The accompanying notes are an integral part of these unaudited condensed financial statements.
The accompanying notes are an integral part of these unaudited condensed financial statements.
The accompanying notes are an integral part of these unaudited condensed financial statements.
The accompanying notes are an integral part of these unaudited condensed financial statements.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note 1 – Organization
Merion, Inc. (the “Company”), a Nevada corporation, was formed on February 4, 2011. Its predecessor, E-World USA Holding, Inc., was a California company incorporated in 2007 (“E-World CA”). In April 2011, E-World CA entered into a merger agreement with its wholly-owned subsidiary, E-World USA Holding, Inc., a Nevada corporation (“E-World NV”) that was the survivor of the merger and became the Company. Under the Merger Agreement, the Company issued 90,000,000 shares of its common stock on a one for one basis for each share of E-World CA’s common stock issued and outstanding at the date of the merger. In addition, the Company issued Type A Warrants and Type B Warrants in exchange for comparable warrants issued and outstanding of E-World CA at the date of the merger. On June 27, 2017, the Company filed an amendment to its Articles of Incorporation with the Secretary of State for the State of Nevada to change its name from E-World NV to Merion, Inc.
The Company is a manufacturer and 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. The Company also provides Original Equipment Manufacturer (“OEM”) and packaging services of hard capsules, tablets, solid beverage (sachet packaging), teabags, powder, granules, dietary supplements for export, softgel capsules and health food.
Note 2 – Going Concern
Management has determined there is substantial doubt about our ability to continue as a going concern as a result of our lack of significant revenues, significant recurring losses, and negative working capital. If we are unable to generate significant revenue or secure additional financing, we may be required to cease or curtail our operations. Our financial statements do not include adjustments that might result from the outcome of this uncertainty.
Management is trying to alleviate the going concern risk by: engaging external sales representatives to sell the Company’s products, investigating and securing various financing resources, including but not limited to borrowing from the Company’s major shareholder, private placements, and the possibility of raising funds through a future public offering.
Note 3 – Summary of Significant Accounting Policies
Basis of Presentation
These unaudited condensed financial statements have been presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). 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, 2019, filed with the Securities and Exchange Commission on April 8, 2020.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant accounting estimates reflected in the Company’s financial statements include the useful lives of property and equipment, the collectability of receivables and impairment on long-live assets. The inputs into the Company’s judgments and estimates consider the economic implications of COVID-19 on the Company’s critical and significant accounting estimates. Actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are comprised primarily of money market accounts and foreign and domestic bank accounts. To reduce its credit risk, the Company monitors the credit standing of the financial institutions that hold the Company’s cash and cash equivalents.
Accounts Receivable
Trade accounts receivable are periodically evaluated for collectability based on credit history with customers and their current financial condition. Bad debt expense or write-offs of receivables are determined on the basis of loss experience, known and inherent risks in the receivable portfolio, and current economic conditions.
The accounts receivable balance and allowance for doubtful accounts are as follows:
|
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Accounts receivable
|
|
$
|
93,114
|
|
|
$
|
80,792
|
|
|
Allowance for doubtful accounts
|
|
|
(58,445
|
)
|
|
|
(41,011
|
)
|
|
Accounts receivable, net
|
|
$
|
34,669
|
|
|
$
|
39,781
|
|
Movement of the allowance for doubtful accounts is as follows:
|
|
|
Three months
ended
March 31,
2020
|
|
|
Year
ended
December 31,
2019
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
41,011
|
|
|
$
|
-
|
|
|
Provision for doubtful accounts
|
|
|
17,434
|
|
|
|
41,011
|
|
|
Less: write-offs
|
|
|
-
|
|
|
|
-
|
|
|
Ending balance
|
|
$
|
58,445
|
|
|
$
|
41,011
|
|
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 products, 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 necessary, when costs exceed expected net realizable value. The inventories’ shelf lives are approximately 3 years. As of March 31, 2020 and December 31, 2019, there were no inventory obsolescence reserves or write-downs.
