Merion, Inc. - Quarter Report: 2021 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2021

For the transition period from _____________ to _____________

Commission file number 333-173681

100 N. Barranca St. #1000

West Covina, CA 91791

(626) 331-7570

(Address and telephone number of principal executive offices and principal place of business)

None.

(Former name, former address and former fiscal year, if changed since last report)

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

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

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 Exchange Act). Yes ☐     No ☒

The number of outstanding shares of Registrant’s Common Stock, $0.001 par value, was 61,519,682 shares as of August 9, 2021.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

MERION, INC.

CONDENSED BALANCE SHEETS

*Giving retroactive effect to the 1-for-3 reverse stock split effected on July 27, 2021.

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

MERION, INC.

CONDENSED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(UNAUDITED)

*Giving retroactive effect to the 1-for-3 reverse stock split effected on July 27, 2021.

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

MERION, INC.

CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT

*Giving retroactive effect to the 1-for-3 reverse stock split effected on July 27, 2021.

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

MERION, INC.

CONDENSED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(UNAUDITED)

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

MERION, INC.

NOTES TO UNAUDITED CONDENSED 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 30,000,000 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 website at www.merionus.com, and to wholesale distributors. The Company also provides Original Equipment Manufacturer (“OEM”) and packaging services of hard capsules, tablets, solid beverage (sachet packaging), teabags, powder, granules, dietary supplements for export, softgel capsules and health food.

In May 2021, the Company determined that it is more beneficial to outsource to third-party manufacturers the production of its branded and OEM products than manufacturing through its Nevada factory. As a result, the Company disposed of its machinery and terminated its Nevada factory lease in May 2021. As the Company has significant continuing involvement in the sale of its branded and OEM products through its third-party manufacturers, this restructuring did not constitute a strategic shift that will have a major effect on the Company’s operations and financial results. Therefore, the results of operations for its Nevada factory were not reported as discontinued operations under the guidance of Accounting Standards Codification 205.

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 we are 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 representatives 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 unaudited condensed financial statements have been presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In the opinion of management, all adjustments consisting of normal recurring adjustments considered necessary for a fair presentation of the financial statements, have been included. Interim results are not necessarily indicative of results to be expected for the full year. The information included in this Form 10-Q should be read in conjunction with information included in the Company’s annual report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission on March 30, 2021.

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 unaudited condensed financial statements include the useful lives of property and equipment, the collectability of receivables and impairment of long-lived assets. The inputs into the Company’s judgments and estimates consider the economic implications of COVID-19 on the Company’s critical and significant accounting estimates. 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 the 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 to be used by the Company’s third party manufacturers 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. For the three months ended June 30, 2021 and 2020, the Company did not recognize any inventory obsolescence reserves or write-downs. For the six months ended June 30, 2021 and 2020, the Company recognized $4,075 and $0, respectively, of inventory 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 Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 Company adopted this standard as of January 1, 2019 utilizing the practical expedients approach.

Long-Lived Assets

Long-lived assets, including property, equipment, and right-of-use-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. Management reviewed the impact of COVID-19 and the related disruptions on the Company’s operating results, and based upon potential orders, it believes that currently there was no impairment during the three and six months ended June 30, 2021 and 2020.

Deferred Revenue

Deferred revenue represents payments 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.

Fair Value of Financial Instruments

The 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:

Revenue Recognition

The Company’s revenue is recognized based on the amount of consideration the Company expects to receive in exchange for satisfying the performance obligations in accordance with ASC 606 Revenue from Contracts with Customers.

The core principle underlying the revenue recognition 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.

ASC 606 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 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 derives 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 $9,645 and $198 for the three months ended June 30, 2021 and 2020, respectively, and totaled $10,306 and $897 for the six months ended June 30, 2021 and 2020, 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 June 30, 2021 and December 31, 2020 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. To date, the Company has not received any buy-back applications. As a result, no allowance for buy-backs had been recorded as of June 30, 2021 and December 31, 2020.

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.

Shipping and Handling Expenses

Shipping and handling costs incurred by the Company are included in selling expenses and totaled $7,878 and $2,691 for the three months ended June 30, 2021 and 2020, respectively, and totaled $23,370 and $6,157 for the six months ended June 30, 2021 and 2020, 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.

306,668 shares and 536,668 shares of unvested restricted common stock granted to three employees which all have a vesting period of three years are excluded in the diluted EPS calculation for the three and six months ended June 30, 2021 and 2020, respectively, due to its anti-dilutive nature. There were no other potential dilutive securities outstanding for the three and six months ended June 30, 2021 and 2020.

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. The Company had no uninsured balances as of June 30, 2021.

Major Customers and Suppliers

For the three months ended June 30, 2021, one customer accounted for approximately 93% of the Company’s sales and for the three months ended June 30, 2020, three customers accounted for approximately 82% (61%, 11% and 10%) of the Company’s sales.

For the six months ended June 30, 2021, one customer accounted for approximately 93% of the Company’s sales and for the six months ended June 30, 2020, three customers accounted for approximately 56% (20%, 19% and 17%) of the Company’s sales.

As of December 31, 2020, one customer accounted for approximately 82% of the Company’s accounts receivable.

For the three months ended June 30, 2021, two suppliers accounted for 69% (43% and 26%) of the Company’s product purchases and for the three months ended June 30, 2020, four suppliers accounted for 75% (27%, 22%, 14%, and 12%) of the Company’s product purchases.

