| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 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. 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. |
