UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Bio Essence Corp.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
| California |
| (State or other jurisdiction |
| incorporation or organization) |
| 5960 |
| (Primary Standard Industrial |
| Classification Code Number) |
| 94-3349551 |
| (I.R.S. Employer |
| Identification Number) |
8 Studebaker Drive in Irvine, California 92618
(949) 706-9966
(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive offices)
Bio Essence Corp.
Attn: Yin Yan
Chief Executive Officer
8 Studebaker Drive
Irvine, CA 92618
T (949) 706-9966
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices and registered agent)
Copies to:
Devin W. Bone
Paesano Akkashian Apkarian, P.C.
7457 Franklin Road, Suite 200
Bloomfield Hills, Michigan 48301
T (248) 796-6886
F (248) 796-6885
E dbone@paalawfirm.com
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Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, please check the following box: [X]
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act Registration Statement number of the earlier effective Registration Statement for the same offering: [ ]
If this form is a post-effective Registration Statement filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act Registration Statement number of the earlier effective Registration Statement for the same offering: [ ]
If this form is a post-effective Registration Statement filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act Registration Statement number of the earlier effective Registration Statement for the same offering:[ ]
Check whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer [ ] | Accelerated filer [ ] |
| Non-accelerated filer [ ] | Smaller reporting company [X] |
| Emerging growth company [X] |
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. [X]
CALCULATION OF REGISTRATION FEE CHART
|
Common Stock Par Value $0.01 |
Amount(1) | Proposed Maximum Registered Per Share(2) |
Proposed Maximum Offering Price(3) | Fee Amount(4) | ||||||||||||
| Selling Shareholders | 33,209,000 | $ | 1.00 | $ | 33,209,000 | $ | 4,024.93 | |||||||||
| Direct Public Offering | 5,000,000 | $ | 1.00 | $ | 5,000,000 | $ | 606.00 | |||||||||
(1) In the event of a stock split, stock dividend or similar transaction involving our common stock, the number of shares registered shall automatically be increased to cover the additional shares of common stock issuable pursuant to Rule 416 under the Securities Act of 1933, as amended.
(2) There is no current market for the securities.
(3) Estimated for the purpose of calculating the registration fee pursuant to Rule 457 under the Securities Act of 1933, as amended.
(4) Fee paid with this initial filing.
THE REGISTRANT HEREBY RESERVES THE RIGHT TO AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE.
THIS REGISTRATION STATEMENT AND THE PROSPECTUS THEREIN COVER THE REGISTRATION OF 38,209,000 SHARES OF COMMON STOCK.
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The information contained in this Prospectus is not complete and may be changed. Neither the Selling Shareholders nor the Company may sell these securities until the registration statement filed with the Securities and Exchange Commission is deemed effective. This Prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION DATED JULY __, 2019
BIO ESSENCE CORP.
This preliminary prospectus relates to the registration of 38,209,000 shares of common stock in Bio Essence Corp., a California corporation (referred to herein as the “Company,” “Bio Essence,” “we,” “our,” “us,” or other similar pronouns). The Company is registering 5,000,000 shares of common stock at $1.00 per share for our initial public offering (“IPO”). In addition, the Company is registering 33,209,000 shares of common stock currently held by our “Selling Shareholders,” or individually, “Selling Shareholder.” The Selling Shareholders intend on selling their respective shares for the fixed price of $1.00 per share for the duration of the offering (the “Resale”). Our shares of common stock subject to the IPO and Resale are referred to herein collectively as our “Shares.” We estimate our total offering registration costs to be approximately $30,625.06. There is no minimum number of shares that must be sold by us for the offering to proceed. The Company will retain any proceeds from the IPO, while the Selling Shareholders will retain the proceeds from the Resale. The Selling Shareholders are deemed to be statutory underwriters under Section 2(a)(11) of the Securities Act of 1933 (“Securities Act”).
No public market currently exists for the securities being offered herein. The current pricing of the IPO and Resale were arbitrarily set by management. Neither the Company nor the Selling Shareholders have a current arrangement or agreement with any underwriters, broker-dealers or selling agents for the sale of the shares subject to this Prospectus. If a Selling Shareholder enters into such an arrangement or agreement, the shares of such Selling Shareholder will be sold through such licensed underwriter(s), broker-dealer(s) and/or selling agent(s). There is no minimum number of shares of common stock that must be sold by us or the Selling Shareholders to proceed.
| Selling Shareholders | Offering Price | Underwriting Discounts; Commissions | Net Proceeds | |||||||
| Per Share | $ | 1.00 | None | $ | 0 | |||||
| Total | $ | 1.00 | None | $ | 0 | |||||
| Initial Public Offering | Offering Price | Underwriting Discounts; Commissions | Net Proceeds | |||||||
| Per Share | $ | 1.00 | None | $ | 1.00 | |||||
| Total | $ | 5,000,000 | None | $ | 5,000,000 | |||||
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act. Investing in our common stock involves a high degree of risk. You should purchase shares only if you can afford a complete loss of your investment. See “Prospectus Summary and Risk Factors” starting on page 5. Neither the Securities and Exchange Commission (the “SEC”), nor any state securities commission, has approved or disapproved of these securities or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
There has been no market for our securities and a public market may never develop, or, if any market does develop, it may not be sustained. Our common stock is not presently traded on any exchange or on the over-the-counter market. Contemporaneously with the filing of this Registration Statement on Form S-1, the Company is engaging with a market maker file an application with the Financial Industry Regulatory Authority (“FINRA”) for our common stock to be eligible for trading on the appropriate United States trading exchange or market. We do not yet have a market maker who has agreed to file such an application. There can be no assurance that our common stock will ever be quoted on a stock exchange or a quotation service or that any market for our stock will develop.
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Neither the SEC nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this Prospectus. Any representation to the contrary is a criminal offense. Investing in our common stock involves a high degree of risk. Before buying any of our common stock, you should carefully read the discussion of material risks of investing in our common stock in the section titled “Risk Factors” in this Prospectus. The Selling Shareholders may use this Prospectus to offer the common stock from time to time.
As set forth in this Prospectus, we have previously issued common stock on a restricted basis to the Selling Shareholders identified herein in consideration of cash and assuming significant start-up expenses for the benefit of the company. For as long as this stock is “restricted” within the meaning of Rule 144(a)(3) under the Securities Act, we will, to the extent required, furnish to any shareholder, or to any prospective purchaser designated by such shareholder, upon request of such shareholder, financial and other information described in paragraph (d)(4) of Rule 144 with respect to the Company to the extent required in order to permit such shareholder to comply with Rule 144 with respect to any resale of their stock, unless during that time, we are subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, or exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act and no such information about the Company is otherwise required pursuant to Rule 144.
Until ninety business days after the effective date of this Prospectus, all dealers that effect transactions in these securities whether or not participating in this offering may be required to deliver a Prospectus. This is in addition to the dealer's obligation to deliver a Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
This Prospectus is dated July __, 2019
Table of Contents
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You may only rely on the information contained in this Prospectus or that we have referred you to. We have not authorized anyone to provide you with different information. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities other than the Common Stock offered by this Prospectus. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any Common Stock in any circumstances in which such offer or solicitation is unlawful. Neither the delivery of this Prospectus nor any sale made in connection with this Prospectus shall, under any circumstances, create any implication that there has been no change in our affairs since the date of this Prospectus or that the information contained by reference to this Prospectus is correct as of any time after its date.
The information in this prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and neither we nor the selling stockholders are soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
BIO ESSENCE CORP.
PROSPECTUS SUMMARY AND RISK FACTORS*
Cautionary Note Regarding Forward-Looking Statements
This Prospectus contains forward-looking statements which relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled "Risk Factors," that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
Although management believes that the assumptions underlying the forward-looking statements included in this filing are reasonable, they do not guarantee our future performance, and actual results could differ from those contemplated by these forward-looking statements. The assumptions used for purposes of the forward-looking statements specified in the following information represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment.
To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements. In the light of these risks and uncertainties, there can be no assurance that the results and events contemplated by the forward-looking statements contained in this filing will in fact transpire. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. We do not undertake any obligation to update or revise any forward-looking statements.
Factors that might cause or contribute to such differences include, but are not limited to, those discussed in "Risk Factors" contained in this report. As a result of these factors, we cannot assure you that the forward-looking statements in this Prospectus will prove to be accurate. Except as required by law, we expressly disclaim any obligation to update publicly any forward-looking statements for any reason after the date of this report, to conform these statements to actual results, or to changes in our expectations. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of this statement.
*For the purposes of this Registration Statement, this Section furnishes information required by Items 101, 102, 103, 105, 201, 301, 302, 303, 304, 305, 402, 403, 404, 407(a), 407(e)(4), and 503 of Regulation S-K, and Rules 8-04 and 8-05 of Regulation S-X (or, collectively, Items 3 and 11 of Form S-1).
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Summary of Business and Present Offering
We are an herbal health, diet, and nutrition company. The Company’s mission is to provide herbal health, diet and vitamin nutritional supplements through three (3) operational subsidiaries, as explained below.
The Company was incorporated in the State of California on January 1, 2000. On January 27, 2016, the Company entered into a change of control whereby our controlling shareholder, Jian Yang, purchased a controlling interest in the Company. On that same date, Jian Yang entered into a stock purchase agreement with Fusion Diet Systems, Inc. a Utah corporation dba, Fusion Naturals (“Fusion Naturals”). Fusion Naturals was originally incorporated in Utah on April 20, 2010. On January 9, 2017, the Company created a new corporation in the State of California called Bio Essence Pharmaceutical, Inc. to serve as a health supplements manufacturer (“BE Pharma”). Then, on January 12, 2017, the Company created its third subsidiary, Bio Essence Herbal Essentials Inc. (“BE Essentials”). The Company serves as a holding corporation for these subsidiaries.
The Company is headquartered at 8 Studebaker Drive in Irvine, California 92618 and the company’s website is located on the Internet at http://www.bioessencecorp.com. Our telephone number is (949) 706-9966. An organizational chart appearing on the next page provides an illustration of the relationship between the entities identified above.
The primary focus of BE Pharma is producing products for BE Essentials and Fusion Naturals, along with providing original equipment manufacturing and private label services to other companies. BE Essentials targets and develops traditional Chinese medicines (“TCM”) in the form of single herbs, granules, pills, and tablets. It also offers special formulated dietary supplements and medical food. The Company intends to develop this subsidiary into one that is engaged in integrated health and to provide its customers to interact with dietitians, nutraceutical practitioners, and traditional integrative wellness doctors worldwide. Fusion Naturals is developing a focus on mass market sales of its products. It currently offers functional supplements, beauty supplements and collagen products.
The Company sells its products through channels such as TCM practitioners, online websites such as Amazon and its own proprietary website, and brick-and-mortar stores, such as GNC, Vitamin World, TJ Max, Home Goods, Marshalls, and Grocery Outlets.
An investment in the Shares offered under the IPO and Resale are highly speculative in nature, involve a high degree of risk, and are suitable only for persons who can afford to risk the loss of the entire amount invested. Before purchasing any of these securities, you should carefully consider the following factors relating to our business and prospects. If any of the following risks occurs, our business, financial condition or operating results could be materially adversely affected. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment.
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An investment in the Shares offered under the IPO and Resale are highly speculative in nature, involve a high degree of risk, and are suitable only for persons who can afford to risk the loss of the entire amount invested. Before purchasing any of these securities, you should carefully consider the following factors relating to our business and prospects. If any of the following risks occurs, our business, financial condition or operating results could be materially adversely affected. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment.
Risks Related to Our Business and Industry
The herbal, vitamin, and nutraceuticals industry is an intensely competitive market.
While there is evidence of strong consumer appeal, we cannot assure you that consumers will continue to embrace using herbs, vitamins, or nutraceuticals. Many factors must be considered when investing in this industry due to regulations set by both U.S. and international committees that oversee the industry. We face significant competition from others in this industry. The herbal, vitamins and nutraceuticals industry is highly fragmented with smaller companies offering products to large multi-national corporations, which have large, integrated manufacturing lines. These large corporations can produce a more robust supply of herbs, vitamins, and nutraceuticals products. There are many ‗friendly competitors that may not compete directly with our operations but supply us or provide source product for our end product. These companies may in turn help our competitors by providing the same source product for their products.
There are thousands of herbal, vitamin and nutraceuticals companies both privately held and publicly traded today. Many have greater financial resources than our company and to the extent we compete directly with any given company with said greater financial resources, we may be at a disadvantage. Other risks within our industry are outlined within this Private Placement Memorandum and are related to regulations set forth by industry committees and to the extent the Food and Drug Administration (“FDA”) is involved, they could have an effect on what source products we use and cannot use. No assurances can be made that any ruling from the FDA or other organization will not ban the use of any source product which may hurt our sales.
We may not be able to compete successfully against current and future competitors.
While many companies compete directly against us for market share, others complement us by providing resource product to produce our end product. Many of our competitors have financial resources that extend far beyond ours, which may adversely affect our ability to compete. We cannot make any assurances to you that we will be successful in our business endeavors if we (a) are unable to compete with a competitor, (b) lose our ability to source product from a competitor or partner, (c) are unable to raise sufficient funds to compete against others, (d) lose our employees to a competitor, or (e) lose advantages over our product offerings against a superior competitor due to price, branding, marketing, and/or distribution power.
We hold no patents on our products, and our business employs proprietary technology (know-how) and information may be difficult to protect and/or infringe on the intellectual property rights of third parties.
The Company currently relies on trade secrets, proprietary know-how, and technology methods that we seek to protect, in part, by confidentiality agreements. We cannot assure you that these agreements will not be breached, that we will have adequate remedies for any breach, or that our trade secrets and proprietary know-how will not otherwise become known or be independently discovered by others. We currently do not hold patents from the United States Patent and Trademark Office (“USPTO”) or hold any FDA approvals. Management believes that part of applying for a patent allows competitors to copy our products and would force the company to file lawsuit against the offending parties upon infringement. As a small company, management believes that it is more effective to mitigate this risk by relying on our trade secrets than to file a patent and allow others to review our processes. Therefore, our success depends, in part, on our ability to keep competitors from reverse engineering our products, methods, know-how and maintain trade secrecy and operate without infringing on the proprietary rights of third parties. Additionally, as a herbal, nutraceuticals company, we are not bound by any law or rules to obtain FDA approval for any of our products at this time.
We cannot assure you that the patents of others will not have an adverse effect on our ability to conduct our business, that any of our trade secrets and applications will be protected, that we will develop additional proprietary technology (know-how) or methods that is defensible against theft or will provide us with competitive advantages or will not be challenged by third parties.
Regulations and oversight by the FDA or other governmental entities may adversely affect our business.
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We may be subject to regulations or oversight implemented by the FDA, which may materially affect our ability to conduct business, including, but not limited to, limit the number or types of products we are able to produce. Additionally, regulations may change over time. Added oversight from the FDA or other governmental entities may increase the cost associated with operating as an herb, vitamin, and nutraceuticals company, which would adversely affect our shareholders.
Negative media coverage on our industry may adversely affect our business and the value of our common stock.
While we strive to produce high quality products, there have been reports of fraud, misrepresentation, and counterfeiting relating to herbs and vitamins in our industry. As a result, some regulatory agencies have initiated investigations into these allegations, including investigations into some of our competitors. While we are not the target of any investigation, business may diminish or be adversely affected by the negative publicity affecting our industry as a whole, which would in turn negatively affect the value of our common stock. Future media coverage or administrative investigations may further damage the reputation of our industry, which may harm our reputation and the value of our common stock.
We were acquired in a stock purchase transaction via a change of control by the current majority shareholder in the Company.
Our majority shareholder, Jian Yang acquired the Company in 2016. We are currently making efforts to develop additional products to grow our business after years of stagnation. Our management believes there are strong merits to our business and seek to meet those challenges. However, we have not been profitable and there can be no assurance that we will operate profitably or will have adequate working capital to meet our obligations as they become due. Investors must consider the risks and difficulties frequently encountered by early stage companies, particularly in rapidly evolving markets. Such risks include adequately adapting to a competitive market, managing our operations, and expanding our business in a sustainable way.
We cannot be certain that our business strategy will be successful or that we will successfully address these risks. In the event that we do not successfully address these risks, our business, prospects, financial condition, and results of operations could be materially and adversely affected, and we may not have the resources to continue or expand our business operations.
We have experienced losses and we may not achieve or sustain profitability in the future.
