Merion, Inc. - Annual Report: 2019 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

OR

Commission file number 333-173681

Issuer’s telephone number: (626) 331-7570

Securities registered pursuant to Section 12(b) of the Act:

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 ☐      No ☒

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 ☐      No ☒

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 ☒      No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒      No ☐

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. ☐

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):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold on the OTC markets on June 28, 2019, the last business day of the registrant’s most recently completed second fiscal quarter, was $27,575,660 based on 78,810,116 shares of common stock held by non-affiliates of the registrant at the price of $0.3499.

The number of outstanding shares of Registrant’s Common Stock, $0.001 par value, was 177,566,608 shares as of April 6, 2020.

MERION, INC.

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 Merion, Inc. (hereinafter referred to as “we,” “us,” “our,” “our Company” or “Merion”) 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

Item 1. Description of Business

Introduction

Merion, Inc. is a provider of health and nutritional supplements and personal care products. Currently, we mainly sell 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 Original Equipment Manufacturer (“OEM”) and packaging products are located in the United States (“U.S.”).

Company History

Merion, Inc., a Nevada corporation, was formed on February 4, 2011. Its predecessor, E-World USA Holding, Inc., was a California company incorporated in 2007 (“E-World CA”). In April 2011, E-World CA entered into a merger agreement with its wholly-owned subsidiary with the same name, E-World USA Holding, Inc., a Nevada corporation (“E-World NV”), that was the survivor of the merger and became the Company. Under the Merger Agreement, the Company issued 90,000,000 shares of its common stock on a one-for-one basis for each share of E-World CA’s common stock issued and outstanding at the date of the merger. In addition, the Company issued its Type A Warrants and Type B Warrants in exchange for comparable warrants issued and outstanding of E-World CA at the date of the merger. On June 27, 2017, the Company filed an amendment to its Articles of Incorporation with the Secretary of State for the State of Nevada to change its name effective immediately, from E-World NV, to Merion, Inc.

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 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 these 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 years ended December 31, 2017 and 2016. With the purchase of these assets, 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 (“FDA”) and Good Manufacturing Practice (“GMP”) compliance and Current Good Manufacturing Practice (“cGMP”) regulations. In addition to manufacturing the nutritional supplements that we sell, we have the ability to 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, similar to our OEM and packaging businesses.

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 micro molecular nutrition formula.

In November and December 2016, our Dibeier Granules & Oral products successfully passed inspection by the Shenzhen Academy of Metrology & Quality Inspection and the Guangdong Quality Supervision and Inspection Institution for Food (Shenzhen). As a result, we were able to directly export these products to the China market and sell them at nutritional supplement stores in China as food, rather than only through our website. However, we are still exploring potential wholesale distributors to import these products.

In June and July 2017, we introduced three new nutritional supplement products: Hepaticia, Auxia, and Capsule of Beauty. In October 2017, we introduced two nutritional supplement products: AntiGrey and Cell Vitality. Hepacticia is a nutritional supplement product that may support liver health. Auxia is a nutritional supplement that may support kidney health. Capsule of Beauty is a nutritional supplement that may prevent wrinkles and support nail health. AntiGrey is a nutritional supplement that may prevent grey hair. Cell Vitality is a nutritional supplement that may support eye health. As of the date of filing of this report, we are no longer selling Hepaticia, Auxia, Capsule of Beauty, AntiGrey and Cell Vitality, as the market demands for these products were not up to our expectations.

In January 2018, we introduced a new beauty product, Noir Naturel, a gentle formula for grey coverage from the first application into hair.

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 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 metabolism.

In May 2019, we introduced M-Power, a nutritional supplement that may provide anti-aging support.

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.

The nutritional supplements’ and beauty products’ formulas do not have patent protection.

Sales breakdown

Currently, the Company does not have plans to expand its business beyond the nutritional products and beauty sector and the OEM and packaging sector.

All nutrition and beauty products are sold in China and all OEM and packaging products are sold in the U.S.

Return and Refund Policy for Our Products

Merion 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 purchase price 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. All of the returned products must not be damaged and must be within the valid shelf-life period specified on the product label. 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.

For the years ended December 31, 2019 and 2018, there were no returns of products.

Sourcing and Production

Our Products

During the years ended December 31, 2019 and 2018, we acquired our ingredients from the suppliers and contracted for production of our proprietary products from manufacturers that we believe are reliable, reputable and deliver high quality materials, products and services. During the year ended December 31, 2019, we also acquired our ingredients from suppliers for direct production in our Nevada factory. In 2019, three suppliers accounted for approximately 68.4% of our purchases: Forward Farma Inc. (35.5%), BioCaps Enterprise Inc. (17.5%), and Vyna Nutra Inc. (15.4%). In 2018, three suppliers accounted for approximately 47.4% of our purchases: Sunland Nutrition Inc. (12.6%), Pure Valley Nutrition (12.1%), and McGoGene, LLC (22.7%). The loss of one or more of these suppliers could have a negative impact on our sales and revenues if we cannot find a substitute quickly or upon favorable terms.

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 manufacturers could outlast the inventory on hand and result in loss of sales.

We maintain good relationships with our suppliers and do not anticipate that any of our suppliers will terminate such relationships in the near term. We also have ongoing relationships with secondary and tertiary suppliers. In the event that 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 suppliers without great difficulty or significant increases to our cost of goods sold.

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 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”). The Seller was one of our major suppliers during the years ended December 31, 2017 and 2016. Having purchased these assets from the Seller, we have begun manufacturing some of the nutritional supplements that we sell. These assets meet all industry nutritional and dietary supplements manufacturing standards, including FDA and GMP compliance and cGMP regulations. In addition to manufacturing the nutritional supplements that we sell, we also anticipate starting production of hard capsules, tablets, solid beverage (sachet packaging), teabags, powder, granules, dietary supplements for export, softgel capsules and healthy food from these assets for any potential new customers who need this product.

For nutritional products and beauty products, we purchase our ingredients from third parties and contract with a third-party manufacturer for further processing of the raw materials into final products to be sold. Prior to January 1, 2018, we did not own a manufacturing plant for product processing and all manufacturing was conducted by third parties.

We also maintain good relationships with our manufacturers and do not anticipate that any of our manufacturers will terminate such relationships in the near term. In the event we become unable have our products produced 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.

In addition, we maintain good relationships with our wholesale distributors in China and our OEM and packing customers in the U.S. and do not anticipate that any of those parties will terminate such relationships in the near term. In 2019, one customer accounted for approximately 9.7% of our sales: American BioSciences Inc. In 2018, two customers accounted for approximately 39.5% of our sales: Nanyu Zhu (27.4%) and Yan Zhu. (12.1 %). The loss of one or more customers could result in a potential loss of sales and have a negative effect on our operations if we cannot find one or more substitutes.

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 three major product categories within the nutrition industry are:

The nutritional supplement market is characterized by:

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.

Marketing Plan

The Company signed a new lease agreement effective March 1, 2020 to open a New York office to expand its business in the New York market. The office will be used as the training center for market development. The Company will focus on promoting its new product (ReMage Power) in the New York market. ReMage Power is a nutritional supplement which provides anti-aging Nicotinamide adenine dinucleotide (NAD)+ support and promotes energy and cell metabolism.

During the first quarter of 2020, the Company entered into letters of intent (“LOIs”) to cooperate with two E-Commerce companies in Hangzhou and Shenzhen, China to promote the sales of our products on their platforms. These two E Commerce companies have over 1 million followers combined and up to RMB 3 billion in annual trading volumes on their platforms.

In the first quarter of 2020, the Company signed Sales Agents Agreements with sales agents in Hong Kong, Malaysia and New York to promote the sales of our products for 2020.

The Company is developing a new sales channel through Youbo which works as a live-streaming platform fully integrated into the WeChat app. Although this is a new live-steaming platform, Youbo has already had 3 million registered users within the first two months of its operation. The Company will promote its products through this new platform.

The Company also promotes its products through its websites. During the early stages of website implementation, 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 on nutritional and beauty products were generated from China for the years ended December 31, 2019 and 2018.

Since June 2014, we have mainly sold our products over the Internet directly to end-user customers through our websites, www.dailynu.com and www.merionus.com, and to wholesale distributors. In March 2016, we launched an Affiliate Marketing Program, which has not been active since January 2017. The Company reactivated such program in January 2020. Members who successfully register with the affiliate program can earn up to a 70% commission from sales achieved through their unique links assigned by the Company.

