Quarterly Report for Quarter Ending March 31, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operation.

Business Overview

The Company 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 have been owned under common control since 2016. Bio Essence and FDS are mainly engaged in manufacturing and distributing health supplement products. In January 2017, Bio Essence incorporated two subsidiaries in the state of California: BEP and BEH, Bio Essence transferred its manufacturing operation into BEP and transferred its distributing operation into BEH. On March 1, 2017, the 100% shareholder of FDS transferred all her ownership in FDS into Bio Essence. On December 7, 2021, the Company dissolved FDS. On November 12, 2021, Bio Essence incorporated a wholly owned subsidiary McBE Pharma Inc. ("McBE") in the state of California, McBE will be engaged in research and development and manufacture of prescription medicine. As a result of the ownership restructure, BEP, BEH, and MCBE became wholly owned subsidiaries of Bio Essence, and Bio Essence serves as a holding corporation for these subsidiaries. McBE has not engaged in any operations since its inception. On December 12, 2023, the Company entered into an agreement with Newway Inc. to sell the 100% equity ownership of BEP for $300,000. On March 28, 2024, the Company entered into an agreement with Health Up Inc to sell the 100% equity ownership of BEH for $400,000. On April 15, 2024, the Company dissolved McBE.

The Company is mainly engaged in selling health supplements and providing OEM services. However, the Company currently outsources manufacture / OEM service after disposal of BEP in December 2023.

Related Party Transactions

Loan to Shareholder

As of March 31, 2026, the Company had loans to one major shareholder (also the Company's senior officer) of $375,173. There are no written loan agreements for these loans, which are unsecured, non-interest bearing without fixed terms of repayment, and therefore, deemed receivable on demand. Subsequently, the entire outstanding balance of $375,173 was fully repaid as of date of this report.

Critical Accounting Policies and Estimates

Our management's discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements ("CFS"), which were prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 2 to our CFS, we believe the following accounting policies are the most critical to assist you in fully understanding and evaluating this management discussion and analysis.

Basis of Presentation

The accompanying consolidated financial statements ("CFS") are prepared in conformity with U.S. Generally Accepted Accounting Principles ("US GAAP") and applicable rules and regulations of the Securities and Exchange Commission ("SEC"). The functional currency of Bio Essence is U.S. dollars ("$''). The accompanying financial statements are presented in U.S. dollars ("$"). The consolidated financial statements include the financial statements of the Company and its subsidiaries, BEH (up to disposal date), and McBE (up to dissolution date). All significant inter-company transactions and balances were eliminated in consolidation.

Going Concern

The Company incurred a net income of $205,373 and a net loss $205,752 for the three months ended March 31, 2026 and2025, respectively. The Company also had an accumulated deficit of $9,347,700as of March 31, 2026. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The Company plans to increase its income by strengthening its sales force, providing attractive sales incentive programs, and increasing marketing and promotion activities. Management also intends to raise additional funds by way of a private or public offering, or by obtaining loans from banks or others. While the Company believes in the viability of its strategy to generate sufficient revenue and in its ability to raise additional funds on reasonable terms and conditions, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company's ability to further implement its business plan and generate sufficient revenue and its ability to raise additional funds by way of a public or private offering. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Use of Estimates

In preparing financial statements in conformity with US GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period.

Significant estimates, required by management, include the recoverability of long-lived assets, assumptions used in the accounting for leases, and the evaluation of contingencies. Actual results could differ from those estimates.

Credit Losses

On January1, 2023, the Company adopted Accounting Standards Update 2016-13 "Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments," which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss ("CECL") methodology.

The Company's account receivables and other receivables in the balance sheet are within the scope of ASC Topic 326. As the Company has limited customers and debtors, the Company uses the loss-rate method to evaluates the expected credit losses on an individual basis. When establishing the loss rate, the Company makes the assessment on various factors, including historical experience, credit-worthiness of customers and debtors, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect its ability to collect from the customers and debtors. The Company also provides specific provisions for allowance when facts and circumstances indicate that the receivable is unlikely to be collected.

Expected credit losses are recorded as allowance for credit losses on the consolidated statements of operations. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. In the event the Company recovers amount that is previously reserved for, the Company will reduce the specific allowance for credit losses.

Accounts Receivable, Net

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 March 31, 2026 and December 31, 2025, there was no bad debt allowance.

Revenue Recognition

The Company recognizes revenues following the five-step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.

Revenue is measured at the amount of consideration we expect to receive in exchange for the sale of our product, which occurs at a point in time, typically upon delivery to the customer. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that it would have recognized is one year or less or the amount is immaterial.

Revenues from sales of goods are measured at net of reserves established for applicable discounts and allowances that are offered within contracts with the Company's customers, and are recognized when the goods are delivered to the customers.

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

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

The Company's return policy allows for the return of damaged or defective products and shipment errors. A notice of damage or wrong items should make within five days from receiving the goods, and actual return of the products must be completed within 30 days from the date of receiving the goods. Delayed notification for damaged or wrong products will not be accepted for return or exchange. Custom formulas and capsules are not returnable. The amount for return of products was immaterial for the three months ended March 31, 2026 and 2025.

