The following discussion of our financial condition and results of operations
should be read in conjunction with our financial statements and the related
notes, and other financial information included in this Form 10-K.
Our Management's Discussion and Analysis contains not only statements that are
historical facts, but also statements that are forward-looking. 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.
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 website, at www.merionus.com, and to
wholesale distributors through phone and electronic communication. Our major
customers of our nutritional and beauty products are located in the Asian
market, predominantly in the People's Republic of China. Our major customers of
our OEM and packaging products are located in the United States.
Since June 2014, we have been selling our products primarily over the internet
directly to end-user customers and by phone/email orders directly to our
wholesale distributors. Certain miscellaneous sales are made directly to
customers who walk into the Company offices and customers who call the Company
directly for products. We are now focusing on selling health and nutritional
supplements and personal care products directly on the internet through our
website at www.merionus.com and to our OEM and packaging customers. As of the
date of this report, we market eight individual nutritional supplement products,
three and five of which were introduced in 2018 and 2019 respectively, and one
beauty product, which was also introduced in 2018, on our website. We are no
longer selling similar products of third parties on our website.
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 "Nevada Factory") for an aggregate purchase price (the
"Purchase Price") of $1,000,000 and 333,334 shares of the Company's common stock
(the "Purchase Shares") valued at $320,000. The Seller was one of our major
suppliers during the year ended December 31, 2017. Upon purchasing these assets
from the Seller, we started to manufacture some of the nutritional supplements
that we sold until May 2021. In May 2021, we determined that it would be more
beneficial to outsource to third-party manufacturers the production of our
branded and OEM products rather than manufacturing through our Nevada Factory.
As a result, we disposed of our factory machinery and terminated our Nevada
Factory lease in May 2021. As we have significant continuing involvement in the
sale of our branded and OEM products through our third-party manufacturers, this
restructuring did not constitute a strategic shift that will have a major effect
on our operations and financial results. Therefore, the results of operations
for our Nevada Factory were not reported as discontinued operations under the
guidance of FASB ASC 205.
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In January 2018, we introduced a new beauty product, Noir Naturel, a gentle
formula for grey coverage from the first application into hair care.
In September 2018, we introduced three different types of natural aphrodisiac
supplements, Viwooba (1-3) for men that may support kidney health, improve
immunity, enhance physical fitness, eliminate fatigue, improve sexual desire and
enhance body energy, strength and sexual ability.
In March 2019, we introduced 1) Lady-S, a female dietary supplement that may
assist with weight loss, 2) Gold King, a nutritional supplement that may provide
antioxidant support and liver health, 3) New Power, a nutritional supplement
that may support heart health, and 4) Taibao, a nutritional supplement that may
enhance physical performance and energy metabolism.
In December 2019, we introduced ReMage Power, a nutritional supplement that may
provide anti-aging Nicotinamide adenine dinucleotide (NAD)+ support and promote
energy & cell metabolism.
On June 11, 2021, our Board of Directors approved a 1-for-3 reverse stock split
of our common stock. On July 27, 2021, we filed a Certificate of Change with the
State of Nevada (the "Certificate") to effect a 1-for-3 reverse stock split of
our authorized shares of common stock, par value $0.001 (the "Common Stock"),
accompanied by a corresponding decrease in our issued and outstanding shares of
Common Stock (the "Reverse Stock Split"), effective upon filing. Following the
Reverse Stock Split, the number of authorized shares of Common Stock was reduced
from 1,000,000,000 to 333,333,333. All shares and per share amounts (except for
par value amount) used herein and in the accompanying financial statements have
been retroactively restated to reflect the 1-for-3 Reverse Stock Split.
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-commerce 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
e-commerce, and increased access to online shopping, 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 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.
As COVID-19 has limited the global travels, transportation, and import and
export of goods, we focused more on our local OEM and packaging business and it
has become our major revenue source in fiscal year 2021. We manufactured these
products through our Nevada Factory prior to May 2021 and subsequently we
purchase the raw material for the products and outsource to the third-party
manufacturers and packaging companies to produce and pack these products for our
customers after we closed our Nevada Factory in May 2021. The loss of one or
more of our U.S. OEM and packaging customers would result in a significant loss
of sales and have a negative effect on our operations.
For the wholesale and retail customers who are looking for private label
products, we provide our own formulas, purchase raw material and contract third
party manufacturers to produce products. For the customers who have their own
formulas, we purchase raw materials and outsource to the third-party
manufacturers and packing companies for their products.
