Merion, Inc. - Annual Report: 2015 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

OR

Commission file number 333-151200

Issuer’s telephone number: (626) 448-3737

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Common stock, par value $0. 001 per share

(Title of class)

_____________________

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes x No o

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No x

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes o No x

The aggregate market value of the Registrant’s Common Stock held by non-affiliates of the Registrant based upon the closing price of the Registrant’s Common Stock as of June 30, 2015 was approximately $1,132,997 (based on 11,329,973 shares of common stock outstanding held by non-affiliates on such date, $0.10 per share). Shares of the Registrant’s Common Stock held by each executive officer and director and by each entity or person that, to the Registrant’s knowledge, owned 5% or more of the Registrant’s outstanding Common Stock as of June 30, 2015 have been excluded in that such persons may be deemed to be affiliates of the Registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of outstanding shares of Registrant’s Common Stock, $0.001 par value, was 142,828,993 shares as of February 6, 2017.

TABLE OF CONTENTS

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION

This Annual Report on Form 10-K, the other reports, statements, and information that we have previously filed or that we may subsequently file with the Securities and Exchange Commission, or SEC, and public announcements that we have previously made or may subsequently make, may include or may incorporate by reference certain statements that may be deemed to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and are intended to enjoy the benefits of that act. Unless the context is otherwise, the forward-looking statements included or incorporated by reference in this Form 10-K and those reports, statements, information and announcements address activities, events or developments that E-World USA Holding, Inc. (hereinafter referred to as “we,” “us,” “our,” “our Company” or “E-World”) expects or anticipates, will or may occur in the future. Any statements in this document about expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “will continue,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” and similar expressions. Accordingly, these statements involve estimates, assumptions and uncertainties, which could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this document. All forward-looking statements concerning economic conditions, rates of growth, rates of income or values as may be included in this document are based on information available to us on the dates noted, and we assume no obligation to update any such forward-looking statements. It is important to note that our actual results may differ materially from those in such forward-looking statements due to fluctuations in interest rates, inflation, government regulations, economic conditions and competitive product and pricing pressures in the geographic and business areas in which we conduct operations, including our plans, objectives, expectations and intentions and other factors discussed elsewhere in this Report.

Certain risk factors could materially and adversely affect our business, financial conditions and results of operations and cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us, and you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. The risks and uncertainties we currently face are not the only ones we face. New factors emerge from time to time, and it is not possible for us to predict which will arise. There may be additional risks not presently known to us or that we currently believe are immaterial to our business. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. If any such risks occur, our business, operating results, liquidity and financial condition could be materially affected in an adverse manner. 

The industry and market data contained in this report are based either on our management’s own estimates or, where indicated, independent industry publications, reports by governmental agencies or market research firms or other published independent sources and, in each case, are believed by our management to be reasonable estimates. However, industry and market data is subject to change and cannot always be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties inherent in any statistical survey of market shares. We have not independently verified market and industry data from third-party sources. In addition, consumption patterns and customer preferences can and do change. As a result, you should be aware that market share, ranking and other similar data set forth herein, and estimates and beliefs based on such data, may not be verifiable or reliable.

PART I

NOTICE TO INVESTORS:

PLEASE READ BEFORE EXAMINING THE REMAINDER OF THIS FORM 10-K.

If E-World’s new method of marketing in China, called the Affiliate Marketing Program, is considered by Chinese government authorities to violate the laws of the People’s Republic of China, the Company could suffer damages similar to, or harsher than, those which resulted from actions taken by the Chinese government in connection with the Company’s previous, now-discontinued Direct Sales Associate, or “DSA”, sales method, which could lead to a significant decline in revenues as well as the loss of all or a significant amount of the value of your investment.

As noted in “Legal Proceedings” below, the Company suffered significant financial hardship as a result of the Chinese government’s action against E-World’s sales activities under its previous DSA marketing program, now discontinued, which the government alleged violated Chinese law. These hardships include the loss of $3,643,000 in cash that is the property of the Company that is now held in bank accounts in the People’s Republic of China and, to a material extent, a decrease in E-World’s annual revenue from $6,833,768 for the fiscal year ended December 31, 2014 to $367,393 for the fiscal year ended December 31, 2015.

The Chinese legal provisions governing the type of sales activities currently used by E-World, called the Affiliate Marketing Program, or AMP (“AMP”) are called Regulations on Prohibition of Chuanxiao (2005) [“Anti Chuanxiao Regulations”]. The law gives regulatory authorities wide discretion in applying the Anti-Chuanxio Regulations to sales activities, such as the AMP used by the Company in China.

There is significant risk that the Chinese regulatory authorities can find the AMP illegal under relevant Chinese law for the following reasons:

Notwithstanding the past history of being found in violation of Chinese law for its selling methods and the significant adverse consequences described above, the Company has chosen to continue to utilize the AMP.

INVESTORS ARE URGED TO USE EXTREME CAUTION IN CONNECTION WITH ANY EXISTING OR POTENTIAL INVESTMENT IN THE COMPANY BECAUSE OF THE RISKS CITED ABOVE.

Item 1. Description of Business

Introduction

Our Company is a provider of Health and Nutritional supplements and Personal Care products currently sold on the Internet. In June 2014, we suspended our prior sales model which involved sales of our products through another website by means of a network of Direct Sales Associates, or “DSA’s.” In response to the legal action taken by the Chinese authorities that resulted in freezing approximately $3,643,000 of funds held in a Chinese account, since June 2014, we have mainly sold our products over the Internet directly to end-user customers, and sales have decreased in a material amount due to the elimination of the use of DSA’s.

