U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
OR
Commission file number:
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
(IRS EMPLOYEE IDENTIFICATION NO.)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ISSUER TELEPHONE NUMBER)
Indicate by check mark whether the
registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| ☐ | Smaller reporting company | |||
| Emerging Growth company | ||||
If an emerging
growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of the latest practicable date, the Company has
TABLE OF CONTENTS
| PAGE | ||
| PART I | FINANCIAL INFORMATION | |
| Item 1. | Financial Statements | |
| Balance Sheets as of September 30, 2021 (Unaudited) and December 31, 2020 | 1 | |
| Statements of Operations for three and nine months ended September 30, 2021 and 2020 (Unaudited) | 2 | |
| Statements of Changes in Stockholders’ Equity for nine months ended September 30, 2021 and 2020 (Unaudited) | 3 | |
| Statements of Cash Flows for nine months ended September 30, 2021 and 2020 (Unaudited) | 4 | |
| Notes to Financial Statements (Unaudited) | 5 | |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 18 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 25 |
| Item 4. | Controls and Procedures | 25 |
| PART II | ||
| Item 1. | Legal Proceedings | 26 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 26 |
| Item 3. | Defaults Upon Senior Securities | 26 |
| Item 4. | Mine Safety Disclosures | 26 |
| Item 5. | Other Information | 26 |
| Item 6. | Exhibits | 26 |
| Signatures | 27 |
i
BIO ESSENCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| AS OF SEPTEMBER 30, 2021 | AS OF DECEMBER 31, | |||||||
| (UNAUDITED) | 2020 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Prepaid expenses | ||||||||
| Advance to suppliers | ||||||||
| Inventory, net | ||||||||
| Total current assets | ||||||||
| NONCURRENT ASSETS | ||||||||
| Security deposit | ||||||||
| Right-of-use assets, net | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Total non-current assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| CURRENT LIABILITIES | ||||||||
| Bank overdraft | $ | $ | ||||||
| Accounts payable | ||||||||
| Taxes payable | ||||||||
| Accrued liabilities and other payables | ||||||||
| Operating lease liabilities | ||||||||
| Finance lease liabilities | ||||||||
| Accrued interest on government loans | ||||||||
| Government loans payable - current portion | ||||||||
| Loan from shareholder | ||||||||
| Total current liabilities | ||||||||
| NONCURRENT LIABILITIES | ||||||||
| Accrued rent | ||||||||
| Operating lease liabilities | ||||||||
| Finance lease liabilities | ||||||||
| Government loans payable | ||||||||
| Total non-current liabilities | ||||||||
| TOTAL LIABILITIES | ||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| STOCKHOLDERS' DEFICIT | ||||||||
| Preferred stock $ | ||||||||
| Common stock $ | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| TOTAL STOCKHOLDERS' DEFICIT | ( | ) | ( | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
1
BIO ESSENCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| NINE MONTHS ENDED SEPTEMBER 30, | THREE MONTHS ENDED SEPTEMBER 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Cost of sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Selling | ||||||||||||||||
| Bad debts | - | |||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expenses) | ||||||||||||||||
| Interest income | - | - | ||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Financial expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income | ||||||||||||||||
| Other expense | ( | ) | ( | ) | - | ( | ) | |||||||||
| Other income, net | ( | ) | ||||||||||||||
| Loss before income tax | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax expense | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic and diluted weighted average shares outstanding | ||||||||||||||||
| Basic and diluted net loss per share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The accompanying notes are an integral part of these consolidated financial statements.
2
BIO ESSENCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| NINE MONTHS ENDED SEPTEMBER 30, | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Bad debts | ||||||||
| Gain on disposal of fixed assets | ( | ) | ||||||
| PPP loans forgiveness | ( | ) | ||||||
| Stock compensation expense | ||||||||
| Operating lease expense | ||||||||
| Changes in assets / liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Prepaid expenses | ( | ) | ||||||
| Advance to suppliers | ||||||||
| Inventory | ||||||||
| Security deposit | ||||||||
| Accounts payable | ( | ) | ||||||
| Accrued liabilities and other payables | ( | ) | ( | ) | ||||
| Taxes payable | ( | ) | ||||||
| Payment on lease liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Proceeds from sales of fixed assets | ||||||||
| Purchase of fixed assets | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Bank overdraft | ( | ) | ( | ) | ||||
| Return of investment to investor | ( | ) | ||||||
| Finance lease liabillity | ( | ) | ||||||
| Proceeds from government loans | ||||||||
| Loan from shareholder | ||||||||
| Net cash provided by financing activities | ||||||||
| NET INCREASE IN CASH & EQUIVALENTS | ||||||||
| CASH & EQUIVALENTS, BEGINNING OF PERIOD | ||||||||
| CASH & EQUIVALENTS, END OF PERIOD | $ | $ | ||||||
| Supplemental Cash Flow Data: | ||||||||
| Income tax paid | $ | $ | ||||||
| Interest paid | $ | $ | ||||||
| Supplemental disclosures of non-cash financing activities: | ||||||||
| Right-of-use assets obtained in exchange for new finance lease liabilities | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
BIO ESSENCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
NINE MONTHS ENDED JUNE 30, 2021 AND 2020
(UNAUDITED)
| COMMON STOCK - SHARES | COMMON STOCK - AMOUNT | ADDITIONAL PAID IN CAPITAL | ACCUMULATED DEFICIT | TOTAL | ||||||||||||||||
| Balance at January 1. 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance at March 31, 2021 | ( | ) | ( | ) | ||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance at June 30, 2021 | ( | ) | ( | ) | ||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Balance at January 1, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Return of investment to investor | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Balance at March 31, 2020 | ( | ) | ( | ) | ||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance at June 30, 2020 | ( | ) | ( | ) | ||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
BIO ESSENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 (UNAUDITED) AND DECEMBER 31, 2020
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Bio Essence Corporation
(“the Company” or “Bio Essence”) was incorporated in 2000 in the state of California. Fusion Diet Systems (“FDS”)
was incorporated in 2010 in the state of Utah. Bio Essence and FDS were under common control since 2016. Bio Essence and FDS are mainly engaged
in manufacturing and distributing health supplement products. In January 2017, Bio Essence incorporated two subsidiaries in the state
of California: Bio Essence Pharmaceutical Inc. (“BEP”) and Bio Essence Herbal Essentials, Inc. (“BEH”), Bio Essence
transferred its manufacturing operation to BEP, and transferred its distributing operation to BEH. On March 1, 2017, the
In December 2019, a novel strain of coronavirus, causing a disease referred to as COVID-19, was reported. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, and the pandemic has resulted in quarantines, travel restrictions, and the temporary closure of office buildings and facilities in the US. The state of California, where the Company is headquartered, has been affected by COVID-19. The global economy has also been materially negatively affected by COVID-19 and there is continued uncertainty about the duration and intensity of its impacts. 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
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 FDS. All significant inter-company transactions and balances were eliminated in consolidation.