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’s marketing effort also used the Company CEO’s network and relationships to approach distributors to purchase the Company’s products in fiscal year 2019 and 2018.

Share Distribution Plans

1) On July 15, 2017, the Board approved Mr. Dinghua Wang, the Chairman and CEO of the Company, to distribute up to thirty million of his own shares to certain persons outside of the United States who have previously worked with the Company as an incentive for these individuals to assist the Company to develop its international market. Accordingly, special legends regarding restrictions on resale of the securities and no-hedging transactions would need to be included on the securities.

On February 14, 2018, Mr. Wang distributed 1,500,000 shares pursuant to Regulation S under the Securities Act of 1933. The Company determined that these shares distributed by Mr. Wang were related to the Company’s operations in accordance to ASC 220-10-S99-4. The fair value of these shares were valued at $480,000 and recorded as stock-based compensation expenses in the Company’s year ended December 31, 2018 statements of operations.

2) On July 28, 2017, the Company’s Board of Directors approved Mr. Dinghua Wang, the Chairman and CEO of the Company, to distribute up to five million of his own shares to the people who, directly or indirectly, loaned funds or referred customers to the Company or purchased products from the Company as the Company faces financial difficulty. To the extent that these share distributions are being made to anyone outside of the U.S., those distributions will be made under Regulation S and must contain appropriate Regulation S subscription agreements and legends. If anyone within the U.S. is to receive those shares, the Company must consult with the Company counsel to comply with U.S. securities laws.

On February 14, 2018, Mr. Wang had distributed 4,181,592 shares pursuant to this plan, all to persons outside the U.S. The Company determined that these 4,181,592 shares distributed by Mr. Wang were at his own discretion and the recipients of the shares did not expect such distribution at the time when they, directly or indirectly, loaned funds or referred customers to the Company or purchased products from the Company as the Company faces financial difficulty.    

3) On June 30, 2017, the Company’s Board of Directors approved the grant of up to twenty million shares (from authorized but unissued shares of the Company’s common stock) to persons outside the U.S. who sell Company products, based on their sales performance in the future. The Company must determine that this type of incentive compensation is legal and appropriate for each country in which it is utilized. For ease of administration, this plan has been, and will continue to be, implemented solely for persons outside of the United States pursuant to Regulation S under the Securities Act of 1933.

During the year ended December 31, 2018, the Company issued 64,500 shares to the Company’s sales agents outside the U.S. The shares are valued at $32,249, determined using the monthly closing price of the Company’s common stock on the applicable issuance dates, and recognized in “selling expenses” in the accompanying statements of operations and other comprehensive income (loss) for the year ended December 31, 2018.

Intellectual Property

We have no registered trademarks or patents in the United States. We have common law ownership rights under U.S. trade secret law for the formulations for eleven of our twelve Nutritional Supplements (all except O2 Cell Power). We also have common law ownership rights for the formulation of our Noir Naturel product.

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 this supplier under oral agreement to sell this product worldwide under our brand name without infringing on any rights of Oxygen America, Inc.

The Company has obtained a Trademark Registration in China for the name of “Dibeier” (or Mandarin pinyin: “Nuo Lin”) with trademark application number 20669799. Under Chinese law, this trademark may be renewed every 10 years and can be valid for an indefinite period subject to timely renewal.

The Company has obtained a Trademark Registration in China for the name of “DailyNu” with trademark application number 20683305. Under Chinese law, this trademark may be renewed every 10 years and can be valid for an indefinite period subject to timely renewal.

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.

Research and Development

During 2018, we made efforts to internally develop an online platform called “E-Hospital”. We anticipated that E-Hospital would provide the latest and the most advanced U.S. health care information and products, including legally exported nutrition supplements and newly-released medication for local hospitals and other medical institutes in China through the Internet. We contacted doctors who would be partnering with our E-Hospital platform to provide periodic video consultation and overseas medical lectures to promote the exchange of medical information and developments. The collaboration of E-Hospital with overseas local hospitals could strengthen the recognition, popularity and reputation of overseas local hospitals, as well as expand the market share and increase the competitiveness of these hospitals.

We expect that the E-Hospital Services will eventually provide the following benefits:

Under our plan, the E-Hospital Services will also include the following:

The Company has put the E-Hospital project on hold in 2019 due to the lack of funding to develop the online system. The Company plans to resume the construction of the system as soon as we secure the funding for this project.

Research and development expenses for the years ended December 31, 2019 and 2018 were $904 and $7,549, respectively.

Government Regulation

Given uncertainties relating to our compliance with personal network marketing laws in foreign jurisdictions, the Company discontinued sales through the network marketing model in 2014, and began selling directly to end-user customers from our website.

We believe we are no longer subject to personal network marketing regulations since we discontinued sales through the network marketing model in 2014. Nonetheless, we are still subject to federal, state, local and foreign regulations. Various governmental agencies have an impact on our business, including but not limited to the U.S. Food and Drug Administration. Regulations promulgated by the FDA cover product ingredients, manufacturing, distribution, marketing, sales, compensation and taxation, to name a few. All of our products have certificates of free sales issued by the FDA Center for Food Safety and Applied Nutrition. If the Company were to fail to meet standards required by these regulations, then the Company could be prohibited from selling its products.

The Company plans 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 websites. Under Chinese law, to import these products into China, the Company must provide the Inspection Report from the Provincial Quality Supervision and Inspection Institution. In November and December 2016, our Dibeier Granules & Oral products successfully passed inspection by the Shenzhen Academy of Metrology & Quality Inspection and the Guangdong Quality Supervision and Inspection Institution for Food (Shenzhen). The Company also obtained the Product Chinese Name registration from local SAIC and the trademark registration in September 2016 from the Trademark Office of State Administration for Industry & Commerce of China (“SAIC”).

Employees

We have the following employees:

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

Item 1A. Risk Factors.

The Company operates in an environment that involves a number of risks and uncertainties. The risks and uncertainties described in this Annual Report on Form 10-K are not the only risks and uncertainties that we face. Additional risks and uncertainties that presently are not considered material or are not known to us, and therefore are not mentioned herein, may impair our business operations. If any of the risks described in this Annual Report on Form 10-K actually occur, our business, operating results and financial position could be adversely affected.

We have had a history of losses since inception.

For the years ended December 31, 2019 and 2018, we had net losses of approximately $0.7 million and $3.1 million, respectively. We can offer no assurance that we will ever operate profitably or that we will generate positive cash flows in the future. Our management expects the business to continue to experience negative cash flow for the foreseeable future and cannot predict when, if ever, our business might become profitable. With our cash on hand as of December 31, 2019, management has concluded under generally accepted accounting principles that there is substantial doubt about our ability to continue as a going concern for the next twelve months from the date of this filing. Until we can generate significant revenues, if ever, we expect to satisfy our future cash needs through equity or debt financing. We will need to raise additional funds, and such funds may not be available on commercially acceptable terms, if at all. If we are unable to raise funds on acceptable terms, we may not be able to execute our business plan, take advantage of future opportunities, or respond to competitive pressures or unanticipated requirements. This may seriously harm our business, financial condition and results of operations. In the event we are not able to continue operations our shareholders will likely suffer a complete loss of their investment in our securities.

If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market, or our competitors. If any of the analysts who may cover us change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, our stock price would likely decline. If any analysts who may cover us were to cease coverage of our Company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

The market price of our common stock may be highly volatile.

The market for our common stock will likely be characterized by significant price volatility when compared to more established issuers and we expect that it will continue to be so for the foreseeable future. The market price of our common stock is likely to be volatile for a number of reasons. First, our common stock is likely to be sporadically and/or thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of common stock by our stockholders may disproportionately influence the price of the common stock in either direction. The price of the common stock could, for example, decline precipitously if even a relatively small number of shares are sold on the market without commensurate demand, as compared to a market for shares of an established issuer which could better absorb those sales without adverse impact on its share price. Secondly, we are a speculative investment due to our lack of profits to date. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the shares of an established issuer. We cannot make any predictions or projections as to what the prevailing market price for our common stock will be at any time or as to what effect the sale of common stock or the availability of common stock for sale at any time will have on the prevailing market price.

Because the principal trading markets for our shares is the OTC Market, the corporate governance rules of the major U.S. stock exchanges do not apply to us. As a result, our governance practices may differ from those of a company listed on such U.S. exchanges.

