The following discussion of our financial condition and results of operations
should be read in conjunction with our financial statements and the related
notes, and other financial information included in this Form 10-Q and our
financial statements and notes thereto included in our annual report on Form
10-K for the fiscal year ended December 31, 2020 (the "2020 Form 10-K").
Our Management's Discussion and Analysis contains not only statements that are
historical facts, but also statements that are forward-looking. Words such as
"anticipates," "expects," "intends," "plans," "predicts," "potential,"
"believes," "seeks," "hopes," "estimates," "should," "may," "will," "with a view
to" and variations of these words or similar expressions are intended to
identify forward-looking statements. These statements are not guarantees of
future performance and are subject to risks, uncertainties and assumptions that
are difficult to predict. Forward-looking statements are, by their very nature,
uncertain and risky. These risks and uncertainties include international,
national, and local general economic and market conditions; our ability to
sustain, manage, or forecast growth; our ability to successfully make and
integrate acquisitions; new product development and introduction; existing
government regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; competition; the loss of significant customers
or suppliers; fluctuations and difficulty in forecasting operating results;
change in business strategy or development plans; business disruptions; the
ability to attract and retain qualified personnel; the ability to protect
technology; the risk of foreign currency exchange rates; and other risks that
might be detailed from time to time in our filings with the Securities and
Exchange Commission. For more information, see our discussion of risk factors
located at Part I, Item 1A of our 2020 Form 10-K.
Although the forward-looking statements in this Report reflect the good faith
judgment of our management, such statements can only be based on facts and
factors currently known by them. Consequently, and because forward-looking
statements are inherently subject to risks and uncertainties, the actual results
and outcomes may differ materially from the results and outcomes discussed in
the forward-looking statements. You are urged to carefully review and consider
the various disclosures made by us in this report as we attempt to advise
interested parties of the risks and factors that may affect our business,
financial condition, and results of operations and prospects.
Overview
Our Company is a provider of health and nutritional supplements and personal
care products. Currently, we are mainly selling our products over the internet
directly to end-user customers through our website, at www.merionus.com, and to
wholesale distributors through phone and electronic communication. Our major
customers of our nutritional and beauty products are located in the Asian
market, predominantly in the People's Republic of China. Our major customers of
our OEM and packaging products are located in the United States.
Since June 2014, we have been selling our products primarily over the internet
directly to end-user customers and by phone/email orders directly to our
wholesale distributors. Certain miscellaneous sales are made directly to
customers who walk into the Company offices and customers who call the Company
directly for products. We are now focusing on selling health and nutritional
supplements and personal care products directly on the internet through our
website at www.merionus.com and to our OEM customers. As of the date of filing
of this report, we market eight individual nutritional supplement products,
three and five of which were introduced in 2018 and 2019 respectively, and one
beauty product, which was also introduced in 2018, on our website. We are no
longer selling similar products of third parties on our website.
In January 2018, we entered into an Asset Purchase Agreement (the "Purchase
Agreement") with SUSS Technology Corporation, a Nevada corporation (the
"Seller"), pursuant to which the Seller agreed to sell to the Company
substantially all of the assets associated with the Seller's manufacture of
dietary supplements (the "Nevada Factory") for an aggregate purchase price (the
"Purchase Price") of $1,000,000 and 333,334 shares of the Company's common stock
(the "Purchase Shares") valued at $320,000. The Seller was one of our major
suppliers during the year ended December 31, 2017. These assets met 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. Upon purchasing these assets from the
Seller, we started to manufacture some of the nutritional supplements that we
sold until May 2021. In May 2021, we determined that it would be more beneficial
to outsource to third-party manufacturers the production of our branded and OEM
products rather than manufacturing through our Nevada Factory. As a result, we
disposed of our factory machinery and terminated our Nevada Factory lease in May
2021. As we have significant continuing involvement in the sale of our branded
and OEM products through our third-party manufacturers, this restructuring did
not constitute a strategic shift that will have a major effect on our operations
and financial results. Therefore, the results of operations for our Nevada
Factory were not reported as discontinued operations under the guidance of FASB
ASC 205.
