription |
|
| - |
|
|
| - |
|
|
| 62,500 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 62,500 |
|
BALANCE, March 31, 2019 (Unaudited) |
|
| 177,214,208 |
|
|
| 177,214 |
|
|
| (1,137,500 | ) |
|
| 19,414,585 |
|
|
| (1,643,443 | ) |
|
| (22,435,590 | ) |
|
| (5,624,734 | ) |
Net income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 777,255 |
|
|
| 777,255 |
|
Issuance of common stock for consulting services |
|
| 50,000 |
|
|
| 50 |
|
|
| - |
|
|
| (50 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
Cancellation of common stock for consulting services |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (360,000 | ) |
|
| 360,000 |
|
|
| - |
|
|
| - |
|
Amortization of deferred stock compensation |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 253,650 |
|
|
| - |
|
|
| 253,650 |
|
Collection of stock subscription |
|
| - |
|
|
| - |
|
|
| 26,805 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 26,805 |
|
BALANCE, June 30, 2019 (Unaudited) |
|
| 177,264,208 |
|
|
| 177,264 |
|
|
| (1,110,695 | ) |
|
| 19,054,535 |
|
|
| (1,029,793 | ) |
|
| (21,658,335 | ) |
|
| (4,567,024 | ) |
Net loss |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (556,074 | ) |
|
| (556,074 | ) |
Amortization of deferred stock compensation |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 214,350 |
|
|
| - |
|
|
| 214,350 |
|
BALANCE, September 30, 2019 (Unaudited) |
|
| 177,264,208 |
|
| $ | 177,264 |
|
| $ | (1,110,695 | ) |
| $ | 19,054,535 |
|
| $ | (815,443 | ) |
| $ | (22,214,409 | ) |
| $ | (4,908,748 | ) |
The accompanying notes are an integral part of these unaudited condensed financial statements.
5 |
Table of Contents |
MERION, INC. CONDENSED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018 (UNAUDITED) For the Nine Months Ended September 30, 2019 2018 Cash Flows from Operating Activities: Net loss Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization Stock compensation expense Gain (loss) on debt settlement Amortization of deferred stock compensation Amortization of right-of-use asset Bad debt expense Changes in operating assets and liabilities Accounts receivable Inventories Prepaid expenses Deposits and other assets Accounts payable and accrued expenses Deferred revenue Lease liabilities Net Cash Used in Operating Activities Cash Flows from Financing Activities: Proceeds from issuance of common stock and stock subscription Advances from shareholder, non-interest bearing Repayment of shareholder loan, non-interest bearing Advances from third parties, interest bearing Advances from third parties, non-interest bearing Repayment of advances from third parties, non-interest bearing Principal payments of debt Net Cash Provided by Financing Activities Net Change in Cash Cash, beginning of period Cash, end of period Supplemental Disclosure of Cash Flow Information: Cash paid for interest Cash paid for income tax Non-cash transactions of investing and financing activities Purchase of machinery and intangible assets Stock issued for purchase of machinery and intangible assets Stock issued for debt settlement Stock issued on deferred stock compensation Initial recognition of right-of-use assets and lease liabilities $ (943 ) $ (1,946,651 ) 44,124 120,846 - 674,000 (241,426 ) 4,804 642,742 58,653 67,116 35,127 24,308 - (64,854 ) 1,665 (115,897 ) 23,676 33,836 8,546 (15,410 ) - 55,548 35,149 (1,418,307 ) (87,576 ) (71,460 ) - (1,060,623 ) (1,071,761 ) 89,305 1,459,553 193,272 84,041 (283,075 ) (214,797 ) 1,480,000 - 50,000 - (19,666 ) (249,318 ) - (9,739 ) 1,509,836 1,069,740 449,213 (2,021 ) 295,521 5,038 $ 744,734 $ 3,017 $ - $ 47,452 $ - $ - . $ - $ 1,000,000 $ - $ 320,000 $ 763,107 $ 360,000 $ 720,000 $ 20,375 $ 618,226 $ -
The accompanying notes are an integral part of these unaudited condensed financial statements.
6 |
Table of Contents |
MERION, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note 1 – Organization
Merion, Inc. (the “Company”), a Nevada corporation, was formed on February 4, 2011. Its predecessor, E-World USA Holding, Inc., was a California company incorporated in 2007 (“E-World CA”). In April 2011, E-World CA entered into a merger agreement with its wholly-owned subsidiary, E-World USA Holding, Inc., a Nevada corporation (“E-World NV”) that was the survivor of the merger and became the Company. Under the Merger Agreement, the Company issued 90,000,000 shares of its common stock on a one share for one share 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 effective immediately, 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 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”) 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 iswas an asset purchase in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) section.section 805-10-55.
The Seller was one of our major suppliers during the years ended December 31, 2017 and 2016. Having purchased 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 supplementssupplement manufacturing standards, including FDAU.S. Food and GMPDrug Administration and Good Manufacturing Practice compliance and cGMPCurrent Good Manufacturing Practice regulations. In addition to manufacturing the nutritional supplements that it sells, the Company also anticipates startingbegan production of hard capsules, tablets, solid beverage (sachet packaging), teabags, powder, granules, dietary supplementsupplements for export, softgel capsules and healthyhealth 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
ThereManagement has determined there is substantial doubt about our ability to continue as a going concern as a result of our lack of significant revenues, significant recurring losses, and negative working capital. If we are unable to generate significant revenue or secure additional financing, we may be required to cease or curtail our operations. Our financial statements do not include adjustments that might result from the outcome of this uncertainty.
Management is trying to alleviate the going concern risk by: engaging external sales representatives to sell the Company’s products, investigating and securing various financing resources, including but not limited to borrowing from the Company’s major shareholder, private placements, and the possibility of raising funds through a future public offering.
Note 3 – Summary of Significant Accounting Policies
Basis of Presentation
These unaudited condensed financial statements have been presented by the Company in accordance with the accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments consisting of normal recurring adjustments considered necessary for a fair presentation of the financial statements, have been included. Interim results are not necessarily indicative of results to be expected for the full year. The information included in this Form 10-Q should be read in conjunction with information included in the Company’s annual report on Form 10-K for the year ended December 31, 2017,2018, filed with the Securities and Exchange Commission on March 20, 2018.28, 2019.
7 |
Table of Contents |
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant accounting estimates reflected in the Company’s financial statements include the useful lives of property and equipment, and the collectability of receivables.receivables and impairment on long-live assets. Actual results could differ from those estimates.
Enterprise wide disclosure
The Company’s chief operating decision-makers (i.e. chief executive officer and his direct reports) review financial information presented on a consolidated basis, accompanied by disaggregated information about revenues by business lines (Product sales and OEM and packaging sales) for purposes of allocating resources and evaluating financial performance. There are no segment managers who are held accountable for operations, operating results and plans for levels or components below the consolidated unit level. Based on qualitative and quantitative criteria established by ASC section 280, “Segment Reporting”, the Company considers itself to be operating within one reportable segment.
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:
|
| September 30, 2018 |
|
| December 31, 2017 |
|
| September 30, 2019 |
|
| December 31, 2018 |
| ||||
|
| (Unaudited) |
|
|
|
| (Unaudited) |
|
|
| ||||||
Accounts receivable |
| $ | 92,475 |
| $ | 94,140 |
|
| $ | 65,527 |
| $ | 673 |
| ||
Allowance for doubtful accounts |
|
| (78,403 | ) |
|
| (43,276 | ) |
|
| (24,308 | ) |
|
| - |
|
Accounts receivable, net |
| $ | 14,072 |
|
| $ | 50,864 |
|
| $ | 41,219 |
|
| $ | 673 |
|
Movement of allowance for doubtful accounts is as follows:
|
| Nine months ended September 30, 2018 |
|
| Year ended December 31, 2017 |
| ||
|
| (Unaudited) |
|
|
|
| ||
|
|
|
|
|
|
| ||
Beginning balance |
| $ | 43,276 |
|
| $ | 25,236 |
|
Provision for doubtful accounts |
|
| 35,127 |
|
|
| 18,040 |
|
Ending balance |
| $ | 78,403 |
|
| $ | 43,276 |
|
|
| Nine months ended September 30, 2019 |
|
| Year ended December 31, 2018 |
| ||
|
| (Unaudited) |
|
|
|
| ||
|
|
|
|
|
|
| ||
Beginning balance |
| $ | - |
|
| $ | 43,276 |
|
Provision for doubtful accounts |
|
| 24,308 |
|
|
| 46,836 |
|
Less: write-offs |
|
| - |
|
|
| (90,112 | ) |
Ending balance |
| $ | 24,308 |
|
| $ | - |
|
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 andproducts, 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.
8 |
Table of Contents |
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 and amortization using the straight-line method over the estimated useful lives of various classes as follow:follows:
Machinery | 10 years | |
Computer and software |
| 3 to 5 years |
Furniture and fixtures |
| 5 to 10 years |
Vehicles |
| 5 to 7 years |
Leasehold improvements |
| over the lesser of the remaining lease term or the expected life of the improvement |
|
|
Repairs and maintenance isare charged to operations when incurred while betterments and renewals are capitalized.
Intangible Assets, netRight-of-use Asset and Lease Liabilities
IntangibleIn February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842).” The new standard requires lessees to recognize lease assets represent(“right of use”) and lease obligations (“lease liabilities”) for leases previously classified as operating leases under generally accepted accounting principles on the technological know-how associatedbalance sheet for leases with the machinery that the Company purchased.terms in excess of 12 months. The technological know-how have finite useful lives and are amortized using a straight-line method that reflects the estimated pattern in which the economic benefits of the intangible asset are to be consumed. The estimated useful livesstandard is effective for the technological know-how are 10 years, which is associated with the economic benefits of the useful lives of the machinery that the Company purchased.annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The Company also re-evaluatesadopted this standard as of January 1, 2019 utilizing the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives.practical expedients approach.