We currently do not use the DSA model in any country, and we cannot predict when, if ever, we will recommence using this model. To date, sales through our website, www.dailynu.com, and our Affiliate Marketing Program (launched in March 2016) have not generated a significant volume of sales, and no assurance can be provided that sales will improve in the near term or long term.

Company History

E-World USA Holding, Inc., a California corporation and our predecessor, was established in January 2007. In April 2011, E-World USA Holding, Inc., a California corporation entered into a merger agreement with its wholly-owned subsidiary, E-World USA Holding, Inc., a Nevada corporation, which was the survivor of the merger. Under the Merger Agreement, we issued 90,000,000 shares of our common stock on a one share for one share basis for each share of E-World USA Holding, Inc., a California corporation, common stock issued and outstanding at the date of the merger. In addition, we issued Type A and Type B Warrants in exchange for comparable Warrants issued and outstanding in E-World USA Holding, Inc., a California corporation, at the date of the merger. All Type A and Type B Warrants have been fully exercised, and none are currently issued and outstanding.

On October 20, 2014, we established a wholly owned subsidiary, E-World Canada Holding, Inc., for the purpose of acquiring a Company in Canada. Also, on October 24, 2014, we entered into a Share Purchase Agreement for the purchase of the outstanding shares of Prime Nutrisource Inc., Nugale Pharmaceutical Inc., and Prime Nutrisource Inc. (New Jersey), in consideration of CAD$2,000,000, the equivalent of $1,766,071, the issuance of a promissory note in the principal amount of CAD$22,780,000, the equivalent of $20,184,902, and the issuance of 25,000,000 exchangeable shares of the Company. In addition, we have agreed to issue to the previous owner of Prime additional shares of exchangeable stock of the Purchaser following the completion of the Offering so that the 25,000,000 exchangeable shares plus such additional shares of exchangeable stock could be exchanged for an aggregate of 25% of the issued and outstanding shares of common stock of our Company immediately following the completion of the Offering.

On April 21, 2015, we terminated our purchase of the Prime Corporations, and entered into a Termination and Release Agreement with the Prime Corporations, the former owners of the Prime Corporations, Guo Yin Xie, Jian Long, Hong Shu Zhu, 2434689 Ontario Inc., 2434691 Ontario Inc., and 2434694 Ontario Inc., and our subsidiary E-World Canada Holding, Inc.. Upon termination of the agreement:

Products

In June 2014, we suspended our direct marketing model in China in response to the legal action taken by the Chinese authorities. Since June 2014, we have sold our products primarily over the Internet directly to end-user customers. Certain miscellaneous sales are made directly to customers who walk into the Company 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, www.dailynu.com. As of the date of filing of this Report, the Company continues to market its seven individual nutritional supplement products and seven skin-care products on this website. We also sell similar products of third parties on the site. See "Notice to Investors," above.

Company Products

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 small molecular nutrition formula.

In November and December 2016, our Dibeier Granules & Oral products successfully passed the inspection by the Shenzhen Academy of Metrology & Qualify Inspection and the Guangdong Quality Supervision and Inspection Institution for Food (Shenzhen). A copy of these two inspection reports are filed as an exhibit to this Form 10-K. As a result, we believe that that our Dibeier Granules & Oral products will be able to be directly exported to the China market and to be sold at nutritional supplement stores in China as food, rather than only through our website. The Company is working to determine which U.S. and Chinese regulatory requirements must be satisfied before it undertakes any exports of the Dibeier products. No assurance can be given that such exports will eventually occur.

The nutritional supplements do not have intellectual property protection for the formulas. Nutritional products consisted of 98% and 81% of total sales for the years ended December 31, 2015 and 2014, respectively.

Our skin-care products were developed, and formulas are owned by, another company from which we purchased the rebranding right. These products focus on restoring epidermal calcium. The products are intended to provide a positive epidermal environment for the homeostasis and regeneration of a person’s own skin barrier. The products were first introduced in 2010 and consisted of 2% and 19% of the 2015 and 2014 annual sales, respectively.

Both types of products were previously sold to persons we called members under our currently discontinued model and are now sold directly to end-user customers from our new website and through our Affiliate Marketing Program. See further discussion in the section "Marketing - The Affiliate Marketing Program."

Other Products

We sell health and nutrition products manufactured by third parties that are already being sold by third party vendors. E-World has obtained permission from the third party vendors to resell the products on our www.dailynu.com website on a purchase order basis.

Sales breakdown

Currently, the Company does not have plans to expand its business beyond the nutritional supplement and skin-care sectors, although the Company is now selling products of third party vendors. Less than 1% of our sales in 2015 came from the sale of products of third parties.

Nutritional Supplements and Price per Bottle/Package

Skin-care and Price per Bottle/Package

Other Products

Products of third party vendors are sold at retail prices similar to those for which the products are being sold by other merchants.

Return and Refund Policy for Our Products

E-World USA guarantees the quality of its products, and will exchange any product found to be defective. Additionally, customers can apply for a 90% refund of the original amount of purchased products within 60 days of purchase. When products are returned, they must be unopened and resalable. All shipping fees for product exchanges or returns must be fully paid by customers. E-World will not be responsible for any shipping costs. All of the returned products must not be damaged and be within the validity period specified on the product label. Products not manufactured by E-World have a 60 day return period for exchange, but without the 90% refund policy for the products. 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 costs less commissions and shipping costs.