We have suffered losses over the last two years. These losses are outlined in detail in our audited financial statements. We have no ability to predict if we will become profitable. We anticipate that our cost of revenues and operating expenses will increase substantially in the foreseeable future as we continue to grow our business and develop our new products. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenues sufficiently to offset these higher expenses. Many of our efforts to generate revenues from our business are new, and any failure to increase our revenues or generate revenues from our products could prevent us from attaining or increasing profitability. We do not expect to be profitable in the foreseeable future and we cannot be certain that we will be able to attain profitability on a quarterly or annual basis, or if we do, that we will sustain profitability.
We have a need to raise additional capital.
The Company may not be able to fully develop and implement its objectives without additional capital beyond this private offering. We may require additional financing in order to meet the milestones and requirements of its plans. Additional funding might be required for staffing, marketing, public relations and the necessary research to expand the scope of its business plan on a global scale. The issuance of additional securities could dilute existing shareholders. Bio Essence funding plans include selling additional capital stock and/or borrowing to fund the aforementioned expenses. We may approach hedge funds, venture capital groups, private investment groups, or other institutional investment groups in our efforts to achieve future funding.
We depend heavily on our management, without whose services, our business operations could cease.
At this time our management is wholly responsible for the development and execution of our business plan. Our management is under no contractual obligation to remain employed by us, although they have no present intent to leave. If our management should choose to leave us for any reason before we have hired additional personnel our operations may fail. Even if we are able to find additional personnel, it is uncertain whether we could find qualified management who could develop our business along the lines described herein or would be willing to work for compensation we could afford. Without such management, we could be forced to cease operations and investors in our common stock or other securities could lose their entire investment.
Bio Essence might experience the risk of managing growth.
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We are a small company with 13 employees. We expect to experience a period of significant expansion in headcount, facilities, infrastructure and overhead and anticipate that further expansion will be required to address potential growth and market opportunities. Future growth will impose significant added responsibilities on members of management, including the need to identify, recruit, maintain and integrate managers. Our future financial performance and its ability to compete effectively will depend, in part, on its ability to manage any future growth effectively.
We expect to expand our operations by increasing its sales and marketing efforts, research into other development opportunities such as functional beverages and TCM products and services. The anticipated growth could place a significant strain on our management, and operational and financial resources. Effective management of the anticipated growth shall require expanding Bio Essence management and financial controls, hiring additional appropriate personnel as required, and developing additional expertise by existing management personnel. However, there can be no assurances that these or other measures implemented by Bio Essence shall effectively increase its capabilities to manage such anticipated growth or to do so in a timely and cost-effective manner. The failure to effectively manage growth could have a material adverse effect on Bio Essence operations.
The requirements of being a public company may strain our resources and distract our management, which could make it difficult to manage our business, particularly after we are no longer an “emerging growth company.”
We are required to comply with various regulatory and reporting requirements, including those required by the SEC. Complying with these reporting and other regulatory requirements are time-consuming and expensive and could have a negative effect on our business, results of operations and financial condition.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934 (“Exchange Act”) and requirements of the Sarbanes-Oxley Act of 2002 (“SOX Act”). The cost of complying with these requirements may place a strain on our systems and resources. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. SOX require that we maintain effective disclosure controls and procedures and internal controls over financial reporting. To maintain and improve the effectiveness of our disclosure controls and procedures, we must commit significant resources, may be required to hire additional staff and need to continue to provide effective management oversight. We will be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. Sustaining our growth also will require us to commit additional management, operational and financial resources to identify new professionals to join the Company and to maintain appropriate operational and financial systems to adequately support expansion. These activities may divert management's attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.
Regulations, including those contained in and issued under the SOX Act and the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”), increase the cost of doing business and may make it difficult for us to retain or attract qualified officers and directors, which could adversely affect the management of our business and our ability to obtain or retain listing of our common stock.
The current regulatory climate for public companies, even small and emerging growth companies such as ours, may make it difficult or prohibitively expensive to attract and retain qualified officers, directors and members of board committees required to provide for our effective management in compliance with the rules and regulations which govern publicly-held companies, including, but not limited to, certifications from executive officers and requirements for financial experts on boards of directors. The perceived increased personal risk associated with these recent changes may deter qualified individuals from accepting these roles. For example, the enactment of the SOX Act has resulted in the issuance of a series of new rules and regulations and the strengthening of existing rules and regulations by the SEC. Further, recent and proposed regulations under Dodd-Frank heighten the requirements for board or committee membership, particularly with respect to an individual’s independence from the corporation and level of experience in finance and accounting matters. We may have difficulty attracting and retaining directors with the requisite qualifications. If we are unable to attract and retain qualified officers and directors, the management of our business could be adversely affected.
If we complete a financing through the sale of additional shares of our common stock in the future, or we acquire property through the issuance of shares of our common stock in the future, then shareholders will experience dilution.
The most likely source of future financing presently available to us is through the sale of shares of our common stock. Any sale of common stock will result in dilution of equity ownership to existing shareholders. This means that, if we sell shares of our common stock or issue stock as consideration for a purchase, more shares will be outstanding, and each existing shareholder will own a smaller percentage of the shares then outstanding. To raise additional capital, we may have to issue additional shares, which may substantially dilute the interests of existing shareholders. Alternatively, we may have to borrow large sums, and assume debt obligations that require us to make substantial interest and capital payments.
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As of the date of this filing, we have earned revenue. However, we cannot guarantee we will be successful in continuing to generate revenue or be successful in raising funds through the sale of shares to pay for the Company's business plan and expenditures. Failure to generate revenue or to raise funds could cause us to go out of business, which would result in the complete loss of your investment.
We will be obligated to develop and maintain proper and effective internal controls over financial reporting.
We may not complete our analysis of our internal controls over financial reporting in a timely manner, or these internal controls may have one or more material weaknesses, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.
Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that will need to be evaluated frequently. Section 404 of SOX Act requires public companies to conduct an annual review and evaluation of their internal controls and attestations of the effectiveness of internal controls by independent auditors. We will be required to perform the annual review and evaluation of our internal controls no later than for the fiscal year ending January 31st on any given year. However, we initially expect to qualify as a smaller reporting company and as an emerging growth company, and thus, we would be exempt from the auditors' attestation requirement until such time as we no longer qualify as a smaller reporting company and an emerging growth company. We would no longer qualify as a smaller reporting company if the market value of our public float exceeded $75 million as of the last day of our second fiscal quarter in any fiscal year following this offering. We would no longer qualify as an emerging growth company at such time as described in the risk factor immediately below.
We are in the early stages of the costly and challenging process of compiling the system and processing documentation necessary to evaluate our internal controls needed to comply with Section 404. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline.
There is no minimum offering.
There is no minimum number of shares of common stock that must be sold by the Company prior to the closing of the IPO. As a result, there can be no assurance that Bio Essence will raise sufficient funds through this Offering to carry out its Business Plan as currently proposed, or that the net proceeds from the initial subscriptions for common stock will be in an amount sufficient to enable Bio Essence to continue operations in any meaningful manner.
Bio Essence might experience potential fluctuations in operating results.
Significant annual and quarterly fluctuations in Bio Essence results of operations may be caused by, among other factors, the volume of revenues generated by Bio Essence, the timing of new product or service announcements and releases by Bio Essence and its competitors in the marketplace, and general economic conditions. There can be no assurances that the level of revenues and profits, if any, achieved by Bio Essence in any particular fiscal period shall not be significantly lower than in others, including comparable fiscal periods. Bio Essence expense levels are based, in part, on its expectations as to future revenues.
As a result, if future revenues are below expectations, net income or loss may be disproportionately affected by a reduction in revenues, as any corresponding reduction in expenses may not be proportionate to the reduction in revenues. As a result, Bio Essence believes that period-to-period comparisons of its results of operations may not necessarily be meaningful and should not be relied upon as indications of future performance.
We have not developed independent corporate governance.
We do not presently have audit, compensation, or nominating committees. This lack of independent controls over our corporate affairs may result in conflicts of interest between our officers, directors and our stockholders. We presently have no policy to resolve such conflicts. As a result, our directors have the ability to, among other things, determine their own level of compensation. Until we comply with such corporate governance measures to form audit and other board committees in a manner consistent with rules of a national securities exchange, there is no assurance that we will not be subject to any conflicts of interest. As a result, potential investors may be reluctant to provide us with funds necessary to expand our operations.
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The relative lack of public company experience of our management team may put us at a competitive disadvantage.
As a company with a class of securities registered under the Exchange Act, we are subject to reporting and other legal, accounting, corporate governance, and regulatory requirements imposed by the Exchange Act and rules and regulations promulgated under the Exchange Act. Our management team lacks significant public company experience, which could impair our ability to comply with these legal, accounting, and regulatory requirements. Such responsibilities include complying with federal securities laws and making required disclosures on a timely basis. Our senior management may not be able to implement and effect programs and policies in an effective and timely manner that adequately responds to such increased legal and regulatory compliance and reporting requirements. Our failure to do so could lead to the imposition of fines and penalties and further result in the deterioration of our business.
Our profitability depends upon achieving success in our future operations through implementing our business plan, increasing sales, and expanding our customer and distribution bases, for which there can be no assurance given.
Profitability depends upon many factors, including the success of the Company’s marketing program, the Company’s ability to identify and obtain the rights to additional products to add to its existing product line, expansion of its distribution and customer base, maintenance or reduction of expense levels and the success of the Company’s business activities. The Company anticipates that it will continue to incur operating losses in the future. The Company’s ability to achieve profitable operations will also depend on its ability to develop and maintain an adequate marketing and distribution system.
Bio Essence needs to continue to attract and retain professional and qualified personnel, which may require the issuance of stock warrants or options.
Bio Essence’s ability to realize its objectives is dependent on its ability to attract and retain additional, qualified personnel. Competition for such personnel can be intense, and there can be no assurance that Bio Essence’s results will not be adversely affected by difficulty in attracting and/or retaining qualified personnel. To the extent it does enter into employment agreements, there can be no assurance that such agreements shall fully protect Bio Essence from competitive injury if any of these individuals leave the company.
One method of attracting talent is issuing stock warrants or options. This provides the Company with a way to compensate key personnel. If issued, the warrants and options would also have a dilutive effect on the interests of the purchasers of stock, thus triggering the anti-dilution rights of the Founders. Moreover, in the event Bio Essence requires additional equity financing pursuant to the shares offered under this Offering, purchasers of the additional shares may experience further dilution to the extent that such shares may be issued for a value less than the price paid for shares offered hereunder.
We will be controlled by existing shareholders after this offering.
Upon the completion of this Offering, the directors and officers currently in place will continue to oversee the Company’s operations. Jian Yang, our former director and majority shareholder, will continue likely continue to maintain control of the Company by virtue of owning a majority of the Company’s issued and outstanding common stock.
As a result, Ms. Yang will likely have a significant influence on the affairs and management of the Company, as well as on all matters requiring stockholder approval, including electing and removing members of its board of directors, causing the Company to engage in transactions with affiliated entities, causing or restricting the sale or merger of the Company and changing the company’s dividend policy. Such concentration of ownership and control could have the effect of delaying, deferring or preventing a change in control of Bio Essence even when such a change of control would be in the best interests of the company’s other stockholders.
Notably, all of Ms. Yang’s shares are being registered under the Resale. As such, there is a possibility that Ms. Yang may divest herself of a majority, or all, of his stock in the Company. This would lead to a change in control over the Company. At this time, the Company believes that such a divestiture is unlikely. While the results of the Resale are unpredictable, the Company believes that, at the close of the Resale and IPO, it will likely remain controlled by Ms. Yang or a small number of shareholders.
Limitations on director and officer liability and our indemnification of our officers and directors may discourage stockholders from bringing suit against a director.
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Article IX, Section 4 of the Bylaws provide that officers and directors will be indemnified by the Company to the fullest extent of California law. These provisions may discourage stockholders from bringing suit against a director for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by stockholders on our behalf against a director. In addition, our Certificate of Incorporation and Bylaws provide for mandatory indemnification of directors and officers to the fullest extent permitted by governing state law.
A downturn in general economic conditions could cause adverse consequences for the Company operations.
The financial success of the Company may be sensitive to adverse changes in general economic conditions in the United States, and any States in which we do business, such as recession, inflation, unemployment, and interest rates. Such changing conditions could reduce demand in the marketplace for the Company's services and products. Management believes that the impending growth of the market, mainstream market acceptance and the targeted product line of the Company will insulate the Company from excessive reduced demand. Nevertheless, the Company has no control over these changes.
Risks Related to Our Common Stock
Our stock price may be volatile or may decline regardless of our operating performance, and the price of our common stock may fluctuate significantly.
Once our shares begin trading, the market price for our common stock is likely to be volatile, in part because our shares have not been traded publicly. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including:
| • competition from related businesses; |
| • changes in key personnel; |
| • entry into new geographic markets; |
| • actions and announcements by us or our competitors or significant acquisitions, divestitures, strategic partnerships, joint ventures or capital commitments; |
| • fluctuations in quarterly operating results, as well as differences between our actual financial and operating results and those expected by investors; |
| • the public’s response to press releases or other public announcements by us or third parties, including our filings with the SEC; |
| • announcements relating to litigation; |
| • financial guidance, if any, that we provide to the public, any changes in this guidance or our failure to meet this guidance; |
| • changes in financial estimates or ratings by any securities analysts who follow our common stock, our failure to meet these estimates or failure of those analysts to initiate or maintain coverage of our common stock; |
| • the development and sustainability of an active trading market for our common stock; |
| • future sales of our common stock by our officers, directors and significant stockholders; and |
| • changes in accounting principles affecting our financial reporting. |
These and other factors may lower the market price of our common stock, regardless of our actual operating performance. The stock markets and trading facilities, including the OTC Bulletin Board, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities in many companies. In the past, stockholders of some companies have instituted securities class action litigation following periods of market volatility. If we were involved in securities litigation, we could incur substantial costs and our resources, and the attention of management could be diverted from our business.
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Future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price.
Sales of substantial amounts of our common stock in the public market after this offering, or the perception that these sales could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional shares. Upon completion of this offering, we will have 38,209,000 shares of common stock outstanding—assuming all shares of the IPO are sold. Our shares of common stock offered herein will be freely tradable without restriction under the Securities Act, except for any shares of our common stock that may be subsequently held or acquired by our directors, executive officers and other “affiliates,” as that term is defined in the Securities Act, which will be restricted securities under the Securities Act. Restricted securities may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available.
In the future, we may also issue our securities in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of our common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to you.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our common stock could be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who cover us downgrades our common stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceased coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease, which could cause our stock price and trading volume to decline.
Our internal controls over financial reporting may not be effective and our independent registered public accounting firm may not be able to certify as to their effectiveness, which could have a significant and adverse effect on our business and reputation.
As a public company, we are required to make a formal assessment of the effectiveness of our internal controls over financial reporting under Section 302. In addition, at such time as we cease to be an “emerging growth company,” as more fully described in these Risk Factors, we will be required to comply with Section 404. At such time, we may identify material weaknesses that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404. We cannot be certain as to the timing of completion of our evaluation, testing and any remediation actions or the impact of the same on our operations. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, our independent registered public accounting firm may issue an adverse opinion due to ineffective internal controls over financial reporting and we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur costs in improving our internal control system and the hiring of additional personnel. Any such action could negatively affect our results of operations and cash flows.
Our management and other affiliates have significant control of our common stock and could control our actions in a manner that conflicts with the interests of other stockholders.
After the offering, we anticipate that our current majority shareholder—Jian Yang—will continue to beneficially own the majority of our common stock, representing the majority of the voting power of our outstanding capital stock. As a result, Ms. Yang will be able to exercise considerable influence over matters requiring approval by our stockholders, including the election of directors, and may not always act in the best interests of other stockholders. Such a concentration of ownership may have the effect of delaying or preventing a change in our control, including transactions in which our stockholders might otherwise receive a premium for their shares over then current market prices.
We do not expect to pay any cash dividends for the foreseeable future.
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The continued operation and growth of our business will require substantial cash. Accordingly, we do not anticipate that we will pay any cash dividends on shares of our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will depend upon our results of operations, financial condition, contractual restrictions relating to indebtedness we may incur, restrictions imposed by applicable law and other factors our Board of Directors deems relevant. Accordingly, if you purchase shares in this offering, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.