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 flowsflow approach or, when available and appropriate, to comparable market values. As of September 30, 2018 and December 31, 2017, no impairment of long-lived assets was recognized.
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 affiliatesaffiliate members (the “Affiliated Members”) for successful product sales. These bonuses are in the form of rebate credits that can be used to order the Company’s products, or thecash rebates provided to Affiliate Members can request a rebate in cash.upon request.
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.
9 |
Table of Contents |
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 – Quoted prices that are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. | |
|
| |
| Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reporting date and includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. |
Revenue Recognition
On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (ASC 606) using the modified retrospective method for contracts that were not completed as of January 1, 2018. This did not result in an adjustment to retained earnings upon adoption of this new guidance, as the Company’s revenue was recognized based on the amount of consideration we expect to receive in exchange for satisfying the performance obligations.
The core principle underlying the revenue recognition ASU is that the Company will recognize revenue to represent the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This will require the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer. The Company’s revenue streams are recognized at a point in time, based on when control of goods and services transfers to a customer.
The ASU requires the use of a new five-stepfive-step model to recognize revenue from customer contracts. The five-stepfive-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-stepfive-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-stepfive-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 controlscontrol of the goods areis 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.
10 |
Table of Contents |
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 $1,136$930 and $2,896$1,136 for the three months ended September 30, 20182019 and 2017,2018, respectively, and totaled $4,299$27,354 and $5,101$4,299 for the nine months ended September 30, 20182019 and 2017,2018, respectively.
Product returns are allowed for unopened products purchased under regular sales terms within 60 days. Allowances for product returns are provided at the time the sale is recorded using historic return rates for each country and the relevant return pattern. Historically the Company has a return rate of nearly zero return rate.zero. Hence, the allowance as of September 30, 20182019 and December 31, 20172018 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 hashad been recorded as of September 30, 20182019 and December 31, 2017.2018.
The majority of the Company’s product sales are generated from China. Product sales generated from other countries or within the United States are immaterial to our financial statements. Currently, all of the Company’s OEM and packaging sales are generated from the United States. While all products are priced in U.S. currency, the Company accepts payments in both U.S. dollars and Hong Kong dollars.
Shipping and Handling Expenses
Shipping and handling costs incurred by the Company are included in selling expenses and totaled $7,774$4,154 and $13,967$10,564 for the three months ended September 30, 20182019 and 2017,2018, respectively, and totaled $23,672$24,117 and $24,824$31,405 for the nine months ended September 30, 2019 and 2018, respectively.
Research and 2017,Development (“R&D”) Expenses
Research and development expenses include salaries and other compensation-related expenses paid to the Company’s research and product development personnel while they are working on R&D projects, as well as raw materials used for the R&D projects. R&D expenses incurred by the Company are included in the general and administrative expenses and totaled $0 and $3,223 for the three months ended September 30, 2019 and 2018, respectively, and totaled $904 and $3,605 for the nine months ended September 30, 2019 and 2018, respectively.
Income Taxes
The Company utilizes ASC 740 Income Taxes,, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Deferred taxes are also recognized for net operating losses that can be carried forward. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
Basic and Diluted Earnings (Loss) Per Share
AccountingGenerally accepted accounting principles generally accepted in the United States of America 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
11 |
Table of Contents |
2,300,000 shares of restricted common stock with weighted average effect of 755,876 and 1,260,686 diluted shares are excluded in the diluted EPS calculation for the three and nine months ended September 30, 20182019, respectively, due to its anti-dilutive nature. There were no other potential dilutive securities outstanding for the three and 2017.nine months ended September 30, 2019 and 2018.
Concentration of Credit Risk
- Financial instruments
Financial instruments that potentially subject the Company to concentrations of credit risk are cash, accounts receivable, and other receivables arising from its normal business activities. The Company maintains balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation (FDIC) insured limits for the banks located in the United States, or may exceed Hong Kong Deposit Protection Board (HKDPB) insured limits for the banks located in Hong Kong. The Company had noapproximately $494,000 of uninsured balances atas of September 30, 2018.2019.
- Major Customers and Suppliers
For the three months ended September 30, 2018, two2019, one customer accounted for approximately 40% (28% and 12%)64% of the Company’s sales and for the three months ended September 30, 2017, one customer2018, two customers accounted for approximately 29%40% (28% and 12%) of the Company’s sales.
For the nine months ended September 30, 2019, no customer accounted for more than 10% of the Company’s sales and for the nine months ended September 30, 2018, two customers accounted for approximately 55% (42% and 13%) of the Company’s salessales.
As of September 30, 2019, two customers accounted for approximately 95% (83% and 12%) of the Company’s accounts receivables. As of December 31, 2018, one customer accounted for 100% of the nineCompany’s accounts receivable.
For the three months ended September 30, 2017, one customer2019, three suppliers accounted for approximately 36%100% (67%, 22% and 11%) of the Company’s sales.
Forproduct purchases and for the three months ended September 30, 2018, three suppliers accounted for approximately 66% (32%, 18% and 16%, respectively) of the Company’s product purchases and for the three months ended September 30, 2017, three suppliers accounted for approximately 89% (35%, 27% and 27%, respectively)) of the Company’s product purchases.
For the nine months ended September 30, 2019, four suppliers accounted for approximately 70% (24%, 19%, 17% and 10%) of the Company’s product purchases and for the nine months ended September 30, 2018, three suppliers accounted for approximately 50% (25%, 14% and 11%, respectively) of the Company’s product purchases and for the nine months ended September 30, 2017, three suppliers accounted for approximately 92% (35%, 30% and 27%, 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.
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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 the assets 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. Twelve months or less lease term, 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. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases. Management does not believe the adoption of these ASUs would have a material effect on the Company’s unaudited condensed consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this Update affect any entity that is required to apply the provisions of Topic 220, Income Statement – Reporting Comprehensive Income, and has items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required by GAAP. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company does not believe the adoption of this ASU will have a material effect on the Company’s unaudited condensed consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic(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 willdid not have aany material effect on the Company’s unaudited condensed consolidated financial statements.
In May 2019, the FASB issued ASU 2019-05, which is an update to ASU Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced the expected credit losses methodology for the measurement of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss methodology. The amendments in Update 2016-13 added Topic 326, Financial Instruments—Credit Losses, and made several consequential amendments to the Codification. Update 2016-13 also modified the accounting for available-for-sale debt securities, which must be individually assessed for credit losses when fair value is less than the amortized cost basis, in accordance with Subtopic 326-30, Financial Instruments— Credit Losses—Available-for-Sale Debt Securities. The amendments in this Update address those stakeholders’ concerns by providing an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For those entities, the targeted transition relief will increase comparability of financial statement information by providing an option to align measurement methodologies for similar financial assets. Furthermore, the targeted transition relief also may reduce the costs for some entities to comply with the amendments in Update 2016-13 while still providing financial statement users with decision-useful information. ASU 2019-05 is effective for the Company for annual and interim reporting periods beginning January 1, 2020. The Company is currently evaluating the impact of this new standard on its consolidated financial statements and related disclosures.
The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s unaudited condensed consolidated financial statements.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current year presentation. These reclassifications have no effect on the accompanying statements of operations and cash flows.
Note 4 – Inventories
Inventories consist of raw materials for production and finished goods available for resale, and can be categorized as:the following:
|
| September 30, 2019 |
|
| December 31, 2018 |
| ||||||||||
|
| September 30, 2018 |
|
| December 31, 2017 |
|
| (Unaudited) |
|
|
| |||||
Raw materials |
| $ | 33,429 |
| $ | - |
|
| $ | 76,593 |
| $ | 31,957 |
| ||
Work-in-progress |
| 8,068 |
| - |
|
| - |
| 2,775 |
| ||||||
Finished goods |
|
| 15,596 |
|
|
| 80,769 |
|
|
| 89,643 |
|
|
| 15,607 |
|
Inventories |
| $ | 57,093 |
|
| $ | 80,769 |
|
| $ | 166,236 |
|
| $ | 50,339 |
|
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Note 5 – Property and Equipment
Property and equipment consist of the following:
|
| September 30, 2019 |
|
| December 31, 2018 |
| ||||||||||
|
| September 30, 2018 |
|
| December 31, 2017 |
|
| (Unaudited) |
|
|
| |||||
Computer equipment and software |
| $ | 114,953 |
| $ | 114,953 |
|
| $ | 114,953 |
| $ | 114,953 |
| ||
Furniture and fixtures |
| 26,686 |
| 26,686 |
|
| 26,686 |
| 26,686 |
| ||||||
Automobiles |
| 179,677 |
| 179,677 |
|
| 179,677 |
| 179,677 |
| ||||||
Leasehold improvement |
| 40,053 |
| 40,053 |
| |||||||||||
Leasehold improvements |
| 40,053 |
| 40,053 |
| |||||||||||
Machinery |
|
| 420,000 |
|
|
| - |
|
|
| 420,000 |
|
|
| 420,000 |
|
Total |
| 781,369 |
| 361,369 |
|
| 781,369 |
| 781,369 |
| ||||||
Less: accumulated depreciation and amortization |
|
| (373,465 | ) |
|
| (320,120 | ) |
|
| (434,801 | ) |
|
| (390,677 | ) |
Property and equipment, net |
| $ | 407,904 |
|
| $ | 41,249 |
|
| $ | 346,568 |
|
| $ | 390,692 |
|
Depreciation expense totaled $17,290$10,763 and $7,949$17,290 for the three months ended September 30, 20182019 and 2017,2018, respectively.
Depreciation expense totaled $53,346$44,124 and $23,950$53,346 for the nine months ended September 30, 20182019 and 2017,2018, respectively.
Note 6 – Intangible Assets
Intangible assets consist of following:
|
| September 30, 2018 |
|
| December 31, 2017 |
| ||
Technological know-how |
| $ | 900,000 |
|
| $ | - |
|
Total |
|
| 900,000 |
|
|
| - |
|
Accumulated amortization |
|
| (67,500 | ) |
|
| - |
|
Intangible Assets, net |
| $ | 832,500 |
|
| $ | - |
|
Amortization expense totaled $22,500 and $0 for the three months ended September 30, 2018 and 2017, respectively.
