10-Q: Bio Essence Narrows Losses, Shifts to OEM Amid Going Concern Doubts

Bio Essence Corp. reported significantly reduced net losses and a strategic pivot to OEM services, yet faces substantial doubt about its ability to continue as a going concern.

Summary

• Net loss from continuing operations decreased by 91.36% to $(132,890) for the nine months ended September 30, 2025, compared to $(1,538,158) in the prior year.
• The company achieved a net income of $12,998 for the three months ended September 30, 2025, a significant improvement from a net loss of $(1,199,493) in the same period last year.
• Total revenues from continuing operations increased by 137.05% to $418,112 for the nine months, driven by a 206.30% increase in manufacture service (OEM) revenue to $416,896.
• Product sales ceased, with $0 reported for the nine months ended September 30, 2025, down from $37,415 in the prior year, reflecting a strategic shift.
• Gross profit from continuing operations rose by 158.66% to $284,992 for the nine months, with gross profit margin improving from 62.47% to 68.16%.
• General and administrative expenses decreased by 33.04% to $384,015 for the nine months, primarily due to reduced office rent and CAM fees.
• The company continues to operate with a significant working capital deficit of $(3,045,643) and an accumulated deficit of $(10,582,160) as of September 30, 2025.
• Management concluded that disclosure controls and internal control over financial reporting were not effective as of September 30, 2025.

Sentiment

Score: 4

Explanation: The company showed significant improvement in revenue growth and a drastic reduction in net loss, even achieving a net income in the most recent quarter, driven by a successful pivot to OEM services. However, these positives are overshadowed by a severe going concern warning, a large accumulated deficit, a worsening working capital deficit, and critical deficiencies in internal controls and disclosure procedures. The reliance on related-party loans and high customer/vendor concentration also add to the risk profile.

Positives

• Significant reduction in net loss from continuing operations for the nine months ended September 30, 2025, decreasing by 91.36% to $(132,890).
• Achieved a net income of $12,998 for the three months ended September 30, 2025, a substantial turnaround from a net loss of $(1,199,493) in the prior year's comparable quarter.
• Total revenues from continuing operations increased by 137.05% to $418,112 for the nine months, primarily driven by a 206.30% increase in manufacture service (OEM) revenue to $416,896.
• Gross profit from continuing operations increased by 158.66% to $284,992 for the nine months, with an improved gross profit margin.
• General and administrative expenses decreased by 33.04% to $384,015 for the nine months, mainly due to reduced office rent and CAM fees.
• Cash and equivalents increased significantly to $28,741 as of September 30, 2025, from $1,371 at December 31, 2024.

Negatives

• Substantial doubt exists about the company's ability to continue as a going concern due to recurring losses and an accumulated deficit.
• Accumulated deficit increased to $(10,582,160) as of September 30, 2025, from $(10,449,270) at December 31, 2024.
• Working capital deficit worsened to $(3,045,643) as of September 30, 2025, from $(2,522,008) at December 31, 2024, with a current ratio of 0.06:1.
• Disclosure controls and procedures were deemed not effective as of September 30, 2025.
• Internal control over financial reporting (ICFR) was also concluded to be not effective as of September 30, 2025.
• High customer concentration, with three major customers accounting for 45.6%, 16.4%, and 13.1% of total sales for the nine months ended September 30, 2025.
• High vendor concentration, with two major vendors accounting for 53.76% and 46.24% of total manufacturing service for the nine months ended September 30, 2025, and one major vendor accounting for 100% for the three months ended September 30, 2025.
• Reliance on unsecured, non-interest bearing loans from major shareholders with no fixed repayment terms.
• Incurred a $50,000 loss on a debt-to-equity conversion with the CEO in 2023.
• A $50,000 security deposit for a previous lease was not returned, and negotiation for early termination is ongoing, with $1.46 million in lease liabilities remaining.

Risks

• Going Concern Uncertainty: The company's recurring net losses and accumulated deficit raise substantial doubt about its ability to continue as a going concern.
• Liquidity Risk: Current liabilities significantly exceed current assets, resulting in a working capital deficit, which may make it difficult to meet upcoming cash requirements.
• Funding Risk: The ability to continue operations is dependent on generating sufficient revenue and raising additional funds through private/public offerings or loans, with no assurance of success.
• Internal Control Deficiencies: Ineffective disclosure controls and internal control over financial reporting increase the risk of material misstatements and non-compliance with SEC regulations.
• Customer Concentration Risk: A significant portion of revenue is derived from a few major customers, making the company vulnerable to the loss of any of these customers.
• Vendor Concentration Risk: Reliance on a limited number of vendors for manufacturing services poses a risk to operational continuity and cost control.
• Related Party Dependence: Heavy reliance on loans from major shareholders (including a senior officer) for funding, which are unsecured, non-interest bearing, and payable on demand, creates financial instability and potential conflicts of interest.
• Lease Termination Uncertainty: Ongoing negotiations for early lease termination and the non-return of a security deposit, coupled with significant remaining lease liabilities, present financial and operational uncertainty.