For the six months ended June 30, 2021, four suppliers accounted for 89% (37%, 30%, 12% and 10%) of the Company’s product purchases and for the six months ended June 30, 2020, four suppliers accounted for 74% (27%, 21%, 14%, and 12%) 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 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. In November 2019, the FASB issued ASU No. 2019-10, to update the effective date of ASU No. 2016-13 for private companies, not-for-profit organizations and certain smaller reporting companies applying for credit losses standard. The new effective date for these preparers is for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company has not early adopted this update and it will become effective on January 1, 2023 assuming the Company will remain eligible to be a smaller reporting company. The Company is currently evaluating the impact of this new standard on the Company’s unaudited condensed financial statements and related disclosures.

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. The adoption of this ASU on January 1, 2021 did not have any significant impact on Company’s unaudited condensed financial statements and related disclosures.

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

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 $12,162 and $15,662 for the three months ended June 30, 2021 and 2020, respectively.

Depreciation expense totaled $27,825 and $27,883 for the six months ended June 30, 2021 and 2020, respectively.

In May 2021, the Company determined that it is more beneficial to outsource to the third-party manufacturers the production of its branded and OEM products than manufacturing through its Nevada factory. As a result, the Company disposed of its machinery for $7,700 which resulted in $268,800 of loss on disposal of equipment for the three and six months ended June 30, 2021.

Note 6 – Debt

Loan payable - Paycheck Protection Program (“PPP”)

On April 17, 2020, the Company received loan proceeds in the amount of approximately $131,100 under the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualified business. The loans and accrued interest are forgivable after eight weeks (or an extended 24-week covered period) as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The loan forgiveness amount will be reduced for the Economic Injury Disaster Loan (“EIDL”) advance of $10,000 that the Company received on April 28, 2020. The amount of loan forgiveness will be further reduced if the borrower terminates employees or reduces salaries during the eight-week period by more than 25%. The Company believes that its use of the loan proceeds of $121,100, net of EIDL advances, complied with the conditions for forgiveness of the loan and interest. The Company filed for loan forgiveness and the application was approved on January 8, 2021. The PPP loan was accounted for as a government grant and the forgiveness of the loan was recorded in other income in the year ended December 31, 2020.

On February 2, 2021, the Company received loan proceeds of $137,792 under the U.S. Small Business Administration (“SBA”) second round of Paycheck Protection Program (“PPP”). The Company currently believes that its use of the loan proceeds of $137,792 will meet the conditions for forgiveness of the loan and intends to file for loan forgiveness twenty-four weeks after receipt of loan proceeds. There can be no assurance that the full amount of the loan will be forgiven.

Loan payable – Economic Injury Disaster Loan (“EIDL”)

On July 17, 2020, the Company received a loan in the amount of $150,000 from the Small Business Administration (“SBA”) EIDL program administered by the SBA pursuant to the CARES Act. In accordance with the requirements of the CARES Act, the Company will use proceeds from the SBA loan primarily for working capital to alleviate economic injury caused by the COVID Pandemic occurring in the month of January 2020 and continuing thereafter. The SBA loan is scheduled to mature on July 17, 2050 with a 3.75% interest rate and is subject to the terms and conditions applicable to loans administered by the SBA under the CARES Act. The monthly payable, including principal and interest of $731, commences on July 17, 2021 payable over 30 years.

The obligation is payable as follows:

Interest expense for the three months ended June 30, 2021 amounted to $1,406. Interest expense for the six months ended June 30, 2021 amounted to $2,812.

Due to third parties, interest bearing

The Company has borrowed money from third parties to fund operations. These third parties consist of friends of Mr. Dinghua Wang, the Chairman, Chief Executive and Financial Officer of the Company, and the spouse of a former board member of the Company. These advances have a weighted average annual interest rates of 10% for the six months ended June 30, 2020 and are unsecured.The full balance of the loans of $1,500,000 was transferred to DW California Food Distribution LLC (“DW Food), a California limited liability company that is owned by Mr. Dinghua Wang, through a debt sale agreement in December 2020. This balance due to DW Food was subsequently paid with shares of the Company’s common stock (See Note 7 – Related Party Transactions).

Interest expense for the three months ended June 30, 2021 and 2020 for the above loans amounted to $0 and $37,198, respectively. Interest expense for the six months ended June 30, 2021 and 2020 for the above loans amounted to $0 and $74,396, respectively.

Long term debt

In March 2020, the Company purchased and financed a vehicle with a six year loan for a total of approximately $124,000. The Company traded in a fully depreciated vehicle and received a credit of $16,000. The monthly payments are $1,715 from March 2020 to February 2026, with interest at 4.56% per annum.

The obligation is payable as follows:

Interest expense for the three months ended June 30, 2021 and 2020 for the above loan amounted to $1,153 and $1,198, respectively. Interest expense for the six months ended June 30, 2021 and 2020 for the above loan amounted to $2,075 and $1,607, respectively.

Note 7 – Related Party Transactions

Due to shareholder, non-interest bearing

From time to time, Mr. Dinghua Wang advances monies to the Company and the Company repays such advances. Such business transactions are recorded as due to or from Mr. Dinghua Wang at the time of the transaction. During the six months ended June 30, 2021 and 2020, advances totaled $6,912 and $11,604, respectively, and repayments totaled $21,490 and $10,635, respectively. As of June 30, 2021 and December 31, 2020, the balance due to Mr. Dinghua Wang, non-interest bearing, amounted to $41,029 and $55,607, respectively. This balance is unsecured.