The interim consolidated financial information as of September 30, 2021 and for the nine and three months ended September 30, 2021 and 2020 was prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures, which are normally included in CFS prepared in accordance with U.S. GAAP were not included. The interim consolidated financial information should be read in conjunction with the Financial Statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, previously filed with the SEC on April 14, 2021.
In the opinion of management, all adjustments (which include all significant normal and recurring adjustments) necessary to present a fair statement of the Company’s consolidated financial position as of September 30, 2021, its consolidated results of operations and cash flows for the nine and three months ended September 30, 2021 and 2020, as applicable, were made.
Going Concern
The Company incurred net losses
of $
5
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.
Leases
The Company determines if an arrangement is a lease or contains a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, and operating lease liabilities (current and non-current) in the Company’s consolidated balance sheets. Finance leases are included in property and equipment, and finance lease liabilities (current and non-current) in the Company’s consolidated balance sheets.
ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company generally uses the incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The Company elected the package of practical expedients permitted under the transition guidance to combine the lease and non-lease components as a single lease component for operating leases associated with the Company’s office space lease, and to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of income on a straight-line basis over the lease term.
ROU assets are reviewed for impairment when indicators of impairment are present. ROU assets from operating and finance leases are subject to the impairment guidance in ASC 360, Property, Plant, and Equipment, as ROU assets are long-lived nonfinancial assets. The Company recognized no impairment of ROU assets as of September 30, 2021 and December 31, 2020.
Cash and Equivalents
For financial statement purposes, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
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 of September 30, 2021 and December 31, 2020, the bad debt allowance was
$
Inventory
Inventories are stated at the lower of cost or net realizable value with cost determined on a weighted-average basis. Management compares the cost of inventories with the net realizable value and an allowance is made for writing down their inventories to net realizable value, if lower.
6
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation, and impairment losses, if any. Major repairs and betterments that significantly extend original useful lives or improve productivity are capitalized and depreciated over the period benefited. Maintenance and repairs are expensed as incurred. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets as follows:
| Leasehold improvements | |||
| Office furniture |
Impairment of Long-Lived Assets
Long-lived assets, which include property and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of long-lived assets to be held and used is measured by comparing of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by it. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds its fair value (“FV”). FV is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. Based on its review, the Company believes that, as of September 30, 2021 and December 31, 2020, there was no significant impairments of its long-lived assets.
Income Taxes
Income taxes are accounted for using an asset and liability method of accounting for income taxes in accordance with ASC Topic 740, “Income Taxes.” Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current period and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets also include the prior years’ net operating losses carried forward. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all of the deferred tax assets will not be realized.
The Company follows ASC Topic 740, which prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 also provides guidance on recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures.
Under the provisions of ASC Topic
740, when tax returns are filed, it is likely that some positions taken would be sustained upon examination by the taxing authorities,
while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately
sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available
evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution
of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that
meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than
7
At September 30, 2021 and December 31, 2020, the Company did not take any uncertain positions that would necessitate recording a tax related liability. The Company files a U.S. income tax return. With few exceptions, the Company’s U.S. income tax return filed for the years ending on December 31, 2018 and thereafter are subject to examination by the relevant taxing authorities.
The Company accounts for income taxes in interim periods in accordance with FASB ASC 740-270, “Interim Reporting.” The Company has determined an estimated annual effective tax rate. The rate will be revised, if necessary, as of the end of each successive interim period during the Company’s fiscal year to its best current estimate. The estimated annual effective tax rate is applied to the year-to-date ordinary income (or loss) at the end of the interim period.
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 product sales are recorded net of reserves established for applicable discounts and allowances that are offered within contracts with the Company’s 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.
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 nine and three months ended September 30, 2021 and 2020.
Cost of Sales
Cost of sales (“COS”) consists primarily of finished goods purchased from other manufacturers, material costs, labor costs and related overhead that are directly attributable to the production of the products. Write-down of inventory to lower of cost or net realizable value is also recorded in COS.
Shipping and Handling Costs
Shipping and handling costs related
to delivery of finished goods are included in selling expenses. During the nine months ended September 30, 2021 and 2020, shipping and
handling costs were $
8
Advertising
Advertising expenses consist
primarily of costs of promotion and marketing for the Company’s image and products, and costs of direct advertising, and are included
in selling expenses. The Company expenses all advertising costs as incurred. During the nine months ended September 30, 2021 and
2020, advertising expense was $
Fair Value (“FV”) of Financial Instruments
Certain of the Company’s financial instruments, including cash and equivalents, accrued liabilities and accounts payable, carrying amounts approximate their FV due to their short maturities. FASB ASC Topic 825, “Financial Instruments,” requires disclosure of the FV of financial instruments held by the Company. The carrying amounts reported in the balance sheets for current liabilities each qualify as financial instruments and are a reasonable estimate of their FV because of the short period of time between the origination of such instruments and their expected realization and the current market rate of interest.
