The following discussion of our financial condition and results of operations
should be read in conjunction with our financial statements and the related
notes, and other financial information included in this Form 10-Q and our
financial statements and notes thereto included in our annual report on Form
10-K for the fiscal year ended December 31, 2021 (the "2021 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 2021 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
Merion, Inc. 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 Original Equipment Manufacturer ("OEM") and packaging products are located
in the United States ("U.S.").
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 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 provide OEM and
packaging products through third party manufacturing. As of the date of filing
of this report, we market eight individual nutritional supplement products and
one beauty product. We did not develop any new products in 2021 and in the first
quarter of 2022. 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. These assets met all industry
nutritional and dietary supplement manufacturing standards, including U.S. Food
and Drug Administration and Good Manufacturing Practice compliance and Current
Good Manufacturing Practice regulations. 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.
20
Table of Contents
Due to the ongoing COVID-19 pandemic which has limited global travel,
transportation, and import and export of goods, the Company has focused more on
its OEM and packaging business to provide private label supplement products or
customized formula supplement products to wholesale and retail customers. 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
third-party manufacturers and packaging companies to produce and pack these
products for our customers after we closed our Nevada Factory in May 2021.
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.
We continue to sell our nutritional supplement and beauty products on our
website. Our nutritional supplement products are made according to a micro
molecular nutrition formula. To achieve the maximum effect of products, micro
molecular health foods were designed to be absorbed by cells directly with
minimum chemical conversion, which we believe promotes faster absorption. We
believe our company is one of only a few companies in the market which are using
a micro molecular nutrition formula.
In January 2018, we introduced a 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.
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 beauty 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 beauty
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 moved our focus on local OEM and packaging business through
the production from third party manufacturers and it has become our major
revenue source since 2021. The loss of one or more of our U.S. OEM and packaging
customers would result in loss of sales and have a negative effect on our
operations if we cannot find one or more substitutes.
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, war in Ukraine and
inflation, 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 spread of
COVID-19 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.
21
Table of Contents
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 be
materially adversely affected, to the extent that the pandemic harms the Chinese
and U.S. economy. Due to the recent outbreak of Omicron variant in China, many
cities in China have imposed new restrictions and quarantine requirements with
office closures, including in Shanghai and Beijing, which will negatively affect
our sales of products in China. 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 COVID-19 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.
For the three months ended March 31, 2022 and 2021, 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 and delivery of our products, revenues and
collection of accounts receivable and the additional allowance for doubtful
accounts. 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 the remaining year of 2022.
In addition, due to COVID-19 spreading around the world and some of the raw
materials to produce our products 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 the remainder of 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.
22
Table of Contents
The Company's total revenues for the three months ended March 31, 2022 were
lower as compared to the same period of 2021. Because of the uncertainty
surrounding COVID-19, the financial impact for the remainder of 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 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 three months ended March 31, 2022 and 2021
For the three months ended March 31,
Percentage
2022 2021 Change Change
Total sales $ 145,889 $ 435,362 $ (289,473 ) (66.5 )%
Total cost of sales 61,959 237,524 (175,565 ) (73.9 )%
Gross profit (loss) 83,930 197,838 (113,908 ) (57.6 )%
Operating expenses
Selling 3,629 46,103 (42,474 ) (92.1 )%
General and administrative 317,141 366,606 (49,465 ) (13.5 )%
Stock compensation expense - 83,934 (83,934 ) (100 )%
Total operating expenses 320,770 496,643 (175,873 ) (35.4 )%
Loss from operations (236,840 ) (298,805 ) 61,965 20.7 %
Other income (expense), net 1,399 1,165 234 20.1 %
Provision for income taxes - - - -
Net loss $ (235,441 ) $ (297,640 ) $ 62,199 (20.9 )%
Total sales decreased by approximately $289,000 or 66.5%, from approximately
$435,000 in the three months ended March 31, 2021 to approximately $146,000 in
the three months ended March 31, 2022. The decrease of sales was mainly because
we fulfilled more OEM contracts during the three months ended March 31, 2021 as
compared to the three months ended March 31, 2022. In addition, we had
experienced a delay of OEM shipments due to supply shortages during the three
months ended March 31, 2022 for which we have accumulated increased backlog
orders with deferred revenue of approximately $0.9 million as of March 31, 2022.