Our Shares will likely be considered “penny stocks”
Our shares likely will be “penny stocks” as that term is generally defined in the Exchange Act and the rules and regulations promulgated thereunder to mean equity securities with a price of less than $5.00. Our shares thus will be subject to rules that impose sales practice and disclosure requirements on broker-dealers who engage in certain transactions involving a penny stock. Penny stocks are volatile and subject to additional regulation. As such, an investment in the Company is especially risky and should be done only if the investor is comfortable losing part or all of his or her investment.
Detailed Description of Business
Overview
Bio Essence is a leader in the nutraceutical industry. Our mission is to provide natural, simple, and effective products that support
wellness and vitality. Because we believe that quality of life is key, our focus is on preventative measures, rather than treatments.
As such, we have pioneered the convergence of modern science with traditional medicines that have been in use for centuries. Since
its establishment in 2000, Bio Essence has extended its reach to the Asian market in Taiwan, Hong Kong, and China, as well as into
the United Kingdom and various regions internationally.
Vision
We envision a world in which a clean, healthy, lifestyle, supported by holistic products and practices, is the foundation of preventative medicine.
Values
Our core values consist of the “Five T’s”:
| - | Transcendence |
| - | Transformation |
| - | Transparency |
| - | Teamwork |
| - | Thoroughness. |
Corporate History
Bio Essence was incorporated in the State of California on January 1, 2000, as an herbal, vitamin supplement, and functional foods company. On January 27, 2016, the Company entered into a change of control whereby its former controlling shareholder sold his shares in the Company to the Company’s current majority shareholder, Jian Yang. On that same date, Jian Yang entered into a stock purchase agreement with Fusion Naturals.
Fusion Naturals was originally incorporated in Utah as Nutri-Fusion Systems, LLC on April 20, 2010. On January 9, 2017, the Company created a new corporation in the State of California called Bio Essence Pharmaceutical, Inc. to serve as a health supplements manufacturer (“BE Pharma”). On January 12, 2017, the Company created Bio Essence Herbal Essentials Inc. dba, Bio Essence Health Science (“BE Essentials”) to handle its sales and customer service business. The Company serves as a holding corporation for these three subsidiaries. We are headquartered at 8 Studebaker, Irvine, CA 92618 and our corporate website is www.bioessencecorp.com.
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Bio Essence Herbal Essentials dba Bio Essence Health Science
www.bioessence.com
For Physicians, By Physicians
BE Essentials focuses on providing safe, effective, and potent dietary supplements and services to healthcare practitioners. Our company employs well-trained, dedicated professionals who possess advanced medical knowledge, have an appreciation for innovative technological methodology, and are willing to promote the BE Essentials vision.
BE Essentials is unique in its integration of Traditional Chinese Medicine (“TCM”) with the modern technological advancements and knowledge found in Western healthcare practices. By implementing multiple practices, we have the means to formulate nutrient-rich herbal products that promote prevention versus treatment.
BE Essentials consistently makes strides in the development and promotion of the Global Integrative Medicine Platform, an online system that advocates for natural prevention of disease and personalized nutrition.
Products
| - | MediTCM™ is a line of Traditional Chinese Medicine products based on thousands of years of history that is widely used in Aisa. |
| - | MediDrink™ is a line of ready-to-drink products supplying a substantial serving of potent nutrients that support cell regeneration, restore energy, and promote an overall feeling of wellness. |
| - | Supplements are a significant portion of our business. Often times our bodies are unable to fully absorb the nutrients that we need for optimum health from food alone. Our line of supplements incorporates a variety of only the most wholesome ingredients such as herbs, vitamins, and amino acids, making it simple for individuals to obtain the specific nutrients they need to correct the health implications of nutritional imbalances. |
| - | MedCosmo is a line of anti-aging beauty care products created using the most advanced stem cell technology. |
| - | Medical Food is a line of medical food that boosts the body’s natural ability to heal itself. Each selection targets specific health concerns to accommodate patient individuality. |
Service
Personalized nutrition services will be part of the future of preventative care, and BE Essentials is proud to be at the forefront of this exciting revolution. We understand that when it comes to nutrition and health challenges, no two people are exactly the same, and we take pride in providing personalized nutrition services to patients through our healthcare practitioner network. Our experts combine genetic DNA testing with our proprietary personal lifestyle survey to get a holistic sense of a patient’s health condition. Leveraging this data, they are then able to design personalized nutritional formulas based on unique individual needs. Our quality-assured, individually formulated supplements are created by an FDA-registered manufacturing partner.
The Global Integrative Medicine Online Platform is tailored to provide effective and timely management of health data for both practitioners and patients. It also offers convenience for patients who seek personalized nutrition service and virtual doctor’s office visits.
Outlook
We anticipate a 20% growth in the next two years as a result of product line expansion in the anti-aging market. As we increase our focus on anti-aging products, we will expand our distribution into individual pharmacies and amongst service providers specializing in anti-aging. Additionally, we are working through our Chinese practitioner’s network to offer personalized nutrition services in China.
Fusion Naturals
www.heyfusion.com
Real Ingredients for Real Products
At Fusion Naturals, we believe that beauty should come from within naturally. That’s why we combine our clinically proven, simple, clean, and wholesome products with a genuine concern for our customers’ health and wellness. On the production side, our supply chain coordinators and quality control staff personally select and inspect each ingredient. On the consumer side, staff dietitians connect with our customers personally in order to cater to their individual needs and support them wherever they are on their wellness journey.
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Fusion Naturals produces a variety of nutritional supplements free of preservatives, GMOs, soy, dairy, and gluten, as well as a selection of vegan-friendly products. We strive to keep our products green, and our small batch sizes guarantee that our products are fresh.
Products
| - | Functional Supplements: Leveraging the best of what both ancient herbs and modern science has to offer, our all-in-one formulas are developed to contain all of the nutrients your body needs in a single capsule, without having to spend a fortune on different types of supplements. Developed by doctors, these products are top-of-the-line, guaranteeing the highest quality ingredients and fast-acting results. |
| - | Beauty Supplements: Our line of comprehensive beauty supplements is dedicated to the unique health needs of women. Formulated with naturally extracted, clinically tested, and proven ingredients, including herbal blends, they provide the best solutions to address many women’s health concerns. |
| - | Deluxe Beauty Set: This beauty set includes a vegan collagen booster and an elixir facial mask pack. The plant-based collagen booster is a revolutionary accomplishment in the world of nutraceuticals, helping to build collagen from within the body so skin both looks fresh and feels vibrant. |
Sales Channels
Our online distributors include Walmart.com, Jet.com, Lucky Vitamin, Billion Vegan, and Amazon. Our brick-and-mortar partners include GNC, TJ Max, Vitamin Shoppe, Vitamin World, and the Fresh Market. Our products are also currently under review by Target, Ulta Beauty, and Wholefoods.
Outlook
We project 2.5 million dollars in sales in 2019. With stronger brand recognition and a broader distribution, we anticipate reaching 40 million dollars in sales within 5 years.
Bio Essence Pharmaceutical
Customized care, effective solutions
BE Pharma develops and manufactures a selection of supplement products that are in accordance with the regulatory standards set by the United States Food and Drug Administration. We gladly support both individualized and joint research and development ventures.
BE Pharma offers four types of services to customers.
| 1. | A Customized research and development service where our customers have the opportunity to work alongside leaders in the industry to create a unique supplement product; |
| 2. | Private Labeling; |
| 3. | OEM Contract Manufacturing (Co-Packing); and |
| 4. | Technology Transfer |
BE Pharma’ production process involves the following four steps:
| - | Careful product formulation by research and development experts. |
| - | Diligent material sourcing to ensure the highest quality in finished goods. |
| - | Efficient state-of-the-art manufacturing facility, warehouse, and distribution. |
| - | Customized end-to-end production, from formulation to labeling and packaging. |
Industry Overview
The world-wide herbal supplements and nutraceuticals market is expected to reach sales of over $278 billion by 2020. While Eastern consumers are aware of benefits of consuming herbs and vitamins, consumers around the western world are looking for natural alternatives to traditional approaches to western medicine. According to Global Industry Analysts, Inc., herbal supplements and remedies cause little to no side effects and provide greater efficacy also illustrates how the market continues to experience robust growth. Factors that fueled growth in the marketplace includes herbs in preventive health and alternative medicine regimens, supplier innovations, and Current Good Manufacturing Practices (CGMP) for dietary supplements by the FDA.
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According to the National Health Interview Survey by the Center of Disease Control and Prevention’s National Center for Health Statistics, one in five U.S. adults regularly take herbal supplements. North America is the largest region for herbal supplements and remedies, according to Global Industry Analysts, Inc., accounting for the largest market share. Asia-Pacific and Japan make up the other important markets for herbal supplements on a global basis. In terms of growth rate, the Asia- Pacific market, led by China and India has the highest CAGR of 10.5% through the end of 2017. Multi- herbs also dominate the market, capturing a significant share of overall herbal supplements and remedies world-wide.
Other new trends that are entering into this market are the rising demand for natural health and food supplements. Fish oils, herbal supplements and other natural offerings such as probiotic acidophilus and detoxes are emerging as alternatives to conventional synthetic supplements. Food supplements such as Omega 3s, herbal extracts, multi-vitamins, probiotics, chondroitin, and glucosamine experienced healthy growth rates over the past few years. There is also increased demand for herbal and botanical products in multi-formula and combo packed format, as well as chewable capsules and tablets.
The U.S., China, India and Japan Vitamin and Dietary Supplement Market
Euromonitor International expects that the U.S. vitamin and dietary supplement market will grow by 53% to $28.7 billion by 2021. With more consumers focused on a diet full of natural, whole foods, as well as functional, value-added products like nutritional beverages and dietary supplements, the market is well positioned to continue its growth. Transparency Market Research estimates that the global nutraceuticals market will reach $278.95 billion by year 2020 with a CAGR of 7.3%. The estimates are due in part to the growing conscious of consumers towards functional foods and beverage, dietary supplements and personal care.
Vitamin and dietary along with herbal supplement sales in China has grown double digits for the past ten years to over $20 billion per year in 2017. Social and demographic factors play a huge role in China as the working age population of 18-59 years old in
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China is projected to decline from 925 million today to 700 million in 2050. By that time, nearly 500 million people will be over the age of 60, compared with 200 million today. China has a strong history in herbal and botanical products along with Hong Kong and Taiwan.
The market in India is largely controlled by pharmaceutical drug manufacturers, while 30% is controlled by Ayurveda medicine manufacturers. The Indian market is rapidly growing due to supplements and nutraceuticals being viewed as lifestyle products. Popular supplement categories in India are joint care, hair loss, memory, and childcare products.
The Japanese market for vitamins and dietary supplements had experienced stagnation due to economic pressures; however, it has recently recovered with government initiatives and changing regulations. The market in Japan is estimated to be worth $30 billion per year in sales.
Challenges
Domestic and International growth of the nutraceuticals industry appear to be in a healthy position overall and future forecasts given by well-known market research analytic firms have placed strong figures for its continued progress. The industry currently enjoys favorable demographics as many Americans and citizens around the world are focused on wellness, which includes a diet full of natural, whole foods, as well as functional, value-added products like nutritional beverages and dietary supplements. Clean labels with simple ingredients and clear messaging also add to this broad appeal.
With the growth of the nutraceuticals industry, provisions from the Food Safety Modernization Act (FSMA) brings new regulations that nutraceutical companies will face various manufacturing challenges. With these additional regulatory challenges, companies are adjusting their production to meet growing consumer demand for clean label products, responsibly sourced ingredients, sustainable packaging and pressure to extend shelf life for their supply chain. To reduce further risk under FSMA, nutraceutical companies are utilizing good manufacturing practices (GMP) and designating hygienic zoning programs to differentiate between unprocessed and processed food locations.
At present, there are thousands of herbal, vitamin and nutraceuticals companies both privately-held and publicly-traded today. While many compete directly against each other for market share, others complement each other by providing resource product to produce the end product. Many have financial resources beyond our ability to compete. We cannot make any assurances to you that we will be successful in our business endeavors if we (a) are unable to compete with a competitor, (b) we lose our ability to source product from a competitor or partner, (c) we are unable to raise sufficient funds to compete against others (d) we lose our employees to a competitor, or (e) we lose advantages over our product offerings against a superior competitor due to price, branding, marketing, and/or distribution power.
Our Solution
Personalized nutrition services will be part of the future of preventative care, and BE Essentials is proud to be at the forefront of this exciting revolution. As we rise to meet the demands of increasingly knowledgeable and health-conscious consumers, we look forward to helping usher in a world in which a clean, healthy, lifestyle, supported by holistic products and practices, is the foundation of preventative medicine.
Opportunities
The global dietary supplements market is expected to reach $278 billion USD by 2024, at a Compound Annual Growth Rate of 9.6% from 2016 to 2024 (Grand View Research, Inc.). At 31.4 % market share, the United States supplement market represents the largest single country of the global supplement industry (NBJ Global Supplement Business Report). However, at $43.5 billion, Asia’s total supplement sales surpassed U.S. sales for the first time in 2018. China has been a notable area of opportunity in the industry, gaining the most market share of any global market by adding $10 billion in annual sales over the past ten years.
Compared with the consumer market ten years ago, consumer demand for individualized nutritional products has increased. In the past, brands recommended products to consumers; but with the popularity of information technology, the richness of shopping channels, and the broadening of consumer horizons, consumers are increasingly aware of what they want and they are looking to the industry to provide it.
There are currently three major trends in the consumer demand for supplement products:
| - | Consumers expect nutrition management to play a greater role in health care: Nearly 80% of global consumers say they will prevent diseases by choosing the right foods or address common health problems such as obesity, diabetes, high blood pressure, and high blood lipids with diet (Nielsen). Hospitals are gradually coming to recognize that proper nutrition is an integral part of comprehensive patient treatment. Dietary therapy is as important as drugs, surgery, physiotherapy, and other specialized therapies. |
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| - | Consumers are exercising control over their own health: Contemporary consumers are exhibiting stronger self-control all around. They are also actively seeking out more health-related information and are increasingly capable of understanding it. |
| - | The demand for individualized nutrition programs is on the rise: Individualized nutrition management is based on individual factors such as age, gender, physical state, medical history, living habits, and environmental conditions. Generalized diet management programs are often unsatisfactory, as different people have different nutritional needs. Following the trend of consumption upgrade, some consumers are willing to pay more for personalized health products or services that are more targeted towards and more effective in meeting their individual needs. |
Issues
As the pressures of life increase and its pace accelerates, people know the importance of taking nutritional supplements. But there are so many health care products available that not everyone knows how to choose the optimal product for their own unique needs.
Although some companies offer a personalized nutrition program, they typically develop their personalized diet programs, consultations, or dietary packages based only on information obtained through questionnaires that focus on dietary habits and physical activity. Others use biometric data monitors to generate their personalized nutrition plans by combining a few existing products. Although these models are taking individual data into account to provide personalized nutrition programs, dietary recommendations, or dietary products, these products are only a slight improvement over the “one size fits all” model.
BE Essentials’ Personalized Nutrition
BE Essentials recognizes what people need and what the market could not offer: a holistic solution for consumers who are in need personalized nutritional care.
Bio Essence Personalized Nutrition = Scientific Testing + Expert Knowledge + Internet Platform
Scientific Testing
Nutritional genomics will focus on the interaction of dietary nutrition and genes at the molecular level and assess that impact on human health. This work will allow us to establish nutritional interventions based on individual genomic structural features. These advances will provide a means with which to propose a more personalized nutrition policy, so that the results of nutrition research can be more effectively applied to the prevention of disease and achieve the purpose of promoting human health.
Expert Knowledge
NCP (nutrition care process) is a specialized field that relies on nutrition-related knowledge and professional medical diagnostic methods. According to the definition of the American Dietetic Association, nutrition care is divided into four steps: nutrition assessment, nutrition diagnosis, nutrition intervention, and nutrition monitoring and evaluation.
Internet Platform
By leveraging digital technologies such as the Internet, big data, and artificial intelligence, experts provide consumers with more suitable medical nutrition treatment solutions through remote nutrition consultation services and interpretation of data.
Our Process
Our process for providing personalized nutrition services is simple. After the customer registers online, provides a DNA sample, and completes our lifestyle survey, our experts will formulate a unique supplement just for them. That product will then be created by our FDA-registered manufacturing partner and shipped directly to the customer.