Fair Value Measurements and Disclosures
ASC Topic 820, “Fair Value Measurements and Disclosures,” defines FV, and establishes a three-level valuation hierarchy for disclosures of FV measurement that enhances disclosure requirements for FV measures. The three levels are defined as follow:
| ● | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. | |
| ● | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. | |
| ● | Level 3 inputs to the valuation methodology are unobservable and significant to the FV measurement. |
As of September 30, 2021 and December 31, 2020, the Company did not identify any assets and liabilities that are required to be presented on the balance sheet at FV. The carrying value of cash, accounts receivable, prepaid expenses, advances to suppliers, accounts payable, taxes payable, other payables and accrued liabilities approximate estimated fair values because of their short maturities.
Share-based Compensation
The Company accounts for share-based compensation awards to employees in accordance with FASB ASC Topic 718, “Compensation – Stock Compensation”, which requires that share-based payment transactions with employees be measured based on the grant-date FV of the equity instrument issued and recognized as compensation expense over the requisite service period.
The Company accounts for share-based compensation awards to non-employees in accordance with FASB ASC Topic 718 and FASB ASC Subtopic 505-50, “Equity-Based Payments to Non-employees”. Share-based compensation associated with the issuance of equity instruments to non-employees is measured at the FV of the equity instrument issued or committed to be issued, as this is more reliable than the FV of the services received. The FV is measured at the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete.
Earnings (Loss) per Share (EPS)
Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS is computed similar to basic net income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if all the potential common shares pertaining to warrants, stock options, and similar instruments had been issued and if the additional common shares were dilutive. Diluted EPS are based on the assumption that all dilutive convertible shares and stock options and warrants were converted or exercised. Dilution is computed by applying the treasury stock method for the outstanding unvested restricted stock, options and warrants, and the if-converted method for the outstanding convertible instruments. Under the treasury stock method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later) and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Under the if-converted method, outstanding convertible instruments are assumed to be converted into common stock at the beginning of the period (or at the time of issuance, if later).
9
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk consist primarily of accounts and other receivables. The Company does not require collateral or other security to support these receivables. The Company conducts periodic reviews of the financial condition and payment practices of its customers to minimize collection risk on accounts receivable.
For the nine months ended September
30, 2021 and 2020, no customer accounted for more than
The Company had
The Company had
Segment Reporting
ASC Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s chief operating decision maker organizes segments within the Company for making operating decisions assessing performance and allocating resources. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
Management determined the Company’s operations constitute a single reportable segment in accordance with ASC 280. The Company operates exclusively in one business and industry segment: manufacture and sale of health supplement products.
New Accounting Pronouncements
Recently issued accounting pronouncements not yet adopted
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance should be adopted on a prospective basis. As a smaller reporting company, the standard will be effective for the Company for interim and annual reporting periods beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on its CFS.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. The Company continues to evaluate the impact of the guidance and may apply the elections as applicable as changes in the market occur.
10
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. This ASU (1) simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock; (2) revises the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification; and (3) revises the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares. For SEC filers, excluding smaller reporting companies, ASU 2020-06 is effective for fiscal years beginning after December 15, 2021 including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. For all other entities, ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Entities should adopt the guidance as of the beginning of the fiscal year of adoption and cannot adopt the guidance in an interim reporting period. The Company is currently evaluating the impact that ASU 2020-06 may have on its CFS and related disclosures.
3. INVENTORY
Inventory consisted of the following at September 30, 2021 and December 31, 2020:
| September 30, 2021 | December 31, 2020 | |||||||
| (unaudited) | ||||||||
| Raw materials | $ | $ | ||||||
| Finished goods – health supplements | ||||||||
| Less: Inventory impairment allowance | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
4. SECURITY DEPOSIT
As of September 30, 2021 and
December 31, 2020, the security deposit was for rent of the Company’s office and warehouse of $
5. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following at September 30, 2021 and December 31, 2020:
| September 30, 2021 | December 31, 2020 | |||||||
| (unaudited) | ||||||||
| Leaseholder improvements | $ | $ | ||||||
| Office furniture and equipment | ||||||||
| Total | ||||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||
| Net | $ | $ | ||||||
Depreciation for the nine months
ended September 30, 2021 and 2020 was $
Depreciation for the three months
ended September 30, 2021 and 2020 was $
11
6. INTANGIBLE ASSETS, NET
Intangible assets consisted of the following as of September 30, 2021 and December 31, 2020:
| September 30, 2021 | December 31, 2020 | |||||||
| (unaudited) | ||||||||
| Computer Software | $ | $ | ||||||
| Trademark | ||||||||
| Total | ||||||||
| Less: Accumulated amortization | ( | ) | ( | ) | ||||
| Net | $ | $ | ||||||
Amortization of intangible assets
was $
Estimated amortization for
the existing intangible assets with finite lives for each of the next
7. TAXES PAYABLE
Taxes payable at September 30,
2021 and December 31, 2020 was for sales tax and payroll tax payable of $
8. ACCRUED LIABILITIES AND OTHER PAYABLES
Accrued liabilities and other payables consisted of the following September 30, 2021 and December 31, 2020:
| September 30, 2021 | December 31, 2020 | |||||||
| (unaudited) | ||||||||
| Accrued legal and merchant fee | $ | $ | ||||||
| Credit card payable | ||||||||
| Payroll payable | ||||||||
| Accrued litigation liabilities - rent | ||||||||
| Other | ||||||||
| Total | $ | $ | ||||||
| Accrued litigation liabilities – rent, non-current | $ | $ | ||||||
The Company was involved in legal proceedings involving a lease with its former landlord, and its former sublessor. On December 9, 2016, the Company entered into a lease with its former landlord for a warehouse facility located in San Leandro, California (the “Premises”). On November 1, 2017, the Company entered into a sublease with a former sublessor, whereby the former sublessor would occupy a portion of the Premises.