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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 downturn due to COVID-19, and the future
economic environment 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. The increase of
trade tensions between US and China and the COVID-19 pandemic have and might
continue to have negative impacts on our business. The reduced consumer spending
may force us and our competitors to lower prices. These conditions may adversely
affect our revenues and results of operations.
Coronavirus (COVID-19)
At the end of 2019, there was an outbreak of a novel strain of coronavirus
(COVID-19) which has spread rapidly to many parts of China and other parts of
the world, including the U.S. In March 2020, the World Health Organization
declared COVID-19 a pandemic. The pandemic has resulted in quarantines, travel
restrictions, and the temporary closure of office buildings and facilities in
China and in the U.S. The economic impact of the coronavirus or COVID-19 in both
China and the U.S have significantly impacted our business and results of
operations.
Our headquarters are located in California and were closed from March 19, 2020
to June 9, 2020. Due to the surge of COVID-19 cases in California, our offices
were closed again from July 16, 2020 to September 16, 2020 and our employees
worked remotely from home during these periods. Our offices have been reopened
since September 16, 2020. Substantially all of our product sales revenues are
generated in China and all of our OEM and packaging revenues are generated in
the U.S. Consequently, our results of operations have been and will continue to
be materially adversely affected, to the extent that the pandemic harms the
Chinese and U.S. economies. Any potential impact to our results will depend on,
to a large extent, future developments and new information that may emerge
regarding the duration and severity of the pandemic and new variants, efficacy
and distribution of COVID-19 vaccines and the actions taken by government
authorities and other entities in China and U.S. to contain COVID-19 or treat
its impact, almost all of which are beyond our control.
Although we expect that our health supplement products and our 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 has been and
may continue to 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, our revenues and
business operations may be materially and adversely impacted.
While the potential economic impact brought by, and the duration of, COVID-19
may be difficult to assess or predict, a widespread pandemic could result in
significant disruption of global financial markets, reducing the Company's
ability to access capital, which could negatively affect the Company's
liquidity.
Substantially all of our revenues are concentrated in the United States.
Consequently, the COVID-19 outbreak has and may continue to materially adversely
affect our business operations, financial condition and operating results,
including but not limited to the material negative impact to the sourcing of raw
materials and delivery of our products, revenues and collection of accounts
receivable and any additional bad debt expense. The situation remains highly
uncertain for any further outbreak or resurgence of the COVID-19, new variants
and the efficacy and distribution of COVID-19 vaccines. It is therefore
difficult for the Company to estimate the impact on our business or operating
results that might be adversely affected by any further outbreak or resurgence
of COVID-19 for 2022.
In addition, due to COVID-19 spreading around the world and some of the raw
materials to produce our products are sourced from outside of the United States,
the suppliers have been and might continue to be negatively impacted due to
supply chain disruption, increased shipping costs and shortage of raw materials.
Consequently, the COVID-19 outbreak has and may continue to materially adversely
affect the Company's business operations, financial condition and operating
results for 2022, including but not limited to the shortage of raw materials,
delay of shipment, and increased prices for the Company's products manufactured
by our suppliers.
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The Company started to recover as total revenues for the years ended December
31, 2021 were higher as compared to the same period of 2020. Because of the
uncertainty surrounding COVID-19, the financial impact for 2022 cannot be
reasonably estimated at this time.
Looking ahead, we understand that these unprecedented times will have a
financial impact on some of our customers, and might potentially cause us loss
of certain existing customers. Our plan has been to promote the awareness of the
importance of health and our health supplement products, which in turn might
build sales with new customers to offset the loss of any of our existing
customers.
As COVID-19 continues to impact global business, the U.S. government established
relief programs for small business such as the Paycheck Protection Program
("PPP") and the Economic Injury Disaster Loan program ("EIDL"). In 2020, we
received a PPP loan of $131,100 and EIDL loan of $150,000 to help fund our
operation in 2020. The PPP loan was fully forgiven by the SBA administration in
January 2021.
On February 2, 2021, the Company received loan proceeds of $137,792 under the
U.S. Small Business Administration ("SBA") second round of Paycheck Protection
Program ("PPP") to help fund our operations in 2021. The PPP loan was fully
forgiven by the SBA administration in October 2021.