Advance from related party, interest bearing

The Company borrowed $30,000 from a related party to fund operations in July 2016. This related party is the son of Mr. Dinghua Wang. The advance had an annual interest rate of 10%, was unsecured and was due on March 20, 2024. The advances of $30,000 was transferred to DW Food, a related party, through a debt sale agreement in December 2020. This balance due to DW Food was subsequently paid with shares of the Company’s common stock.

Interest expense for the three and six months ended June 30, 2020 for the above loan amounted to $748 and $1,496, respectively.

Note 8 – Income Taxes

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the three and six months ended June 30, 2021 and 2020:

*Represents 50% of meal and entertainment expenses and stock compensation expenses that are not deductible.

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. Net operating losses for the years ended 2017 through June 30, 2021 of approximately $5.5 million will not expire but are limited to 80% of income until utilized. Net operating losses for the years ended 2016 and prior of approximately $5.5 million will expire in the years 2031 to 2036. As deferred tax assets may not be fully realizable due to potential recurring losses, management has provided a 100% valuation allowance for the deferred tax assets.

The components of the deferred tax assets are as follows:

Changes in the valuation allowance for deferred tax assets increased by $223,224 and $220,760 for the six months ended June 30, 2021 and 2020, respectively. During the six months ended June 30, 2021, the Company did not utilize any deferred tax assets from the prior period.

As of June 30, 2021, federal tax returns filed for 2018, 2019 and 2020 remain subject to examination by the taxing authorities. As of June 30, 2021, California tax returns filed for 2017, 2018, 2019 and 2020 remain subject to examination by the taxing authorities

Note 9 – Leases

Operating leases

Effective January 1, 2019, the Company adopted ASU 2016-02, “Leases” (Topic 842), and elected the practical expedients that do not require us to reassess: (1) whether any expired or existing contracts are, or contain, leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases. The Company adopted the practical expedient that allows lessees to treat the lease and non-lease components of a lease as a single lease component. There was no impact from the adoption of ASC 842 as of January 1, 2019, as the Company did not have any existing leases with a lease term in excess of twelve months on January 1, 2019.

In January 2019, the Company entered an office lease agreement with a 5-year lease term starting in March 2019 and ending in February 2024. The Company recognized lease liabilities of approximately $618,000, with a corresponding right-of-use (“ROU”) asset in the same amount based on the present value of the future minimum rental payments of the lease, using an effective interest rate of 4.78%, which was determined using the Company’s estimated incremental borrowing rate. As of June 30, 2021, the remaining term of the lease is 2.67 years.

In March 2020, the Company entered another office lease agreement with a 3-year lease term starting in March 2020 and ending in February 2023. The Company recognized lease liabilities of approximately $279,000, with a corresponding right-of-use (“ROU”) asset in the same amount based on the present value of the future minimum rental payments of the new lease, using an effective interest rate of 4.78%, which was determined using the Company’s incremental borrowing rate. As of June 30, 2021, the remaining term of the lease is 1.67 years.

The Company leased factory space on a month-to-month basis, which it classifies as an operating lease. This lease was terminated in May 2021. Leases with an initial term of 12 months or less are not recorded on the balance sheet.

The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

For the three months ended June 30, 2021 and 2020, lease expenses amounted to $63,287 and $70,286, respectively, of which, $3,500 and $10,500 are short-term lease expenses, respectively.

For the six months ended June 30, 2021 and 2020, lease expenses amounted to $133,573 and $123,906, respectively, of which, $14,000 and $21,000 are short-term lease expenses, respectively.

The maturity of the Company’s lease obligations is presented below:

Note 10 – Commitments and Contingencies

Contingencies

Coronavirus (COVID-19)

At the end of 2019, there was an outbreak of a novel strain of coronavirus (COVID-19) which has spread rapidly to many parts of China and other parts of the world, including the United States. The epidemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and facilities in China, United States, and elsewhere around the world.

Substantially all of the Company’s revenues are concentrated in China and the United States. Consequently, the COVID-19 outbreak has and may continue to materially adversely affect the Company’s business operations, financial condition and operating results for 2021, including but not limited to the material negative impact to the Company’s suppliers and delivery of products, total revenues, slower collection of accounts receivable and additional allowances for doubtful accounts. The situation remains highly uncertain for any further outbreak or resurgence of COVID-19 and its new variants. It is therefore difficult for the Company to estimate the impact on our business or operating results that might be adversely affected by any further outbreak or resurgence of COVID-19 and its new variants.

In addition, due to the COVID-19 going around the world and some of the raw materials to produce our products are sourced from outside of the United States, the suppliers have been and might continue to be negatively impacted due to increases of shipping costs and shortages of raw materials around the world. Consequently, COVID-19 has and may continue to materially adversely affect the Company’s business operations, financial condition and operating results for 2021, including but not limited to the shortage, delay of shipment, and increased price for the Company’s products manufactured by our suppliers.

Because of the uncertainty surrounding COVID-19, the financial impact for the remainder of 2021 cannot be reasonably estimated at this time. The Company’s operations started to recover as total revenues for the three and six months ended June 30, 2021 were higher as compared to the same period of 2020. There can be no assurance that the Company will be able to maintain or increase its revenues for the remaining half of 2021.

Note 11 – Equity

Reverse stock split

On June 11, 2021, the Company’s Board of Directors approved a 1-for-3 reverse stock split of the Company’s common stock. On July 27, 2021, the Company filed a Certificate of Change with the State of Nevada (the “Certificate”) to effect a 1-for-3 reverse stock split of the Company’s authorized shares of common stock, par value $0.001 (the “Common Stock”), accompanied by a corresponding decrease in the Company’s issued and outstanding shares of Common Stock (the “Reverse Stock Split”), effective upon filing. Following the Reverse Stock Split, the number of authorized shares of Common Stock was reduced from 1,000,000,000 to 333,333,333. All shares and per share amounts used herein and in the accompanying unaudited condensed financial statements have been retroactively restated to reflect the 1-for-3 Reverse Stock Split.