Our Strengths
DNA Testing
BE Essentials enables consumers to obtain personalized health consultation management services through genetic testing. In this way, an individual can understand his or her own genetic background, detect the body's disease-associated susceptibility genes, and predict their risk of disease. This knowledge allows for early prevention and early treatment, so that diseases will occur less, occur later, or not occur at all, thereby improving quality of life and extending lifetimes.
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With genetic testing, individuals can take the initiative to truly understand their own health situations. Because each person's genes are different, the most effective methods of health care differ for each individual. Genetic testing allows for the development of personalized solutions so that customers can better care for their bodies.
Blindly taking nutritional supplements can cause unnecessary harm to the body. For example, people with susceptibility genes for cirrhosis diseases should not supplement with iron-based health care products for a long time because iron can induce the occurrence of cirrhosis of the liver. Similarly, people with susceptibility genes for lupus erythematosus should not add a lot of protein. Genetic testing allows customers to understand the fundamentals of the body and avoid the harm that could occur from blindly taking health care products.
Internet Platform
Our online platform tailors the optimal health care plan for each person's own situation through the management and interpretation of big data. In order to effectively manage health in real time, data can be collected using wearable technology. Customers can then use our online platform to interact with doctors and the manufacturers of health care products. With every visit, they are guaranteed to obtain the most accurate information for their individual health situation.
Experts
BE Essentials is based in the United States and has access to a wealth of U.S. medical resources at all levels to ensure that patients enjoy world-class health care consulting services. The company has a team of American medical doctors who are unique in the industry, and who both participate in our product design and escort each user through the experience of personalized nutritional care.
The BE Essentials medical advisory team are from American universities such as Harvard and Massachusetts Institute of Technology (MIT) and have a rich background in both the Chinese and American medical industries. The team combines an “all user-centric” attitude with their professional medical backgrounds to protect the health of patients!
Quality Assurance
As a leader in nutraceuticals, BE Essentials spares no effort to promote the healthy growth of the industry. We have strictly implemented the first “full safety” quality management model, having strictly adopted the Good Manufacturing Practice (GMP) standard for U.S. health foods in our planned production, facilities, supply engineering, and storage areas. We have implemented the ISO 9001:2000 international quality system. We also operate in strict accordance with the Hazard Analysis and Critical Control Points (HACCP) food safety management system. Our operations fully meet U.S. national food hygiene and safety standards and comply with the U.S. Food and Drug Administration (FDA) for health food hygiene regulations.
With our formulation, the customer only needs to take one to two capsules a day rather buying a lot of bottles of individual supplements.
Our Services
| - | We establish a health record for each customer that matches a suitable doctor to the customer’s current health condition to achieve rapid diagnosis. |
| - | We use genetic testing to formulate personalized health products that provide the nutrients required by the customer’s unique body |
| - | Our products are produced by FDA-registered manufacturers and delivered to customers quickly. |
| - | Our integrated health care services combine online appointments and consultations with offline medical treatment |
| - | Our platform integrates the appointment and treatment process with real-time feedback from customers |
| - | We offer regular health courses |
| - | Our services include long-term management of the customer’s health. The doctor adjusts the formula of the health care product as the customer’s health situation evolves. |
| - | Our e-commerce platform means customers can purchase health care products through online pharmacies. |
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Employees
As of June 27, 2019, the Company had 13 employees. It considers its relationship with its employee to be stable and anticipates growing its workforce.
Facilities and Logistics
Bio Essence Corp. is headquartered in Irvine, CA and occupies space within an industrial park facility and an office suite. The office’s purpose is to serve as its main headquarters and as part of its production facilities.
Description of Capital Stock
The current capital structure of the Company consists of 100,000,000 authorized shares of Common Stock, with a par value of $0.0001. As of this offering, there are 33,209,000 shares of our common stock issued and outstanding to the Selling Shareholders.
Preferred Stock
The Company’s Articles of Incorporation, as amended, authorize 10,000,000 shares of preferred stock. However, as of this offering, there are no preferred shares issued or outstanding.
Dividends
No dividends are anticipated in the near future but may change at the discretion of the Board of Directors.
Liquidation Rights
In the event of any liquidation, dissolution, or winding up of the affairs of the Company, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities and obligations of the Company, the holders of the Common Stock of the Company will participate on a pro- rata basis in the distribution of the Company's remaining assets.
Voting Rights
Holders of shares of our common stock are entitled to one vote for each share on all matters to be voted on by the stockholders. Shares of Common Stock do not have cumulative voting rights.
Description of Property
The Company leases its principle executive offices at 8 Studebaker Drive in Irvine, California 92618. The Company does not own any property or lease any other facilities
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The Company is currently involved in legal proceedings involving a lease agreement with its former landlord, Harsch Investment Properties, LLC, an Oregon limited liability company (“Harsh”), and its former sublessor Topworth Holding LLC, a California limited liability company (“Topworth”). On December 9, 2016, the Company entered into a lease agreement with Harsch for a warehouse facility located at 2265 Polvorosa Ave., Unit 350 in San Leandro, California (the “Premises”). Then, on November 1, 2017, the Company entered into a sublease with Topworth, whereby Topworth would occupy a portion of the Premises.
Then, beginning in April of 2018, Topsworth began violating its sublease by failing to pay rent, utilities, and operating a cannabis operation in the Premises, which constituted a direct violation of the sublease. Harsch instructed the Company to evict Topworth. Thereafter, the Company was forced to leave the Premises because of Topworth’s activities.
Harsch initiated litigation against the Company seeking $2,088,030.69 in damages relating to lost rental profits. The Company has filed a cross-complaint against Topworth for breach of the sublease agreement, seeking damages related to the Company’s breach of the lease, costs, and attorney’s fees. The case is currently pending in the Superior Court of California in the County of Alameda.
Market for Common Equity and Related Stockholder Matters
Market Information
There is no established public trading market for our securities and a regular trading market may not develop, or if developed, may not be sustained. A stockholder in all likelihood, therefore, will not be able to resell his or her securities should he or she desire to do so when eligible for public resale. Furthermore, it is unlikely that a lending institution will accept our securities as pledged collateral for loans unless a regular trading market develops. We have no plans, proposals, arrangements, or understandings with any person with regard to the development of a trading market in any of our securities. The Company is registering 33,209,000 shares of common stock held by the Selling Shareholders.
Penny Stock Considerations
Our shares likely will be “penny stocks” as that term is generally defined in the Exchange Act and the rules and regulations promulgated thereunder to mean equity securities with a price of less than $5.00. Our shares thus will be subject to rules that impose sales practice and disclosure requirements on broker-dealers who engage in certain transactions involving a penny stock.
Under the penny stock regulations, a broker-dealer selling a penny stock to anyone other than an established customer or accredited investor must make a special suitability determination regarding the purchaser and must receive the purchaser’s written consent to the transaction prior to the sale. Generally, an individual with a net worth in excess of $1,000,000 or annual income exceeding $200,000 individually or $300,000 together with his or her spouse is considered an accredited investor. In addition, under the penny stock regulations the broker-dealer is required to:
| • Deliver, prior to any transaction involving a penny stock, a disclosure schedule prepared by the SEC relating to the penny stock market, unless the broker-dealer or the transaction is otherwise exempt; |
| • Disclose commissions payable to the broker-dealer and our registered representatives and current bid and offer quotations for the securities; |
| • Send monthly statements disclosing recent price information pertaining to the penny stock held in a customer’s account, the account’s value and information regarding the limited market in penny stocks; and |
| • Make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction, prior to conducting any penny stock transaction in the customer’s account. |
Because of these regulations, broker-dealers may encounter difficulties in their attempt to sell shares of our common stock, which may affect the ability of Selling Stockholders or other holders to sell their shares in the secondary market and have the effect of reducing the level of trading activity in the secondary market. These additional sales practice and disclosure requirements could impede the sale of our securities, if our securities become publicly traded. In addition, the liquidity for our securities may be decreased, with a corresponding decrease in the price of our securities. Our shares in all probability will be subject to such penny stock rules and our stockholders will, in all likelihood, find it difficult to sell their securities.
OTC Bulletin Board Qualification for Quotation
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To have our shares of common stock on the OTC Bulletin Board, a market maker must file an application on our behalf in order to make a market for our common stock. We are in the process of engaging a FINRA Market Maker to file our application on Form 211 with FINRA.
Holders
As of the date of this Prospectus, the Company has fifty-one (51) holders of record of our common stock.
Dividends
We have not declared any cash dividends on our common stock since our inception and do not anticipate paying such dividends in the foreseeable future. Any decisions as to future payments of dividends will depend on our earnings and financial position and such other facts, as the Board of Directors deems relevant.
Securities Authorized for Issuance Under Equity Compensation Plans
The Company currently has no equity compensation plans in place.
|
Plan Category
|
Number of Securities to be issued upon exercise of outstanding options, warrants, and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuances under equity compensation plans |
|
Equity compensation plans approved by security holders
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N/A | N/A | N/A |
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Equity compensation plans not approved by securities holders
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N/A | N/A | N/A |
Financial Statements
The Company’s Financial Statements and Notes appear at the end of this Registration Statement.
Selected Financial Data
The Company is not required to provide this information because it qualifies as a smaller reporting company.
Supplemental Financial Information
The Company is not required to provide this information because it qualifies as a smaller reporting company.
Management’s Discussion and Analysis of Financial Conditions 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 beginning of 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 into BEP, and transferred its distributing operation into BEH. On March 1, 2017, the 100% shareholder of FDS transferred all of her ownership in FDS into Bio Essence. As a result of the ownership restructure, FDS, BEP and BEH became wholly-owned subsidiaries of Bio Essence, and Bio Essence serves as a holding corporation for these subsidiaries. The Company’s organizational chart as of December 31, 2018 is as follows:
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The primary focus of BEP is producing products for BEH and FDS, along with providing original equipment manufacturing and private label services to other companies. BEH targets and develops traditional Chinese medicines (“TCM”) in the form of single herbs, granules, pills, and tablets. It also offers special formulated dietary supplements and medical food. The Company intends to develop this subsidiary into one that is engaged in integrated health and to provide its customers to interact with dietitians, nutraceutical practitioners, and traditional integrative wellness doctors worldwide. FDS is developing a focus on mass market sales of its products. It currently offers functional supplements, beauty supplements and collagen products.
The Company sells its products through channels such as TCM practitioners, online websites such as Amazon and its own proprietary website, and brick-and-mortar stores, such as GNC, Vitamin World, TJ Max, Home Goods, Marshalls, and Grocery Outlets.
Related Party Transactions
At December 31, 2018, the Company had loan from one major shareholder (also the Company’s senior officer) of $90,000. The loan was payable on demand and bore no interest.
Shareholders Capital Contribution
Two major shareholders (one is the Company’s senior officer) contributed $1.61 million cash to the Company for the Company’s working capital needs in 2017, and these two major shareholders also converted their loans to the Company of $0.71 million (which was incurred in 2016) into capital contribution in 2017.
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
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These accompanying CFS were prepared in accordance with US GAAP and pursuant to the rules and regulations of the SEC for financial statements. The functional currency of Bio Essence is U.S. dollars (“USD’’). The accompanying financial statements are presented in U.S. dollars (“USD”).
Going Concern
The Company incurred net losses of $1.46 million and $1.76 million for the years ended December 31, 2018 and 2017 respectively. The Company also had an accumulated deficit of $4.41 million as of December 31, 2018. 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. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis of Consolidation
The CFS include the accounts of BEC and, its subsidiary, BEP, BEH and FDS as of December 31, 2018. All significant inter-company accounts and transactions were eliminated in consolidation.
Use of Estimates
In preparing the CFS, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets as well as revenues and expenses during the year reported. Actual results may differ from these estimates.
Accounts Receivable
The Company’s policy is to maintain an allowance for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.
Revenue Recognition
In May 2014 the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition requirements, including most industry specific guidance. This new standard requires a company to recognize revenues when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. The FASB subsequently issued the following amendments to ASU No. 2014-09 that have the same effective date and transition date: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations; ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The Company adopted these amendments with ASU 2014-09 (collectively, the new revenue standards).
The new revenue standards became effective for the Company on January 1, 2018, and were adopted using the modified retrospective method. The adoption of the new revenue standards as of January 1, 2018 did not change the Company’s revenue recognition as the majority of its revenues continue to be recognized when the customer takes control of its product. As the Company did not identify any accounting changes that impacted the amount of reported revenues with respect to its product revenues, no adjustment to retained earnings was required upon adoption.
Under the new revenue standards, the Company recognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods. The Company recognizes revenues following the five step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.
Revenues from product sales are recognized when the customer obtains control of the Company’s product, which occurs at a point in time, typically upon delivery to the customer. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that it would have recognized is one year or less or the amount is immaterial.
Revenues from product sales are recorded net of reserves established for applicable discounts and allowances that are offered within contracts with the Company’s customers.
Product revenue reserves, which are classified as a reduction in product revenues, are generally characterized in the following categories: discounts, returns and rebates. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable as the amount is payable to the Company’s customer.
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The Company’s return policy allows for the return of damaged or defective products and shipment errors. A notice of damage or wrong items should make within five days from receiving the goods, and actual return of the products must be completed within 30 days from the date of receiving the goods. Delayed notification for damaged or wrong products will not be accepted for return or exchange. Custom formulas and capsules are not returnable. The amount for return of products was immaterial for the years ended December 31, 2018 and 2017.
Results of operations
Comparison of the years ended December 31, 2018 and 2017
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.
| 2018 | % of Sales | 2017 | % of Sales | Dollar Increase (Decrease) | Percent Increase (Decrease) | |||||
| Sales | $ | 984,575 | $ | 1,338,722 | $ | (354,147) | (26.45)% | |||
| Cost of goods sold | 622,999 | 63.28% | 950,362 | 70.99% | (327,363) | (34.45)% | ||||
| Gross profit | 361,576 | 36.72% | 388,360 | 29.01% | (26,784) | (6.90)% | ||||
| Selling expenses | 87,161 | 8.85% | 129,080 | 9.64% | (41,919) | (32.48)% | ||||
| General and administrative expenses | 1,774,729 | 180.25% | 1,984,294 | 148.22% | (209,565) | (10.56)% | ||||
| Operating expenses | 1,861,890 | 189.10% | 2,113,374 | 157.87% | (251,484) | (11.90)% | ||||
| Loss from operations | (1.500,314) | (152.38)% | (1,725,014) | (128.86)% | (224,700) | (13.03)% | ||||
| Other income (expenses), net | 44,828 | 4.55% | (33,394) | (2.49)% | 78,222 | 234.24% | ||||
| Loss before income taxes | (1,455,486) | (147.83)% | (1,758,408) | (131.35)% | (302,922) | (17.23)% | ||||
| Income tax expense | 3,200 | 0.32% | 1,600 | 0.12% | 1,600 | 100.00% | ||||
| Net loss | $ | (1,458,686) | (148.15)% | (1,760,008) | (131.47)% | (301,322) | (17.12)% |
Sales
The sales for the years ended December 31, 2018 and 201 7was $984,575 and $1,338,722, respectively, a decrease of $354,147 or 26.45%. The decrease of sales was due to the significant drop of sales from FDS. FDS stopped selling certain old products and released new proteins and other supplements products in 2018, which takes time for the customers and the market to accept the new products.
Cost of Goods Sold
The cost of goods sold for the years ended December 31, 2018 and 2017 was $622,999 and 950,362, respectively, a decrease of $327,363 or 34.45%. The decrease was mainly resulted from 1) decreased freight in and custom and duty expenses due to decreased overseas purchase; 2) decreased usage of bottles and packing materials due to decreased sales in 2018, and 3) decreased inventory impairment provision, which was $12,515 reversal of inventory impairment provision for the year ended December 31, 2018 comparing with $270 inventory impairment provision for the year ended December 31, 2017.
Gross profit
The gross profit for the years ended December 31, 2018 and 2017 was$361,576 and $388,360, respectively, a decrease of $ 26,784 or 6.90%, respectively. The profit margin was 36.72% for 2018 comparing with 29.01% for 2017, the increase was mainly due to decreased cost for material purchased resulting from decreased cost for freight and custom and duty, and decreased inventory impairment provision for the year ended December 31, 2018.
Operating expenses
Selling expenses consist mainly of advertising, show expense, products marketing and promotion expenses. Selling expense were $87,161 for the year ended December 31, 2018, compared to $129,080 for the year ended December 31, 2017, a decrease of $41,919 or 32.48%, mainly resulting from decreased show expense by $25,652 and decrease marketing expenses by $24,194, but was partly offset by increased advertising expense by $7,525.