Property and Equipment, net
Property and equipment are stated at cost, net of accumulated depreciation. Upon disposition, the cost and related accumulated depreciation and amortization is removed from the books, and any resulting gain or loss is included in operations. The Company provides depreciation and amortization using the straight-line method over the estimated useful lives of various classes as follows:
|
Machinery
|
|
10 years
|
|
Computer and software
|
|
3 to 5 years
|
|
Furniture and fixtures
|
|
5 to 10 years
|
|
Vehicles
|
|
5 to 7 years
|
|
Leasehold improvements
|
|
over the lesser of the remaining lease term or the expected life of the improvement
|
Repairs and maintenance are charged to operations when incurred while betterments and renewals are capitalized.
Right-of-use Asset and Lease Liabilities
In February 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02 “Leases (Topic 842).” The new standard requires lessees to recognize lease assets (“right of use”) and related lease obligations (“lease liabilities”) for leases previously classified as operating leases under generally accepted accounting principles on the balance sheet for leases with terms in excess of 12 months. The standard is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted this standard as of January 1, 2019 utilizing the practical expedients approach.
Impairment of Long-Lived Assets
Long-lived assets, including property, equipment and intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flows the assets are expected to generate and recognizes an impairment loss when estimated discounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When the Company identifies an impairment, the Company reduces the carrying amount of the asset to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, to comparable market values. Management reviewed the potential impact of COVID-19 and the related disruptions on the Company’s operating results, and based upon potential orders believes that currently there was no impairment during the three months ended March 31, 2020.
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.
Fair Value of Financial Instruments
The FASB accounting standards codification (“ASC”), FASB ASC 825 Financial Instruments, requires that the Company discloses estimated fair values of financial instruments.
As defined in ASC 820 Fair Value Measurement, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes the market data of similar entities in its industry or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).
The three levels of the fair value hierarchy are as follows:
|
Level 1 –
|
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, 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
The Company’s revenue is recognized based on the amount of consideration the Company expects to receive in exchange for satisfying the performance obligations in accordance with ASC 606 Revenue from Contracts with Customers.
The core principle underlying the revenue recognition 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 and there are no remaining performance obligations under the contract.
ASC 606 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 Company accounts for a contract with a customer when the contract is committed in writing, the rights of the parties, including payment terms, are identified, the contract has commercial substance and consideration is probable of collection.
The Company derives 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 when the sale is made. The Company recognizes revenue when control of the goods is transferred upon shipment to the customer by the Company and collectability of payment is reasonably assured. These revenues are recognized at a point in time after all performance obligations are satisfied.
The Company also recognizes revenue on shipping and handling fees charged to the Company’s customers. Shipping and handling fee revenue is recognized when products have been delivered at a point in time. Shipping and handling fee revenues totaled $699 and $2,809 for the three months ended March 31, 2020 and 2019, respectively.
Product returns are allowed for unopened products purchased under regular sales terms within 60 days. Allowances for product returns are provided at the time the sale is recorded using historic return rates for each country and the relevant return pattern. Historically the Company has a return rate of nearly zero. Accordingly, the allowance as of March 31, 2020 and December 31, 2019 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. To date, the Company has not received any buy-back applications. As a result, no allowance for buy-backs had been recorded as of March 31, 2020 and December 31, 2019.
The majority of the Company’s product sales are generated from China and all of the Company’s OEM and packaging sales are generated from the United States. While all products are priced in U.S. currency, the Company accepts payments in both U.S. dollars and Hong Kong dollars.
Shipping and Handling Expenses
Shipping and handling costs incurred by the Company are included in selling expenses and totaled $3,466 and $10,702 for the three months ended March 31, 2020 and 2019, respectively.
Research and Development (“R&D”) Expenses
Research and development expenses include salaries and other compensation-related expenses paid to the Company’s research and product development personnel while they are working on R&D projects, as well as raw materials used for the R&D projects. R&D expenses incurred by the Company are included in general and administrative expenses and totaled $0 and $904 for the three months ended March 31, 2020 and 2019, 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 net deferred tax assets to the amount expected to be realized.
Basic and Diluted Earnings (Loss) Per Share
Generally accepted accounting principles regarding earnings per share (“EPS”) require presentation of basic and diluted earnings (loss) per share in conjunction with the disclosure of the methodology used in computing such earnings (loss) per share.
Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average of common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. These common stock equivalents are not included when the Company has a loss because they would be anti-dilutive.