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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.
On June 11, 2021, our Board of Directors approved a 1-for-3 reverse stock split
of our common stock. On July 27, 2021, we filed a Certificate of Change with the
State of Nevada (the "Certificate") to effect a 1-for-3 reverse stock split of
our authorized shares of common stock, par value $0.001 (the "Common Stock"),
accompanied by a corresponding decrease in our issued and outstanding shares of
Common Stock (the "Reverse Stock Split"), effective upon filing. Following the
Reverse Stock Split, the number of authorized shares of Common Stock was reduced
from 1,000,000,000 to 333,333,333. All shares and per share amounts used herein
and in the accompanying unaudited condensed financial statements have been
retroactively restated to reflect the 1-for-3 Reverse Stock Split.
Principal Factors Affecting Our Financial Performance
We believe consumers have become more confident in ordering products like ours
over the internet. However, the nutritional supplement and skin care products
e-commerce markets have been, and continue to be, increasingly competitive and
are rapidly evolving due to the reasons discussed below.
Barriers to entry are minimal in the nutritional supplement and skin care
businesses, and current and new competitors can launch new websites at a
relatively low cost. Many competitors in this area have greater financial,
technical and marketing resources than we do. Continued advancement in
e-commerce, and increased access to online shopping, is paving the way for
growth in direct marketing. We also face competition for consumers from
retailers, duty-free retailers, specialty stores, department stores and
specialty and general merchandise catalogs, many of which have greater financial
and marketing resources than we have. Notwithstanding the foregoing, we believe
that we are well-positioned within the Asian consumer market with our current
plan of supplying American merchandise to consumers in Asia. There can be no
assurance that we will maintain or increase our competitive position or that we
will continue to provide only American-made merchandise.
As COVID-19 has limited the global travels, transportation, and import and
export of goods, we moved our focus on local OEM and packaging business through
the production from third party manufacturers and it has become our major
revenue source in fiscal year 2021. The loss of one or more of our U.S. OEM and
packaging customers would result in a potential loss of sales and have a
negative effect on our operations if we cannot find one or more substitutes.
Our products are sensitive to business and personal discretionary spending
levels, and demand tends to decline or grow more slowly during economic
downturns, including downturns in any of our major markets. The global economy
is currently undergoing a period of downturn due to COVID-19, and the future
economic environment continues to remain uncertain. This has led, and could
further lead, to reduced consumer spending, which may include spending on
nutritional and beauty products and other discretionary items. The increase of
trade tensions between US and China and the spread of COVID-19 have and might
continue to have negative impacts on our business. The reduced consumer spending
may force us and our competitors to lower prices. These conditions may adversely
affect our revenues and results of operations.
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Coronavirus (COVID-19)
At the end of 2019, there was an outbreak of a novel strain of coronavirus
(COVID-19) which has spread rapidly to many parts of China and other parts of
the world, including the U.S. In March 2020, the World Health Organization
declared COVID-19 a pandemic. The pandemic has resulted in quarantines, travel
restrictions, and the temporary closure of office buildings and facilities in
China and in the U.S. The economic impact of the coronavirus or COVID-19 in both
China and the U.S have significantly impacted our business and results of
operations.
Our headquarters are located in California and were closed from March 19, 2020
to June 9, 2020. Due to the surge of COVID-19 cases in California, our offices
were closed again from July 16, 2020 to September 16, 2020 and our employees
worked remotely from home during these periods. Our offices have been reopened
since September 16, 2020. Substantially all of our product sales revenues are
generated in China and all of our OEM and packaging revenues are generated in
the U.S. Consequently, our results of operations have been and will continue be
materially adversely affected, to the extent that COVID-19 harms the Chinese and
U.S. economy. Any potential impact to our results will depend on, to a large
extent, future developments and new information that may emerge regarding the
duration and severity of COVID-19 and new variants, efficacy and distribution of
COVID-19 vaccines and the actions taken by government authorities and other
entities in China and U.S. to contain COVID-19 or treat its impact, almost all
of which are beyond our control.
