UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

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

 

For the quarterly period ended June 30, 2018

 

o

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

 

For the transition period from _____________ to _____________

 

Commission file number 333-173681

 

Merion, Inc.

(Name of small business issuer in its charter)

 

Nevada

 

5122

 

45-289-8504

(State or Other Jurisdiction of

 

(Primary Standard Industrial

 

(I.R.S. Employer

Incorporation or Organization)

 

Classification Code Number)

 

Identification No.)

 

9550 Flair Dr., Suite 302, El Monte CA

 

91731

(Address of principal executive offices)

 

(Zip Code)

 

9550 Flair Dr, Suite 302

El Monte CA 91731

(626) 448-3737

(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). Yes x 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. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange 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 ¨

 

As of August 10, 2018, there were 174,697,628 issued and outstanding shares of the registrant’s common stock.

 

 
 
 
 

 

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

 3

Item 2.

Management’s Discussion and Analysis or Plan of Operation

20

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

27

Item 4.

Controls and Procedures

27

 

PART II — OTHER INFORMATION

 

Item 1.

Legal Proceedings

28

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28

Item 3.

Defaults Upon Senior Securities

28

Item 4.

Mine Safety Disclosures

28

Item 5.

Other Information

28

Item 6.

Exhibits

29

 

 
2
 
Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

MERION, INC.

 

 

 

 

 

 

CONDENSED BALANCE SHEETS

 

 

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(UNAUDITED)

 

 

 

ASSETS

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

Cash

 

$ 25,859

 

 

$ 5,038

 

Accounts receivable, net

 

 

23,418

 

 

 

50,864

 

Inventories

 

 

63,465

 

 

 

80,769

 

Prepaid expenses

 

 

42,467

 

 

 

29,068

 

TOTAL CURRENT ASSETS

 

 

155,209

 

 

 

165,739

 

 

 

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT, net

 

 

425,193

 

 

 

41,249

 

INTANGIBLE ASSETS, net

 

 

855,000

 

 

 

-

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$ 1,435,402

 

 

$ 206,988

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$ 1,218,997

 

 

$ 297,164

 

Deferred revenue

 

 

1,482,333

 

 

 

1,610,236

 

Accrued bonus

 

 

679,800

 

 

 

679,800

 

Due to shareholder, interest bearing

 

 

471,603

 

 

 

-

 

Due to shareholder, non-interest bearing

 

 

2,642,237

 

 

 

2,790,946

 

Advances from related parties, interest bearing

 

 

30,000

 

 

 

30,000

 

Advances from related parties, non-interest bearing

 

 

518,839

 

 

 

518,839

 

Due to employee

 

 

95,000

 

 

 

95,000

 

Due to third parties, interest bearing

 

 

109,030

 

 

 

109,030

 

Due to third parties, non-interest bearing

 

 

129,857

 

 

 

729,175

 

Current portion of long term debt

 

 

12,112

 

 

 

11,933

 

TOTAL CURRENT LIABILITIES

 

 

7,389,808

 

 

 

6,872,123

 

 

 

 

 

 

 

 

 

 

NON-CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Long term debt

 

 

6,748

 

 

 

13,395

 

Due to shareholder, interest bearing

 

 

-

 

 

 

471,603

 

TOTAL NON-CURRENT LIABILITIES

 

 

6,748

 

 

 

484,998

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

 

7,396,556

 

 

 

7,357,121

 

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' DEFICIT:

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

172,172,028 and 169,161,896 shares issued and outstanding,

 

 

 

 

 

 

 

 

as of June 30, 2018 and December 31, 2017, respectively

 

 

172,172

 

 

 

169,162

 

Stock subscription receivable

 

 

-

 

 

 

(123,455 )

Additional paid-in capital

 

 

14,298,896

 

 

 

11,870,808

 

Accumulated deficit

 

 

(20,432,222 )

 

 

(19,066,648 )

TOTAL SHAREHOLDERS' DEFICIT

 

 

(5,961,154 )

 

 

(7,150,133 )

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT

 

$ 1,435,402

 

 

$ 206,988

 

 

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

 

 
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MERION, INC.

 

 

 

 

 

 

 

 

 

 

 

 

 

CONDENSED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2018 AND 2017

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

SALES

 

 

 

 

 

 

 

 

 

 

 

 

Product Sales

 

$ 130,946

 

 

$ 87,501

 

 

$ 160,129

 

 

$ 119,997

 

OEM

 

 

15,963

 

 

 

-

 

 

 

51,488

 

 

 

-

 

TOTAL SALES

 

 

146,909

 

 

 

87,501

 

 

 

211,617

 

 

 

119,997

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COST OF SALES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product Sales

 

 

22,027

 

 

 

33,761

 

 

 

36,791

 

 

 

39,493

 

OEM

 

 

3,615

 

 

 

-

 

 

 

16,029

 

 

 

-

 

TOTAL COST OF SALES

 

 

25,642

 

 

 

33,761

 

 

 

52,820

 

 

 

39,493

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

 

121,267

 

 

 

53,740

 

 

 

158,797

 

 

 

80,504

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling expenses

 

 

25,915

 

 

 

52,220

 

 

 

257,816

 

 

 

57,204

 

General and administrative expenses

 

 

387,705

 

 

 

280,283

 

 

 

808,340

 

 

 

666,143

 

Stock compensation expense

 

 

44,000

 

 

 

-

 

 

 

524,000

 

 

 

-

 

Total operating expenses

 

 

457,620

 

 

 

332,503

 

 

 

1,590,156

 

 

 

723,347

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LOSS FROM OPERATIONS

 

 

(336,353 )

 

 

(278,763 )

 

 

(1,431,359 )

 

 

(642,843 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE), net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

 

28,764

 

 

 

-

 

 

 

102,083

 

 

 

-

 

Finance expenses

 

 

(18,221 )

 

 

(18,198 )

 

 

(36,298 )

 

 

(36,047 )

Total other income (expense), net

 

 

10,543

 

 

 

(18,198 )

 

 

65,785

 

 

 

(36,047 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LOSS BEFORE INCOME TAXES

 

 

(325,810 )

 

 

(296,961 )

 

 

(1,365,574 )

 

 

(678,890 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET LOSS

 

$ (325,810 )

 

$ (296,961 )

 

$ (1,365,574 )

 

$ (678,890 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF COMMON SHARES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

171,610,812

 

 

 

142,828,993

 

 

 

170,631,039

 

 

 

142,828,993

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LOSS PER SHARE - BASIC & DILUTED

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$ 0.00

 

 

$ 0.00

 

 

$ (0.01 )

 

$ 0.00

 

 

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

 

 
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MERION, INC.

