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Share Name	Share Symbol	Market	Type
Bio Essence Corporation (PK)	USOTC:BIOE	OTCMarkets	Common Stock

	Price Change	% Change	Share Price	Bid Price	Offer Price	High Price	Low Price	Open Price	Shares Traded	Last Trade
	-0.01885	-7.28%	0.24	0.24	0.285	0.241275	0.225	0.2251	45,250	16:20:21

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 333-232839

BIO ESSENCE CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

California

(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)

94-3349551
(IRS EMPLOYEE IDENTIFICATION NO.)

8 Studebaker Drive in Irvine, California 92618
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

(949) 706-9966
(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. Yes ☒ No ☐

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). Yes ☒ No ☐

Large accelerated filer ☐

Accelerated filer ☐

Non-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. ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Trading Symbol		Name of Exchange on Which Registered
N/A		N/A		N/A

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of the latest practicable date, the Company has 33,009,000 shares of its common stock issued and outstanding.

TABLE OF CONTENTS

		PAGE

PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Balance Sheets as of September 30, 2022 (Unaudited) and December 31, 2021	1
	Statements of Operations for nine months ended September 30, 2022, and three months ended September 30, 2022 and 2021 (Unaudited)	2
	Statements of Cash Flows for nine months ended September 30, 2022 and 2021 (Unaudited)	3
	Statements of Changes in Stockholders’ Equity for nine months ended September 30, 2022 and 2021 (Unaudited)	4
	Notes to Financial Statements (Unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	22

PART II	OTHER INFOMRATION

Item 1.	Legal Proceedings	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Mine Safety Disclosures	24
Item 5.	Other Information	24
Item 6.	Exhibits	24
	Signatures	25

BIO ESSENCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	AS OF SEPTEMBER 30, 2022 (UNAUDITED)			AS OF DECEMBER 31, 2021
ASSETS

CURRENT ASSETS
Cash and equivalents	$	572		$	303
Accounts receivable, net		46,698			16,820
Prepaid expenses		5,007			31,870
Inventory, net		200,744			212,969

Total current assets		253,021			261,962

NONCURRENT ASSETS
Security deposit		41,841			41,841
Right-of-use assets, net		1,094,056			1,213,472
Property and equipment, net		257,102			180,909
Intangible assets, net		861			1,037

Total non-current assets		1,393,860			1,437,259

TOTAL ASSETS	$	1,646,881		$	1,699,221

LIABILITIES AND STOCKHOLDERS’ DEFICIT

CURRENT LIABILITIES
Bank overdraft	$	32,833		$	19,032
Accounts payable		73,329			62,583
Taxes payable		9,108			12,428
Accrued liabilities and other payables		57,230			77,109
Operating lease liabilities		153,311			161,732
Accrued interest on government loans		16,209			13,054
Government loans payable - current portion		4,533			4,427
Loan payables		11,609			11,814
Finance Lease Liability		12,447			-
Loan from shareholder		3,021,786			2,393,785

Total current liabilities		3,392,394			2,755,964

NONCURRENT LIABILITIES
Operating lease liabilities		996,917			1,122,902
Finance Lease Liability		42,998			-
Loan payables		28,788			37,918
Government loans payable		211,067			211,173

Total non-current liabilities		1,279,769			1,371,993

TOTAL LIABILITIES		4,672,163			4,127,957

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ DEFICIT
Preferred stock $0.0001 par value; authorized shares 10,000,000		-			-
Common stock $0.0001 par value; authorized shares 100,000,000; issued and outstanding shares 33,009,000 as of September 30, 2022 and December 31, 2021		3,301			3,301
Additional paid in capital		4,926,879			4,926,879
Accumulated deficit		(7,955,462	)		(7,358,916	)

TOTAL STOCKHOLDERS’ DEFICIT		(3,025,282	)		(2,428,736	)

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	1,646,881		$	1,699,221

The accompanying notes are an integral part of these consolidated financial statements.

BIO ESSENCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	NINE MONTHS ENDED SEPTEMBER 30,						THREE MONTHS ENDED SEPTEMBER 30,
	2022			2021			2022			2021

Revenues
Sales of goods	$	483,432		$	545,713		$	163,342		$	174,992
Manufacture service revenue		303,170			129,232			28,710			51,998
Total revenues		786,602			674,945			192,052			226,990

Cost of revenues
Cost of goods sold		232,911			280,062			62,539			82,747
Cost of manufacture service		239,380			158,283			43,006			48,862
Total cost of revenues		472,291			438,345			105,545			131,609

Gross profit		314,311			236,600			86,507			95,381

Operating expenses
Selling		68,858			51,544			20,365			17,611
Bad debts		-			380			-			-
General and administrative		820,350			843,434			258,712			270,702

Total operating expenses		889,209			895,358			279,078			288,313

Loss from operations		(574,898	)		(658,758	)		(192,571	)		(192,932	)

Other income (expenses)
Interest expense		(15,575	)		(33,493	)		(5,256	)		(3,821	)
Finance lease interest expense		(920	)		-			(724	)		-
Financial expense		(4,595	)		(7,702	)		(917	)		(1,284	)
Other income		3,376			151,219			341			15,000
Other expense		(737	)		(4,896	)		(107	)		-

Other income (expenses), net		(18,451	)		105,128			(6,663	)		9,895

Loss before income tax		(593,348	)		(553,630	)		(199,233	)		(183,037	)

Income tax expense		3,200			3,300			-			-

Net loss	$	(596,548	)	$	(556,930	)	$	(199,233	)	$	(183,037	)

Basic and diluted weighted average shares outstanding		33,009,000			33,009,000			33,009,000			33,009,000

Basic and diluted net loss per share	$	(0.02	)	$	(0.02	)	$	(0.01	)	$	(0.01	)

The accompanying notes are an integral part of these consolidated financial statements.