Marketing: The Affiliate Marketing Program

The Company has alerted investors and others reading this Report about risks related to its Affiliate Marketing Program.

See "Notice to Investors," above. 

A more complete description of how the AMP operates is as follows:

Cost-Per-Sale (CPS) affiliate marketing

Based on the description of the Company, the Affiliate Marketing Program appears on its face to be the “Cost-Per-Sale” (CPS) marketing method, a popular internet-based marketing method used by e-commerce companies in China. Under the CPS affiliate marketing method, the cost of advertising is determined by the revenue generated as a result of the advertisement itself.

Relevant Chinese Law

The Company’s understanding of Chinese law relevant to current AMP activities is as follows:

“Multi-level marketing” (“MLM”) or “pyramid marketing” is not a legal term used under PRC law. However, it is commonly understood as a marketing strategy or salesforce structure in which the sales force is compensated not only for sales they generate, but also for the sales of the other salespeople that they recruit. In this sense, MLM is generally prohibited by the Regulations on Prohibition of Chuanxiao (2005) (“Anti-Chuanxiao Regulations”).

Anti-Chuanxiao Regulations use the simplified Chinese term “Chuanxiao” (mandarin pinyin: “chuán xiāo”) to cover those prohibited fraudulent sales and marketing activities. According to the Anti-Chuanxiao Regulations:

According to the above provisions, Anti-Chuanxiao Regulations not only prohibit MLM but also one-level marketing, if the one-level marketing resembles the pattern described in paragraph 2) above.

Neither “affiliate marketing” nor CPS is a legal term under PRC law. PRC law, including the Anti-Chuanxiao Regulations, does not classify CPS or this type of marketing method as an illegal marketing activity. Thus it appears that CPS is a neutral internet based marketing tool, and that the legality of the Affiliate Marketing Program largely depends on if it is used for illegal purposes or associated with illegal activities.

Potential legal risks in relation to the Affiliate Marketing Program and the activities of the Company and Affiliate Members

Sourcing and Production

Our Products

In order to maintain high product quality, we anticipated that we would manufacture our products upon successful completion of our acquisition of Prime. As we terminated such acquisition in April 20, 2015, we currently do not manufacture and do not intend in the future to manufacture any of the products we sell. Instead, we acquire our ingredients from the suppliers and contract for production of our proprietary products from the manufacturers that we believe are reliable, reputable and deliver high quality materials, products and service. In 2015, three suppliers, SUSS Technology Corp., Taiwan K.K. Corp and V-Plus Trading Inc., accounted for approximately 71.8% of our purchases. In 2014, two suppliers, SUSS Technology Corp and Maxsun Industries, Inc., accounted for approximately 74.2% of our purchases. The loss of one or more suppliers could result in a potential loss of our sales and revenues if we cannot find a substitute.

The Company does not have a written or contractual agreement with our other suppliers, or manufacturers. Our product ingredient sourcing and other manufacturing requirements are conducted on a purchase-order basis. If one or more of our current suppliers stopped selling us ingredients and/or if one or more of our current manufacturers stopped manufacturing our products, we would be forced to find other suppliers and manufacturers. The time needed to find other suppliers or manufactures could outlast the inventory on hand and result in loss of sales.

We maintain a good relationship with our suppliers and do not anticipate that any of our suppliers will terminate the relationship in the near term. We also have ongoing relationships with secondary and tertiary suppliers. In the event we become unable to source any products or ingredients from our major suppliers, we believe that we would be able to produce or replace those products or substitute source these ingredients from our secondary and tertiary other suppliers without great difficulty or significant increases to our cost of goods sold.

Our Skin-care products are developed by a company which owns the intellectual property for those products. We purchased the rebranding right from them to sell these products under our names. Currently we only have one supplier for our skin-care products, and the specific product is solely owned by this supplier. If the supplier were to discontinue this product, we would need to find a substitute supplier for a similar product. We have not identified any substitute supplier or substitute product.

For nutritional products, we purchase our ingredients from third parties and contract with a third party manufacturer for further processing the material into final products to be sold. We do not own a manufacturing plant for processing of our products. We only provide self-developed formulas to be manufactured. Our company is able to obtain the ingredients necessary for production of our nutritional supplements. Our skin-care products are produced by our supplier, and we are unable to obtain the intellectual property rights to produce such products.

We also maintain a good relationship with our manufacturers and do not anticipate that any of our manufacturers will terminate our relationship in the near term. In the event we become unable have our products manufactured by our major manufacturers, we believe that we would be able to reallocate production to our other manufacturers or locate other manufacturers without great difficulty or significant increases to our cost of goods sold.

Other Products

We currently acquire other products we sell from third party vendors on a wholesale basis and then resell them on our website. We acquire most of these products on a purchase order basis. A small amount of products is purchased and stored in our warehouse. Less than 1% of our sales in 2015 and 2014 came from these products.

Order Backlog

We have no current order backlog.

Industry Analysis

The nutrition industry includes many small and medium sized companies that manufacture and distribute products generally intended to enhance the body’s performance and wellness. The four major product categories within the nutrition industry are:

The nutritional supplement market is characterized by:

Marketing Plan

The Company promotes its products through its website and newspaper advertisements. During the early stages of implementation of the website, the Company offered coupon codes for certain products to generate sales and website traffic but has since discontinued this practice.

