Annual Report for Fiscal Year Ending December 31, 2025 (Form 10-K)

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

Loans from Shareholders

As of December 31, 2024, the Company had loans from one major shareholder (also the Company's senior officer) of $1,186,177, including $608,631 for settling a litigation, which the Company also repaid the outstanding balance in full during the year ended December 31, 2025. These loans are unsecured, non-interest bearing and have no fixed terms of repayment, and therefore, deemed payable on demand.

Loan to Shareholder

As of December 31, 2025, the Company had loans to one major shareholder (also the Company's senior officer) of $385,173. There are no written loan agreements for these loans. These loans are unsecured, non-interest bearing and have no fixed terms of repayment, and therefore, deemed receivable on demand. Subsequently, $380,000 was repaid on March 20, 2026.

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 $896,197 and a net loss $1,565,721 from the company's continuing operations for the years ended December 31, 2025 and 2024, respectively. The Company also had an accumulated deficit of $9,553,073 from the company's continuing operations as of December 31, 2025. 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 December 31, 2025 and 2024, 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 years ended December 31, 2025 and 2024.

Results of operations

Comparison of continuing operations for the years ended December 31, 2025 and 2024

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.

		2025				% of Sales				2024				% of Sales				Dollar Increase (Decrease)				Percent Increase (Decrease)
Sales of goods		$	-				-	%		$	37,415				11.55	%		$	(37,415	)			(100.00	)%
Revenue from OEM services			1,896,350				99.94	%			282,752				87.29	%			1,613,598				570.68	%
Shipping and delivery income			1,216				0.06	%			3,773				1.16	%			(2,557	)			(67.77	)%
Total revenues			1,897,566				100.00	%			323,940				100.00	%			1,573,626				485.78	%
Cost of goods sold			-				-	%			20,513				6.33	%			(20,513	)			(100.00	)%
Cost of OEM services			469,153				24.72	%			86,350				26.66	%			382,803				443.32	%
Total cost of revenues			469,153				24.72	%			106,863				32.99	%			362,290				339.02	%
Gross profit			1,428,413				75.28	%			217,077				67.01	%			1,211,336				558.02	%
Selling expenses			30,593				1.61	%			-				-	%			30,593				100.00	%
General and administrative expenses			497,809				26.23	%			676,515				208.84	%			(178,706	)			(26.42	)%
Operating expenses			528,402				27.85	%			676,515				208.84	%			(148,113	)			(21.89	)%
Income (loss) from operations			900,011				47.43	%			(459,438	)			(141.83	)%			1,359,449				295,89	%
Other income (expenses), net			(3,014	)			(0.16	)%			(1,105,483	)			(341.26	)%			(1,102,469	)			(99.73	)%
Income (loss) before income taxes			896,997				47.27	%			(1,564,921	)			(483.09	)%			2,461,918				157.32	%
Income tax expense			800				0.04	%			800				0.25	%			-				-	%
Net income (loss) from continuing operations			896,197				47.23	%			(1,565,721	)			(483.34	)%			2,461,918				157.24	%
Loss from discontinued operations			-				-	%			(120,827	)			(37.30	)%			120,827				100.00	%
Gain from disposal of discontinued operations			-				-	%			377,752				116.61	%			(377,752	)			(100.00	)%
Net income		$	896,197				47.23	%		$	(1,308,796	)			(404.02	)%		$	2,204,993				168.47	%

Revenues

Revenues from the company's continuing operations for the years ended December 31, 2025 and 2024 were $1,897,566 and $323,940, respectively. We had nil product sales, $1,896,350 OEM service revenue, and $1,216 shipping and delivery income for the year ended December 31, 2025. We had $37,415 product sales, $282,752 OEM service revenue, and $3,773 shipping and delivery income for the year ended December 31, 2024. Revenue from the company's discontinued operations for the year ended December 31, 2024 was $153,865. The significant increase in revenue during the year ended December 31, 2025, compared to the same period in 2024, was primarily attributable to a higher volume of OEM service orders, including large orders from three new major customers. 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 from the company's continuing operations for the years ended December 31, 2025 and 2024 were $469,153 and $106,863, respectively. We had nil cost of sales for products and $469,153 cost for OEM service revenue for the year ended December 31, 2025. We had $20,513 cost of sales for products and $86,350 cost for OEM service revenue for the year ended December 31, 2024. The increase in cost of revenues was mainly due to increase in revenues. Costs of revenues from the company's discontinued operations for the year ended December 31, 2024 was $76,592.

Gross profit

For the factors mentioned above, the gross profits from the company's continuing operations for the years ended December 31, 2025 and 2024 were $1,428,413 and $217,077, respectively. The increase in gross profit was mainly due to increase in revenues. The gross profits from the company's discontinued operations for the year ended December 31, 2024 was $77,273.

Operating expenses

Selling expenses consisted mainly of advertising, show expenses, products marketing, shipping expenses, and promotion expenses. Selling expenses from the company's continuing operations for the years ended December 31, 2025 and 2024 were $30,593 and nil, respectively. Selling expense from the company's discontinued operations for the year ended December 31, 2024 was $13,716.

