UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2020

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)

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 x 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 x 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 x

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

As of June 24, 2020, there were 177,566,608 issued and outstanding shares of the registrant’s common stock.

TABLE OF CONTENTS

SPECIAL NOTE REGARDING RELIANCE ON RELIEF ORDER.

On May 13, 2020 we filed a Current Report on Form 8-K (“Form 8-K”) in compliance with and in reliance upon the SEC Order issued pursuant to Section 36 of the Securities Exchange Act of 1934, as amended, granting Exemptions from Specified Provisions of the Exchange Act and Certain Rules thereunder (SEC Release No. 34-88465 on March 25, 2020) (the “Relief Order”). By way of filing the Form 8-K, we, among other things, extended the time of filing of our quarterly report on Form 10-Q for the quarter ended March 31, 2020 (“Form 10-Q”), until no later than June 29, 2020 in reliance on the Relief Order. The Form 8-K disclosed the reasons that the Form 10-Q could not be timely filed.

Merion, Inc. (the “Company”) is relying on the SEC Order to delay the filing of its quarterly report on Form 10-Q for the quarter ended March 31, 2020, or the Quarterly Report, due to circumstances related to the COVID-19 pandemic. Our headquarters are located in California and our manufacturing facility is located in Nevada. The Company has been following the orders of local government and health authorities to minimize exposure risk for its employees and business partners, including the closures of its offices and having employees work remotely. Substantially all of the Company’s workforce in California has been working from home either all or substantially all of the time, including the Company’s limited number of general administrative and accounting personnel since March 19, 2020. Our office is reopened on June 9, 2020 but some of our employees are still working from home and our manufacturing facility in Nevada has partially suspended its operations since March 23, 2020 due to lack of raw materials. These safety measures have restricted access to the Company’s offices and facilities and books and records, and have disrupted routine interactions among the Company’s staff, advisors and third parties involved in the preparation of the Quarterly Report. Due to these disruptions, the Company is unable to timely file its Quarterly Report, originally due on May 15, 2020.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

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

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

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

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 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 manufacturer and 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, 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.

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, 2019, filed with the Securities and Exchange Commission on April 8, 2020.

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. 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 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 March 31, 2020 and December 31, 2019, there were no 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 Standard 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 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.

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. Management reviewed the potential impact of COVID-19 and the related disruptions on the Company’s operating results, and based upon potential orders believes that currently there was no impairment during the three months ended March 31, 2020.

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.

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 $699 and $2,809 for the three months ended March 31, 2020 and 2019, 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 March 31, 2020 and December 31, 2019 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 March 31, 2020 and December 31, 2019.

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 and Hong Kong dollars.

Shipping and Handling Expenses

Shipping and handling costs incurred by the Company are included in selling expenses and totaled $3,466 and $10,702 for the three months ended March 31, 2020 and 2019, 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 general and administrative expenses and totaled $0 and $904 for the three months ended March 31, 2020 and 2019, 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 are excluded in the diluted EPS calculation for the three months ended March 31, 2020, due to its anti-dilutive nature. There were no other potential dilutive securities outstanding for the three months ended March 31, 2020 and 2019.

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 March 31, 2020 and December 31, 2019.

Major Customers and Suppliers

For the three months ended March 31, 2020, three customers accounted for approximately 68% (29%, 25% and 14%) of the Company’s sales and for the three months ended March 31, 2019, one customer accounted for approximately 30% of the Company’s sales.

As of March 31, 2020, two customers accounted for approximately 73% (58% and 15%) of the Company’s accounts receivable. As of December 31, 2019, three customers accounted for approximately 88% (67%, 11% and 10%) of the Company’s accounts receivable.

For the three months ended March 31, 2020, one supplier accounted for 100% of the Company’s product purchases and for the three months ended March 31, 2019, four suppliers accounted for approximately 69% (21%, 20%, 16% and 12%) of the Company’s product purchases.