The majority of the Company’s sales are generated from China for the years ended December 31, 2015 and 2014.

Since June 2014, we have mainly sold our products over the Internet directly to end-user customers through our web site, www.dailynu.com. In March 2016, we launched an Affiliate Marketing Program. See Marketing: The Affiliate Marketing Program in the aforementioned section above.

In addition, we believe that consumers have become more confident in ordering products, like ours, over the Internet. However, the nutritional supplement and skin care product e-business markets have been, and continue to be, increasingly competitive and are rapidly evolving.

The Company hopes to export its Dibeier products into China to be sold over-the-counter in retail locations such as nutritional product stores, rather than only through our website. The Company is currently examining the regulations that may apply to the export of Dibeier products, but no assurance can be given that the export of such products will occur in the future.

Competition

The market for nutritional products is large and intensely competitive. The Company competes directly with companies that manufacture and market nutritional products. The Company competes with other companies in the nutritional products industry by emphasizing the uniqueness, value and premium quality of the Company's products and convenience of the Company's Internet sales system. Many of the Company's competitors have much greater name recognition and financial resources than the Company. In addition, nutritional products can be purchased in a wide variety of channels of distribution. While the Company believes that consumers appreciate the convenience of ordering products from home through the Internet, the buying habits of many consumers accustomed to purchasing products through traditional retail channels are difficult to change. The Company's product offerings are also relatively small compared to the wide variety of products offered by many other nutritional product companies.

Intellectual Property

We have no registered or patented intellectual property in the United States. We have common law ownership rights for the formulations for six of our seven non-cosmetic products.

The Company has obtained in China a Trademark Registration for the name of “Dibeier” (or mandarin pinyin: “Nuo Lin”) with trademark application number 20669799 as set forth in Exhibit 10.3. Under China law, this trademark is valid for an indefinite period, as there is no expiration date.

The Company has obtained in China a Trademark Registration for the name of “DailyNu” with trademark application number 20683305 as set forth in Exhibit 10.4. Under China law, this trademark is valid for an indefinite period, as there is no expiration date.

Other than the aforementioned trademarks, we do not own any other registered trademarks, trade names or other governmentally approved intellectual property rights for those products.

The three types of cosmetics products have formulation patents owned by our supplier of these products, Genepharm Inc. manufactures these products and packages them with Company designed packaging under an oral agreement with us. The formulation of the O2 Cell Power product is owned by Oxygen America, Inc., which manufactures this product and packages it with Company designed packaging under an oral agreement with us. We are authorized by these suppliers under oral agreements to sell these products worldwide under our brand name without infringing any rights of Genepharm or Oxygen America, Inc.

Research and Development

We are not currently conducting any research and development activities.

Government Regulation

Given uncertainties as to full compliance with network marketing laws in foreign jurisdictions, in 2014, the Company discontinued sales through the network marketing model and began selling directly to end-user customers from its new website. See "Notice to Investors," above.

We believe we are no longer subject to network marketing regulations. Nonetheless, we are still subject to federal, state, local and foreign regulations. Various governmental agencies have an impact on our business. The regulations cover product ingredients, manufacturing, distribution, marketing, sales, compensation and taxation, to name a few. If the Company were to fail to meet standards set by these regulations, then the Company could be prohibited from selling its products. See “Notice to Investors” above, and “Potential legal risks in relation to the Affiliate Marketing Program and the activities of the Company and Affiliate Members,” above.

The Company hopes to export its Dibeier products into China to be sold over-the-counter in retail locations such as nutritional product stores, rather than only through our website. Under China Law, in order to import these products into China, the Company must provide the Inspection Report from Provincial Quality Supervision and Inspection Institution obtained in November and December 2016 (as set forth in Exhibits 10.1 and 10.2), the Product Chinese Name registration (as set forth in Exhibit 10.3) obtained in September 2016 and the Trademark registration (as set forth in Exhibit 10.4) obtained in September 2016 from the Trademark Office of State Administration for Industry & Commerce of China to the importer in China. The Company currently has no binding contracts or agreement with any person or entity in China to purchase and import the Dibeier products. The Company is currently reviewing U.S. and Chinese import/export regulations regarding the sale of Dibeier products and will not commence the export and sale of Dibeier products until it believes that it is in compliance with these regulations. Additional information concerning this matter will be made available in the Company’s future SEC reports.

Employees

We have the following employees:

We have no collective bargaining agreement with our employees. We consider our relationship with our employees to be excellent.

Additional Information

We are a public company and are required to file annual, quarterly and special reports and other information with the SEC. We are currently delinquent in our reporting requirements. We are not required to, and do not intend to, deliver an annual report to security holders. You may read and copy any document we file at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. You can request copies of these documents by writing to the SEC and paying a fee for the copying cost. Please call the SEC at 1-800-SEC-0330 for more information about the operation of the public reference room. Our filings are also available, at no charge, to the public at http://www.sec.gov.

Item 2. Description of Property

We rent the following properties:

U.S. Offices and warehouses

We believe our current facilities, including warehousing facilities, are fully suitable and adequate for our business.

We do not intend to renovate, improve, or develop properties. We are not subject to competitive conditions for property. We have no policy with respect to investments in real estate or interests in real estate and no policy with respect to investments in real estate mortgages. Further, we have no policy with respect to investments in securities of or interests in persons primarily engaged in real estate activities.