Results of Operations
Comparison of the years ended December 31, 2021 and 2020
For the years ended December 31,
Percentage
2021 2020 Change Change
Total sales $ 1,481,068 $ 439,033 $ 1,042,035 237.3 %
Total cost of sales 1,035,091 454,346 580,745 127.8 %
Gross profit (loss) 445,977 (15,313 ) 461,290 3,012.4 %
Operating expenses
Selling 82,981 48,190 34,791 72.2 %
General and administrative 1,271,500 1,345,007 (73,507 ) (5.5 )%
Stock compensation expense 179,992 421,101 (241,109 ) (57.3 )%
Loss (gain) on disposal of
equipment 268,800 (16,000 ) 284,800 1,780.0 %
Total operating expenses 1,803,273 1,798,298 4,975 0.3 %
Loss from operations (1,357,296 ) (1,813,611 ) (456,315 ) (25.2 )%
Other income (expense), net 161,772 (3,927 ) 165,699 4,219.5 %
Provision for income taxes 800 800 - 0.0 %
Net loss $ (1,196,324 ) $ (1,818,338 ) $ (622,014 ) (34.2 )%
Total sales increased by approximately $1,042,000 or 237.3%, from approximately
$439,000 in the year ended December 31, 2020 to approximately $1,481,000 in the
year ended December 31, 2021. The increase of sales was mainly due to the OEM
contracts that the Company signed in 2020 and we fulfilled approximately $1.3
million of the orders during the year ended December 31, 2021 with approximately
$0.9 million unfilled as of December 31, 2021
The cost of sales increased by approximately $581,000, or 127.8%, from
approximately $454,000 in the year ended December 31, 2020 to approximately
$1,035,000 in the year ended December 31, 2021. The increase of cost of sales
was in line with the increase of revenue as we fulfilled our OEM orders during
the year ended December 31, 2021.
Our overall gross margin (loss) percentage increased from a gross loss of
approximately (3.5)% in the year ended December 31, 2020 to a gross margin of
approximately 30.1% in the year ended December 31, 2021, mainly due to the
increase of sales in the year ended December 31, 2021 as compared to the same
period in 2020. We had more sales to absorb our fixed production costs during
the year ended December 31, 2021 as our products normally have high gross
margins. In May 2021, we determined that it is more beneficial to outsource to
third-party manufacturers the production of our branded and OEM products rather
than manufacturing through our Nevada Factory. As a result, we closed our Nevada
Factory, disposed its assets and terminated its lease in May 2021, which also
contributed to a higher gross margin in 2021 because we had more idle
manufacturing capacity cost for our Nevada factory during the same period in
2020 which had driven down our gross margin.
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Our product sales decreased by approximately $27,000, or 38.0% from $69,735 for
the year ended December 31, 2020 to $43,217 for the year ended December 31,
2021. The gross margin percentage decreased from approximately 48.8% in the
year ended December 31, 2020 to approximately 30.7% in the year ended December
31, 2021. The reason for the decrease of gross margin percentage was due to
providing more discounts to our customers during the year ended December 31,
2021 on some of our products that were closer to the expiration date as compared
to the same period in 2020.
Our OEM and packaging sales increased by approximately $1,069,000, or 289.3%
from approximately $369,000 for the year ended December 31, 2020 to
approximately $1,438,000 for the year ended December 31, 2021. The gross margin
percentage increased from approximately 29.2% in the year ended December 31,
2020 to approximately 31.2% in the year ended December 31, 2021. For the year
ended December 31, 2021, we fulfilled our OEM orders with normal gross margin
because we are no longer required to absorb our fixed production costs after the
closing of our factory in Nevada in May 2021. During the year ended December 31,
2020, we had manufacturing overhead costs for our OEM and packaging sales
including labor hours being allocated to such production, which we didn't have
during the majority of the year ended December 31, 2021. As a result, our OEM
and packaging sales gross margin percentage increased by 2.0% during the year
ended December 31, 2021 as compared to the year ended December 31, 2020.
Selling expenses increased from approximately $48,000 in the year ended December
31, 2020 to approximately $83,000 in the year ended December 31, 2021. The
increase of approximately $35,000, or 72.2%, was mainly due to the increase of
approximately $10,000 of sales department salaries as we transferred our factory
employees to be our sales representatives after closing our Nevada factory in
May 2021, the increase of approximately $46,000 of shipping and packing expenses
as we had more OEM orders that required packing and shipping services, offset by
the decrease of approximately $21,000 of advertising and marketing expenses and
other selling expenses.
General and administrative ("G&A") expenses decreased by approximately $74,000
from approximately $1,345,000 in the year ended December 31, 2020 to
approximately $1,272,000 in the year ended December 31, 2021. The decrease was
mainly attributable to the decrease of approximately $29,000 of bad debt
expense, a decrease of approximately $54,000 contractor expense and the decrease
of approximately $21,000 salary and employee benefit expenses as we closed our
Nevada factory in May 2021. The decrease was offset by the increase of
approximately $29,000 in professional fees, such as attorney fees, auditor fees
and consulting fees.
