The following discussion of our financial condition and results of operations
should be read in conjunction with our financial statements and the related
notes, and other financial information included in this Form 10-Q and our
financial statements and notes thereto included in our annual report on Form
10-K for the fiscal year ended December 31, 2019 (the "2019 Form 10-K").
Our Management's Discussion and Analysis contains not only statements that are
historical facts, but also statements that are forward-looking. Words such as
"anticipates," "expects," "intends," "plans," "predicts," "potential,"
"believes," "seeks," "hopes," "estimates," "should," "may," "will," "with a view
to" and variations of these words or similar expressions are intended to
identify forward-looking statements. These statements are not guarantees of
future performance and are subject to risks, uncertainties and assumptions that
are difficult to predict. Forward-looking statements are, by their very nature,
uncertain and risky. These risks and uncertainties include international,
national, and local general economic and market conditions; our ability to
sustain, manage, or forecast growth; our ability to successfully make and
integrate acquisitions; new product development and introduction; existing
government regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; competition; the loss of significant customers
or suppliers; fluctuations and difficulty in forecasting operating results;
change in business strategy or development plans; business disruptions; the
ability to attract and retain qualified personnel; the ability to protect
technology; the risk of foreign currency exchange rates; and other risks that
might be detailed from time to time in our filings with the Securities and
Exchange Commission. For more information, see our discussion of risk factors
located at Part I, Item 1A of our 2019 Form 10-K.
Although the forward-looking statements in this Report reflect the good faith
judgment of our management, such statements can only be based on facts and
factors currently known by them. Consequently, and because forward-looking
statements are inherently subject to risks and uncertainties, the actual results
and outcomes may differ materially from the results and outcomes discussed in
the forward-looking statements. You are urged to carefully review and consider
the various disclosures made by us in this report as we attempt to advise
interested parties of the risks and factors that may affect our business,
financial condition, and results of operations and prospects.
Overview
Our Company is a provider of health and nutritional supplements and personal
care products. Currently, we are mainly selling our products over the Internet
directly to end-user customers through our websites, www.dailynu.com and
www.merionus.com, and to wholesale distributors through phone and electronic
communication. Our major customers of our nutritional and beauty products are
located in the Asian market, predominantly in the People's Republic of China.
Our major customers of our OEM and packaging products are located in the United
States.
Since June 2014, we have sold our products primarily over the Internet directly
to end-user customers and by phone/email orders directly to our wholesale
distributors. Certain miscellaneous sales are made directly to customers who
walk into the Company offices and customers who call the Company directly for
products. We are now focusing on selling health and nutritional supplements and
personal care products directly on the internet through our websites,
www.dailynu.com and www.merionus.com. As of the date of filing of this report,
we market thirteen individual nutritional supplement products, three and five of
which were introduced in 2018 and 2019 respectively, and one beauty product,
which was also introduced in 2018, on our websites. We are no longer selling
similar products of third parties on our websites.
In January 2018, we entered into an Asset Purchase Agreement (the "Purchase
Agreement") with SUSS Technology Corporation, a Nevada corporation (the
"Seller"), pursuant to which the Seller agreed to sell to the Company
substantially all of the assets associated with the Seller's manufacture of
dietary supplements (the "Asset Sale") for an aggregate purchase price (the
"Purchase Price") of $1,000,000 and 1,000,000 shares of the Company's common
stock (the "Purchase Shares") valued at $320,000. The Seller was one of our
major suppliers during the year ended December 31, 2017. Upon purchasing these
assets from the Seller, we started to manufacture some of the nutritional
supplements that we sell. These assets meet all industry nutritional and dietary
supplement manufacturing standards, including U.S. Food and Drug Administration
and Good Manufacturing Practice compliance and Current Good Manufacturing
Practice regulations. In addition to manufacturing the nutritional supplements
that we sell, we produce hard capsules, tablets, solid beverages (sachet
packaging), teabags, powder, granules, dietary supplements, softgel capsules and
health foods from these assets for any potential new customers who need such
products. These are the products that were added to our existing products, as a
part of our OEM and packaging businesses.
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In January 2018, we introduced a new beauty product, Noir Naturel, a gentle
formula for grey coverage from the first application into hair care.
In September 2018, we introduced three different types of natural aphrodisiac
supplements, Viwooba (1-3) for men that may support kidney health, improve
immunity, enhance physical fitness, eliminate fatigue, improve sexual desire and
enhance body energy, strength and sexual ability.
In March 2019, we introduced 1) Lady-S, a female dietary supplement that may
assist with weight loss, 2) Gold King, a nutritional supplement that may provide
antioxidant support and liver health, 3) New Power, a nutritional supplement
that may support heart health, and 4) Taibao, a nutritional supplement that may
enhance physical performance and energy metabolism.