Risk and Uncertainties

In March 2020, the World Health Organization declared the COVID-19 as a pandemic. Given the rapidly expanding nature of the COVID-19 pandemic, and because substantially all of the Company’s business operations and its major customers are concentrated in China and United States, its business, results of operations, and financial condition could be adversely affected for the rest of fiscal year 2020 and beyond.

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, which 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 smaller reporting company. The Company is currently evaluating the impact of this new standard on 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. 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 unaudited condensed 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 unaudited condensed 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 the following:

Note 5 – Property and Equipment

Property and equipment consist of the following:

Depreciation expense totaled $12,221 and $17,211 for the three months ended March 31, 2020 and 2019, 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 three months ended March 31, 2020 and 2019, respectively, are unsecured, and are due on demand or March 30, 2024. As of March 31, 2020 and December 31, 2019, the Company owed $1,500,000 to these third parties, among which, $20,000 are due on March 20, 2024.

Interest expense for the three months ended March 31, 2020 and 2019 for the above loans amounted to $37,198 and $1,423, respectively.

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 or March 30, 2024. During the three months ended March 31, 2020 and 2019, additional advances totaled $10,000 and $0, respectively. As of March 31, 2020 and December 31, 2019, the Company owed $110,000 and $100,000 to these third parties, respectively, of which, $50,000 is due on March 20, 2024

Long term debt

In March 2020, the Company purchased and financed a vehicle with a six year loan for a total of approximately of $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. As of March 31, 2020, $106,596 of loan payments remained outstanding, of which $16,066 are due within one year from March 31, 2020.

The obligation is payable as follows:

Interest expense for the three months ended March 31, 2020 for the above loan amounted to $409.

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%. The full balance of $471,603 was repaid in October 2019.

Interest expense for the three months ended March 31, 2020 and 2019 for the above loan amounted to $0 and $12,488.

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 three months ended March 31, 2020 and 2019, advances totaled $8,953 and $84,616, respectively, and payments to Mr. Wang totaled $10,435 and $61,644, respectively. As of March 31, 2020 and December 31, 2019, the balance due to Mr. Wang, non-interest bearing, amounted to $2,436,573 and $2,438,055, respectively. This balance is unsecured and is due on demand.

In March 2019, the repayment terms 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 March 20, 2024. As of March 31, 2020 and December 31, 2019, the Company owed $95,000 to such employee. 

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 is due on March 20, 2024. As of March 31, 2020 and December 31, 2019, the Company owed $30,000 to this related party.

Interest expense for the three months ended March 31, 2020 and 2019 for the above loans amounted to $748 and $740, respectively.

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 March 20, 2024. As of March 31, 2020 and December 31, 2019, the Company owed $518,839 to these related parties.

Note 8 – Income Taxes

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the three months ended March 31, 2020 and 2019:

*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. The cumulative net operating loss carryforwards that may be applied against future taxable income is approximately $8,732,000 for federal and state income taxes as of March 31, 2020. The cumulative net operating loss carry forward that may be applied against future taxable income is approximately $8,342,000 for federal and state as of December 31, 2019. Net operating loss for the years ended 2017 through 2019 will not expire but limited to 80% of income until utilized. Net operating loss for the years ended 2016 and prior 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 value allowance for deferred tax assets increased by $109,152 from $2,333,023 at December 31, 2019 to $2,442,175 at March 31, 2020. During the three months ended March 31, 2020, the Company did not utilized any deferred tax assets from the prior period.

As of March 31, 2020, federal tax returns filed for 2017, 2018 and 2019 remain subject to examination by the taxing authorities. As of March 31, 2020, California tax returns filed for 2016, 2017, 2018 and 2019 remain subject to examination by the taxing authorities.

Note 9 – Commitments

Operating lease

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 is 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 terminating 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. The remaining term of the lease is 3.92 years.