Future Outlook

Management plans to increase income by strengthening its sales force, providing attractive sales incentive programs, and increasing marketing and promotion activities. The company also intends to raise additional funds through private or public offerings or by obtaining loans from banks or other sources to support future operations and address its going concern issues.

Management Comments

• The Company disposed non-profitable subsidiaries BEH and BEP, and is actively seeking other business opportunities including expanding OEM business and looking for potential acquisition targets.
• Management also intends to raise 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 significant increase in revenue during the nine months ended September 30, 2025, compared to the same period in 2024, was primarily attributable to a higher volume of OEM service orders, including a major order from a new customer, Qnet Limited.
• 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.
• Management concluded that the Company's disclosure controls and procedures are not effective to ensure that material information relating to the Company is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC.
• Management concluded that, as of September 30, 2025, our ICFR were not effective at the reasonable assurance level based on those criteria.

Industry Context

Bio Essence Corp.'s strategic pivot from direct product sales to a focus on OEM (Original Equipment Manufacturer) services aligns with a broader trend in the health supplement industry where companies may specialize in manufacturing for other brands to leverage production capabilities and reduce direct marketing/distribution costs. This shift can offer higher gross profit margins, as seen in the company's improved profitability metrics, but also introduces new risks related to customer concentration and reliance on manufacturing contracts.

Corporate Governance

Related Party Transactions

• Loans from a major shareholder (also the Company's senior officer) totaling $277,196 as of September 30, 2025. These loans are unsecured, non-interest bearing, and have no fixed terms of repayment, deemed payable on demand.
• A loan from another major shareholder for $608,631 as of September 30, 2025, for settling litigation. This loan is also unsecured, non-interest bearing, and has no fixed terms of repayment.
• A debt-to-equity conversion on May 31, 2023, where Ms. Yan (CEO and major shareholder) converted $2,500,000 debt into 5,000,000 shares of common stock, resulting in a $50,000 loss for the company.

Stakeholder Impact

• Shareholders: Potential for significant dilution if future capital raises involve equity offerings. The going concern risk poses a threat to the value of existing shares. Improved financial performance in the short term might offer some positive sentiment, but long-term viability is uncertain.
• Employees: The company's focus on strengthening its sales force and increasing marketing activities could imply job stability or growth in those areas, but overall going concern issues could create uncertainty.
• Customers: The strategic shift to OEM services and focus on a few major customers (like Qnet Limited) suggests a concentrated effort to serve specific clients, potentially improving service for them, but also increasing reliance on these relationships.
• Suppliers/Vendors: High vendor concentration (one major vendor for 100% of manufacturing service in Q3 2025) indicates strong relationships but also potential single-point-of-failure risk.
• Creditors: The significant working capital deficit and reliance on related-party loans suggest a high credit risk, especially for non-related party creditors. The ongoing lease liability dispute also adds to this.

Next Steps

• Strengthen sales force.
• Provide attractive sales incentive programs.
• Increase marketing and promotion activities.
• Seek other business opportunities, including expanding OEM business and looking for potential acquisition targets.
• Raise additional funds through private or public offerings or by obtaining loans from banks or others.
• Implement controls and procedures to remedy ineffective disclosure controls and internal control over financial reporting.

Key Dates

Recommendation

Despite a notable improvement in net loss and a strategic shift to profitable OEM services, the company faces severe fundamental issues. The explicit 'going concern' warning, a substantial and worsening working capital deficit, and an accumulated deficit exceeding $10 million indicate significant financial instability. Furthermore, the acknowledged ineffectiveness of both disclosure controls and internal control over financial reporting raises serious concerns about the reliability of financial statements and corporate governance. The heavy reliance on unsecured, demand-payable loans from major shareholders and high customer/vendor concentration add to the precarious risk profile. While the operational pivot shows promise, the overarching financial and control weaknesses make this a high-risk investment with significant downside potential, warranting a 'sell' recommendation for seasoned investors.

Keywords

health supplements, OEM services, financial results, 10-Q filing, going concern, liquidity, SEC filing, corporate governance, risk management, financial reporting, Bio Essence Corp, manufacturing services, accumulated deficit, internal controls, related party loans