10-Q: Acro Biomedical Faces Severe Financial Headwinds

Acro Biomedical Co., Ltd. reported no revenue for the nine months ended September 30, 2023, a significant net loss, and a negative working capital, raising substantial doubt about its ability to continue as a going concern.

Summary

• Reported no revenue for the three and nine months ended September 30, 2023, compared to $298,500 in revenue for the nine months ended September 30, 2022.
• Incurred a net loss of $1,589,490 for the three months and $8,789,333 for the nine months ended September 30, 2023.
• Total assets decreased significantly to $19,027 at September 30, 2023, from $687,486 at December 31, 2022.
• Working capital shifted from a surplus of $456,421 at December 31, 2022, to a deficiency of $(246,139) at September 30, 2023.
• Cash balance stood at a minimal $3,271 as of September 30, 2023.
• Wrote off $480,000 in accounts receivable and $12,000 in a purchase deposit for inventory during the nine months ended September 30, 2023.
• Research and development efforts, including a cordyceps-infused chicken feed project, did not yield any marketable products, and consultant agreements expired in May and August 2023.
• The company's common stock is traded on the OTC Market Group's Expert Market, limiting public viewing of quotes and broker-dealer activity.
• Management identified material weaknesses in internal controls over financial reporting and ineffective disclosure controls due to lack of segregation of duties and reliance on a single part-time CEO/CFO.

Sentiment

Score: 1

Explanation: The company is in severe financial distress, with no revenue, minimal cash, negative working capital, and substantial doubt about its ability to continue as a going concern. R&D efforts failed, and internal controls are ineffective. The outlook is extremely negative.

Positives

• Net loss for the nine months ended September 30, 2023, decreased to $(8,789,333) from $(11,936,762) in the prior year, primarily due to lower operating expenses.
• Cash used in operating activities significantly reduced to $(2,833) for the nine months ended September 30, 2023, compared to $(136,913) in the prior year.

Negatives

• No revenue generated for the three and nine months ended September 30, 2023.
• Significant net loss of $8,789,333 for the nine months ended September 30, 2023.
• Cash balance is critically low at $3,271.
• Working capital deficit of $(246,139) at September 30, 2023.
• Total stockholders' equity turned into a deficit of $(239,613).
• Accumulated deficit increased to $(32,597,258).
• $480,000 of accounts receivable and $12,000 of inventory purchase deposit were written off.
• Research and development efforts have not produced any marketable products, and consultant contracts have expired.
• The company has no full-time employees, with the CEO working part-time without compensation.
• Increased accounts payable and accrued expenses to $153,036.
• Increased amounts due to related parties to $79,078.

Risks

• Substantial doubt about the ability to continue as a going concern due to minimal cash, no revenue, negative cash flow from operations, and accumulated losses.
• Inability to generate revenue from products, potentially leading to business cessation.
• Difficulty in raising necessary financing (debt or equity) due to financial condition, lack of sales, and common stock trading on the OTC Expert Market.
• Significant dilution for existing stockholders if equity financing is secured.
• Dependence on advances from a minority stockholder and an officer for funding operations.
• Inability to increase customer base and supply chain.
• Challenges in increasing gross margins.
• Difficulty in hiring and retaining qualified research and development, marketing, and administrative personnel, especially given reliance on equity-based compensation and Expert Market status.
• Failure to develop marketable products or to market any developed products in the United States and other Western markets.
• Inability to comply with government regulations related to product manufacture, distribution, and marketing.
• Impact of inflationary pressures and supply chain disruptions on costs and product availability.
• Potential negative effects of political instability in Hong Kong on sales.
• Delinquency in SEC filings, which further hinders fundraising capabilities.
• Material weaknesses in internal controls over financial reporting and ineffective disclosure controls due to lack of segregation of duties, insufficient accounting personnel, and reliance on a single part-time CEO/CFO.

Future Outlook

The company anticipates incurring marketing and other expenses without assurance of generating significant revenue, cash flow, or net income. It may rely on equity-based compensation for employees and contractors and loans from stockholders or related parties. There is no assurance of developing or marketing products, which could lead to continued inability to generate revenue.