Stock compensation expenses decreased by approximately $241,000 during the year
ended December 31, 2021 compared to the same period in 2020. Approximately
$180,000 and $296,000, related to the amortization of the value of 766,668
shares of restricted common stock issued to three employees for the years ended
December 31, 2021 and 2020, respectively, which all had a vesting period of
three years and were fully vested as of July 2021.
The loss on disposal of equipment increased by approximately $285,000 from a
gain of $16,000 in the year ended December 31, 2020 to a loss of $268,800 in the
year ended December 31, 2021. The decrease was mainly due to the Company
disposing of its machinery in the Nevada factory for $7,700 which resulted
$268,800 of loss on disposal of equipment in May 2021.
Other income (expense) increased by approximately $166,000 from an expense of
approximately $(4,000) in the year ended December 31, 2020 to approximately
$162,000 in the year ended December 31, 2021, mainly due to the decrease of
interest expenses of approximately $143,000 incurred from a third party and
related parties interest bearing loans that were transferred to DW Food
California Food Distribution LLC, a related party, through a debt sale agreement
in December 2020 and subsequently paid with shares of the Company's common stock
in December 2020. The increase of other income was also due to a $25,000
California Small Business COVID-19 Relief Grant that we received in May 2021.
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Net loss decreased by approximately $622,000 from approximately $1.8 million in
the year ended December 31, 2020 to approximately $1.2 million in the year ended
December 31, 2021, mainly due to the reasons discussed above.
Liquidity and Capital Resources
As of December 31, 2021, we had a cash balance of approximately $900, compared
to a cash balance of approximately $10,000 at December 31, 2020.
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 current liabilities of
approximately $1.4 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 liquidity factors described above, the Company has continued to find ways
to reduce its operating expenses. In addition, should our Company need funds,
our principal shareholder and Chief Executive and Financial Officer Mr. Dinghua
Wang may lend additional money to the Company from time to time to the extent he
is in a position and willing to do so. No assurance can be provided that he will
continue to lend funds to the Company in the future.
Management has concluded under U.S. GAAP that there is substantial doubt about
our ability to continue as a going concern as a result of our lack of
significant revenue and sufficient working capital. If we are unable to generate
significant revenue or secure financing, we may be required to cease or limit
our operations. Our financial statements do not include adjustments that might
result from the outcome of this uncertainty.
For the year ended December 31, 2021, cash used in operating activities amounted
to approximately $216,000 as compared to approximately $990,000 used in
operating activities in the same period in 2020. Cash used in operating
activities for the year ended December 31, 2021 was primarily the result of our
approximately $1.2 million net loss, the non-cash adjustment of approximately
$138,000 for the gain on forgiveness of loan payable, and the payment of lease
liabilities of approximately $162,000. This amount was partially offset by the
non-cash expense of approximately $180,000 in stock based compensation,
approximately $38,000 of depreciation expenses, approximately $214,000 in
amortization of operating leases right-of-use assets and approximately $269,000
of loss on disposal of equipment, the decrease of accounts receivable of
approximately $50,000, the decrease of inventories of approximately $52,000, the
decrease of prepaid expenses approximately $113,000 as we realized our prepaid
inventory purchases to fulfill our OEM orders and the increase of accounts
payable and accrued expenses of approximately $111,000 and the increase of
deferred revenue of approximately $246,000 as we still have some OEM backlog
orders to be fulfilled.
For the year ended December 31, 2021, investing activities provided $7,700 in
cash received from the sale of machinery in our Nevada factory.
For the year ended December 31, 2021, financing activities provided
approximately $200,000 as compared to approximately $990,000 during the year
ended December 31, 2020. Net cash received in the year ended December 31, 2021
includes approximately $138,000 from the second round of the SBA PPP loan that
was forgiven in October 2021, and approximately $103,000 from a loan from our
principal shareholder and Chief Executive and Financial Officer, Mr. Dinghua
Wang partially offset by our repayment of approximately $24,000 to Mr. Dinghua
Wang and approximately $17,000 of principal payments for long-term debt.
The material terms of the loans from Mr. Dinghua Wang, certain related parties
and certain unaffiliated third parties are set forth in Note 6 and Note 7 of the
accompanying notes to financial statements.
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Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to our stockholders.
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MERION, INC. 