ACBM Arco Biomedical Company Ltd (CE)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. See “Forward-Looking Statements.”

Overview

Since January 30, 2017, following a change of control, we have been engaged in the business of developing and marketing nutritional products that promote wellness and a healthy lifestyle. Our business to date has involved the purchase of products from three suppliers in Taiwan and the sale of these products to four unrelated customers, one of which accounted for all of our sales in the years ended December 31, 2020 and 2019. We did not have any sales during the second quarter of 2022, the third quarter of 2021, the second, third and fourth quarters of 2020 and the first three quarters of 2019. As of the date of this report we have had no sales in the third quarter of 2022, and we cannot give any assurance that we will generate any sales during the third quarter or subsequent periods. Based on our discussion with our customers, the current absence of sales results from reports from our customers that they are facing a negative business environment. We sell product in bulk to companies who may use our products as ingredients in their products or sell the products they purchase from us to their own customers.

All of our sales to date have been sales of cordyceps related products except that, in in the quarter ended June 30, 2018, we sold metallothionein MT-3 elizer, a product that we do not currently sell. Cordyceps is a fungus that is used in traditional Chinese medicine. Cordyceps sinensis has been described as a medicine in old Chinese medical books and Tibetan medicine. It is a rare combination of a caterpillar and a fungus and found at altitudes above 4500m in Sikkim. We may also seek to market other products which we see as complimentary to our present products; however, we have not entered into negotiations with respect to the distribution of other products and we have not developed any products for sale, and we cannot assure you that we will be able to market any other products.

All of our revenue for the years ended December 31, 2021 and 2020 represents sales to three customers and one customer, respectively. During 2021, our three customers accounted for was 58.5%, 33.2% and 8.3% of our revenue. Our sole customer for 2020 was the smallest of the three customers for 2021.  One of these customers, which accounted for 33.2% of our revenue in 2021, was our sole customer in the six months ended June 30, 2022. These sales were made in the quarter ended March 31, 2022, and we did not generate any revenue in the three months ended June 30, 2022/

We believe that our failure to sell products in the third quarter of 2021 and second, third and fourth quarters of 2020 resulted substantially from the COVID – 19 pandemic and actions taken by governments to address the pandemic, as well as a continuation of downturn in the market in the PRC for cordyseps products as well as the political conditions in Hong Kong, and we cannot assure you that the market will improve. We also cannot assure you the political instability in Hong Kong will not affect our sales, since our customers in 2017 and 2018 were Hong Kong based customers who sold their products in the PRC and none of these customers has made purchases from us since the quarter ended December 31, 2018. We cannot assure you that these factors will not affect our ability to generate revenues in the future and, to the extent that any of these factors affects our ability to generate revenue, we may not be able to continue in business. We believe that our failure to sell products in the second quarter of 2022 and the third quarter of 2022 to the date of this report reflects a negative business environment in which our customers have reported that there is not a market for our product.

At present, we have no full-time employees. Our only employee is our chief executive officer who works for us on a part-time basis. We face significant risks in implementing our business plan, including, but not limited to, our ability to raise the necessary financing either through the sale of debt or equity securities or through a loan facility, our ability to increase our customer base and supply chain, our ability to increase our gross margins, our ability to hire and retain qualified research and development, marketing and administrative personnel, our ability to develop products and to market in the United States and other western markets any products we may develop, our ability to comply with any government regulations relating to the manufacture, distribution and marketing any products we develop. We cannot assure you that we can or will develop any products or generate revenue or profits in the future.

Our statement of operation reflects the amortization of common stock issued to consultants in connection with our proposed chicken feed product, which is a cordyceps-infused chicken feed, which, if developed, would be marketed to chicken farmers. Our marketing and research and development with respect to our proposed chicken feed product has not generated a marketable product, and we cannot assure you that we will be able to develop marketable product or, if we develop the product, engage the necessary qualified personnel or to implement an effective marketing program.

We issued a total of 12,282,000 shares of common stock to consultants as stock grants pursuant to agreements with the consultants in May and August 2021. The agreements provide for the consultants to perform services described in the contracts for the two-year period commencing the date of the agreements. The shares were valued at $31,424,800, based on the market price of the common stock on the respective dates of the agreements, and is being amortized over two-year period starting from the date of the agreement using the straight-line method. During the six months ended June 30, 2022 and 2021, we recorded stock-based compensation expense of $7,856,200 and $804,650, respectively. During the three months ended June 30, 2022, we recorded stock-based compensation expenses of $3,928,100. We had deferred stock compensation of $15,917,183 and $23,773,383 as of June 30, 2022 and December 31, 2021, respectively. The deferred stock compensation is being recognized over the balance of the terms of the agreements.