Amortization expense totaled $67,500 and $0 for the nine months ended September 30, 2018 and 2017, respectively.
Note 7 – 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 raterates of 6% and 10%, are unsecured, and are due on demand. During the nine months ended September 30, 2019 and 2018, advances totaled $1,480,000 and $0, respectively. As of each of September 30, 20182019 and December 31, 2017,2018, the Company owed $1,500,000 and $109,030 to these third parties.parties, respectively. In March 2019, the Company settled $89,030 of the debt owed to some of these third parties and converted the debt into the Company’s common stock (See Note 10 - Equity).
Interest expense for the three months ended September 30, 20182019 and 20172018 for the above loans amounted to $1,649$4,160 and $1,649, respectively.
Interest expense for the nine months ended September 30, 20182019 and 20172018 for the above loans amounted to $4,755 and $4,893, and $4,684, respectively.
In March 2019, the repayment term related to the amount of $20,000 was changed by the third party creditor from due on demand to due on March 20, 2024.
Due to third parties, non-interest bearing
The Company has borrowed money from third parties to fund operations. These third parties consist of the Chief Executive and Financial Officer’s friends and a former board member of the Company. These advances do not bear interest, are unsecured, and are due on demand. During the nine months ended September 30, 2019 and 2018, advances totaled $50,000 and $0, respectively. As of September 30, 20182019 and December 31, 2017,2018, the Company owed $119,857$100,000 and $729,175$0 to these third parties, respectively. In March 2019, the Company settled $32,000 of the debt owed to a third party and converted the debt into the Company’s common stock (See Note 10 - Equity). The Company also repaid $19,666 and $249,318 to a third party during the nine months ended September 30, 2019 and 2018, respectively.
In March 2019, the repayment term related to the amount of $50,000 was changed by the third party creditor from due on demand to due on March 20, 2024.
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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 nine months ended September 30, 2018 and 2017, the Company paid principal of $9,739 and $9,453, respectively, for the loan.
Future maturities of long term debt are as follows:
Three months ended December 31, 2018 |
| $ | 2,194 |
|
Year ended December 31, 2019 |
|
| 13,395 |
|
Total |
|
| 15,589 |
|
Current portion of long term debt |
|
| (12,203 | ) |
Long term debt |
| $ | 3,386 |
|
Interest expense for the three months ended September 30, 2018 and 2017 for the above loan amounted to $141 and $237, respectively.
Interest expense for the nine months ended September 30, 2018 and 2017 for the above loan amounted to $496 and $781, respectively.
Note 87 – 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 ofon 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 September 30, 20182019 and December 31, 2017,2018, the balance due to Mr. Wang, interest bearing, amounted to $471,603. The full balance of $471,603 is to bewas repaid on February 1,in October 2019.
Interest expense for each of the three monthsmonth periods ended September 30, 20182019 and 20172018 for the above loan amounted to $12,488.
Interest expense for each of the nine monthsmonth periods ended September 30, 20182019 and 20172018 for the above loan amounted to $37,463.
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 nine months ended September 30, 20182019 and 2017,2018, advances totaled $84,041$193,272 and $34,937,$84,041, respectively, and payments to Mr. Wang totaled $214,797$283,075 and $106,380,$214,797, respectively. As of September 30, 20182019 and December 31, 2017,2018, the balance due to Mr. Wang, non-interest bearing, amounted to $2,660,190$2,418,248 and $2,790,946,$2,508,051, respectively. This balance does not bear interest, is unsecured and is due on demand.
In March 2019, the repayment term related to $2,000,000 of the total balance was changed by Mr. Wang from due on demand to due on March 20, 2024.
Due to employee
The Company has borrowed money from Vickie Ho, Executive Vice President of the Company, to fund operations. These advances do not bear interest, are unsecured, and are due on demand. As of each of September 30, 20182019 and December 31, 2017,2018, the Company owed $95,000 to such employee.
In March 2019, the repayment term related to the balance of $95,000 was changed by the employee from due on demand to due on March 20, 2024.
Advances from related parties, interest bearing
The Company has borrowed $30,000 from a related party to fund operations since July 2016. This related party is the son of the Company’s Chief Executive and Financial Officer. These advances have an annual interest rate of 10%, are unsecured and are due on demand. No repayments have been made during either of the nine month periods ended September 30, 2018 and 2017. As of each of September 30, 20182019 and December 31, 2017,2018, the Company owed $30,000 to this related party.
Interest expense for the three months ended September 30, 20182019 and 20172018 for the above loans amounted to $756.
Interest expense for the nine months ended September 30, 20182019 and 20172018 for the above loans amounted to $2,244.
In March 2019, the repayment term was changed by the related party from due on demand to due on March 20, 2024.
Advances from related parties, non-interest bearing
The Company has borrowed money from certain related parties to fund operations. The related parties consist of the Chief Executive and Financial Officer’s immediate family members and relatives. These advances do not bear interest, are unsecured and are due on demand. As of each of September 30, 20182019 and December 31, 2017,2018, the Company owed $518,839 to these related parties.
In March 2019, the repayment term for the $518,839 was changed by these related parties from due on demand to due on March 20, 2024.
15 |
Table of Contents |
Note 98 – Income Taxes
The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the three months ended September 30, 20182019 and 2017:2018:
|
| Three months ended September 30, 2019 |
|
| Three months ended September 30, 2018 |
|
| Nine months ended September 30, 2019 |
|
| Nine months ended September 30, 2018 |
| ||||||||||||||||||||
|
| Three months ended September 30, 2018 |
|
| Three months ended September 30, 2017 |
|
| Nine months ended September 30, 2018 |
|
| Nine months ended September 30, 2017 |
|
| (Unaudited) |
|
| (Unaudited) |
|
| (Unaudited) |
|
| (Unaudited) |
| ||||||||
Federal statutory rate |
| 21.0 | % |
| 34.0 | % |
| 21.0 | % |
| 34.0 | % |
| 21.0 | % |
| 21.0 | % |
| 21.0 | % |
| 21.0 | % | ||||||||
State statutory rate |
| 7.0 | % |
| 5.8 | % |
| 7.0 | % |
| 5.8 | % |
| 7.0 | % |
| 7.0 | % |
| 7.0 | % |
| 7.0 | % | ||||||||
Valuation allowance |
| (17.8 | )% |
| 12.2 | % |
| (17.3 | )% |
| (25.0 | )% |
| (16.5 | )% |
| (17.8 | )% |
| 20,320.9 | % |
| (17.3 | )% | ||||||||
Permanent difference * |
|
| (10.2 | )% |
|
| (52.0 | )% |
|
| (10.7 | )% |
|
| (14.8 | )% |
|
| (11.5 | )% |
|
| (10.2 | )% |
|
| (20,348.9 | )% |
|
| (10.7 | )% |
Effective tax rate |
|
| 0.0 | % |
|
| 0.0 | % |
|
| 0.0 | % |
|
| 0.0 | % |
|
| 0.0 | % |
|
| 0.0 | % |
|
| 0.0 | % |
|
| 0.0 | % |
_________
*Represents 50% of meal and entertainment expenses and stock compensation expenseexpenses that are not deductible in the Company’s U.S. tax returns.deductible.
The Company uses the asset and liability method, where deferred tax assets and liabilities are determined based on the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes. Deferred taxes are also recognized for net operating loss carry forwards which can be utilized to offset taxable income in the future. The cumulative net operating loss carryforwards that may be applied against future taxable income is approximately $6,767,000$7,132,000 for Federal income taxesfederal and $6,767,000 for Californiastate income taxes as of September 30, 2018.2019. The cumulative net operating loss carryforwardcarry forward that may be applied against future taxable income is approximately $6,386,000$7,817,000 for Federalfederal and is approximately $5,338,000 for Californiastate as of December 31, 2018. Net operating loss for the years ended 2017 and 2018 will not expire but limited to 80% of income until utilized. Net operating loss for the years ended 2016 and prior will expire in the years 2031 to 2037. During the nine months ended September 30, 2018 and 2017, the Company incurred net losses.2036. As deferred tax assets may not be fully realizable due to potential recurring losses, management has provided a 100% valuation allowance for the deferred tax assets.
On December 22, 2017, the “Tax Cuts and Jobs Act” (the “Act”) was enacted. Under the provisionsThe components 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 are as offollows:
|
| September 30, 2019 |
|
| December 31, 2018 |
| ||
|
| (Unaudited) |
|
|
| |||
Allowance for doubtful accounts |
| $ | 6,802 |
|
| $ | - |
|
Amortization of intangible assets |
|
| 200,223 |
|
|
| 211,556 |
|
Net operating losses |
|
| 1,788,794 |
|
|
| 1,975,889 |
|
Deferred tax assets |
|
| 1,995,819 |
|
|
| 2,187,445 |
|
Valuation allowance |
|
| (1,995,819 | ) |
|
| (2,187,445 | ) |
Deferred tax assets, net |
| $ | - |
|
| $ | - |
|
Changes in the value allowance for deferred tax assets decreased by $191,626 from $2,187,445 at December 31, 2017. However, this re-measurement had no effect on2018 to $1,995,819 at September 30, 2019. During the Company’s income tax expense asnine months ended September 30, 2019, the Company provides a 100% valuation allowance on itsutilized $187,095 deferred tax assets.assets from the prior period.
As of September 30, 2019, federal tax returns filed for 2016, 2017 and 2018 remain subject to examination by the taxing authorities. As of September 30, 2019, California tax returns filed for 2015, 2016, 2017 and 2018 remain subject to examination by the taxing authorities.