2,300,000 shares of restricted common stock are excluded in the diluted EPS calculation for the three months ended March 31, 2020, due to its anti-dilutive nature. There were no other potential dilutive securities outstanding for the three months ended March 31, 2020 and 2019.
Concentration of Credit Risk
Financial instruments
Financial instruments that potentially subject the Company to concentrations of credit risk are cash and accounts receivable 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 as of March 31, 2020 and December 31, 2019.
Major Customers and Suppliers
For the three months ended March 31, 2020, three customers accounted for approximately 68% (29%, 25% and 14%) of the Company’s sales and for the three months ended March 31, 2019, one customer accounted for approximately 30% of the Company’s sales.
As of March 31, 2020, two customers accounted for approximately 73% (58% and 15%) of the Company’s accounts receivable. As of December 31, 2019, three customers accounted for approximately 88% (67%, 11% and 10%) of the Company’s accounts receivable.
For the three months ended March 31, 2020, one supplier accounted for 100% of the Company’s product purchases and for the three months ended March 31, 2019, four suppliers accounted for approximately 69% (21%, 20%, 16% and 12%) of the Company’s product purchases.
Risk and Uncertainties
In March 2020, the World Health Organization declared the COVID-19 as a pandemic. Given the rapidly expanding nature of the COVID-19 pandemic, and because substantially all of the Company’s business operations and its major customers are concentrated in China and United States, its business, results of operations, and financial condition could be adversely affected for the rest of fiscal year 2020 and beyond.
Related Parties
A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.
New Accounting Pronouncements
In May 2019, the FASB issued ASU 2019-05, which is an update to ASU Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced the expected credit losses methodology for the measurement of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss methodology. The amendments in Update 2016-13 added Topic 326, Financial Instruments—Credit Losses, and made several consequential amendments to the Codification. Update 2016-13 also modified the accounting for available-for-sale debt securities, which must be individually assessed for credit losses when fair value is less than the amortized cost basis, in accordance with Subtopic 326-30, Financial Instruments— Credit Losses—Available-for-Sale Debt Securities. The amendments in this update address those stakeholders’ concerns by providing an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For those entities, the targeted transition relief will increase comparability of financial statement information by providing an option to align measurement methodologies for similar financial assets. Furthermore, the targeted transition relief also may reduce the costs for some entities to comply with the amendments in Update 2016-13 while still providing financial statement users with decision-useful information. In November 2019, the FASB issued ASU No. 2019-10, which to update the effective date of ASU No. 2016-13 for private companies, not-for-profit organizations and certain smaller reporting companies applying for credit losses standard. The new effective date for these preparers is for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company has not early adopted this update and it will become effective on January 1, 2023 assuming the Company will remain eligible to be smaller reporting company. The Company is currently evaluating the impact of this new standard on Company’s unaudited condensed financial statements and related disclosures.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”. The amendments in this Update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 is effective for the Company for annual and interim reporting periods beginning January 1, 2021. Early adoption of the amendments is permitted, including adoption in any interim period for public business entities for periods for which financial statements have not yet been issued. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption must adopt all the amendments in the same period. The Company is currently evaluating the impact of this new standard on Company’s unaudited condensed financial statements and related disclosures
The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s unaudited condensed financial statements.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current year presentation. These reclassifications have no effect on the accompanying statements of operations and cash flows.
Note 4 – Inventories
Inventories consist of the following:
|
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Raw materials
|
|
$
|
111,858
|
|
|
$
|
101,102
|
|
|
Work-in-progress
|
|
|
8.925
|
|
|
|
6,776
|
|
|
Finished goods
|
|
|
49,248
|
|
|
|
57,866
|
|
|
Inventories
|
|
$
|
170,031
|
|
|
$
|
165,744
|
|
Note 5 – Property and Equipment
Property and equipment consist of the following:
|
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Computer equipment and software
|
|
$
|
114,953
|
|
|
$
|
114,953
|
|
|
Furniture and fixtures
|
|
|
26,686
|
|
|
|
26,686
|
|
|
Automobiles
|
|
|
123,902
|
|
|
|
179,677
|
|
|
Leasehold improvements
|
|
|
40,053
|
|
|
|
40,053
|
|
|
Machinery
|
|
|
420,000
|
|
|
|
420,000
|
|
|
Total
|
|
|
725,594
|
|
|
|
781,369
|
|
|
Less: accumulated depreciation and amortization
|
|
|
(277,913
|
)
|
|
|
(445,369
|
)
|
|
Property and equipment, net
|
|
$
|
447,681
|
|
|
$
|
336,000
|
|
Depreciation expense totaled $12,221 and $17,211 for the three months ended March 31, 2020 and 2019, respectively.