In December 2019, we introduced ReMage Power, a nutritional supplement that may
provide anti-aging Nicotinamide adenine dinucleotide (NAD)+ support and promote
energy & cell metabolism.
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)
In January 2020, 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. The economic
impact of the coronavirus or COVID-19 in both China and the U.S have
significantly impacted our business and resulting in lesser demand from our
customers.
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Our headquarters are located in California and were closed from March 19, 2020
to June 9, 2020. Due to the recent surge of new 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 are reopen
since September 16, 2020. Our manufacturing facility is located in Nevada and
partially suspended its operations from March 23, 2020 to April 1, 2020 due to
lack of raw materials and it has been operating normally since April 1, 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 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 for the remainder of 2020, including but not limited to material
negative impact to our production and delivery of our products, revenues and
collection of accounts receivable and additional allowance for doubtful
accounts. The situation remains highly uncertain for any further outbreak or
resurgence of the COVID-19. 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 remainder of
2020 and beyond.
In addition, due to the of COVID-19 going around the world and some of the
Company's raw materials sourced from outside of the United States, the raw
material supplies have been and might continue to be negatively impacted and due
to increase of 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 2020, including but not limited to the shortage of raw materials,
delay of shipment, and increased price of raw materials for the Company's
productions.
Because of the uncertainty surrounding the COVID-19 outbreak, the overall
financial impact for 2020 cannot be reasonably estimated at this time. Our total
revenues in October of 2020 were lower as compared to the same period of 2019.
Although we expect to generate $1,125,900 of revenues for the quarter ended
December 31, 2020 for two OEM orders that are currently in process, there is no
guarantee that our total revenues will grow or remain at a similar level year
over year for the remainder of 2020.
Looking ahead, we understand that these unprecedented times will bring 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 term might build sales
with new customers to offset the loss of any of our existing customers.
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Results of Operations
Comparison of the three months ended September 30, 2020 and 2019
For the three months ended September 30,
Percentage
2020 2019 Change Change
Total sales $ 41,697 $ 97,811 $ (56,114 ) (57.4 )%
Total cost of sales 56,656 48,947 7,709 15.7 %
Gross profit (14,959 ) 48,864 (63,823 ) (130.6 )%
Operating expenses
Selling 10,456 18,531 (8,075 ) (43.6 )%
General and administrative 300,470 350,301 (49,831 ) (14.2 )%
Stock compensation expense 83,002 214,350 (131,348 ) (61.3 )%
Total operating expenses 393,928 583,182 (189,254 ) (32.5 )%
Loss from operations (408,887 ) (534,318 ) (125,431 ) (23.5 )%
Other expense, net (33,734 ) (21,756 ) 11,978 55.1 %
Net loss $ (442,621 ) $ (556,074 ) $ (113,453 ) (20.4 )%
Total sales decreased by approximately $56,000, or 57.4%, from approximately
$98,000 in the three months ended September 30, 2019 to approximately $42,000 in
the three months ended September 30, 2020. The decrease of sales was mainly due
to lesser demand from our customers resulting from the negative economic impact
of the coronavirus or COVID-19 in both China and the U.S. In May 2020, the
Company entered into an OEM order and originally expected to recognize $920,000
of revenue in August 2020. The order was delayed due to product labeling issues
and is expected to be completed in December 2020. The Company expects to
generate a total of $1,125,900 of revenues for the quarter ended December 31,
2020 for two OEM orders that are currently in process.
The cost of sales increased by approximately $8,000, or 15.7%, from
approximately $49,000 in the three months ended September 30, 2019 to
approximately $57,000 in the three months ended September 30, 2020. The major
reason for the increase of cost of sales was due to the increase of idle
capacity costs with less productions as we were operating under capability
during the three months ended September 30, 2020, due to the outbreak and
economic impact of COVID-19 pandemic. During the three months September 30,
2019, we have more productions on our self-manufactured products which were
remained unsold and capitalized into our inventories as of September 30, 2019
and resulted in lesser cost of sales.
Our overall gross margin (loss) percentage decreased from approximately 50.0% in
the three months ended September 30, 2019 to approximately a negative (35.9)% in
the three months ended September 30, 2020, mainly due to the decrease of sales
in the three months ended September 30, 2020 as compared to the same period in
2019 while we were still incurring significant overhead cost in our factory
which were underutilized creating the idle capacity.
Our product sales gross margin percentage decreased from approximately 61.8% in
the three months ended September 30, 2019 to approximately 8.4% in the three
months ended September 30, 2020. The main reason for the decrease of sales gross
margin percentage was due to the combination of reduced sales and our periodic
inventory count to account for inventory loss on our raw materials during the
three months ended September 30, 2020.