Beginning in April of 2018, the former sublessor began violating its sublease by failing to pay rent, utilities, and operating a cannabis operation in the Premises, which constituted a violation of the sublease. The former landlord instructed the Company to evict the former sublessor. Thereafter, the Company was forced to leave the Premises because of the former sublessor’s activities.
12
The former landlord initiated
litigation against the Company seeking $
9. GOVERNMENT LOANS PAYABLE
In May and June 2020, BEH, BEP
and FDS received a total of $
| Year Ending | Amount | |||
| (unaudited) | ||||
| September 30, 2022 | $ | |||
| September 30, 2023 | ||||
| September 30, 2024 | ||||
| September 30, 2025 | ||||
| September 30, 2026 | ||||
| Thereafter | ||||
| Total | $ | |||
13
10. RELATED PARTY TRANSACTIONS
Loans from Shareholder
At September 30, 2021 and December
31, 2020, the Company had loans from one major shareholder (also the Company’s senior officer) of $
11. INCOME TAXES
The Company and its subsidiaries
are subject to
At September 30, 2021 and December
31, 2020, the Company had net operating loss (“NOL”) for income tax purposes; for federal income tax purposes,
The Company has NOL carry-forwards
for Federal and California income tax purposes of $
Components of the Company’s deferred tax assets as of September 30, 2021 and December 31, 2020 are as follows:
| September 30, 2021 | December 31, 2020 | |||||||
| (unaudited) | ||||||||
| Net deferred tax assets: | ||||||||
| Bad debt expense | $ | $ | ||||||
| Inventory impairment (reversal) | ( | ) | ||||||
| Operating lease charge | ||||||||
| Depreciation and amortization | ( | ) | ( | ) | ||||
| Expected income tax benefit from NOL carry-forwards | ||||||||
| Less: valuation allowance | ( | ) | ( | ) | ||||
| Deferred tax assets, net of valuation allowance | $ | $ | ||||||
Income Tax Provision in the Statements of Operations
A reconciliation of the consolidated federal statutory income tax rate and the effective income tax rate as a percentage of income before income taxes for the nine months ended September 30, 2021 and 2020 is as follows:
| 2021 | 2020 | |||||||
| (unaudited) | (unaudited) | |||||||
| Federal statutory income tax expense (benefit) rate | ( | )% | ( | )% | ||||
| State statutory income tax (benefit) rate, net of effect of state income tax deductible to federal income tax | ( | )% | ( | )% | ||||
| Permanent difference | % | % | ||||||
| Change in valuation allowance | % | % | ||||||
| Effective income tax rate | % | % | ||||||
14
A reconciliation of the consolidated federal statutory income tax rate and the effective income tax rate as a percentage of income before income taxes for the three months ended September 30, 2021 and 2020 is as follows:
| 2021 | 2020 | |||||||
| (unaudited) | (unaudited) | |||||||
| Federal statutory income tax expense (benefit) rate | ( | )% | ( | )% | ||||
| State statutory income tax (benefit) rate, net of effect of state income tax deductible to federal income tax | ( | )% | ( | )% | ||||
| Permanent difference | - | % | % | |||||
| Change in valuation allowance | % | % | ||||||
| Effective income tax rate | % | % | ||||||
The provision for income tax expense for the nine months ended September 30, 2021 and 2020 consisted of the following:
| 2021 | 2020 | |||||||
| (unaudited) | (unaudited) | |||||||
| Income tax expense – current | $ | $ | ||||||
| Income tax benefit – current | ||||||||
| Total income tax expense | $ | $ | ||||||
The provision for income tax expense for the three months ended September 30, 2021 and 2020 consisted of the following:
| 2021 | 2020 | |||||||
| (unaudited) | (unaudited) | |||||||
| Income tax expense – current | $ | $ | ||||||
| Income tax benefit – current | ||||||||
| Total income tax expense | $ | $ |
12. LEASES
Operating Leases
Warehouse and office lease
Effective October 1, 2018,
The components of lease costs, lease term and discount rate with respect of warehouse and office lease in the City of Irvine with an initial term of more than 12 months are as follows:
| Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 | |||||||
| (unaudited) | (unaudited) | |||||||
| Operating lease cost | $ | $ | ||||||
| Weighted Average Remaining Lease Term - Operating leases including options to renew | ||||||||
| Weighted Average Discount Rate - Operating leases | % | % | ||||||
15
| Three Months Ended September 30, 2021 |
Three Months Ended September 30, 2020 |
|||||||
| (unaudited) | (unaudited) | |||||||
| Operating lease cost | $ | $ | ||||||
| Weighted Average Discount Rate - Operating leases | % | % | ||||||
The following is a schedule, by years, of maturities of warehouse and office lease liabilities as of September 30, 2021:
| For the 12 months ending | Operating Leases | |||
| (unaudited) | ||||
| September 30, 2022 | $ | |||
| September 30, 2023 | ||||
| September 30, 2024 | ||||
| September 30, 2025 | ||||
| September 30, 2026 | ||||
| Thereafter | ||||
| Total undiscounted cash flows | ||||
| Less: imputed interest | ( | ) | ||
| Present value of lease liabilities | $ | |||
Equipment leases
In 2017, the Company entered
two leases for two copiers with terms of 60 and 63 months respectively, and monthly payments of $
The components of lease costs, lease term and discount rate with respect of equipment lease with an initial term of more than 12 months are as follows:
| Nine Months Ended | Nine Months Ended | |||||||
| September 30, 2021 | September 30, 2020 | |||||||
| (unaudited) | (unaudited) | |||||||
| Operating lease cost | $ | $ | ||||||
| Weighted Average Remaining Lease Term - Operating leases | ||||||||
| Weighted Average Discount Rate - Operating leases | % | % | ||||||
| Three Months Ended | Three Months Ended | |||||||
| September 30, 2021 | September 30, 2020 | |||||||
| (unaudited) | (unaudited) | |||||||
| Operating lease cost | $ | $ | ||||||
| Weighted Average Discount Rate – Operating leases | % | % | ||||||
16
The following is a schedule, by years, of maturities of lease liabilities as of September 30, 2021:
| For the 12 months ending | Operating Leases | |||
| September 30, 2022 | $ | |||
| September 30, 2023 | ||||
| Total undiscounted cash flows | ||||