Note 6 – Debt
Due to third parties, interest bearing
The Company has borrowed money from third parties to fund operations. These third parties consist of the Chief Executive and Financial Officer’s friends and the spouse of a former board member of the Company. These advances have weighted average annual interest rates of 10% and 6% for the three months ended March 31, 2020 and 2019, respectively, are unsecured, and are due on demand or March 30, 2024. As of March 31, 2020 and December 31, 2019, the Company owed $1,500,000 to these third parties, among which, $20,000 are due on March 20, 2024.
Interest expense for the three months ended March 31, 2020 and 2019 for the above loans amounted to $37,198 and $1,423, 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 or March 30, 2024. During the three months ended March 31, 2020 and 2019, additional advances totaled $10,000 and $0, respectively. As of March 31, 2020 and December 31, 2019, the Company owed $110,000 and $100,000 to these third parties, respectively, of which, $50,000 is due on March 20, 2024
Long term debt
In March 2020, the Company purchased and financed a vehicle with a six year loan for a total of approximately of $124,000. The Company traded in a fully depreciated vehicle and received a credit of $16,000. The monthly payments are $1,715 from March 2020 to February 2026, with interest at 4.56% per annum. As of March 31, 2020, $106,596 of loan payments remained outstanding, of which $16,066 are due within one year from March 31, 2020.
The obligation is payable as follows:
|
Twelve months ended March 31,
|
|
Amount
|
|
|
|
|
(Unaudited)
|
|
|
2021
|
|
$
|
16,066
|
|
|
2022
|
|
|
16,813
|
|
|
2023
|
|
|
17,594
|
|
|
2024
|
|
|
18,411
|
|
|
2025
|
|
|
19,266
|
|
|
Thereafter
|
|
|
18,446
|
|
|
Total long-term debt payment
|
|
|
106,596
|
|
|
Current portion of long-term debt
|
|
|
(16,066
|
)
|
|
Long term debt
|
|
$
|
90,530
|
|
Interest expense for the three months ended March 31, 2020 for the above loan amounted to $409.
Note 7 – Related Party Transactions
Due to shareholder, interest bearing
In January 2016, Mr. Dinghua Wang, a major shareholder, director, Chief Executive and Financial Officer of the Company, pledged certain of his personal assets and obtained a personal loan from which he provided funds for the operations of the Company. In consideration for the funds the Company received, the Company agreed to pay the interest on this loan on Mr. Wang’s behalf. This loan has an annual borrowing rate of 9.99%. The full balance of $471,603 was repaid in October 2019.
Interest expense for the three months ended March 31, 2020 and 2019 for the above loan amounted to $0 and $12,488.
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 three months ended March 31, 2020 and 2019, advances totaled $8,953 and $84,616, respectively, and payments to Mr. Wang totaled $10,435 and $61,644, respectively. As of March 31, 2020 and December 31, 2019, the balance due to Mr. Wang, non-interest bearing, amounted to $2,436,573 and $2,438,055, respectively. This balance is unsecured and is due on demand.
In March 2019, the repayment terms related to $2,000,000 of the total balance was changed by Mr. Wang from due on demand to due on March 20, 2024.
Due to employee
The Company has borrowed money from Vickie Ho, Executive Vice President of the Company, to fund operations. These advances do not bear interest, are unsecured, and are due on March 20, 2024. As of March 31, 2020 and December 31, 2019, the Company owed $95,000 to such employee.
Advances from related parties, interest bearing
The Company borrowed $30,000 from a related party to fund operations in July 2016. This related party is the son of the Company’s Chief Executive and Financial Officer. The advance has an annual interest rate of 10%, is unsecured and is due on March 20, 2024. As of March 31, 2020 and December 31, 2019, the Company owed $30,000 to this related party.
Interest expense for the three months ended March 31, 2020 and 2019 for the above loans amounted to $748 and $740, respectively.
