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 AtDecember 31, 2022 and 2021, the Company had loans from one major shareholder (also the Company's senior officer) of$2,543,155 and$1,785,154 , respectively. AtDecember 31, 2022 and 2021, the Company had loan from another major shareholder for$608,631 for settling the litigation. There are no written loan agreements for these loans. These loans are unsecured, non-interest bearing and have no fixed terms of repayment, and therefore, deemed payable on demand.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results
of operations are based on our consolidated financial statements ("CFS"), which
were prepared in accordance with accounting principles generally accepted in the
United States of America ("US GAAP"). The preparation of these financial
statements requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements as well as the
reported net sales and expenses during the reporting periods. On an ongoing
basis, we evaluate our estimates and assumptions. We base our estimates on
historical experience and various other factors that we believe are reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 2 to
our CFS, we believe the following accounting policies are the most critical to
assist you in fully understanding and evaluating this management discussion
and
analysis.
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Basis of Presentation
The accompanying consolidated financial statements ("CFS") are prepared in
conformity with U.S. Generally Accepted Accounting Principles ("US GAAP") and
applicable rules and regulations of the Securities and Exchange Commission
("SEC") regarding interim financial reporting. The functional currency of Bio
Essence is U.S. dollars ("$''). 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 inconsolidation. Going Concern The Company incurred net losses of$809,679 and$647,564 for the years endedDecember 31, 2022 and 2021, respectively. The Company also had an accumulated deficit of$8,168,595 as ofDecember 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 from the 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 ofDecember 31, 2022 and 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.
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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 goodswere delivered to the customers. 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 years endedDecember 31, 2022 and 2021.
Results of operations
Comparison of the years 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
% of % of Increase Increase
2022 Sales 2021 Sales (Decrease) (Decrease)
Sales of goods $ 621,590 63.06 % $ 774,066 87.17 % $ (152,476 ) (19.70 )%
Manufacture service
revenue 364,167 36.94 % 113,918 12.83 % 250,249 219.67 %
Total revenues 985,757 100.00 % 887,984 100.00 % 97,773 11.01 %
Cost of goods sold 289,867 29.41 % 497,905 56.07 % (208,038 ) (41.78 )%
Cost of manufacture
service 310,941 31.54 % 91,755 10.33 % 219,186 238.88 %
Total cost of revenues 600,808 60.95 % 589,660
66.40 % 11,148 1.89 %
Gross profit 384,949 39.05 % 298,324 33.60 % 86,625 29.04 %
Selling expenses 87,775 8.90 % 70,193 7.90 % 17,582 25.05 %
Bad debts - - % 8,615 0.97 % (8,615 ) (100.00 )%
General andadministrative expense 1,079,978 109.56 % 1,077,043
121.29 % 2,935 0.27 %
Operating expenses 1,167,753 118.46 % 1,155,851 149.32 % 11,902 1.03 %
Loss from operations (782,804 ) (79.41 )% (857,527 ) (110.78 )% 74,723 (8.71 )%
Other income (expense),
net (23,575 ) (2.39 )% 213,263 24.02 % (236,838 ) (111.05 )%
Loss before income taxes (806,379 ) (81.80 )% (644,264 ) (72.55 )% (162,115 ) 25.16 %
Income tax expense 3,300 0.33 % 3,300
0.37 % - - %
Net loss $ (809,679 ) (82.14 )% $ (647,564 ) (72,93 )% $ (162,115 ) 25.03 %
Revenues
Sales for the years ended December 31, 2022 and 2021 were $985,757 and $887,984 ,
respectively, an increase of $97,773 or 11.01%. For the years ended December 31,
2022 , we had sales of goods of $621,590 and manufacture service revenue of
$364,167 . For the years ended December 31, 2021 , we had sales of goods of
$774,066 and manufacture service revenue of $113,918 . The decreased sales of
goods was mainly due to certain big customers reducing their purchase orders in
2022, as a remediation, we started to provide OEM service since 4th quarter of
2021, which increased significantly in 2022 as a result of our effort to promote
our manufacture service.
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Cost of revenues
Cost of revenues for the years ended December 31, 2022 and 2021 was $600,808 and
$589,660 , respectively, an increase of $11,148 or 1.89%. The increase of cost of
revenue in 2022 was primarily attributed to the increased cost of manufacturing
service. During the years ended December 31, 2022 , we received quite a few big
orders for the OEM, which required additional labor and manufacture equipment to
complete the orders.
Gross profit
The gross profit for the years ended December 31, 2022 and 2021 was $384,949 and
$298,324 , respectively, an increase of $86,625 or 29.04%. The profit margin was
39.05% for 2022 compared to 33.60% for 2021, the increase in profit margin was
mainly due to increased profit margin from sale of goods, which was 53.37% for
the year ended December 31, 2022 compared to 35.68% for the year ended December
31, 2021 . We lost a few big customers due to strong competition and our pricing
disadvantage, however the corresponding high cost was also decreased.