Although we expect that our health supplement products and our OEM/packaging
services will still be in demand due to awareness of the importance of health
growing along with the realities of COVID-19, the global economy has been and
may continue to be negatively affected by COVID-19 and there is continued
uncertainty about the duration and intensity of the impact of COVID-19. Many of
our customers are individuals and small and medium-sized enterprises (SMEs),
which may not have strong cash flows or be well capitalized, and may be
vulnerable to a pandemic outbreak and slowing macroeconomic conditions. If the
SMEs cannot weather the COVID-19 pandemic and the resulting economic impact, or
cannot resume business as usual after a prolonged outbreak, our revenues and
business operations may be materially and adversely impacted.
While the potential economic impact brought by, and the duration of, COVID-19
may be difficult to assess or predict, a widespread pandemic could result in
significant disruption of global financial markets, reducing the Company's
ability to access capital, which could negatively affect the Company's
liquidity.
Substantially all of our revenues are concentrated in China and the United
States. Consequently, the COVID-19 outbreak has and may continue to materially
adversely affect our business operations, financial condition and operating
results, including but not limited to the material negative impact to the
sourcing and delivery of our products, revenues and collection of accounts
receivable and the additional allowance for doubtful accounts. The situation
remains highly uncertain for any further outbreak or resurgence of the COVID-19,
new variants and the efficacy and distribution of COVID-19 vaccines. It is
therefore difficult for the Company to estimate the impact on our business or
operating results that might be adversely affected by any further outbreak or
resurgence of COVID-19 for the remaining year of 2021.
In addition, due to the COVID-19 going around the world and some of raw
materials to produce our products sourced from outside of the United States, the
suppliers have been and might continue to be negatively impacted due to supply
chain disruption, increased shipping costs and shortage of raw materials around
the world. Consequently, the COVID-19 outbreak has and may continue to
materially adversely affect the Company's business operations, financial
condition and operating results for the remainder of 2021, including but not
limited to the shortage of raw materials, delay of shipment, and increased
prices for the Company's products manufactured by our suppliers.
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The Company started to recover as total revenues for the three and nine months
ended September 30, 2021 were higher as compared to the same period of 2020.
Because of the uncertainty surrounding COVID-19, the financial impact for 2021
cannot be reasonably estimated at this time.
Looking ahead, we understand that these unprecedented times will have a
financial impact on some of our customers, and might potentially cause loss of
certain existing customers. Our plan has been to promote the awareness of the
importance of health and our health supplement products, which in turn might
build sales with new customers to offset the loss of any of our existing
customers.
As COVID-19 continues to impact global business, the U.S. government established
relief programs for small business such as the Paycheck Protection Program
("PPP") and the Economic Injury Disaster Loan program ("EIDL"). In 2020, we
received a PPP loan of $131,100 and EIDL loan of $150,000 to help fund our
operation in 2020. The PPP loan was fully forgiven by the SBA administration in
January 2021.
On February 2, 2021, the Company received loan proceeds of $137,792 under the
U.S. Small Business Administration ("SBA") second round of Paycheck Protection
Program ("PPP") to help fund our operations in 2021.