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 March 20, 2024. As of March 31, 2020 and December 31, 2019, the Company owed $518,839 to these related parties.
Note 8 – Income Taxes
The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the three months ended March 31, 2020 and 2019:
|
|
|
Three months ended
March 31, 2020
|
|
|
Three months ended
March 31, 2019
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Federal statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
|
State statutory rate
|
|
|
7.0
|
%
|
|
|
7.0
|
%
|
|
Valuation allowance
|
|
|
(18.4
|
)%
|
|
|
(4.2
|
)%
|
|
Permanent difference *
|
|
|
(9.6
|
)%
|
|
|
(23.8
|
)%
|
|
Effective tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
*Represents 50% of meal and entertainment expenses and stock compensation expenses that are not deductible.
The Company uses the asset and liability method, where deferred tax assets and liabilities are determined based on the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes. Deferred taxes are also recognized for net operating loss carry forwards which can be utilized to offset taxable income in the future. The cumulative net operating loss carryforwards that may be applied against future taxable income is approximately $8,732,000 for federal and state income taxes as of March 31, 2020. The cumulative net operating loss carry forward that may be applied against future taxable income is approximately $8,342,000 for federal and state as of December 31, 2019. Net operating loss for the years ended 2017 through 2019 will not expire but limited to 80% of income until utilized. Net operating loss for the years ended 2016 and prior will expire in the years 2031 to 2036. As deferred tax assets may not be fully realizable due to potential recurring losses, management has provided a 100% valuation allowance for the deferred tax assets.
The components of the deferred tax assets are as follows:
|
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
16,355
|
|
|
$
|
11,476
|
|
|
Amortization of intangible assets
|
|
|
192,667
|
|
|
|
196,445
|
|
|
Net operating losses
|
|
|
2,233,153
|
|
|
|
2,125,102
|
|
|
Total deferred tax assets
|
|
|
2,442,175
|
|
|
|
2,333,023
|
|
|
Valuation allowance
|
|
|
(2,442,175
|
)
|
|
|
(2,333,023
|
)
|
|
Deferred tax assets, net
|
|
$
|
-
|
|
|
$
|
-
|
|
Changes in the value allowance for deferred tax assets increased by $109,152 from $2,333,023 at December 31, 2019 to $2,442,175 at March 31, 2020. During the three months ended March 31, 2020, the Company did not utilized any deferred tax assets from the prior period.
As of March 31, 2020, federal tax returns filed for 2017, 2018 and 2019 remain subject to examination by the taxing authorities. As of March 31, 2020, California tax returns filed for 2016, 2017, 2018 and 2019 remain subject to examination by the taxing authorities.
Note 9 – Commitments
Operating lease
Effective January 1, 2019, the Company adopted ASU 2016-02, “Leases” (Topic 842), and elected the practical expedients that do not require us to reassess: (1) whether any expired or existing contracts are, or contain, leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases. The Company adopted the practical expedient that allows lessees to treat the lease and non-lease components of a lease as a single lease component. There is no impact from the adoption of ASC 842 as of January 1, 2019, as the Company did not have any existing leases with a lease term in excess of twelve months on January 1, 2019.
In January 2019, the Company entered an office lease agreement with a 5-year lease term starting in March 2019 and terminating in February 2024. The Company recognized lease liabilities of approximately $618,000, with a corresponding right-of-use (“ROU”) asset in the same amount based on the present value of the future minimum rental payments of the lease, using an effective interest rate of 4.78%, which was determined using the Company’s estimated incremental borrowing rate. The remaining term of the lease is 3.92 years.
In March 2020, the Company entered another new office lease agreement with 3-year lease term starting in March 2020 and terminating in February 2023. The Company recognized lease liabilities of approximately $279,000, with a corresponding right-of-use (“ROU”) asset in the same amount based on the present value of the future minimum rental payments of the new lease, using an effective interest rate of 4.78%, which was determined using the Company’s incremental borrowing rate.
The Company also leases factory space on a month-to-month basis, which it classifies as an operating lease. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
For the three months ended March 31, 2020 and 2019, lease expenses amounted to $53,620 and $22,095, respectively, of which, $10,500 and $0 are short-term lease expenses, respectively.