 

 

 

 

 

CONDENSED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

(UNAUDITED)

 

 

 

 

 

 

 

For the Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

Net loss

 

$ (1,365,574 )

 

$ (678,890 )

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

81,056

 

 

 

16,001

 

Stock based compensation

 

 

524,000

 

 

 

-

 

Bad debt expense

 

 

23,418

 

 

 

-

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

4,028

 

 

 

77,931

 

Inventories

 

 

17,304

 

 

 

(1,950 )

Prepaid expenses

 

 

(13,399 )

 

 

(129,212 )

Accounts payable and accrued expenses

 

 

(78,167 )

 

 

(42,163 )

Deferred revenue

 

 

(127,903 )

 

 

392,699

 

Accrued bonus

 

 

-

 

 

 

(1,376 )

Net Cash Used in Operating Activities

 

 

(935,237 )

 

 

(366,960 )

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

1,350,553

 

 

 

-

 

Advances from shareholder, non-interest bearing

 

 

62,316

 

 

 

22,737

 

Repayment of shareholder loan, non-interest bearing

 

 

(211,025 )

 

 

(61,705 )

Repayment of advances from related parties, interest bearing

 

 

-

 

 

 

(15,000 )

Advances from third parties, non-interest bearing

 

 

-

 

 

 

440,000

 

Repayment of advances from third parties, non-interest bearing

 

 

(239,318 )

 

 

(10,000 )

Principal payments of debt

 

 

(6,468 )

 

 

(6,278 )

Net Cash Provided by Financing Activities

 

 

956,058

 

 

 

369,754

 

 

 

 

 

 

 

 

 

 

Net Change in Cash

 

 

20,821

 

 

 

2,794

 

 

 

 

 

 

 

 

 

 

Cash, beginning of period

 

 

5,038

 

 

 

2,054

 

 

 

 

 

 

 

 

 

 

Cash, end of period

 

$ 25,859

 

 

$ 4,848

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$ 31,566

 

 

$ 31,524

 

Cash paid for income tax

 

$ -

 

 

$ -

 

 

 

 

 

 

 

 

 

 

Non-cash transactions of investing and operating activities

 

 

 

 

 

 

 

 

Purchase of machinery and intangible assets - Unpaid

 

$ 1,000,000

 

 

$ -

 

Stock issued for purchase of machinery and intangible assets

 

$ 320,000

 

 

$ -

 

Stock issued for debt settlement

 

$ 360,000

 

 

$ -

 

 

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

 

 
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MERION, INC.

 

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

Note 1 – Organization

 

Merion, Inc. (the “Company”), a Nevada corporation, was formed on February 4, 2011. Its predecessor, E-World USA Holding, Inc., was a California company incorporated in 2007 (“E-World CA”). In April 2011, E-World CA entered into a merger agreement with its wholly-owned subsidiary, E-World USA Holding, Inc., a Nevada corporation (“E-World NV”) that was the survivor of the merger and became the Company. Under the Merger Agreement, the Company issued 90,000,000 shares of its common stock on a one 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 is an asset purchase in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) section. 805-10-55.

 

The Seller was one of our major suppliers during the years ended December 31, 2017 and 2016. 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 supplements manufacturing standards, including FDA and GMP compliance and cGMP regulations. In addition to manufacturing the nutritional supplements that it sells, the Company also anticipates starting production of hard capsules, tablets, solid beverage (sachet packaging), teabags, powder, granules, dietary supplement export, softgel capsules and healthy food from these assets for any potential new customers who need these products, similar to Original Equipment Manufacturer (“OEM”) business. In May 2018, the Company began manufacturing some of the nutritional supplements that it sells.

 

Note 2 – Going Concern

 

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 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, filed with the Securities and Exchange Commission on March 20, 2018.

 

 
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Use of Estimates

 

The preparation of financial statements in conformity with 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. Actual results could differ from those estimates.

 

Enterprise wide disclosure

 

The Company’s chief operating decision-makers (i.e. chief executive officer and her direct reports) review financial information presented on a consolidated basis, accompanied by disaggregated information about revenues by business lines (Product sales and OEM 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:

 

 

 

June 30,

2018

 

 

December 31,

2017

 

 

 

(Unaudited)

 

 

 

Accounts receivable

 

$ 90,112

 

 

$ 94,140

 

Allowance for doubtful accounts

 

 

(66,694 )

 

 

(43,276 )

Accounts receivable, net

 

$ 23,418

 

 

$ 50,864

 

 

Movement of allowance for doubtful accounts is as follows:

 

 

 

Six months

ended

June 30, 2018

 

 

Year ended December 31,

2017

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$ 43,276

 

 

$ 25,236

 

Provision for doubtful accounts

 

 

23,418

 

 

 

18,040

 

Ending balance

 

$ 66,694

 

 

$ 43,276

 

 
 
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Inventories

 

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

 

Property and Equipment, net

 

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

 

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

Machinery

 

10 years

 

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

 

Intangible Assets, net

 

Intangible assets represent the technological know-how associated with the machinery that the Company purchased. 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 lives 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. The Company also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives.

 

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 flows approach or, when available and appropriate, to comparable market values. As of June 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.

 

 
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Accrued Bonus

 

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

 

Fair Value of Financial Instruments

 

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

 

As defined in ASC 820 Fair Value Measurement , fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes the market data of similar entities in its industry or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. 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.

 

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

 

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

 

The Company also recognizes revenue on shipping and handling fees charged to the Company’s customers. Shipping and handling fee revenue is recognized when products have been delivered at a point in time. Shipping and handling fee revenues totaled $703 and $1,137 for the three months ended June 30, 2018 and 2017, respectively, and totaled $3,163 and $2,205 for the six months ended June 30, 2018 and 2017, respectively.

 

Product returns are allowed for unopened products purchased under regular sales terms within 60 days. Allowances for product returns are provided at the time the sale is recorded using historic return rates for each country and the relevant return pattern. Historically the Company has a nearly zero return rate. Hence, the allowance as of June 30, 2018 and December 31, 2017 is estimated at $0.

 

In addition to the Company’s 60-day return policy, the Company, at its discretion, may accept a customer’s application for a buy-back of products previously sold within one year at 90% of the original product’s cost less commissions and shipping costs. The Company implemented its buy-back policy on January 1, 2012. To date, the Company has not received any buy-back applications. As a result, no allowance for buy-backs has been recorded as of June 30, 2018 and December 31, 2017.

 

The majority of the Company’s product sales are generated from China. Product sales generated from other countries or within the United States are immaterial to our financial statements. Currently, all of the Company’s OEM 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 $11,072 and $8,257 for the three months ended June 30, 2018 and 2017, respectively, and totaled $15,898 and $10,857 for the six months ended June 30, 2018 and 2017, respectively.

 

Income Taxes

 

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

 

 
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Basic and Diluted Earnings (Loss) Per Share

 

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.

 

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 no uninsured balances at June 30, 2018.

 

- Major Customers and Suppliers

 

For the three months ended June 30, 2018, one customer accounted for approximately 71% of the Company’s sales and for the three months ended June 30, 2017, one customer accounted for approximately 87% of the Company’s sales.

 

For the six months ended June 30, 2018, two customers accounted for approximately 60% of the Company’s sales and for the six months ended June 30, 2017, two customers accounted for approximately 75% of the Company’s sales.