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General and administrative expenses consist mainly of employee salaries and welfare, business meeting, utilities and audit and legal expenses. General and administrative expenses were $ 1,774,729 for the year ended December 31, 2018, compared to $1,984,294 for the year ended December 31, 2017, a decreased of $209,565 or 10.56%, mainly resulting from decreased payroll and related expenses by $274,041, decreased travel and entertainment expense by $71,543 and decreased rental expense by $250,544, which was partly offset by increased contractor expense by $16,782 and increased litigation loss by $360,000 (see Note 8).
Non-operating income (expenses), net
Net non-operating income was $44,828 for the year ended December 31, 2018, compared to net non-operating expenses of $33,394 for the year ended December 31, 2017, an increase of other income of $78,222 or 234.24%. The increase was mainly due to 1) refund of overpaid payroll tax expense of $7,793, 2) refund of sublease rent security deposit of $41,000, 3) increased freight income by $7,477, and 4) decreased other expenses by $13,096, which was mainly the late renal payment penalty of $10,330.
Net Loss
We had a net loss of $1,458,686 for the year ended December 31, 2018, compared to net loss of $1,760,008 for the year ended December 31, 2017, a decrease of $ 301,322 or 17.12%. The decrease in our net loss was mainly resulted from decreased operating expense by $251,484 as describe above.
Liquidity and Capital Resources
As of December 31, 2018, we had bank overdraft of $16,376, current assets of $828,465, other current liabilities of $836,470, working capital deficit of $24,381, a current ratio of 0.97:1. As of December 31, 2017, we had cash and equivalents of $713,551, other current assets of $1,011,086, current liabilities of $357,812, working capital of $1,366,825, a current ratio of 4.82:1. The following is a summary of cash provided by or used in each of the indicated types of activities during the years ended December 31, 2018 and 2017, respectively.
| 2018 | 2017 | |||||||
| Net cash used in operating activities | $ | (831,004 | ) | $ | (2,104,753 | ) | ||
| Net cash used in investing activities | $ | (88,923 | ) | $ | (91,646 | ) | ||
| Net cash provided by financing activities | $ | 206,376 | $ | 2,836,000 | ||||
Net cash used in operating activities
Net cash used in operating activities was $831,004 for the year ended December 31, 2018, compared to $2,104,753 in 2017. The decrease of cash outflow from operating activities for the year ended December 31, 2018 was principally attributable to increased cash inflow from inventory by $420,488, increased cash inflow from accounts payable by $197,244, increased cash inflow from accrued liability and other payables by $386,762, and decreased net loss by $301,322, despite we had increased cash outflow from security deposit and taxes payables by $36,974.
Net cash used in investing activities
Net cash used in investing activities was $88,923 for the year ended December 31, 2018, compared to net cash used in investing activities of $91,646 in 2017. In 2018, we had $7,810 proceeds from sale of fixed assets and we spent $96,733 for purchase of fixed assets. In 2017, we spent $91,646 for purchase of fixed assets.
Net cash provided by financing activities
Net cash provided by financing activities was $206,376 for the year ended December 31, 2018, compared to net cash provided by financing activities of $2,836,000 in 2017. The net cash provided by financing activities in 2018 consisted of proceeds from issuance of shares $100,000 and loan from a major shareholder (also the senior officer) $90,000. The net cash provided by financing activities in 2017 consisted of proceeds from issuance of share $1,056,000 and shareholder contribution $1,780,000.
Off-Balance Sheet Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
On August 30, 2017, the Company engaged the independent accounting firm of Kenne Ruan, CPA, P.C., to audit the Company’s financial statements. There have been no disagreements or conflicts with Kenne Ruan, CPA, P.C., regarding the Company’s account policies.
Quantitative and Qualitative Disclosures about Market Risk
We have not utilized any derivative financial instruments such as futures contracts, options and swaps, forward foreign exchange contracts or interest rate swaps and futures. We believe that adequate controls are in place to monitor any hedging activities. We do not have any borrowings and, consequently, we are not affected by changes in market interest rates. We do not currently have any sales or own assets and operate facilities in countries outside the United States and, consequently, we are not affected by foreign currency fluctuations or exchange rate changes. Overall, we believe that our exposure to interest rate risk and foreign currency exchange rate changes is not material to our financial condition or results of operations.
Directors, Executive Officers, Promoters and Control Persons
Pursuant to Item 401 of Regulation S-K, the names and ages of the directors and executive officers and directors of the Company, and their positions with the Company, are detailed in the table below. Information regarding their business experience is contained in the biographical information below. Neither the Company, its property, nor any of its directors or officers is a party to any pending legal proceeding, nor have they been subject to a bankruptcy petition filed against them. None of its officers or directors have been convicted in, nor is subject to, any criminal proceeding.
| Name | Age | Position | Familial Relationships |
| Yin Yan | 44 | Chief Executive Officer, Chief Financial Officer, and Chairman of the Board of Directors | None |
| Dr. Sia Fooladian | 39 | Director | None |
| Robert D. Nagel | 49 | Director | None |
| Sharon Mair | 47 | Director | None |
| Simon Shavanson | 49 | Director | None |
| Yang Yang Huang | 37 | Director | None |
| Kuan-Ping “Peter” Huang | 31 | General Manager | None |
| Amy Kajiya | 43 | Vice President of Sales | None |
Yin Yan, Chief Executive Officer, Chief Financial Officer, and Chairman of the Board of Directors
Ms. Yan serves as the Company’s Chief Executive Officer, Chief Financial Officer, and Chairman of the Board of Directors. She began her career in 2002 at Intel Corp., a semiconductor designer and manufacturing company as automation project manager. From 2002 to 2004, Ms. Yan managed manufacturing automation and software as well as database development in computer infrastructure applications. From 2004 to present, she has been president of H&Y International, LLC, a real estate investment and brokerage company. Ms. Yan spends twenty hours per week on the affairs of H&Y International, LLC.
Dr. Sia Fooladian, Director
Sia Fooladian, MD, MPH is a board-certified Cardiac Anesthesiologist, Ironman triathlete, and a passionate advocate for a holistic, integrative approach to health and wellness. With over ten years of clinical experience caring for patients with an array of medical ailments, Dr. Fooladian understands the need for an integrative approach to health. He believes that optimal health can be achieved and maintained by holistic understanding of a patient’s mind, body, and spirit and thereby, merging the best of Eastern and Western modalities to treat the root cause of disease. Dr. Fooladian maintains a daily practice of meditation and mindfulness, alongside nutraceutical supplementation and cold therapy in order to promote peak performance in his active lifestyle. Dr. Fooladian holds a BA in history and education from UCLA. He received his MD and MPH in health management from The George Washington University School of Medicine and Health Sciences. He completed his residency and fellowship training at UCLA Medical Center, where he served as Chief Resident. He currently resides and practices in Orange County, California
Robert D. Nagel. Esq., Director
Mr. Nagel is an experienced attorney and investor with 18 years of experience in the legal and financial fields. Mr. Nagel served for the last 8 years, and continues to serve, as an in-house commercial transactions and corporate attorney for a large, privately held medical device company. Before that, Mr. Nagel served in a similar role at a Fortune 100 pharmaceutical company for 4 years. Prior to serving as in-house counsel, Mr. Nagel was as an attorney at two major international law firms for 8 years, specializing in intellectual property litigation and technology transactions.
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Mr. Nagel earned an M.B.A. from the University of Chicago Booth School of Business, with concentrations in Entrepreneurship, Finance and Strategic Management, and a J.D. from the University of Colorado School of Law. Before that, Mr. Nagel received a Master of Science in Environmental Science and Engineering (Environmental Microbiology focus) from the University of North Carolina at Chapel Hill, and a B.S. in Biology from Purdue University. Mr. Nagel is a member of the California Bar and a licensed patent attorney.
Sharon Mair
Ms. Mair is a seasoned Medical and Pharmaceutical Senior Manager. Ms. Mair has worked in various positions including Sales, Business Development, Marketing, Reimbursement and Operations. She has extensive experience in the Pharmaceutical supportive care space and was a part of the successful launch of several blockbuster products as well as a patient support division. Ms. Mair received her B.A. in Biology from the University of Southern California and a M.B.A. from Drexel University.
Simon Shavanson
Mr. Shavanson is the founder and CEO at Shavanson Enterprises Corp and its affiliated companies since June 2011. With over 25 years of experience in the CPG and Retail industry, Mr. Shavanson has led the development of a shared services platform that would take brands and products from “Concept to Consumer”. As a visionary and a passionate, relationship driven executive, he has created the platform with affiliated owned and partner companies to support brands as a turnkey solution for various needs including packaging components, R&D and formulation, fill-in & manufacturing, retail placement and staffing support for at-shelf demo and social & digital activation.
Mr. Shavanson started his career with his family business, First Quality back in February of 1994 and during his 18 years’
tenure at the company, he held various roles in business development, Sales Management & Marketing where he was an integral
part of the culture and growth of the businesses from under $20 million when he joined First Quality to over $3 billion in annual
revenue when he decided to venture out in 2012. His passion for people and his relationships and integrity are his most important
assets. Simon is a great creative visionary that has always strive to offer solutions to make his industry partners differentiate
while offering solutions to elevate their position in the marketplace.
Yang Yang Huang, Director
Ms. Yang has served as a director of the Company since November 2017. She has served as the Chief Executive Officer and Chairman of Panjin Futian Petrochemical Industry Development Co., Ltd., since 2016. She has been previously employed by the People’s Bank of China from 2007 to 2016 as a principal staff member responsible for approval of international payments made by commercial banks and monitoring of foreign exchange transactions. Prior to her position at People’s Bank of China, Ms. Yang was employed by Industrial and Commercial Bank of China from 2005 to 2007 as a staff member. Ms. Yang holds a Ph.D. in finance from Dongbei University of Finance and Economics, a Masters in Management from the University of Leeds, and a B.A. in English and International Trade from Dalian University.
Kuan-Ping “Peter” Huang, General Manager
Kuan-Ping “Peter” Huang is the General Manager of BE Pharma. He is responsible for operating our regulatory, logistics, and manufacturing capabilities for over 750 herbal and botanical supplements. In addition, he works on our compliance to oversee our production goals as well as our financial revenue projections. Peter is a graduate of the University of Massachusetts with a B.A. in business and is a graduate of Massachusetts Institute of Technology with a degree in Biology. He also received an M.S. in Oriental Medicine and Acupuncture from South Baylo University.
Amy Kajiya, VP of Sales
Amy graduated from University of California Berkeley with a degree in Economics. She’s an established P&L executive and has demonstrated success accelerating sales growth and increasing profitability across a multitude of business units. A dynamic and accomplished leader, she brings over 18 years of experience in the domestic and international consumer goods sector to the team. Amy’s background includes first-hand experience with Top Box distribution as well as competitive positioning across various markets. She has dedicated innovation and focus to identifying and improving quality product availability for the consumer. Amy is carrying on this evolvement within Bio Essence Corp. in great strides.
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Meetings of the Board of Directors
The Board establishes policy and provides strategic direction, oversight, and control of the Company. As of the date of this Prospectus, the Board of Directors had no standing audit, compensation, nominating or other committees, although the Board intends to establish such committees in the future.
Code of Ethics
As of the date of this Prospectus, we had not adopted a formal, written code of conduct (“Code of Ethics”) within the specific guidelines promulgated by the SEC, although we intend to adopt a Code of Ethics in the near future.
Director and Executive Compensation
Option Grants in the Last Fiscal Year
No Stock Appreciation Rights (“SARs”) or options to purchase our stock were granted to the named executive officers during fiscal year ended December 31, 2018 or 2017.
Retirement Plan
We do not currently have any retirement plan, but we expect to adopt one in the near term.
Compensation of Directors During Period Ended March 31, 2019, and Years Ended December 31, 2018 2018 and 2017
Other than described below, the Company did not compensate its directors for acting as such.
Summary Compensation Table
The following table provides information regarding the compensation of our named executive officers for the years ended December 31, 2018, December 31, 2017, and as of March 31, 2019.
| Name and Principal Position | Year | Salary | Option Awards (1) | Non-Equity Incentive Plan Compensation (2) | Other Compensation | Total | ||||||||||||||||||
Yin Yan (Chief Executive Officer, Chief Financial Officer, and Director) | Period Ending March 31, 2019 | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||
| 2017 and 2018 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
| Yang Yang Huang (Director) | Period Ending March 31, 2019 | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||
| 2017 and 2018 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
| Dr. Sia Fooladian, MD* | Period Ending March 31, 2019 | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||
| 2017 and 2018 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
| Robert D. Nagel. Esq.* | Period Ending March 31, 2019 | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||
| 2017 and 2018 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
| Sharon Mair* | Period Ending March 31, 2019 | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||
| 2017 and 2018 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
| Simon Shavanson* | Period Ending March 31, 2019 | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||
| 2017 and 2018 | $ | — | $ | — | $ | — | $ | — | $ | — |
| 31 |
* Identifies directors that were appointed in the second quarter of 2019. Each identified director received 10,000 shares of common stock upon execution of a Board Director Agreement. Directors receive 10,000 shares of stock annually as compensation for their service to the Company.
Compensation Committee Interlocks and Insider Participation
The Company does not currently have a compensation committee. The Board of Directors will consider compensation matters relating to directors and officers collectively moving forward.
Security Ownership of Certain Beneficial Owners and Management
The following tables sets forth information as of the date of this Prospectus regarding the beneficial ownership of the Company’s common stock by individuals who own more than 5% of the issued and outstanding common stock and the Company’s officers and directors.
Certain Beneficial Owners
| Title of Class | Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent of Class(3) |
| Common Stock | Yin Yan(1) – 31921 Apuesto Way, Trabuco Canyon CA, 92679 | 9,000,000 shares—directly owned | 23% |
| Common Stock | Jian Yang(2) – 2012 Paseo Del Mar, Palos Verdes Estates, CA 90274 | 21,000,000 shares—directly owned | 64% |
(1) Yin Yan is the Company’s Chief Executive Officer, Chief Financial Officer, and Chairman of the Board of Directors
(2) Jain Yang is the Company’s controlling shareholder and former director
(3) Assumes all 5,000,000 shares offered by the Company through the IPO are purchased, making the total number of shares of common stock issued and outstanding 38,209,000
Management
| Title of Class | Name of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent of Class(5) |
| Common Stock | Yin Yan(1) | 9,000,000 shares—directly owned | 23% |
| Common Stock | Dr. Sia Fooladian(2) | 10,000 shares—directly owned | <1% |
| Common Stock | Robert D. Nagel(2) | 10,000 shares—directly owned | <1% |
| Common Stock | Sharon Mair(2) | 10,000 shares—directly owned | <1% |
| Common Stock | Simon Shavanson(2) | 10,000 shares—directly owned | <1% |
| Common Stock | Yang Yang Huang(4) | 400,000 shares—directly owned | 1% |
| Common Stock | Kaun-Ping “Peter” Huang(3) | 10,000 shares—directly owned | <1% |
| Common Stock | Amy Kajiya(4) | 15,000 shares—directly owned | <1% |
| Common Stock |
All Directors and Officers as a Group |
9,465,000 shares | 24.77% |
(1) Chief Executive Officer, Chief Financial Officer, and Chairman of the Board of Directors
(2) Director
(3) General Manager of BE Pharma
(4) Vice President of Sales
(5) Assumes all 5,000,000 shares offed by the Company through the IPO are purchased, making the total number of shares of common stock issued and outstanding 38,209,000
| 32 |
Changes in Control
The Company is not aware of any agreements, pledges, or other arrangements that will lead to a change in control of the Company.
Transactions with Related Persons
At this time, the Company is not aware of any transaction in which the Company is a participant, the amount involved exceeds the lesser of $120,000 or 1% of the average of the Company’s total assets, and in which a related person has a material direct or indirect interest.
Further, the Company has not engaged any promoter, and is not receiving assets from a promoter in any way.
The Company is offering 5,000,000 shares of common stock at $1.00 per share under the IPO. The Company does not have a current plan for the net proceeds from the IPO. Proceeds from the IPO will be deposited into its operations account and applied to operational costs as the Company implements its business plan. These costs include, but are not limited to, developing products, funding sales teams, paying costs associated with the Company’s reporting obligations under the Exchange Act, and taking steps to expand the Company’s business.