BIO ESSENCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	NINE MONTHS ENDED SEPTEMBER 30,
	2022			2021

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(596,548	)	$	(556,930	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		37,668			26,002
Bad debts		-			380
Operating lease expense		165,558			171,935
Gain on disposal of fixed assets		-			(1,089	)
PPP loans forgiveness		-			(127,740	)
Increase (decrease) in assets: Changes in assets / liabilities:
Accounts receivable		(29,874	)		14,908
Prepaid expenses		26,863			(34,725	)
Advance to suppliers		-			4,733
Inventory		12,225			41,290
Accounts payable		10,746			7,749
Customer deposit		(28,283	)		-
Accrued liabilities and other payables		8,404			(527,338	)
Accrued interest		3,154			-
Taxes payable		(3,320	)		(2,205	)
Payment on lease liabilities		(180,551	)		(168,523	)

Net cash used in operating activities		(573,958	)		(1,151,553	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of fixed assets		-			2,700
Purchase of fixed assets		(53,593	)		(29,649	)

Net cash used in investing activities		(53,593	)		(26,949	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft		13,801			(63,895	)
Proceeds from government loans (SBA)		-			115,245
Payment of finance lease liability		(4,646	)		(2,238	)
Repayment of loan payables		(9,335	)		-
Loan from shareholder		628,000			1,150,778

Net cash provided by financing activities		627,820			1,199,890

NET INCREASE IN CASH & EQUIVALENTS		269			21,388

CASH & EQUIVALENTS, BEGINNING OF PERIOD		303			5,325

CASH & EQUIVALENTS, END OF PERIOD	$	572		$	26,713

Supplemental Cash Flow Data:
Income tax paid	$	3,200		$	3,300
Interest paid	$	4,716		$	33,493

Supplemental disclosures of non-cash financing activities:
Fixed assets obtained in exchange for new financing lease liabilities	$	60,091		$	-

The accompanying notes are an integral part of these consolidated financial statements.

BIO ESSENCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

(UNAUDITED)

	COMMON		COMMON		ADDITIONAL
	STOCK -SHARES		STOCK -AMOUNT		PAID IN CAPITAL		ACCUMULATED DEFICIT			TOTAL

Balance at January 1, 2022		33,009,000	$	3,301	$	4,926,879	$	(7,358,916	)	$	(2,428,736	)

Net loss		-		-		-		(233,120	)		(233,120	)

Balance at March 31, 2022		33,009,000		3,301		4,926,879		(7,592,036	)		(2,661,856	)

Net loss		-		-		-		(164,193	)		(164,193	)

Balance at June 30, 2022		33,009,000		3,301		4,926,879		(7,756,229	)		(2,826,049	)

Net loss		-		-		-		(199,233	)		(199,233	)

Balance at September 30, 2022		33,009,000	$	3,301	$	4,926,879	$	(7,955,462	)	$	(3,025,282	)

Balance at January 1, 2021		33,009,000	$	3,301	$	4,926,879	$	(6,711,352	)	$	(1,781,172	)

Net loss		-		-		-		(210,355	)		(210,355	)

Balance at March 31, 2021		33,009,000		3,301		4,926,879		(6,921,707	)		(1,991,527	)

Net loss		-		-		-		(163,538	)		(163,538	)

Balance at June 30, 2021		33,009,000		3,301		4,926,879		(7,085,245	)		(2,155,065	)

Net loss		-		-		-		(183,037	)		(183,037	)

Balance at September 30, 2021		33,009,000	$	3,301	$	4,926,879	$	(7,268,282	)	$	(2,338,102	)

The accompanying notes are an integral part of these consolidated financial statements.

BIO ESSENCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022 (UNAUDITED) AND DECEMBER 31, 2021

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 100% shareholder of FDS transferred all of her ownership in FDS to Bio Essence. On December 7, 2021, the Company dissolved FDS. On November 12, 2021, Bio Essence incorporated a wholly owned subsidiary McBE Pharma Inc. (“McBE”) in the state of California, McBE will be engaged in developing, manufacturing and sales of prescription medicine. As a result of the ownership restructure, BEP BEH and McBE became wholly owned subsidiaries of Bio Essence. McBE has not engaged any operations since its inception.

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 McBE. All significant inter-company transactions and balances were eliminated in consolidation.