In March 2020, the Company entered another new office lease agreement with 3-year lease term starting in March 2020 and terminating 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.

The Company also leases factory space on a month-to-month basis, which it classifies as an operating lease. 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 March 31, 2020 and 2019, lease expenses amounted to $53,620 and $22,095, respectively, of which, $10,500 and $0 are short-term lease expenses, respectively.

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

Note 10 – Equity

Private placements

During the three months ended March 31, 2020, the Company entered into a series of Securities Purchase Agreements with various unrelated third party purchasers, pursuant to which the Company sold to these purchasers in private placements an aggregate of 162,000 shares of the Company’s common stock, par value $0.001 per share, at a purchase price of $1.00 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 March 31, 2020 and December 31, 2019, $1,110,695 and $1,140,695, respectively, were unpaid and recognized as stock subscription receivables in the accompanying statements of changes in shareholders’ deficit. During the three months ended March 31, 2020 and 2019, the Company received $50,000 and $62,500 of the stock subscription receivables, respectively.

Settlement of debt

On March 19, 2019, the Company entered into two Debt Repayment Agreements with two creditors of the Company (the “Creditors”), pursuant to which the Company agreed to repay $135,851 owed to the Creditors in the form of 295,480 shares of Company’s common stock at an average debt conversion rate of $0.46 per share (the “Debt Repayment”). The Debt Repayment was completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended. The closing price of the Company’s common stock on March 19, 2019 was $0.60 per share, which resulted in a loss on settlement of debt of $41,437.

On March 30, 2019, the Company entered into four Debt Repayment Agreements with four creditors of the Company (the “Creditors”), pursuant to which the Company agreed to repay $868,682 owed to the Creditors in the form of 976,364 shares of Company’s common stock at an average debt conversion rate of $0.89 per share (the “Debt Repayment”). The Debt Repayment was completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended. The closing price of the Company’s common stock on March 30, 2019 was $0.60 per share, which resulted in a gain on settlement of debt of $282,863.

Common stock issued for consulting services

On August 30, 2018, the Company entered into two advisory agreements with two advisors (the “Financial Advisors”), pursuant to which the Company engaged the Financial Advisors to provide certain financial advisory services for a service period of six months. As compensation for the services, the Company agreed to issue the Financial Advisors an aggregate of 67,916 shares of its common stock, par value $0.001. These shares are valued at $20,375, determined using the closing price of the Company’s common stock on August 30, 2018 of $0.30 per share. For the three months ended March 31, 2020 and 2019, amortization of deferred stock compensation of these shares amounted to $0 and $6,792, respectively.

On January 23, 2019, the Company entered into a consulting agreement with Redfield Management Service limited for business, finance and investor relations services. The consultant is due a monthly consulting fee of $7,000 and 50,000 shares, to be paid every three months. The term of the agreement was for one year. The service agreement was terminated at the end of April 2019 and the Company issued a total of 200,000 shares of its common stock. For the three months ended March 31, 2020 and 2019, amortization of deferred stock compensation of these shares amounted to $0 and $80,000, respectively.

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 1,000,000 shares of common stock of the Company (the “Share Payment”). Shares subject to the Share Payment were to be issued to GMU within 30 days after the agreement was signed. The term of the agreement was for one year but the cash consideration and payment obligation by the Company under this agreement was terminated in May 2019. For the three months ended March 31, 2020 and 2019, amortization of deferred compensation of these shares amounted to $125,000 and $25,000, respectively.

Issuance of restricted common stock

On July 13, 2018, the Board of Directors of the Company approved the grant of 2,300,000 restricted stock units (the “RSUs”) to three employees of the Company, pursuant to the Merion, Inc. 2018 Omnibus Equity Plan. Thirty percent of the RSUs vested on July 13, 2019, thirty percent of the RSUs will vest on July 13, 2020, and the remaining forty percent of the RSUs will vest 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 $0.37 per share, and are being amortized ratably over the term of the vesting periods 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 March 31, 2020 and 2019, amortization of deferred stock compensation of these shares amounted to $63,650 and $62,951, respectively. Deferred stock compensation of $412,443 and $476,093 has been recognized as a reduction of shareholders’ deficit as the services have not been performed as of March 31, 2020 and December 31, 2019, respectively.