Private placements

During the six months ended June 30, 2020, the Company entered into a series of Securities Purchase Agreements with various unrelated third party purchasers, pursuant to which the Company sold in private placements an aggregate of 54,000 shares of the Company’s common stock, at a purchase price of $3.00 per share for an aggregate offering price of $162,000. The sales were completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.

As of June 30, 2021 and December 31, 2020, $1,735,695 were unpaid and recognized as stock subscription receivables in the accompanying statements of changes in shareholders’ deficit. During the six months ended June 30, 2021 and 2020, the Company received $0 and $50,000 of the stock subscription receivables, respectively.

Common stock issued for consulting services

On March 13, 2019, the Company entered into a consulting agreement with Global Merchants Union (“GMU”), pursuant to which GMU was to provide business and financial operation and planning consultation services to the Company for consideration of $7,500 per month and a one-time stock payment of 333,334 shares of common stock of the Company (the “Share Payment”). The cash payments required of $7,500 per month in the agreement were cancelled in May 2019. However, GMU was required to provide services in respect to the stock compensation for the remaining term of the agreement until March 12, 2020. For the three months ended June 30, 2021 and 2020, amortization of deferred compensation of these shares amounted to $0. For the six months ended June 30, 2021 and 2020, amortization of deferred compensation of these shares amounted to $0 and $125,000, respectively.

Issuance of restricted common stock

On July 13, 2018, the Board of Directors of the Company approved the grant of 766,668restricted stock units (the “RSUs”) to three employees of the Company, pursuant to the Merion, Inc. 2018 Omnibus Equity Plan. The RSUs vested 30% each on July 13, 2019 and 2020 and the remaining 40% of the RSUs vested on July 13, 2021, in each case provided that the employee remains employed, in good standing, by the Company. These shares were valued at $851,000, determined using the closing price of the Company’s common stock on July 13, 2018 of $1.11 per share, and are being amortized ratably over the term of the vesting period of three years on a straight line basis. The Company accounts for the restricted common stock as equity-settled awards in accordance with ASC 718. For the three months ended June 30, 2021 and 2020, amortization of deferred stock compensation of these shares amounted to $84,867 and $63,650, respectively. For the six months ended June 30, 2021 and 2020, amortization of deferred stock compensation of these shares amounted to $168,801 and $127,300, respectively. Deferred stock compensation of $11,191 and $179,992 has been recognized as a reduction of shareholders’ deficit as the services have not been performed as of June 30, 2021 and December 31, 2020, respectively.

The following table summarizes unvested restricted common stock activity for the six months ended June 30, 2021 and for the year ended December 31, 2020:

Note 12 – Subsequent Events

The Company evaluated all events and transactions that occurred after June 30, 2021 up through the date the Company issued these unaudited condensed financial statements on August 13, 2021. Based on the review, the Company did not identify any subsequent events that would have required adjustment or disclosure in the unaudited condensed financial statements other than the events discussed in Note 11.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes, and other financial information included in this Form 10-Q and our financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended December 31, 2020 (the “2020 Form 10-K”).

Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking. Words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “potential,” “believes,” “seeks,” “hopes,” “estimates,” “should,” “may,” “will,” “with a view to” and variations of these words or similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national, and local general economic and market conditions; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; change in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; the risk of foreign currency exchange rates; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission. For more information, see our discussion of risk factors located at Part I, Item 1A of our 2020 Form 10-K.

Although the forward-looking statements in this Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.

Overview

Our Company is a provider of health and nutritional supplements and personal care products. Currently, we are mainly selling our products over the internet directly to end-user customers through our website, at www.merionus.com, and to wholesale distributors through phone and electronic communication. Our major customers of our nutritional and beauty products are located in the Asian market, predominantly in the People’s Republic of China. Our major customers of our OEM and packaging products are located in the United States.

Since June 2014, we have been selling our products primarily over the internet directly to end-user customers and by phone/email orders directly to our wholesale distributors. Certain miscellaneous sales are made directly to customers who walk into the Company offices and customers who call the Company directly for products. We are now focusing on selling health and nutritional supplements and personal care products directly on the internet through our website at www.merionus.com and to our OEM customers. As of the date of filing of this report, we market eight individual nutritional supplement products, three and five of which were introduced in 2018 and 2019 respectively, and one beauty product, which was also introduced in 2018, on our website. We are no longer selling similar products of third parties on our website.

In January 2018, we entered into an Asset Purchase Agreement (the “Purchase Agreement”) with SUSS Technology Corporation, a Nevada corporation (the “Seller”), pursuant to which the Seller agreed to sell to the Company substantially all of the assets associated with the Seller’s manufacture of dietary supplements (the “Nevada Factory”) for an aggregate purchase price (the “Purchase Price”) of $1,000,000 and 333,334 shares of the Company’s common stock (the “Purchase Shares”) valued at $320,000. The Seller was one of our major suppliers during the year ended December 31, 2017. Upon purchasing these assets from the Seller, we started to manufacture some of the nutritional supplements that we sold until May 2021. 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 January 2018, we introduced a new beauty product, Noir Naturel, a gentle formula for grey coverage from the first application into hair care.