The interim consolidated financial information as of September 30, 2022, and for the nine and three months periods ended September 30, 2022 and 2021 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, 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, 2022, its consolidated results of operations for the nine and three months ended September 30, 2022 and 2021, and consolidated cash flows for the nine months ended September 30, 2022 and 2021, as applicable, were made. The results for the period ended September 30, 2022 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2022 or for any future period.

Reclassification

Certain prior period accounts have been reclassified in conformity with current period’s presentation. These reclassifications had no impact on the reported results of operations and cash flows.

Going Concern

The Company incurred net losses of $596,548 and $556,930 for the nine months ended September 30, 2022 and 2021, respectively. The Company incurred net losses of $199,233 and $183,037 for the three months ended September 30, 2022 and 2021, respectively. The Company also had an accumulated deficit of $7,955,462 as of September 30, 2022. 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.

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 follows ASC 842 and 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, 2022 and December 31, 2021.

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, 2022 and December 31, 2021, the bad debt allowance was $2,252 and $2,252, respectively.

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.

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		7-10 years
Office furniture		5 years

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, 2022 and December 31, 2021, 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 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest associated with unrecognized tax benefits is classified as interest expense and penalties are classified in selling, general and administrative expenses in the statement of income.

At September 30, 2022 and December 31, 2021, 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, 2019 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 sales of goods are measured at net of reserves established for applicable discounts and allowances that are offered within contracts with the Company’s customers, and are recognized when the goods are delivered to the customers.

Product revenue reserves, which are classified as a reduction in product revenues, are generally characterized in the following categories: discounts, returns and rebates. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable as the amount is payable to the Company’s customers.

Revenues from manufacture services are recognized when the manufacture process is completed pursuant to the customers’ requirement and the manufactured goods were 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 nine and three months ended September 30, 2022 and 2021.

Cost of Revenue

Cost of goods sold (“COGS”) 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 COGS.

Cost of manufacture service consists primarily of direct labor costs and related overhead that are directly attributable to the manufacture process.

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, 2022 and 2021, shipping and handling costs were $27,382 and $25,179, respectively. During the three months ended September 30, 2022 and 2021, shipping and handling costs were $7,629 and $7,848, respectively.

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, 2022 and 2021, advertising expense was $41,476 and $24,114, respectively. During the three months ended September 30, 2022 and 2021, advertising expense was $12,736 and $8,990, respectively.

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, 2022 and December 31, 2021, 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 in accordance with ASC 718, “Compensation – Stock Compensation”. The cost of services received from employees and non-employees in exchange for awards of equity instruments is recognized in the consolidated statement of operations based on the estimated fair value of those awards on the grant date and amortized on a straight-line basis over the requisite service period or vesting period. The Company records forfeitures as they occur.

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). There were no potentially dilutive securities outstanding (options and warrants) for the nine and three months ended September 30, 2022 and 2021.

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, 2022, the company had two major customers accounted for 12% and 12%, respectively, of the Company’s total sales. During the nine months ended September 30, 2021, no customer accounted for more than 10% of the Company’s total sales.

For the three months ended September 30, 2022, no customer accounted for more than 10% of the Company’s total sales. During the three months ended September 30, 2021 one customer accounted for 10% of the Company’s total sales.

The Company had four major vendors accounted for 17%, 14%, 14% and 12%, respectively, of total purchases during the nine months ended September 30, 2022. The Company had three major vendors accounted for 27%, 23% and 15%, respectively, of total purchases during the nine months ended September 30, 2021.

The Company had two major vendors accounted for 65% and 13%, respectively, of total purchases during the three months ended September 30, 2022. The Company had three major vendors accounted 38%, 17% and 13%, respectively, of total purchases during the three months ended September 30, 2021.

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 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, 2022 and December 31, 2021:

	September 30, 2022			December 31, 2021
	(unaudited)

Raw materials	$	63,692		$	49,706
Finished goods – health supplements		163,149			189,360
Less: inventory impairment allowance		(26,097	)		(26,097	)
Total	$	200,744		$	212,969

4. SECURITY DEPOSIT

As of September 30, 2022 and December 31, 2021, the security deposit was for rent of the Company’s office and warehouse of $41,841.

5. PROPERTY AND EQUIPMENT, NET

Property and equipment consisted of the following at September 30, 2022 and December 31, 2021:

	September 30, 2022			December 31, 2021
	(unaudited)

Leaseholder improvements	$	57,067		$	57,067
Office furniture and equipment		400,714			287,029
Total		457,781			344,096
Less: accumulated depreciation		(200,679	)		(163,187	)
Net	$	257,102		$	180,909

Depreciation for the nine months ended September 30, 2022 and 2021 was $37,492 and $19,712, respectively.

Depreciation for the three months ended September 30, 2022 and 2021 was $15,232 and $7,764, respectively.

6. INTANGIBLE ASSETS, NET

Intangible assets consisted of the following as of September 30, 2022 and December 31, 2021:

	September 30, 2022			December 31, 2021
	(unaudited)

Computer Software	$	36,928		$	36,928
Trademark		2,350			2,350
Total		39,278			39,278
Less: accumulated amortization		(38,417	)		(38,241	)
Net	$	861		$	1,037

Amortization of intangible assets was $176 and $6,290 for the nine months ended September 30, 2022 and 2021, respectively.