Results of Operations
Comparison of the three months ended September 30, 2021 and 2020
For the three months ended September 30,
Percentage
2021 2020 Change Change
Total sales $ 169,822 $ 41,697 $ 128,125 307.3 %
Total cost of sales 61,200 56,656 4,544 8.0 %
Gross profit (loss) 108,622 (14,959 ) 123,581 826.1 %
Operating expenses
Selling 14,565 10,456 4,109 39.3 %
General and administrative 302,455 300,470 1,985 0.7 %
Stock compensation expense 11,191 83,002 (71,811 ) (86.5 )%
Total operating expenses 328,211 393,928 (65,717 ) (16.7 )%
Loss from operations (219,589 ) (408,887 ) (189,298 ) (46.3 )%
Other expense, net (873 ) (33,734 ) (32,861 ) (97.4 )%
Provision for income taxes - - - -
Net loss $ (220,462 ) $ (442,621 ) $ (222,159 ) (50.2 )%
Total sales increased by approximately $128,000 or 307.3%, from approximately
$42,000 in the three months ended September 30, 2020 to approximately $170,000
in the three months ended September 30, 2021. The increase of sales was mainly
due to the OEM contracts that the Company signed in 2020 and we fulfilled some
of those orders during the three months ended September 30, 2021.
The cost of sales increased by approximately $4,000, or 8.0%, from approximately
$57,000 in the three months ended September 30, 2020 to approximately $61,000 in
the three months ended September 30, 2021. The increase of cost of sales was in
line with the increase of revenue as we fulfilled our OEM orders during the
three months ended September 30, 2021.
Our overall gross margin (loss) percentage increased from a gross loss
approximately (35.9)% in the three months ended September 30, 2020 to a gross
margin of approximately 64.0% in the three months ended September 30, 2021,
mainly due to the increase of sales in the three months ended September 30, 2021
as compared to the same period in 2020. We are no longer required to absorb our
fixed production costs during the three months ended September 30, 2021 after
the closing and disposal of our factory and the termination of our Nevada
Factory lease in May 2021 as our OEM orders normally have high gross margins
without fixed production costs from our factory in Nevada. On the other hand,
we had more idle manufacturing capacity cost for our Nevada factory which we
closed down in May 2021 during the same period in 2020 which had created a gross
loss.
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Our product sales decreased by approximately $8,000, or 93.9% from $8,870 for
the three months ended September 30, 2020 to $542 for the same period ended
September 30, 2021. The gross margin percentage increased from approximately
8.4% in the three months ended September 30, 2020 to approximately 71.4% in the
three months ended September 30, 2021. The reason for the increase of gross
margin percentage was due to the sale of products at retail price without any
wholesale discounts in the three months ended September 30, 2021 while we
offered some wholesales and bundle discounts to our customers during the same
period in 2020.
Our OEM and packaging sales increased by approximately $136,000, or 415.7% from
approximately $33,000 for the three months ended September 30, 2020 to
approximately $169,000 for the same period ended September 30, 2021. The gross
margin percentage increased from approximately 14.6% in the three months ended
September 30, 2020 to approximately 63.9% in the three months ended September
30, 2021. For the three months ended September 30, 2021, we fulfilled our OEM
orders with normal gross margin because we are no longer required to absorb our
fixed production costs after the closing and disposal of our factory in Nevada.
During the three months ended September 30, 2020, we had manufacturing overhead
costs for our OEM and packaging sales including labor hours being allocated to
such production, which we didn't have during the same period in 2021. As a
result, our OEM and packaging sales gross margin percentage increased by 49.3%
during the three months ended September 30, 2021 as compared to the same period
in 2020.
Selling expenses increased from approximately $10,000 in the three months ended
September 30, 2020 to approximately $14,000 in the three months ended September
30, 2021. The increase of approximately $4,000, or 39.3%, was mainly due to the
increase of approximately $9,000 of sales department salaries as we transferred
our factory employees to be our sales representatives after closing our Nevada
factory in May 2021, the increase of approximately $1,000 of shipping and
packing expenses as we have more OEM orders that requires packing and shipping
services, offset by the decrease of approximately $6,000 of advertising and
marketing expenses.