Item 3. Legal Proceedings

We are not a party to any material legal proceedings nor are we aware of any circumstance that may reasonably lead any third party to initiate material legal proceedings against us, except with respect to the matter described below and as set forth in the "Notice to Investors," above, and as set forth in “Potential legal risks in relation to the Affiliate Marketing Program and the activities of the Company and Affiliate Members,” above.

Notwithstanding the foregoing, on May 26, 2015, the Board of Directors concluded that a material charge for impairment to one of its assets is required under generally accepted accounting principles. The impaired assets are approximately $3,643,000 in cash that is the property of the Company held in bank accounts in the People’s Republic of China, which for administrative reasons in China, were held in the name of Ding Hua Wang, President and Chief Executive Officer of the Company, that have been frozen by authorities in the Chinese legal system (the “Frozen Accounts”) in a case involving alleged illegal activities in China by one or more persons claiming to be officers in the Company in China. The Chinese legal authorities asserted that these activities gave them the right to freeze property of the Company in China, (i.e., the Frozen Accounts), notwithstanding the fact that Company itself was not named in the case. Accordingly, the Board of Directors recognized an impairment of this amount in the financial statements filed in this Report.  Although the Company believed that the funds in the Frozen Accounts were improperly frozen, the Company now believes, based on an informal conversation with a person in another company, that the Frozen Accounts will never be returned to the Company.  As of the date of this Report, the Company and Mr. Wang are not aware of a separate case having been filed against the Company or Mr. Wang. 

Mr. Wang, President of the Company, individually filed a complaint to the Commission for Discipline Inspection of the Central Committee of the Communist Party of China and is in the process of attempting to recover the Frozen Accounts. Based upon the foregoing with respect to the status of the matter against the Company, As of the date of this Report, although this action is is still pending, neither Mr. Wang nor the Company expects to prevail. 

Item 4. Mine Safety Disclosures

None

PART II

Item 5. Market for Common Equity and Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities

Trading History

Our common stock is qualified for quotation on the OTCQB under the symbol “EWLU.”

There have been no trades in our Common Stock as of the date of this Report, as we are not current in our SEC filings. While the Company is committed to bringing its SEC reporting obligations current, no assurance can be provided as to if or when trading in the Company’s securities will be permitted.

Dividends

We have never declared or paid any cash dividends on our common stock. For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our common stock. Any future determination to pay dividends will be at the discretion of the Board of Directors and will be dependent upon then existing conditions, including our financial condition and results of operations, capital requirements, contractual restrictions, business prospects and other factors that the Board of Directors considers relevant.

There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends. The Nevada Revised Statutes, however, prohibit us from declaring dividends where, after giving effect to the distribution of the dividend:

Securities Authorized for Issuance Under Equity Compensation Plans

None

Item 6. Selected Consolidated Financial Data

Not required.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes, and other financial information included in this Form 10-K.

Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking. 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 rate; 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 directly to customers on the Internet through our website, www.dailynu.com. In June 2014, we ceased utilizing our prior sales model which involved sales of our product through another website by means of a network of Direct Sales Associates, or “DSA’s." We currently do not use the DSA model in any country.

Since June 2014, we have sold our products over the Internet directly to end-user customers through our web site, www.dailynu.com. In March 2016, we launched an Affiliate Marketing Program. See "Marketing: The Affiliate Marketing Program," above.

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

The skin care products are acquired from another company which developed the products. They also are marketed and sold through our web site, www.dailynu.com.

Barriers to entry are minimal, 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 increasing access to that technology are paving the way for growth in direct marketing. We also face competition for consumers from retailers, duty-free retailers, specialty stores, department stores and specialty and general merchandise catalogs, many of which have greater financial and marketing resources than we have. Notwithstanding the foregoing, we believe that we are well-positioned within the Asian consumer market with our current plan of supplying American merchandise brands to consumers and that our exposure to both the Asian and American cultures gives us a competitive advantage. There can be no assurance that we will maintain our competitive edge or that we will continue to provide only American made merchandise.

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

Discontinued operations

On October 20, 2014, we entered into a Share Purchase Agreement for the purchase of the outstanding shares of Prime Nutrisource Inc., Nugale Pharmaceutical Inc., and Prime Nutrisource Inc. (New Jersey), and together as “Prime”. Total purchase price included:

On April 21, 2015, we terminated our purchase of the Prime Corporations, and entered into a Termination and Release Agreement with each of the Prime Corporations, the former owners of the Prime Corporations, Guo Yin Xie, Jian Long, Hong Shu Zhu, 2434689 Ontario Inc., 2434691 Ontario Inc., and 2434694 Ontario Inc., and the Company’s subsidiary E-World Canada Holding, Inc.. The parties agreed that the Termination Agreement would be deemed effective as of October 20, 2014. Upon termination of the agreement:

In accordance with ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, a disposal of a component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the components of an entity meet the criteria in paragraph 205-20-45-1E to be classified as held for sale. When all of the criteria to be classified as held for sale are met, including management, having the authority to approve the action, commits to a plan to sell the entity, the major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations, less applicable income taxes (benefit), shall be reported as components of net income (loss) separate from the net income (loss) of continuing operations in accordance with ASC 205-20-45.

Results of Operations

Comparison of the fiscal years ended December 31, 2015 and 2014

Total sales decreased by approximately $6.5 million or 94% from approximately $6.8 million in 2014 to approximately $379,000 in 2015. The decrease of sales was mainly due to termination of our prior sales model which involved sales of our product by means of a network of Direct Sales Associates, or “DSA’s” in June 2014 with a higher selling price. Since June 2014, we have mainly sold our products over the Internet directly to end-user customers with a lower selling price. As a result, the change in sales approach has materially decreased sales of the Company.