 

For the three months ended June 30, 2018, three suppliers accounted for approximately 57% of the Company’s product purchases and for the three months ended June 30, 2017, two suppliers accounted for approximately 91% of the Company’s product purchases.

 

For the six months ended June 30, 2018, two suppliers accounted for approximately 40% of the Company’s product purchases and for the six months ended June 30, 2017, two suppliers accounted for approximately 91% 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 would have a material effect on the Company’s unaudited condensed consolidated financial statements.

 

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

 

Note 4 – Inventories

 

Inventories consist of raw materials for production and finished goods available for resale, and can be categorized as:

 

 

 

June 30,

2018

 

 

December 31,

2017

 

Raw materials

 

$ 22,761

 

 

$ -

 

Work-in-progress

 

 

2,218

 

 

 

-

 

Finished goods

 

 

38,486

 

 

 

80,769

 

Inventories

 

$ 63,465

 

 

$ 80,769

 

 

Note 5 – Property and Equipment

 

Property and equipment consist of following:

 

 

 

June 30,

2018

 

 

December 31,

2017

 

Computer equipment and software

 

$ 114,953

 

 

$ 114,953

 

Furniture and fixtures

 

 

26,686

 

 

 

26,686

 

Automobiles

 

 

179,677

 

 

 

179,677

 

Leasehold improvement

 

 

40,053

 

 

 

40,053

 

Machinery

 

 

420,000

 

 

 

-

 

Total

 

 

781,369

 

 

 

361,369

 

Accumulated depreciation and amortization

 

 

(356,176 )

 

 

(320,120 )

Property and equipment, net

 

$ 425,193

 

 

$ 41,249

 

 

 
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Depreciation expense totaled $17,727 and $7,971 for the three months ended June 30, 2018 and 2017, respectively.

 

Depreciation expense totaled $36,056 and $16,001 for the six months ended June 30, 2018 and 2017, respectively.

 

Note 6 – Intangible Assets

 

Intangible assets consist of following:

 

 

 

June 30,

2018

 

 

December 31,

2017

 

Technological know-hows

 

$ 900,000

 

 

$ -

 

Total

 

 

900,000

 

 

 

-

 

Accumulated amortization

 

 

(45,000 )

 

 

-

 

Intangible Assets, net

 

$ 855,000

 

 

$ -

 

 

Amortization expense totaled $22,500 and $0 for the three months ended June 30, 2018 and 2017, respectively.

 

Amortization expense totaled $45,000 and $0 for the six months ended June 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 rate of 6%, are unsecured, and are due on demand. As of each of June 30, 2018 and December 31, 2017, the Company owed $109,030 to these third parties.

 

Interest expense for the three months ended June 30, 2018 and 2017 for the above loans amounted to $1,631 and $1,631, respectively.

 

Interest expense for the six months ended June 30, 2018 and 2017 for the above loans amounted to $3,244 and $3,035, respectively.

 

Due to third parties, non-interest bearing

 

The Company has borrowed money from third parties to fund operations. These third parties consist of the Chief Executive and Financial Officer’s friends and a former board member of the Company. These advances do not bear interest, are unsecured, and are due on demand. As of June 30, 2018 and December 31, 2017, the Company owed $129,857 and $729,175 to these third parties, respectively.

 

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 six months ended June 30, 2018 and 2017, the Company paid principal of $6,468 and $6,278, respectively, for the loan.

 

 
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Future maturities of long term debt are as follows:

 

Six months ended December 31, 2018

 

$ 5,464

 

Year ended December 31, 2019

 

 

13,396

 

Total

 

 

18,860

 

Current portion of long term debt

 

 

(12,112 )

Long term debt

 

$ 6,748

 

 

Interest expense for the three months ended June 30, 2018 and 2017 for the above loan amounted to $166 and $261, respectively.

 

Interest expense for the six months ended June 30, 2018 and 2017 for the above loan amounted to $355 and $544, respectively.

 

Note 8 – 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 of this loan on Mr. Wang’s behalf. This loan has an annual borrowing rate of 9.99%. During the year ended December 31, 2017, advances totaled $471,603. As of June 30, 2018 and December 31, 2017, the balance due to Mr. Wang, interest bearing, amounted to $471,603. The full balance of $471,603 is to be repaid on February 1, 2019.

 

Interest expense for the three months ended June 30, 2018 and 2017 for the above loan amounted to $12,487.

 

Interest expense for the six months ended June 30, 2018 and 2017 for the above loan amounted to $24,975.

 

Due to shareholder, non-interest bearing

 

From time to time, Mr. Dinghua Wang, a major shareholder, director, Chief Executive and Financial Officer of the Company, advances monies to the Company and the Company repays such advances. Such business transactions are recorded as due to or from Mr. Wang at the time of the transaction. During the six months ended June 30, 2018 and 2017, advances totaled $62,316 and $22,737, respectively, and payments to Mr. Wang totaled $211,025 and $61,705, respectively. As of June 30, 2018 and December 31, 2017, the balance due to Mr. Wang, non-interest bearing, amounted to $2,642,237 and $2,790,946, respectively. This balance does not bear interest, is unsecured and is due on demand.

 

Due to employee

 

The Company has borrowed money from Vickie Ho, Executive Vice President of the Company, to fund operations. These advances do not bear interest, are unsecured and are due on demand. As of each of June 30, 2018 and December 31, 2017, the Company owed $95,000 to such employee.

 

Advances from related parties, interest bearing

 

The Company has borrowed $30,000 from a related party to fund operations since July 2016. This related party is the son of the Company’s Chief Executive and Financial Officer. These advances have an annual interest rate of 10%, are unsecured and are due on demand. No repayments have been made for both the six month periods ended June 30, 2018 and 2017, respectively. As of each of June 30, 2018 and December 31, 2017, the Company owed $30,000 to this related party.

 

Interest expense for the three months ended June 30, 2018 and 2017 for the above loans amounted to $748.

 

Interest expense for the six months ended June 30, 2018 and 2017 for the above loans amounted to $1,488.

 

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 June 30, 2018 and December 31, 2017, the Company owed $518,839 to these related parties.

 

 
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Note 9 – Income Taxes

 

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the three months ended June 30, 2018 and 2017:

 

 

 

Three months ended June 30,

2018

 

 

Three months ended June 30,

2017

 

 

Six months ended June 30,

2018

 

 

Six months ended June 30,

2017

 

Federal statutory rate

 

 

21.0 %

 

 

34.0 %

 

 

21.0 %

 

 

34.0 %

State statutory rate

 

 

7.0 %

 

 

8.8 %

 

 

7.0 %

 

 

8.8 %

Valuation allowance

 

 

(15.0 )%

 

 

(42.7 )%

 

 

(17.1 )%

 

 

(42.7 )%

Permanent difference *

 

 

(13.0 )%

 

 

(0.1 )%

 

 

(10.9 )%

 

 

(0.1 )%

Effective tax rate

 

 

0.0 %

 

 

0.0 %

 

 

0.0 %

 

 

0.0 %

 

*Represents 50% of meal and entertainment expenses and stock compensation expense that are not deductible in the Company’s U.S. tax returns.