Our governance practices need not comply with certain New York Stock Exchange and NASDAQ corporate governance standards, including:

There can be no assurance that we will voluntarily comply with any of the foregoing requirements. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to such corporate governance requirements.

The requirements of being a public company may strain our resources, divert management’s attention and require us to disclose information that is helpful to competitors, make us more vulnerable to litigation and make it more difficult to attract and retain qualified personnel.

As a public company, we are subject to the reporting requirements of the Securities Act, the Securities Exchange Act of 1934, as amended (Exchange Act), the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Compliance with these rules and regulations requires significant legal and financial compliance costs and makes some activities difficult, time-consuming or costly.

Our future growth and stability depends, in part, on our ability to diversify our sales. Our efforts to establish new sales from existing customers and new customers could require significant initial investments, which may or may not result in higher sales and improved financial results.

Our business strategy depends in large part on our ability to develop new product sales from current and new customer relationships. These activities often require a significant up-front investment including, among others, customized formulations, regulatory compliance, product registrations, package design, product testing, pilot production runs, and the build-up of initial inventory. We may experience significant delays from the time we increase our operating expenses and make investments in inventory until the time we generate net sales from new products or customers, and it is possible that we may not generate material revenue from new products or customers after incurring such expenditures. If we incur significant expenses and investments in creating and purchase inventory that we are not able to recover our cost, and we are not able to compensate for those expenses, our operating results could be adversely affected.

We are affected by extensive laws, governmental regulations, administrative determinations, court decisions and similar constraints, which can make compliance costly and subject us to enforcement actions by governmental agencies.

The formulation, manufacturing, packaging, labeling, holding, storage, distribution, advertising and sale of our products are affected by extensive laws, governmental regulations and policies, administrative determinations, court decisions and similar constraints at the federal, state and local levels, both within the United States and China and in any country where we conduct business. There can be no assurance that we or our independent distributors will be in compliance with all of these regulations. A failure by us or our distributors to comply with these laws and regulations could lead to governmental investigations, civil and criminal prosecutions, administrative hearings and court proceedings, civil and criminal penalties, injunctions against product sales or advertising, civil and criminal liability for the Company and/or its principals, bad publicity, and tort claims arising out of governmental or judicial findings of fact or conclusions of law adverse to the Company or its principals. In addition, the adoption of new regulations and policies or changes in the interpretations of existing regulations and policies may result in significant new compliance costs or discontinuation of product sales, and may adversely affect the marketing of our products, resulting in decreased revenues.

We are currently dependent on a limited number of independent suppliers and manufacturers of our products that cannot be manufactured in our Nevada factory, which may affect our ability to deliver our products in a timely manner. If we are not able to ensure timely product deliveries, potential distributors and customers may not order our products, and our revenues may decrease.

We currently rely entirely on a limited number of third parties to supply and manufacture our products that cannot be manufactured in our Nevada factory. Our products are manufactured on a purchase order basis only and manufacturers can terminate their relationships with us at will. These third party manufacturers may be unable to satisfy our supply requirements, manufacture our products on a timely basis, fill and ship our orders promptly, provide services at competitive costs or offer reliable products and services. The failure to meet any of these critical needs would delay or reduce product shipment and adversely affect our revenues, as well as jeopardize our relationships with our distributors and customers. In the event any of our third party manufacturers were to become unable or unwilling to continue to provide us with products in required volumes and at suitable quality levels, we would be required to identify and obtain acceptable replacement manufacturing sources. There is no assurance that we would be able to obtain alternative manufacturing sources on a timely basis. Additionally, all our third party manufacturers source the raw materials for our products, and if we were to use alternative manufacturers we may not be able to duplicate the exact profile of the product from the original manufacturer. An extended interruption in the supply of our products would result in decreased product sales and our revenues would likely decline. We believe that we can meet our current supply and manufacturing requirements with our current suppliers and manufacturers or with available substitute suppliers and manufacturers. Historically, we have not experienced any delays or disruptions to our business caused by difficulties in obtaining supplies.

We face significant competition from existing suppliers of products similar to ours. If we are not able to compete with these companies effectively, we may not be able to achieve and maintain profitability.

We face intense competition from numerous resellers, manufacturers and wholesalers of health and nutritional supplements and personal care products similar to ours, including retail, online and mail order providers. Many of our competitors have longer operating histories, established brands in the marketplace, revenues significantly greater than ours and better access to capital than us. We expect that these competitors may use their resources to engage in various business activities that could result in reduced sales of our products. Companies with greater capital and research capabilities could re-formulate existing products or formulate new products that could gain wide marketplace acceptance, which could have a depressive effect on our future sales. In addition, aggressive advertising and promotion by our competitors may require us to compete by lowering prices because we do not have the resources to engage in marketing campaigns against these competitors, and the economic viability of our operations likely would be diminished.

Adverse publicity associated with our products, ingredients, or those of similar companies, could adversely affect our sales and revenue.

Our customers’ perception of the safety and quality of our products or even similar products distributed by others can be significantly influenced by national media attention, publicized scientific research or findings, product liability claims and other publicity concerning our products or similar products distributed by others. Adverse publicity, whether or not accurate, that associates consumption of our products or any similar products with illness or other adverse effects, will likely diminish the public’s perception of our products. Claims that any products are ineffective, inappropriately labeled or have inaccurate instructions as to their use, could have a material adverse effect on the market demand for our products, including reducing our sales and revenues.

The efficiency of nutritional supplement products is supported by limited conclusive clinical studies, which could result in less market acceptance of these products and lower revenues or lower growth rates in revenues.

Our nutritional supplement products are made from various ingredients including vitamins, minerals, amino acids, herbs, botanicals, fruits, berries and other substances for which there is a long history of human consumption. However, there is little long-term experience with human consumption of certain product ingredients or combinations of ingredients in concentrated form. Although we believe all of our products fall within the generally known safe limits for daily doses of each ingredient contained within them, nutrition science is imperfect. Moreover, some people have peculiar sensitivities or reactions to nutrients commonly found in foods, and may have similar sensitivities or reactions to nutrients contained in our products. Furthermore, nutritional science is subject to change based on new research. New scientific evidence may disprove the efficacy of our products or prove our products to have effects not previously known. We could be adversely affected by studies that may assert that our products are ineffective or harmful to consumers, or if adverse effects are associated with a competitor’s similar products.

Our products may not meet health and safety standards or could become contaminated.

We do not have control over all of the third parties involved in the manufacturing of our products and their compliance with government health and safety standards. Even if our products meet these standards they could otherwise become contaminated. A failure to meet these standards or contamination could occur in our operations or those of our distributors or suppliers. This could result in expensive production interruptions, recalls and liability claims. Moreover, negative publicity could be generated from false, unfounded or nominal liability claims or limited recalls. Any of these failures or occurrences could negatively affect our business and financial performance.

Compliance with new and existing laws and governmental regulations could increase our costs significantly and adversely affect our results of operations.

The processing, formulation, safety, manufacturing, packaging, labeling, advertising and distribution of our products are subject to federal laws and regulation by one or more federal agencies, including the FDA. These activities are also regulated by various state, local and international laws and agencies of the states and localities in which our products are sold. Government regulations may prevent or delay the introduction, or require the reformulation, of our products, which could result in lost revenues and increased costs to us. For example, the FDA regulates, among other things, the composition, safety, manufacture, labeling and marketing of dietary ingredients and dietary supplements (including vitamins, minerals, herbs, and other dietary ingredients for human use). Dietary supplements and dietary ingredients that do not comply with FDA’s regulations and/or the Dietary Supplement Health and Education Act of 1994 ("DSHEA") will be deemed adulterated or misbranded. Manufacturers and distributors of dietary supplements and dietary ingredients are prohibited from marketing products that are adulterated or misbranded, and the FDA may take enforcement action against any adulterated or misbranded dietary supplement on the market. The FDA has broad enforcement powers. If we violate applicable regulatory requirements, the FDA may bring enforcement actions against us, which could have a material adverse effect on our business, prospects, financial condition, and results of operations.