The cost of sales decreased by approximately $272,000 or 44% from approximately $617,000 in 2014 to approximately $345,000 in 2015. The decrease was mainly due to the decreases in sales as we ceased utilizing our prior sales model in June 2014 which involved sales of our product through another website by means of DSA’s.

Gross profit percentage is generally higher with the sales of our own products with the DSA model than selling our products over the Internet directly to end-user customers. As a result, from ceasing to utilize our prior sales model which involved sales of our product through another website by means of the DSA model in June 2014, our gross margin decreased from approximately $6.2 million or 91% in 2014 to approximately $35,000 or 9% in 2015.

Selling expenses decreased from approximately $373,000 in 2014 to approximately $305,000 in 2015. The decrease of approximately $68,000 or 18% was mainly due to a decrease in shipping expenses which is in line with our decrease in sales offset by the increase in marketing development expenses incurred for promotion of our own website.

General and administrative expenses decreased by approximately $109,000 from approximately $3.0 million in 2014 to approximately $2.9 million in 2015. General and administrative expenses decreased significantly mainly attribute to reduction of payroll expenses as we required fewer employees to support our decreased sales after the change of our sales model.

Impairment expense totaled approximately $3,643,000 in 2014 that is related to cash frozen by authorities in the Chinese legal system (the “Frozen Accounts”) in a case involving alleged illegal activities in China by one or more persons claiming to be officers in the Company in China. The account was held in the name of Ding Hua Wang, President and Chief Executive Officer of the Company. Those funds remain frozen. There was no additional impairment in 2015. See Item 3 - Legal Proceedings.

Other expenses totaled approximately $178,000 in 2015 mainly due to approximately $913,000 of gain from the disposal of Prime in April 2015 offset by approximately $1,083,000 from amortization of promissory note discount related to the short term debt issued to acquire Prime in 2015 as compared to approximately $708,000 of amortization of promissory note discount in 2014. The promissory note was non-interest bearing and therefore was discounted and amortized over the term of the note.

Net loss from continuing operations increased by approximately $1.8 million from approximately $1.5 million net loss in 2014 to $3.4 million net loss in 2015 mainly due to decrease in sales as mentioned above.

Net (loss) income from discontinued operations totaled approximately $(123,000) in 2015 and approximately $472,000 in 2014 resulted from the acquisition of Prime on October 20, 2014, which we terminated on April 21, 2015. Prime incurred loss from its operations in 2015 mainly due to the fact that it has incurred more professional fees such as accounting, legal and consulting expense in related to the merger between Prime and us.

Liquidity and Capital Resources

As of December 31, 2015, we had a cash balance of $8,550 and $317,346 at December 31, 2014. Our cash balance at December 31, 2015 and December 31, 2014 was significantly impacted by the inability to access approximately $3,643,000 in cash held in bank accounts in the People’s Republic of China and decreased sales of the Company after the change in sales approach from the DSA sales model to our direct sales to end users from our own website without utilizing any sales agents.

In 2015, cash used in operating activities amounted to approximately $2.0 million as compared to approximately $4.0 million used in operating activities in 2014. Cash used in operating activities was mainly due to approximately $3.4 million of net loss from the Company and the decrease of approximately $0.1 million of deferred revenue, offset by non-cash operating activities of approximately $0.3 million, operating activities from discontinued operations of approximately $1.0 million and increase of accounts payable and accrued expenses of approximately $0.2 million, as we are behind on payments for various of our operating expenses.

In 2015, cash used in investing activities amounted to approximately $0.8 million as compared to $1.7 million in 2014. Cash used in investing in 2015 was mainly due to disposal of approximately $2.0 million in Prime’s cash balance offset by $1.2 million in cash consideration returned from disposal of Prime.

In 2015, financing activities provided approximately $1.4 million as compared to approximately $1.9 million in 2014. Net cash received in 2015 for the amount of approximately $2.0 million was from our principal shareholder and Chief Executive Officer, our related parties and our employee as compared to approximately $2.6 million in 2014. We repaid principal payments of approximately $0.5 million to these parties as compared to approximately $0.6 million in 2014.

Other than operating expenses, the Company does not have significant cash commitments. Cash requirements include cash needed for 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 our operating expenses. In addition, should our Company need additional capital, we expect that our principal shareholder and Chief Executive Officer and his affiliates may continue to lend money to the Company from time to time to the extent they are in a position to do so. As of December 31, 2015, we owe an aggregate of approximately $3.8 million to our CEO and his affiliates. No assurance can be provided that they will be in a position to continue to lend funds to the Company in the future.

Management has concluded under generally accepted accounting principles that there is substantial doubt about our ability to continue as a going concern as a result of our lack of significant revenues, recurring losses 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.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Not required.

Item 8. Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of

E-World USA Holding, Inc.