 

The Company uses the liability method, where deferred tax assets and liabilities are determined based on the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes. The cumulative net operating loss carryforwards that may be applied against future taxable income is approximately $7,225,000 for Federal income taxes and $6,177,000 for California income taxes as of June 30, 2018. The cumulative net operating loss carryforward that may be applied against future taxable income is approximately $6,386,000 for Federal and is approximately $5,338,000 for California as of December 31, 2017, and will expire in the years 2031 to 2037. During the six months ended June 30, 2018 and 2017, the Company incurred net losses. As deferred tax assets may not be fully realizable due to potential recurring losses, management has provided 100% valuation allowance for the deferred tax assets.

 

On December 22, 2017, the “Tax Cuts and Jobs Act” (“The Act”) was enacted. Under the provisions of the Act, the U.S. corporate tax rate decreased from 34% to 21% beginning in 2018. Accordingly, we have re-measured our deferred tax assets as of December 31, 2017. However, this re-measurement had no effect on the Company’s income tax expense as the Company provides a 100% valuation allowance on its deferred tax assets.

 

The components of the deferred tax assets is as follows:

 

 

 

June 30,

2018

 

 

December 31,

2017

 

Allowance for doubtful accounts

 

$ 18,663

 

 

$ 12,110

 

Net operating loss

 

 

1,930,060

 

 

 

1,701,704

 

Deferred tax assets

 

 

1,948,724

 

 

 

1,713,814

 

Valuation allowance

 

 

(1,948,724 )

 

 

(1,713,814 )

Deferred tax assets, net

 

$ -

 

 

$ -

 

 

Changes in the value allowance for deferred tax assets increased by $234,910 from $1,713,814 at December 31, 2017 to $1,948,724 at June 30, 2018.

 

As of June 30, 2018, federal tax returns filed for 2015 and 2016 remain subject to examination by the taxing authorities. As of June 30, 2018, California tax returns filed for 2014, 2015, and 2016 remain subject to examination by the taxing authorities. As of June 30, 2018, the Company’s federal and California income tax returns for 2017 have not been filed.

 

 
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Note 10 – Commitments

 

Operating lease

 

The Company has contracted to rent office and warehouse space for its main corporate office through October 2018 and thereafter on a month-to-month basis without future commitment. In addition, the Company has contracted to rent a factory in Nevada on a month-to-month basis with a two-month notice before termination. The Company’s commitment for minimum lease payments under these operating leases as of June 30, 2018 for the following periods is as follow:

 

Six months ending December 31, 2018

 

$ 12,400

 

 

The Company incurred rent expense of $22,318 and $12,400 for the three months ended June 30, 2018 and 2017, respectively.

 

The Company incurred rent expense of $41,974 and $21,400 for the six months ended June 30, 2018 and 2017, respectively.

 

Note 11 – Equity

 

Share Distribution Plan

 

On June 30, 2017, the Company’s Board of Directors approved the following share distribution plans for the Company in accordance with appropriate time frames consistent with applicable law and in the best interests of the Company.

 

1) The Company would grant up to thirty million shares of common 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 to develop its international market. In connection with this transaction, Mr. Wang would voluntarily relinquish up to thirty million shares of common stock owned by him to the Company’s Treasury, and thereafter the Company would issue to persons not citizens or residents of the U.S. only an equal number of shares pursuant to Regulation S under the Securities Act of 1933. Accordingly, special legends regarding restrictions on resale of the securities and no-hedging transactions would need to be included on the securities.

 

On July 15, 2017, the Company’s Board of Directors approved the Company’s withdrawal from plan (1), as the Board has determined that it is in the best interests of the Company and its shareholders that Mr. Wang distribute these shares directly to the intended recipients. 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. 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. The fair value of these shares were valued at $480,000 and recorded as stock-based compensation expenses in the Company’s six months ended June 30, 2018 consolidated statements of operations.

 

2) To thank the people 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, the Company would grant up to five million shares of common stock to these individuals upon approval by the Board of Directors, and the Company would complete the stock transfer. In connection with this transaction, Mr. Wang would voluntarily relinquish up to five million shares of common stock owned by him to the Company’s Treasury. To the extent that these share distributions are being made to anyone outside of the U.S., those distributions will be made under Regulation S and must contain appropriate Regulation S subscription agreements and legends. If anyone within U.S. is to receive those shares, the Company must consult with the Company counsel to comply with U.S. securities laws.

 

On July 28, 2017, the Company’s Board of Directors approved the Company’s withdrawal from plan (2) , as the Board has determined that it is in the best interests of the Company and its shareholders that Mr. Wang distribute these shares directly to the intended recipients. 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 its financial difficulties.

 

 
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3) The Company can grant up to twenty million shares (from authorized but unissued shares of its 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 will be implemented solely for persons outside of the United States pursuant to Regulation S under the Securities Act of 1933. No shares have been issued as of the date of this report.

 

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

 

During the six months ended June 30, 2018, the Company issued an aggregate of 46,668 shares of Common Stock to various unrelated third-party individuals for 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 $42,001, which was determined by using the associated private placement purchase price of $0.90 per share. The value of the shares was accounted for as a reduction of additional paid-in capital because the issuances were made as compensation for financing-related services in connection with the Company’s 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.

 

Purchase of assets

 

On January 1, 2018, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with SUSS Technology Corporation, a Nevada corporation (the “Seller”), pursuant to which the Seller agreed to sell to the Company substantially all of the assets associated with the Seller’s manufacture of dietary supplements (the “Asset Sale”) for an aggregate purchase price (the “Purchase Price”) of $1,000,000 and 1,000,000 shares of the Company’s common stock (the “Purchase Shares”) valued at $320,000. The Seller’s cash and cash equivalents, minute books, stock ledger and other company records, as well as raw materials and customer lists remained with the Seller, and the Company assumed the Seller’s obligations under a lease of real property used in the Seller’s business.

 

 
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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 shall occur in two distributions: (i) the first, in the amount of $600,000, shall occur within six months of the date of the Purchase Agreement, and (ii) the second, in the amount of $400,000, shall 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 first installment payment of $600,000 was extended to December 31, 2018.

 

Common stock to be issued for consulting services

 

On November 9, 2017, the Company entered into a Planning and Establishing Services Agreement (the “Agreement”) with Fuzhou Wingo Brand Management LTD., a company incorporated in China (the “Consultant”), pursuant to which the Company engaged the Consultant to provide certain research and strategic planning services and to introduce investors to the Company (the “Services”). As compensation for the Services, the Company agreed to pay the Consultant RMB 50,000 (approximately $7,541) and issue to the Consultant 500,000 shares of its common stock, par value $0.001 (the “Shares”), in two installments. The first installment of 200,000 Shares was to be issued within twenty (20) days of the delivery of a report and investment strategy to the Company, and the second installment of 300,000 Shares shall be delivered following the completion of an investment of at least $3,000,000 in proceeds to the Company. The term of the Agreement for providing the investment strategy report is three months and can 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. The valuation of these shares are valued at $44,000, determined using the closing price of the Company’s common stock on November 9, 2017 of $0.22 per share. The Company’s obligation to issue the second installment of 300,000 Shares shall remain effective indefinitely until the completion of an investment of at least $3,000,000 in proceeds to the Company and the issuance of such Shares.