Amortization of intangible assets was $59 and $932 for the three months ended September 30, 2022 and 2021, respectively.

Estimated amortization for the existing intangible assets with finite lives for each of the next five years at September 30, 2022 is as follows: $235, $235, $235 and $156.

7. TAXES PAYABLE

Taxes payable at September 30, 2022 and December 31, 2021, was for sales tax and payroll tax payable of $9,180 and $12,428, respectively.

8. ACCRUED LIABILITIES AND OTHER PAYABLES

Accrued liabilities and other payables consisted of the following September 30, 2022 and December 31, 2021:

	September 30, 2022		December 31, 2021
	(unaudited)

Accrued expenses	$	3,852	$	9,686
Credit card payable		53,378		39,190
Customer deposit		-		28,283

Total	$	57,230	$	77,109

9. GOVERNMENT LOANS PAYABLE

In May and June 2020, BEH, BEP and FDS received a total of $127,740 from the Paycheck Protection Program loan (“PPP loan”) from US Small Business Administration (“the SBA”). The loan will be fully forgiven if the funds are used for payroll costs, interest on mortgages, rent, and utilities (at least 60% of the forgiven amount must have been used for payroll). The loan amount not forgiven, will have annual interest of 1%. Loan payments will be deferred to either (1) the date that SBA remits the borrower’s loan forgiveness amount to the lender or (2) if the borrower does not apply for loan forgiveness, 10 months after the end of the borrower’s loan forgiveness covered period. Loans issued prior to June 5, 2020 have a maturity of two years, loans issued after June 5, 2020 have a maturity of five years. No collateral or personal guarantees are required. A borrower may apply for loan forgiveness any time on or before the maturity date of the loan, including before the end of the Covered Period (either (1) the 24-week (168-day) period beginning on the PPP Loan Disbursement Date, or (2) if the Borrower received its PPP loan before June 5, 2020, the Borrower may elect to use an eight-week (56-day) Covered Period); provided such application for loan forgiveness is made within 10 months after the last day of the covered period, otherwise the loan is no longer deferred and the borrower must begin paying principal and interest. Subsequently, The U.S. Treasury and SBA announced a streamlined PPP forgiveness application for loans of $50,000 or less (unless those borrowers together with their affiliates received loans totaling $2 million or more). It requires fewer calculations and may call for less documentation. It does not require borrowers to reduce their loan forgiveness calculations if they have reduced full-time equivalent (“FTE”) or salaries. In addition, in February 2021, BEH, BEP and FDS received a total of $115,245 from the second round of PPP loan from the SBA. As of December 31, 2021, all BEH, BEP and FDS’ PPP loans’ forgiveness were approved and the Company recorded $242,985 PPP loan forgiveness as other income in the year ended December 31, 2021.

In May and June 2020, BEH, BEP and FDS received total of $215,600 from the Economic Injury Disaster Loan (“EIDL loan”) from the SBA after deducting $100 Uniform Commercial Code (“UCC”) handling charge and filing fee for each company. This is a low-interest federal disaster loan for working capital to small businesses and non-profit organizations of any size suffering substantial economic injury as a result of the Coronavirus (COVID-19), to help the businesses to meet financial obligations and operating expenses that could have been met had the disaster not occurred. This loan has interest of 3.75% and is not forgivable. The maturity of the loan is 30 years, installment payments including principal and interest of $515 monthly will begin 12 months from the date of the promissory note. On March 4, 2022, The FDS transferred its EIDL loan to BEC due to the dissolution of FDS.

As of September 30, 2022, the future minimum loan payments (including the PPP loan and EIDL loan) to be paid by year are as follows:

Year Ending	Amount
	(unaudited)

September 30, 2023	$	4,553
September 30, 2024		4,727
September 30, 2025		4,907
September 30, 2026		5,094
September 30, 2027		5,289
Thereafter		191,030
Total	$	215,600

10. RELATED PARTY TRANSACTIONS

Loans from Shareholder

At September 30, 2022 and December 31, 2021, the Company had loans from one major shareholder (also the Company’s senior officer) for $2,413,155 and $1,785,154, respectively. At September 30, 2022 and December 31, 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. Cash flows from loans form shareholder are classified as cash flows from financing activities.

11. INCOME TAXES

The Company and its subsidiaries are subject to 21% federal corporate income tax in US.

At September, 2022 and December 31, 2021, the Company had net operating loss (“NOL”) for income tax purposes; for federal income tax purposes, the NOL arising in tax years beginning after 2017 may only reduce 80% of a taxpayer’s taxable income, and may be carried forward indefinitely; for California income tax purposes, the entire NOL can be carried forward up to 20 years. However, the coronavirus Aid, Relief and Economic Security Act (“the CARES Act”) issued in March 2020, provides tax relief to both corporate and noncorporate taxpayers by adding a five-year carryback period and temporarily repealing the 80% limitation for NOLs arising in 2018, 2019 and 2020.