Results of operations

Comparison for the three months ended March 31, 2026 and 2025

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.

		2026				% of Sales				2025				% of Sales				Dollar Increase (Decrease)				Percent Increase (Decrease)
Sales of goods		$	-				-	%		$	-				-	%		$	-				-	%
Revenue from OEM services			500,537				100.00	%			20,973				94.52	%			479,564				2,286.58	%
Shipping and delivery income			-				-	%			1,216				5.48	%			(1,216	)			(100.00	)%
Total revenues			500,537				100.00	%			22,189				100.00	%			478,348				2,155.79	%
Cost of goods sold			-				-	%			-				-	%			-				-	%
Cost of OEM services			181,184				36.20	%			1,601				7.22	%			179,583				11,216.93	%
Total cost of revenues			181,184				36.20	%			1,601				7.22	%			179,583				11,216.93	%
Gross profit			319,353				63.80	%			20,588				92.78	%			298,765				1,451.16	%
Selling expenses			680				0.14	%			543				2.45	%			137				25.23	%
General and administrative expenses			102,878				20.55	%			225,137				1,014.63	%			(122,259	)			(54.30	)%
Operating expenses			103,558				20.69	%			225,680				1,017.08	%			(122,122	)			(54.11	)%
Income (loss) from operations			215,795				43.11	%			(205,092	)			(924.30	)%			420,887				(205.22	)%
Other income (expenses), net			(583	)			(0.12	)%			(660	)			(2.97	)%			77				(11.67	)%
Income (loss) before income taxes			215,212				43.00	%			(205,752	)			(927.27	)%			420,964				(204.60	)%
Income tax expense			9,839				1.97	%			-				-	%			9,839				100.00	%
Net income (loss)			205,373				41.03	%			(205,752	)			(927.27	)%			411,125				(199.82	)%

Revenues

Revenues for the three months ended March 31, 2026 and 2025 were $500,537 and $22,189, respectively. We had $500,537 OEM service revenue, and nil shipping and delivery income for the three months ended March 31, 2026. We had $20,973 OEM service revenue, and $1,216 shipping and delivery income for the three months ended March 31, 2025. The significant increase in revenue during the three months ended March 31, 2026, compared to the same period in 2025, was primarily attributable to a higher volume of OEM service orders, including large orders from one new major customer. The Company's strategic emphasis on OEM service revenue rather than product sales contributed to the overall growth in revenue and an improvement in the revenues.

Costs of revenues

Costs of revenues for the three months ended March 31, 2026 and 2025 were $181,184 and $1,601, respectively. We had $181,184 and $1,601cost for OEM service revenue for the three months ended March 31, 2026 and 2025. The increase in cost of revenues was mainly due to increase in revenues.

Gross profit

For the factors mentioned above, the gross profits for the three months ended March 31, 2026 and 2025 were $319,353 and $20,588, respectively. The increase in gross profit was mainly due to increase in revenues.

Operating expenses

Selling expenses consisted mainly of advertising, show expenses, products marketing, shipping expenses, and promotion expenses. Selling expenses for the three months ended March 31, 2026 and 2025 were $680 and $543, respectively.

General and administrative expenses consisted mainly of employee salaries and welfare, business meeting, utilities, accounting, consulting, and legal expenses. General and administrative expenses were $102,878 for the three months ended March 31, 2026, compared to $225,137 for the three months ended March 31, 2025, a decrease of $122,259 or 54.30%, the decrease was mainly due to decreased office rent and office CAM fee by $5,970, decreased consulting fee by $129,175, decreased accountant fee by $10,900, decreased dues and subscriptions by $4,944, which was partly offset by increased salary expense by $2,150, and increased professional fee by $28,248.

Other income (expenses), net

Other expenses was $583 and $660 for the three months ended March 31, 2026 and 2025, respectively. For the three months ended March 31, 2026, other expenses mainly consisted of interest expense of $542 and other expenses of $41. For the three months ended March 31, 2025, other expenses mainly consisted of interest expense of $543 and other expenses of $117.

Net income (loss)

We had a net income of $205,373 for the three months ended March 31, 2026, compared to a net loss $205,752 for the three months ended March 31, 2025, an increase of $411,125 or 199.82%. The increase in revenue was mainly due to increased gross profit and decreased general and administrative expenses as described above.

Liquidity and Capital Resources

As of March 31, 2026, we had cash and equivalents of $36,177, other current assets of $752,817, other current liabilities of $2,160,871, working capital deficit of $1,371,877, a current ratio of 0.37:1. As of December 31, 2025, we had no cash and equivalents, other current assets of $422,377, other current liabilities of $2,439,211, working capital deficit of $2,016,834, a current ratio of 0.17:1.

The following is a summary of cash provided by or used in each of the indicated types of activities during the three months ended March 31, 2026, and 2025, respectively.