In September 2018, we introduced three different types of natural aphrodisiac supplements, Viwooba (1-3) for men that may support kidney health, improve immunity, enhance physical fitness, eliminate fatigue, improve sexual desire and enhance body energy, strength and sexual ability.

In March 2019, we introduced 1) Lady-S, a female dietary supplement that may assist with weight loss, 2) Gold King, a nutritional supplement that may provide antioxidant support and liver health, 3) New Power, a nutritional supplement that may support heart health, and 4) Taibao, a nutritional supplement that may enhance physical performance and energy metabolism.

In December 2019, we introduced ReMage Power, a nutritional supplement that may provide anti-aging Nicotinamide adenine dinucleotide (NAD)+ support and promote energy & cell metabolism.

In May 2021, we determined that it is more beneficial to outsource to third-party manufacturers the production of our branded and OEM products than manufacturing through our Nevada Factory. As a result, we disposed of our factory machinery and terminated our Nevada Factory lease in May 2021. As we have significant continuing involvement in the sale of our branded and OEM products through our third-party manufacturers, this restructuring did not constitute a strategic shift that will have a major effect on our operations and financial results. Therefore, the results of operations for our Nevada Factory were not reported as discontinued operations under the guidance of Accounting Standards Codification 205.

On June 11, 2021, our Board of Directors approved a 1-for-3 reverse stock split of our common stock. On July 27, 2021, we filed a Certificate of Change with the State of Nevada (the “Certificate”) to effect a 1-for-3 reverse stock split of our authorized shares of common stock, par value $0.001 (the “Common Stock”), accompanied by a corresponding decrease in our issued and outstanding shares of Common Stock (the “Reverse Stock Split”), effective upon filing. Following the Reverse Stock Split, the number of authorized shares of Common Stock was reduced from 1,000,000,000 to 333,333,333. All shares and per share amounts used herein and in the accompanying unaudited condensed financial statements have been retroactively restated to reflect the 1-for-3 Reverse Stock Split.

Principal Factors Affecting Our Financial Performance

We believe consumers have become more confident in ordering products like ours over the internet. However, the nutritional supplement and skin care products e-commerce markets have been, and continue to be, increasingly competitive and are rapidly evolving due to the reasons discussed below.

Barriers to entry are minimal in the nutritional supplement and skin care businesses, and current and new competitors can launch new websites at a relatively low cost. Many competitors in this area have greater financial, technical and marketing resources than we do. Continued advancement in 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.

As COVID-19 has limited the global travels, transportation, and import and export goods, we moved our focus on local OEM and packaging business through the production from third party manufacturers and it has become our major revenue source in fiscal year 2021. The loss of one or more of our U.S. OEM and packaging customers would result in a potential loss of sales and have a negative effect on our operations if we cannot find one or more substitutes.

Our products are sensitive to business and personal discretionary spending levels, and demand tends to decline or grow more slowly during economic downturns, including downturns in any of our major markets. The global economy is currently undergoing a period of downturn due to COVID-19, and the future economic environment continues to remain uncertain. This has led, and could further lead, to reduced consumer spending, which may include spending on nutritional and beauty products and other discretionary items. The increase of trade tensions between US and China and the spread of COVID-19 have and might continue to have negative impacts on our business. The reduced consumer spending may force us and our competitors to lower prices. These conditions may adversely affect our revenues and results of operations.

Coronavirus (COVID-19)

At the end of 2019, there was an outbreak of a novel strain of coronavirus (COVID-19) in China, which has spread rapidly to many parts of the world, including the U.S. In March 2020, the World Health Organization declared COVID-19 a pandemic. The pandemic has resulted in quarantines, travel restrictions, and the temporary closure of office buildings and facilities in China and in the U.S. The economic impact of the coronavirus or COVID-19 in both China and the U.S have significantly impacted our business and results of operations.

Our headquarters are located in California and were closed from March 19, 2020 to June 9, 2020. Due to the surge of COVID-19 cases in California, our offices were closed again from July 16, 2020 to September 16, 2020 and our employees worked remotely from home during these periods. Our offices have been reopened since September 16, 2020. Substantially all of our product sales revenues are generated in China and all of our OEM and packaging revenues are generated in the U.S. Consequently, our results of operations have been and will continue be materially adversely affected, to the extent that COVID-19 harms the Chinese and U.S. economy. Any potential impact to our results will depend on, to a large extent, future developments and new information that may emerge regarding the duration and severity of COVID-19 and new variants, efficacy and distribution of COVID-19 vaccines and the actions taken by government authorities and other entities in China and U.S. to contain COVID-19 or treat its impact, almost all of which are beyond our control.

Although we expect that our health supplement products and our OEM/packaging services will still be in demand due to awareness of the importance of health growing along with the realities of COVID-19, the global economy has been and may continue to be negatively affected by COVID-19 and there is continued uncertainty about the duration and intensity of the impact of COVID-19. Many of our customers are individuals and small and medium-sized enterprises (SMEs), which may not have strong cash flows or be well capitalized, and may be vulnerable to a pandemic outbreak and slowing macroeconomic conditions. If the SMEs cannot weather the COVID-19 pandemic and the resulting economic impact, or cannot resume business as usual after a prolonged outbreak, our revenues and business operations may be materially and adversely impacted.

While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing the Company’s ability to access capital, which could negatively affect the Company’s liquidity.