 

Debt repayment

 

On May 1, 2018, the Company entered into a Debt Repayment Agreement (the “Repayment Agreement”) with certain creditors of the Company (the “Creditors”), pursuant to which the Company agreed to repay $360,000 debt owed to the Creditors in the form of 400,000 shares of Company’s common stock at a debt conversion rate of $0.90 per share (the “Debt Repayment”), which was determined by using the latest private placement purchase price of $0.90 per share. As a result, there was no gain/loss on being recorded in these transactions. The Debt Repayment was completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.

 

Note 12 – Subsequent Events

 

Common stocks issued on consulting services

 

On July 1, 2018, the Company entered into an Investor Relations Agreement with an investor relation 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 NYSE or NASDAQ.

 

Issuance of restricted common stocks

 

On July 13, 2018, the Board of Directors of the Company approved the grant of 2,300,000 restricted stock units (the “RSUs”) to three employees of the Company, pursuant to the Merion, Inc. 2018 Omnibus Equity Plan. Thirty percent of the RSUs will vest on July 13, 2019, 30% of the RSUs will vest on July 13, 2020, and the remaining 40% of the RSUs will vest on July 13, 2021, in each case based on the employees’ continued employment, in good standing, by the Company. The valuation of 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.

 

 
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Private placements

  

On August 9, 2018, Merion, Inc. (the “Company”), entered into a Securities Purchase Agreement (the “First Purchase Agreement”) with Guiqin Lu (the “First Purchaser”), pursuant to which the Company agreed to sell to the First Purchaser in a private placement 5,000 shares (the “Lu Shares”) of the Company’s common stock, par value $0.001 per share (the “Common Stock”), at a purchase price of $1.00 per Lu Share for an aggregate offering price of $5,000 (the “ First Private Placement ”). The First Private Placement will be completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.

 

On August 9, 2018, Merion, Inc. (the “Company”), entered into a Securities Purchase Agreement (the “Second Purchase Agreement”) with Lijun Zhang (the “Second Purchaser”), pursuant to which the Company agreed to sell to the Second Purchaser in a private placement 15,000 shares (the “Zhang Shares”) of the Company’s common stock, par value $0.001 per share (the “Common Stock”), at a purchase price of $1.00 per Zhang Share for an aggregate offering price of $15,000 (the “ Second Private Placement ”). The Second Private Placement will be completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.

 

On August 9, 2018, Merion, Inc. (the “Company”), entered into a Securities Purchase Agreement (the “Third Purchase Agreement”) with Chuntian Cheng (the “Third Purchaser”), pursuant to which the Company agreed to sell to the Third Purchaser in a private placement 20,000 shares (the “Cheng Shares”) of the Company’s common stock, par value $0.001 per share (the “Common Stock”), at a purchase price of $1.00 per Cheng Share for an aggregate offering price of $20,000 (the “ Third Private Placement ”). The Third Private Placement will be completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.

 

On August 9, 2018, Merion, Inc. (the “Company”), entered into a Securities Purchase Agreement (the “Fourth Purchase Agreement”) with Shuhua Wu (the “Fourth Purchaser”), pursuant to which the Company agreed to sell to the Fourth Purchaser in a private placement 20,000 shares (the “Wu Shares”) of the Company’s common stock, par value $0.001 per share (the “Common Stock”), at a purchase price of $1.00 per Wu Share for an aggregate offering price of $20,000 (the “ Fourth Private Placement ”). The Fourth Private Placement will be completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.

 

On August 9, 2018, Merion, Inc. (the “Company”), entered into a Securities Purchase Agreement (the “Fifth Purchase Agreement”) with Qin Sun (the “Fifth Purchaser”), pursuant to which the Company agreed to sell to the Fifth Purchaser in a private placement 10,000 shares (the “Sun Shares”) of the Company’s common stock, par value $0.001 per share (the “Common Stock”), at a purchase price of $1.00 per Sun Share for an aggregate offering price of $10,000 (the “ Fifth Private Placement ”). The Fifth Private Placement will be completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.

 

The representations, warranties and covenants contained in the First Purchase Agreement, Second Purchase Agreement, the Third Purchase Agreement, the Fourth Purchase Agreement and the Fifth Purchase Agreement (together, the “Agreements”) were made solely for the benefit of the parties to the Agreements. In addition, such representations, warranties and covenants (i) are intended as a way of allocating the risk between the parties to the Agreements and not as statements of fact, and (ii) may apply standards of materiality in a way that is different from what may be viewed as material by shareholders of, or other investors in, the Company. Accordingly, the Agreements are filed with this report only to provide investors with information regarding the terms of transactions, and not to provide investors with any other factual information regarding the Company. Shareholders should not rely on the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or condition of the Company. Moreover, information concerning the subject matter of the representations and warranties may change after the respective dates of the Agreements, which subsequent information may or may not be fully reflected in public disclosures.

 

Concurrently, the Company agreed to issue an aggregate of 5,600 shares of Common Stock to two unrelated third-party individuals for compensation for introducing the above mentioned private placement investors to the Company, which led to successfully raised capital. The issuances will also be completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.

 

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

 

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes, and other financial information included in this Form 10-Q a nd our financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended December 31, 2017 (the “2017 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 2017 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 products sales are located in the Asian market, predominantly in the People’s Republic of China and our major customers of our OEM sales 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 beauty products directly on the Internet 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. As of the filing date of this report, we continue to market our six individual nutritional supplement products and seven skin-care and beauty products on these websites. In addition, we currently have six individual nutritional supplement products and one skin-care and beauty products that we only sell to wholesale distributors. We also sell similar products of third parties on our websites.

 

In January 2018, we entered into an Asset Purchase Agreement (the “Purchase Agreement”) with SUSS Technology Corporation, a Nevada corporation (the “Seller”), pursuant to which the Seller agreed to sell to the Company substantially all of the assets associated with the Seller’s manufacture of dietary supplements (the “Asset Sale”) for an aggregate purchase price (the “Purchase Price”) of $1,000,000 and 1,000,000 shares of the Company’s common stock (the “Purchase Shares”) valued at $320,000. The Seller was one of our major suppliers during the years ended December 31, 2017 and 2016. With this newly purchased 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 supplements manufacturing standards, including FDA and GMP compliance and cGMP regulations. In addition to manufacturing the nutritional supplements that we sell, we could produce hard capsules, tablets, solid beverage (sachet packaging), teabags, powder, granules, dietary supplement export, softgel capsules and healthy foods from these assets for any potential new customers who need such products.

 

 
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In the third and fourth quarters of 2018, we anticipate introducing more biological dietary supplements products such as 1) female dietary supplements, including but not limited to, weight loss and beauty products, 2) a natural aphrodisiac supplement for men, and 3) supplements that may aid the body in fighting cancer.