The following table summarizes unvested restricted common stock activity for the three months ended March 31, 2020 and for the year ended December 31, 2019:

Note 11 – Subsequent Events

The Company evaluated all events and transactions that occurred after March 31, 2020 up through the date the Company issued these unaudited condensed financial statements on June 26, 2020.

Coronavirus (COVID-19)

Recently, a novel strain of coronavirus (COVID-19) surfaced and 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 may materially adversely affect the Company’s business operations, financial condition and operating results for 2020, including but not limited to the material negative impact to the Company’s production and delivery, total revenues, slower collection of accounts receivables and additional allowance for doubtful accounts.

Although the impact of the COVID-19 lead the Company to the temporary closure of its offices from March 19, 2020 and June 8, 2020, the Company’s CEO has been working remotely from home and effectively using video/telephone conference to market its products and its OEM/packaging services. The Company had successfully signed an OEM contract with a customer in China in April 2020 and the Company is expecting to generate a significant amount of revenue from this customer in the last two quarters of 2020. In addition, considering the Company’s products are health supplements, it also expects growth in demand at a time when everyone’s health is at risk. The Company is hoping this translates into sustainable growth as the awareness of the importance of health expands.

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

Because of the uncertainty surrounding the COVID-19 outbreak, the financial impact cannot be reasonably estimated at this time. The Company’s total revenues in April and May of 2020 were lower as compared to the same period of 2019, and there is no guarantee that its total revenues will grow or remain at a similar level year over year in the last two quarters of 2020, although the Company recently signed an OEM contract as mentioned above.

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 qualifying 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 any 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 intends to use the proceeds for purposes consistent with the PPP. While the Company currently believes that its use of the loan proceeds of $121,100, net of EIDL advances, will meet the conditions for forgiveness of the loan and intends to file for loan forgiveness after eight weeks after receipt of loan proceeds. There can be no assurance that the full amount of the loan will be forgiven.

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, 2019 (the “2019 Form 10-K”).

Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking. Words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “potential,” “believes,” “seeks,” “hopes,” “estimates,” “should,” “may,” “will,” “with a view to” and variations of these words or similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national, and local general economic and market conditions; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; change in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; the risk of foreign currency exchange rates; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission. For more information, see our discussion of risk factors located at Part I, Item 1A of our 2019 Form 10-K.

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

Overview

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

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

In January 2018, we entered into an Asset Purchase Agreement (the “Purchase Agreement”) with SUSS Technology Corporation, a Nevada corporation (the “Seller”), pursuant to which the Seller agreed to sell to the Company substantially all of the assets associated with the Seller’s manufacture of dietary supplements (the “Asset Sale”) for an aggregate purchase price (the “Purchase Price”) of $1,000,000 and 1,000,000 shares of the Company’s common stock (the “Purchase Shares”) valued at $320,000. The Seller was one of our major suppliers during the year ended December 31, 2017. Upon purchasing these assets from the Seller, we started to manufacture some of the nutritional supplements that we sell. These assets meet all industry nutritional and dietary supplement manufacturing standards, including U.S. Food and Drug Administration and Good Manufacturing Practice compliance and Current Good Manufacturing Practice regulations. In addition to manufacturing the nutritional supplements that we sell, we produce hard capsules, tablets, solid beverages (sachet packaging), teabags, powder, granules, dietary supplements, softgel capsules and health foods from these assets for any potential new customers who need such products. These are the products that were added to our existing products, as a part of our OEM and packaging businesses.