The Company will not receive any proceeds from the sale of common stock by the Selling Shareholders under the terms of the Resale.
ITEM 5. DETERMINATION OF OFFERING PRICE
The offering price of registered shares of common stock in this Prospectus has been determined arbitrarily by the Company. The price does not bear any relationship to our assets, book value, earnings, or other established criteria for valuing a publicly-reporting company. In determining the number of shares to be offered and the offering price, we took into consideration (1) our cash on hand and the amount of money we would need to implement our business plan, (2) the price at which we sold our common stock in offerings not registered under the Securities Act, (3) the risk and unpredictable nature of our business, and (4) the price we believed a purchaser would be willing to pay for our common stock. The Company further based this offering price on comparable companies operating in the same or similar industry. Accordingly, the offering price should not be considered an indication of the actual value of the securities
ITEM 6. DILUTION
At this time, the Company does not have any disclosures required under Item 506 of Regulation S-K.
ITEM 7. SELLING SECURITY HOLDERS
The Company is registering for offer and sale by existing holders thereof 33,209,000 shares of common stock held by such shareholders. The Company will not receive any proceeds from the sale of the Selling Shareholder shares. The Selling Shareholders have no agreement with any underwriters with respect to the sale of the Selling Shareholder Shares. The Selling Shareholders, who are deemed to be statutory underwriters, will offer their shares at the fixed price of $1.00 per share in one or more transactions that may take place by ordinary broker’s transactions, privately negotiated transactions or through sales to one or more dealers for resale.
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The Selling Shareholders may from time to time offer the Selling Shareholder shares through underwriters, dealers or agents, which may receive compensation in the form of underwriting discounts, concessions or commissions from them and/or the purchasers of the Selling Shareholder shares for whom they may act as agents. Any agents, dealers or underwriters that participate in the distribution of the Selling Shareholder shares may be deemed to be “underwriters” under the Securities Act and any discounts, commissions or concessions received by any such underwriters, dealers or agents might be deemed to be underwriting discounts and commissions under the Securities Act.
The following table sets forth ownership of shares held by each person who is a Selling Shareholder.
| Name | Number of Shares Owned Before the Resale Offering | Shares Offered Herein | Number of Shares Owned After Offering | Percentage of Shares Owned After Offering | ||||||||||||
| Jian Yang(1) | 21,000,000 | 21,000,000 | 0 | 0.00 | % | |||||||||||
| Yin Yan(2) | 9,000,000 | 9,000,000 | 0 | 0.00 | % | |||||||||||
| Yang Yang Huang(3) | 400,000 | 400,000 | 0 | 0.00 | % | |||||||||||
| Zi Yang Bi | 200,000 | 200,000 | 0 | 0.00 | % | |||||||||||
| Gang Cheng | 40,000 | 40,000 | 0 | 0.00 | % | |||||||||||
| Xudong Sun | 100,000 | 100,000 | 0 | 0.00 | % | |||||||||||
| Weijia Guo | 200,000 | 200,000 | 0 | 0.00 | % | |||||||||||
| Hechi Sun | 200,000 | 200,000 | 0 | 0.00 | % | |||||||||||
| Zhe Qu | 240,000 | 240,000 | 0 | 0.00 | % | |||||||||||
| Xianghua Gai | 100,000 | 100,000 | 0 | 0.00 | % | |||||||||||
| Dianlin Wang | 100,000 | 100,000 | 0 | 0.00 | % | |||||||||||
| Jing Yang | 100,000 | 100,000 | 0 | 0.00 | % | |||||||||||
| Resse Jiang | 20,000 | 20,000 | 0 | 0.00 | % | |||||||||||
| Shaqin Yang | 200,000 | 200,000 | 0 | 0.00 | % | |||||||||||
| Shili Zhou | 200,000 | 200,000 | 0 | 0.00 | % | |||||||||||
| Kevin Yanzhi Wu | 20,000 | 20,000 | 0 | 0.00 | % | |||||||||||
| CB Capital Inc | 40,000 | 40,000 | 0 | 0.00 | % | |||||||||||
| Zhenhan Huang | 80,000 | 80,000 | 0 | 0.00 | % | |||||||||||
| Ying Chen | 72,000 | 72,000 | 0 | 0.00 | % | |||||||||||
| An-Ni Chi | 20,000 | 20,000 | 0 | 0.00 | % | |||||||||||
| Kuan-Ting Wu | 10,000 | 10,000 | 0 | 0.00 | % | |||||||||||
| Man-Ning Chiu | 40,000 | 40,000 | 0 | 0.00 | % | |||||||||||
| Yu-Ching Chou | 10,000 | 10,000 | 0 | 0.00 | % | |||||||||||
| Shang Min Huang | 10,000 | 10,000 | 0 | 0.00 | % | |||||||||||
| Pei-Hsuan Chang | 10,000 | 10,000 | 0 | 0.00 | % | |||||||||||
| Qi Sun | 2,000 | 2,000 | 0 | 0.00 | % | |||||||||||
| Dunyong He | 2,000 | 2,000 | 0 | 0.00 | % | |||||||||||
| Yuan Chen | 2,000 | 2,000 | 0 | 0.00 | % | |||||||||||
| Wantongda Group | 12,000 | 12,000 | 0 | 0.00 | % | |||||||||||
| Mao Yuan Int'l Commercial and Trading LLC | 580,000 | 580,000 | 0 | 0.00 | % | |||||||||||
| Cuixia Sun | 2,000 | 2,000 | 0 | 0.00 | % | |||||||||||
| Yang Zou | 10,000 | 10,000 | 0 | 0.00 | % | |||||||||||
| Jia Liu | 10,000 | 10,000 | 0 | 0.00 | % | |||||||||||
| Peter Hu | 2,000 | 2,000 | 0 | 0.00 | % | |||||||||||
| 34 |
| Zhixiong Yang | 10,000 | 10,000 | 0 | 0.00 | % | |||||||||||
| Ning Jiang | 10,000 | 10,000 | 0 | 0.00 | % | |||||||||||
| Yuling Xiong | 10,000 | 10,000 | 0 | 0.00 | % | |||||||||||
| Zhili Yan | 10,000 | 10,000 | 0 | 0.00 | % | |||||||||||
| Hong Ouyang | 10,000 | 10,000 | 0 | 0.00 | % | |||||||||||
| Alan Hung | 10,000 | 10,000 | 0 | 0.00 | % | |||||||||||
| Jing Li | 10,000 | 10,000 | 0 | 0.00 | % | |||||||||||
| Jie Luo | 10,000 | 10,000 | 0 | 0.00 | % | |||||||||||
| Tony Lu | 10,000 | 10,000 | 0 | 0.00 | % | |||||||||||
| Yulin Huang | 10,000 | 10,000 | 0 | 0.00 | % | |||||||||||
| Kuan Ping Huang | 10,000 | 10,000 | 0 | 0.00 | % | |||||||||||
| Amy Kajiya | 15,000 | 15,000 | 0 | 0.00 | % | |||||||||||
| Feifei Rautionmaa | 10,000 | 10,000 | 0 | 0.00 | % | |||||||||||
| Simon Shavanson(3) | 10,000 | 10,000 | 0 | 0.00 | % | |||||||||||
| Siyavash Fooladian(3) | 10,000 | 10,000 | 0 | 0.00 | % | |||||||||||
| Robert Nagel(3) | 10,000 | 10,000 | 0 | 0.00 | % | |||||||||||
| Sharon Mair(3) | 10,000 | 10,000 | 0 | 0.00 | % |
(1) All of the Selling Shareholders Shares are being offered as a part of the Resale. This table projects ownership assuming the Selling Shareholders sell all of their Shares as part of the Resale. However, Selling Shareholders have no obligation to sell any shares as a party of the Resale, which may result in the Selling Shareholders retaining an interest in the Company. The numbers identified herein assume that the Selling Shareholders sell all of their shares as a result of the Resale.
(2) Yin Yan is the Chief Executive Officer, Chief Financial Officer, and Chairman of the Board of the Directors for the Company
(3) Denotes directors of the Company within the past three (3) years
We intend to offer and sell the IPO Shares through our officers and directors who will receive no compensation or fees with the offers and/or sales. This Offering is commencing on the date of this Prospectus and will continue until all shares are sold, or until the Board of Directors determines it is appropriate to close the offering (the “Offering Period”). The shares are being offered on a “reasonable efforts, best efforts” basis—i.e. there is no requirement for all of the shares registered under the IPO to be sold in order for the Offering to be closed. Affiliates of the Company may purchase shares for their own account. Such purchases will be included in determining whether all of the shares have been sold.
The Company has agreed to indemnify its officers and directors in offering and selling the common stock, to the fullest extent permitted by law, against certain liabilities that may be incurred in connection with this Offering, including certain civil liabilities under the Securities Act. If we should find reasonable cause to believe that any statement in this Prospectus or the due diligence information is not true or continued ownership of such shares will cause a violation of any law by which we are governed, we may either (i) refuse to issue the common stock, or (ii) redeem any common stock at 100% of the original purchase price on the date of redemption as specified in the notice advising the investor of the compulsory redemption.
During such time as we may be engaged in a distribution of any of the shares we are registering by this registration statement, we are required to comply with Regulation M. In general, Regulation M precludes any selling security holder, any affiliated purchasers and any broker-dealer or other person who participates in a distribution from bidding for or purchasing, or attempting to induce any person to bid for or purchase any security which is the subject of the distribution until the entire distribution is complete. Regulation M defines a “distribution” as an offering of securities that is distinguished from ordinary trading activities by the magnitude of the offering and the presence of special selling efforts and selling methods. Regulation M also defines a “distribution participant” as an underwriter, prospective underwriter, broker, dealer, or other person who has agreed to participate or who is participating in a distribution.
Regulation M under the Exchange Act prohibits, with certain exceptions, participants in a distribution from bidding for or purchasing, for an account in which the participant has a beneficial interest, any of the securities that are the subject of the distribution. Regulation M also governs bids and purchases made in order to stabilize the price of a security in connection with a distribution of the security. We have informed the Selling Shareholders that the anti-manipulation provisions of Regulation M may apply to the sales of their shares offered by this prospectus, and we have also advised the Selling Shareholders of the requirements for delivery of this prospectus in connection with any sales of the common stock offered by this Prospectus. The anti-manipulation rules of Regulation M under the Exchange Act, may apply to sales of shares and activities of the Selling Shareholders. The Selling Shareholders will act independently of us in making decisions with respect to the timing, manner and size of each sale.
| 35 |
The Selling Shareholders may use a variety of methods when selling shares. They may engage in ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers. They may block trades in which the broker-dealer will attempt to sell the shares as agent, but may position and resell a portion of the block as principal to facilitate the transaction. The shares may be purchased by a broker-dealer as principal and resale by the broker-dealer for its account. They might elect to engage in an exchange distribution in accordance with the rules of the applicable exchange. Finally, they might engage in privately negotiated transactions or broker-dealers may agree with the Selling Shareholders to sell a specified number of such shares at the fixed price per share set forth herein, or any other method permitted pursuant to applicable law.
The Selling Shareholders or their pledges, donees, transferees or other successors in interest, may also sell the Shares directly
to market makers acting as principals and/or broker-dealers acting as agents for themselves or their customers. Such broker-dealers
may receive compensation in the form of discounts, concessions or commissions from the Selling Shareholders and/or the purchasers
of Shares for whom such broker-dealers may act as agents or to whom they sell as principal or both, which compensation as to a
particular broker-dealer might be in excess of customary commissions. Market makers and block purchasers purchasing the shares
will do so for their own account and at their own risk. It is possible that the Selling Shareholders will attempt to sell shares
in block transactions to market makers or other purchasers at a price per Share which may be below the then market price. The Selling
Shareholders cannot assure that all or any of the shares offered in this Prospectus will be sold by the Selling Shareholders. In
addition, the Selling Shareholders and any brokers, dealers or agents, upon effecting the sale of any of the shares offered in
this Prospectus are "underwriters" as that term is defined under the Securities Act or the Exchange Act, or the rules
and regulations under such acts. In such event, any commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act.
The Selling Shareholders may from time to time pledge or grant a security interest in some or all of their shares and, if it defaults in the performance of its secured obligations, the pledgee or secured parties may offer and sell the shares from time to time under this Prospectus after the Company has filed an amendment to this Prospectus under Rule 424(b)(3) or any other applicable provision of the Securities Act amending the list of Selling Shareholders to include the pledgee, transferee or other successors in interest as a Selling Shareholders under this Prospectus.
The Selling Shareholders also may transfer the shares in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this Prospectus and may sell the shares from time to time under this Prospectus after we have filed an amendment to this Prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of Selling Stockholders to include the pledgee, transferee or other successors in interest as a Selling Stockholders under this Prospectus.
The Selling Shareholders acquired the shares offered hereby in the ordinary course of business and they have advised us that they have not entered into any agreements, understandings or arrangements with any underwriters or broker-dealers regarding the sale of the shares, nor is there an underwriter or coordinating broker acting in connection with a proposed sale of Shares by the Selling Shareholders. We will file a supplement to this Prospectus if the Selling Shareholders enter into a material arrangement with a broker-dealer for sale of common stock being registered. If the Selling Shareholders use this Prospectus for any sale of the shares, it will be subject to the prospectus delivery requirements of the Securities Act.
Pursuant to a requirement by the Financial Industry Regulatory Authority, or FINRA, the maximum commission or discount to be received by any FINRA member or independent broker/dealer may not be greater than eight percent of the gross proceeds received by the Selling Shareholders for the sale of any securities being registered pursuant to SEC Rule 415 under the Securities Act.
ITEM 9. DESCRIPTION OF SECURITIES TO BE REGISTERED
Under Item 202 of Regulation S-K, the Company is to disclose any share classes and any provisions of its Bylaws that might affect an investor, such as any clauses that may act as a “poison pill” or liability of shares to foreign tax. The Company currently does not have any such disclosures, and furthermore, directs any investor to the Bylaws and Articles of Incorporation, both of which are set forth in the exhibits, below.
The authorized capital stock of the Company consists of 100,000,000 shares of common stock, par value $.0001 per share, of which there are 33,209,000 issued and outstanding, and 10,000,000 shares of preferred stock par value $.0001 per share, of which none have been designated or issued. The Company is seeking the registration of 38,209,000 shares—5,000,000 for the IPO and 33,209,000 shares for the Resale, which will be sold by Selling Shareholders as described above.
| 36 |
We have not paid any dividends on our common stock. The payment of cash dividends in the future, if any, will be contingent upon our revenues and earnings, if any, capital requirements and general financial condition subsequent to consummation of a business combination, if any. The payment of any dividends, if any, will be within the discretion of our then existing Board of Directors. It is the present intention of our Board of Directors to retain all earnings, if any, for use in our business operations and, accordingly, the Board of Directors does not anticipate paying any cash dividends. Holders of common stock are not entitled to pre-emptive or subscription or conversion rights, and there are no redemption or sinking fund provisions applicable to the common stock.
We have not issued and do not have outstanding any warrants to purchase common shares. We have not issued and do not have outstanding any securities convertible into common shares or any rights convertible or exchangeable into common shares.
ITEM 10. INTERESTS OF NAMED EXPERTS AND COUNSEL
The Company has retained Anthony R. Paesano and Devin W. Bone of the law firm of Paesano Akkashian Apkarian, P.C. (“PAA”) located at 7457 Franklin Road, Suite 200 in Bloomfield Hills, Michigan to serve as counsel. Mr. Bone authored a professional opinion on the validity of the shares to be issued at Exhibit 23.1. Mr. Paesano, Mr. Bone, and PAA do not have any equity interest in the Company. The audited financial statement of the Company as of and for the years ended December 31, 2017 and 2018 were audited by Kenne Ruan, CPA, P.C., an independent registered public accounting firm, located at 40 Hemlock Hollow Road, Woodbridge, CT 06525 to the extent set forth in its report and are included herein in reliance upon the authority of this firm as experts in accounting and auditing. See Exhibit 23.2.
ITEM 11. INFORMATION WITH RESPECT TO THE REGISTRANT
The Company hereby incorporates by reference the information provided in the above Prospectus from page 5 to 33.
ITEM 11A. MATERIAL CHANGES
The Company does not have any disclosures associated with material changes in its affairs since the end of the latest fiscal year.
ITEM 12. INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Company does not have any disclosures under this item.