El Monte, California

We have audited the accompanying consolidated balance sheets of E-World USA Holding, Inc. (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations and other comprehensive loss, shareholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2015. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has a working capital deficiency, which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to this matter are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ The Pun Group, LLP

Santa Ana, California

February 6, 2017

200 East Sandpointe Avenue, Suite 600, Santa Ana, California 92707

Tel: 949-777-8800 · Toll Free: 855-276-4272 · Fax: 949-777-8850

www.pungroup.com

The accompanying notes are an integral part of these financial statements

The accompanying notes are an integral part of these financial statements

The accompanying notes are an integral part of these financial statements

The accompanying notes are an integral part of these financial statements

E-WORLD USA HOLDING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Organization

E-World USA Holding, Inc. (the "Company"), a Nevada corporation, was formed February 4, 2011. Its predecessor, with the same name was a California company incorporated in 2007. In April 2011, E-World USA Holding, Inc., a California corporation entered into a merger agreement with its wholly-owned subsidiary, E-World USA Holding, Inc., a Nevada corporation which was the survivor of the merger. Under the Merger Agreement, the Company issued 90,000,000 shares of its common stock on a one share for one share basis for each share of E-World USA Holding, Inc., a California corporation, common stock issued and outstanding at the date of the merger. In addition, the Company issued the Type A Warrants and Type B Warrants in exchange for comparable Warrants issued and outstanding of E-World USA Holding, Inc., a California corporation, at the date of the merger.

The Company is a provider of health and nutritional supplements and personal care products currently sold on the Internet through our website www.dailynu.com. In June 2014, we suspended our prior sales model which involved sales of our products through another website by means of a network of Direct Sales Associates, or “DSA’s”.

On October 20, 2014, the Company established a wholly owned subsidiary, E-World Canada Holding, Inc. for the purpose of acquiring a company in Canada.

Note 2 – Discontinued Operations

On October 20, 2014, the Company entered into a Share Purchase Agreement for the purchase of the outstanding shares of Prime Nutrisource Inc., Nugale Pharmaceutical Inc., and Prime Nutrisource Inc. (New Jersey), and together “Prime”. Total purchase price included:

On April 21, 2015, the Company terminated its purchase of Prime, and entered into a Termination and Release Agreement with each of Prime, the former owners of the Prime, Guo Yin Xie, Jian Long, Hong Shu Zhu, 2434689 Ontario Inc., 2434691 Ontario Inc., and 2434694 Ontario Inc., and the Company’s subsidiary E-World Canada Holding, Inc. Upon termination of the agreement:

E-WORLD USA HOLDING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Total gain from disposal of Prime on April 21, 2015 is calculated as follows:

In accordance with ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, a disposal of a component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the components of an entity meet the criteria in paragraph ASC 205-20-45-1E to be classified as held for sale. When all of the criteria to be classified as held for sale are met, including management, having the authority to approve the action, committing to a plan to sell the entity, the major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations, less applicable income taxes (benefit), shall be reported as components of net income (loss) separate from the net income (loss) of continuing operations in accordance with ASC 205-20-45.

Reconciliation of the carrying amounts of major classes of assets and liabilities of discontinued operations classified as held for sale in the consolidated balance sheet at December 31, 2014 and as of the disposal date at April 21, 2015 is as follows:

E-WORLD USA HOLDING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Reconciliation of the amounts of major classes of income and losses from discontinued operations in the consolidated statements of operations and comprehensive income (loss) is as follows:

The Company’s acquisition of Prime was accounted for as a business combination in accordance with ASC 805. The Company allocated the purchase price of Prime based upon the fair value of the identifiable assets acquired and liabilities assumed on the acquisition date. Management determined the fair value of assets acquired, liabilities assumed and intangible assets identified, as of the acquisition date, and considered a number of factors including valuations from independent appraisers. Acquisition-related costs incurred for the acquisition were not material and were expensed as incurred in general and administrative expense. The valuation methodologies, all level 3 inputs, were as follows:

E-WORLD USA HOLDING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the fair value of the identifiable assets acquired and liabilities assumed on the acquisition date, October 20, 2014, which represents the net purchase price allocation of Prime based on valuation performed by an independent appraisal firm engaged by the Company:

The following table represents total consideration paid for the acquisition of Prime:

Valuation of the 25,000,000 exchangeable shares of the Company

The Company valued the 25,000,000 shares issued to acquire Prime using the following assumptions:

The Company has determined two valuations of the 25,000,000 exchangeable shares in one high and one low valuation and takes the midpoint of the valuation and recorded $3,117,311 in equity for the 25,000,000 exchangeable shares issued.

E-WORLD USA HOLDING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Valuation of the contingent shares

The Company valued the option to obtain 25% ownership of E-World using the following assumptions in a Binomial Tree model:

The Company has determined two valuations of the 25% pro-rated option in one high and one low valuation and takes the midpoint of the valuation at $481,938 and recorded the fair value of the contingent shares in the balance sheet.

Note 3 – Going Concern

There is substantial doubt about our ability to continue as a going concern as a result of our lack of significant revenues, significant recurring losses and negative working capital. If we are unable to generate significant revenue or secure 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 by: securing various financing resources, including but not limited to, borrowing from the Company’s major shareholder, and the possibility of raising funds through a future public offering.

Note 4 – Summary of Significant Accounting Policies

Basis of Presentation

These financial statements have been presented by the Company in accordance with accounting principles generally accepted in the United States, are expressed in U.S. dollars and include the accounts of E-World USA Holding, Inc. and its subsidiaries, E-World Canada Holding, Inc., Prime Nutrisource Inc., Nugale Pharmaceutical Inc. and Prime Nutrisource Inc. (New Jersey). As of April 21, 2015, these subsidiaries mentioned above were deconsolidated from E-World USA Holding, Inc. For more details, see Note 2.

Principles of consolidation

The accompanying consolidated financial statements include the financial statements of E-World USA Holding, Inc. and its subsidiaries.