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

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

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

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

In December 2019, a novel strain of coronavirus (COVID-19) surfaced in Wuhan, China, which has spread rapidly to many parts of the world, including the United States. On March 11, 2020, the World Health Organization characterized the outbreak as a “pandemic”. The pandemic has resulted in quarantines, travel restrictions, and the temporary closure of offices and facilities in China, the United States, and elsewhere around the world.

We have been following the orders of local government and health authorities to minimize exposure risk for its employees and business partners, including the closures of our offices and having employees work remotely. Substantially all of our workforce in California has been working from home either all or substantially all of the time, including our limited number of general administrative and accounting personnel since March 19, 2020. Our office is reopened on June 9, 2020 but some of our employees are still working from home, and our manufacturing facility in Nevada has partially suspended its operations since March 23, 2020 due to lack of raw materials.

In addition, substantially all of our revenues are concentrated in China and the United States. Consequently, the COVID-19 outbreak has and may continue to materially adversely affect our business operations, financial condition and operating results for 2020, including but not limited to material negative impact to our production and delivery of our products, revenues and collection of accounts receivables and additional allowance for doubtful accounts. Because of the significant uncertainties surrounding the COVID-19 outbreak, the extent of the business disruption and the related financial impact cannot be reasonably estimated at this time.

Principal Factors Affecting Our Financial Performance

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

Barriers to entry are minimal in the nutritional supplement and skin care businesses, and current and new competitors can launch new websites at a relatively low cost. Many competitors in this area have greater financial, technical and marketing resources than we do. Continued advancement in technology, and increased access to that technology, is paving the way for growth in direct marketing. We also face competition for consumers from retailers, duty-free retailers, specialty stores, department stores and specialty and general merchandise catalogs, many of which have greater financial and marketing resources than we have. Notwithstanding the foregoing, we believe that we are well-positioned within the Asian consumer market with our current plan of supplying American merchandise to consumers in Asia. There can be no assurance that we will maintain or increase our competitive position or that we will continue to provide only American-made merchandise.

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

Coronavirus (COVID-19)

Recently, there was an outbreak of a novel strain of coronavirus (COVID-19) in China, which has spread rapidly to many parts of the world, including the U.S. In March 2020, the World Health Organization declared COVID-19 a pandemic. The pandemic has resulted in quarantines, travel restrictions, and the temporary closure of office buildings and facilities in China and in the U.S. The President of the United States declared the COVID-19 pandemic a national emergency, invoking powers under the Stafford Act, the legislation that directs federal emergency disaster response. Similarly, the Governor of California has issued a stay-at-home order, which took effect on March 19, 2020, and the Governor of Nevada has issued a stay-at-home order which took effect on April 1, 2020.

Our headquarters are located in California and have been closed since March 19, 2020 and just reopened on June 9, 2020 although some of our employees are still working from home. Our manufacturing facility is located in Nevada and has partially suspended its operations since March 23, 2020 due to lack of raw materials. Substantially all of our product sales revenues are generated in China and all of our OEM and packaging revenues are generated in the U.S. Consequently, our results of operations will be adversely, and may be materially, affected, to the extent that COVID-19 harms the Chinese and U.S. economy. Any potential impact to our results will depend on, to a large extent, future developments and new information that may emerge regarding the duration and severity of COVID-19 and the actions taken by government authorities and other entities in China and U.S. to contain COVID-19 or treat its impact, almost all of which are beyond our control.

Although the impact of the COVID-19 lead us to the temporary closure of our offices from March 19, 2020 and June 8, 2020, our CEO has been working remotely from home and effectively using video/telephone conference to market our products and our OEM/packaging services. We had successfully signed an OEM contract with a customer in China in April 2020 and we expected to generate a significant amount of revenue from this customer in the last two quarters of 2020. In addition, considering our products are health supplements, we also expect demand growth at a time when everyone’s health is at risk. This should translate into sustainable growth once awareness of the importance of health is created.