ITEM 12A. Disclosure of Commission Position on Indemnification for Securities Act Liabilities
Our Bylaws provide to the fullest extent permitted by law that our directors or officers, former directors and officers, and persons who act at our request as a director or officer of a body corporate of which we are a shareholder or creditor shall be indemnified by us. We believe that the indemnification provisions in our Bylaws are necessary to attract and retain qualified persons as directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, or persons controlling the registrant, the Company has been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Act and is therefore unenforceable. Further, California law provides that indemnification is only available to agents of a corporation where the individual acted in good faith and in a manner the person reasonably believed to be in the best interest of the company. Thus, intentional violations of securities law—federal or otherwise—or other laws would not be indemnified by the Company under California law or the Bylaws.
Where you can Find More Information
We are subject to the informational requirements of the Exchange Act, as amended, and accordingly, file current and periodic reports, proxy statements and other information with the SEC. We have also filed with the SEC a Registration Statement on Form S-1, under the Securities Act of 1933, as amended, with respect to the securities offered by this prospectus. This prospectus, which forms a part of the registration statement, does not contain all the information set forth in the registration statement, as permitted by the rules and regulations of the SEC. For further information with respect to us and the securities offered by this prospectus, reference is made to the registration statement. The registration statement and other information may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website at www.sec.gov that contains reports and other information regarding issuers that file electronically with the SEC.
PART II – INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table indicates the expenses to be incurred in connection with the offering described in this registration statement, all of which will be paid by us. All amounts are estimated except the Securities and Exchange Commission registration fee, accountant's fees and expenses, the legal fee and expenses, and transfer agent's fees and expenses.
| Securities and Exchange Commission registration fee | $4,630.93 | |
| DTC Eligibility and support fee | $10,000.00 | |
| Accountants' fees and expenses | $3,000.00 | |
| Legal fees and expenses | $10,000.00 | |
| Transfer Agent's fees and expenses | $1,000.00 | |
| Edgar Agent fees and expenses | $2,000.00 | |
| Total expenses | $30,630.93 |
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ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 317 of California’s Corporation Code (“CCC”) provides that a corporation shall have the power to indemnify any person who is a party to a lawsuit, or who is threatened with litigation, by reason of the fact that the person is or was an agent of the corporation. This includes officers, directors, employees, or other individuals working in any way for the corporation. The caveat is, however, that indemnification may be provided “if that person acted in good faith and in a manner the person reasonably believed to be in the best interests of the corporation and (in a criminal proceeding) had no reasonable cause to believe the conduct of the person was unlawful. Indemnification under the CCC extends to all costs “actually and reasonably” incurred by the agent of the corporation.
Our Bylaws provide the following direction on indemnification:
The liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. The corporation is authorized to provide indemnification of agents (As defined in Section 317 of the [CCC]) for breach of duty to the corporation and shareholders through bylaw provisions or through agreements with the agents, or both, in excess of the indemnification otherwise permitted by Section 317 of the [CCC], subject to the limits on such excess indemnification set forth in Section 204 of the [CCC].
The Company has not entered into any indemnification agreements with any directors or officers, but it may elect to do so in the future in order to secure talented directors and officers. Any indemnification agreements entered into by the Company will mirror our Bylaws but carve out exceptions for intentional acts.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the past three (3) years, the Company has sold unregistered securities on several occasions. The information required by Rule 701 of Regulation S-K is provided in the table below. The sales identified herein were sold in reliance of Rule 506(b) of Regulation D of the Securities Act. The individuals who purchased the common stock were accredited investors with personal relationships with the Company’s officers and directors. No general solicitation was used, and none of the purchasers were merely sophisticated. For the sales identified below, no underwriters were used.
| Name | Date of Sale | Shares Offered Herein | Number of Shares Sold | Aggregate Offering Price |
| Yang Yang Huang | 11/16/2017 | Common Stock | 400,000 | $ 200,000.00 |
| Zi Yang Bi | 11/15/2017 | Common Stock | 200,000 | $ 100,000.00 |
| Gang Cheng | 11/17/2017 | Common Stock | 40,000 | $ 20,000.00 |
| Xudong Sun | 11/27/2017 | Common Stock | 100,000 | $ 50,000.00 |
| Weijia Guo | 11/28/2017 | Common Stock | 200,000 | $ 100,000.00 |
| Hechi Sun | 11/30/2017 | Common Stock | 200,000 | $ 100,000.00 |
| Zhe Qu | 12/1/2017 | Common Stock | 240,000 | $ 120,000.00 |
| Xianghua Gai | 12/5/2017 | Common Stock | 100,000 | $ 50,000.00 |
| Dianlin Wang | 12/5/2017 | Common Stock | 100,000 | $ 50,000.00 |
| Jing Yang | 12/11/2017 | Common Stock | 100,000 | $ 50,000.00 |
| Resse Jiang | 12/1/2017 | Common Stock | 20,000 | $ 10,000.00 |
| Shaqin Yang | 12/6/2017 | Common Stock | 200,000 | $ 100,000.00 |
| Shili Zhou | 12/22/2017 | Common Stock | 200,000 | $ 100,000.00 |
| Kevin Yanzhi Wu | 12/14/2017 | Common Stock | 20,000 | $ 10,000.00 |
| CB Capital Inc | 12/25/2017 | Common Stock | 40,000 | $ 20,000.00 |
| Zhenhan Huang | 12/18/2017 | Common Stock | 80,000 | $ 40,000.00 |
| Ying Chen | 12/27/2017 | Common Stock | 72,000 | $ 36,000.00 |
| An-Ni Chi | 5/15/2019 | Common Stock | 20,000 | $ 10,000.00 |
| Kuan-Ting Wu | 6/20/2019 | Common Stock | 10,000 | $ 5,000.00 |
| Man-Ning Chiu | 5/15/2019 | Common Stock | 40,000 | $ 20,000.00 |
| Yu-Ching Chou | 5/15/2019 | Common Stock | 10,000 | $ 5,000.00 |
| Shang Min Huang | 5/17/2019 | Common Stock | 10,000 | $ 5,000.00 |
| Pei-Hsuan Chang | 5/16/2019 | Common Stock | 10,000 | $ 5,000.00 |
| Qi Sun | 5/19/2019 | Common Stock | 2,000 | $ 1,000.00 |
| Dunyong He | 5/19/2019 | Common Stock | 2,000 | $ 1,000.00 |
| Yuan Chen | 5/20/2019 | Common Stock | 2,000 | $ 1,000.00 |
| Wantongda Group | 5/23/2019 | Common Stock | 12,000 | $ 6,000.00 |
| Mao Yuan Int'l Commercial and Trading LLC | 5/20/2019 | Common Stock | 580,000 | $ 290,000.00 |
| Cuixia Sun | 5/20/2019 | Common Stock | 2,000 | $ 1,000.00 |
| Yang Zou | 5/28/2019 | Common Stock | 10,000 | $ 5,000.00 |
| Jia Liu | 5/29/2019 | Common Stock | 10,000 | $ 5,000.00 |
| Peter Hu | 6/13/2019 | Common Stock | 2,000 | $ 1,000.00 |
| 38 |
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The Company’s financial statements, notes, and schedules are attached hereto, along with the following exhibits identified in the chart below.
| Incorporated by reference | ||||||
| Exhibit | Exhibit Description | Filed herewith | Form | Period ending | Exhibit | Filing date |
| 3.1 | Articles of Incorporation | X | ||||
| 3.2 | By-Laws | X | ||||
| 3.3 | Amendment to Certificate of Incorporation | X | ||||
| 4.1 | Specimen Stock Certificate | X | ||||
| 23.1 | Legal Opinion and Consent | X | ||||
| 23.2 | Consent of Independent Auditor | X | ||||
The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Irvine, State of California, on July 26, 2019.
BIO ESSENCE CORP.
| By: /s/ Yin Yan Yin Yan, Chief Executive Officer and Chairman of the Board of Directors |
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons and on the dates indicated.
By: /s/Yin Yan
Yin Yan, Chief Executive Officer and
Chairman of the Board of Directors
Date: July 26, 2019
| 39 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and
Stockholders of Bio Essence Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Bio Essence Corporation (the Company) as of December 31, 2018, and 2017, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Matter
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred recurring net losses with significant accumulated deficit, and negative cash flows from operations. These conditions raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/Kenne
Ruan, CPA, P.C.
We have served as the Company’s auditor since 2017.
Woodbridge, Connecticut
July 18, 2019
| F-1 |
| BIO ESSENCE CORPORATION AND SUBSIDIARIES | ||||||||
CONSOLIDATED BALANCE SHEETS | ||||||||
| AS OF DECEMBER 31, | ||||||||
| 2018 | 2017 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash & cash equivalents | $ | — | $ | 713,551 | ||||
| Accounts receivable | $ | 182,170 | $ | 210,264 | ||||
| Other receivables | $ | — | $ | 2,933 | ||||
| Advance to supplies | $ | 64,683 | $ | 38,324 | ||||
| Inventory, net | $ | 581,612 | $ | 759,565 | ||||
| Total current assets | $ | 828,465 | $ | 1,724,637 | ||||
| NONCURRENT ASSETS | ||||||||
| Security deposit | $ | 64,043 | $ | 62,202 | ||||
| Property and equipment, net | $ | 100,259 | $ | 94,752 | ||||
| Intangible assets, net | $ | 29,511 | $ | 4,339 | ||||
| Total non-current assets | $ | 193,813 | $ | 161,293 | ||||
| TOTAL ASSETS | $ | 1,022,278 | $ | 1,885,930 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Bank overdraft | $ | 16,376 | — | |||||
| Accounts payable | $ | 60,565 | $ | 14,582 | ||||
| Taxes payable | $ | 13,837 | $ | 28,235 | ||||
| Accrued liability and other payables | $ | 672,068 | $ | 314,995 | ||||
| Loan from shareholder | $ | 90,000 | — | |||||
| Total current liabilities | $ | 852,846 | $ | 357,812 | ||||
| TOTAL LIABILITIES | $ | 852,846 | $ | 357,812 | ||||
| COMMITMENTS AND CONTINGENCY | ||||||||
| STOCKHOLDERS' EQUITY | ||||||||
| 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 32,312,000 and 30,000,000 as of December 31, 2018 and 2017 | $ | 3,231 | $ | 3,000 | ||||
| Additional paid in capital | $ | 4,578,309 | $ | 4,478,540 | ||||
| Accumulated deficit | $ | (4,412,108 | ) | $ | (2,953,422 | ) | ||
| TOTAL STOCKHOLDERS' EQUITY | $ | 169,432 | $ | 1,528,118 | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 1,022,278 | $ | 1,885,930 | ||||
The accompanying notes are an integral part of the consolidated financial statements
| F-2 |
| BIO ESSENCE CORPORATION AND SUBSIDIARIES | ||||||||
| CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||
| YEARS ENDED DECEMBER 31, | ||||||||
| 2018 | 2017 | |||||||
| Net sales | $ | 984,575 | $ | 1,338,722 | ||||
| Cost of goods sold | 622,999 | 950,362 | ||||||
| Gross profit | 361,576 | 388,360 | ||||||
| Operating expenses | ||||||||
| Selling expenses | 87,161 | 129,080 | ||||||
| General and administrative expenses | 1,774,729 | 1,984,294 | ||||||
| Total operating expenses | 1,861,890 | 2,113,374 | ||||||
| Loss from operations | (1,500,314 | ) | (1,725,014 | ) | ||||
| Non-operating income (expenses) | ||||||||
| Interest income | 303 | 142 | ||||||
| Financial expense | (20,898 | ) | (26,490 | ) | ||||
| Other income | 87,394 | 28,022 | ||||||
| Other expenses | (21,971 | ) | (35,068 | ) | ||||
| Non-operating income (expenses), net | 44,828 | (33,394 | ) | |||||
| Loss before income tax | (1,455,486 | ) | (1,758,408 | ) | ||||
| Income tax expense | 3,200 | 1,600 | ||||||
| Net loss | $ | (1,458,686 | ) | $ | (1,760,008 | ) | ||
| Basic and diluted weighted average shares outstanding | 32,128,307 | 29,191,784 | ||||||
| Basic and diluted net loss per share | $ | (0.05 | ) | $ | (0.06 | ) | ||
The accompanying notes are an integral part of the consolidated financial statements
| F-3 |
| BIO ESSENCE CORPORATION AND SUBSIDIARIES |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| YEARS ENDED DECEMBER 31, | ||||||||
| 2018 | 2017 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (1,458,686 | ) | $ | (1,760,008 | ) | ||
| Asset loss on disposal | 18,706 | — | ||||||
| Depreciation and amortization expenses | 39,538 | 19,293 | ||||||
| Provision for inventory impairment | (12,515 | ) | 270 | |||||
| Increase (decrease) in assets/ liabilities: | ||||||||
| Accounts receivable | 28,095 | (57,801 | ) | |||||
| Other receivables | 2,933 | 6,632 | ||||||
| Advance to supplies | (26,359 | ) | 77,097 | |||||
| Inventory | 190,465 | (230,023 | ) | |||||
| Security deposit | (1,841 | ) | 11,854 | |||||
| Accounts payable | 45,984 | (151,260 | ) | |||||
| Taxes payable | (14,398 | ) | 8,881 | |||||
| Accrued liability and other payables | 357,074 | (29,688 | ) | |||||
| Net cash used in operating activities | (831,004 | ) | (2,104,753 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Proceeds from sale of fixed assets | $ | 7,810 | — | |||||
| Purchase of fixed assets | (96,733 | ) | (91,646 | ) | ||||
| Net cash used in investing activities | (88,923 | ) | (91,646 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Bank overdraft | 16,376 | — | ||||||
| Proceeds from issuance of shares | 100,000 | 1,056,000 | ||||||
| Shareholder contribution | — | 1,780,000 | ||||||
| Loan from shareholder | 90,000 | — | ||||||
| Net cash provided by financing activities | 206,376 | 2,836,000 | ||||||
| NET INCREASE (DECREASE) IN CASH & EQUIVALENTS | (713,551 | ) | 639,601 | |||||
| CASH & CASH EQUIVALENTS, BEGINNING OF YEAR | 713,551 | 73,950 | ||||||
| CASH & CASH EQUIVALENTS, END OF YEAR | $ | — | $ | 713,551 | ||||
| Supplemental Cash Flow Data: | ||||||||
| Income tax paid | $ | 3,200 | $ | 1,600 | ||||
| Interest paid | $ | — | $ | — | ||||
The accompanying notes are an integral part of the consolidated financial statements
| F-4 |
| BIO ESSENCE CORPORATION AND SUBSIDIARIES | ||||||||||||||||||||
| CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||||||||||||||
| YEARS ENDED DECEMBER 31, 2018 AND 2017 | ||||||||||||||||||||
| COMMON | COMMON | ADDITIONAL | ||||||||||||||||||
| DATE | STOCK - SHARES | STOCK - AMOUNT | PAID IN CAPITAL | ACCUMULATED DEFICIT | TOTAL | |||||||||||||||
| Balance at January 1, 2017 | 25,000,020 | $ | 2,500 | $ | 935,150 | $ | (1,193,414 | ) | $ | (255,764 | ) | |||||||||
| Shares issued for shareholder contribution | 4,999,980 | 500 | 166,166 | — | 166,666 | |||||||||||||||
| Shareholders contribution | — | — | 2,321,224 | — | 2,321,224 | |||||||||||||||
| Shares to be issued for equity financing | — | — | 1,056,000 | — | 1,056,000 | |||||||||||||||
| Net loss for the year | — | — | — | (1,760,008 | ) | (1,760,008 | ) | |||||||||||||
| Balance at December 31, 2017 | 30,000,000 | 3,000 | 4,478,540 | (2,953,422 | ) | 1,528,118 | ||||||||||||||
| Shares issued for equity financing completed in 2017 | 2,112,000 | 211 | (211 | ) | — | — | ||||||||||||||
| Shares issued for equity financing | 200,000 | 20 | 99,980 | — | 100,000 | |||||||||||||||
| Net loss for the year | — | — | — | (1,458,686 | ) | (1,458,686 | ) | |||||||||||||
| Balance at December 31, 2018 | 32,312,000 | $ | 3,231 | $ | 4,578,309 | $ | (4,412,108 | ) | $ | 169,432 | ||||||||||
The accompanying notes are an integral part of the consolidated financial statements
| F-5 |
BIO ESSENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 and 2017
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 owned under common control since beginning of 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 into BEP, and transferred its distributing operation into BEH. On March 1, 2017, the 100% shareholder of FDS transferred all of her ownership in FDS into Bio Essence. As a result of the ownership restructure, FDS, BEP and BEH became wholly-owned subsidiaries of Bio Essence.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements are prepared in conformity with U.S. Generally Accepted Accounting Principles (“US GAAP”). The functional currency of Bio Essence is U.S. dollars (“USD’’). The accompanying financial statements are presented in U.S. dollars (“USD”).