The five-year maturity of the Company’s lease obligations is presented below:
|
Twelve months ended March 31,
|
|
Operating lease amount
|
|
|
|
|
(Unaudited)
|
|
|
2021
|
|
$
|
205,338
|
|
|
2022
|
|
|
239,800
|
|
|
2023
|
|
|
235,654
|
|
|
2024
|
|
|
135,609
|
|
|
Total lease payments
|
|
|
816,401
|
|
|
Less: interest
|
|
|
(70,647
|
)
|
|
Present value of lease liabilities
|
|
$
|
745,754
|
|
Note 10 – Equity
Private placements
During the three months ended March 31, 2020, 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 162,000 shares of the Company’s common stock, par value $0.001 per share, at a purchase price of $1.00 per share for an aggregate offering price of $162,000. The sales were completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended
As of March 31, 2020 and December 31, 2019, $1,110,695 and $1,140,695, respectively, were unpaid and recognized as stock subscription receivables in the accompanying statements of changes in shareholders’ deficit. During the three months ended March 31, 2020 and 2019, the Company received $50,000 and $62,500 of the stock subscription receivables, respectively.
Settlement of debt
On March 19, 2019, the Company entered into two Debt Repayment Agreements with two creditors of the Company (the “Creditors”), pursuant to which the Company agreed to repay $135,851 owed to the Creditors in the form of 295,480 shares of Company’s common stock at an average debt conversion rate of $0.46 per share (the “Debt Repayment”). The Debt Repayment was completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended. The closing price of the Company’s common stock on March 19, 2019 was $0.60 per share, which resulted in a loss on settlement of debt of $41,437.
On March 30, 2019, the Company entered into four Debt Repayment Agreements with four creditors of the Company (the “Creditors”), pursuant to which the Company agreed to repay $868,682 owed to the Creditors in the form of 976,364 shares of Company’s common stock at an average debt conversion rate of $0.89 per share (the “Debt Repayment”). The Debt Repayment was completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended. The closing price of the Company’s common stock on March 30, 2019 was $0.60 per share, which resulted in a gain on settlement of debt of $282,863.
Common stock issued for consulting services
On August 30, 2018, the Company entered into two advisory agreements with two advisors (the “Financial Advisors”), pursuant to which the Company engaged the Financial Advisors to provide certain financial advisory services for a service period of six months. As compensation for the services, the Company agreed to issue the Financial Advisors an aggregate of 67,916 shares of its common stock, par value $0.001. These shares are valued at $20,375, determined using the closing price of the Company’s common stock on August 30, 2018 of $0.30 per share. For the three months ended March 31, 2020 and 2019, amortization of deferred stock compensation of these shares amounted to $0 and $6,792, respectively.
On January 23, 2019, the Company entered into a consulting agreement with Redfield Management Service limited for business, finance and investor relations services. The consultant is due a monthly consulting fee of $7,000 and 50,000 shares, to be paid every three months. The term of the agreement was for one year. The service agreement was terminated at the end of April 2019 and the Company issued a total of 200,000 shares of its common stock. For the three months ended March 31, 2020 and 2019, amortization of deferred stock compensation of these shares amounted to $0 and $80,000, respectively.
On March 13, 2019, the Company entered into a consulting agreement with Global Merchants Union (“GMU”), pursuant to which GMU was to provide business and financial operation and planning consultation services to the Company for consideration of $7,500 per month and a one-time stock payment of 1,000,000 shares of common stock of the Company (the “Share Payment”). Shares subject to the Share Payment were to be issued to GMU within 30 days after the agreement was signed. The term of the agreement was for one year but the cash consideration and payment obligation by the Company under this agreement was terminated in May 2019. For the three months ended March 31, 2020 and 2019, amortization of deferred compensation of these shares amounted to $125,000 and $25,000, respectively.