 

In July 2018, we entered into a cooperation agreement with a sales agent company in the PRC, which will promote our products in over 300 pharmaceutical chain stores in the Sichuan Province, PRC for a period of three years starting on August 1, 2018. In return, for each product that we sell through our website with the specified promotional code, we will pay a sales commission to the agent.

 

Principal Factors Affecting Our Financial Performance

 

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

 

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

 

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

 

Results of Operations

 

Comparison of the three months ended June 30, 2018 and 2017

 

 

 

For the three months ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

Percentage

 

 

 

2018

 

 

2017

 

 

Change

 

 

Change

 

Total sales

 

$ 146,909

 

 

$ 87,501

 

 

$ 59,408

 

 

 

67.9 %

Total cost of sales

 

 

25,642

 

 

 

33,761

 

 

 

(8,119 )

 

 

(24.0 )%

Gross profit

 

 

121,267

 

 

 

53,740

 

 

 

67,527

 

 

 

125.7 %

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling

 

 

25,915

 

 

 

52,220

 

 

 

(26,305 )

 

 

(50.4 )%

General and administrative

 

 

387,705

 

 

 

280,283

 

 

 

107,422

 

 

 

38.3 %

Stock compensation expense

 

 

44,000

 

 

 

-

 

 

 

44,000

 

 

 

100.0 %

Total operating expenses

 

 

457,620

 

 

 

332,503

 

 

 

125,117

 

 

 

37.6 %

Loss from operations

 

 

(336,353 )

 

 

(278,763 )

 

 

57,590

 

 

 

20.7 %

Other income (expense), net

 

 

10,543

 

 

 

(18,198 )

 

 

28,741

 

 

 

157.9 %

Provision for income taxes

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

%

Net loss

 

$ (325,810 )

 

$ (296,961 )

 

$ 28,849

 

 

 

9.7 %

 

 
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Total sales increased by approximately $59,000, or 67.9%, from approximately $88,000 in the three months ended June 30, 2017 to approximately $147,000 in the three months ended June 30, 2018. The increase of sales was mainly due to an increase of approximately $16,000 in sales from our Original Equipment Manufacturer (“OEM”) business of dietary supplements after the acquisition of the assets associated with the manufacture of dietary supplements, which we acquired in January 2018. During the second quarter of 2018, we produced two small batches of OEM dietary supplements and provided packaging services by assisting our customers to package their dietary supplements into capsules and then package those capsules in bottles with tagged label during the second quarter of 2018. The increase is also attributable to the increase in sales of our nutritional supplement products, Hepaticia and Auxia, which we started manufacturing in our Nevada factory, which increase was partially offset by the decrease in sales of our Dibeier Granules & Oral products.

 

The cost of sales decreased by approximately $8,000, or 24.0%, from approximately $34,000 in the three months ended June 30, 2017 to approximately $26,000 in the three months ended June 30, 2018. For the three months ended June 30, 2018, the majority of our product sales were attributable to our Hepaticia and Auxia products, which have a lower unit cost and higher profit margins as compared to our Dibeier Granules & Oral products, of which we sold more during the three months ended June 30, 2017. The cost of Hepaticia and Auxia products is generally lower as we started self-manufacturing those products in our Nevada factory in 2018 following the acquisition in January 2018, as compared to the cost of the Dibeier Granules & Oral products, which we purchased from a third-party manufacturer in 2017. The decrease in overall cost of sales was partially offset by the increase of our OEM production for the same reasons discussed above. As a result, our cost of sales decreased by approximately 24.0% in the three months ended June 30, 2018 as compared to the same period in 2017.

 

As a result, our gross margin percentage increased from approximately 61.4% in the three months ended June 30, 2017 to approximately 82.5% in the three months ended June 30, 2018.

 

Selling expenses decreased from approximately $52,000 in the three months ended June 30, 2017 to approximately $26,000 in the three months ended June 30, 2018. The decrease of approximately $26,000, or 50.4%, was mainly due to 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 three months ended June 30, 2017. We did not incur such expenses during the three months ended June 30, 2018. This decrease in selling expense was partially offset by an increase in shipping expenses, which is consistent with the increase in sales during the three months ended June 30, 2018 as compared to the three months ended June 30, 2017.

 

General and administrative (“G&A”) expenses increased by approximately $107,000 from approximately $280,000 in the three months ended June 30, 2017 to approximately $388,000 in the three months ended June 30, 2018. General and administrative expenses increased mainly due to the increase in the Nevada factory operating expenses during the three months ended June 30, 2018 as compared to the three months ended June 30, 2017, during which period we were not operating the Nevada factory. In January 2018, we purchased machinery with its technological know-how in Nevada to produce our OEM products and nutritional supplements. However, our Nevada factory is currently working under capacity, for which we allocated approximately $76,000 fixed manufacturing overhead, including approximately $31,000 of depreciation and amortization expenses, approximately $10,000 of rental expenses, and $35,000 of salary expenses to G&A expenses. We also incurred approximately $28,000 various other miscellaneous G&A expenses in our Nevada factory, increase of bad debt expense of approximately $12,000, increase of payroll expense of $6,000 as we hired additional employees to meet our anticipated future demands in preparation for an expansion of our operations, and increases of other various G&A expenses of approximately $15,000 such as telephone expenses, computer and internet expenses, travel expenses, meals and entertainment and office supplies. The increase in G&A expenses was partially offset by the decrease in professional expenses of approximately $30,000 mainly due to lower professional expenses from our attorneys, auditors and consultants during the second quarter of 2018 as we completed our outstanding periodic filings with the SEC to become current as of May 2017. As a result, our operating expenses increased by approximately $107,000 during the three months ended June 30, 2018 as compared to the same period in 2017.

 

 
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Stock compensation expense increased by $44,000 in the three months ended June 30, 2018 compared to the same period in 2017 as 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 three months ended months ended June 30, 2018, and we did not incur any stock compensation expenses for the same period in 2017.

 

Other income increased by approximately $28,000 from approximately $18,000 of other expense in the three months ended June 30, 2017 to approximately $10,000 of other income in the three months ended June 30, 2018, mainly due to approximately $18,000 of fees charged to our shareholders in assisting them to obtain electronic stock certificates during the three months ended June 30, 2018.

 

Net loss from operations increased by approximately $29,000 from approximately $297,000 in the three months ended June 30, 2017 to approximately $326,000 in the three months ended June 30, 2018 mainly due to the reasons discussed above.

