The following discussion of our financial condition and results of operations
should be read in conjunction with our financial statements and the related
notes, and other financial information included in this Form 10-K.
Our Management's Discussion and Analysis contains not only statements that are
historical facts, but also statements that are forward-looking. 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.
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 ten individual nutritional supplement products, three and four 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.
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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.
As COVID-19 has limited the global travels and import goods, we moved our focus
on local OEM and packaging business and it became our majority revenue source in
the fiscal year of 2020. The loss of one or more of our local OEM and packaging
customers could result in a potential loss of sales and have a negative effect
on our operations if we cannot find one or more substitutes.
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)
At the end of 2019, there was an outbreak of a novel strain of coronavirus
(COVID-19) in China, which has spread rapidly to many parts of the world,
including the U.S. In March 2020, the World Health Organization declared
COVID-19 a pandemic. The pandemic has resulted in quarantines, travel
restrictions, and the temporary closure of office buildings and facilities in
China and in the U.S. The economic impact of the coronavirus or COVID-19 in both
China and the U.S have significantly impacted our business and resulting in
lesser demand from our customers.
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 have been
reopened 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.
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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 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
our production and delivery of our products, revenues and collection of accounts
receivable and the additional allowance for doubtful accounts. The situation
remains highly uncertain for any further outbreak or resurgence of the COVID-19.
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 year of 2021.
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 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 2021, including but not limited to the shortage of raw materials,
delay of shipment, and increased price of raw materials for the Company's
products.
Because of the uncertainty surrounding the COVID-19 outbreak, the overall
financial impact for 2021 cannot be reasonably estimated at this time. Our total
revenues in 2020 were lower as compared to the same period of 2019.
Looking ahead, we understand that these unprecedented times will have a
financial impact to some of our customers, and might potentially cause loss of
certain existing customers. Our plan has been to promote the awareness of the
importance of health and our health supplement products, which in term might
build sales with new customers to offset the loss of any of our existing
customers.
As COVID-19 continues to impact global business, the U.S. government established
relief programs for small business such as the Paycheck Protection Program
("PPP") and the Economic Injury Disaster Loan program ("EIDL"). We received a
PPP loan of $131,100 and EIDL loan of $150,000 to help fund our operation in
2020. The PPP loan was fully forgiven by the SBA administration in January 2021.
Results of Operations
Comparison of the years ended December 31, 2020 and 2019
For the years ended December 31,
Percentage
2020 2019 Change Change
Total sales $ 439,033 $ 1,807,965 $ (1,368,932 ) (75.7 )%
Total cost of sales 454,346 287,854 166,492 57.8 %
Gross (loss) profit (15,313 ) 1,520,111 (1,535,424 ) (101.0 )%
Operating expenses
Selling 48,190 165,461 (117,271 ) (70.9 )%
General and administrative 1,345,007 1,410,931 (65,924 ) (4.7 )%
Stock compensation expense 421,101 857,092 (435,991 ) (50.9 )%
Gain on disposal of
equipment (16,000 ) - (16,000 ) (100.0 )%
Total operating expenses 1,798,298 2,433,484 (635,186 ) (26.1 )%
(Loss) from operations (1,813,611 ) (913,373 ) (900,238 ) 98.6 %
Other (expense) income, net (3,927 ) 191,769 (195,696 ) (102.0 )%
Provision for income taxes 800 800 - -
Net (loss) $ (1,818,338 ) $ (722,404 ) $ (1,095,934 ) 151.7 %
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Total sales decreased by approximately $1,369,000, or 75.7%, from approximately
$1,808,000 in the year ended December 31, 2019 to approximately $439,000 in the
year ended December 31, 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.
The cost of sales increased by approximately $166,000, or 57.8%, from
approximately $288,000 in the year ended December 31, 2019 to approximately
$454,000 in the year ended December 31, 2020. The main reason for the increase
was due to the increase of OEM and packaging costs of approximately $130,000,
which is in line with this type of revenue, the increase of inventory write-down
of approximately $36,000 due to obsolescence, and the increase of idle capacity
costs of approximately $71,000 as we were operating under capacity during the
year ended December 31, 2020, due to the negative impact of COVID-19 pandemic.
Our overall gross margin (loss) percentage decreased from approximately 84.1% in
the year ended December 31, 2019 to approximately (3.5) % in the year ended
December 31, 2020, mainly due to the decrease of sales in the year ended
December 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. The decrease in overall gross margin percentage was also due to the
inventory obsolescence write-down.
Our product sales gross margin (loss) percentage decreased from approximately
93.1% in the year ended December 31, 2019 to approximately 48.8% in the year
ended December 31, 2020. For the year ended December 31, 2019, the majority of
our product sales were attributable to our Cell Power, Viwooba (1-3), OPC Spa,
Lady-S, Gold King, New Power, Taibao and Remage Power products, which were all
manufactured by us. For the year ended December 31, 2020, in additional to our
own manufacturing products, we sold two new supplements products that promote
brain health and anti-aging that were manufactured by the third-party
manufactures. The main reason for the decrease of sales gross margin percentage
was due to our majority sales in 2019 are self-manufactured products which has a
higher profit margin and some of our product sales in 2020 had a lower profit
margin as we did not manufacture these products.
