BIO ESSENCE CORPORATION Business Overview
Bio Essence Corporation ("the Company" or "Bio Essence") was incorporated in 2000 in the state ofCalifornia . Fusion Diet Systems ("FDS") was incorporated in 2010 in the state ofUtah .Bio Essence and FDS were owned under common control since 2016.Bio Essence and FDS are mainly engaged in manufacturing and distributing health supplement products. InJanuary 2017 ,Bio Essence incorporated two subsidiaries in the state ofCalifornia : BEP and BEH,Bio Essence transferred its manufacturing operation into BEP, and transferred its distributing operation into BEH. OnMarch 1, 2017 , the 100% shareholder of FDS transferred all her ownership in FDS intoBio Essence . OnDecember 7, 2021 , the Company dissolved FDS. OnNovember 12, 2021 ,Bio Essence incorporated a wholly owned subsidiaryMcBE Pharma Inc. ("McBE") in the state ofCalifornia , McBE will be engaged in research and development and manufacture of prescription medicine. As a result of the ownership restructure, BEP, BEH, and MCBE became wholly owned subsidiaries ofBio Essence , andBio Essence serves as a holding corporation for these subsidiaries. McBE has not engaged any operations since its inception. The primary focus of BEP is producing products for BEH, along with providing OEM services to other companies. BEH targets healthcare practitioners with herbal products in the form of granules, capsules, pills and tablets. It also offers special formulation service to practitioners. The Company intends to develop the subsidiary into an integrated healthcare platform that provides customers direct connections with integrative healthcare practitioners such as dietitians, nutraceutical practitioners, and other practitioners in this discipline worldwide.
However, the 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.
Related Party Transactions Loans from Officer AtMarch 31, 2022 andDecember 31, 2021 , the Company had loans from one major shareholder (also the Company's senior officer) of$2,035,155 and$1,785,154 , respectively. AtMarch 31, 2022 andDecember 31, 2021 , the Company had loan from another major shareholder for$608,631 for settling the litigation (see Note 8). There are no written loan agreements for these loans. These loans are unsecured, non-interest bearing and have no fixed terms of repayment, and therefore, deemed payable on demand.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results
of operations are based on our consolidated financial statements ("CFS"), which
were prepared in accordance with accounting principles generally accepted in the
United States of America ("US GAAP"). The preparation of these financial
statements requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements as well as the
reported net sales and expenses during the reporting periods. On an ongoing
basis, we evaluate our estimates and assumptions. We base our estimates on
historical experience and various other factors that we believe are reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 2 to
our CFS, we believe the following accounting policies are the most critical to
assist you in fully understanding and evaluating this management discussionand analysis. Basis of Presentation
The accompanying consolidated financial statements ("CFS") are prepared in
conformity with U.S. Generally Accepted Accounting Principles ("US GAAP") and
applicable rules and regulations of the Securities and Exchange Commission
("SEC") regarding interim financial reporting. The functional currency of Bio
Essence is U.S. dollars ("$''). The accompanying financial statements are
presented in U.S. dollars ("$"). The consolidated financial statements include
the financial statements of the Company and its subsidiaries, BEP, BEH and McBE.
All significant inter-company transactions and balances were eliminated in
consolidation.
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Going Concern
The Company incurred net losses of $233,120 and $210,355 for the three months
ended March 31, 2022 and 2021, respectively. The Company also had an accumulated
deficit of $7,592,036 as of March 31, 2022 . These conditions raise substantial
doubt about the Company's ability to continue as a going concern. The Company
plans to increase its income by strengthening its sales force, providing
attractive sales incentive programs, and increasing marketing and promotion
activities. Management also intends to raise additional funds by way of a
private or public offering, or by obtaining loans from banks or others. While
the Company believes in the viability of its strategy to generate sufficient
revenue and in its ability to raise additional funds on reasonable terms and
conditions, there can be no assurances to that effect. The ability of the
Company to continue as a going concern is dependent upon the Company's ability
to further implement its business plan and generate sufficient revenue and its
ability to raise additional funds by way of a public or private offering. The
financial statements do not include any adjustments that might result fromthe outcome of this uncertainty. Use of Estimates In preparing financial statements in conformity with US GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates, required by management, include the recoverability of long-lived assets, allowance for doubtful accounts, and the reserve for obsolete and slow-moving inventories. Actual results could differ from those estimates Accounts Receivable The Company's policy is to maintain an allowance for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. As ofMarch 31, 2022 andDecember 31, 2021 , the bad debt allowance was$2,252 and$2,252 , respectively. Revenue Recognition The Company recognizes revenues following the five-step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation. Revenue is measured at the amount of consideration we expect to receive in exchange for the sale of our product, which occurs at a point in time, typically upon delivery to the customer. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that it would have recognized is one year or less or the amount is immaterial. Revenues from sales of goods are measured at net of reserves established for applicable discounts and allowances that are offered within contracts with the Company's customers, and are recognized when the goods are delivered to the customers. Product revenue reserves, which are classified as a reduction in product revenues, are generally characterized in the following categories: discounts, returns and rebates. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable as the amount is payable to the Company's customers. Revenues from manufacture services are recognized when the manufacture process is completed pursuant to the customers' requirement and the finished goods
were
delivered to the customers.