| Less: imputed interest | ( | ) | ||
| Present value of lease liabilities | $ | |||
Finance Leases
As of September 30, 2021, the Company had two finance leases for Videojet and spectrophotometer workstation. The components of lease costs, lease term and discount rate with respect of equipment finance lease with an initial term of more than 12 months are as follows:
| Nine Months Ended | ||||
| September 30, 2021 | ||||
| (unaudited) | ||||
| Finance lease cost | $ | |||
| Weighted Average Remaining Lease Term - Finance leases | ||||
| Weighted Average Discount Rate - Finance leases | % | |||
| For the 12 months ending | Finance Leases | |||
| (unaudited) | ||||
| September 30, 2022 | $ | |||
| September 30, 2023 | ||||
| September 30, 2024 | ||||
| September 30, 2025 | ||||
| September 30, 2026 | ||||
| Total undiscounted cash flows | ||||
| Less: imputed interest | ( | ) | ||
| Present value of lease liabilities | ||||
13. SUBSEQUENT EVENTS
The Company follows the guidance in FASB ASC 855-10 for the disclosure of subsequent events. The Company evaluated subsequent events through the date the financial statements were issued and determined the Company did not have any material subsequent event.
17
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
Bio Essence Corporation (“the Company” or “Bio Essence”) was incorporated in 2000 in the state of California. Fusion Diet Systems (“FDS”) was incorporated in 2010 in the state of Utah. 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. In January 2017, Bio Essence incorporated two subsidiaries in the state of California: BEP and BEH, Bio Essence transferred its manufacturing operation into BEP, and transferred its distributing operation into BEH. On March 1, 2017, the 100% shareholder of FDS transferred all of her ownership in FDS into Bio Essence. As a result of the ownership restructure, FDS, BEP and BEH became wholly owned subsidiaries of Bio Essence, and Bio Essence serves as a holding corporation for these subsidiaries. The Company’s organizational chart is as follows:
The primary focus of BEP is producing products for BEH and FDS, along with providing original equipment manufacturing and private label services to other companies. BEH targets and develops traditional Chinese medicines (“TCM”) in the form of single herbs, granules, pills, and tablets. It also offers special formulated dietary supplements and medical food. The Company intends to develop this subsidiary into one that is engaged in integrated health and to provide its customers to interact with dietitians, nutraceutical practitioners, and traditional integrative wellness doctors worldwide. FDS is developing a focus on mass market sales of its products. It currently offers functional supplements, beauty supplements and collagen products.
The Company sells its products through channels such as TCM practitioners, online websites such as Amazon and its own proprietary website.
In December 2019, a novel strain of coronavirus, causing a disease referred to as COVID-19, was firstly reported. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, and the pandemic has resulted in quarantines, travel restrictions, and the temporary closure of office buildings and facilities in the US. The state of California, where the Company is headquartered, has been affected by COVID-19.
The global economy has also been materially negatively affected by COVID-19 and there is continued uncertainty about the duration and intensity of its impacts. 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.
18
Related Party Transactions
Loans from Officer
At September 30, 2021 and December 31, 2020, the Company had loans from one major shareholder (also the Company’s senior officer) of $1,650,155 and $1,108,008, respectively. At September 30, 2021, the Company had loan from another major shareholder for $608,631 for settling the litigation (see Note 8). There are no written loan agreements for these loans. These loans are unsecured, non-interest bearing and have no fixed terms of repayment, and therefore, deemed payable on demand.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements (“CFS”), which were prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 2 to our CFS, we believe the following accounting policies are the most critical to assist you in fully understanding and evaluating this management discussion and analysis.
Basis of Presentation
The accompanying consolidated financial statements (“CFS”) are prepared in conformity with U.S. Generally Accepted Accounting Principles (“US GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. The functional currency of Bio Essence is U.S. dollars (“$’’). 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 FDS. All significant inter-company transactions and balances were eliminated in consolidation.
The interim consolidated financial information as of September 30, 2021 and for the nine and three months ended September 30, 2021 and 2020 was prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures, which are normally included in CFS prepared in accordance with U.S. GAAP were not included. The interim consolidated financial information should be read in conjunction with the Financial Statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, previously filed with the SEC on April 14, 2021.
In the opinion of management, all adjustments (which include all significant normal and recurring adjustments) necessary to present a fair statement of the Company’s consolidated financial position as of September 30, 2021, its consolidated results of operations and cash flows for the nine and three months ended September 30, 2021 and 2020, as applicable, were made.
Going Concern
The Company incurred net losses of $0.56 million and $0.51 million for the nine months ended September 30, 2021 and 2020, respectively. The Company incurred net losses of $0.18 million and $0.20 million for the three months ended September 30, 2021 and 2020, respectively. The Company also had an accumulated deficit of $7.27 million as of September 30, 2021. These conditions raise a 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 program, 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.