Our OEM and packaging sales gross margin percentage decreased from approximately
51.1% in the year ended December 31, 2019 to approximately 29.2% in the year
ended December 31, 2020. For the year ended December 31, 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 21.9%
during the year ended December 31, 2020 as compared to the same period in 2019.
Selling expenses decreased from approximately $165,000 in the year ended
December 31, 2019 to approximately $48,000 in the year ended December 31, 2020.
The decrease of approximately $117,000, or 70.9%, was mainly due to the decrease
of approximately $118,000 of marketing expenses as we have limited our global
business marketing and traveling due to COVID-19.
General and administrative ("G&A") expenses decreased by approximately $66,000
from approximately $1,411,000 in the year ended December 31, 2019 to
approximately $1,345,000 in the year ended December 31, 2020. The decrease was
mainly attributable to the decrease of approximately $30,000 of professional
expenses, such as attorney fees, auditor fees and consulting fees, the decrease
of approximately $99,000 of payroll and benefit expenses and the decrease of
approximately $12,000 of bad debt expense, the decrease of $25,000 of other
miscellaneous G&A expenses such as insurance expenses, meals and entertainment
and storage expenses as we temporarily closed our California office due COVID-19
outbreak from March 19, 2020 to June 9, 2020 and again from July 16, 2020 to
September 16, 2020, offset by the increase of approximately $100,000 of rent
expense of our training center in New York.
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Stock compensation expenses decreased by approximately $436,000 from
approximately $857,000 in the year ended December 31, 2019 to approximately
$421,000 in the year ended December 31, 2020. 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 $445,000 and $125,000 during the years ended December 31, 2019 and
2020, respectively. We also issued shares of our common stock to other financial
advisors which resulted in approximately $157,000 of stock compensation expense
during the year ended December 31, 2019. Approximately $255,000 and $296,000,
related to the amortization of the value of 2,300,000 shares of restricted
common stock issued to three employees for the year ended December 31, 2019 and
2020, respectively, which all have a vesting period of three years.
During the year ended December 31, 2020, we traded in one of our vehicles which
resulted in a gain of $16,000.
Other income decreased by approximately $196,000 from approximately $192,000 of
other income in the year ended December 31, 2019 to approximately $4,000 of
other expense in the year ended December 31, 2020, mainly due to the decrease of
approximately $241,000 of gain on debt settlement as we were able to negotiate a
higher conversion with our debtor as compared to our closing stock price as of
the conversion date in 2019, the decrease of approximately $27,000 of other
income and the increase of approximately $59,000 of interest expenses, offset by
approximately $131,000 of gain on forgiveness of loan payable.
Net loss increased by approximately $1.1 million from approximately $0.7 million
in the year ended December 31, 2019 to approximately $1.8 million in the year
ended December 31, 2020, mainly due to the reasons discussed above.
Liquidity and Capital Resources
As of December 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 current liabilities of
approximately $0.9 million, the Company does not have significant cash
commitments. Cash requirements include cash needed for purchase of inventory,
payroll, payroll taxes, rent, and other operating expenses. However, in response
to the liquidity factors described above, the Company has continued to find ways
to reduce its operating expenses. In addition, should our Company need funds,
our principal shareholder and Chief Executive and Financial Officer Mr. Dinghua
Wang may lend additional money to the Company from time to time to the extent he
is in a position and willing to do so. No assurance can be provided that he will
continue to lend funds to the Company in the future.
Management has concluded under U.S. GAAP that there is substantial doubt about
our ability to continue as a going concern as a result of our lack of
significant revenue and sufficient working capital. If we are unable to generate
significant revenue or secure financing, we may be required to cease or limit
our operations. Our financial statements do not include adjustments that might
result from the outcome of this uncertainty.
For the year ended December 31, 2020, cash used in operating activities amounted
to approximately $990,000 as compared to approximately $1,444,000 used in
operating activities in the same period in 2019. Cash used in operating
activities for the year ended December 31, 2020 was primarily due to the result
of our approximately $1.8 million net loss, non-cash transaction of
approximately $16,000 from gain on disposal of equipment and approximately
$131,000 from gain on forgiveness of loan payable, the increase of accounts
receivable of approximately $64,000, the increase of prepaid expenses of
approximately $167,000 and the payment of lease liabilities of approximately
$177,000 as we paid for our lease obligations when they become due. This amount
was partially offset by the non-cash expense of approximately $421,000 in stock
based compensation, approximately $59,000 of depreciation expense, approximately
$190,000 in amortization of operating leases right-of-use assets, approximately
$29,000 of bad debt expense, approximately $49,000 of inventory write-down, the
decrease of inventories of approximately $36,000, the increase of accounts
payable and accrued expenses of approximately $103,000 and increase of deferred
revenue of approximately $497,000.
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For the year ended December 31, 2020, financing activities provided
approximately $990,000 as compared to approximately $1,158,000 during the year
ended December 31, 2019. Net cash received in the year ended December 31, 2020
includes approximately $1.1 million 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. These amounts were
partially offset by our net repayments to our principal shareholder and Chief
Executive and Financial Officer, Mr. Dinghua Wang of approximately $382,000,
repayment of third party loans of approximately $10,000 and principal payments
of our long-term debt of approximately $13,000.
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 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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