Table of Contents |
Note 9 – Leases
Effective January 1, 2019, the Company adopted ASU 2016-02, “Leases” (Topic 842), and elected the practical expedients that do not require us to reassess: (1) whether any expired or existing contracts are, or contain, leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases. The Company adopted the practical expedient that allows lessees to treat the lease and non-lease components of a lease as a single lease component. There is no impact from the deferred tax assets isadoption of ASC 842 as follows:
|
| September 30, 2018 |
|
| December 31, 2017 |
| ||
Allowance for doubtful accounts |
| $ | 21,940 |
|
| $ | 12,110 |
|
Net operating losses |
|
| 1,871,878 |
|
|
| 1,701,704 |
|
Deferred tax assets |
|
| 1,893,818 |
|
|
| 1,713,814 |
|
Valuation allowance |
|
| (1,893,818 | ) |
|
| (1,713,814 | ) |
Deferred tax assets, net |
| $ | - |
|
| $ | - |
|
Changesof January 1, 2019, as the Company did not have any existing leases with a lease term in the value allowance for deferred tax assets increased by $180,004 from $1,713,814 at December 31, 2017 to $1,893,818 at September 30, 2018.excess of twelve months on January 1, 2019.
AsIn January 2019, the Company entered a new office lease agreement with a 5-year lease term starting in March 2019 and terminating in February 2024. Upon adoption of September 30, 2018, federal tax returns filed for 2015, 2016 and 2017 remain subject to examination byASU 2016-02, the taxing authorities. AsCompany recognized lease liabilities of September 30, 2018, California tax returns filed for 2014, 2015, 2016 and 2017 remain subject to examination byapproximately $618,000, with corresponding right-of-use (“ROU”) assets in the taxing authorities.
Note 10 – Commitments
Operatingsame amount based on the present value of the future minimum rental payments of the new lease, using an effective interest rate of 4.78%, which is determined using an incremental borrowing rate. The remaining term of the lease is 4.33 years.
The Company has contracted to rent office and warehousealso leases a factory space for its main corporate office through October 2018 and thereafter on a month-to-month basis, which it classifies as an operating lease. Leases with an initial term of $3,100 per month without future commitment. In addition,12 months or fewer are not recorded on the Company has contracted to rent a factory in Nevada on a month-to-month basis with a two-month notice before termination. The Company’s commitment for minimum lease payments under these operating leases as of September 30, 2018 for the following periods is as follow:balance sheet.
|
The Company incurred rent expense of $20,392 and $5,346 forCompany’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
For the three months ended September 30, 2019 and 2018, lease expenses amounted to $45,286 and 2017,$20,392, respectively, of which, $10,500 and $0 are short-term lease expenses, respectively.
The Company incurred rent expense of $62,366 and $26,746 forFor the nine months ended September 30, 2019 and 2018, lease expenses amounted to $112,668 and 2017,$62,366, respectively, of which, $21,000 and $0 are short-term lease expenses, respectively.
The five-year maturity of the Company’s lease obligations is presented below:
Twelve months ended September 30, |
| Operating lease amount |
| |
|
| (Unaudited) |
| |
2020 |
| $ | 121,806 |
|
2021 |
|
| 136,740 |
|
2022 |
|
| 140,844 |
|
2023 |
|
| 145,064 |
|
2024 |
|
| 98,624 |
|
Total lease payments |
|
| 643,078 |
|
Less: interest |
|
| (70,322 | ) |
Present value of lease liabilities |
| $ | 572,756 |
|
Note 1110 – Equity
Share Distribution PlanPlans
1) On July 15, 2017, the Board approved Mr. Dinghua Wang, the Chairman and CEO of the Company, to distribute up to 30thirty 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.internationally. Accordingly, special legends regarding restrictions on resale of the securities and no-hedging transactions would needare required to be included on the securities.
17 |
Table of Contents |
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 towith ASC 220-10-S99-4. The fair value of these shares werewas valued at $480,000 and recorded as stock-based compensation expenses in the Company’s nine months ended September 30, 2018 consolidated statementsstatement 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 peopleindividuals who, directly or indirectly, loaned funds or referred customers to the Company or purchased products from the Company as the Company faces its financial difficulties.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 mustwill contain appropriate Regulation S subscription agreements and legends. If anyone within U.S. is to receive thosethese shares, the Company mustwill consult with the Companyits counsel to complyensure compliance 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 itsfaced financial difficulties.
3) On June 30, 2017, the Company’s Board of Directors approved that the Company can grant of up to twenty million shares (from authorized but unissued shares of itsthe 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.
On September 30, 2018, No shares have been issued during the Company issued 15,500 shares to the Company’s sales agents outside the U.S. The shares are valued at $4,804, determined using the closing price of the Company’s common stock on the applicable issuance dates and recognized in the captioned “selling expenses” in the accompanying condensed statements of operations and other comprehensive income (loss) for the three and nine months ended September 30, 2019 and 2018.
Private placements
During the year ended December 31, 2017, the Company entered into a series of Securities Purchase Agreement 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 nine months ended September 30, 2018, the Company entered into a series of Securities Purchase Agreements with various unrelated third party purchasers, pursuant to which the Company sold to these purchasers in private placements an aggregate of 1,583,5741,474,574 shares of the Common StockCompany’s common stock, par value $0.001 per share, at an averagea purchase price of $0.91$0.90 per share for an aggregate offering price of $1,436,098.$1,327,098. The sales were completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.
As of September 30, 2019 and December 31, 2018, $1,110,695 and $1,200,000, respectively, were unpaid and recognized as stock subscription receivables in the accompanying statements of changes in shareholders’ deficit. During the nine months ended September 30, 2018,2019, the Company issued an aggregate of 55,388 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 and which led to successfully raised capital. The issuances were completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended. These shares were valued at $50,403, which was determined by using the associated average private placement purchase price of $0.91 per share. The valuereceived $89,305 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 successful capital raise.
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.subscription receivables.
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 ofpurchased 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 cash and cash equivalents, minute books, stock ledger andNo other company records, as well as raw materials and customer lists remainedassets were included with the Seller,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 issuance of the Purchase Shares was contingent on the Seller or its designated recipient executing all certificates and other documents reasonably requested by the Company, the completion of the assignment of the assets subject to the Asset Sale (the “Acquired Assets”), and the completion of all applications for relevant business and manufacturing licenses for the Company’s benefit. The payment of the cash portion of the Purchase Price shallwas to occur in two distributions: (i) the first, in the amount of $600,000, shallwas to occur within sixnine months of the date of the Purchase Agreement, and (ii) the second, in the amount of $400,000, shallwas to occur within twelve months of the date of the Purchase Agreement. Each such distribution will be contingent on the completion of the transfer of the Acquired Assets and all permits and other governmental registrations and licenses relating to the Acquired Assets. 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 first installment payment$1,000,000 cash portion of $600,000the Purchase Price was extended to December 31, 2018.2019.
Common stock to be issued for consulting servicesSettlement of debt
On November 9, 2017,March 19, 2019, 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”)Agreements with certaintwo creditors of the Company (the “Creditors”), pursuant to which the Company agreed to repay $360,000 debt$135,851 owed to the Creditors in the form of 400,000295,480 shares of Company’s common stock at aan average debt conversion rate of $0.90$0.46 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. These shares are valued at $150,000, determined using the closing price of the Company’s common stock on July 1, 2018March 19, 2019 was $0.60 per share, which resulted in a loss on settlement of $1.00debt of $41,437.
On March 30, 2019, the Company entered into four Debt Repayment Agreements with four creditors of the Company (the “Creditors”), pursuant to which the Company agreed to repay $868,682 owed to the Creditors in the form of 976,364 shares of Company’s common stock at an average debt conversion rate of $0.89 per share. Forshare (the “Debt Repayment”). The Debt Repayment was completed pursuant to the three and nine months ended Septemberexemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended. The closing price of the Company’s common stock on March 30, 2018, stock compensation expenses2019 was $0.60 per share, which resulted in a gain on settlement of these shares amounted to $150,000.debt of $282,863.
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Common stock issued for consulting services
On August 30, 2018, the Company entered into two advisory agreements with two advisors (the “Financial Advisors”), pursuant to which the Company engaged the Financial Advisors to provide certain Financial Advisoryfinancial advisory services for a service period of sixNine 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. The valuation of theseThese shares are valued at $20,375, determined using the closing price of the Company’s common stock on August 30, 2018 of $0.30 per share. For the three and nine months ended September 30, 2019 and 2018, amortization of deferred stock compensation of these shares amounted to $0 and $3,396, respectively. For the nine months ended September 30, 2019 and $16,979 are capitalized as2018, amortization of deferred stock compensation of these shares amounted to $6,792 and $3,396, respectively
On January 23, 2019, the Company entered into a consulting agreement with Redfield Management Service limited for business, finance and investor relations services. The consultant is due a monthly consulting fee of $7,000 and 50,000 shares, to be paid every three months. The term of the agreement is one year. The service agreement was terminated at the end of April and the Company issued a total of 200,000 shares of its common stock during the nine months ended September 30, 2019. For the three and nine months ended September 30, 2019, amortization of deferred stock compensation of these shares amounted to $0 and $120,000, respectively.
On March 13, 2019, the Company entered into a consulting agreement with Global Merchants Union (“GMU”), a company incorporated in California, pursuant to which GMU will provide business and financial operation and planning consultation services to the Company for consideration of $7,500 per month and a one-time stock payment of 1,000,000 shares of common stock of the Company (the “Share Payment”). Shares subject to the Share Payment were to be issued to GMU within 30 days after the agreement was signed. The term of the agreement was for one year but the cash consideration and payment obligation by the Company under this agreement was terminated in May 2019. For the three and nine months ended September 30, 2019, amortization of deferred compensation of these shares amounted to $150,000 and $325,000, respectively. Deferred stock compensation of $275,000 has been recognized as a reduction of shareholders’ deficit as the services havehad not been performed as of September 30, 2018.2019.