19
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 of September 30, 2021 and December 31, 2020, the bad debt allowance was $151,752 and $151,372, respectively.
Revenue Recognition
The Company recognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods. The Company recognizes revenues following the five step model prescribed under ASU No. 2014-09: (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.
Revenues from product sales are recognized when the customer obtains control of the Company’s 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 product sales are recorded net of reserves established for applicable discounts and allowances that are offered within contracts with the Company’s 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 customer.
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 nine and three months ended September, 2021 and 2020.
20
Results of operations
Comparison of the nine months ended September 30, 2021 and 2020
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.
| 2021 | % of Sales | 2020 | % of Sales | Dollar Increase (Decrease) | Percent Increase (Decrease) | |||||||||||||||||||
| Sales | $ | 674,945 | $ | 739,770 | $ | (64,825 | ) | (8.76 | )% | |||||||||||||||
| Cost of goods sold | 438,345 | 64.95 | % | 450,434 | 60.89 | % | (12,089 | ) | (2.68 | )% | ||||||||||||||
| Gross profit | 236,600 | 35.05 | % | 289,336 | 39.11 | % | (52,736 | ) | (18.23 | )% | ||||||||||||||
| Selling expenses | 51,544 | 7.64 | % | 120,283 | 16.26 | % | (68,739 | ) | (57.15 | )% | ||||||||||||||
| Bad debts | 380 | 0.06 | % | 342 | 0.05 | % | 38 | 11.11 | % | |||||||||||||||
| General and administrative expenses | 843,434 | 124.96 | % | 672,453 | 90.90 | % | 170,981 | 25.43 | % | |||||||||||||||
| Operating expenses | 895,358 | 132.66 | % | 793,078 | 107.21 | % | 102,280 | 12.90 | % | |||||||||||||||
| Loss from operations | (658,758 | ) | (97.60 | % | (503,742 | ) | (68.09 | )% | 155,016 | 30.77 | % | |||||||||||||
| Other income (expense), net | 105,128 | 15.58 | % | 746 | 0.1 | % | 104,382 | 13,992.23 | % | |||||||||||||||
| Loss before income taxes | (553,630 | ) | (82.03 | )% | (502,996 | ) | (67.99 | )% | 50,634 | 10.07 | % | |||||||||||||
| Income tax expense | 3,300 | 0.49 | % | 3,300 | 0.45 | % | - | - | % | |||||||||||||||
| Net loss | $ | (556,930 | ) | (82.52 | )% | $ | (506,296 | ) | (68.44 | )% | $ | 50,634 | 10.00 | % | ||||||||||
Sales
Sales for the nine months ended September 30, 2021 and 2020 were $674,945 and $739,770, respectively, a decrease of $64,825 or 8.76%. The decrease was mainly due to the discontinuation of most of the products of FDS in the end of 2020 due to lack of demand and only keep one product for sell; and decreased purchase orders from doctors and practitioners for stock up the inventory for the epidemic prevention as a result of COVID-19 vaccine becoming available.
Cost of sales
Cost of sales for the nine months ended September 30, 2021 and 2020 was $438,345 and $450,434, respectively, an decrease of $12,089 or 2.68%. The decreased cost of sales was due to the decreased sales.
Gross profit
The gross profit for the nine months ended September 30, 2021 and 2020 was $236,600 and $289,336, respectively, a decrease of $52,736 or 18.23%. The profit margin was 35.05% for 2021 compared to 39.11% for 2020, the decrease in profit margin was mainly due to decreased sales and increased freight-in cost and increased raw materials purchase price.
Operating expenses
Selling expenses consist mainly of advertising, show expense, products marketing, shipping expense and promotion expenses. Selling expense was $51,544 for the nine months ended September 30, 2021, compared to $120,283 for the nine months ended September 30, 2020, a decrease of $68,739 or 57.15%, mainly resulting from decreased advertising expense and show expense by $1,900, decreased shipping-out expense by $13,700 and decreased marketing fee by $53,120.
Bad debt expense was $380 for the nine months ended September 30, 2021, compared to $342 for the nine months ended September 30, 2020.
21
General and administrative expenses consist mainly of employee salaries and welfare, business meeting, utilities and audit and legal expenses. General and administrative expenses were $843,434 for the nine months ended September 30, 2021, compared to $672,453 for the nine months ended September 30, 2020, an increase of $170,981 or 25.43%, the increase was mainly due to increased accounting fee by $23,850 and increased legal expense by $15,000 for filing the Form 10-K of 2020; increased salary expense by $40,520 for the newly hired employees for business development; increased office management fee by $23,400 for deferred payment due to COVID-19 pandemic; and increased consulting fee by $54,960 for stock trading symbol application and related services.
Other income, net
Other income was $105,128 for the nine months ended September 30, 2021, compared to of $746 for the nine months ended September 30, 2020, an increase of $104,382 or 13,992.23%. The increase in other income was mainly due to PPP loan forgiveness by $127,740, which was partly offset by increased interest expense by $12,760, partially due to the settlement of litigation liability of $608,631, as more fully disclosure in the Note 8 to the consolidated financial statements.
Net loss
We had a net loss of $556,930 for the nine months ended September 30, 2021, compared to $506,296 for the nine months ended September 30, 2020, an increase of $50,634 or 10.00%. The increase in our net loss was mainly resulted from decreased gross profit by $52,736 as described above.