Operating expenses
Selling expenses consisted mainly of advertising, show expense, product
marketing, shipping expenses, and promotion expenses. Selling expense was
$87,775 for the year ended December 31, 2022 , compared to $70,193 for the year
ended December 31, 2021 , an increase of $17,582 or 25.05%, mainly resulting from
increased trade show expense by $11,740 , increased advertising expense by
$4,140 , and increased marketing expense by $3,410 , which was partly offset by
decreased shipping expenses by $1,720 .
Bad debt expense was $0 for the year ended December 31, 2022 , compared to $8,615
for the year ended December 31, 2021 , an decrease of $8,615 or 100%, primarily
attributed to written off FDS's receivables in 2021, as FDS was dissolved.
General and administrative expenses consisted mainly of employee salaries and
welfare, business meeting, utilities, audit, and legal expenses. General and
administrative expenses were $1,079,978 for the year ended December 31, 2022 ,
compared to $1,077,043 for the year ended December 31, 2021 , a slight increase
of $2,935 or 0.27%. The increase was mainly due to increased salary expenses by
$32,801 , increased rental expense by $7,820 ; offset by decreased consultantfees of$33,717 . Other income (expense), net
Other expense was$23,575 for the year endedDecember 31, 2022 , compare to other income$213,263 for the year endedDecember 31, 2021 . For the year endedDecember 31, 2022 , other expenses mainly consisted of interest expense of$23,042 , financial expense of$5,332 , and net other income of$4,799 . For the year endedDecember 31, 2021 , other income mainly consists of PPP Loan forgiveness of$242,985 , which was partly offset by interest expense of$38,558 and financial expense of$9,699 . Net loss We had a net loss of$809,679 for the year endedDecember 31, 2022 , compared to$647,564 for the year endedDecember 31, 2021 , an increase of$162,115 or 25.03% reflected the above-mentioned factors combined. 8
Liquidity and Capital Resources
As ofDecember 31, 2022 , we had cash and equivalents of$6,262 , bank overdraft of 53,651, other current assets of$197,569 , other current liabilities (excluding bank overdraft) of$3,504,179 , working capital deficit of$3,353,999 , a current ratio of 0.06:1. 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 years endedDecember 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$706,824 for the year endedDecember 31, 2022 , compared to$1,294,118 in 2021. The decrease of cash outflow of$587,294 from operating activities for the year endedDecember 31, 2022 was principally due to decreased cash outflow on prepaid expenses by$52,661 , and decreased cash outflow on accrued liability and other payable by$503,307 .
Net cash used in investing activities
Net cash used in investing activities was$59,120 for the year endedDecember 31, 2022 , compared to$116,796 in 2021. For the year endedDecember 31, 2022 , we purchased fixed assets of$59,120 . For the year endedDecember 31, 2021 , we purchased fixed assets of$119,496 and sold fixed assets for$2,700 .
Net cash provided by financing activities
Net cash provided by financing activities was$771,903 for the year endedDecember 31, 2022 , compared to$1,405,892 in 2021. The net cash provided by financing activities for the year endedDecember 31, 2022 consisted of proceeds of$758,000 from loans from one major shareholder (also the senior officer) and increase in bank overdraft of$34,619 , partly offset by repayment of loan payable of$12,218 , repayment of government loan of$698 , and payment of finance lease liability of$7,800 . The net cash provided by financing activities in 2021 consisted of proceeds of$1,285,777 from loans from two major shareholders (one of which is the Company's senior officer), proceeds of$53,767 from loans payable, and proceeds of$115,245 from government loans, partly offset by decrease in bank overdraft of$44,863 and repayment of loan payable of 4,034. Our current liabilities exceed current assets atDecember 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 ofDecember 31, 2022 , our principal source of funds was loans from an officer (also is the Company's major shareholder). As ofDecember 31, 2022 , we believe we will need$1.2 million cash to continue our current business for the next 12 months. In addition to our continuous effort to improve our sales and net profits, we have explored and continue to explore other options to provide additional financing to fund future operations as well as other possible courses of action. Such actions may include, but are not limited to, securing lines of credit, sales of debt or equity securities (which may result in dilution to existing shareholders), loans and cash advances from other third parties or banks, and other similar actions. There can be no assurance that we will be able to obtain additional funding (if needed), on acceptable terms or at all, through a sale of our common stock, loans from financial institutions, or other third parties, or any of the actions discussed above. If we cannot sustain profitable operations, and additional capital is unavailable, lack of liquidity could have a material adverse effect on our business viability, financial position, results of operations and cash flows. 9 CONTRACTUAL OBLIGATIONS The Company's contractual obligations as ofDecember 31, 2022 are as follows: 1 year or More than Contractual Obligation less 1 year Total Operating lease liabilities$ 156,560 $ 952,756 $ 1,109,316 Finance lease liabilities 12,603 39,687 52,290 Loan payables 11,954 25,561 37,515
SBA loan payables including accrued interest of$16,867 4,596
210,306 214,902 Total$ 185,713 $ 1,228,310 $ 1,414,023
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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