Substantially all of our revenues are concentrated in China and the United States. Consequently, the COVID-19 outbreak has and may continue to materially adversely affect our business operations, financial condition and operating results, including but not limited to the material negative impact to the production and delivery of our products, revenues and collection of accounts receivable and the additional allowance for doubtful accounts. The situation remains highly uncertain for any further outbreak or resurgence of the COVID-19, new variants and the efficacy and distribution of COVID-19 vaccines. It is therefore difficult for the Company to estimate the impact on our business or operating results that might be adversely affected by any further outbreak or resurgence of COVID-19 for the remaining year of 2021.

In addition, due to COVID-19 going around the world and some of the raw materials to produce our products are sourced from outside of the United States, the suppliers have been and might continue to be negatively impacted due to increased shipping costs and shortage of raw materials around the world. Consequently, the COVID-19 outbreak has and may continue to materially adversely affect the Company’s business operations, financial condition and operating results for the remainder of 2021, including but not limited to the shortage of raw materials, delay of shipment, and increased prices for the Company’s products manufactured by our suppliers.

The Company started to recover as total revenues for the three and six months ended June 30, 2021 were higher as compared to the same period of 2020. Because of the uncertainty surrounding COVID-19, the financial impact for 2021 cannot be reasonably estimated at this time.

Looking ahead, we understand that these unprecedented times will have a financial impact to some of our customers, and might potentially cause loss of certain existing customers. Our plan has been to promote the awareness of the importance of health and our health supplement products, which in turn might build sales with new customers to offset the loss of any of our existing customers.

As COVID-19 continues to impact global business, the U.S. government established relief programs for small business such as the Paycheck Protection Program (“PPP”) and the Economic Injury Disaster Loan program (“EIDL”). We received a PPP loan of $131,100 and EIDL loan of $150,000 to help fund our operation in 2020. The PPP loan was fully forgiven by the SBA administration in January 2021.

On February 2, 2021, the Company received loan proceeds of $137,792 under the U.S. Small Business Administration (“SBA”) second round of Paycheck Protection Program (“PPP”) to help fund our operations in 2021.

Results of Operations

Comparison of the three months ended June 30, 2021 and 2020

Total sales increased by approximately $732,000 or 2,513.3%, from approximately $29,000 in the three months ended June 30, 2020 to approximately $761,000 in the three months ended June 30, 2021. The increase of sales was mainly due to the OEM contracts that the Company signed in 2020 and we fulfilled some of those orders during the three months ended June 30, 2021.

The cost of sales increased by approximately $559,000, or 765.8%, from approximately $73,000 in the three months ended June 30, 2020 to approximately $632,000 in the three months ended June 30, 2021. The increase of cost of sales was in line with our revenue as we fulfilled two large OEM orders during the three months ended June 30, 2021.

Our overall gross margin (loss) percentage increased from approximately (150.6)% in the three months ended June 30, 2020 to approximately 17.0% in the three months ended June 30, 2021, mainly due to the increase of sales in the three months ended June 30, 2021 as compared to the same period in 2020. We had more sales to absorb our fixed production costs during the three months ended June 30, 2021 as our products normally have high gross margins. On the other hand, we had more idle capacity cost during the same period in 2020 which had created a gross loss.

Our product sales increased by approximately $8,000, or 87.1% from $8,777 for the three months ended June 30, 2020 to $16,420 for the same period ended June 30, 2021. The gross margin percentage increased from approximately 2.9% in the three months ended June 30, 2020 to approximately 19.5% in the three months ended June 30, 2021. The reason for the increase of product sales gross margin percentage was due to the sale of products at retail price without any wholesale discounts in the three months ended June 30, 2021 while we offered some wholesales and bundle discounts to our customers during the same period in 2020.

Our OEM and packaging sales increased by approximately $724,000, or 3,559.9% from approximately $20,000 for the three months ended June 30, 2020 to approximately $744,000 for the same period ended June 30, 2021. The gross margin percentage decreased from approximately 43.4% in the three months ended June 30, 2020 to approximately 17.0% in the three months ended June 30, 2021. For the three months ended June 30, 2021, we had incurred more manufacturing overhead costs for our OEM and packaging sales with additional labor hours being allocated to such production due to increased production procedures as compared to the same period in 2020. In addition, the cost of raw materials of the two large OEM orders required higher material usage in the three months ended June 30, 2021 as compared to the OEM and packaging products sold in the same period in 2020. As a result, our OEM and packaging sales gross margin percentage decreased by 24.0% during the three months ended June 30, 2021 as compared to the same period in 2020.

Selling expenses increased from approximately $18,000 in the three months ended June 30, 2020 to approximately $20,000 in the three months ended June 30, 2021. The increase of approximately $2,000, or 13.3%, was mainly due to the increase of approximately $10,000 of sales department salaries as we transferred our factory employees to be our sales representatives after closing our Nevada factory in May 2021, the increase of approximately $1,000 of packing expenses and the increase of approximately $5,000 of shipping expenses as we have more OEM orders that required packing and shipping services, offset by the decrease of approximately $14,000 of advertising and marketing expenses.

General and administrative (“G&A”) expenses decreased by approximately $8,000 from approximately $309,000 in the three months ended June 30, 2020 to approximately $301,000 in the three months ended June 30, 2021. The decrease was mainly attributable to the decrease of approximately $15,000 of foreign currency transaction fees in the three months ended June 30, 2021, the decrease of approximately $4,000 of professional fees, and the decrease of approximately $9,000 of bad debt expenses, offset by the increase of approximately $20,000 to upgrade our website.