Issuance of restricted common stock
On July 13, 2018, the Board of Directors of the Company approved the grant of 2,300,000 restricted stock units (the “RSUs”) to three employees of the Company, pursuant to the Merion, Inc. 2018 Omnibus Equity Plan. Thirty percent of the RSUs vested on July 13, 2019, thirty percent of the RSUs will vest on July 13, 2020, and the remaining forty percent of the RSUs will vest on July 13, 2021, in each case provided that the employee remains employed, in good standing, by the Company. These shares were 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 are being amortized ratably over the term of the vesting periods of three years on a straight line basis. The Company accounts for the restricted common stock as equity-settled awards in accordance with ASC 718. For the three months ended March 31, 2020 and 2019, amortization of deferred stock compensation of these shares amounted to $63,650 and $62,951, respectively. Deferred stock compensation of $412,443 and $476,093 has been recognized as a reduction of shareholders’ deficit as the services have not been performed as of March 31, 2020 and December 31, 2019, respectively.
The following table summarizes unvested restricted common stock activity for the three months ended March 31, 2020 and for the year ended December 31, 2019:
|
|
|
Number of
shares
|
|
|
Weighted average grant-date fair value per share
|
|
|
Outstanding as of December 31, 2018
|
|
|
2,300,000
|
|
|
$
|
0.37
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Vested
|
|
|
690,000
|
|
|
|
-
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding as of December 31, 2019
|
|
|
1,610,000
|
|
|
$
|
0.37
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding as of March 31, 2020
|
|
|
1,610,000
|
|
|
$
|
0.37
|
|
Note 11 – Subsequent Events
The Company evaluated all events and transactions that occurred after March 31, 2020 up through the date the Company issued these unaudited condensed financial statements on June 26, 2020.
Coronavirus (COVID-19)
Recently, a novel strain of coronavirus (COVID-19) surfaced and has spread rapidly to many parts of China and other parts of the world, including the United States. The epidemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and facilities in China, United States, and elsewhere around the world.
Substantially all of the Company’s revenues are concentrated in China and the United States. Consequently, the COVID-19 outbreak may materially adversely affect the Company’s business operations, financial condition and operating results for 2020, including but not limited to the material negative impact to the Company’s production and delivery, total revenues, slower collection of accounts receivables and additional allowance for doubtful accounts.
Although the impact of the COVID-19 lead the Company to the temporary closure of its offices from March 19, 2020 and June 8, 2020, the Company’s CEO has been working remotely from home and effectively using video/telephone conference to market its products and its OEM/packaging services. The Company had successfully signed an OEM contract with a customer in China in April 2020 and the Company is expecting to generate a significant amount of revenue from this customer in the last two quarters of 2020. In addition, considering the Company’s products are health supplements, it also expects growth in demand at a time when everyone’s health is at risk. The Company is hoping this translates into sustainable growth as the awareness of the importance of health expands.
Although the Company expects that its health supplement products and its OEM/packaging services will still be in demand due to awareness of the importance of health growing along with the realities of COVID-19, the global economy may be negatively affected by COVID-19 and there is continued uncertainty about the duration and intensity of the impact of COVID-19. Many of our customers are individuals and small and medium-sized enterprises (SMEs), which may not have strong cash flows or be well capitalized, and may be vulnerable to a pandemic outbreak and slowing macroeconomic conditions. If the SMEs cannot weather the COVID-19 pandemic and the resulting economic impact, or cannot resume business as usual after a prolonged outbreak, the Company’s revenues and business operations may be materially and adversely impacted.
Because of the uncertainty surrounding the COVID-19 outbreak, the financial impact cannot be reasonably estimated at this time. The Company’s total revenues in April and May of 2020 were lower as compared to the same period of 2019, and there is no guarantee that its total revenues will grow or remain at a similar level year over year in the last two quarters of 2020, although the Company recently signed an OEM contract as mentioned above.
Paycheck Protection Program (“PPP”)
On April 17, 2020, the Company received loan proceeds in the amount of approximately $131,100 under the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable after eight weeks (or an extended 24-week covered period) as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The loan forgiveness amount will be reduced for any Economic Injury Disaster Loan (“EIDL”) advance of $10,000 that the Company received on April 28, 2020. The amount of loan forgiveness will be further reduced if the borrower terminates employees or reduces salaries during the eight-week period by more than 25%. The Company intends to use the proceeds for purposes consistent with the PPP. While the Company currently believes that its use of the loan proceeds of $121,100, net of EIDL advances, will meet the conditions for forgiveness of the loan and intends to file for loan forgiveness after eight weeks after receipt of loan proceeds. There can be no assurance that the full amount of the loan will be forgiven.