The Company has NOL carry-forwards for Federal and California income tax purposes of $5.03 million and $4.22 million at September 30, 2022 and December 31, 2021, respectively. No tax benefit was reported with respect to these NOL carry-forwards in the accompanying consolidated financial statements because the Company believes the realization of the Company’s net deferred tax assets for the NOL for both federal and California State of approximately $1.41 million as of September 30, 2022, was not considered more likely than not and accordingly, the potential tax benefits of the net loss carry-forwards are fully offset by a full valuation allowance.

Components of the Company’s deferred tax assets as of September 30, 2022 and December 31, 2021 are as follows:

	September 30, 2022			December 31, 2021
	(unaudited)
Net deferred tax assets:
Bad debt expense	$	1,978		$	1,978
Inventory impairment		697			697
Operating lease charge		14,443			14,821
Depreciation and amortization		237			(2,561	)
Expected income tax benefit from NOL carry-forwards		1,408,120			1,181,525
Less: valuation allowance		(1,425,475	)		(1,196,460	)
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, 2022 and 2021 is as follows:

	2022			2021
	(unaudited)			(unaudited)
Federal statutory income tax expense (benefit) rate		(21.00	)%		(21.00	)%
State statutory income tax (benefit) rate, net of effect of state income tax deductible to federal income tax		(6.44	)%		(6.30	)%
Change in valuation allowance		27.98	%		26.71	%
Effective income tax rate		0.54	%		0.60	%

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, 2022 and 2021 is as follows:

	2022			2021
	(unaudited)			(unaudited)

Federal statutory income tax expense (benefit) rate		(21.00	)%		(21.00	)%
State statutory income tax (benefit) rate, net of effect of state income tax deductible to federal income tax		(6.64	)%		(6.93	)%
Change in valuation allowance		27.64	%		27.93	%
Effective income tax rate		0.00	%		0.00	%

The provision for income tax expense for the nine months ended September 30, 2022 and 2021 consisted of the following:

	2022		2021
	(unaudited)		(unaudited)

Income tax expense – current	$	3,200	$	3,300
Income tax benefit – current		-		-
Total income tax expense	$	3,200	$	3,300

The provision for income tax expense for the three months ended September 30, 2022 and 2021 consisted of the following:

	2022		2021
	(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 Company entered a 62.5 months lease for a facility including warehouse and office in the City of Irvine, California, with a security deposit of $41,841. The monthly rent is approximately $16,200 with a 3% increase each year. The lease provided an option to extend at lease maturity for another five-years, with six months prior written notice of lessee’s intention to extend the lease. The Company’s CEO is the guarantor of this lease. Lessor will have the right to proceed against guarantor following any breach or default by lessee without first proceeding against lessee and without previous notice to or demand upon either lessee or guarantor.

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, 2022			Nine Months Ended September 30, 2021
	(unaudited)			(unaudited)
Operating lease cost	$	159,844		$	159,844
Weighted Average Remaining Lease Term - Operating leases including options to renew		6.01 years			7.01 years
Weighted Average Discount Rate - Operating leases		5	%		5	%

	Three Months Ended September 30, 2022 (unaudited)			Three Months Ended September 30, 2021 (unaudited)
Operating lease cost	$	53,281		$	53,281

Weighted Average Discount Rate - Operating leases		5	%		5	%

The following is a schedule, by years, of maturities of warehouse and office lease liabilities as of September 30, 2022:

For the 12 months ending	Operating Leases

September 30, 2023	$	207,407
September 30, 2024		225,757
September 30, 2025		225,757
September 30, 2026		225,757
September 30, 2027		225,757
Thereafter		225,757
Total undiscounted cash flows		1,336,192
Less: imputed interest		(186,286	)
Present value of lease liabilities	$	1,149,906

Equipment leases

In 2017, the Company entered two leases for two copiers with terms of 60 and 63 months respectively, and monthly payments of $162 and $213, respectively. The Company also entered two leases for two forklifts with a term of 60 months for each, and the monthly payment was $292 and $669, respectively.

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, 2022			September 30, 2021
	(unaudited)			(unaudited)
Operating lease cost	$	5,714		$	12,091
Weighted Average Remaining Lease Term - Operating leases		0.14 years			0.69 years
Weighted Average Discount Rate - Operating leases		5	%		5	%

	Three Months Ended			Three Months Ended
	September 30, 2022			September 30, 2021
	(unaudited)			(unaudited)
Operating lease cost	$	488		$	4,047
Weighted Average Discount Rate - Operating leases		5	%		5	%

The following is a schedule, by years, of maturities of lease liabilities as of September 30, 2022:

For the 12 months ending	Operating Leases
September 30, 2023	$	323
Total undiscounted cash flows		323
Less: imputed interest		(2	)
Present value of lease liabilities	$	321

Finance lease

Effective March 15, 2022, the company entered two 39-months lease for two copiers with same vendor for a monthly payment of $234 and $214, respectively. Effective June 24, 2022, the company entered two leases for two forklifts with a term of 60 months for each, and the monthly payment was $383 and $451, respectively. At the lease expiration date, the Company has the option to purchase the copier for $1 each.