We require funds for our operations. At June 30, 2022, we had $12,107 in cash, $298,500 in accounts receivables, and inventory of $296,000. Although we may seek to raise funds in the equity market, we have no agreements or understandings with respect to any funding and we can give no assurance as to the availability or terms of any such financing. Because of our financial condition, the lack of sales in the five out of ten quarters in 2022, 2021 and 2020, our reliance of sales primarily of one product, along with the absence of an active market for our stock and our market capitalization in relation to our financial performance, together with risk related to the COVID-19 pandemic and the political and legal situation in Hong Kong, it may be difficult for us to raise funds in the equity market, and, if we are able to raise funds our stockholders may suffer significant dilution.

To the extent that we implement our business plan, we anticipate that we will incur marketing and other expenses without any assurance that such expenses will generate any significant revenue or net income. Because of our cash position, we may use equity-based compensation for our employees and independent contractors. Because of our low cash position, we may rely on loans from stockholders or related parties, although we do not have any agreements or understandings at this time and we may issue equity to attract employees and consultants to help us develop our business plan.

Effects of COVID-19

Since our products are purchased by customers in Taiwan and Hong Kong primarily as one ingredient of a product to be sold to their customers, our business has been and may continue to be impacted by the effects of the COVID-19 pandemic and the actions taken by the governments of the PRC, Hong Kong and Taiwan as well as any other countries in which we may seek to sell products, as they effect manufacturers and their customers, including the recent lockdowns in cities and provinces of China.

Inflation and Supply Chain Disruption 

After years of relatively low inflation, during the past year, countries throughout the world, including Asia, have be subject to inflation at a rate significantly higher than in recent years. The slowdown resulting from the COVID-19 pandemic and steps taken by governments to address the pandemic, including the recent lockdown in a number of Chinese provinces and cities, have created major supply chain disruptions. Although we did not purchase any inventory in 2021 and we purchased modest inventory in the first and second quarter of 2022, we expect that both the inflationary pressures and supply chain disruption that affect other industries will affect us. These factors may result in delays in receipt of products we order, and increased costs which we may not be able to pass on to consumers. The recent Russian invasion of Ukraine has also exacerbated the inflationary and supply chain issues. We cannot assure you that our business will not be materially impair by inflationary and supply chain disruption. We do not know the extent to which our customer’s report of a negative business environment is based on issues relating to inflation or supply chain issues.

To the extent that we implement our business plan and develop a marketable product, we anticipate that we will incur marketing and other expenses without any assurance that such expenses will generate any significant revenue or net income. Because of our cash position, we have used and may continue to use equity-based compensation for our employees and independent contractors.

Our research and development has related to our development effort for a cordyceps-infused chicken feed and the inspection, analysis and comparison of the nutritional components of eggs that are laid by chickens that are fed cordyceps-infused chicken feed. We are formulating both the chicken feed and a marketing plan for cordyceps-based chicken feed. In order to be successful, we would need to satisfy chicken farmers that the use of cordyceps-infused check feed is safe, that there is improved nutrition in the chickens and the eggs and that the cost of the feed is reasonable and that there is a market for eggs laid by chickens that were feed with cordyceps-infused chicken feed. To date, our proposed product has not been tested by chicken farmers. As of the date of this report, we have not developed a marketable product and we cannot assure you that we will be successful in developing a marketable product or that we will generate any significant revenue from this product.

 Results of Operations

Three and Six Months Ended June 30, 2022 and 2021

For the three months ended June 30, 2022, we had no revenues or cost of revenue, and we incurred operating expenses of $3,996,432, of which $3,928,100 represented stock-based compensation to consultants for research and development ($2,520,000) and marketing expenses ($1,408,100) related primarily to the development of cordyceps-infused chicken feed, and the balance was primarily expenses and professional fees relating to our status as a public company. We also incurred interest expense to a related party of $211. As a result, we had a net loss of $3,996,643 or $(0.07) per share (basic and diluted).

For the three months ended June 30, 2021, we had revenues of $500,000, representing the sale of cordyceps products to two customers, cost of revenue of $420,000, a gross profit of $80,000, operating expenses of $873,320, of which $641,725 represented research and development expenses, $162,925 represented selling, general and administrative expenses relating to services provided by our consultants who received stock grants as compensation, and $68,670 related primarily to expenses and professional fees relating to our status as a public company. We also incurred interest expense to a related party of $1,367. As a result, we had a net loss of $794,687 or $(0.02) per share (basic and diluted).