General and administrative expenses consisted mainly of employee salaries and welfare, business meeting, utilities, accounting, consulting, and legal expenses. General and administrative expenses from the company's continuing operations were $497,809 for the year ended December 31, 2025, compared to $676,515 for the year ended December 31, 2024, a decrease of $178,706 or 26.42%, the decrease was mainly due to decreased office rent and office CAM fee by $400,034, decreased property tax expense by $4,699, which was partly offset by increased salary expense by $115,332, increased professional fee by $34,607, and increased consulting fee by $75,033. General and administrative expenses from the company's discontinued operations was $178,936 for the year ended December 31, 2024.

Other income (expenses), net

Other expenses from the company's continuing operations was $3,014 and $1,105,483 for the years ended December 31, 2025 and 2024, respectively. For the year ended December 31, 2025, other expenses mainly consisted of interest expense of $2,186 and other expenses of $828. For the year ended December 31, 2024, other expenses mainly consisted of interest expense of $2,153, impairment of ROU asset of $1,050,940 due to early termination of the lease, and other expenses of $53,091, which was partly offset by other income of $701. Other expenses from the company's discontinued operations was $5,448 for the year ended December 31, 2024.

Net income (loss) from continuing operations

We had a net income of $896,197 from the company's continuing operations for the year ended December 31, 2025, compared to a net loss $1,565,721 from the company's continuing operations for the year ended December 31, 2024, a increase of $2,461,918 or 157.24%. The increase in revenue was mainly due to increased gross profit and decreased other expenses as describe above.

Net income from discontinued operations

We had a net income of $256,925 from the company's discontinued operations for the year ended December 31, 2024.

Liquidity and Capital Resources

As of December 31, 2025, from the company's continuing operations, we had none 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 0.0.17:1. As of December 31, 2024, from the company's continuing operations, we had cash and equivalents of $1,371, other current assets of $279,321, other current liabilities of $2,802,700, working capital deficit of $2,522,008, a current ratio of 0.10:1.

The following is a summary of cash provided by or used in each of the indicated types of activities during the years ended December 31, 2025, and 2024, respectively.

		2025				2024
Net cash provided by operating activities for continuing operations		$	1,569,753			$	639,817
Net cash used in operating activities for discontinued operations			-				(15,952	)
Net cash provided by operating activities			1,569,753				623,865
Net cash provided by investing activities for continuing operations			-				(114	)
Net cash provided by investing activities for discontinued operations			-				-
Net cash provided by investing activities			-				(114	)
Net cash used in financing activities for continuing operations			(1,571,124	)			(613,171	)
Net cash used in financing activities for discontinued operations			-				(9,323	)
Net cash used in provided by financing activities		$	(1,571,124	)		$	(622,494	)

Net cash provided by operating activities for continuing operations

Net cash provided by operating activities for continuing operations was $1,569,753 for the year ended December 31, 2025, compared to net cash provided by operating activities for continuing operations of $639,817 for the year ended December 31, 2024. The increase of cash inflow of $929,936 from operating activities of continuing operations for the year ended December 31, 2025 was principally attributable increased net income from continuing operations by $2,204,993, increased cash inflow from prepaid expenses and other receivables by $390,838, increased cash inflow from customer deposits by $474,370, increased cash inflow from prepayment and deposits by $91,261, increased cash inflow from account payable by $24,855, and increased cash inflow on payment of lease liability by $47,100, partly offset by decreased cash inflow from receivable from sale of BEP by $700,00 as the payment was received in 2025, and decreased cash inflow from accrued liability and other payables by $502,474.

Net cash used in investing activities for continuing operations

Net cash used in investing activities for continuing operations was nil for the year ended December 31, 2025, compared to net cash used in investing activities for continuing operations of $114 in 2024. The net cash used in investing activities for the year ended December 31, 2024 mainly consisted of $114 cash loss due to disposal of subsidiaries.

Net cash used in financing activities for continuing operations

Net cash used in financing activities for continuing operations was $1,571,124 for the year ended December 31, 2025, compared to net cash used in financing activities for continuing operations of $613,171 for the year ended December 31, 2024. The net cash used in financing activities for the year ended December 31, 2025 mainly consisted of $1,853,800 loan repayment to major shareholders, loan to the shareholder of $ 485,173, and payment of government loan of $1,305, partly offset by proceeds of $667,623 from loan from the major shareholder (also the senior officer), repayment from the shareholder of $100,000, and increased bank overdraft by $1,531. The net cash used in financing activities for year ended December 31, 2024 mainly consisted of $602,500 loan repayment to one major shareholder (also the senior officer), decreased bank overdraft of $9,436, and repayment of government loan of $1,235.

Our current liabilities exceed current assets at December 31, 2025, however, we incurred a net income of $896,197 during the year ended December 31, 2025. We may have difficulty meeting upcoming cash requirements. As of December 31, 2025, our principal source of funds was loans from an officer (also is the Company's major shareholder). As of December 31, 2025, 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 December 31, 2025, the future minimum EIDL loan payments from the company's continuing operations to be paid by year are as follows:

Year Ending		Amount
December 31, 2026		$	1,326
December 31, 2027			1,404
December 31, 2028			1,457
December 31, 2029			1,512
December 31, 2030			1,569
Thereafter			50,214
Total		$	57,482

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 December 31, 2025, 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 December 31, 2025 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 December 31, 2025, 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.