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

Because of the uncertainty surrounding the COVID-19 outbreak, the financial impact cannot be reasonably estimated at this time. Our total revenues in April and May of 2020 were lower as compared to the same period of 2019, and there is no guarantee that its total revenues will grow or remain at a similar level year over year in the last two quarters of 2020, although we recently signed an OEM contract as mentioned above.

Looking ahead, we understand that these unprecedented times will bring financial impact to some of our customers, and potentially loss of customers. Our plan has been to promote the awareness of the importance of health and our health supplement products, which in term might be able to offset the loss of any of our existing customers while building sales with new customers.

Results of Operations

Comparison of the three months ended March 31, 2020 and 2019

Total sales decreased by approximately $82,000, or 55.5%, from approximately $148,000 in the three months ended March 31, 2019 to approximately $66,000 in the three months ended March 31, 2020. The decrease of sales was mainly due to the outbreak and economic impact of the coronavirus or COVID-19 in China, where the majority of our customers are located. The stay-at-home order which existed in China during the majority of the first quarter of 2020, resulted in less demand from our wholesale distributor in China.

The cost of sales increased by approximately $7,000, or 18.2%, from approximately $40,000 in the three months ended March 31, 2019 to approximately $47,000 in the three months ended March 31, 2020. The major reason for the increase was due to the increase of idle capacity of our factory as we were operating under capability due to less orders from our customers. We also partially suspended our factory operations in late March of 2020 due to the impact of the coronavirus and lack of raw materials.

Our overall gross margin percentage decreased from approximately 72.8% in the three months ended March 31, 2019 to approximately 27.7% in the three months ended March 31, 2020, mainly due to the decrease of sales in the three months ended March 31, 2020 as compared to the same period in 2019 while we were still incurring significant overhead cost in our factory which we operated under idle capacity.

Our product sales gross margin percentage decreased from approximately 89.4% in the three months ended March 31, 2019 to approximately 68.9% in the three months ended March 31, 2020. The major reason for the decrease of sales gross margin percentage was due to the increase of sales in our ReMage Power product that we introduced in December 2019 during the three months ended March 31, 2020 as compared to the same period in 2019. The ingredients that we used to manufacture our ReMage Power product are more expensive which result in a higher manufacturing unit cost and less gross margin percentage of 68.9% as compared to other products, such as Viwooba (1-3), Lady-S, Gold King, New Power and Tabiao with an average of 89.4% of gross margin percentage, that we sold during the three months ended March 31, 2019, which have a lower unit cost and higher gross margin percentage than ReMage Power.

Our OEM and packaging sales gross margin percentage increased from approximately 19.0% in the three months ended March 31, 2019 to approximately 60.8% in the three months ended March 31, 2020. For the three months ended March 31, 2020, we had incurred less manufacturing overhead costs for our OEM and packaging sales with fewer labor hours being allocated to such production due to the lesser degree of specified production procedures which required fewer labor hours as compared to the same period in 2019. As a result, our OEM and packaging sales gross margin percentage increased by 41.8% during the three months ended March 31, 2020 as compared to the same period in 2019.

Selling expenses decreased from approximately $24,000 in the three months ended March 31, 2019 to approximately $13,000 in the three months ended March 31, 2020. The decrease of approximately $11,000, or 43.8%, was mainly due to the decrease of approximately $7,200 of shipping expenses and the decrease of approximately $5,500 of marketing expenses.

General and administrative (“G&A”) expenses decreased by approximately $7,000 from approximately $390,000 in the three months ended March 31, 2019 to approximately $383,000 in the three months ended March 31, 2020. The decrease was mainly attributable to the decrease of approximately $31,000 of professional expenses, such as attorneys fees, auditor fees and consulting fees, and the decrease of approximately $1,100 of other miscellaneous G&A expenses, offset by the increase of approximately $25,000 of rent expense and the increase of approximately $17,000 of bad debt expense.