The components of lease costs, lease term and discount rate with respect of the copier lease with an initial term of more than 12 months are as follows:

	Nine Months Ended September 30, 2022
Finance lease cost
Amortization	$	4,257
Interest on lease liabilities		920
Total finance lease cost	$	5,177
Weighted Average Remaining Lease Term - Finance leases		4.23
Weighted Average Discount Rate – Finance leases		5	%

	Three Months Ended September 30, 2022
Finance lease cost
Amortization	$	3,110
Interest on lease liabilities		724
Total finance lease cost	$	3,834
Weighted Average Discount Rate – Finance leases		5	%

The following is a schedule, by years, of maturities of finance lease liabilities as of September 30, 2022:

For the 12 months ending	Finance Leases

September 30, 2023	$	14,947
September 30, 2024		15,337
September 30, 2025		13,995
September 30, 2026		9,967
September 30, 2027		7,475
Total undiscounted cash flows		61,721
Less: imputed interest		(6,277	)
Present value of finance lease liabilities	$	55,444

13. LOAN PAYABLES

In June 2021, the Company entered a loan agreement of $14,549 for purchasing a videojet with interest rate of 14.11% and a term of three-years. In September 2021, the Company entered another loan agreement of $39,218 for purchasing a spectrophotometer workstation with interest rate of 10.26% and a term of five-years. The Company recorded interest expense of $3,796 and $1,185 during the nine and three months ended September 30, 2022.

The following is a schedule, by years, of maturities of loan payable as of September 30, 2022:

For the 12 months ending	Loan Payable

September 30, 2023	$	15,492
September 30, 2024		13,913
September 30, 2025		9,974
September 30, 2026		9,143
Total undiscounted cash flows		48,522
Less: imputed interest		(8,125	)
Present value of loan payables	$	40,397

14. 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.

Item 2. 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 her ownership in FDS into Bio Essence. On December 7, 2021, the Company dissolved FDS. On November 12, 2021, Bio Essence incorporated a wholly owned subsidiary McBE Pharma Inc. (“McBE”) in the state of California, 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 of Bio Essence, and Bio 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

At September 30, 2022 and December 31, 2021, the Company had loans from one major shareholder (also the Company’s senior officer) of $2,413,155 and $1,785,154, respectively. At September 30, 2022 and December 31, 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.

Basis of Presentation

Going Concern

The Company incurred net losses of $596,548 and $556,930 for the nine months ended September 30, 2022 and 2021, respectively. The Company incurred net losses of $199,233 and $183,037 for the three months ended September 30, 2022 and 2021, respectively. The Company also had an accumulated deficit of $7,955,462 as of September30, 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

Accounts Receivable

Revenue Recognition

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.

Revenues from manufacture services are recognized when the manufacture process is completed pursuant to the customers’ requirement and the finished goods were delivered to the customers.

Results of operations

Comparison of the nine months ended September 30, 2022 and 2021

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.

	2022			% of Sales			2021			% of Sales			Dollar Increase (Decrease)			Percent Increase (Decrease)
Sales of goods	$	483,432			61.46	%	$	545,713			80.85	%	$	(62,281	)		(11.41	)%
Manufacture service revenue		303,170			38.54	%		129,232			19.15	%		173,938			134.59	%
Total revenues		786,602			100.00	%		674,945			100.00	%		111,657			16.54	%
Cost of goods sold		232,911			48.18	%		280,062			61.32	%		(47,151	)		(16.84	)%
Cost of manufacture service		239,380			78.96	%		158,283			122.48	%		81,097			51.24	%
Total cost of revenues		472,291			60.04	%		438,345			64.95	%		33,946			7.74	%
Gross profit		314,311			39.96	%		236,600			35.05	%		77,711			32.84	%
Selling expenses		68,858			8.75	%		51,544			7.64	%		17,314			33.59	%
Bad debts		-			-	%		380			0.06	%		(380	)		(100.00	)%
General and administrative expense		820,350			104.29	%		843,434			124.96	%		(23,084	)		(2.74	)%
Operating expenses		889,209			113.04	%		895,358			132.66	%		(6,149	)		(0.69	)%
Loss from operations		(574,898	)		(73.09	)%		(658,758	)		(97.60	)%		(83,860	)		(12.73	)%
Other income (expense), net		(18,451	)		(2.35	)%		105,128			15.58	%		(123,579	)		(117.55	)%
Loss before income taxes		(593,348	)		(75.43	)%		(553,630	)		(82.03	)%		39,718			7.17	%
Income tax expense		3,200			0.41	%		3,300			0.49	%		(100	)		(3.03	)%
Net loss	$	(596,548	)		(75.84	)%	$	(556,930	)		(85.51	)%	$	39,618			7.11	%

Revenues

Sales for the nine months ended September 30, 2022 and 2021 were $786,602 and $674,945, respectively, an increase of $111,657 or 16.54%. For the nine months ended September 30, 2022, we had sales of goods of $483,432 and manufacture service revenue of $303,170. For the nine months ended September 30, 2021, we had sales of goods of $545,713 and manufacture service revenue of $129,232. 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 4^th quarter of 2021.