Issuance of restricted common stock
On July 13, 2018, the Board of Directors of the Company approved the grant of 2,300,000 restricted stock units (the “RSUs”) to three employees of the Company, pursuant to the Merion, Inc. 2018 Omnibus Equity Plan. 30%Thirty percent of the RSUs will vest on July 13, 2019, 30%thirty percent of the RSUs will vest on July 13, 2020, and the remaining 40%forty percent of the RSUs will vest on July 13, 2021, in each case provided that the employee remains employed, in good standing, by the Company. These shares are valued at $851,000, determined using the closing price of the Company’s common stock on July 13, 2018 of $0.37 per share, and will be amortized ratably over the term of the vesting periods of three years on a straight line basis. The Company accounts for the restricted common stock as equity-settled awards in accordance with ASC 718. For the three and nine months ended September 30, 2019 and 2018, amortization of deferred stock compensation of these shares amounted to $55,257.$64,349 and $55,257, respectively. For the nine months ended September 30, 2019 and 2018, amortization of deferred stock compensation of these shares amounted to $190,950 and $55,257, respectively. Deferred stock compensation of $812,722 are capitalized$540,443 and $731,394 has been recognized as a reduction of shareholders’ equity (deficit)deficit as the services have not been performed as of September 30, 2018.2019 and December 31, 2018, respectively.
The following table summarizes unvested restricted common stock activity for the nine months ended September 30, 2019 and for the year ended December 31, 2018:
|
| Number of shares |
|
| Weighted average grant-date fair value per share |
|
| Number of shares |
|
| Weighted average grant-date fair value per share |
| ||||
Outstanding as of December 31, 2017 |
| - |
| $ | - |
|
| - |
| $ | - |
| ||||
Granted |
| 2,300,000 |
| 0.37 |
|
| 2,300,000 |
| 0.37 |
| ||||||
Vested |
| - |
| - |
|
| - |
| - |
| ||||||
Forfeited |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Outstanding as of September 30, 2018 |
|
| 2,300,000 |
|
| $ | 0.37 |
| ||||||||
Outstanding as of December 31, 2018 |
|
| 2,300,000 |
|
| $ | 0.37 |
| ||||||||
Granted |
| - |
| - |
| |||||||||||
Vested |
| 690,000 |
| - |
| |||||||||||
Forfeited |
|
| - |
|
|
| - |
| ||||||||
Outstanding as of September 30, 2019 |
|
| 1,610,000 |
|
| $ | 0.37 |
|
Note 12 – 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 August 9, 2017, the Company’s common stock 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 September 30, 2017 was $621,427. As a result, the Company recorded a loss of $372,316 for the change in fair value of Rescission Liabilities for the three and nine months ended September 30, 2017.
Note 13 – Subsequent Events
Private placements
Subsequent to September 30, 2018 and until the date of this report, the Company entered into a series of Securities Purchase Agreement with various unrelated third party purchasers, pursuant to which the Company sold to these purchasers in private placements an aggregate of 15,000 shares of the Company’s common stock, par value $0.001 per share, at a purchase price of $1.00 per share for an aggregate offering price of $15,000. The sales were completed pursuant to the exemption from registration provided by Regulation S under the Securities Act of 1933, as amended. Concurrently, the Company issued an aggregate of 1,200 shares of Common Stock to an unrelated third-party individual as compensation for introducing private placement investors to the Company and which led to successfully raised capital.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes, and other financial information included in this Form 10-Q and our financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended December 31, 20172018 (the “2017“2018 Form 10-K”).
Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking. Words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “potential,” “believes,” “seeks,” “hopes,” “estimates,” “should,” “may,” “will,” “with a view to” and variations of these words or similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national, and local general economic and market conditions; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; change in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; the risk of foreign currency exchange rates; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission. For more information, see our discussion of risk factors located at Part I, Item 1A of our 20172018 Form 10-K.
Although the forward-looking statements in this Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.
Overview
Our Company is a provider of health and nutritional supplements and personal care products. Currently, we are mainly selling our products over the Internet directly to end-user customers through our websites, www.dailynu.com and www.merionus.com, and to wholesale distributors through phone and electronic communication. Our major customers of our nutritional and beauty products sales are located in the Asian market, predominantly in the People’s Republic of China and ourChina. Our major customers of our OEM salesand 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 skin-care and beautypersonal care products directly on the Internetinternet through our websites, www.dailynu.com and www.merionus.com or selling directly to our wholesale distributors. During 2017, we introduced five nutritional supplement products.www.merionus.com. As of the date of filing date of this report, we continue to market our sixthirteen individual nutritional supplement products, three and seven skin-carefive of which were introduced in 2018 and beauty products on these websites. In addition, we currently have six individual nutritional supplement products2019 respectively, and one skin-care and beauty product, that we only sell to wholesale distributors.which was also introduced in 2018, on our websites. We also sellare 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 yearsyear ended December 31, 2017 and 2016. With this newly purchased2017. Upon purchasing these assets from the Seller, we have started to manufacture some of the nutritional supplements that we sell. These assets meet all industry nutritional and dietary supplementssupplement manufacturing standards, including FDAU.S. Food and GMPDrug Administration and Good Manufacturing Practice compliance and cGMPCurrent Good Manufacturing Practice regulations. In addition to manufacturing the nutritional supplements that we sell, we could produce hard capsules, tablets, solid beveragebeverages (sachet packaging), teabags, powder, granules, dietary supplement export,supplements, softgel capsules and healthyhealth foods from these assets for any potential new customers who need such products. These are the products that were added to our existing products, similar to our OEM and packaging businesses.
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In the fourth quarter ofJanuary 2018, we anticipate introducing more biological dietary supplements products such as 1) female dietary supplements, including but not limited to, weight loss andintroduced a new beauty products, and 2) supplements that may aidproduct, Noir Naturel, a gentle formula for grey coverage from the body in fighting cancer. During the third quarter of 2018, we successfully launched a natural aphrodisiac supplement for men.first application into hair care.
In JulySeptember 2018, we entered intointroduced three different types of natural aphrodisiac supplements, Viwooba (1-3) for men that may support kidney health, improve immunity, enhance physical fitness, eliminate fatigue, improve sexual desire and enhance body energy, strength and sexual ability.
In March 2019, we introduced 1) Lady-S, a cooperation agreementfemale dietary supplement that may assist with weight loss, 2) Gold King, a sales agent company in the PRC, which was to promote our products in over 300 pharmaceutical chain stores in the Sichuan Province, PRC fornutritional supplement that may provide antioxidant support and liver health, 3) New Power, a period of three years starting on August 1, 2018. nutritional supplement that may support heart health, and 4) Taibao, a nutritional supplement that may enhance physical performance and energy metabolism.
In return, for each productMay 2019, we introduced M-Power, a nutritional supplement that we sell through our website with the specified promotional code, we will pay a sales commission to the agent. The cooperation agreement did not start as we anticipated as the sales agent decided to only commit to promoting our products with one store. We anticipate that the sale agent will increase the promotion of our projects with additional stores if the agent sees positive feedback and high demand for our products.may provide anti-aging support.
Principal Factors Affecting Our Financial Performance
We believe consumers have become more confident in ordering products like ours over the Internet.internet. However, the nutritional supplement and skin care products e-business markets have been, and continue to be, increasingly competitive and are rapidly evolving due to the reasons discussed below.
Barriers to entry are minimal in the nutritional supplement and skin care businesses, and current and new competitors can launch new websites at a relatively low cost. Many competitors in this area have greater financial, technical and marketing resources than we do. Continued advancement in technology, and increased access to that technology, is paving the way for growth in direct marketing. We also face competition for consumers from retailers, duty-free retailers, specialty stores, department stores and specialty and general merchandise catalogs, many of which have greater financial and marketing resources than we have. Notwithstanding the foregoing, we believe that we are well-positioned within the Asian consumer market with our current plan of supplying American merchandise brands to consumers in Asia. There can be no assurance that we will maintain or increase our competitive position or that we will continue to provide only American-made merchandise.
Our products are sensitive to business and personal discretionary spending levels, and demand tends to decline or grow more slowly during economic downturns, including downturns in any of our major markets. The global economy is currently undergoing a period of volatility, and the future economic environment, while improving, continues to remain uncertain. This has led, and could further lead, to reduced consumer spending, which may include spending on nutritional and beauty products and other discretionary items. Also, the increase of trade tensions between US and China might have negative impacts on our business. In addition, reduced consumer spending may force us and our competitors to lower prices. These conditions may adversely affect our revenues and results of operations.