The FDA may not accept the evidence of safety for any new dietary ingredient that we may wish to market, may determine that a particular dietary supplement or ingredient presents an unacceptable health risk based on the required submission of serious adverse events or other information, and may determine that a particular claim or statement of nutritional value that we use to support the marketing of a dietary supplement is an impermissible drug claim, is not substantiated, or is an unauthorized version of a "health claim." Any of these actions could prevent us from marketing particular dietary supplement products or making certain claims or statements with respect to those products. The FDA could also require us to remove a particular product from the market. Any future recall or removal would result in additional costs to us, including lost revenues from any products that we are required to remove from the market, any of which could be material. Any product recalls or removals could also lead to an increased risk of litigation and liability, substantial costs, and reduced growth prospects.

We could be exposed to product liability claims or other litigation, which may be costly and could materially adversely affect our operations.

We could face financial liability due to product liability claims if the use of our products results in significant loss or injury. Additionally, the manufacture and sale of our products involves the risk of injury to consumers from tampering by unauthorized third parties or product contamination. We could be exposed to future product liability claims that, among others: our products contain contaminants; we provide consumers with inadequate instructions about product use; or we provide inadequate warning about side effects or interactions of our products with other substances. Even if we were to prevail in any such claims, the cost of litigation and settlement could be significant. We do not maintain product liability insurance, and could experience significant losses from any litigation relating to our products.

Our business could be adversely affected by legal challenges to our business model or by actions restricting our ability to provide the full range of our services in certain jurisdictions.

Our future ability to operate a platform for e-Hospital and expert medical services in a particular jurisdiction is directly dependent upon the applicable laws governing remote healthcare, the practice of medicine and healthcare delivery in general in such location, which are subject to changing political, regulatory and other influences. Accordingly, if the e-Hospital platform becomes operational, we will be required to monitor our compliance with laws in every jurisdiction in which we operate, on an ongoing basis, and we cannot provide assurance that our activities and arrangements, if challenged, would be found to be in compliance with the applicable laws. Additionally, it is possible that the laws and rules governing the practice of medicine, including remote healthcare, in one or more jurisdictions may change in a manner that is harmful to our business. If a successful legal challenge or an adverse change in the relevant laws were to occur, and we were unable to adapt our business model accordingly, our operations in the affected jurisdictions would be disrupted, which could have a material adverse effect on our business, financial condition and results of operations.

A severe and prolonged downturn in the Chinese or global economy or disruptions in the financial markets may adversely impact our business and results of operations and may limit our access to additional financing.

The nutritional supplement and personal care industry can be affected by macroeconomic factors, including changes in national, regional, and local economic conditions, employment levels and consumer spending patterns. A prolonged slowdown in the Chinese or global economy could erode consumer confidence which could result in changes to consumer spending patterns, which could be harmful to our financial position and results of operations.

In addition, the capital and credit markets is experiencing volatility and the availability of funds remains limited, we will incur increased costs associated with equity and/or debt financing. It is possible that our ability to access the capital and credit markets may be limited by these or other factors at a time when we would like, or need, to do so, which could have an adverse impact on our ability to refinance maturing debt and/or react to changing economic and business conditions. In addition, fluctuations in interest rates could impact our floating rate debt negatively and increase our debt obligations.

Loss of key personnel could impair our ability to operate.

Our success depends on hiring, retaining and integrating senior management and skilled employees. We are currently dependent on certain current key employees, including Mr. Ding Hua Wang, our Chief Executive Officer, Chief Financial Officer, and director, who is vital to our ability to grow our business and achieve profitability. As with all personal service providers, our officers can terminate their relationship with us at will. Our inability to retain these individuals may result in our reduced ability to operate our business.

Ding Hua Wang has control over key decision making as a result of his control of a majority of our voting stock.

Ding Hua Wang, a member of the Board of Directors and our Chief Executive and Financial Officer, beneficially owns 92,861,912 shares, or 51.8%, of our outstanding common stock. Mr. Wang will be able to exercise voting rights with respect to these shares of common stock, and has the ability to control the outcome of matters submitted to our shareholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets. This concentrated control could delay, defer, or prevent a change of control, merger, consolidation, or sale of all or substantially all of our assets that our other shareholders support, or conversely this concentrated control could result in the consummation of such a transaction that our other shareholders do not support. This concentrated control could also discourage a potential investor from acquiring our common stock due to the limited voting power of such stock. As a board member and officer, Mr. Wang owes a fiduciary duty to our shareholders and must act in good faith in a manner he reasonably believes to be in the best interests of our shareholders. As a shareholder, even a controlling shareholder, Mr. Wang is entitled to vote his shares, and shares over which he has voting control, in his own interests, which may not always be in the interests of our shareholders.

Failure to adequately protect our intellectual property rights may undermine our competitive position, and litigation to protect our intellectual property rights may be costly.

We rely primarily on trade secrets and other contractual restrictions to protect our intellectual property. We have not registered or applied for protections for most of our intellectual property or proprietary technologies relating to the formulations of nutritional supplements that we produce. To protect our proprietary technology and processes, we also rely in part on nondisclosure agreements with our employees, licensing partners, third-party producers, consultants, agents and other organizations to which we disclose our proprietary information. The actions we have taken to protect our intellectual property rights may not be adequate to provide us with meaningful protection or commercial advantage. As a result, third parties may use the intellectual property or proprietary technologies that we have developed and compete with us, which could have a material adverse effect on our business, financial condition and operating results.

PRC intellectual property-related laws and their implementation are still under development. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or many other countries. In addition, policing unauthorized use of proprietary technology can be difficult and expensive. Litigation may be necessary to enforce our intellectual property rights and the outcome of any such litigation may not be in our favor. Given the relative unpredictability of China’s legal system and potential difficulties enforcing a court judgment in China, there is no guarantee that we would be able to halt the unauthorized use of our intellectual property through litigation in a timely manner or at all. Furthermore, any such litigation may be costly and may divert management attention away from our business and cause us to expend significant resources. An adverse determination in any such litigation will impair our intellectual property rights and may harm our business, prospects and reputation. In addition, we have no insurance coverage against litigation costs and would have to bear all costs arising from such litigation to the extent we are unable to recover them from other parties. The occurrence of any of the foregoing could have a material adverse impact on our business, financial condition and results of operations.

We may be exposed to infringement or misappropriation claims by third parties, which, if determined adversely against us, could disrupt our business and subject us to significant liability to third parties.

Our success largely depends on our ability to use and develop our know-how and product formulations without infringing upon the intellectual property rights of third parties. We may be subject to litigation involving claims of infringement or violation of other intellectual property rights of third parties. The holders of patents and other intellectual property rights potentially relevant to our product offerings may be unknown to us or may otherwise make it difficult for us to acquire a license on commercially acceptable terms.

There may also be technologies licensed to and relied on by us that are subject to infringement or other corresponding allegations or claims by others which could damage our ability to rely on such technologies. In addition, although we endeavor to ensure that companies that work with us possess appropriate intellectual property rights or licenses, we cannot fully avoid the risks of intellectual property rights infringement created by suppliers of raw materials used in our products, our third-party producers, or by companies with which we work in cooperative research and development activities. Our current or potential competitors, many of which have substantial resources and have made substantial investments in competing technologies, may have obtained or may obtain patents that will prevent, limit or interfere with our ability to make, use or sell our products in China or other countries. The defense of intellectual property claims, including patent infringement suits, and related legal and administrative proceedings can be both costly and time-consuming, and may significantly divert the efforts and resources of our technical and management personnel. Furthermore, an adverse determination in any such litigation or proceeding to which we may become a party could cause us to:

These factors could effectively prevent us from pursuing some or all of our business and result in our customers or potential customers deferring, canceling or limiting their purchase or use of our products, which could have a material adverse effect on our financial condition and results of operations.

We or the third parties upon whom we depend may be adversely affected by earthquakes, natural disaster or health epidemics, including the recent COVID-19 outbreak

In recent years, there have been outbreaks of epidemics in various countries, including China. 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 the COVID-19 a pandemic. The epidemic has resulted in quarantines, travel restrictions, and the temporary closure of office buildings and facilities in China and in the U.S.

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 likely be adversely, and may be materially, affected, to the extent that the COVID-19 or any other epidemic 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 the COVID-19 and the actions taken by government authorities and other entities to contain the COVID-19 or treat its impact, almost all of which are beyond our control. Potential impacts include, but are not limited to, the following:

Because of the uncertainty surrounding the COVID-19 outbreak, the financial impact related to the outbreak of and response to the coronavirus cannot be reasonably estimated at this time, but our results for the first quarter of and full year 2020 may be adversely affected. We expect our total revenues in the first quarter of 2020 to decrease year over year, and there is no guarantee that our total revenues will grow or remain at the similar level year over year in the next three quarters of 2020.