		2026				2025
Net cash used in operating activities		$	(411,970	)		$	(26,069	)
Net cash used in investing activities		$	-			$	-
Net cash provided by financing activities		$	448,147			$	24,698

Net cash used in operating activities

Net cash used in operating activities was $411,970 for the three months ended March 31, 2026, compared to net cash used in operating activities of $26,069 for the three months ended March 31, 2025. The increase of cash outflow of $385,901 from operating activities for the three months ended March 31, 2026 was principally attributable increased cash outflow from prepaid expenses and other receivables by $121,075, decreased cash inflow from customer deposits by $476,863, increased cash outflow from prepayment and deposits by $154,444, decreased cash inflow from account payable by $51,125, and increased cash outflow on accrued liability and other payables by $7,807, partly offset by increased net income by $411,125 and decreased cash outflow from accounts receivable by $21,202.

Net cash provided by financing activities

Net cash provided by financing activities was $448,147 for the three months ended March 31, 2026, compared to net cash provided by financing activities of $24,698 for the three months ended March 31, 2025. The net cash provided by financing activities for the three months ended March 31, 2026 mainly consisted of repayment from the shareholder of $429,000 and cash received from issue of common stock of $440,000, partly offset by loan to the shareholder of $419,000, and payment of government loan of $322, and decreased bank overdraft of $1,531.The net cash provided by financing activities for the three months ended March 31, 2025 mainly consisted of proceeds of $343,600 loan from one major shareholder (also the senior officer) and increased bank overdraft of $2,414, partly offset by $321,000 loan repayment to one major shareholder (also the senior officer) and payment of government loan of $316.

Our current liabilities exceed current assets at March 31, 2026, however, we incurred a net income of $205,373 during the three months ended March 31, 2026. We may have difficulty meeting upcoming cash requirements. As of March 31, 2026, we believe we will need $1.2 million cash to continue our current business for the next 12 months. In addition to our continuous effort to improve our sales and net profits, we have explored and continue to explore other options to provide additional financing to fund future operations as well as other possible courses of action. Such actions may include, but are not limited to, securing lines of credit, sales of debt or equity securities (which may result in dilution to existing shareholders), loans and cash advances from other third parties or banks, and other similar actions. There can be no assurance that we will be able to obtain additional funding (if needed), on acceptable terms or at all, through a sale of our common stock, loans from financial institutions, or other third parties, or any of the actions discussed above. If we cannot sustain profitable operations, and additional capital is unavailable, lack of liquidity could have a material adverse effect on our business viability, financial position, results of operations and cash flows.

Contractual Obligations

Long-Term Debts

Government Loans

In May and June 2020, BEH, BEP and FDS received total of $215,600 from the Economic Injury Disaster Loan ("EIDL loan") from the SBA after deducting $100 Uniform Commercial Code ("UCC") handling charge and filing fee for each company. This is a low-interest federal disaster loan for working capital to small businesses and non-profit organizations of any size suffering substantial economic injury as a result of the Coronavirus (COVID-19), to help the businesses to meet financial obligations and operating expenses that could have been met had the disaster not occurred. This loan has interest of 3.75% and is not forgivable. The maturity of the loan is 30 years, installment payments including principal and interest of $288 monthly will begin 12 months from the date of the promissory note. On March 4, 2022, The FDS transferred its EIDL loan to BEC due to the dissolution of FDS. The SBA extended the deferment period to allow small businesses and not-for-profits that received EIDL funds do not have to begin payments on the loan until 30 months after the date of the note. Accordingly, the company began to make installment payments in the fourth quarter 2022.

As of March 31, 2026, the future minimum EIDL loan payments from the company's continuing operations to be paid by year are as follows:

Year Ending		Amount
March 31, 2027		$	1,479
March 31, 2028			1,476
March 31, 2029			1,532
March 31, 2030			1,591
March 31, 2031			1,651
Thereafter			49,431
Total		$	57,160

Commitments and Contingencies

From time to time, the Company may be a party to various legal actions arising in the ordinary course of business. The Company accrues costs associated with these matters when they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.

Contingencies

On March 9, 2026, the Company was served with a summons and complaint filed by Stason Industrial Corporation (the "Plaintiff"). The complaint alleges breach of contract in connection with the Company's early vacation of the Irvine facility and seeks damages of approximately $1.5 million.

As of March 31, 2026, the Company had accrued approximately $1.5 million related to this matter under lease liabilities. Management has evaluated the claim and determined that a loss is probable. While the Company intends to participate in the legal process, management believes the liability recorded as of March 31, 2026 representing the most likely outcome of this matter. Management does not believe it is reasonably possible that a loss materially in excess of the amount accrued will be incurred.

The complaint also asserts an additional cause of action alleging breach of a Statement of Work ("SOW"). The Plaintiff alleges that the Company failed to perform certain laboratory and pharmaceutical processing services and seeks recovery of alleged unreturned service payments as well as alleged lost revenues associated with a third-party agreement.

The Company is currently evaluating these allegations. The ultimate outcome of this claim is inherently uncertain, and management is presently unable to predict whether the Company will prevail. The Company intends to defend its position and may also engage in settlement discussions; however, the litigation remains in its early stages. As of March 31, 2026, management concluded that a loss related to the SOW claim was neither probable nor reasonably estimable; accordingly, no accrual has been recorded for this matter.

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.