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The Company's return policy allows for the return of damaged or defective
products and shipment errors. A notice of damage or wrong items should make
within five days from receiving the goods, and actual return of the products
must be completed within 30 days from the date of receiving the goods. Delayed
notification for damaged or wrong products will not be accepted for return or
exchange. Custom formulas and capsules are not returnable. The amount for return
of products was immaterial for the three months ended March 31, 2022 and 2021.
Results of operations
Comparison of three months ended
The following table sets forth the results of our operations for the
periods indicated as a percentage of net sales. Certain columns may not add due
to rounding.
Dollar Percent
Increase Increase
2022 % of Sales 2021 % of Sales (Decrease) (Decrease)
Sales of goods $ 181,579 59.26 % $ 212,028 100 % $ (30,449 ) (14.36 )%
Manufacture service revenue 124,835 40.74 % - - % 124,835 - %
Total revenues 306,414 100 % 212,028 100 % 94,386 44.52 %
Sales of goods cost 145,665 80.22 % 135,309 63.82 % 10,356 7.65 %
Cost of manufacture service 90,293 72.33 % - - % 90,293 - %
Total cost of revenues 235,958 77.01 % 135,309 63.82 % 100,649 74.38 %
Gross profit 70,456 22.99 % 76,179 36.18 % (6,263 ) (8.16 )%
Selling expenses 10,614 3.46 % 15,523 7.32 % (4,909 ) (31.62 )%
Bad debts - - % 380 0.18 % (380 ) (100 )%
General and administrative expenses 286,274 93.43 % 265,347 125.15 % 20,927 7.89 %
Operating expenses 296,888 96.89 % 281,250 132.65 % 15,638 5.56 %
Loss from operations (226,432 ) (73.9 )% (204,531 ) (96.46 )% (21,901 ) 10.71 %
Other income (expense), net (6,688 ) (2.18 )% (2,524 ) (1.19 )% (4,164 ) 164.98 %
Loss before income taxes (233,120 ) (76.08 )% (207,055 ) (97.65 )% (26,065 ) 12.59 %
Income tax expense - - % 3,300 1.56 % (3,300 ) (100 )%
Net loss $ (233,120 ) (76.08 )% $ (210,355 ) (99.21 )% $ (22,765 ) 10.82 %
Sales
Sales for the three months endedMarch 31, 2022 and 2021 were$306,414 and$212,028 , respectively, an increase of$94,386 or 44.52%. The increase was primarily attributable to (i) increase the big purchase orders from new customers, (ii) increased revenue from manufacture service (OEM) provided by BEP, and (iii) purchased of new equipment to enhance our ability to complete and deliver the big orders in a more speedy and efficient way. Costs of sales Costs of sales for the three months endedMarch 31, 2022 and 2021 was$235,958 and$135,309 , respectively, an increase of$100,649 or 74.38%. The increase of COGS in 2022 was due to increased revenue and increased cost of production especially the labor. During the three months endedMarch 31, 2022 , we received quite a few big orders especially the OEM orders, which required more manufacture labors to complete the orders. In addition, we had inventory adjustment for obsolete inventory of$41,854 during the three months endedMarch 31, 2022 . The percentage of cost of sales of goods to total sales of goods was 80.22% and 63.82% for the three months endedMarch 31, 2022 and 2021, respectively. The percentage of cost of manufacture services to total manufacture income was 72.33% and 0.00% for the three months endedMarch 31, 2022 and 2021, respectively. 18 Gross profit The gross profit for the three months endedMarch 31, 2022 and 2021 was$70,456 and$76,719 , respectively, a decrease of$6,263 or 8.16%. The blended profit margin was 23.0% and 36.2% for the three months endedMarch 31, 2022 and 2021, respectively. Operating expenses Selling expenses consist mainly of advertising, show expense, products marketing, shipping expenses, and promotion expenses. Selling expense was$10,614 for the three months endedMarch 31, 2022 , compared to$15,523 for the three months endedMarch 31, 2021 , a decrease of$4,909 or 31.62%, mainly resulting from decreased advertising expense by$5,960 , was partly offset by increased shipping expense by$1,200 .