In addition, our corporate headquarters is located in Los Angeles, which has in the past experienced severe earthquakes and other natural disasters. Consequently, if any natural disasters, health epidemics or other public safety concerns were to affect cities and regions that we have operations or cause travel restriction in such regions, our operation may experience material disruptions, which may materially and adversely affect our business, financial condition and results of operations.

In general, our business could be adversely affected by the effects of epidemics, including, but not limited to, the COVID-19, avian influenza, severe acute respiratory syndrome (SARS), the influenza A virus, Ebola virus, severe weather conditions such as a snowstorm, flood or hazardous air pollution, or other outbreaks. In response to an epidemic, severe weather conditions, or other outbreaks, government and other organizations may adopt regulations and policies that could lead to severe disruption to our daily operations, including temporary closure of our offices and other facilities. These severe conditions may cause us and/or our partners to make internal adjustments, including but not limited to, temporarily closing down business, limiting business hours, and setting restrictions on travel and/or visits with clients and partners for a prolonged period of time. Various impact arising from a severe condition may cause business disruption, resulting in material, adverse impact to our financial condition and results of operations.

Risks Related to Doing Business in China

Adverse changes in political and economic policies of the PRC government could impede the overall economic growth of China, which could reduce the demand for our products and damage our business.

We generate most of our revenues in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The PRC economy differs from the economies of most developed countries in many respects, including:

As the PRC economy has been transitioning from a planned economy to a more market-oriented economy, the PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. While these measures may benefit the overall PRC economy, they may also have a negative effect on us.

Although the PRC government has in recent years implemented measures emphasizing the utilization of market forces for economic reform, the PRC government continues to exercise substantial control over virtually every sector of the PRC economy through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and imposing policies that impact particular industries or companies in different ways. Our ability to operate in China may be harmed by changes in PRC laws and regulations, including those relating to how we conduct our business, taxation, import and export tariffs, environmental regulations, land use rights, property and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations. Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant adverse effect on economic conditions in China or particular regions thereof and could require us to divest ourselves of any interest we then hold in PRC properties or joint ventures.

If we are found to have failed to comply with applicable laws, we may incur additional expenditures or be subject to significant fines and penalties.

Our sales in the PRC are subject to certain PRC laws and regulations applicable to us. However, many PRC laws and regulations are uncertain in their scope, and the implementation of such laws and regulations in different localities could have significant differences. In certain instances, local implementation rules and/or the actual implementation are not necessarily consistent with the regulations at the national level. Although we strive to comply with all the applicable PRC laws and regulations, we cannot assure you that the relevant PRC government authorities will not later determine that we have not been in compliance with certain laws or regulations.

Inflation in China and measures to contain inflation could negatively affect our operations and growth.

While the PRC economy has experienced rapid growth, such growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in the money supply and rising inflation. If prices for our products rise at a rate that is insufficient to compensate for the rise in our costs, our business may be materially and adversely affected. In order to control inflation in the past, the PRC government has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state bank lending. If imposed in the future, such austerity measures or other measures could lead to a slowing of economic growth. A slowdown in the PRC economy could also materially and adversely affect our business and prospects.

If relations between the U.S. and China worsen, our business could be adversely affected and investors may be unwilling to hold or buy our stock and our stock price may decrease.

At various times during recent years, the U.S. and China have had significant disagreements over political and economic issues. Controversies may arise in the future between these two countries. Any political or trade controversies between the U.S. and China, whether or not directly related to our business, could reduce the price of our common stock. These controversies also could make it more difficult for us to provide our products to our customers in China. The international trade policies of China and the U.S. could adversely affect our business, and the imposition of trade sanctions relating to import and export, taxes, import duties and other charges on imports from China or exports to China. Due to an increase in tariffs imposed by China on products from U.S., some customers might seek alternatives, which could have negative impact on our sales as we mainly sell our products to customers in China. In order to avoid these new tariffs, the market has shifted towards an uncertain era. Our sales during this stage may also be impacted by this shift in behavior.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Description of Property

We rent the following properties for the year ended December 31, 2019:

California offices and warehouses

Nevada manufacturing facility

We believe our current facilities, including warehousing facilities, are fully suitable and adequate for our business, and that our facilities in Nevada are not currently used at full capacity.

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

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We are not currently a party to any material legal proceedings, and to our knowledge none is threatened. There can be no assurance that future legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on our financial position, results of operations or cash flows.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

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

On February 28, 2018, we up-listed our trading market from the OTC Pink Open Market to the OTCQB Market. The following table sets forth the quarterly high and low sales prices of a share of our common stock as reported by OTC Pink Open Market and OTCQB Market for the periods indicated. These over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

Holders of Common Stock

As of April 6, 2020, there were 177,566,608 shares of our common stock issued and outstanding and there were approximately 5,151 shareholders of record of our common stock.

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:

Equity Compensation Plan Information

The following table provides information about our equity compensation plan as of December 31, 2019:

Recent Sales of Unregistered Securities

None.

Item 6. Selected Consolidated Financial Data

Not applicable.

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, particularly under the heading “Risk Factors”, 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, similar to our OEM and packaging businesses.

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 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 metabolism.

In May 2019, we introduced M-Power, a nutritional supplement that may provide anti-aging support.

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. Subsequent to December 31, 2019, COVID-19 has spread rapidly to many parts of China and other parts of the world, including the United States. The epidemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and facilities in China, the United States, and elsewhere around the world.

Substantially all of our revenues are concentrated in China and the United States. Consequently, the COVID-19 outbreak may materially adversely affect our business operations, financial condition and operating results for 2020, including but not limited to material negative impact to our total revenues, slower 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-business 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.

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 volatility, and 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. Also, the increase of trade tensions between US and China and spread of COVID-19 might have negative impacts on our business. In addition, reduced consumer spending may force us and our competitors to lower prices. These conditions may adversely affect our revenues and results of operations.

Results of Operations

Comparison of the years ended December 31, 2019 and 2018

Total sales increased by approximately $1,429,000, or 377.0%, from approximately $379,000 in the year ended December 31, 2018 to approximately $ 1,808,000 in the year ended December 31, 2019. The increase in sales was mainly due to the shipping of our backlog of 1,329 orders of Auxia and 3,344 orders of Cell Power products to our members who had previously paid for their purchases. The increase is also attributable to the sales of our products, namely 1,568 orders of Viwooba (1-3), 119 orders of OPC Spa, and new products we introduced in 2019: 1,777 orders of Lady-S, 161 orders of Gold King, 107 orders of Heart Power, 94 orders of Taibao, and 285 orders of Remage Power. These products were not available during the first nine months of 2018. The increase in sales is also attributable to the increase of $164,467 in sales of our packaging and OEM revenues, as we have more clients who requested that we perform packaging services in 2019 as compared to the same period in 2018. The increase was partially offset by the decrease of the sales of 2,430 orders of our Noir Naturel product in 2019 as compared to the same period in 2018 as the demand of the product became more saturated, as well as the decrease of sales of 1,195 orders of our Longevity product during 2018, as we did not generate any Longevity sales during 2019.

The cost of sales decreased by approximately $70,000, or 19.6%, from approximately $358,000 in the year ended December 31, 2018 to approximately $288,000 in the year ended December 31, 2019. The major reason for the decrease was due to we wrote down $810,000 of intangible assets due to impairment at December 31, 2018, for which we were no longer incurring amortization expense of $90,000 per year in our manufacturing costs in 2019. The decrease also due to the decease of our idle capacity cost of approximately $159,000 incurred in our Nevada factory during the year ended December 31, 2018, where we were operating at close to full capacity at normal 8 hours shift in the same period in 2019 as some of the manufacturing costs were capitalized into our unsold inventories.

Our overall gross margin percentage increased from approximately 5.5% in the year ended December 31, 2018 to a gross profit of approximately 84.1% in the year ended December 31, 2019, mainly due to the reduction of the idle capacity cost incurred in the year ended December 31, 2019 as compared to the same period in 2018, as described above.

