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 third quarter of 2021, the second, third and fourth quarters of 2020 and the first three quarters of 2019. 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 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 three months ended March 31, 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.

At present, we have no full-time employees. Our only employee is our chief executive officer who work 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. 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 year ended December 31, 2021, we recorded stock-based compensation of $7,651,417 and had deferred stock compensation of $23,773,383 as of December 31, 2021. During the three months ended March 31, 2022, we recorded stock-based compensation of $3,928,100, and we had deferred stock compensation of $19,845,283 as of March 31, 2022. The deferred stock compensation will be recognized over the balance of the terms of the agreements

We require funds for our operations. At March 31, 2022, we had $357,668 in cash and $298,500 in accounts receivables, and no inventory. 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 four out of eight quarters in 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 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.

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 have used and may continue to use equity-based compensation for our employees and independent contractors. 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 2021 and August 2021. The agreements provide for the consultants to perform services described in the contracts for the two-year period commencing May 25, 2021 and August 23, 2021. The shares were valued at $31,424,800 and are being amortized over the two-year terms of the agreements period using the straight line method. During the three months ended March 31, 2022, we recorded stock-based compensation of $3,928,100 and had deferred stock compensation of $19,845,283 as of March 31, 2022, which will be amortized over the balance of the terms of the agreements. In order to pay cash expenses, we may have to rely on loans from stockholders or related parties, although we do not have any agreements or understandings at this time.

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. 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 Months Ended March 31, 2022 and 2021

For the three months ended March 31, 2022, we had revenues of $298,500, representing the sale of cordyceps products to one customer, cost of revenue of $222,000, a gross profit of $76,500, operating expenses of $4,005,088, of which $2,520,000 represented research and development expenses related primarily to the development of cordyceps-infused chicken feed, $1,485,088 represented selling, general and administrative expenses primarily relating to services provided by our consultants who received stock grants as compensation and, to a significantly lesser extent, to expenses and professional fees relating to our status as a public company. Our operating expenses included stock-based compensation to our consultants of $3,928,100. We also incurred interest expense to a related party of $209. As a result, we had a net loss of $3,928,797 or $(0.07) per share (basic and diluted).

For the three months ended March 31, 2021, we had revenues of $99,500, representing the sale of cordyceps products to one customer, which is a different customer from the customer in the first quarter of 2022, cost of revenue of $70,000, a gross profit of $29,500, operating expenses of $86,491 which represented selling, general and administrative expenses primarily relating to expenses and professional fees relating to our status as a public company. We also incurred interest expense to a related party of $2,503. As a result, we had a net loss of $59,494 or $(0.00) per share (basic and diluted).

Because of our dependence on a few customers, one of which accounted for all of our sales since in the first quarter of 2022, 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 three months ended March 31, 2022 and 2021:

Cash provided by operating activities of $262,132 for the three months ended March 31, 2022 reflected primarily our net loss of $3,928,797, increased primarily by stock-based compensation of $3,928,100, as well as a decrease in account receivable of $299,500.

Cash used in operating activities of $8,380 for the three months ended March 31, 2021 reflected primarily our net loss of $59,494 increased primarily by a decrease in inventory of $70,000 and decreased by an increase in prepaid expenses of $10,667 and a decrease in accounts payable and accrued expenses of $10,662.

Cash used in financing activities of $288 for the three months ended March 31, 2022 and $14,616 for the three months ended March 31, 2021 reflected advances from related parties.

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 three months ended March 31, 2022 and for the past few years. 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 its products, it 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.