Cost of revenues

Cost of revenues for the nine months ended September 30, 2022 and 2021 was $472,291 and $438,345, respectively, an increase of $33,946 or 7.74%. The increase of cost of revenue in 2022 was due to increased revenue and increased cost of manufacturing service especially the labor increase. During the nine months ended September 30, 2022, we received quite a few big orders for the OEM, which required more manufacture labors to complete the orders.

Gross profit

The gross profit for the nine months ended September 30, 2022 and 2021 was $314,311 and $236,600, respectively, an increase of $77,711 or 32.84%. The profit margin was 39.96% for 2022 compared to 35.05% for 2021, the increase in profit margin was mainly due to increased profit margin from sale of goods, which was 48.01% for the nine months ended September 30, 2022 compared to 64.96% for the nine months ended September 31, 2021. We lost a few big customers due to strong competition and our pricing disadvantage, but 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 $68,858 for the nine months ended September 30, 2022, compared to $51,544 for the nine months ended September 30, 2021, an increase of $17,314 or 33.59%, mainly resulting from increased show expense by $10,650, increased shipping expense by $2,200, and increased marketing expense by $8,100, which was partly offset by decreased advertising expenses by $3,640.

General and administrative expenses consisted mainly of employee salaries and welfare, business meeting, utilities, audit, and legal expenses. General and administrative expenses were $820,350 for the nine months ended September 30, 2022, compared to $843,434 for the nine months ended September 30, 2021, a decrease of $23,084 or 2.74%, the decrease was mainly due to decreased consulting fee by $37,040, decreased legal service fee by 11,090, decreased office and other expense by $22,890, which was partly offset by increased salary expense by $47,940.

Other income (expense), net

Other expense was $18,451 for nine months ended September 30, 2022, compare to other income $105,128 for the nine months ended September 30, 2021. For the nine months ended September 30, 2022, other expenses mainly consisted of interest expense of $16,495, financial expense of $4,595 and net other income of $2,639. For the nine months ended September 30, 2021, other income mainly consisted of other income including PPP loan forgiveness of $151,219, which was partly offset by interest expense of $33,493, financial expense of $7,702, and other expense of $4,896.

Net loss

We had a net loss of $596,548 for the nine months ended September 30, 2022, compared to $556,930 for the nine months ended September 30, 2021, an increase of $39,618 or 7.11%. The increase in net loss was mainly due to decreased other income (net) by $123,579, partly offset by increased gross profit by $77,711 as describe above.

Comparison of three months ended September 30, 2022 and 2021

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.

	2022			% of Sales			2021			% of Sales			Dollar Increase (Decrease)			Percent Increase (Decrease)
Sales of goods	$	163,342			85.05	%	$	174,992			77.09	%	$	(11,650	)		(6.66	)%
Manufacture service revenue		28,710			14.95	%		51,998			22.91	%		(23,288	)		(44.79	)%
Total revenues		192,052			100.00	%		226,990			100.00	%		(34,938	)		(15.39	)%
Cost of goods sold		62,539			38.29	%		82,747			47.29	%		(20,208	)		(24.42	)%
Cost of manufacture service		43,006			149.79	%		48,862			93.97	%		(5,856	)		(11.98	)%
Total cost of revenues		105,545			54.96	%		131,609			57.98	%		(26,064	)		(19.80	)%
Gross profit		86,507			45.04	%		95,381			42.02	%		(8,874	)		(9.30	)%
Selling expenses		20,365			10.60	%		17,611			7.76	%		2,754			15.64	%
Bad debts		-			-	%		-			-	%		-			-	%
General and administrative expenses		258,712			134.71	%		270,702			119.26	%		(11,990	)		(4.43	)%
Operating expenses		279,078			145.31	%		288,313			127.02	%		(9,235	)		(3.20	)%
Loss from operations		(192,571	)		(100.27	)%		(192,932	)		(85.00	)%		(361	)		(0.19	)%
Other income (expense), net		(6,663	)		(3.47	)%		9,895			4.36	%		(16,558	)		(167.33	)%
Loss before income taxes		(199,233	)		(103.74	)%		(183,037	)		(80.64	)%		16,196			8.85	%
Income tax expense		-			%			-			-%			-			%
Net loss	$	(199,233	)		(103.74	)%	$	(183,037	)		(80.64	)%	$	16,196			8.85	%

Revenues

Sales for the three months ended September 30, 2022 and 2021 were $192,052 and $226,990 respectively, a decrease of $34,938 or 15.39%. The decrease was primarily due to decreased purchase orders from some of BEH’s existing customers due to strong competition and our pricing disadvantage.

Cost of revenues

Costs of revenues for the three months ended September 30, 2022 and 2021 was $105,545 and $131,609, respectively, a decrease of $26,064 or 19.8%. The decrease of cost of revenues during the three months ended September 30, 2022 was due to decreased cost of goods sold resulting from decreased sales and inventory purchase from overseas which also reduced our customs duty and freight cost.