Our product sales gross margin percentage increased from approximately 70.6% in the year ended December 31, 2018 to approximately 92.3% in the year ended December 31, 2019. For the year ended December 31, 2019, the majority of our product sales were attributable to our Cell Power, Viwooba (1-3), OPC Spa, Lady-S, Gold King, New Power, Taibao and Remage Power products, which were all manufactured by us. The major reason for the increase of sales gross margin percentage was that we were no longer incurring any amortization of the intangible assets that we wrote off in December 2018. In addition, during the year ended December 31, 2018, the majority of our product sales were attributable to our beauty product, Noir Naturel, which has a lower profit margin. As a result, our product sales gross margin percentage increased accordingly during the year ended December 31, 2019 as compared to the same period in 2018.

Our OEM and packaging sales gross margin percentage increased from approximately 22.4% in the year ended December 31, 2018 to approximately 51.1% in the year ended December 31, 2019. For the year ended December 31, 2019, 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 reduction of specified production procedures which required fewer labor hours as compared to the same period in 2018. As a result, our OEM and packaging sales gross margin percentage increased by 28.7% during the year ended December 31, 2019 as compared to the same period in 2018.

Selling expenses decreased from approximately $336,000 in the year ended December 31, 2018 to approximately $165,000 in the year ended December 31, 2019. The decrease of approximately $170,000, or 50.7%, was mainly due to the decrease of approximately $126,000 of marketing expenses, the decrease of approximately $32,000 of commission expenses and the decrease of approximately $12,000 of shipping expenses.

General and administrative (“G&A”) expenses increased by approximately $162,000 from approximately $1,248,000 in the year ended December 31, 2018 to approximately $1,411,000 in the year ended December 31, 2019. The increase was mainly attributable to the increase of approximately $82,000 of rental expenses and the increase of approximately $112,000 of payroll expenses, the increase of approximately $18,000 of insurance expenses and the increase of approximately $12,000 of our Nevada factory general G&A expenses, such as office and other miscellaneous expenses, offset by the decrease of approximately $39,000 of professional fees, the decrease of approximately $16,000 of depreciation expenses and the decrease of approximately $14,000 of computer expenses.

Stock compensation expenses increased by approximately $50,000 from approximately $807,000 in the year ended December 31, 2018 to approximately $857,000 in the year ended December 31, 2019. $255,300 and $119,606 related to the amortization of the value of 2,300,000 shares of restricted common stock to three employees for the year ended December 31, 2019 and 2018, respectively, which all have a vesting period of three years. In addition, in January and March 2019, we issued 1,150,000 shares of our common stock valued at $1,080,000 to two advisors to provide certain financial advisory services, and amortized such cost, which was approximately $595,000. One of the service contracts was terminated in April 2019 due to non-performance and the Company is no longer obligated to issue the remaining 400,000 shares with a valuation of $360,000. During the year ended December 31, 2018, Mr. Wang, our CEO and CFO, distributed 1,500,000 shares of his own stock to certain persons outside of the United States who had previously worked with the Company as an incentive for these individuals to assist the Company in developing its international market. The Company determined that these 1,500,000 shares distributed by Mr. Wang were related to the Company’s operations in accordance to ASC 225-10-S99-4. As a result, we incurred $480,000 in stock compensation expense for the year ended December 31, 2018. In addition, we also incurred $194,000 in stock compensation expense as we issued 350,000 shares to a consultant for research and strategic planning consulting services during the year ended December 31, 2018.

Other income increased by approximately $157,000 from approximately $34,000 of other income in the year ended December 31, 2018 to approximately $192,000 of other income in the year ended December 31, 2019, mainly due to the increase of approximately $241,000 of gain on debt settlement, the decrease of approximately $60,000 of other income and the decrease of approximately $23,000 of interest expenses.

Net loss decreased by approximately $2.4 million from approximately $3.1 million in the year ended December 31, 2018 to approximately $0.7 million in the year ended December 31, 2019, mainly due to the reasons discussed above.

Liquidity and Capital Resources

As of December 31, 2019, we had a cash balance of approximately $9,000, compared to a cash balance of approximately $296,000 at December 31, 2018.

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 sufficient working capital. If we are unable to generate significant revenue or secure financing, we may be required to cease or limit our operations. Our financial statements do not include adjustments that might result from the outcome of this uncertainty.

For the year ended December 31, 2018, cash used in operating activities amounted to approximately $1.5 million as compared to approximately $1.4 million used in operating activities in the same period in 2019. Cash used in operating activities for the year ended December 31, 2019 mainly included approximately $722,000 net loss, non-cash transactions of approximately $241,000 from gain on debt settlement, the increase of accounts receivable of approximately $80,000 as we have incurred some credit sales from our packing and OEM business, the increase of inventory of approximately $115,000 as we had started production in almost full capacity during the year ended December 31, 2019 and stocked up our inventory at December 31, 2019, the increase of deposits and other assets of $15,000 as we deposited for the leasing of our office which we started in March 2019, the decrease of deferred revenue of approximately $1.4 million from shipping our backlog orders of Auxia and Cell Power products for which our members had previously paid, and the decrease of lease liability of approximately $87,000 as we paid off our lease obligations that were undertaken in March 2019. This amount was partially offset by the non-cash expense of approximately $857,000 in stock based compensation, approximately $55,000 of depreciation expenses, approximately $95,000 in amortization of a lease right-of-use asset, approximately $41,000 of bad debt expense, the decrease of prepaid expenses of approximately $46,000, and the increase of accounts payable and accrued expenses of approximately $143,000, as we were behind on our payment schedule.

For the year ended December 31, 2018, cash provided by financing activities amounted to approximately $1.8 million as compared to approximately $1.2 million during the year ended December 31, 2019. Net cash received in the year ended December 31, 2019 includes approximately $189,000 from the collection of our stock subscription receivable, approximately $242,000 from a loan from our principal shareholder and Chief Executive and Financial Officer, and approximately $1.5 million from third party loans we received in 2019. These amounts were partially offset by our repayment of principal amounts on various loans of approximately $804,000, of which approximately $784,000 was repaid to our principal shareholder and Chief Executive and Financial Officer, and approximately $20,000 was paid to unaffiliated third parties.

The material terms of the loans from our principal shareholder and Chief Executive and Financial Officer, certain related parties and certain unaffiliated third parties are set forth in Note 6 and Note 7 of the accompanying notes to financial statements.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our stockholders.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 8. Financial Statements

INDEX TO 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.

MERION, INC.

 STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018

The accompanying notes are an integral part of these financial statements.

MERION, INC.

NOTES TO FINANCIAL STATEMENTS

Note 1 – Organization

Merion, Inc. (the “Company”), a Nevada corporation, was formed on February 4, 2011. Its predecessor, E-World USA Holding, Inc., was a California company incorporated in 2007 (“E-World CA”). In April 2011, E-World CA entered into a merger agreement with its wholly-owned subsidiary, E-World USA Holding, Inc., a Nevada corporation (“E-World NV”) that was the survivor of the merger and became the Company. Under the Merger Agreement, the Company issued 90,000,000 shares of its common stock on a one for one basis for each share of E-World CA’s common stock issued and outstanding at the date of the merger. In addition, the Company issued Type A Warrants and Type B Warrants in exchange for comparable warrants issued and outstanding of E-World CA at the date of the merger. On June 27, 2017, the Company filed an amendment to its Articles of Incorporation with the Secretary of State for the State of Nevada to change its name from E-World NV to Merion, Inc.

The Company is a provider of health and nutritional supplements and personal care products currently sold on the internet through our websites, www.dailynu.com and www.merionus.com, principally in mainland China, and to wholesale distributors in the United States.

On January 1, 2018, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with SUSS Technology Corporation (the “Seller”), pursuant to which the Seller agreed to sell to the Company substantially all of the assets associated with the 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 Company has evaluated this transaction to determine whether it is considered to be an asset purchase or business purchase and concluded such transaction was an asset purchase in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) section 805-10-55.

The Seller was one of our major suppliers prior to this purchase. 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 it sells, the Company also began production of hard capsules, tablets, solid beverage (sachet packaging), teabags, powder, granules, dietary supplements for export, softgel capsules and health food from these assets for any potential new customers who need these products, similar to our Original Equipment Manufacturer (“OEM”) business. In May 2018, the Company began manufacturing certain of the nutritional supplements that it sells.

Note 2 – Going Concern

Management has determined there is substantial doubt about our ability to continue as a going concern as a result of our lack of significant revenues, significant recurring losses, and negative working capital. If continue to be unable to generate significant revenue or secure additional financing, we may be required to cease or curtail our operations. Our financial statements do not include adjustments that might result from the outcome of this uncertainty.