 

Comparison of the six months ended June 30, 2018 and 2017

 

 

 

For the six months ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

Percentage

 

 

 

2018

 

 

2017

 

 

Change

 

 

Change

 

Total sales

 

$ 211,617

 

 

$ 119,997

 

 

$ 91,620

 

 

 

76.4 %

Total cost of sales

 

 

52,820

 

 

 

39,493

 

 

 

13,327

 

 

 

33.7 %

Gross profit

 

 

158,797

 

 

 

80,504

 

 

 

78,293

 

 

 

97.3 %

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling

 

 

257,816

 

 

 

57,204

 

 

 

200,612

 

 

 

350.7 %

General and administrative

 

 

808,340

 

 

 

666,143

 

 

 

142,197

 

 

 

21.3 %

Stock compensation expense

 

 

524,000

 

 

 

-

 

 

 

524,000

 

 

 

100.0 %

Total operating expenses

 

 

1,590,156

 

 

 

723,347

 

 

 

866,809

 

 

 

119.8 %

Loss from operations

 

 

(1,431,359 )

 

 

(642,843 )

 

 

788,516

 

 

 

122.7 %

Other income (expense), net

 

 

65,785

 

 

 

(36,047 )

 

 

101,832

 

 

 

282.5 %

Provision for income taxes

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

%

Net loss

 

$ (1,365,574 )

 

$ (678,890 )

 

$ (686,684 )

 

 

101.1 %

 

Total sales increased by approximately $92,000, or 76.4%, from approximately $120,000 in the six months ended June 30, 2017 to approximately $212,000 in the six months ended June 30, 2018. The increase is mainly attributable to the increase in sales of our nutritional supplement products, Hepaticia and Auxia, which we started manufacturing in our Nevada factory during that period, and our newly introduced beauty product, Noir Naturel, which such increases were partially offset by the decrease in sales of our Dibeier Granules & Oral products. The increase of sales was also due to the increase of sales of approximately $16,000 in our Original Equipment Manufacturer (“OEM”) business after the acquisition of the assets associated with the manufacture of dietary supplements, which were acquired in January 2018. We produced a few batches of OEM and packaging production during the six months ended June 30, 2018.

 

 
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The cost of sales increased by approximately $13,000, or 33.7%, from approximately $39,000 in the six months ended June 30, 2017 to approximately $52,000 in the six months ended June 30, 2018. The increase in cost of sales was mainly attributable to the increase of our OEM production, which consistent with our increase in total OEM sales for the reasons discussed above. The increase in OEM cost of sales was partially offset by the decrease in cost of product sales. For the six months ended June 30, 2018, a majority of our products sales were attributable to our Hepaticia and Auxia products, which have a lower unit cost and higher profit margins as compared to our Dibeier Granules & Oral products, of which we sold more during the six months ended June 30, 2017. The cost of Hepaticia and Auxia products is generally lower as we started self-manufacturing the products in our Nevada factory in 2018 after the acquisition, as compared to the Granules & Oral products, which we purchased from a third-party manufacturer in 2017. As a result, in the six month period ended June 30, 2018, our cost of sales increased by approximately 33.7% and our sales increased by approximately 76.4% compared to the same period in 2017.

 

As discussed above, during the six months ended June 30, 2018, we began our own Hepaticia and Auxia production, which increased our overall gross profit percentage during the period because the unit cost of Hepaticia and Auxia products is generally lower due our self-manufacturing of the products, as compared to our Dibeier Granules & Oral products, of which we sold more during the six months ended June 30, 2017, and which we purchased from a third-party manufacturer in 2017. As a result, our gross margin percentage increased from approximately 67.1% in the six months ended June 30, 2017 to approximately 75.0% in the six months ended June 30, 2018.

 

Selling expenses increased from approximately $57,000 in the six months ended June 30, 2017 to approximately $258,000 in the six months ended June 30, 2018. The increase of approximately $201,000, or 350.7%, 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 during the first quarter of 2018 as well as approximately $54,000 in promotion expenses for our products that are expiring in May 2018 and which we are giving out as gifts to our customers. The increase was also attributable in part to an increase in shipping expenses, which is consistent with the increase in sales during the six months ended June 30, 2018 as compared to the six months ended June 30, 2017. 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 six months ended June 30, 2017, which we did not incur again during the six months ended June 30, 2018.

 

General and administrative (“G&A”) expenses increased by approximately $142,000 from approximately $666,000 in the six months ended June 30, 2017 to approximately $808,000 in the six months ended June 30, 2018. General and administrative expenses increased mainly due to the increase in the Nevada factory operating expenses during the six months ended June 30, 2018 as compared to the six months ended June 30, 2017. In January 2018, we purchased machinery with its technological know-how in Nevada to produce our OEM products and nutritional supplements. However, our Nevada factory is currently working under capacity, and as a result we allocated approximately $131,000 fixed manufacturing overhead, including approximately $62,000 of depreciation and amortization expenses, approximately $20,000 of rental expenses, and $49,000 of salary expenses to G&A expenses. We also incurred approximately $50,000 various other miscellaneous G&A expenses in our Nevada factory, an increase of bad debt expense of approximately $23,000, an increase of payroll expense of $49,000 as we hired additional employees to meet our anticipated future demands in preparation for an expansion of our operations, and increases of other various G&A expenses such as telephone expenses, computer and internet expenses, travel expenses, meals and entertainment and office supplies, of approximately $29,000. The increase in G&A expenses was offset by the decrease in professional expenses of approximately $140,000 mainly due to lower professional expenses from our attorneys, auditors and consultants during the six months ended June 30, 2018 as we completed our outstanding periodic filings with the SEC to become current as of May 2017. As a result, our operating expenses increased by approximately $142,000 during the six months ended June 30, 2018 as compared to the same period in 2017.

 

Stock compensation expense increased by $524,000 in the six months ended June 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 to develop 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 225-10-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 six months ended months ended June 30, 2018, and comparatively we did not incur any stock compensation expenses for the same period in 2017. As a result, we incurred $524,000 stock compensation expense for the six months ended June 30, 2018.

 

 
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Other income increased by approximately $102,000 from approximately $36,000 of other expense in the six months ended June 30, 2017 to approximately $66,000 of other income in the six months ended June 30, 2018, mainly due to approximately $102,000 of fees charged to our shareholders in assisting them to obtain electronic stock certificates and lab testing fees charged to our customers during the six months ended June 30, 2018.

 

Net loss from operations increased by approximately $686,000 from approximately $679,000 in the six months ended June 30, 2017 to approximately $1,365,000 in the six months ended June 30, 2018 mainly due to the reasons discussed above.

 

Liquidity and Capital Resources

 

As of June 30, 2018, we had a cash balance of approximately $26,000, compared to a cash balance of approximately $5,000 at December 31, 2017.

 

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

 

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

 

For the six months ended June 30, 2018, cash used in operating activities amounted to approximately $935,000 as compared to approximately $366,000 used in operating activities in the six months ended June 30, 2017. Cash used in operating activities for the six months ended June 30, 2018 mainly includes approximately $1,366,000 net loss, the increase of prepaid expenses of approximately $14,000, the decrease of accounts payable and accrued expenses of approximately $78,000, and the decrease of deferred revenue of approximately $128,000. This amount was partially offset by the decrease of inventory of approximately $17,000, the non-cash expense of $524,000 in stock based compensation, approximately $23,000 in bad debt expense, and approximately $81,000 in depreciation and amortization expenses.