For the six months ended June 30, 2022, we had revenues of $298,500, representing the sale of cordyceps products to one customer in the first quarter, cost of revenue of $222,000, a gross profit of $76,500, operating expenses of $8,001,520, of which $7,856,200 represented stock-based compensation to consultants for research and development ($5,040,000) and marketing expenses ($2,816,200) and the balance was primarily expenses and professional fees relating to our status as a public company. We also incurred interest expense to a related party of $420. As a result, we had a net loss of $7,925,440 or $(0.13) per share (basic and diluted).

For the six months ended June 30, 2021, we had revenues of $599,500, of which $500,000 was generated in the second quarter, representing the sale of cordyceps products to two customers, cost of revenue of $490,000, a gross profit of $109,500, operating expenses of $959,811, of which $641,725 represented research and development expenses related to improving the cordyceps products,$162,925 represented selling, general and administrative expenses relating to services provided by our consultants who received stock grants as compensation, and $155,161 relating primarily to expenses and professional fees relating to our status as a public company. We also incurred interest expense to a related party of $3,870. As a result, we had a net loss of $854,181 or $(0.02) per share (basic and diluted).

Because of our dependence on a few customers, one of which accounted for all of our sales in 2022, which were made in the first quarter, our revenue in any quarter is dependent upon both the timing of orders from customers and the delivery of products from our suppliers.

The following table summarizes our cash flows for the six months ended June 30, 2022 and 2021:

Cash used in operating activities of $83,645 for the six months ended June 30, 2022 reflected primarily our net loss of $7,925,440, increased primarily by stock-based compensation of $7,856,200, as well as a decrease in account receivable of $299,500, offset by an increase in inventories of $296,000.

Cash provided by operating activities of $424,390 for the six months ended June 30, 2021 reflected primarily our net loss of $854,181, increased primarily by stock-based compensation of $804,650, increased by a decrease in inventory of $490,000 and a decrease in accounts payable and accrued expenses of $12,662.

Cash used in financing activities of $504 for the six months ended June 30, 2022 reflected advances from related parties. Cash used in financing activities of $227,019 for the six months ended June 30, 2021 reflected payments to related parties of $241,851 offset by advances from related parties of $14,832.

Going Concern

The accompanying financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. We had limited gross profit and incurred a loss from operations for the six months ended June 30, 2022. During the past few years we did not generate revenue during a number of quarters, including the three months ended June 30, 2022. These factors, among others, raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We propose to fund operations through sales of products and equity financing arrangements. However, because of the lack of sales and the absence of any active trading market for our common stock, our financial condition and our lack of an operating history, including our dependence upon a limited number of customers, we may not be able to raise funds for capital expenditures, working capital and other cash requirements and will have to rely on advances from a minority stockholder, who is also an unpaid consultant, and our officer. If we cannot generate revenue from our products, we may not be able to continue in its business.

Critical Accounting Policy and Estimates

Our critical accounting policies are disclosed in Note 2 of Notes to Financial Statements.

Recent Accounting Pronouncements

Management has considered all recent accounting pronouncements. Our management believes that these recent pronouncements will not have a material effect on our financial statements.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Item 3: Quantitative and Qualitative Disclosures About Market Risk

Smaller reporting companies are not required to provide the information required by this item.

Item 4: Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We conducted an evaluation of the effectiveness of our disclosure controls and procedures (“Disclosure Controls”), as defined by Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of June 30, 2022, the end of the period covered by this Quarterly Report on Form 10-Q. The Disclosure Controls evaluation was done under the supervision and with the participation of management, including our chief executive officer and chief financial officer, which positions are held by the same person and who is our only employee and who does not work for us on a full-time basis. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon this evaluation, our chief executive officer and chief financial officer, concluded that, due to the inadequacy of our internal controls over financial reporting, our sole employee being our chief executive and financial officer and our limited internal audit function, our disclosure controls were not effective as of June 30, 2022, such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to the president and treasurer, as appropriate to allow timely decisions regarding disclosure.

Changes in Internal Control over Financial Reporting

As reported in our annual report on Form 10-K for the year ended December 31, 2021, management has determined that our internal controls contain material weaknesses due to the absence of segregation of duties, as well as lack of qualified accounting personnel and excessive reliance on third party consultants for accounting, financial reporting and related activities. The lack of any separation of duties, with the same person, who is our only employee who serves as both chief executive officer and chief financial officer, who is our sole director and who does not have an accounting background and serves on a part-time basis, makes it unlikely that we will be able to implement effective internal controls over financial reporting in the near future.

During the period ended June 30, 2022, there was no change in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 6: Exhibits

Exhibits