Management is trying to alleviate the going concern risk by: engaging external sales agents to sell the Company’s products, investigating and securing various financing resources, including but not limited to borrowing from the Company’s major shareholder, private placements, and the possibility of raising funds through a future public offering.

Note 3 – Summary of Significant Accounting Policies

Basis of Presentation

These financial statements have been presented by the Company in accordance with the accounting principles generally accepted in the United States of America.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant accounting estimates reflected in the Company’s financial statements include the useful lives of property and equipment, the collectability of receivables and impairment on long-live assets. Actual results could differ from those estimates.

Cash and cash equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are comprised primarily of money market accounts and foreign and domestic bank accounts. To reduce its credit risk, the Company monitors the credit standing of the financial institutions that hold the Company’s cash and cash equivalents.

Accounts Receivable

Trade accounts receivable are periodically evaluated for collectability based on credit history with customers and their current financial condition. Bad debt expense or write-offs of receivables are determined on the basis of loss experience, known and inherent risks in the receivable portfolio, and current economic conditions.

The accounts receivable balance and allowance for doubtful accounts are as follows:

Movement of allowance for doubtful accounts is as follows:

Inventories

Inventories are valued at the lower of cost (determined on a first-in, first-out basis) or net realizable value. Inventory consists of nutritional products, beauty products, and raw materials in our manufacturing facility. Management reviews inventory on hand for estimated obsolescence or unmarketable items, as compared to future demand requirements and the shelf life of the various products. Based on the review, the Company records inventory write-downs, when necessary, when costs exceed expected net realizable value. The inventories’ shelf lives are approximately 3 years. As of December 31, 2019 and 2018, there are no inventories obsolescence reserves or write-downs.

Property and Equipment, net

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

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

Right-of-use Asset and Lease Liabilities

In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842).” The new standard requires lessees to recognize lease assets (“right of use”) and related lease obligations (“lease liabilities”) for leases previously classified as operating leases under generally accepted accounting principles on the balance sheet for leases with terms in excess of 12 months. The standard is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted this standard as of January 1, 2019 utilizing the practical expedients approach.

Intangible Assets, net

Intangible assets represent the technological knowhow associated with the machinery that the Company has purchased. The technological knowhow has a finite useful life and is amortized using a straight-line method that reflects the estimated pattern in which the economic benefits of the intangible asset is to be consumed. The estimated useful life for the technological knowhow was estimated to be 10 years, which is associated with the economic benefits of the useful life of the machinery that the Company purchased. The Company also reevaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful life.

As of December 31, 2018, the Company determined the intangible asset was impaired, as the estimated discounted future cash flows expected to result from the use of the assets as being less than the carrying value of the asset. As a result, the Company recognized $810,000 of an impairment loss for the year ended December 31, 2018. Amortization expense totaled $0 and $90,000 for the years ended December 31, 2019 and 2018, respectively.

Impairment of Long-Lived Assets

Long-lived assets, including property, equipment and intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flows the assets are expected to generate and recognizes an impairment loss when estimated discounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When the Company identifies an impairment, the Company reduces the carrying amount of the asset to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, to comparable market values.

Deferred Revenue

Deferred revenue represents product deposits advanced by customers on specified product orders or on future orders that have not been shipped as of the balance sheet date. Deferred revenue also represents shipping fee deposits advanced by customers in relation to the unshipped product orders. Deferred revenue is reduced when the related sale is recognized in accordance with the Company’s revenue recognition policy.

Accrued Bonus

Accrued bonus represents amounts earned by the Company’s affiliate members (the “Affiliated Members”) for successful product sales. These bonuses are in the form of rebate credits that can be used to order the Company’s products, or cash rebates provided to Affiliate Members upon request.

Fair Value of Financial Instruments

The Financial Accounting Standard Board (“FASB”) accounting standards codification (“ASC”), FASB ASC 825 Financial Instruments, requires that the Company discloses estimated fair values of financial instruments.

As defined in ASC 820 Fair Value Measurement, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes the market data of similar entities in its industry or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).

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

Level 1 – Quoted prices that are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 – Pricing inputs, other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reporting date and includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

Revenue Recognition

On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (ASC 606) using the modified retrospective method for contracts that were not completed as of January 1, 2018. This did not result in an adjustment to retained earnings upon adoption of this new guidance, as the Company’s revenue was recognized based on the amount of consideration we expect to receive in exchange for satisfying the performance obligations.

The core principle underlying the revenue recognition ASU is that the Company will recognize revenue to represent the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This will require the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer. The Company’s revenue streams are recognized at a point in time, based on when control of goods and services transfers to a customer and there are no remaining performance obligations under the contract.

The ASU requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies each performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result in significant changes in the way the Company records its revenue. Upon adoption, the Company evaluated its revenue recognition policy for all revenue streams within the scope of the ASU under previous standards and using the five-step model under the new guidance and confirmed that there were no differences in the pattern of revenue recognition.

The Company accounts for a contract with a customer when the contract is committed in writing, the rights of the parties, including payment terms, are identified, the contract has commercial substance and consideration is probable of collection.

The Company continues to derive its revenues from sales contracts with its customers with revenues being recognized upon delivery of products. Persuasive evidence of an arrangement is demonstrated via sales contracts and invoices; and the sales price to the customer is fixed upon acceptance of the sales contract. Sales rebates or discounts are recognized as a reduction of revenue when the sale is made. The Company recognizes revenue when control of the goods is transferred upon shipment to the customer by the Company and collectability of payment is reasonably assured. These revenues are recognized at a point in time after all performance obligations are satisfied.

The Company also recognizes revenue on shipping and handling fees charged to the Company’s customers. Shipping and handling fee revenue is recognized when products have been delivered at a point in time. Shipping and handling fee revenues totaled $30,635 and $4,956 for the year ended December 31, 2019 and 2018, respectively.

Product returns are allowed for unopened products purchased under regular sales terms within 60 days. Allowances for product returns are provided at the time the sale is recorded using historic return rates for each country and the relevant return pattern. Historically the Company has a return rate of nearly zero. Accordingly, the allowance as of December 31, 2019 and 2018 is estimated at $0.

In addition to the Company’s 60-day return policy, the Company, at its discretion, may accept a customer’s application for a buy-back of products previously sold within one year at 90% of the original product’s cost less commissions and shipping costs. 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 had been recorded as of December 31, 2019 and 2018.

The majority of the Company’s product sales are generated from China and all of the Company’s OEM and packaging sales are generated from the United States. While all products are priced in U.S. currency, the Company accepts payments in both U.S. dollars, Chinese Yuan, and Hong Kong dollars.

Shipping and Handling Expenses

Shipping and handling costs incurred by the Company are included in selling expenses and totaled $27,571 and $40,049 for the years ended December 31, 2019 and 2018, respectively.

Research and Development (“R&D”) Expenses

Research and development expenses include salaries and other compensation-related expenses paid to the Company’s research and product development personnel while they are working on R&D projects, as well as raw materials used for the R&D projects. R&D expenses incurred by the Company are included in the general and administrative expenses and totaled $904 and $7,549 for the year ended December 31, 2019 and 2018, respectively.

Income Taxes

The Company utilizes ASC 740 Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Deferred taxes are also recognized for net operating losses that can be carried forward. A valuation allowance is established, when necessary, to reduce net deferred tax assets to the amount expected to be realized.

Basic and Diluted Earnings (Loss) Per Share

Generally accepted accounting principles regarding earnings per share (“EPS”) require presentation of basic and diluted earnings (loss) per share in conjunction with the disclosure of the methodology used in computing such earnings (loss) per share.

Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average of common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. These common stock equivalents are not included when the Company has a loss because they would be anti-dilutive.

2,300,000 shares of restricted common stock with weighted average effect of 1,278,120 diluted shares are excluded in the diluted EPS calculation for the year ended December 31, 2019, respectively, due to its anti-dilutive nature. There were no other potential dilutive securities outstanding for the year ended December 31, 2019 and 2018.

Concentration of Credit Risk

Financial instruments

Financial instruments that potentially subject the Company to concentrations of credit risk are cash and accounts receivable arising from its normal business activities. The Company maintains balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation (FDIC) insured limits for the banks located in the United States, or may exceed Hong Kong Deposit Protection Board (HKDPB) insured limits for the banks located in Hong Kong. The Company had no uninsured balances as of December 31, 2019.