Our OEM and packaging sales gross margin percentage decreased from approximately
52.3% in the three months ended September 30, 2019 to approximately 14.6% in the
three months ended September 30, 2020. For the three months ended September 30,
2020, we had incurred more manufacturing overhead costs for our OEM and
packaging sales with additional labor hours being allocated to such production
due to more production procedures for certain products as compared to the same
period in 2019. As a result, our OEM and packaging sales gross margin percentage
decreased by 37.7% during the three months ended September 30, 2020 as compared
to the same period in 2019.
Selling expenses decreased from approximately $19,000 in the three months ended
September 30, 2019 to approximately $10,000 in the three months ended September
30, 2020. The decrease of approximately $8,000, or 43.6%, was mainly due to the
decrease of approximately $6,000 of marketing, advertising and promotion
expenses and the decrease of approximately $2,000 of shipping expenses.
General and administrative ("G&A") expenses decreased by approximately $50,000
from approximately $350,000 in the three months ended September 30, 2019 to
approximately $300,000 in the three months ended September 30, 2020. The
decrease was mainly attributable to the decrease of approximately $59,000 of
payroll and benefit expenses, the decrease of approximately $10,000 of
automobile expenses and the decrease of approximately $6,000 of other
miscellaneous G&A expenses, offset by the increase of approximately $25,000 of
rent expense.
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Stock compensation expenses decreased by approximately $131,000 during the three
months ended September 30, 2020 compared to the same period in 2019. 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
with amortization expenses of approximately $150,000, and such services were
completed in March 2020 and we no longer incurred such costs in the three months
ended September 30, 2020. Approximately $83,000 and $64,000 are related to the
amortization of the value of 2,300,000 shares of restricted common stock to
three employees for the three months ended September 30, 2020 and 2019,
respectively, which all have a vesting period of three years.
Other expense increased by approximately $12,000 from approximately $22,000 in
the three months ended September 30, 2019 to approximately $34,000 in the three
months ended September 30, 2020, mainly due to the increase of interest expenses
of approximately $19,000 incurred from the third party interest bearing loans
that we obtained in August and September of 2019.
Net loss decreased by approximately $113,000 from approximately $556,000 in the
three months ended September 30, 2019 to approximately $443,000 in the three
months ended September 30, 2020, mainly due to the reasons discussed above.
Comparison of the nine months ended September 30, 2020 and 2019
For the nine months ended September 30,
Percentage
2020 2019 Change Change
Total sales $ 136,809 $ 1,723,837 $ (1,587,028 ) (92.1 )%
Total cost of sales 177,325 163,485 13,840 8.5 %
Gross profit (40,516 ) 1,560,352 (1,600,868 ) (102.6 )%
Operating expenses
Selling 41,629 58,001 (16,372 ) (28.2 )%
General and administrative 993,266 1,092,961 (99,695 ) (9.1 )%
Stock compensation expense 335,302 642,742 (307,440 ) (47.8 )%
Gain on disposal of equipment (16,000 ) - (16,000 ) (100.0 )%
Total operating expenses 1,354,197 1,793,704 (439,507 ) (24.5 )%
Loss from operations (1,394,713 ) (233,352 ) 1,161,361 497.7 %
Other (expense) income, net (106,797 ) 232,409 (339,206 ) (146.0 )%
Net loss $ (1,501,510 ) $ (943 ) $ 1,500,567 159,126.9 %
Total sales decreased by approximately $1,587,000, or 92.1%, from approximately
$1,724,000 in the nine months ended September 30, 2019 to approximately $137,000
in the nine months ended September 30, 2020. The decrease of sales was mainly
due to lesser demand from our customers resulting from the negative economic
impact of the coronavirus or COVID-19 in both China and the U.S. In May 2020,
the Company entered into an OEM order and originally expected to recognize
$920,000 of revenue in August 2020. The order was delayed due to product
labeling issues and is expected to be completed in December 2020. The Company
expects to generate a total of $1,125,900 of revenues for the quarter ended
December 31, 2020 for two OEM orders that are currently in process.
The cost of sales increased by approximately $14,000, or 8.5%, from
approximately $163,000 in the nine months ended September 30, 2019 to
approximately $177,000 in the nine months ended September 30, 2020. The main
reason for the increase was due to the increase of idle capacity costs as we
were operating under capability during the nine months ended September 30, 2020,
due to the negative impact of COVID-19 pandemic.
Our overall gross margin (loss) percentage decreased from approximately 90.5% in
the nine months ended September 30, 2019 to approximately (29.6)% in the nine
months ended September 30, 2020, mainly due to the decrease of sales in the nine
months ended September 30, 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. The decrease in overall gross margin percentage was also
due to our periodic inventory count to account for inventory loss on our raw
materials.