Gross profit

The gross profit for the three months ended September 30, 2022 and 2021 was $86,507 and $95,381, respectively, a decrease of $8,874 or 9.30%. The blended profit margin was 45.04% and 42.02% for the three months ended September 30, 2022 and 2021, respectively. The increased profit margin was due to increased profit margin from sale of goods, which was 36.48% for the three months ended September 30, 2022 compared to 57.98% for the three months ended September 31, 2021.

Operating expenses

Selling expenses consisted mainly of advertising, show expense, products marketing, shipping expenses, and promotion expenses. Selling expense was $20,365 for the three months ended September 30, 2022, compared to $17,611 for the three months ended September 30, 2021, an increase of $2,754 or 15.64%, mainly resulting from increased show expense by $7,500, and increased marketing expense by $860, which was partly offset by decreased advertising expenses by $5,390 and decreased shipping expense by $220.

General and administrative expenses consisted mainly of employee salaries and welfare, business meeting, utilities, accounting, consulting, and legal expenses. General and administrative expenses were $258,712 for the three months ended September 30, 2022, compared to $270,702 for the three months ended September 30, 2021, a decrease of $11,990 or 4.43%, the decrease was mainly due to decreased consulting fee by $12,150, decreased other expense by $18,220, which was partly offset by increased office CAM fee by 7,170, increased salary expense by 10,130, and increased accounting fee by $1,200.

Other income (expenses), net

Other expenses was $6,663 for the three months ended September 30, 2022, compared to other income $9,895 for the three months ended September 30, 2021. For the three months ended September 30, 2022, other expenses (net) mainly consisted of interest expense of $5,256, financial expense of $917 and net other income of $341. For the three months ended September 30, 2021, other income (net) mainly consisted of other income including PPP loan forgiveness by $15,000, which was partly offset by interest expense of $3,821, and financial expense of $1,284.

Net loss

We had a net loss of $199,233 for the three months ended September 30, 2022, compared to $183,037 for the three months ended September 30, 2021, an increase of $16,196 or 8.85%. The slight increase in net loss was mainly due to decreased other income by $15,000, as describe above.

Liquidity and Capital Resources

As of September 30, 2022, we had cash and equivalents of $572, bank overdraft of 32,833, other current assets of $252,449, other current liabilities (excluding bank overdraft) of $3,359,561, working capital deficit of $3,139,373, a current ratio of 0.07:1. As of December 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 nine months ended September 30, 2022, and 2021, respectively.

	2022			2021
Net cash used in operating activities	$	(573,958	)	$	(1,151,553	)
Net cash used in investing activities	$	(53,593	)	$	(26,949	)
Net cash provided by financing activities	$	627,820		$	1,199,890

Net cash used in operating activities

Net cash used in operating activities was $573,958 for the nine months ended September 30, 2022, compared to $1,151,553 in 2021. The decrease of cash outflow of $577,595 from operating activities for the nine months ended September 30, 2022 was principally due to decreased cash outflow on prepaid expenses by $61,588, and decreased cash outflow on accrued liability and other payable by $535,742, partly offset by cash outflow on customer deposit by $28,283.

Net cash used in investing activities

Net cash used in investing activities was $53,593 for the nine months ended September 30, 2022, compared to $26,949 in 2021. For the nine months ended September 30, 2022, we purchased fixed assets of $53,593. For the nine months ended September 30, 2021, we purchased fixed assets of $29,649 and sold fixed assets for $2,700.

Net cash provided by financing activities

Net cash provided by financing activities was $627,820 for the nine months ended September 30, 2022, compared to $1,199,890 in 2021. The net cash provided by financing activities for the nine months ended September 30, 2022 consisted of proceeds of $628,000 from loans from one major shareholder (also the senior officer) and increase in bank overdraft of $13,801, but partly offset by repayment of loan payable of $9,335 and payment of finance lease liability of $4,646. The net cash provided by financing activities in the nine months ended September 30, 2021 consisted of proceeds from government loans of $115,245 due to the Covid-19, and loan from a major shareholder (also the senior officer) of $1,150,778, but partly offset by decrease in bank overdraft of $63,895, and repayment of loan payable of $2,238.

Our current liabilities exceed current assets at September 30, 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 of September 30, 2022, our principal source of funds was loans from an officer (also is the Company’s major shareholder). As of September 30, 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.

CONTRACTUAL OBLIGATIONS

The Company’s contractual obligations as of September 30, 2022 are as follows:

	1 year or		More than		See Note
Contractual Obligation	less		1 year		(for details)
Operating lease liabilities	$	153,311	$	996,917	12
Finance lease liabilities		12,447		42,998	12
Loan payables		11,609		28,788	13
SBA loan payables including accrued interest of $16,209		20,742		211,067	9
Total	$	198,108	$	1,279,769

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.

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, 2022, 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, 2022, 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, 2022 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, 2022 that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

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

32.1

Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

Inline XBLR Instance Document

101.SCH

Inline XBLR Taxonomy Extension Schema Document

101.CAL

Inline XBLR Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBLR Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBLR Taxonomy Extension Label Linkbase Document

101.PRE

Inline EBLR Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (formatted as Inline XBLR and Contained in Exhibit 101)

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 14, 2022

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BIOE Bio Essence Corporation (PK)