General and administrative ("G&A") expenses increased by approximately $2,000
from approximately $300,000 in the three months ended September 30, 2020 to
approximately $302,000 in the three months ended September 30, 2021. The
increase was mainly attributable to the increase of approximately $12,000 of
professional fees, the increase of approximately $6,000 of insurance expense,
the increase of approximately $11,000 property management expense, the increase
of approximately $2,000 other miscellaneous G&A expenses offset by the decrease
of approximately $16,000 of salary and employee benefit expenses as we did not
replace certain employees after their departure, the decrease of approximately
$10,000 of computer expenses, and the decrease of approximately $3,000 of bad
debt expenses.
Stock compensation expenses decreased by approximately $72,000 during the three
months ended September 30, 2021 compared to the same period in 2020.
Approximately $11,000 and $83,000, related to the amortization of the value of
766,668 shares of restricted common stock to three employees for the three
months ended September 30, 2021 and 2020, respectively, which all had a vesting
period of three years and all have been fully vested in July 2021.
Other expense decreased by approximately $33,000 from approximately $34,000 in
the three months ended September 30, 2020 to approximately $900 in the three
months ended September 30, 2021, mainly due to the decrease of interest expenses
of approximately $40,000 incurred from the third party and related parties
interest bearing loans that were transferred to DW Food, a related party,
through a debt sale agreement in December 2020 and subsequently paid with shares
of the Company's common stock in December 2020.
Net loss decreased by approximately $222,000 from approximately $443,000 in the
three months ended September 30, 2020 to approximately $221,000 in the three
months ended September 30, 2021, mainly due to the reasons discussed above.
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Comparison of the nine months ended September 30, 2021 and 2020
For the nine months ended September 30,
Percentage
2021 2020 Change Change
Total sales $ 1,366,291 $ 136,809 $ 1,229,482 898.7 %
Total cost of sales 930,558 177,325 753,233 424.8 %
Gross profit (loss) 435,733 (40,516 ) 476,249 1,175.5 %
Operating expenses
Selling 80,762 41,629 39,133 94.0 %
General and administrative 970,395 993,266 (22,871 ) (2.3 )%
Stock compensation expense 179,992 335,302 (155,310 ) (46.3 )%
Loss (gain) on disposal of
equipment 268,800 (16,000 ) 284,800 1,780.0 %
Total operating expenses 1,499,949 1,354,197 145,752 10.8 %
Loss from operations (1,064,216 ) (1,394,713 ) (330,497 ) (23.7 )%
Other income (expense), net 25,678 (106,797 ) 132,475 124.0 %
Provision for income taxes - - - -
Net loss $ (1,038,538 ) $ (1,501,510 ) $ 462,972 30.8 %
Total sales increased by approximately $1.2 million or 898.7%, from
approximately $137,000 in the nine months ended September 30, 2020 to
approximately $1.36 million in the nine months ended September 30, 2021. The
increase of sales was mainly due to the OEM contracts that the Company signed in
2020 and we have been fulfilling the orders under such contracts during the nine
months ended September 30, 2021.
The cost of sales increased by approximately $753,000, or 424.8%, from
approximately $177,000 in the nine months ended September 30, 2020 to
approximately $930,000 in the nine months ended September 30, 2021. The increase
of cost of sales was in line with the increase of revenue as we fulfilled our
OEM orders during the nine months ended September 30, 2021.
Our overall gross margin (loss) percentage increased from a gross loss of
approximately (29.6%) in the nine months ended September 30, 2020 to a gross
margin of approximately 31.9% in the nine months ended September 30, 2021,
mainly due to the increase of sales in the nine months ended September 30, 2021
as compared to the same period in 2020. We had more sales to absorb our fixed
production costs during the nine months ended September 30, 2021 as our products
normally have high gross margins. In May 2021, we determined that it is more
beneficial to outsource to third-party manufacturers the production of our
branded and OEM products rather than manufacturing through our Nevada Factory.
As a result, we closed and disposed of our factory and terminated our Nevada
Factory lease in May 2021, which also attributable to higher gross margin
because we had more idle manufacturing capacity cost for our Nevada factory
during the same period in 2020 which had driven down our gross margin.