Our direct sales for the three months ended March 31, 2022 and 2021 were $240
and $961, respectively.
The cost of sales decreased by approximately $176,000, or 73.9%, from
approximately $238,000 in the three months ended March 31, 2021 to approximately
$62,000 in the three months ended March 31, 2022. The decrease of cost of sales
was in line with the decrease of revenue as we fulfilled lesser OEM orders
during the three months ended March 31, 2022.
Our overall gross margin percentage increased from a gross margin approximately
45.4% in the three months ended March 31, 2021 to a gross margin of
approximately 57.6% in the three months ended March 31, 2022, mainly due to us
no longer incurring any idle capacity cost during the three months ended March
31, 2022 as compared to the same period in 2021 after we disposed of our
machinery and terminated our Nevada factory lease in May 2021 as discussed
above. The increase of gross margin was also attributable to that we provided
more sales volume discounts on the unit price during the three months ended
March 31, 2021 OEM sales contract as compared to the same period in March 31,
2022.
23
Table of Contents
Selling expenses decreased from approximately $46,000 in the three months ended
March 31, 2021 to approximately $3,600 in the three months ended March 31, 2022.
The decrease of approximately $42,000, or 92.1%, was mainly due to the decrease
of approximately $43,000 of shipping and packing expenses as we had less OEM
orders that required packing and shipping services.
General and administrative ("G&A") expenses decreased by approximately $50,000
from approximately $367,000 in the three months ended March 31, 2021 to
approximately $317,000 in the three months ended March 31, 2022. The decrease
was mainly attributable to the decrease of approximately $32,000 of professional
fees and approximately $18,000 of employee payroll and benefits as we did not
replace certain employees after their departure.
Stock compensation expenses were zero for the three months ended March 31, 2022,
a decrease of approximately $84,000 compared to the same period in 2021. The
expense related to the amortization of the value of 766,668 shares of restricted
common stock to three employees for the three months ended March 31, 2021, which
were all fully vested in July 2021.
Other income increased by $234 from approximately $1,200 in the three months
ended March 31, 2021 to approximately $1,400 in the three months ended March 31,
2022, mainly due to the increase of other income of approximately $600 and
decrease of interest expense of approximately $300.
Net loss decreased by approximately $62,000 from approximately $298,000 in the
three months ended March 31, 2021 to approximately $235,000 in the three months
ended March 31, 2022, mainly due to the reasons discussed above.
Liquidity and Capital Resources
As of March 31, 2022, we had a cash balance of approximately $6,000, compared to
a cash balance of approximately $900 at December 31, 2021.
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 $1.6 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.
24
Table of Contents
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 three months ended March 31, 2022, cash used in operating activities
amounted to approximately $9,000 as compared to approximately $124,000 used in
operating activities in the same period in 2021. Cash used in operating
activities for the three months ended March 31, 2022 was primarily the result of
our approximately $235,000 net loss and the decrease of lease liabilities of
approximately $7,000. This amount was partially offset by the increase of
accounts payable and accrued expenses of approximately $37,000, deferred revenue
of approximately $126,000 as our OEM backlog orders to be fulfilled increased,
and the decrease of the non-cash expense of approximately $5,000 of depreciation
expense, approximately $55,000 in amortization of operating right-of-use assets,
the decrease of prepaid expenses of approximately $6,000 as we realized our
prepaid inventory purchases to fulfill our OEM orders.
For the three months ended March 31, 2022, financing activities provided
approximately $13,000 as compared to approximately $120,000 during the three
months ended March 31, 2021. Net cash received in the three months ended March
31, 2022 includes approximately $18,000 from a loan from our principal
shareholder and Chief Executive and Financial Officer, Mr. Dinghua Wang. These
amounts were partially offset by our repayment of approximately $4,300 of
principal payments for long-term debt.
The material terms of the loans from our principal shareholder and Chief
Executive and Financial Officer, Mr. Dinghua Wang, and certain unaffiliated
third parties are set forth in Note 6 and Note 7 of the accompanying notes to
unaudited condensed financial statements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to our stockholders.
© Edgar Online, source Glimpses
MERION, INC. 