Stock compensation expenses increased by approximately $21,000 during the three months ended June 30, 2021 compared to the same period in 2020. Approximately $85,000 and $64,000, related to the amortization of the value of 766,668 shares of restricted common stock to three employees for the three months ended June 30, 2021 and 2020, respectively, which all have a vesting period of three years.

In May 2021, we determined that it is more beneficial to outsource to third-party manufacturers the production our branded and OEM products than manufacturing in our Nevada factory. As a result, we terminated our Nevada factory lease and disposed of all machinery held in Nevada which resulted in $268,800 of loss on disposal of equipment for the three months ended June 30, 2021.

Other income (expense) increased by approximately $57,000 from an expense of approximately $(32,000) in the three months ended June 30, 2020 to income of approximately $25,000 in the three months ended June 30, 2021, mainly due to the decrease of interest expenses of approximately $40,000 incurred from the third party and related parties interest bearing loans that were transferred to DW Food, a related party, through a debt sale agreement in December 2020 and subsequently paid with shares of the Company’s common stock in December 2020. The increase of other income was also due to a $25,000 California Small Business COVID-19 Relief Grant that we received in May 2021.

Net loss increased by approximately $54,000 from approximately $466,000 in the three months ended June 30, 2020 to approximately $520,000 in the three months ended June 30, 2021, mainly due to the reasons discussed above.

Comparison of the six months ended June 30, 2021 and 2020

Total sales increased by approximately $1.1 million or 1,158.0%, from approximately $95,000 in the six months ended June 30, 2020 to approximately $1.2 million in the six months ended June 30, 2021. The increase of sales was mainly due to the OEM contracts that the Company signed in 2020 and we fulfilled those orders during the six months ended June 30, 2021.

The cost of sales increased by approximately $749,000, or 620.4%, from approximately $121,000 in the six months ended June 30, 2020 to approximately $869,000 in the six months ended June 30, 2021. The increase of cost of sales was in line with our revenue as we fulfilled two large OEM orders during the six months ended June 30, 2021.

Our overall gross margin (loss) percentage increased from approximately (26.9)% in the six months ended June 30, 2020 to approximately 27.3% in the six months ended June 30, 2021, mainly due to the increase of sales in the six months ended June 30, 2021 as compared to the same period in 2020. We had more sales to absorb our fixed production costs during the six months ended June 30, 2021 as our products normally have high gross margins. On the other hand, we had more idle capacity cost during the same period in 2020 which had driven down our gross margin.

Our product sales decreased by approximately $12,000, or 41.6% from $29,754 for the six months ended June 30, 2020 to $17,381 for the same period ended June 30, 2021. The gross margin percentage decreased from approximately 49.4% in the six months ended June 30, 2020 to approximately 23.5% in the six months ended June 30, 2021. The reason for the decrease of product sales gross margin percentage was due to providing more discounts to our customers during the six months ended June 30, 2021 on some of our products that were closer to the expiration date as compare to the same period in 2020.

Our OEM and packaging sales increased by approximately $1.1 million, or 1,704.0% from $65,358 for the six months ended June 30, 2020 to $1,179,088 for the same period ended June 30, 2021. The gross margin percentage decreased from approximately 55.4% in the six months ended June 30, 2020 to approximately 28.5% in the six months ended June 30, 2021. For the six months ended June 30, 2021, we had incurred more manufacturing overhead costs for our OEM and packaging sales with additional labor hours being allocated to such production due to increased production procedures as compared to the same period in 2020. In addition, the cost of raw materials of the two large OEM orders required higher material usage in the first quarter of 2021 as compared to the OEM and packaging products sold in the same period in 2020. As a result, our OEM and packaging sales gross margin percentage decreased by 26.9% during the six months ended June 30, 2021 as compared to the same period in 2020.

Selling expenses increased from approximately $31,000 in the six months ended June 30, 2020 to approximately $66,000 in the six months ended June 30, 2021. The increase of approximately $35,000, or 112.4%, was mainly due to the increase of approximately $31,000 of packing expenses and the increase of approximately $17,000 of shipping expenses as we fulfilled more OEM orders that required packing and shipping services, the increase of approximately $10,000 of sales department salaries as we transferred our factory employees to be our sales representatives after closing our Nevada factory in May 2021 offset by the decrease of approximately $23,000 of advertising, marketing and training expenses.

General and administrative (“G&A”) expenses decreased by approximately $25,000 from approximately $693,000 in the six months ended June 30, 2020 to approximately $668,000 in the six months ended June 30, 2021. The decrease was mainly attributable to the decrease of approximately $30,000 of payroll and benefit expenses as we did not replace certain employees after their resignations and the decrease of approximately $27,000 of bad debt expenses, the decrease of approximately $15,000 of foreign currency transaction fees offset by the increase of approximately $17,000 of rent expense with our training center in New York, the increase of approximately $20,000 to upgrade our website, and the increase of approximately $10,000 of other miscellaneous G&A expenses.

Stock compensation expenses decreased by approximately $84,000 during the six months ended June 30, 2021 compared to the same period in 2020. In March 2019, we issued 333,334 shares of our common stock to an advisor to provide certain business and financial operation and planning consultation services, and with amortization expenses of approximately $125,000, and such services were completed in March 2020 and we no longer incurred such costs in the six months ended June 30, 2021. Approximately $169,000 and $127,000, related to the amortization of the value of 766,668 shares of restricted common stock to three employees for the six months ended June 30, 2021 and 2020, respectively, which all have a vesting period of three years.