Stock compensation expenses increased by approximately $14,000 during the three months ended March 31, 2020 compared to the same period in 2019. Approximately $64,000 and $63,000, related to the amortization of the value of 2,300,000 shares of restricted common stock to three employees for the three months ended March 31, 2020 and 2019, respectively, which all have a vesting period of three years. In addition, in March 2019, we issued 1,000,000 shares of our common stock to an advisor to provide certain business and financial operation and planning consultation services, and amortized such cost, which was $125,000 and $25,000 during the three months ended March 31, 2020 and 2019, respectively. We also issued shares of our common stock to other financial advisors which resulted in $105,000 of stock compensation expense during the three months ended March 31, 2019.

During the three months ended March 31, 2020, we traded in one of our vehicles which resulted in a gain of $16,000.

Other income (expense) decreased by approximately $300,000 from approximately $259,000 in the three months ended March 31, 2019 to approximately ($41,000) of expense in the three months ended March 31, 2020, mainly due to the decrease of approximately $241,000 of gain on settlement of debt in which we issued stock with a fair value of approximately $763,000 in exchange for the settlement of debt of approximately $1.0 million during the three months ended March 31, 2019. We did not enter into such transactions during the same period in 2020.

Net loss increased by approximately $371,000 from approximately $222,000 in the three months ended March 31, 2019 to approximately $593,000 in the three months ended March 31, 2020, mainly due to the reasons discussed above.

Liquidity and Capital Resources

As of March 31, 2020, we had a cash balance of approximately $10,000, compared to a cash balance of approximately $9,000 at December 31, 2019.

In assessing our liquidity, we monitor and analyze our cash on-hand and our operating and capital expenditure commitments. Our liquidity needs are to meet our working capital requirements, operating expenses and capital expenditure obligations. Other than operating expenses and an outstanding commitment of $1.0 million in relation to the purchase of assets associated with the manufacture of dietary supplements, the Company does not have significant cash commitments. Cash requirements include cash needed for purchase of inventory, payroll, payroll taxes, rent, and other operating expenses. However, in response to the reduced liquidity factors described above, the Company has continued to find ways to reduce its operating expenses. In addition, should our Company need additional capital, our principal shareholder and Chief Executive and Financial Officer may lend additional money to the Company from time to time to the extent he is in a position and willing to do so. No assurance can be provided that he will continue to lend funds to the Company in the future.

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

For the three months ended March 31, 2020, cash used in operating activities amounted to approximately $187,000 as compared to approximately $357,000 used in operating activities in the same period in 2019. Cash used in operating activities for the three months ended March 31, 2020 was primarily the result of our $593,000 net loss, non-cash transaction of approximately $16,000 from gain on disposal of equipment, the increase of account receivable of approximately $12,000, and the payment of lease liabilities of approximately $65,000 as we paid for our lease obligations when they become dues. This amount was partially offset by the non-cash expense of approximately $189,000 in stock based compensation, approximately $12,000 of depreciation expenses, approximately $36,000 in amortization of operating leases right-of-use assets, approximately $17,000 of bad debt expense and the increase of accounts payable and accrued expenses of approximately $241,000 as we were behind on our payment schedule.

For the three months ended March 31, 2020, financing activities provided approximately $187,000 as compared to approximately $66,000 during the three months ended March 31, 2019. Net cash received in the three months ended March 31, 2020 includes approximately $180,000 from the issuance of common stock and collection of our stock subscription receivable, approximately $9,000 from a loan from our principal shareholder and Chief Executive and Financial Officer, and approximately $10,000 from a third party loan. These amounts were partially offset by our repayment to our principal shareholder and Chief Executive and Financial Officer of approximately $10,000.

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 March 31,2020 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 March 31, 2020, 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 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 Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II — OTHER INFORMATION

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.

None.  

(a) Exhibits.

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

_______________

* 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 Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Merion, Inc.

Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.