Going Concern
The Company incurred net losses of $1.46 million and $1.76 million for the years ended December 31, 2018 and 2017 respectively. The Company also had an accumulated deficit of $4.41 million as of December 31, 2018. 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. 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.
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 December 31, 2018 and 2017, the bad debt allowance was $0.
Inventory
Inventories are stated at the lower of cost and 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 market value, if lower. The Company recorded provision for write-downs of inventory of $32,697 and $45,212, at December 31, 2018 and 2017, respectively.
| F-6 |
In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330) - Simplifying the Measurement of Inventory,” which requires that inventory within the scope of the guidance be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company adopted ASU 2015-11 effective January 1, 2017 and it did not have a material effect on the Company’s consolidated financial statements.
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:
| Building | 20 years | |||
| Leasehold improvement | 7-10 years | |||
| Office furniture | 5 years | |||
| Electronic Equipment | 3 years | |||
| Vehicles | 5 years |
Depreciation of plant, property and equipment attributable to manufacturing activities is capitalized as part of inventories, and expensed to cost of goods sold when inventories are sold.
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, but at least annually.
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 December 31, 2018 and 2017, there was no significant impairments of its long-lived assets.
Income Taxes
Income taxes are accounted for using an asset and liability method. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to 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.
| F-7 |
BEC and subsidiaries are subject to U.S. federal and state income taxes. On December 22, 2017, the Tax Cut and Jobs Act (“Tax Act”) was signed into law. The Tax Act introduced a broad range of tax reform measures that significantly change the federal income tax laws. The provisions of the Tax Act that have significant impact on the Company include the permanent reduction of the corporate income tax rate from 35% to 21% effective for tax years including or commencing on January 1, 2018, one-time transition tax on post-1986 foreign unremitted earnings, provision for Global Intangible Low-Taxed Income ("GILTI"), deduction for Foreign Derived Intangible Income ("FDII"), repeal of corporate alternative minimum tax, limitation of various business deductions, and modification of the maximum deduction of net operating loss with no carryback but indefinite carryforward provision. Many provisions in the Tax Act are generally effective in tax years beginning after December 31, 2017.
At December 31, 2018 and 2017, the Company did not take any uncertain positions that would necessitate recording a tax related liability.
Revenue Recognition
In May 2014 the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition requirements, including most industry specific guidance. This new standard requires a company to recognize revenues when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. The FASB subsequently issued the following amendments to ASU No. 2014-09 that have the same effective date and transition date: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations; ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The Company adopted these amendments with ASU 2014-09 (collectively, the new revenue standards).
The new revenue standards became effective for the Company on January 1, 2018, and were adopted using the modified retrospective method. The adoption of the new revenue standards as of January 1, 2018 did not change the Company’s revenue recognition as the majority of its revenues continue to be recognized when the customer takes control of its product. As the Company did not identify any accounting changes that impacted the amount of reported revenues with respect to its product revenues, no adjustment to retained earnings was required upon adoption.
Under the new revenue standards, the Company recognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods. The Company recognizes revenues following the five step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.
Revenues from product sales are recognized when the customer obtains control of the Company’s product, which occurs at a point in time, typically upon delivery to the customer. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that it would have recognized is one year or less or the amount is immaterial.
Revenues from product sales are recorded net of reserves established for applicable discounts and allowances that are offered within contracts with the Company’s customers.
Product revenue reserves, which are classified as a reduction in product revenues, are generally characterized in the following categories: discounts, returns and rebates. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable as the amount is payable to the Company’s customer.
The Company’s return policy allows for the return of damaged or defective products and shipment errors. A notice of damage or wrong items should make within five days from receiving the goods, and actual return of the products must be completed within 30 days from the date of receiving the goods. Delayed notification for damaged or wrong products will not be accepted for return or exchange. Custom formulas and capsules are not returnable. The amount for return of products was immaterial for the years ended December 31, 2018 and 2017.
Cost of Sales
Cost of sales (“COS”) consists primarily of finished goods purchased from other manufacturers, material costs, labor costs and related overhead that are directly attributable to the production of the products. Write-down of inventory to lower of cost or market is also recorded in COS.
Statement of Cash Flows
| F-8 |
In accordance with ASC Topic 230, “Statement of Cash Flows,” cash flows from the Company’s operations are calculated based on the local currencies using the average translation rates. As a result, amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.
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 December 31, 2018 and 2017, the Company did not identify any assets and liabilities that are required to be presented on the balance sheet at FV.
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.
Two customers accounted for 13% and 10%, respectively, of the Company’s sales for the year ended December 31, 2018, and at December 31, 2018, one customer accounted for 6.0% of the total outstanding accounts receivable of the Company. Two customers accounted for 11% and 10%, respectively, of the Company sales for the year ended December 31, 2017, and at December 31, 2017, one customer accounted for 71% of the total outstanding accounts receivable of the Company.
The Company purchased its products from five major vendors during the year ended December 31, 2018, accounting for a total of 73% (19%, 16%, 14%, 13% and 11% for each) of the Company’s purchases, respectively. The Company purchased its products from five major vendors during the year ended December 31, 2017, accounting for a total of 66 % (25%, 17%, 9%, 9% and 6% for each) of the Company’s purchases, respectively. Accounts payable to these major vendors were $296,699 and $651,797 as of December 31, 2018 and 2017, respectively.
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 that 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
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of adoption of this ASU on the consolidated financial statements.
| F-9 |
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 clarifies the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. The amendments are an improvement to U.S. GAAP because they provide guidance for each of the eight issues, thereby reducing the current and potential future diversity in practice. This ASU is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company has adopted the guidance retrospectively to each period presented. The adoption did not have any material effect on the presentation of its consolidated statements of cash flows.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This ASU improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. For public business entities, the amendments in this update are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The adoption of this ASU did not have a significant impact on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, and interim period within those fiscal years. The Company has adopted the guidance retrospectively to each period presented. The adoption did not have any material effect on the presentation of its consolidated statements of cash flows.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company has adopted the guidance effective January 1, 2018. The Company will evaluate the impact of adopting this standard prospectively upon any transactions of acquisitions or disposals of assets or businesses.
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 for the annual or any interim goodwill impairment tests beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, "Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting," which expands the scope of ASC 718 to include share-based payment transactions for acquiring goods and services from non-employees. An entity should apply the requirements of ASC 718 to non-employee awards except for specific guidance on inputs to an option pricing model and the attribution of cost. The amendments specify that ASC 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor's own operations by issuing share-based payment awards. The new guidance is effective for SEC filers for fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, 2019 (i.e., January 1, 2020, for calendar year entities). Early adoption is permitted. The Company is evaluating the effects of the adoption of this guidance and currently believes that it will impact the accounting of the share-based awards granted to non-employees.
In August 2018, the SEC issued Release No. 33-10532 that amends and clarifies certain financial reporting requirements. The principal change to our financial reporting will be the inclusion of the annual disclosure requirement of changes in stockholders’ equity in Rule 3-04 of Regulation S-X to interim periods. We will adopt this new rule beginning with its financial reporting for the quarter ending March 31, 2019. Upon adoption, the Company will include its Consolidated Statements of Stockholders’ Equity with each quarterly filing on Form 10-Q.
| F-10 |
3. INVENTORY
Inventory consisted of the following at December 31, 2018 and 2017:
| 2018 | 2017 | |||||||
| Raw materials | $ | 33,235 | $ | — | ||||
| Finished goods – health supplements | 581,074 | 804,777 | ||||||
| Less: Inventory impairment allowance | (32,697 | ) | (45,212 | ) | ||||
| Total | $ | 581,612 | $ | 759,565 | ||||
4. SECURITY DEPOSIT
As of December 31, 2018 and 2017, security deposit was mainly for the rent deposit of the Company’s office and warehouse of $64,043 and $62,202, respectively.
5. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following at December 31, 2018 and 2017:
| 2018 | 2017 | |||||||
| Leaseholder improvement | $ | 47,354 | $ | 18,538 | ||||
| Office furniture and equipment | 145,616 | 160,922 | ||||||
| Total | 192,970 | 179,460 | ||||||
| Less: Accumulated depreciation | (92,711 | ) | (84,708 | ) | ||||
| Net | $ | 100,259 | $ | 94,752 | ||||
Depreciation for the years ended December 31, 2018 and 2017 was $33,270 and $17,352, respectively.
6. INTANGIBLE ASSETS, NET
Intangible assets consisted of the following as of December 31, 2018 and 2017:
| 2018 | 2017 | |||||||
| Computer Software | $ | 36,928 | $ | 5,488 | ||||
| Trademark | 2,350 | 2,350 | ||||||
| Total | 39,278 | 7,838 | ||||||
| Less: Accumulated amortization | (9,767 | ) | (3,499 | ) | ||||
| Net | $ | 29,511 | $ | 4,339 | ||||
Amortization of intangible assets was $6,268 and $1,941 for the years ended December 31, 2018 and 2017, respectively.
Estimated amortization expense relating to the existing intangible assets with finite lives for each of the next five years at December 31, 2018 is as follows: $11,410, $10,716, $6,361, $240 and $240.
7. TAXES PAYABLE
Tax payable at December 31, 2018 and 2017 was for sales tax and payroll tax payable of $13,837 and $28,235, respectively.
8. ACCRUED LIABILITIES AND OTHER PAYABLES
Accrued liabilities and other payables consisted of the following at December 31, 2018 and 2017:
| 2018 | 2017 | |||||||
| Accrued Expense | $ | 249 | $ | 5,000 | ||||
| Credit Card Payable | 18,518 | — | ||||||
| Accrued rent | 43,935 | 27,066 | ||||||
| Payroll payable | 5,191 | 3,754 | ||||||
| Accrued litigation loss | 360,000 | — | ||||||
| Customer deposit | 244,175 | 279,175 | ||||||
| Total | $ | 672,068 | $ | 314,995 | ||||
| F-11 |
The Company is currently involved in legal proceedings involving a lease agreement with its former landlord, and its former sublessor. On December 9, 2016, the Company entered into a lease agreement with former landlord for a warehouse facility located in San Leandro, California (the “Premises”). On November 1, 2017, the Company entered into a sublease with former sublessor, whereby the former sublessor would occupy a portion of the Premises.
Beginning in April of 2018, the former sublessor began violating its sublease by failing to pay rent, utilities, and operating a cannabis operation in the Premises, which constituted a direct violation of the sublease. The former landlord instructed the Company to evict the former sublessor. Thereafter, the Company was forced to leave the Premises because of the former sublessor’s activities.
The former landlord initiated litigation against the Company seeking $2.09 million in damages relating to lost rental profits. The Company has filed a cross-complaint against the former sublessor for breach of the sublease agreement, seeking damages related to the Company’s breach of the lease, costs, and attorney’s fees. The case is currently pending in the Superior Court of California in the County of Alameda.
The Company believes it is probable that a loss is likely to occur, and estimated the loss is around $360,000, and recorded accrual for such loss contingency as of December 31, 2018, it is possible the actual liability could be higher or lower than the Company’s estimate.
9. RELATED PARTY TRANSACTIONS
Loans from Shareholders
At December 31, 2018, the Company had loan from one major shareholder (also the Company’s senior officer) of $90,000. The loan was payable on demand, and bore no interest.
Shareholders Capital Contribution
Two major shareholders (one is the Company’s senior officer) contributed $1.61 million cash to the Company for the Company’s working capital needs in 2017, and these two major shareholders also converted their loans to the Company of $0.71 million (which was incurred in 2016) into capital contribution in 2017.
10. STOCKHOLDERS’ EQUITY
Shareholders Contribution
In the beginning of 2017, 4,999,980 shares were issued to one major shareholder of the Company (also the Company’s senor officer) for her capital contribution of $0.17 million to the Company. As of December 31, 2017, total 30,000,000 shares were outstanding and were 100% hold by two major shareholders.
In addition, this major shareholder (also the Company’s senior officer) and another major shareholder contributed additional $1.61 million cash to the Company for the Company’s working capital needs in 2017, and these two major shareholders also converted their loans to the Company of $0.71 million (which was incurred in 2016) into capital contribution in 2017.
Equity Financing
In November 2017, the Company and certain accredited investors entered subscription agreements for purchase of the Company’s restricted common stock at $0.50 per share for total of 2,312,000 shares, the Company received $1,156,000 from this equity financing, of which, $1,056,000 was received in 2017, and the $100,000 was received in beginning of 2018. The 2,312,000 shares were issued in 2018.
11. INCOME TAXES
The President of the United States signed into law H.R. 1 (the “Tax Reform Law”). The Tax Reform Law, effective for tax years beginning on or after January 1, 2018, except for certain provisions, resulted in significant changes to existing United States tax law, including various provisions that are expected to impact the Company. The Tax Reform Law reduces the federal corporate tax rate from 34% to 21% effective October 1, 2018 for the Company. The Company will continue to analyze the provisions of the Tax Reform Law to assess the impact on the Company’s consolidated financial statements.
| F-12 |
At December 31, 2018 and 2017, 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. The Company has NOL carry-forwards for Federal and California income tax purposes of $4.05 million and $2.95 million at December 31, 2018 and 2017, 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 $0.98 million as of December 31, 2018, 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 deferred tax assets as of December 31, 2018 and 2017 are as follows:
| 2018 | 2017 | |||||||
| Net deferred tax assets – Non-current: | ||||||||
| Expected income tax benefit from NOL carry-forwards | $ | 975,827 | $ | 664,873 | ||||
| Less: valuation allowance | (975,827 | ) | (664,873 | ) | ||||
| 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 years ended December 31, 2018 and 2017 is as follows:
| 2018 | 2017 | |||||||
| Federal statutory income tax expense (benefit) rate | (21.00 | )% | (34.00 | )% | ||||
| Federal income tax rate difference | — | % | 19.00 | % | ||||
| State statutory income tax (benefit) rate, net of effect of state income tax deductible to federal income tax | (6.98 | )% | (7.51 | )% | ||||
| California minimum state income tax | 0.09 | % | 0.07 | % | ||||
| Change in valuation allowance on net operating loss carry-forwards | 27.98 | % | 22.51 | % | ||||
| Effective income tax rate | 0.09 | % | 0.07 | % | ||||
12. COMMITMENTS
Effective March 10, 2016, the Company entered a three-year lease agreement to lease an office in the City of Newport, California, with a security deposit of $22,202. The monthly rent was approximately $9,200 with a 4% increase for each year. The lease was terminated in March 2019 and the Company did not renew the lease.
Effective January 1, 2017, the Company entered a seven-year and three-month lease agreement to lease a warehouse in San Leandro, California, with a security deposit of $40,000. The monthly rent was approximately $25,000 with a 3% increased each year. In July 2018, the Company cancelled the lease and moved the warehouse to Southern California due to the Company’s expansion and resource integration; accordingly, the security deposit of $40,000 was forfeited.
Effective October 1, 2018, the Company entered a five-year and 2.5 months lease agreement to lease a facility including warehouse and office in the City of Irvine, California, with a security deposit of $41,841. The monthly rent was approximately $16,200 with a 3% increase each year.
For the years ended December 31, 2018 and 2017, the rental expense was $297,039 and $364,159, respectively.
| F-13 |
As of December 31, 2018, the future annual minimum lease payments were $227,937; $203,591; $209,698; $215,989 and $166,030.
13. SUBSEQUENT EVENTS
Private Placement
In May and June 2019, the Company sold 712,0000 shares to individual investors at $0.50 per share through a private placement for the proceeds of $356,000.
Shares to Employees
In May and June 2019, the Company granted total of 145,000 options to its employees for purchase 145,000 of the Company’s restricted common shares. All 145,000 options have been exercised at nil exercise price on the grant date.
Shares to directors
In June 2019, the Company entered Board Director Agreement with three directors for retaining them to be the Company’s independent directors for one year. The Company agreed to issue 10,000 shares of the Company’s restricted stock to each of the directors annually, with the first issuance to occur within ten days of the effective day of the agreement.
| F-14 |
