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 five unrelated customers, two of which accounted for 83% and 17% our sales in the six months ended June 30, 2021. All of our sales in the first quarter of 2021 were sold to one customer (accounting for 17% of sales for the six month period and all of sales during the six months ended June 30, 2020) and all of the sales in the second quarter were sold to a different customer, which accounted for 83% of sales for the six months ended June 30, 2021. We did not have any sales during the second, third and fourth quarters of 2020. To date, all of our sales were sales 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 and inventory deposit are 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, 2021 was generated by sales to two customers, one of which accounted for all of our revenue in the both three months ended March 31, 2020 and the three months ended March 31, 2021. All of our revenue for the second quarter of 2021 was made to a different customer. We did not sell any products in the second, third and fourth quarters of 2020 substantially as a result of the COVID – 19 pandemic and actions taken by governments to address the pandemic. We believe our failure to generate sales also 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 do not presently have any manufacturing facilities. During the three months ended June 30, 2021, we engaged consultants to perform research and development and marketing services. Because of our lack of funds, we compensated our consultant through the issuance of stock pursuant to our 2020 equity incentive plan. We issued a total of 6,776,000 shares of common stock to consultants as stock grants pursuant to agreements with the consultants. The agreements provide for the consultants to perform services described in the contracts, which include research and development and marketing services for the two-year period commencing May 25, 2021. The shares were valued at $19,311,600, based on the market price of the common stock on the respective dates of the agreements, which was $2.85 per share. During the six months ended June 30, 2021, we recorded stock-based compensation of $804,650 and had deferred stock compensation of $18,506,950 as of June 30, 2021.

Approximately $280,000 of our inventory at June 30, 2021 has a January 2022 expiration date. None of that inventory has been sold as of date of this report. We are speaking with our customers currently and believe that we will be able to sell this inventory before the expiration date.

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.

We require funds for our operations. At June 30, 2021, we had $215,494 of cash, $448,000 of inventory of cordyceps products and a $12,000 purchase deposit for cordyceps products 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 modest sales in the three and six months ended June 30, 2021 and the lack of sales in the second, third and fourth quarters 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 risks 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. If we cannot raise necessary funds, we may be unable to implement our business plan.

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. 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 Taiwan and Hong Kong either as one ingredient of a product to be sold to their customers or to be resold 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 they effect manufacturers and their customers. Since we had modest sales in the six months ended June 30, 2021, 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 the modest level our revenue in the six months ended June 30, 2021, most of which was in the second quarter, and the lack of revenue in the second, third and fourth quarters of 2020 may affect us and the market for our products which include, but are not limited to, the following.

As the population of China, Hong Kong and Taiwan becomes vaccinated and restrictions that had been imposed to address the pandemic are lifted, we cannot assure you that our sales will increase as a result of the reduction of such restrictions. The effects of the Delta variation and any other variations which may develop as well as other illnesses which may affect a broad segment of the population and the governmental and public response to these developments may impair the market for our products.

Results of Operations

Three and Six Months Ended June 30, 2021 and 2020

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 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 $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 three months ended June 30, 2020 we had no revenues, selling, general and administrative expenses of $62,771, related primarily to expenses and professional fees relating to our status as a public company, interest expense to a related party of $928, and a net loss of $63,699, or $(0.00) 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).

For the six months ended June 30, 2020 we had revenues of $687,964, all of which was generated during the first quarter, cost of revenue of $528,560, a gross profit of $159,404, selling, general and administrative expenses of $140,618, related primarily to expenses and professional fees relating to our status as a public company, interest expense to a related party of $1,369, and net income of $17,417, or $0.00 per share (basic and diluted).

Because of our dependence on a few customers, two 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 $448,000 at June 30, 2021 and $938,000 at December 31, 2020. 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, 2021 and 2020:

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

Cash used in financing activities of $227,019 for the six months ended June 30, 2021 primarily reflected payments to related parties of $241,851. Cash provided by financing activities for the six months ended June 30, 2020 represented advances from related parties of $97,315.

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 incurred losses from its operations and had accumulated deficit as of June 30, 2021. 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 proposes to fund operations through sales of our products and equity financing arrangements. However, we 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 its marketing plan may also 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 and may need to rely on advances from stockholders.

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.