 

For the six months ended June 30, 2018, financing activities provided approximately $956,000 as compared to approximately $370,000 during the six months ended June 30, 2017. Net cash received in the six months ended June 30, 2018 includes approximately $1,327,000 from the sale of our common stock through several private placements, approximately $23,000 from the stock subscription received resulted from prior period issuance of common stock, and approximately $62,000 from a loan from our principal shareholder and Chief Executive and Financial Officer. These amounts were partially offset by our repayment of principal amounts on various loans of approximately $457,000, of which approximately $211,000 was paid to our principal shareholder and Chief Executive and Financial Officer, approximately $239,000 was paid to the unaffiliated third parties, and approximately $6,000 was paid on our bank loan.

 

The material terms of the loans from our principal shareholder and Chief Executive and Financial Officer, certain related parties and certain unaffiliated third parties are set forth below.

 

 
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Due to shareholder, interest bearing

 

In January 2016, Mr. Dinghua Wang, a major shareholder, director, Chief Executive and Financial Officer of the Company, pledged certain of his personal assets and obtained a personal loan from which he provided funds for the operations of the Company. In consideration for the funds the Company received, the Company agreed to pay the interest of this loan on Mr. Wang’s behalf. This loan has an annual borrowing rate of 9.99%. During the year ended December 31, 2017, advances totaled $471,603. As of June 30, 2018 and December 31, 2017, the balance due to Mr. Wang, interest bearing, amounted to $471,603. The full balance of $471,603 is to be repaid on February 1, 2019.

 

Interest expense for the three months ended June 30, 2018 and 2017 for the above loan amounted to $12,487.

 

Interest expense for the six months ended June 30, 2018 and 2017 for the above loan amounted to $24,975.

 

Due to shareholder, non-interest bearing

 

From time to time, Mr. Dinghua Wang, a major shareholder, director, Chief Executive and Financial Officer of the Company, advances monies to the Company and the Company repays such advances. Such business transactions are recorded as due to or from Mr. Wang at the time of the transaction. During the six months ended June 30, 2018 and 2017, advances totaled $62,316 and $22,737, respectively, and payments to Mr. Wang totaled $211,025 and $61,705, respectively. As of June 30, 2018 and December 31, 2017, the balance due to Mr. Wang, non-interest bearing, amounted to $2,642,237 and $2,790,946, respectively. This balance does not bear interest, is unsecured and is due on demand.

 

Due to employee

 

The Company has borrowed money from Vickie Ho, Executive Vice President of the Company, to fund operations. These advances do not bear interest, are unsecured and are due on demand. As of each of June 30, 2018 and December 31, 2017, the Company owed $95,000 to such employee.

 

Advances from related parties, interest bearing

 

The Company has borrowed $30,000 from a related party to fund operations since July 2016. This related party is the son of the Company’s Chief Executive and Financial Officer. These advances have an annual interest rate of 10%, are unsecured and are due on demand. Repayment to this related party amounted to $0 for both the six months ended June 30, 2018 and 2017, respectively. As of each of June 30, 2018 and December 31, 2017, the Company owed $30,000 to this related party.

 

Interest expense for the three months ended June 30, 2018 and 2017 for the above loans amounted to $748.

 

Interest expense for the six months ended June 30, 2018 and 2017 for the above loans amounted to $1,488.

 

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 June 30, 2018 and December 31, 2017, the Company owed $518,839 to these related parties.

 

Due to third parties, interest bearing

 

The Company has borrowed money from third parties to fund operations. These third parties consist of the Chief Executive and Financial Officer’s friends and the spouse of a former board member of the Company. These advances have an annual interest rate of 6%, are unsecured, and are due on demand. As of each of June 30, 2018 and December 31, 2017, the Company owed $109,030 to these third parties.

 

 
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Interest expense for the three months ended June 30, 2018 and 2017 for the above loans amounted to $1,631 and $1,631, respectively.

 

Interest expense for the six months ended June 30, 2018 and 2017 for the above loans amounted to $3,244 and $3,035, respectively.

 

Due to third parties, non-interest bearing

 

The Company has borrowed money from third parties to fund operations. These third parties consist of the Chief Executive and Financial Officer’s friends and a former board member of the Company. These advances do not bear interest, are unsecured, and are due on demand. As of June 30, 2018 and December 31, 2017, the Company owed $129,857 and $729,175 to these third parties, respectively.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

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

 

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) at June 30, 2018 based on the evaluation of these controls and procedures required by paragraph (b) of Rule 13a-15 or Rule 15d-15 under the Exchange Act. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer/Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer/Chief Financial Officer concluded that, at June 30, 2018, 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 on U.S. GAAP – Our current number of accounting staff is relatively small, and we lack sufficient accounting personnel with the appropriate level of knowledge, experience and training in U.S. GAAP and SEC reporting requirements. This material weakness also relates to a lack of personnel with expertise in preparing financial statements in accordance with U.S. GAAP.

 

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

 

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

 

Changes in Internal Controls over Financial Reporting

 

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

 

 
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PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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

 

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

 

During the quarter ended June 30, 2018, the Company entered into a series of Securities Purchase Agreements with various unrelated third-party purchasers, pursuant to which the Company sold to these purchasers in private placements an aggregate of 715,011 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 $643,500. 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 six months ended June 30, 2018, the Company issued an aggregate of 46,668 shares of Common Stock to various unrelated third-party individuals for 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.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Not applicable.

 

 
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Item 6. Exhibits.

 

(a) Exhibits.

 

Exhibit No.

 

Document Description

 

 

 

31.1

 

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

 

 

 

32.1*

 

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

 

 

 

Exhibit 101

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

 

 

101.INS

XBRL Instance Document

 

101.SCH

XBRL Taxonomy Extension Schema Document

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

 

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

_______________

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

 

 
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SIGNATURE

 

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

 

Merion, Inc.

 

Title

Name

Date

Signature

President, CEO and CFO

Ding Hua Wang

August 14, 2018

/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,

Principal Financial and

Principal Accounting Officer,

Director

August 14, 2018

 

 
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EXHIBIT INDEX

  

Exhibit No.

Document Description

 

10.1

 

Securities Purchase Agreement by and between Merion, Inc. and Guiqin Lu, dated August 9, 2018.

 

 

 

10.2

 

Securities Purchase Agreement by and between Merion, Inc. and Lijun Zhang, dated August 9, 2018.

 

 

 

10.3

 

Securities Purchase Agreement by and between Merion, Inc. and Chuntian Cheng, dated August 9, 2018.

 

 

 

10.4

 

Securities Purchase Agreement by and between Merion, Inc. and Shuhua Wu, dated August 9, 2018.

 

 

 

10.5

 

Securities Purchase Agreement by and between Merion, Inc. and Qin Sun, dated August 9, 2018.

 

 

 

31.1

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

 

 

32.1*

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

 

 

Exhibit 101

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

 

 

101.INS

XBRL Instance Document

 

 

101.SCH

XBRL Taxonomy Extension Schema Document

 

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

 

 

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

 

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

_____________

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

 

 

31

 

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