Subsidiaries are those entities in which the Company, directly or indirectly, controls more than one half of the voting power; or has the power to govern the financial and operating policies, to appoint or remove the majority of the members of the board of directors, or to cast a majority of votes at the meeting of directors.

All significant inter-company transactions and balances have been eliminated upon consolidation.

E-WORLD USA HOLDING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Foreign Currency

The reporting currency of the Company is the U.S. dollar. The Company’s subsidiaries in Canada use the local currency, Canadian Dollars (“CAD$”), as their functional currency. Assets and liabilities are translated at the unified exchange rate as quoted by the Bank of New York at the end of the period. The statement of operations accounts are translated at the average translation rates and the equity accounts are translated at historical rates. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of change in deficit. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

The assets and liabilities of the Company’s subsidiaries in Canada at April 21, 2015 (disposal date) and December 31, 2014 were translated at 0.82 CAD$ and 0.86 CAD$, respectively, to 1.00 USD$. The equity accounts were stated at their historical rate. The average translation rate applied to statement of operations accounts for the year ended December 31, 2015 was 0.81 CAD$. Cash flows are also translated at average translation rates for the periods; therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheet.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 consolidated financial statements include fair value of assets and liabilities acquired in a business combination, fair value of contingent liabilities, the useful lives of property and equipment, collectability of receivables and fair value of rescission liability – Type A & B Warrants. Actual results could differ from those estimates.

Cash

The Company considers all highly liquid investments purchased with a 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:

E-WORLD USA HOLDING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Movement of allowance for doubtful accounts is as follows:

Inventory

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

Property and Equipment

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

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

Impairment of Long-Lived Assets

Long-lived assets, including, property and equipment and intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flows the assets are expected to generate and recognizes an impairment loss when estimated discounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When the Company identifies an impairment, the Company reduces the carrying amount of the asset to its estimated fair value based on a discounted cash flows approach or, when available and appropriate, to comparable market values. As of December 31, 2015 and 2014, no impairment of long-lived assets was recognized.

E-WORLD USA HOLDING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Value of Financial Instruments

ASC 825 requires that the Company discloses estimated fair values of financial instruments. The Company believes the carrying value of short-term debt is a reasonable estimate of fair value due to rates being currently offered.

As defined in ASC 820, 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 utilized the market data of similar entities in its industry or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).

The three levels of the fair value hierarchy are as follows:

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of December 31, 2015 and 2014:

The following is a reconciliation of the beginning and ending balance of the assets and liabilities measured at fair value on a recurring basis in operations disposed for the years ended December 31, 2015 and 2014:

E-WORLD USA HOLDING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Revenue Recognition

The Company recognizes revenue when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. The Company generally receives the net sales price in cash or through credit card payments when products are ordered. When the Company has sales events whereby the sales are non-returnable or non-refundable, the revenue is recognized when products are shipped. Advance payments from customers are deferred and revenue is recognized when products are shipped. Deferred revenue for customer deposits as of December 31, 2015 and 2014 was $1,486,360 and $1,617,369 respectively.

The Company also recognized revenue on shipping and handling fees charged to the Company’s customers. Shipping and handling fee revenue is recognized when products have been delivered. Shipping and handling fee revenues are immaterial to the Company’s financial statements for the years ended December 31, 2015 and 2014.

Product returns are allowed for unopened products purchased under regular sales terms within 60 days. Allowances for product returns are provided at the time the sale is recorded using historic return rates for each country and the relevant return pattern. Historically the Company has a nearly zero return rate. Hence, the allowance as of December 31, 2015 and 2014 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 costs less commissions and shipping costs. The Company implemented its buy-back policy on January 1, 2012. To date, the Company has not received any buy-back applications. As a result, no allowance for buy-backs has been recorded as of December 31, 2015 and 2014.

The majority of the Company’s revenues are generated from China. Revenues generated from other countries or within the United States are immaterial to our consolidated financial statements. While all products are priced in US currency, the Company accepts payments in USD, Hong Kong dollars and Chinese RMB.

Shipping and Handling Expenses

Shipping and handling costs paid by the Company are included in selling expenses, and totaled $23,776 and $137,857 for the years ended December 31, 2015 and 2014, respectively.

Bonus Expense

Prior to June 1, 2014, the Company offered a network membership to individuals interested in selling E-World products. Members could earn bonuses, similar to commissions, based on retail sales volume of certain other downline members referred by the member. Bonus expenses were accrued in the period in which the member met the qualifications to receive the related benefits. Bonuses were redeemed by members in cash, either by withdrawal or by applying their cash balance against future product purchases. As bonus expenses result in cash payments to our customers, we net these expenses with revenue in accordance with ASC 605-50-45-2. Bonus expenses netted with revenue for the years ended December 31, 2015 and 2014 were $0 and $2,570,276, respectively. In June 2014, the Company ceased utilizing its membership network to sell its products.

Operating Leases

The Company leases all of its properties under operating leases. Lease agreements generally include rent holidays and tenant improvement allowances. The Company records tenant improvement allowances and rent holidays as deferred rent liabilities and amortizes the deferred rent over the term of the lease. There were no deferred rent liabilities.

Income Taxes

The Company utilizes ASC 740, 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. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

E-WORLD USA HOLDING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Basic and Diluted Earnings Per Share

Accounting principles generally accepted in the United States 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 are computed by dividing income available to common stockholders by the weighted average of common shares outstanding during the period. Diluted earnings (loss) 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.