Comparison of the three months ended September 30, 2021 and 2020
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.
| 2021 | % of Sales | 2020 | % of Sales | Dollar Increase (Decrease) | Percent Increase (Decrease) | |||||||||||||||||||
| Sales | $ | 226,990 | $ | 228,333 | $ | (1,343 | ) | (0.59 | )% | |||||||||||||||
| Cost of goods sold | 131,609 | 57.98 | % | 145,512 | 63.73 | % | (13,903 | ) | (9.55 | )% | ||||||||||||||
| Gross profit | 95,381 | 42.02 | % | 82,821 | 36.27 | % | 12,560 | 15.17 | % | |||||||||||||||
| Selling expenses | 17,611 | 7.76 | % | 38,485 | 16.85 | % | (20,874 | ) | (54.24 | )% | ||||||||||||||
| Bad debts | - | - | % | - | - | % | - | - | % | |||||||||||||||
| General and administrative expenses | 270,702 | 119.26 | % | 231,477 | 101.38 | % | 39,225 | 16.95 | % | |||||||||||||||
| Operating expenses | 288,313 | 127.02 | % | 269,962 | 118.23 | % | 18,351 | 6.80 | % | |||||||||||||||
| Loss from operations | (192,932 | ) | (85.00 | )% | (187,141 | ) | (81.96 | )% | 5,791 | 3.09 | % | |||||||||||||
| Other income (expense), net | 9,895 | 4.36 | % | (17,564 | ) | 7.69 | % | 27,459 | 156.34 | % | ||||||||||||||
| Loss before income taxes | (183,037 | ) | (80.64 | )% | (204,705 | ) | (89.65 | )% | (21,668 | ) | (10.58 | )% | ||||||||||||
| Income tax expense | - | - | % | - | - | % | - | ) | - | % | ||||||||||||||
| Net loss | $ | (183,037 | ) | (80.64 | )% | $ | (204,705 | ) | (89.65 | )% | $ | (21,668 | ) | (10.58 | )% | |||||||||
Sales
Sales for the three months ended September 30, 2021 and 2020 were $226,990 and $228,333, respectively, a decrease of $1,343 or 0.59%. The slight decrease in sales was mainly due to the discontinuation of most of the products of FDS in the end of 2020 due to lack of demand and only keep one product for sell which was partly offset by increased sales orders for BEP as a result of it starting to provide manufacturing service (OEM) to outside customers during this quarter.
Cost of sales
Cost of sales for the three months ended September 30, 2021 and 2020 was $131,609 and 145,512, respectively, a decrease of $13,903 or 9.55%. The decreased cost of sales was mainly due to decreased sales.
Gross profit
The gross profit for the three months ended September 30, 2021 and 2020 was $95,381 and $82,821, respectively, an increase of $12,560 or 15.17%. The profit margin was 42.02% for 2021 compared to 36.27% for 2020, the increase in profit margin was mainly due to increased OEM business which provides better profit margin.
22
Operating expenses
Selling expenses consist mainly of advertising, show expense, products marketing, shipping expense and promotion expenses. Selling expense was $17,611 for the three months ended September 30, 2021, compared to $38,485 for the three months ended September 30, 2020, a decrease of $20,874 or 54.24%, mainly resulting from decreased shipping-out expense by $2,680 and decreased marketing expense by $21,070, which was partly offset by increased advertising expense by $2,870.
Bad debt expense was $0 for the three months ended September 30, 2021 and 2020.
General and administrative expenses consist mainly of employee salaries and welfare, business meeting, utilities and audit and legal expenses. General and administrative expenses were $270,702 for the three months ended September 30, 2021, compared to $231,477 for the three months ended September 30, 2020, an increase of $39,225 or 16.95%, the increase was mainly due to increased salary expense by $25,050 for the newly hired employees for business development, and increased consulting fee by $13,120 for OTC stock symbol application.
Other income (expense), net
Other income was $9,895 for the three months ended September 30, 2021, compared to other expense $17,564 for the three months ended September 30, 2020, an increase of other income of $27,459 or 156.34%. The increase in other income was mainly due to increased other income by $5,970, decreased interest expense by $15,090 and decreased financial expense by $6,240, due to the settlement of litigation liability mentioned above.
Net loss
We had a net loss of $183,037 for the three months ended September 30, 2021, compared to $204,705 for the three months ended September 30, 2020, a decrease of $21,668 or 10.58%. The decrease in our net loss was mainly resulted from increased other income by $27,459, which was partly offset by increased operating loss by $5,791 as described above.
Liquidity and Capital Resources
As of September 30, 2021, we had cash and equivalents of $26,713, other current assets of $297,715, other current liabilities (excluding bank overdraft) of $2,698,168, working capital deficit of $2,373,740, a current ratio of 0.12:1. As of December 31, 2020, we had cash and equivalents of $5,325, bank overdraft of $63,895, other current assets of $324,300, other current liabilities (excluding bank overdraft) of $1,830,996, working capital deficit of $1,565,266, a current ratio of 0.17:1. The following is a summary of cash provided by or used in each of the indicated types of activities during the nine months ended September 30, 2021 and 2020, respectively.
| 2021 | 2020 | |||||||
| Net cash used in operating activities | $ | (1,151,553 | ) | $ | (496,018 | ) | ||
| Net cash used in investing activities | $ | (26,949 | ) | $ | (1,617 | ) | ||
| Net cash provided by financing activities | $ | 1,199,890 | $ | 498,120 | ||||
23
Net cash used in operating activities
Net cash used in operating activities was $1,151,553 for the nine months ended September 30, 2021, compared to $496,018 in 2020. The increase of cash outflow from operating activities for the nine months ended September 30, 2021 was principally attributable to increased net loss by $50,634, and increased cash outflow on accrued liability and other payables by $434,191 due to pay off the litigation liability, increased cash outflow on prepaid expenses by $34,725, and increased non-cash adjustment of PPP loans forgiveness by $127,740.