Results of Operations
Comparison of the three months ended September 30, 2019 and 2018
For the three months ended September 30, Percentage 2019 2018 Change Change Total sales Total cost of sales (46.8% )% Gross profit Operating expenses Selling General and administrative Stock compensation expense Total operating expenses Loss from operations Other income (expenses), net Net loss $ 97,811 $ 53,560 $ 44,251 82.6 % 48,947 92,046 (43,099 ) 48,864 (38,486 ) 87,350 227.0 % 18,531 28,548 (10,017 ) (35.1 )% 350,301 290,700 59,601 20.5 % 214,350 208,653 5,697 2.7 % 583,182 527,901 55,281 10.5 % (534,318 ) (566,387 ) (32,069 ) (5.7 )% (21,756 ) (14,690 ) (7,066 ) (48.1 )% $ (556,074 ) $ (581,077 ) $ (25,003 ) (4.3 )%
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Results of Operations
Comparison of the three months ended September 30, 2018 and 2017
|
| For the three months ended September 30, |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
| Percentage |
| ||||
|
| 2018 |
|
| 2017 |
|
| Change |
|
| Change |
| ||||
Total sales |
| $ | 53,560 |
|
| $ | 469,806 |
|
| $ | (416,246 | ) |
|
| (88.6 | )% |
Total cost of sales |
|
| 92,046 |
|
|
| 83,735 |
|
|
| 8,311 |
|
|
| 9.9 | % |
Gross profit (loss) |
|
| (38,486 | ) |
|
| 386,071 |
|
|
| (424,557 | ) |
|
| (110.0 | )% |
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling |
|
| 28,548 |
|
|
| 14,130 |
|
|
| 14,418 |
|
|
| 102.0 | % |
General and administrative |
|
| 290,700 |
|
|
| 305,228 |
|
|
| (14,528 | ) |
|
| (4.8 | )% |
Stock compensation expense |
|
| 150,000 |
|
|
| - |
|
|
| 150,000 |
|
|
| 100.0 | % |
Amortization of deferred stock compensation |
|
| 58,653 |
|
|
| - |
|
|
| 58,653 |
|
|
| 100.0 | % |
Total operating expenses |
|
| 527,901 |
|
|
| 319,358 |
|
|
| 208,543 |
|
|
| 65.3 | % |
Income (loss) from operations |
|
| (566,387 | ) |
|
| 66,713 |
|
|
| (633,100 | ) |
|
| (949.0 | )% |
Other income (expense), net |
|
| (14,690 | ) |
|
| (390,722 | ) |
|
| (376,032 | ) |
|
| (96.2 | )% |
Provision for income taxes |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - | % |
Net loss |
| $ | (581,077 | ) |
| $ | (324,009 | ) |
| $ | 257,068 |
|
|
| 79.3 | % |
Total sales decreasedincreased by approximately $416,000,$44,000, or 88.6%82.6%, from approximately $470,000$54,000 in the three months ended September 30, 20172018 to approximately $53,560$98,000 in the three months ended September 30, 2019. The increase of sales was mainly due to the increase of package revenues. The increase is also attributable to the sales of our own products: 101 orders of Cell Power, 22 orders of OPC Spa, and 266 orders of Viwooba (1-3) and new products we introduced in March 2019: 211 orders of Lady-S, 36 orders of Gold King, 26 orders of Heart Power, and 75 orders of Taibao, These new products were not available during the three months ended September 30, 2018. The decrease of sales was mainly due to decreasesincrease in sales of three of our products, Auxia, Capsule of Beauty and Hepatica, which we newly introduced in June and July 2017. During the three months ended September 30, 2018, the market for Auxi, Capsule of Beauty and Hepatica started to become saturated. The decrease was slightlyis offset by the increasedecrease of Noir Naturel sales, of our natural aphrodisiac supplement for men, which we initially introduced in September 2018. As a result, our sales has decreased significantly during the three months ended September 30, 2018 as compared to the same period in 2017.
The cost of sales increased by approximately $8,000, or 9.9%, from approximately $84,000with 118 orders in the three months ended September 30, 20172019 as compared to 4,386 orders in the same period in 2018.
The cost of sales decreased by approximately $43,000, or 46.8%, from approximately $92,000 in the three months ended September 30, 2018. For2018 to approximately $49,000 in the three months ended September 30, 2018, we wrote down approximately $7,0002019. The major reason for the decrease was the decease of our Dibeier Granules & Oral products, for which we experienced some issues during the shipping process with abnormal temperature condition that led to us disposing them. We do not expect to incur such cost going forward as we are fully aware of this situation and to ensure such issues will not recur going forward. In addition, we incurred approximately $46,000 of idle capacity cost of approximately $42,000 incurred 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 three months ended September 30, 2018, as compared towhere we were operating at 91% capacity at normal 8 hours shift in the same period in 2017.2019. Furthermore, we wrote down $810,000 of intangible assets due to impairment at December 31, 2018, for which we were no longer incurring amortization expense of $22,500 per quarter or $90,000 per year in our manufacturing costs in 2019.
Our overall gross margin (loss) percentage decreasedincreased from approximately 82.2% in the three months ended September 30, 2017 to approximately (71.9)% in the three months ended September 30, 2018 to a gross profit of approximately 50.0% in the three months ended September 30, 2019, mainly due to our product mix, the issues during the shipping process with our Dibeier Granules & Oral products described above andreduction of the idle capacity cost.
Our product sales gross margin percentage decreasedincreased from approximately 82.2% in the three months ended September 30, 2017 to approximately 1.5% in the three months ended September 30, 2018 to approximately 61.8% in the three months ended September 30, 2019. For the three months ended September 30, 2019, the majority of our product sales were attributable to our Cell Power, Viwooba (1-3), OPC Spa, Lady-S, Gold King, New Power, and Taibao products, which were all manufactured by us. The major reason for the increase of sales gross margin percentage was that we were no longer incurring any amortization of the intangible assets that we wrote off in December 2018. ForIn addition, during the three months ended September 30, 2018, the majority of our product sales were attributable to our beauty product, Noir Naturel, which has a lower profit margin. As a result, our product sales gross margin percentage increased accordingly during the three months ended September 30, 2019 as compared to the same period in 2018.
Our OEM and packaging sales gross margin percentage increased from approximately 24.1% in the three months ended September 30, 2018 to approximately 52.3% in the three months ended September 30, 2019. For the three months ended September 30, 2019, we had incurred less manufacturing overhead costs for our OEM and packaging sales with fewer labor hours being allocated to such production due to the lesser degree of specified production procedures which required fewer labor hours as compared to the same period in 2018. As a result, our OEM and packaging sales gross margin percentage increased by 28.2% during the three months ended September 30, 2019 as compared to the same period in 2018.
Selling expenses decreased from approximately $29,000 in the three months ended September 30, 2018 to approximately $19,000 in the three months ended September 30, 2019. The decrease of approximately $10,000, or 35.1%, was mainly due to the decrease of approximately $2,400 of marketing expenses, the decrease of approximately $1,400 of commission expenses and the decrease of approximately $6,400 of shipping expenses.
General and administrative (“G&A”) expenses increased by approximately $59,000 from approximately $291,000 in the three months ended September 30, 2018 to approximately $350,000 in the three months ended September 30, 2019. The increase was mainly attributable to the increase of approximately $25,000 of rental expenses and the increase of approximately $53,000 of payroll expenses, offset by the decrease of approximately $13,000 of professional fees, such as attorney fees, auditor fees and consulting fees and the decrease of approximately $6,000 of other miscellaneous G&A expenses, such as travel and lab test expenses.
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Stock compensation expenses increased by approximately $6,000 during the three months ended September 30, 2019 compared to the same period in 2018. Approximately $64,000 related to the amortization of the value of 2,300,000 shares of restricted common stock to three employees for the three months ended September 30, 2019, which all have a vesting period of three years. For the three months ended September 30, 2018, such expenses were approximately $55,000. In addition, in January and March 2019, we issued 1,150,000 shares of our common stock with an additional 450,000 shares of our common stock to be issued in each of the next three quarters of 2019 valued at $1,080,000 to two advisors to provide certain financial advisory services, and amortized such cost, which was approximately $150,000. The increase was offset by $150,000 in stock compensation expense incurred in the three months ended September 30, 2018 which we issued 150,000 shares to a consultant for research and strategic planning consulting services during the three months ended September 30, 2018. We did not incur such stock compensation expense for the three months ended September 30, 2019.
Other expenses increased by approximately $7,000 from approximately $15,000 of other expenses in the three months ended September 30, 2018 to approximately $22,000 of other expenses in the three months ended September 30, 2019, mainly due to the increase of approximately $5,000 of interest expenses and the decrease of approximately $2,000 of other income.
Net loss decreased by approximately $25,000 from approximately $581,000 in the three months ended September 30, 2018 to approximately $556,000 in the three months ended September 30, 2019, mainly due to the reasons discussed above.
Comparison of the nine months ended September 30, 2019 and 2018
For the Nine months ended September 30, Percentage 2019 2018 Change Change Total sales Total cost of sales Gross profit Operating expenses Selling General and administrative Stock compensation expense Total operating expenses Loss from operations Other income, net Net income (loss) $ 1,723,837 $ 250,306 $ 1,473,531 588.7 % 163,485 277,975 (114,490 ) (41.2 )% 1,560,352 (27,669 ) 1,588,021 5,739.4 % 58,001 271,493 (213,492 ) (78.6 )% 1,092,961 965,931 127,030 13.2 % 642,742 732,653 (89,911 ) (12.3 )% 1,793,704 1,970,077 (176,373 ) (9.0 )% (233,352 ) (1,997,746 ) (1,764,394 ) (88.3 )% 232,409 51,095 181,314 354.9 % $ (943 ) $ (1,946,651 ) $ (1,945,708 ) (100.0 )%
Total sales increased by approximately $1.5 million or 588.7%, from approximately $250,000 in the nine months ended September 30, 2018 to approximately $1.7 million in the nine months ended September 30, 2019. The increase in sales was mainly due to the shipping of our backlog of 1,329 orders of Auxia and 3,225 orders of Cell Power products to our members who had previously paid for their purchases. The increase is also attributable to the sales of our own products, namely 479 orders of Viwooba (1-3), 107 orders of OPC Spa, and new products we introduced in March 2019: 1,044 orders of Lady-S, 36 orders of Gold King, 104 orders of Heart Power, and 134 orders of Taibao. These products were not available during the nine months ended September 30, 2018. The increase in sales is also attributable to our packaging and OEM revenues, as we have more clients who requested that we perform packaging services in the nine months ended September 30, 2019 as compared to the same period in 2018. The increase was partially offset by the decrease of the sales of 2,276 orders of our Noir Naturel product in the nine months ended September 30, 2019 as compared to the same period in 2018 as the demand of the such product become more saturated. The decrease was also attributable to the decrease of sales of 1,195 orders of our Longevity product during the nine months ended September 30, 2018, as we did not generate any sales during the nine months ended September 30, 2019.
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The cost of sales decreased by approximately $115,000, or 41.2%, from approximately $278,000 in the nine months ended September 30, 2018 to approximately $163,000 in the nine months ended September 30, 2019. The major reason was the decease of our idle capacity cost of approximately $175,000 incurred in our Nevada factory during the nine months ended September 30, 2018, where we were operating at almost full capacity in the same period in 2019. The decrease is also attributable to the decrease of our cost of sales of our Longevity products, which normally have a higher unit cost as compared to our other products. Furthermore, we wrote down $810,000 of intangible assets due to impairment in December 2018, for which we were no longer incurring amortization of $22,500 per quarter or $90,000 per year in our manufacturing costs in 2019.