Bad debt expense was
General and administrative expenses consist mainly of employee salaries and welfare, business meeting, utilities, accounting, consulting, and legal expenses. General and administrative expenses were$286,274 for the three months endedMarch 31, 2022 , compared to$265,347 for the three months endedMarch 31, 2021 , an increase of$20,927 or 7.89%, the increase was mainly due to increased salaries expense by$46,650 , was partly offset by decreased consulting fee by$17,200 , and decreased other G&A expenses by$8,520 . Other expenses, net Other expenses was$6,688 and$2,524 for the three months endedMarch 31, 2022 and 2021, respectively. For the three months endedMarch 31, 2022 , other expenses mainly consisted of interest expense of$5,160 , financial expense of$1,568 and other income of$40 . For the three months endedMarch 31, 2021 , other expenses mainly consisted of interest expense of$2,763 , financial expense of$3,299 and other income of$3,538 . Net loss
We had a net loss of
Liquidity and Capital Resources
As ofMarch 31, 2022 , we had cash and equivalents of$225 , bank overdraft of 27,400, other current assets of$378,638 , other current liabilities (excluding bank overdraft) of$3,074,991 , working capital deficit of$2,723,528 , a current ratio of 0.12:1. As ofDecember 31, 2021 , we had cash and equivalents of$303 , bank overdraft of$19,032 , other current assets of$261,659 , other current liabilities (excluding bank overdraft) of$2,736,932 , working capital deficit of$2,494,002 , a current ratio of 0.10:1. The following is a summary of cash provided by or used in each of the indicated types of activities during the three months endedMarch 31, 2022 , and 2021, respectively. 2022 2021
Net cash used in operating activities
Net cash used in operating activities
Net cash used in operating activities was$254,475 for the three months endedMarch 31, 2022 , compared to$158,639 in 2021. The increase of cash outflow of$95,836 from operating activities for the three months endedMarch 31, 2022 was principally attributable to increased cash outflow on accounts receivable by$57,974 and increase cash outflow on inventory by$40,093 . 19
Net cash used in investing activities
Net cash used in investing activities was$0 for the three months endedMarch 31, 2022 , compared to$6,837 in 2021. We did not have any investing activities for the three months endedMarch 31, 2022 ; for the three months endedMarch 31, 2021 , we purchased fixed assets of$9,537 , but offset with the proceeds from sale of fixed assets for$2,700 .
Net cash provided by financing activities
Net cash provided by financing activities was$254,397 for the three months endedMarch 31, 2022 , compared to$170,409 in 2021. The net cash provided by financing activities for the three months endedMarch 31, 2022 consisted of proceeds of$250,000 from loans from one major shareholder (also the senior officer), but partly offset by repayment of loan payable of$3,970 . The net cash provided by financing activities for three months endedMarch 31, 2021 mainly consisted of proceeds from government loans of$115,245 due to the Covid-19, and loan from a major shareholder (also the senior officer) of$84,146 , but partly offset by bank overdraft of$28,982 . Our current liabilities exceed current assets atMarch 31, 2022 , and we incurred substantial losses and cash outflows from operating activities in the periods presented. We may have difficulty to meet upcoming cash requirements. As ofMarch 31, 2022 , our principal source of funds was loans from an officer (also is the Company's major shareholder). As ofMarch 31, 2022 , we believe we will need$1.2 million cash to continue our current business for the next 12 months. In addition to our continuous effort to improve our sales and net profits, we have explored and continue to explore other options to provide additional financing to fund future operations as well as other possible courses of action. Such actions may include, but are not limited to, securing lines of credit, sales of debt or equity securities (which may result in dilution to existing shareholders), loans and cash advances from other third parties or banks, and other similar actions. There can be no assurance that we will be able to obtain additional funding (if needed), on acceptable terms or at all, through a sale of our common stock, loans from financial institutions, or other third parties, or any of the actions discussed above. If we cannot sustain profitable operations, and additional capital is unavailable, lack of liquidity could have a material adverse effect on our business viability, financial position, results of operations and cash flows.
Off-Balance Sheet Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder's equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
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