Our product sales decreased by approximately $21,000, or 53.6% from $38,624 for
the nine months ended September 30, 2020 to $17,923 for the same period ended
September 30, 2021. The gross margin percentage decreased from approximately
40.0% in the nine months ended September 30, 2020 to approximately 24.9% in the
nine months ended September 30, 2021. The reason for the decrease of gross
margin percentage was due to providing more discounts to our customers during
the nine months ended September 30, 2021, mostly during the first six months of
2021, on some of our products that were closer to the expiration date as
compared to the same period in 2020.
Our OEM and packaging sales increased by approximately $1.3 million, or 1,273.3%
from approximately $98,000 for the nine months ended September 30, 2020 to
approximately $1,348,000 for the same period ended September 30, 2021. The gross
margin percentage decreased from approximately 41.7% in the nine months ended
September 30, 2020 to approximately 33.0% in the nine months ended September 30,
2021. For the nine months ended September 30, 2021, we had incurred more
manufacturing overhead costs for our OEM and packaging sales with additional
labor hours being allocated to production due to increased production procedures
for certain products in our Nevada factory before it was closed down in May
2021, as compared to the same period in 2020. In addition, the cost of raw
materials of certain OEM orders required higher material usage in the first half
of 2021 as compared to the OEM and packaging products sold in the same period in
2020. As a result, our OEM and packaging sales gross margin percentage
decreased by 8.7% during the nine months ended September 30, 2021 as compared to
the same period in 2020.
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Selling expenses increased from approximately $42,000 in the nine months ended
September 30, 2020 to approximately $81,000 in the nine months ended September
30, 2021. The increase of approximately $39,000, or 94.0%, was mainly due to the
increase of approximately $31,000 of packing expenses and the increase of
approximately $19,000 of shipping expenses as we fulfilled more OEM orders that
required packing and shipping services, the increase of approximately $20,000 of
sales department salaries as we transferred our factory employees to be our
sales representatives after closing our Nevada factory in May 2021 offset by the
decrease of approximately $30,000 of advertising, marketing and training
expenses.
General and administrative ("G&A") expenses decreased by approximately $23,000
from approximately $993,000 in the nine months ended September 30, 2020 to
approximately $970,000 in the nine months ended September 30, 2021. The decrease
was mainly attributable to the decrease of approximately $47,000 of payroll and
benefit expenses as we did not replace certain employees after their departure,
the decrease of approximately $30,000 of bad debt expenses, and the decrease of
approximately $15,000 of foreign currency transaction fees offset by the
increase of approximately $27,000 of rent and management fee expense in
connection with our training center in New York, the increase of approximately
$12,000 to upgrade our website, the increase of approximately $10,000 of
professional fees, and the increase of approximately $20,000 of other
miscellaneous G&A expenses.
Stock compensation expenses decreased by approximately $155,000 during the nine
months ended September 30, 2021 compared to the same period in 2020. In March
2019, we issued 333,334 shares of our common stock to an advisor to provide
certain business and financial operation and planning consultation services, and
with amortization expenses of approximately $125,000, and such services were
completed in March 2020 and we no longer incurred such costs in the nine months
ended September 30, 2021. Approximately $180,000 and $210,000, related to the
amortization of the value of 766,668 shares of restricted common stock issued to
three employees for the nine months ended September 30, 2021 and 2020,
respectively, which all have a vesting period of three years and all have been
fully vested in July 2021.
In May 2021, we determined that it is more beneficial to outsource to
third-party manufacturers the production our branded and OEM products rather
than manufacturing through our Nevada factory. As a result, we terminated our
Nevada factory lease and closed and disposed of all machinery held in our Nevada
factory which resulted in a $268,800 loss on disposal of equipment for the nine
months ended September 30, 2021. 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 (expense) increased by approximately $132,000 from an expense of
approximately $(107,000) in the nine months ended September 30, 2020 to income
of approximately $26,000 in the nine months ended September 30, 2021, mainly due
to the decrease of interest expense of approximately $117,000 incurred from the
third and related parties interest bearing loans that were transferred to DW
Food, a related party, through a debt sale agreement in December 2020 and
subsequently paid with shares of the Company's common stock in December 2020.