Our overall gross margin percentage increased from approximately (11.1) % in the nine months ended September 30, 2018 to approximately 90.5% in the nine months ended September 30, 2019, mainly due to the reduction of the idle capacity cost incurred in the nine months ended September 30, 2018, as described above.
Our product sales gross margin percentage increased from approximately 64.1% in the nine months ended September 30, 2018 to approximately 96.5% in the nine months ended September 30, 2019. For the nine months ended September 30, 2019, the majority of our product sales were attributable to our Auxia, Cell Power, Viwooba (1-3), OPC Spa, Lady-S, Gold King, New Power, and Taibao products, which were all manufactured by us and have a higher profit margin compared to our Auxia, Capsule of Beauty and Hepatica products,Longevity product, manufactured by third party, which comprised the majority of our product sales in the threenine months ended September 30, 2017.2018. As a result, our product sales gross margin percentage decreased significantlyincreased accordingly during the threenine months ended September 30, 20182019 as compared to the same period in 2017.2018.
Our OEM and packaging sales gross margin percentage increased from approximately 52.7% in the nine months ended September 30, 2018 to approximately 53.7% in the nine months ended September 30, 2019. We normally are able to keep our OEM and packaging revenues gross margin percentage consistent between periods unless our customers required us to provide additional specified production procedures, which procedures might incur more labor costs to allocate more of our manufacturing overhead cost. As a result, our OEM and packaging sales gross margin percentage remained consistent and slightly increased by 1.0% during the nine months ended September 30, 2019 as compared to the same period in 2018.
Selling expenses increaseddecreased from approximately $14,000$271,000 in the threenine months ended September 30, 20172018 to approximately $28,000$58,000 in the threenine months ended September 30, 2018.2019. The increasedecrease of approximately $14,000,$213,000, or 102.0%78.6%, was mainly due to the increasesdecrease of approximately $206,000 of marketing advertising and promotional expenses of approximately $13,000 as we are tryingheld a conference in Hong Kong to expandpromote our sales channels, increaseproducts costing $131,000 during the nine months ended September 30, 2018, and we did not hold any conference during the same period in 2019. In addition, we gave out approximately $54,000 worth of commission expensepromotional products during the nine months ended September 30, 2018 and we did not give out any promotional products in the same period in 2019. We also did not spent as much on other marketing expenses during the nine months ended September 30, 2019 as compared to the same period in 2018, which resulted in approximately $21,000 less of approximately $5,000 for shares based compensation to our sales agents, which was partially offset by the decrease of shipping expenses of approximately $4,000 asother marketing expenses. As a result, ofour selling expenses have decreased approximately $213,000 in the decreased sales.nine months ended September 30, 2019 as compared to the same period in 2018.
General and administrative (“G&A”) expenses decreasedincreased by approximately $15,000$127,000 from approximately $305,000$966,000 in the threenine months ended September 30, 20172018 to approximately $291,000$1.1 million in the threenine months ended September 30, 2018. General and administrative expenses decreased2019. The increase was mainly dueattributable to lower professional expenses of approximately $52,000 from our attorneys, auditors and consultants during the third quarter of 2018 due to higher fees incurred in the three months ended September 30, 2017, as we were paying extra legal fees while transitioning to new legal counsel to better serve our operational needs. The decrease was partially offset by the increase of approximately $29,000$85,000 of payroll related to various other miscellaneousexpenses, the increase of approximately $56,000 of rental expenses, the increase of approximately $15,000 of insurance expenses, the increase of approximately $6,000 of printing expenses, the increase of approximately $13,000 of our Nevada factory general G&A expenses, in our Nevada factorysuch as office and travel expenses, and the increase of approximately $8,000 related to various$3,000 of other miscellaneous G&A expenses in our headquarter office. As a result, our operatingoffset by the decrease of approximately $14,000 of professional fees, such as attorney fees, auditor fees and consulting fees, the decrease of approximately $11,000 of bad debt expenses, the decrease of approximately $11,000 of bank service charges, the decrease of approximately $10,000 of computer expenses, and the decrease of approximately $4,000 of custom inspection fees.
Stock compensation expenses decreased by approximately $90,000 during the threenine months ended September 30, 2018 as2019 compared to the same period in 2017.
Stock2018 because Mr. Wang, our CEO and CFO, distributed 1,500,000 shares of his own stock to certain persons outside of the United States who had previously worked with the Company as an incentive for these individuals to assist the Company in developing its international market during the 2018 period. The Company determined that these 1,500,000 shares distributed by Mr. Wang were related to the Company’s operations in accordance to ASC 225-10-S99-4. As a result, we incurred $480,000 in stock compensation expense increased by $150,000 infor the threenine months ended September 30, 2018 compared to the same period2018. In addition, we also incurred $194,000 in 2017stock compensation expense as we issued 150,000350,000 shares of our common stock valued at $150,000 to an investor relations consulting firm to provide up-listinga consultant for research and strategic planning consulting services during the three months endednine months ended September 30, 2018, and we2018. We did not incur anysuch stock compensation expenses for the same period in 2017.nine months ended September 30, 2019.
Amortization
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The increase was offset by the amortization of deferred stock compensation increased byincurred as approximately $59,000 in the three months ended September 30, 2018 compared to the same period in 2017 of which $55,000$191,000 related to the amortization of the value of 2,300,000 shares of restricted shares of common stock to our three employees, which grants 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 three monthsyear ended September 30,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 $4,000.$7,000. In January and March 2019, we issued 1,150,000 shares of our common stock with an additional 450,000 shares of our common stock to be issued in each of the next three quarters of 2019 valued at $1,080,000 to two advisors to provide certain financial advisory services, and amortized such cost of approximately $445,000. One of the service contracts was terminated in April 2019 due to non-performance and the Company is no longer obligated to issue the remaining 400,000 shares with a valuation of $360,000. We did not incur any amortization of deferred stock compensation forduring the same period in 2017.
Other expense decreased by approximately $0.4 million from approximately $391,000 in the three months ended September 30, 2017 to approximately $15,000 in the three months ended September 30, 2018, mainly due to approximately $372,000 of loss in change in fair value of our Warrant Recession Liability – Type B warrants during the three months ended September 30, 2017.
Net loss from operations increased by approximately $257,000 from approximately $324,000 net loss in the three months ended September 30, 2017 to approximately $581,000 net loss in the three months ended September 30, 2018 mainly due to the reasons discussed above.
Comparison of the nine months ended September 30, 2018 and 2017
|
| For the nine months ended September 30, |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
| Percentage |
| ||||
|
| 2018 |
|
| 2017 |
|
| Change |
|
| Change |
| ||||
Total sales |
| $ | 250,306 |
|
| $ | 589,803 |
|
| $ | (339,497 | ) |
|
| (57.6 | )% |
Total cost of sales |
|
| 277,975 |
|
|
| 123,228 |
|
|
| 154,747 |
|
|
| 125.6 | % |
Gross profit |
|
| (27,669 | ) |
|
| 466,575 |
|
|
| (494,244 | ) |
|
| (105.9 | )% |
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling |
|
| 271,493 |
|
|
| 71,334 |
|
|
| 200,159 |
|
|
| 280.6 | % |
General and administrative |
|
| 965,931 |
|
|
| 971,371 |
|
|
| (5,440 | ) |
|
| (0.6 | )% |
Stock compensation expense |
|
| 674,000 |
|
|
| - |
|
|
| 674,000 |
|
|
| 100.0 | % |
Amortization of deferred stock compensation |
|
| 58,653 |
|
|
| - |
|
|
| 58,653 |
|
|
| 100.0 | % |
Total operating expenses |
|
| 1,970,077 |
|
|
| 1,042,705 |
|
|
| 927,372 |
|
|
| 88.9 | % |
Loss from operations |
|
| (1,997,746 | ) |
|
| (576,130 | ) |
|
| (1,421,616 | ) |
|
| 246.8 | % |
Other income (expense), net |
|
| 51,095 |
|
|
| (426,769 | ) |
|
| 477,864 |
|
|
| (112.0 | )% |
Provision for income taxes |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - | % |
Net loss |
| $ | (1,946,651 | ) |
| $ | (1,002,899 | ) |
| $ | 943,752 |
|
|
| 94.1 | % |
Total sales decreased by approximately $339,000, or 57.6%, from approximately $590,000 in the nine months ended September 30, 2017 to approximately $250,000 in the nine months ended September 30, 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 nine months ended September 30, 2018, the market for Auxi, Capsule of Beauty, Hepatica and Dibeier Granules & Oral started to become saturated. 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 has decreased significantly during the nine months ended September 30, 2018 as compared to the same period in 2017.
The cost of sales increased by approximately $155,000, or 125.6%, from approximately $123,000 in the nine months ended September 30, 2017 to approximately $278,000 in the nine months ended September 30, 2018. For the nine months ended September 30, 2018, we have wrote down approximately $7,000 of our Dibeier Granules & Oral products, for which we experienced some issues during the shipping process with abnormal temperature condition that led to us disposing them. We do not expect to incur such cost going forward as we are fully aware of this situation and to ensure such issues will not recur going forward. In addition, we incurred approximately $179,000 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 nine months ended September 30, 2018 as compared to the same period in 2017.
Our overall gross margin (loss) percentage decreased from approximately 79.1% in the nine months ended September 30, 2017 to approximately (11.1)% in the nine months ended September 30, 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 79.1% in the nine months ended September 30, 2017 to approximately 64.1% in the nine months ended September 30, 2018. For the nine months ended September 30, 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 nine months ended September 30, 2017. As a result, our product sales gross margin percentage decreased significantly during the nine months ended September 30, 2018 as compared to the same period in 2017.