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Our product sales gross margin percentage decreased from approximately 96.5% in
the nine months ended September 30, 2019 to approximately 40.0% in the nine
months ended September 30, 2020. The main 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 nine months ended September 30,
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 as compared to other
products, such as OPC, Cell Power, Viwooba (1-3), Lady-S, Gold King, New Power
and Tabiao with an average of 96.5% of gross margin percentage, that we sold
during the nine months ended September 30, 2019, which have a lower unit cost
and higher gross margin percentage than ReMage Power. In addition, the decrease
of sales gross margin percentage of product sales was also due to our periodic
inventory count to account for inventory loss on our raw materials during the
nine months ended September 30, 2020 as compared to the same period in 2019.
Our OEM and packaging sales gross margin percentage decreased from approximately
53.7% in the nine months ended September 30, 2019 to approximately 41.7% in the
nine months ended September 30, 2020. For the nine months ended September 30,
2020, we had incurred more manufacturing overhead costs for our OEM and
packaging sales with additional labor hours being allocated to such production
due to more production procedures for certain products as compared to the same
period in 2019. As a result, our OEM and packaging sales gross margin percentage
decreased by 12.0% during the nine months ended September 30, 2020 as compared
to the same period in 2019.
Selling expenses decreased from approximately $58,000 in the nine months ended
September 30, 2019 to approximately $42,000 in the nine months ended September
30, 2020. The decrease of approximately $16,000, or 28.2%, was mainly due to the
decrease of approximately $16,000 of shipping expenses.
General and administrative ("G&A") expenses decreased by approximately $100,000
from approximately $1,093,000 in the nine months ended September 30, 2019 to
approximately $993,000 in the nine months ended September 30, 2020. The decrease
was mainly attributable to the decrease of approximately $42,000 of professional
expenses, such as attorney fees, auditor fees and consulting fees, the decrease
of approximately $95,000 of payroll and benefit expenses and the decrease of
approximately $38,000 of other miscellaneous G&A expenses, offset by the
increase of approximately $75,000 of rent expense.
Stock compensation expenses decreased by approximately $307,000 during the nine
months ended September 30, 2020 compared to the same period in 2019. 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 $445,000 during the nine months
ended September 30, 2020 and 2019, respectively. We also issued shares of our
common stock to other financial advisors which resulted in $7,000 of stock
compensation expense during the nine months ended September 30, 2019.
Approximately $210,000 and $191,000, related to the amortization of the value of
2,300,000 shares of restricted common stock to three employees for the nine
months ended September 30, 2020 and 2019, respectively, which all have a vesting
period of three years.
During the nine months ended September 30, 2020, we traded in one of our
vehicles which resulted in a gain of $16,000.
Other income decreased by approximately $339,000 from approximately $232,000 of
other income in the nine months ended September 30, 2019 to approximately
$107,000 of other expense in the nine months ended September 30, 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 nine months
ended September 30, 2019. We did not enter into such transactions during the
same period in 2020. The decrease of other income was also due to the increase
of interest expenses of approximately $73,000 incurred from the third party
interest bearing loans that we obtained in August and September of 2019.
Net loss increased by approximately $1.5 million from approximately $900 in the
nine months ended September 30, 2019 to approximately $1.5 million in the nine
months ended September 30, 2020, mainly due to the reasons discussed above.
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Liquidity and Capital Resources
As of September 30, 2020, we had a cash balance of approximately $69,000,
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 current liabilities of
approximately $3.8 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 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 additional 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 nine months ended September 30, 2020, cash used in operating activities
amounted to approximately $801,000 as compared to approximately $1,061,000 used
in operating activities in the same period in 2019. Cash used in operating
activities for the nine months ended September 30, 2020 was primarily the result
of our $1.5 million net loss, non-cash transaction of approximately $16,000 from
gain on disposal of equipment, the increase of prepaid expense of approximately
$193,000, the decrease of accounts payable and accrued expenses of approximately
$26,000 and the payment of lease liabilities of approximately $126,000 as we
paid for our lease obligations when they become due. This amount was partially
offset by the non-cash expense of approximately $335,000 in stock based
compensation, approximately $44,000 of depreciation expense, approximately
$138,000 in amortization of operating leases right-of-use assets, approximately
$30,000 of bad debt expense, the decrease of inventories of approximately
$23,000 and increase of deferred revenue of approximately $497,000.
For the nine months ended September 30, 2020, financing activities provided
approximately $860,000 as compared to approximately $1,510,000 during the nine
months ended September 30, 2019. Net cash received in the nine months ended
September 30, 2020 includes approximately $805,000 from the issuance of common
stock and collection of our stock subscriptions receivable, approximately
$10,000 from a third party loan, and approximately $281,000 from SBA loans that
we are expected to have a forgiveness of approximately $121,000. These amounts
were partially offset by our net repayments to our principal shareholder and
Chief Executive and Financial Officer of approximately $216,000, repayment of
third party loan of approximately $10,000 and principal payments of our
long-term debt of approximately $9,000.
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