The increase of other income was also due to a $25,000 California Small Business
COVID-19 Relief Grant that we received in May 2021.
Net loss decreased by approximately $463,000 from approximately $1.5 million in
the nine months ended September 30, 2020 to approximately $1.0 million in the
nine months ended September 30, 2021, mainly due to the reasons discussed above.
Liquidity and Capital Resources
As of September 30, 2021, we had a cash balance of approximately $1,000,
compared to a cash balance of approximately $10,000 at December 31, 2020.
In assessing our liquidity, we monitor and analyze our cash on-hand and our
operating and capital expenditure commitments. Our liquidity needs are to meet
our working capital requirements, operating expenses and capital expenditure
obligations. Other than operating expenses and current liabilities of
approximately $1.2 million, the Company does not have significant cash
commitments. Cash requirements include cash needed for purchase of inventory,
payroll, payroll taxes, rent, and other operating expenses. However, in response
to the liquidity factors described above, the Company has continued to find ways
to reduce its operating expenses. In addition, should our Company need funds,
our principal shareholder and Chief Executive and Financial Officer Mr. Dinghua
Wang may lend additional money to the Company from time to time to the extent he
is in a position and willing to do so. No assurance can be provided that he will
continue to lend funds to the Company in the future. Subsequent to September
30, 2021, Mr. Wang has lent approximately $40,000 to the Company for working
capital purposes.
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Management has concluded under U.S. GAAP that there is substantial doubt about
our ability to continue as a going concern as a result of our lack of
significant revenue and sufficient working capital. If we are unable to generate
significant revenue or secure financing, we may be required to cease or limit
our operations. Our financial statements do not include adjustments that might
result from the outcome of this uncertainty.
For the nine months ended September 30, 2021, cash used in operating activities
amounted to approximately $135,000 as compared to approximately $801,000 used in
operating activities in the same period in 2020. Cash used in operating
activities for the nine months ended September 30, 2021 was primarily the result
of our approximately $1.0 million net loss, the decrease of accounts payable and
accrued expenses of approximately $29,000 and the payment of lease liabilities
of approximately $151,000. This amount was partially offset by the non-cash
expense of approximately $180,000 in stock based compensation, approximately
$33,000 of depreciation expenses, approximately $159,000 in amortization of
operating leases right-of-use assets and approximately $269,000 of loss on
disposal of equipment, the decrease of accounts receivable of approximately
$67,000, the decrease of inventories of approximately $9,000, the decrease of
prepaid expenses approximately $151,000 as we realized our prepaid inventory
purchases to fulfill our OEM orders and the increase of deferred revenue of
approximately $211,000 as we still have some OEM backlog orders to be fulfilled.
For the nine months ended September 30, 2021, investing activities provided
approximately $7,700 in net cash received from the sale of machinery in our
Nevada factory.
For the nine months ended September 30, 2021, financing activities provided
approximately $119,000 as compared to approximately $860,000 during the nine
months ended September 30, 2020. Net cash received in the nine months ended
September 30, 2021 includes approximately $138,000 from the second round of the
SBA PPP loan, and approximately $16,000 from a loan from our principal
shareholder and Chief Executive and Financial Officer, Mr. Dinghua Wang. These
amounts were partially offset by our repayment of approximately $23,000 to our
principal shareholder and Chief Executive and Financial Officer, Mr. Dinghua
Wang and approximately $12,000 of principal payments for long-term debt.
The material terms of the loans from our principal shareholder and Chief
Executive and Financial Officer, Mr. Dinghua Wang, certain related parties and
certain unaffiliated third parties are set forth in Note 6 and Note 7 of the
accompanying notes to unaudited condensed financial statements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to our stockholders.
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MERION, INC. 