Management Comments

• Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially.
• We believe that, since a major market for cordyceps products is China, our customers have significant customers in China and our business was impacted by COVID-19 and steps taken by the government of China, particularly its Zero COVID policy, which was relaxed in December 2022.
• We cannot assure you that these factors will not affect our ability to generate revenue in the future and, to the extent that any of these factors affect our ability to generate revenue, we may not be able to continue in business.
• Our research and development activities did not generate a marketable product, and we cannot assure you that we will seek to continue the development of this product or any other product.
• Because of our financial condition, the lack of sales... along with the absence of an active market for our stock and our stock being traded on the OTC Market Groups Expert Market... 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.
• Our disclosure controls were not effective as of September 30, 2023, 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.
• 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.

Industry Context

Acro Biomedical operates in the nutritional products market, specifically with cordyceps-related products, a segment often associated with traditional Chinese medicine. The company's historical sales were heavily reliant on customers selling into China, making it vulnerable to China's economic policies and health crises like COVID-19. The failure of its R&D efforts to produce a marketable product, coupled with a lack of sales and funding, indicates a severe struggle to compete or even sustain operations within this or any other market segment.

Comparison to Industry Standards

• The company's complete lack of revenue for the nine months ended September 30, 2023, stands in stark contrast to typical operational companies in the nutritional supplement or biomedical industry, which generally aim for consistent revenue generation and growth.
• A cash balance of $3,271 and a negative working capital position are far below industry benchmarks for liquidity and financial stability, indicating an inability to cover short-term obligations.
• The significant accumulated deficit of over $32 million and negative stockholders' equity suggest a prolonged period of unprofitability and capital erosion, which is unsustainable compared to healthy industry peers.
• The failure of R&D efforts to yield marketable products, despite substantial stock-based compensation for consultants, indicates a severe lack of return on investment, unlike successful companies that regularly bring new products to market.
• Trading on the OTC Expert Market, with no public quotes and restricted viewing, places the company far outside the visibility and liquidity standards of publicly traded companies on major exchanges or even more active OTC markets, severely limiting access to capital and investor interest.
• The identified material weaknesses in internal controls and ineffective disclosure controls, stemming from a single part-time CEO/CFO, fall significantly short of corporate governance and financial reporting standards expected of public companies, regardless of size.

Corporate Governance

Related Party Transactions

• A minority stockholder paid expenses of $252 on behalf of the company during the nine months ended September 30, 2023.
• The company owed $77,978 to the minority stockholder for non-interest-bearing advances and paid expenses as of September 30, 2023.
• The company owed $1,100 to its chief executive officer for non-interest-bearing advances and paid expenses as of September 30, 2023.
• Imputed interest at 4% on related party advances amounted to $2,367 for the nine months ended September 30, 2023.

Stakeholder Impact

• Shareholders: Face significant dilution risk if new equity financing is secured. The stock trading on the OTC Expert Market severely limits liquidity and transparency, making it difficult to trade shares. The negative stockholders' equity indicates a complete erosion of shareholder value.
• Employees: The company has no full-time employees, and the CEO works part-time without compensation, indicating a lack of stable employment opportunities. Potential employees or consultants may be reluctant to accept common stock as compensation due to the Expert Market status.
• Creditors: Related parties (minority stockholder, CEO) are providing non-interest-bearing advances, indicating their exposure. Other creditors (accounts payable) face increased risk due to the company's severe financial distress and going concern doubts.
• Customers: The company has no current orders and has written off significant accounts receivable, suggesting a breakdown in customer relationships or ability to deliver.
• Suppliers: The company has no inventory and wrote off a purchase deposit, indicating a lack of current purchasing activity and potential issues with past supplier relationships.

Next Steps

• Seek to raise funds through equity financing arrangements or loans from stockholders/related parties.
• Potentially issue equity to attract employees and consultants.
• Address delinquency in SEC filings.
• Develop and market products to generate revenue.

Key Dates

Recommendation

The company exhibits severe financial distress with no revenue, critically low cash, negative working capital, and a substantial accumulated deficit. The 'going concern' warning is explicit, and R&D efforts have failed to yield marketable products. Trading on the OTC Expert Market severely limits liquidity and transparency. Material weaknesses in internal controls and a single part-time CEO/CFO highlight significant governance and operational risks. There are no discernible positive catalysts, and the company's ability to continue operations is highly questionable, making it an extremely high-risk investment with a high probability of further value erosion.

Keywords

Acro Biomedical, 10-Q, SEC filing, cordyceps, nutritional products, going concern, net loss, no revenue, OTC Expert Market, financial distress, biomedical, health and wellness, research and development, corporate governance, internal controls, related party transactions