Major Customers and Suppliers

For the year ended December 31, 2019, one customer accounted for approximately 10% of the Company’s sales and for the year ended December 31, 2018, two customers accounted for approximately 39% (27% and 12%) of the Company’s sales.

As of December 31, 2019, three customers accounted for approximately 88% (67%, 11% and 10%) of the Company’s accounts receivables. As of December 31, 2018, one customer accounted for 100% of the Company’s accounts receivable.

For the year ended December 31, 2019, three suppliers accounted for 69% (36%, 18% and 15%) of the Company’s product purchases and for the year ended December 31, 2018, three suppliers accounted for approximately 48% (23%, 13% and 12%, respectively) of the Company’s product purchases.

Related Parties

A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.

New Accounting Pronouncements

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, or ASU 2018-07. ASU 2018-07 simplifies the accounting for share-based payments made to nonemployees so the accounting for such payments is substantially the same as those made to employees. Under this ASU, share based awards to nonemployees will be measured at fair value on the grant date of the awards, entities will need to assess the probability of satisfying performance conditions if any are present, and awards will continue to be classified according to Accounting Standards Codification (“ASC”) 718 upon vesting, which eliminates the need to reassess classification upon vesting, consistent with awards granted to employees. This ASU was effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of this ASU did not have any material effect on the Company’s financial statements.

In May 2019, the FASB issued ASU 2019-05, which is an update to ASU Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced the expected credit losses methodology for the measurement of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss methodology. The amendments in Update 2016-13 added Topic 326, Financial Instruments—Credit Losses, and made several consequential amendments to the Codification. Update 2016-13 also modified the accounting for available-for-sale debt securities, which must be individually assessed for credit losses when fair value is less than the amortized cost basis, in accordance with Subtopic 326-30, Financial Instruments— Credit Losses—Available-for-Sale Debt Securities. The amendments in this update address those stakeholders’ concerns by providing an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For those entities, the targeted transition relief will increase comparability of financial statement information by providing an option to align measurement methodologies for similar financial assets. Furthermore, the targeted transition relief also may reduce the costs for some entities to comply with the amendments in Update 2016-13 while still providing financial statement users with decision-useful information. ASU 2019-05 is effective for the Company for annual and interim reporting periods beginning January 1, 2020. The adoption of this ASU on January 1, 2020 did not have any material effect on the Company’s financial statements.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”. The amendments in this Update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 is effective for the Company for annual and interim reporting periods beginning January 1, 2021. Early adoption of the amendments is permitted, including adoption in any interim period for public business entities for periods for which financial statements have not yet been issued. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption must adopt all the amendments in the same period. The Company is currently evaluating the impact of this new standard on Company’s financial statements and related disclosures.

The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s financial statements.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current year presentation. These reclassifications have no effect on the accompanying statements of operations and cash flows.

Note 4 – Inventories

Inventories consist of raw materials for production and finished goods available for resale, and can be categorized as:

Note 5 – Property and Equipment

Property and equipment consist of the following:

Depreciation expense totaled $54,692 and $70,557 for the years ended December 31, 2019 and 2018, respectively.

Note 6 – Debt

Due to third parties, interest bearing

The Company has borrowed money from third parties to fund operations. These third parties consist of the Chief Executive and Financial Officer’s friends and the spouse of a former board member of the Company. These advances have weighted average annual interest rates of 10% and 6% for the years ended December 31, 2019 and 2018, respectively, are unsecured, and are due on demand. During the year ended December 31, 2019, advances totaled $1,480,000. As of December 31, 2019 and 2018, the Company owed $1,500,000 and $109,030 to these third parties, respectively. In March 2019, the Company settled $89,030 of the debt owed to some of these third parties and converted the debt into the Company’s common stock (See Note 10 - Equity).

Interest expense for the year ended December 31, 2019 and 2018 for the above loans amounted to $42,362 and $6,542, respectively.

In March 2019, the repayment term related to the amount of $20,000 was changed by the third party creditor from due on demand to due on March 20, 2024.

Due to third parties, non-interest bearing

The Company has borrowed money from third parties to fund operations. These third parties consist of the Chief Executive and Financial Officer’s friends and a former board member of the Company. These advances do not bear interest, are unsecured, and are due on demand. During the year ended December 31, 2019, advances totaled $50,000. As of December 31, 2019 and 2018, the Company owed $100,000 and $101,666 to these third parties, respectively. In March 2019, the Company settled $32,000 of the debt owed to a third party and converted the debt into the Company’s common stock (See Note 10 - Equity). The Company also repaid $19,666 and $0 to a third party during the year ended December 31, 2019 and 2018, respectively.

In March 2019, the repayment term related to the amount of $50,000 was changed by the third party creditor from due on demand to due on March 20, 2024.

Note 7 – Related Party Transactions

Due to shareholder, interest bearing

In January 2016, Mr. Dinghua Wang, a major shareholder, director, Chief Executive and Financial Officer of the Company, pledged certain of his personal assets and obtained a personal loan from which he provided funds for the operations of the Company. In consideration for the funds the Company received, the Company agreed to pay the interest on this loan on Mr. Wang’s behalf. This loan has an annual borrowing rate of 9.99%. As of December 31, 2019 and 2018, the balance due to Mr. Wang, interest bearing, amounted to $0 and $471,603, respectively. The full balance of $471,603 was repaid in October 2019.

Interest expense for the years ended December 31, 2019 and 2018 for the above loan amounted to $38,849 and $49,950, respectively.

Due to shareholder, non-interest bearing

From time to time, Mr. Dinghua Wang, a major shareholder, director, Chief Executive and Financial Officer of the Company, advances monies to the Company and the Company repays such advances. Such business transactions are recorded as due to or from Mr. Wang at the time of the transaction. During the years ended December 31, 2019 and 2018, advances totaled $242,335 and $156,692, respectively, and payments to Mr. Wang totaled $312,331 and $439,587, respectively. As of December 31, 2019 and 2018, the balance due to Mr. Wang, non-interest bearing, amounted to $2,438,055 and $2,508,051, respectively. This balance is unsecured and is due on demand.

In March 2019, the repayment term related to $2,000,000 of the total balance was changed by Mr. Wang from due on demand to due on March 20, 2024.

Due to employee

The Company has borrowed money from Vickie Ho, Executive Vice President of the Company, to fund operations. These advances do not bear interest, are unsecured, and are due on demand. As of December 31, 2019 and 2018, the Company owed $95,000 to such employee.

In March 2019, the repayment term related to the balance of $95,000 was changed by the employee from due on demand to due on March 20, 2024.

Advances from related parties, interest bearing

The Company borrowed $30,000 from a related party to fund operations in July 2016. This related party is the son of the Company’s Chief Executive and Financial Officer. The advance has an annual interest rate of 10%, is unsecured and was due on demand. As of December 31, 2019 and 2018, the Company owed $30,000 to this related party.

Interest expense for the years ended December 31, 2019 and 2018 for the above loans amounted to $3,000.

In March 2019, the repayment term was changed by the related party from due on demand to due on March 20, 2024.

Advances from related parties, non-interest bearing

The Company has borrowed money from certain related parties to fund operations. The related parties consist of the Chief Executive and Financial Officer’s immediate family members and relatives. These advances do not bear interest, are unsecured and are due on demand. As of December 31, 2019 and 2018, the Company owed $518,839 to these related parties.

In March 2019, the repayment term for the $518,839 was changed by these related parties from due on demand to due on March 20, 2024.

Note 8 – Income Taxes

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the years ended December 31, 2019 and 2018:

*Represents 50% of meal and entertainment expenses and stock compensation expenses that are not deductible in the Company’s U.S. tax returns.

The Company uses the asset and liability method, where deferred tax assets and liabilities are determined based on the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes. Deferred taxes are also recognized for net operating loss carry forwards which can be utilized to offset taxable income in the future. The cumulative net operating loss carryforwards that may be applied against future taxable income is approximately $8,342,000 for federal and state income taxes as of December 31, 2019. The cumulative net operating loss carry forward that may be applied against future taxable income is approximately $7,817,000 for federal and state as of December 31, 2018. Net operating loss for the years ended 2018 and 2019 will not expire but utilization is limited to 80% of income each year until utilized. Net operating loss for the years ended 2017 and prior will expire in the years 2031 to 2037. As the net deferred tax asset may not be fully realizable due to potential recurring losses, management has provided a 100% valuation allowance for the deferred tax asset.

The components of the deferred tax assets is as follows: