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, 2019 (the "2019 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 2019 Form 10-K.
Although the forward-looking statements in this Report reflect the good faith
judgment of our management, such statements can only be based on facts and
factors currently known by them. Consequently, and because forward-looking
statements are inherently subject to risks and uncertainties, the actual results
and outcomes may differ materially from the results and outcomes discussed in
the forward-looking statements. You are urged to carefully review and consider
the various disclosures made by us in this report as we attempt to advise
interested parties of the risks and factors that may affect our business,
financial condition, and results of operations and prospects.
Overview
Our Company is a provider of health and nutritional supplements and personal
care products. Currently, we are mainly selling our products over the Internet
directly to end-user customers through our websites, www.dailynu.com and
www.merionus.com, and to wholesale distributors through phone and electronic
communication. Our major customers of our nutritional and beauty products 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 sold our products primarily over the Internet directly
to end-user customers and by phone/email orders directly to our wholesale
distributors. Certain miscellaneous sales are made directly to customers who
walk into the Company offices and customers who call the Company directly for
products. We are now focusing on selling health and nutritional supplements and
personal care products directly on the internet through our websites,
www.dailynu.com and www.merionus.com. As of the date of filing of this report,
we market thirteen 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 websites. We are no longer selling
similar products of third parties on our websites.
In January 2018, we entered into an Asset Purchase Agreement (the "Purchase
Agreement") with SUSS Technology Corporation, a Nevada corporation (the
"Seller"), pursuant to which the Seller agreed to sell to the Company
substantially all of the assets associated with the Seller's manufacture of
dietary supplements (the "Asset Sale") for an aggregate purchase price (the
"Purchase Price") of $1,000,000 and 1,000,000 shares of the Company's common
stock (the "Purchase Shares") valued at $320,000. The Seller was one of our
major suppliers during the year ended December 31, 2017. Upon purchasing these
assets from the Seller, we started to manufacture some of the nutritional
supplements that we sell. These assets meet 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. In addition to manufacturing the nutritional supplements
that we sell, we produce hard capsules, tablets, solid beverages (sachet
packaging), teabags, powder, granules, dietary supplements, softgel capsules and
health foods from these assets for any potential new customers who need such
products. These are the products that were added to our existing products, as a
part of our OEM and packaging businesses.
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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.
In December 2019, a novel strain of coronavirus (COVID-19) surfaced in Wuhan,
China, which has spread rapidly to many parts of the world, including the United
States. On March 11, 2020, the World Health Organization characterized the
outbreak as a "pandemic". The pandemic has resulted in quarantines, travel
restrictions, and the temporary closure of offices and facilities in China, the
United States, and elsewhere around the world.
We have been following the orders of local government and health authorities to
minimize exposure risk for its employees and business partners, including the
closures of our offices and having employees work remotely. Substantially all of
our workforce in California has been working from home either all or
substantially all of the time, including our limited number of general
administrative and accounting personnel since March 19, 2020. Our office is
reopened on June 9, 2020 but some of our employees are still working from home,
and our manufacturing facility in Nevada has partially suspended its operations
since March 23, 2020 due to lack of raw materials.
In addition, substantially all of our revenues are concentrated in China and the
United States. Consequently, the COVID-19 outbreak has and may continue to
materially adversely affect our business operations, financial condition and
operating results for 2020, including but not limited to material negative
impact to our production and delivery of our products, revenues and collection
of accounts receivables and additional allowance for doubtful accounts. Because
of the significant uncertainties surrounding the COVID-19 outbreak, the extent
of the business disruption and the related financial impact cannot be reasonably
estimated at this time.
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
technology, and increased access to that technology, is paving the way for
growth in direct marketing. We also face competition for consumers from
retailers, duty-free retailers, specialty stores, department stores and
specialty and general merchandise catalogs, many of which have greater financial
and marketing resources than we have. Notwithstanding the foregoing, we believe
that we are well-positioned within the Asian consumer market with our current
plan of supplying American merchandise 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.
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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 now 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 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.
Coronavirus (COVID-19)
Recently, there was an outbreak of a novel strain of coronavirus (COVID-19) in
China, which has spread rapidly to many 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
President of the United States declared the COVID-19 pandemic a national
emergency, invoking powers under the Stafford Act, the legislation that directs
federal emergency disaster response. Similarly, the Governor of California has
issued a stay-at-home order, which took effect on March 19, 2020, and the
Governor of Nevada has issued a stay-at-home order which took effect on April 1,
2020.
Our headquarters are located in California and have been closed since March 19,
2020 and just reopened on June 9, 2020 although some of our employees are still
working from home. Our manufacturing facility is located in Nevada and has
partially suspended its operations since March 23, 2020 due to lack of raw
materials. 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 will be adversely, and may be
materially, affected, to the extent that COVID-19 harms the Chinese and U.S.
economy. 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 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 the impact of the COVID-19 lead us to the temporary closure of our
offices from March 19, 2020 and June 8, 2020, our CEO has been working remotely
from home and effectively using video/telephone conference to market our
products and our OEM/packaging services. We had successfully signed an OEM
contract with a customer in China in April 2020 and we expected to generate a
significant amount of revenue from this customer in the last two quarters of
2020. In addition, considering our products are health supplements, we also
expect demand growth at a time when everyone's health is at risk. This should
translate into sustainable growth once awareness of the importance of health is
created.
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 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, our 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. Our 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 we recently signed an OEM
contract as mentioned above.
Looking ahead, we understand that these unprecedented times will bring financial
impact to some of our customers, and potentially loss of customers. Our plan has
been to promote the awareness of the importance of health and our health
supplement products, which in term might be able to offset the loss of any of
our existing customers while building sales with new customers.
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Results of Operations
Comparison of the three months ended March 31, 2020 and 2019
For the three months ended March 31,
Percentage
2020 2019 Change Change
Total sales $ 65,988 $ 148,377 $ (82,389 ) (55.5 )%
Total cost of sales 47,689 40,361 7,328 18.2 %
Gross profit 18,299 108,016 (89,717 ) (83.1 )%
Operating expenses
Selling 13,431 23,918 (10,487 ) (43.8 )%
General and administrative 383,608 390,421 (6,813 ) (1.7 )%
Stock compensation expense 188,650 174,742 13,908 8.0 %
Gain on disposal of equipment (16,000 ) - (16,000 ) (100.0 )%
Total operating expenses 569,689 589,081 (19,392 ) (3.3 )%
Loss from operations (551,390 ) (481,065 ) (70,325 ) (14.6 )%
Other income (expense), net (41,380 ) 258,941 (300,321 ) (116.0 )%
Net loss $ (592,770 ) $ (222,124 ) $ (370,646 ) (166.9 )%
Total sales decreased by approximately $82,000, or 55.5%, from approximately
$148,000 in the three months ended March 31, 2019 to approximately $66,000 in
the three months ended March 31, 2020. The decrease of sales was mainly due to
the outbreak and economic impact of the coronavirus or COVID-19 in China, where
the majority of our customers are located. The stay-at-home order which existed
in China during the majority of the first quarter of 2020, resulted in less
demand from our wholesale distributor in China.
The cost of sales increased by approximately $7,000, or 18.2%, from
approximately $40,000 in the three months ended March 31, 2019 to approximately
$47,000 in the three months ended March 31, 2020. The major reason for the
increase was due to the increase of idle capacity of our factory as we were
operating under capability due to less orders from our customers. We also
partially suspended our factory operations in late March of 2020 due to the
impact of the coronavirus and lack of raw materials.
Our overall gross margin percentage decreased from approximately 72.8% in the
three months ended March 31, 2019 to approximately 27.7% in the three months
ended March 31, 2020, mainly due to the decrease of sales in the three months
ended March 31, 2020 as compared to the same period in 2019 while we were still
incurring significant overhead cost in our factory which we operated under idle
capacity.
Our product sales gross margin percentage decreased from approximately 89.4% in
the three months ended March 31, 2019 to approximately 68.9% in the three months
ended March 31, 2020. The major reason for the decrease of sales gross margin
percentage was due to the increase of sales in our ReMage Power product that we
introduced in December 2019 during the three months ended March 31, 2020 as
compared to the same period in 2019. The ingredients that we used to manufacture
our ReMage Power product are more expensive which result in a higher
manufacturing unit cost and less gross margin percentage of 68.9% as compared to
other products, such as Viwooba (1-3), Lady-S, Gold King, New Power and Tabiao
with an average of 89.4% of gross margin percentage, that we sold during the
three months ended March 31, 2019, which have a lower unit cost and higher gross
margin percentage than ReMage Power.
Our OEM and packaging sales gross margin percentage increased from approximately
19.0% in the three months ended March 31, 2019 to approximately 60.8% in the
three months ended March 31, 2020. For the three months ended March 31, 2020, we
had incurred less manufacturing overhead costs for our OEM and packaging sales
with fewer labor hours being allocated to such production due to the lesser
degree of specified production procedures which required fewer labor hours as
compared to the same period in 2019. As a result, our OEM and packaging sales
gross margin percentage increased by 41.8% during the three months ended March
31, 2020 as compared to the same period in 2019.
Selling expenses decreased from approximately $24,000 in the three months ended
March 31, 2019 to approximately $13,000 in the three months ended March 31,
2020. The decrease of approximately $11,000, or 43.8%, was mainly due to the
decrease of approximately $7,200 of shipping expenses and the decrease of
approximately $5,500 of marketing expenses.
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General and administrative ("G&A") expenses decreased by approximately $7,000
from approximately $390,000 in the three months ended March 31, 2019 to
approximately $383,000 in the three months ended March 31, 2020. The decrease
was mainly attributable to the decrease of approximately $31,000 of professional
expenses, such as attorneys fees, auditor fees and consulting fees, and the
decrease of approximately $1,100 of other miscellaneous G&A expenses, offset by
the increase of approximately $25,000 of rent expense and the increase of
approximately $17,000 of bad debt expense.
Stock compensation expenses increased by approximately $14,000 during the three
months ended March 31, 2020 compared to the same period in 2019. Approximately
$64,000 and $63,000, related to the amortization of the value of 2,300,000
shares of restricted common stock to three employees for the three months ended
March 31, 2020 and 2019, respectively, which all have a vesting period of three
years. In addition, in March 2019, we issued 1,000,000 shares of our common
stock to an advisor to provide certain business and financial operation and
planning consultation services, and amortized such cost, which was $125,000 and
$25,000 during the three months ended March 31, 2020 and 2019, respectively. We
also issued shares of our common stock to other financial advisors which
resulted in $105,000 of stock compensation expense during the three months ended
March 31, 2019.
During the three months ended March 31, 2020, we traded in one of our vehicles
which resulted in a gain of $16,000.
Other income (expense) decreased by approximately $300,000 from approximately
$259,000 in the three months ended March 31, 2019 to approximately ($41,000) of
expense in the three months ended March 31, 2020, mainly due to the decrease of
approximately $241,000 of gain on settlement of debt in which we issued stock
with a fair value of approximately $763,000 in exchange for the settlement of
debt of approximately $1.0 million during the three months ended March 31, 2019.
We did not enter into such transactions during the same period in 2020.
Net loss increased by approximately $371,000 from approximately $222,000 in the
three months ended March 31, 2019 to approximately $593,000 in the three months
ended March 31, 2020, mainly due to the reasons discussed above.
Liquidity and Capital Resources
As of March 31, 2020, we had a cash balance of approximately $10,000, compared
to a cash balance of approximately $9,000 at December 31, 2019.
In assessing our liquidity, we monitor and analyze our cash on-hand and our
operating and capital expenditure commitments. Our liquidity needs are to meet
our working capital requirements, operating expenses and capital expenditure
obligations. Other than operating expenses and an outstanding commitment of $1.0
million in relation to the purchase of assets associated with the manufacture of
dietary supplements, the Company does not have significant cash commitments.
Cash requirements include cash needed for purchase of inventory, payroll,
payroll taxes, rent, and other operating expenses. However, in response to the
reduced liquidity factors described above, the Company has continued to find
ways to reduce its operating expenses. In addition, should our Company need
additional capital, our principal shareholder and Chief Executive and Financial
Officer may lend additional money to the Company from time to time to the extent
he is in a position and willing to do so. No assurance can be provided that he
will continue to lend funds to the Company in the future.
Management has concluded under 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 negative 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.
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For the three months ended March 31, 2020, cash used in operating activities
amounted to approximately $187,000 as compared to approximately $357,000 used in
operating activities in the same period in 2019. Cash used in operating
activities for the three months ended March 31, 2020 was primarily the result of
our $593,000 net loss, non-cash transaction of approximately $16,000 from gain
on disposal of equipment, the increase of account receivable of approximately
$12,000, and the payment of lease liabilities of approximately $65,000 as we
paid for our lease obligations when they become dues. This amount was partially
offset by the non-cash expense of approximately $189,000 in stock based
compensation, approximately $12,000 of depreciation expenses, approximately
$36,000 in amortization of operating leases right-of-use assets, approximately
$17,000 of bad debt expense and the increase of accounts payable and accrued
expenses of approximately $241,000 as we were behind on our payment schedule.
For the three months ended March 31, 2020, financing activities provided
approximately $187,000 as compared to approximately $66,000 during the three
months ended March 31, 2019. Net cash received in the three months ended March
31, 2020 includes approximately $180,000 from the issuance of common stock and
collection of our stock subscription receivable, approximately $9,000 from a
loan from our principal shareholder and Chief Executive and Financial Officer,
and approximately $10,000 from a third party loan. These amounts were partially
offset by our repayment to our principal shareholder and Chief Executive and
Financial Officer of approximately $10,000.
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