Selling expenses increased from approximately $71,000 in the nine months ended September 30, 2017 to approximately $271,000 in the nine months ended September 30, 2018. The increase of approximately $200,000, or 280.6%, was mainly due to the increase of approximately $157,000 of marketing expenses relating to a conference we held in Hong Kong to promote our products in March 2018, other marking expenses of approximately $25,000 as we are trying to expand our sales channels, as well as approximately $54,000 in promotion 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 $5,000 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 nine months ended September 30, 2017, which we did not incur again during the nine months ended September 30, 2018.
General and administrative (“G&A”) expenses decreased by approximately $5,000 from approximately $971,000 in the nine months ended September 30, 2017 to approximately $966,000 in the nine months ended September 30, 2018. General and administrative expenses decreased mainly due to the decrease in professional expenses of approximately $193,000, mostly due to lower professional expenses from our attorneys, auditors and consultants during the nine months ended September 30, 2018 as we completed our outstanding periodic filings with the SEC and became current as of May 2017. The decrease was partially offset by the increase of approximately $78,000 related to various other miscellaneous G&A expenses in our Nevada factory, the increase of approximately $9,000 for computer and internet expenses, the increase of approximately in $19,000 in payroll and payroll tax expense, the increase of approximately $7,000 in travel expense, the increase of approximately $40,000 related to various other miscellaneous G&A expenses in our headquarter office, and an increase of bad debt provision of approximately $35,000. As a result, our operating expenses decreased during the nine months ended September 30, 2018 as compared to the same period in 2017.
Stock compensation expense increased by $674,000 during the nine months ended September 30, 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 nine months ended months ended September 30, 2018, and comparatively we did not incur any stock compensation expenses for the same period in 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 nine months ended months ended September 30, 2018, and we did not incur any stock compensation expenses for the same period in 2017. As a result, we incurred $674,000 stock compensation expense for the nine months ended September 30, 2018.
Amortization of deferred stock compensation increased by approximately $59,000 in the nine months ended September 30, 2018 compared to the same period in 2017 of which $55,000 related to the amortization of the value of 2,300,000 shares of restricted share of common stock to our three employees, which 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 nine months ended September 30, 2018 to two financial advisors to provide certain financial advisory services for a period of six months and amortized such cost of approximately $4,000. We did not incur any amortization of deferred stock compensation for the same period in 2017.
Other income increased by approximately $478,000$181,000 from approximately $427,000 of other expense in the nine months ended September 30, 2017 to approximately $51,000 of other income in the nine months ended September 30, 2018 to approximately $232,000 of other income in the nine months ended September 30, 2019, mainly due to approximately $372,000$241,000 of loss in change ingain on debt settlement which we issued stock with a fair value of our Warrant Recession Liability – Type B warrantsapproximately $763,000 in exchange for the settlement of debt of approximately $1.0 million during the nine months ended September 30, 2017 and2019. In addition, during the nine months ended September 30, 2019, we generated approximately $106,000$11,000 from sales of our sample products. We did not enter into such transactions during the same period in 2018. During the nine months ended September 30, 2018, we had approximately $105,000 of fees charged to our shareholders in assisting them to obtain electronic stock certificates and lab testing fees charged to our customers during the nine months ended September 30, 2018.certificates.
Net loss from operations increaseddecreased by approximately $944,000$1.9 million from approximately $1.0$2.0 million in the nine months ended September 30, 20172018 to approximately $1.9 million$1,000 in the nine months ended September 30, 20182019 mainly due to the reasons discussed above.
Liquidity and Capital Resources
As of September 30, 2018,2019, we had a cash balance of approximately $3,000,$745,000, compared to a cash balance of approximately $5,000$296,000 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 commitmentassociated with the manufacture of $1.0 million,dietary supplements, the Company does not have significant cash commitments. Cash requirements include cash needed for purchase of inventory, payroll, payroll taxes, rent, and other operating expenses. However, in response to the reduced liquidity factors described above, the Company has continued to find ways to reduce its operating expenses. In addition, should our Company need additional capital, our principal shareholder and Chief Executive and Financial Officer may lend additional money to the Company from time to time to the extent he is in a position and willing to do so. No assurance can be provided that he will continue to lend funds to the Company in the future.
Management has concluded under accounting principles generally accepted in the United States of AmericaU.S. GAAP that there is substantial doubt about our ability to continue as a going concern as a result of our lack of significant revenue and working capital. If we are unable to generate significant revenue or secure financing, we may be required to cease or limit our operations. Our financial statements do not include adjustments that might result from the outcome of this uncertainty.
For the nine months ended September 30, 2018,2019, cash used in operating activities amounted to approximately $1.1 million as compared to approximately $432,000$1.1 million used in operating activities in the nine months ended September 30, 2017.same period in 2018. Cash used in operating activities for the nine months ended September 30, 20182019 mainly includesincluded non-cash transactions of approximately $1.9 million net loss,$241,000 from gain on debt settlement, the increase of accounts receivable of approximately $65,000 as we have incurred some credit sales from our packing and OEM business, the increase of inventory of approximately $116,000 as we had started production in almost full capacity during the nine months ended September 30, 2019 and stocked up our inventory at September 30, 2019, the increase of deposits and other assets of $15,000 as we deposited for the leasing of our office which we started leasing in March 2019, the decrease of deferred revenue of approximately $88,000.$1.4 million from shipping our backlog orders of Auxia and Cell Power products for which our members had previously paid, and the decrease of lease liability of approximately $71,000 as we paid off our lease obligations that were undertaken in March 2019. This amount was partially offset by the decrease of inventoriesnon-cash expense of approximately $643,000 in stock based compensation, approximately $44,000 of depreciation expenses, approximately $67,000 in amortization of a lease right-of-use asset, approximately $24,000 of bad debt expense, the decrease of prepaid expenses of approximately $9,000,$34,000, and the increase of accounts payable and accrued expenses of approximately $29,000, the non-cash expense of $121,000 of depreciation and amortization, the non-cash expense of approximately $679,000 in stock based compensation, the non-cash expense of amortization of deferred stock compensation, and approximately $35,000 in bad debt expense.$56,000, as we were behind on our payment schedule.
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For the nine months ended September 30, 2018,2019, financing activities provided approximately $1.1$1.5 million as compared to approximately $433,000$1.1 million during the nine months ended September 30, 2017.2018. Net cash received in the nine months ended September 30, 20182019 includes approximately $1.5 million$89,000 from the salecollection of our common stock through several private placements and the stock subscription receivable, from prior period issuance of common stock, and approximately $84,000$193,000 from a loan from our principal shareholder and Chief Executive and Financial Officer.Officer, and approximately $1.5 million from third party loans we received in 2019. These amounts were partially offset by our repayment of principal amounts on various loans of approximately $474,000,$300,000, of which approximately $215,000$283,000 was paidrepaid to our principal shareholder and Chief Executive and Financial Officer, and approximately $249,000$20,000 was paid to the unaffiliated third parties, and approximately $10,000 was paid on our bank loan.parties.
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 7 and Note 8 of the accompanying notes to unaudited condensed financial statements.
Item 3. Quantitative and Qualitative Disclosures Aboutabout Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company has established disclosure controls and procedures to ensure that information required to be disclosed in this quarterly report on Form 10-Q was properly recorded, processed, summarized and reported within the time periods specified in the Commission’sCommission's rules and forms. The Company’s controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers to allow timely decisions regarding required disclosure.
We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) at September 30, 20182019 based on the evaluation of these controls and procedures required by paragraph (b) of Rule 13a-15 or Rule 15d-15 under the Exchange Act. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer/Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer/Chief Financial Officer concluded that, at September 30, 2018,2019, our disclosure controls and procedures are not effective due to the following material weakness that we have identified:
1. Lack of Accounting and Finance Expertise in U.S. GAAP – Our current number of accounting staff is relatively small, and we lack sufficient accounting personnel withdo not have the appropriate levelrequired infrastructure of knowledge, experience and training inmeeting the higher demands of being a U.S. GAAP and SEC reporting requirements.public company. This material weakness also relates to a lack of personnel with expertise in preparing financial statements in accordance with U.S. GAAP.
We have taken certain actions to remediate the material weakness related to our lack of U.S. GAAP experience. We have engaged an outside CPA with U.S. GAAP knowledge and SEC reporting experience to supplement our current internal accounting personnel and assist us in the preparation of our financial statements to ensure that our financial statements are prepared in accordance with U.S. GAAP.
The Company’s operations are relatively small and uncomplicated, and as our operations grow and become more complex, we intend to hire additional personnel in financial reporting and other areas. However, there can be no assurance of when, if ever, we will be able to remediate the identified material weaknesses.
Changes in Internal Controls over Financial Reporting
Except as disclosed above, there have been no changes in the Company’sCompany's internal controls over financial reporting that occurred during the Company’sCompany's last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’sCompany's internal controls over financial reporting.
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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.
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During the nine months ended September 30, 2018, the Company issued an aggregateItem 2.Unregistered Sales of 55,388 sharesEquity Securities and Use of Common Stock to various unrelated third-party individuals as compensation for introducing private placement investors to the Company and which led to successfully raised capital. Such issuances were made on the following dates in the following amounts:Proceeds
The above issuances were completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.
None.
Not applicable.
Not applicable.
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(a) Exhibits.
The following exhibits are filed herewith and this list is intended to constitute the exhibit index.
Exhibit No. | Document Description | ||
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Exhibit 101 | Interactive data files formatted in XBRL (eXtensible Business Reporting Language): (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Cash Flows, and (iv) the Notes to the Financial Statements. | ||
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101.INS | XBRL Instance Document | ||
101.SCH | XBRL Taxonomy Extension Schema Document | ||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
* This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 of the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings. |
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In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Merion, Inc.
Title | Name | Date | Signature | |||
President, CEO and CFO | Ding Hua Wang | November | /s/ Ding Hua Wang |
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE | NAME | TITLE | DATE | |||
/s/ Ding Hua Wang | Ding Hua Wang | President, Chief Executive Officer, | November | |||
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| Principal Financial and | ||
Principal Accounting Officer, Director |
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