In May 2021, we determined that it is more beneficial to outsource to third-party manufacturers the production our branded and OEM products than manufacturing through our Nevada factory. As a result, we terminated our Nevada factory lease and disposed of all machinery held in Nevada which resulted in $268,800 of loss on disposal of equipment for the six months ended June 30, 2021. During the six months ended June 30, 2020, we traded in one of our vehicles which resulted in a gain of $16,000.

Other income (expense) increased by approximately $100,000 from an expense of approximately $(73,000) in the six months ended June 30, 2020 to income of approximately $27,000 in the six months ended June 30, 2021, mainly due to the decrease of interest expenses of approximately $78,000 incurred from the third and related parties interest bearing loans that were transferred to DW Food, a related party, through a debt sale agreement in December 2020 and subsequently paid with shares of the Company’s common stock in December 2020. The increase of other income was also due to a $25,000 California Small Business COVID-19 Relief Grant that we received in May 2021.

Net loss decreased by approximately $241,000 from approximately $1.1 million in the six months ended June 30, 2020 to approximately $818,000 in the six months ended June 30, 2021, mainly due to the reasons discussed above.

Liquidity and Capital Resources

As of June 30, 2021, we had a cash balance of approximately $6,000, compared to a cash balance of approximately $10,000 at December 31, 2020.

In assessing our liquidity, we monitor and analyze our cash on-hand and our operating and capital expenditure commitments. Our liquidity needs are to meet our working capital requirements, operating expenses and capital expenditure obligations. Other than operating expenses and current liabilities of approximately $1.1 million, the Company does not have significant cash commitments. Cash requirements include cash needed for purchase of inventory, payroll, payroll taxes, rent, and other operating expenses. However, in response to the liquidity factors described above, the Company has continued to find ways to reduce its operating expenses. In addition, should our Company need funds, our principal shareholder and Chief Executive and Financial Officer Mr. Dinghua Wang may lend additional money to the Company from time to time to the extent he is in a position and willing to do so. No assurance can be provided that he will continue to lend funds to the Company in the future.

Management has concluded under U.S. GAAP that there is substantial doubt about our ability to continue as a going concern as a result of our lack of significant revenue and sufficient working capital. If we are unable to generate significant revenue or secure financing, we may be required to cease or limit our operations. Our financial statements do not include adjustments that might result from the outcome of this uncertainty.

For the six months ended June 30, 2021, cash used in operating activities amounted to approximately $126,000 as compared to approximately $315,000 used in operating activities in the same period in 2020. Cash used in operating activities for the six months ended June 30, 2021 was primarily the result of our approximately $818,000 net loss, the decrease of accounts payable and accrued expenses of approximately $76,000 and the payment of lease liabilities of approximately $105,000. This amount was partially offset by the non-cash expense of approximately $169,000 in stock based compensation, approximately $28,000 of depreciation expenses, approximately $106,000 in amortization of operating leases right-of-use assets and approximately $269,000 of loss on disposal of equipment, the decrease of accounts receivable of approximately $75,000, the decrease of inventories of approximately $11,000, the decrease of prepaid expenses approximately $106,000 as we realized our prepaid inventory purchases to fulfill our OEM orders and the increase of deferred revenue of approximately $105,000 as we still have some OEM backlog orders to be fulfilled.

For the six months ended June 30, 2021, investing activities provided approximately $7,700 in net cash received from the sale of machinery in our Nevada factory.

For the six months ended June 30, 2021, financing activities provided approximately $115,000 as compared to approximately $317,000 during the six months ended June 30, 2020. Net cash received in the six months ended June 30, 2021 includes approximately $138,000 from the second round of the SBA PPP loan, and approximately $7,000 from a loan from our principal shareholder and Chief Executive and Financial Officer, Mr. Dinghua Wang. These amounts were partially offset by our repayment of approximately $21,000 to our principal shareholder and Chief Executive and Financial Officer, Mr. Dinghua Wang and approximately $8,000 of principal payments for long-term debt.

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

Off-Balance Sheet Arrangements

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company has established disclosure controls and procedures to ensure that information required to be disclosed in this quarterly report on Form 10-Q was properly recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. The Company’s controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers to allow timely decisions regarding required disclosure.

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) at June 30, 2021 based on the evaluation of these controls and procedures required by paragraph (b) of Rule 13a-15 or Rule 15d-15 under the Exchange Act. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer/Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer/Chief Financial Officer concluded that, at June 30, 2021, our disclosure controls and procedures are not effective due to the following material weakness that we have identified:

Lack of Accounting and Finance Expertise – Our current accounting staff is relatively small, and we do not have the required infrastructure of meeting the higher demands of being a U.S. public company. This material weakness also relates to a lack of personnel with expertise in preparing financial statements in accordance with U.S. GAAP.

We have taken certain actions to remediate the material weakness related to our lack of U.S. GAAP experience. We have engaged an outside CPA firm with U.S. GAAP knowledge and SEC reporting experience to supplement our current internal accounting personnel and assist us in the preparation of our financial statements to ensure that our financial statements are prepared in accordance with U.S. GAAP.

The Company’s operations are relatively small and uncomplicated, and as our operations grow and become more complex, we intend to hire additional personnel in financial reporting and other areas. However, there can be no assurance of when, if ever, we will be able to remediate the identified material weaknesses.

Changes in Internal Controls over Financial Reporting

Except as disclosed above, there have been no changes in the Company’s internal controls over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II — OTHER INFORMATION

Item 1. 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 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 6. Exhibits. 

(a) Exhibits.

The following exhibits are filed herewith and this list is intended to constitute the exhibit index.

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* This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 of the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

SIGNATURE

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Merion, Inc.