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 the Republic of China and the sale of these products to three unrelated customers, one of which accounted for all of our sales in the quarters ended March 31, 2020, which were our only sales in the six months ended June 30, 2020, and December 31, 2019, which were our only sales in the year ended December 31, 2019. We did not have any sales during the three months ended June 30, 2020 or first three quarters of the year ended December 31, 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 and, in the quarter ended March 31, 2018, metallothionein MT-3 elizer. 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. Our present inventory is for cordyseps products. The encoded protein in metallothionein MT-3 is a growth inhibitory factor, and reduced levels of the protein are observed in the brains of individuals with some metal-linked neurodegenerative disorders such as Alzheimer’s disease. We have not sold metallothionein MT-3 elizer since the quarter ended March 31, 2018, and we do not have any orders for metallothionein MT-3 elizer. We cannot assure you that we will be able to sell metallothionein MT-3 elizer in the future. 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 six months ended June 30, 2020 represents sales to one customer which were made during the three months ended March 31, 2020. There were no sales during the three months ended June 30, 2020. We believe that our failure to sell products in the three months ended June 30, 2020 resulted substantially from the COVID – 19 pandemic and actions taken by governments to address the pandemic. We believe our failure to generate sales reflects a 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 People’s Republic of China (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 works for us on a part-time basis, and all of our sales to date have been made by our chief executive officer. We plan to develop a marketing program pursuant to which we will seek to:

We do not presently have either a marketing staff or any manufacturing facilities. We intend to develop a marketing staff by hiring a marketing manager and engaging independent sales representatives or hiring sales and marketing and sales personnel or a combination of independent representatives and sales staff. We cannot assure you that we will be able to engage the necessary qualified personnel or to implement an effective marketing program.

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.

Although our business plan initially contemplated that we would conduct research and development on our own proprietary products based on cordyceps sinensis, to date we have neither commenced such activities nor take any preliminary steps with respect to such activities. We do not presently have the funds necessary for us to engage in such activities, and we cannot assure you that we will be able to commence any research and development activities or that any such activities that we may undertake will be successful.

We require funds for our operations. At June 30, 2020, we had $381cash and cash equivalents, $938,000 of inventory of cordyceps products. 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 three months ended June 30, 2020 or first nine months of 2019 and only modest sales in the fourth quarter of 2019 and the first quarter of 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. In August 2020, we adopted our 2020 long-term incentive plan, pursuant to which up to 12,000,000 shares can be issued. 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.

Effects of COVID-19

Since our products are purchased by customers in Hong Kong 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 the Republic of China (“Taiwan”) as they effect manufacturers and their customers. Since we had modest sales in the three months ended March 31, 2020 as well as the year ended December 31, 2019, with sales in only the last quarter of 2019, we cannot predict the effect of COVID-19 on our business. A prolonged outbreak could have a material adverse impact on our financial results and business operations. Factors relating to COVID-19 which significantly contributed to our lack of revenue in the three months ended June 30, 2020, may affect us and the market for our products include, but are not limited to, the following.

Results of Operations

Three and Six Months Ended June 30, 2020 and 2019.

For the three months ended June 30, 2020, we had no revenue, operating expenses of $62,771, primarily professional fees relating to our status as a public company, interest expense of $928 and a net loss of $63,699, or $(0.00) per share (basic and diluted).

For the three months-ended June 30, 2019, we had no revenues, operating expenses of $68,092, primarily professional fees related to our status as a public company, interest expense of $609, a loss before income taxes of $68,701, an income tax credit of $17,877, and a net loss of $50,824 or $(0.00) per share (basic and diluted).

For the six months ended June 30, 2020, we had revenue of $687,964, representing sales of cordyceps products from one customer. Our cost of revenue was $528,560, our gross profit was $159,404, and our gross margin was 23.17%.  Our operating expenses were $140,618, primarily professional fees relating to our status as a public company, our interest expense was $1,369 and we had net income of $17,417, or $0.00 per share (basic and diluted).

For the six months ended June 30, 2019 we had no revenue, operating expenses of $282,858, primarily stock-based compensation to consultants of $148,395, and professional fees relating to our status as a public company, interest expense of $717, a loss before income tax credit of $283,575, an income tax credit of $63,001, and a net loss of $220,574, 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 January 1, 2019, our revenue in any quarter is dependent upon both the timing of orders from customers and the delivery of products from our suppliers.

Our principal current asset is inventory, which was $938,000 at June 30, 2020 and $878,560 at December 31, 2019. To the extent that we are not able to sell our inventory, our working capital will be materially impaired.

The following table summarizes our cash flows for the six months ended June 30, 2020 and 2019: 

Cash used in operating activities of $97,845 for the six months ended June 30, 2020 reflected primarily our net income of $17,417 decreased primarily by an increase in inventory of $59,440, a decrease in accounts payable and accrued expenses of $22,762, and a decrease of deferred revenue of $17,464 and an increase in prepaid expenses of $12,000.

Cash used by operating activities of $137,511 for the six months ended June 30, 2019 reflected primarily our net loss of $220,574, decreased primarily by stock-based compensation of $148,395, deferred revenue of $20,000 and a deferred tax asset of $10,070, and increased by an adjustment in income tax payable $73,071 and income tax payable of $19,156.

Our cash used in financing activities of $97,315 for the six months ended June 30, 2020 and $100,135 for the six months ended June 30, 2019 represented advances from related parties.

Going Concern

The accompanying unaudited 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 minimal cash as of June 30, 2020 and did not generate cash from its operation for the six months ended June 30, 2020 and we had no sales in the three months ended June 30, 2020 and, during the year ended December 31, 2019, we only had sales in the fourth quarter. 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 its products and equity financing arrangements. We plan to introduce a marketing effort to market our products, however, we cannot give any assurance as to our ability to implement a marketing program or to generate revenue or net income from these efforts. Further, we did not have any sales during the three months ended June 30, 2020, do not have any agreements or understanding with respect to any financing and, 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, we may not be able to raise funds for capital expenditures, working capital and other cash requirements. Our ability to implement our proposed marketing plan may be affected by the COVID-19 pandemic and actions taken by governments to address the pandemic as well as political events and legislation in Hong Kong. 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 or 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.