Net cash used in investing activities
Net cash used in investing activities was $26,949 for the nine months ended September 30, 2021, compared to $1,617 in 2020. For the nine months ended September 30, 2021, we purchased fixed assets of $29,649 and sold fixed assets for $2,700. For the nine months ended September 30, 2020, we purchased fixed assets of $1,617.
Net cash provided by financing activities
Net cash provided by financing activities was $1,199,890 for the nine months ended September 30, 2021, compared to $498,120 in 2020. The net cash provided by financing activities in 2021 consisted of proceeds from government loans of $115,245 due to the Covid-19 and loan from two major shareholders of $1,150,778 (one of which is the Company’s senior officer), but partly offset by payback of bank overdraft of $63,895. The net cash provided by financing activities in 2020 mainly consisted of proceeds from government loans of $343,340 due to the Covid-19 and loan from a major shareholder (also the senior officer) of $273,890, but partly offset by return of investment to an investor for $100,000 and payback of bank overdraft of $19,110.
Our current liabilities exceed current assets at September 30, 2021, 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 of September 30, 2021, our principal source of funds was loans from an officer (also is the Company’s major shareholder). As of September 30, 2021, 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.
24
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As a smaller reporting company, as defined in 17 CFR § 229.10(f)(1), we are not required to provide the information requested by this Item.
Item 4. Controls and Procedures.
The Company’s Chief Executive, Yin Yan, is responsible for establishing and maintaining disclosure controls and procedures for the Company.
Evaluation of Disclosure Controls and Procedures
For purposes of this Item 4, the term disclosure controls and procedures means controls and other procedures of the Company (i) that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (15 U.S.C. 78a et seq. and hereinafter the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC, and (ii) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
On September 30, 2021, Ms. Yan reviewed the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report and has concluded that the Company’s disclosure controls and procedures are effective to ensure that material information relating to the Company is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC.
Report of Management
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (“ICFR”), as defined in Exchange Act Rule 13a-15. Our ICFR is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. Management conducted an assessment of our ICFR based on the framework and criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013). Based on the assessment, management concluded that, as of September 30, 2021, our ICFR were effective at the reasonable assurance level based on those criteria.
Our independent public accountant has not conducted an audit of our controls and procedures regarding ICFR and therefore expresses no opinion with regards to the effectiveness or implementation of our controls and procedures with regards to ICFR.
Changes in Internal Controls over Financial Reporting
There were no changes in our ICFR identified in connection with our evaluation of these controls as of the end of the quarter ending on September 30, 2021 as covered by this report that has materially affected, or is reasonably likely to materially affect, our ICFR.
Inherent Limitations on Effectiveness of Controls
The Company’s management does not expect that its disclosure controls or its ICFR will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ending on September 30, 2021 that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company was involved in legal proceedings involving a lease with its former landlord, Harsch Investment Properties, LLC, an Oregon limited liability company (“Harsh”), and its former sublessor Topworth Holding LLC, a California limited liability company (“Topworth”). On December 9, 2016, the Company entered into a lease with Harsch for a warehouse facility at 2265 Polvorosa Ave., Unit 350 in San Leandro, California (the “Premises”). Then, on November 1, 2017, the Company entered into a sublease with Topworth, whereby Topworth would occupy a portion of the Premises.
Then, beginning in April of 2018, Topsworth began violating its sublease by failing to pay rent, utilities, and operating a cannabis operation in the Premises, which constituted a violation of the sublease. Harsch instructed the Company to evict Topworth. Thereafter, the Company was forced to leave the Premises because of Topworth’s activities.
Harsch initiated litigation against the Company seeking $2,088,030 in damages for lost rental profits. The Company filed a cross-complaint against Topworth for breach of the sublease agreement, seeking damages related to the Company’s breach of the lease, costs, and attorney’s fees.
On August 7, 2020, the Company entered into a Settlement Agreement and Release (“Settlement Agreement”) whereby the Company did not admit liability but agreed to make installment payments totaling $750,000 to Harsch for Harsch’s release of the Company. The Settlement Agreement is not recorded or public record. The Company’s claims against Topworth are not affected by the Settlement Agreement. The Company intends on continuing to pursue its claims against Topworth.
Since the beginning of 2021, the Company did not make payments to Harsch, pursuit to the Settlement Agreement. In May of 2021, the Company’s majority shareholder Jian Yang agreed to loan the Company $608,631.00 so that the Company could fully satisfy the Settlement Agreement. On May 13, 2021, the Company paid Harsch $608,631.00. Harsh filed an Acknowledgement of Satisfaction of Judgment on the same day, fully resolving this matter.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There have been no unregistered sales of equity securities in the third quarter of 2021.
Pursuant to Rule 463 of Regulation S-K, the Company’s first registration statement filed on Form S-1 pursuant to the Securities Act was deemed effective on December 30, 2020 (the “Registration Statement”). The Registration Statement registered 33,009,000 shares of the Company’s common stock. However, there have been no sales of registered common stock since the Registration Statement was deemed effective. The offering has not commenced because the Company is waiting to file its Form 211 in order to obtain a trading symbol on the OTC Markets. The Registration Statement has not been terminated.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
| Incorporated by reference | ||||||||||||
| Exhibit | Exhibit Description | Filed herewith | Form | Period ending | Exhibit | Filing date | ||||||
| 31.1 | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | X | ||||||||||
| 32.1 | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | X | ||||||||||
| 101.INS | Inline XBRL Instance Document. | |||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. |
|||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
|||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
|||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. |
|||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
|||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
|||||||||||
26
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
| BIO ESSENCE CORP. | |
| /s/ Yin Yan | |
| By: Yin Yan | |
| Its: Chairman of the Board, Chief | |
| Executive Officer, Chief Financial Officer | |
| Date: November 12, 2021 |
27