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 two suppliers and the sale of these products to two unrelated customers. All of our sales to date have been sales of cordyceps related products and, commencing in the second quarter of the year ended September 30, 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. 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 may also seek to market other products which we see as complimentary to our present products. We intend to conduct research and development on our own proprietary products based on cordyceps sinensis, however, to date we have not commenced such activities and we cannot assure you that we will do so. We can give no assurance that we can or will be successful in developing marketable products or expanding our customer base or supply chain.

We did not generate any revenue since the quarter ended December 31, 2018, having generated no revenues during the three months ended June 30, 2019 (the “June 2019 quarter”) or the quarter ended March 31, 2019. All of our sales to date were made to two customers who sell our products in the People’s Republic of China. One of these customers accounted for 94% of our revenue in the nine months ended June 30, 2019 (the “June 2019 period”) and 67% for the nine months ended June 30, 2018 (the “June 2018 period”). Thus, we are dependent upon one major customer whose ability to sell our product is dependent upon the market for cordyceps related products and metallothionein MT-3 elizer products in China. We believe our failure to generate sales reflects a downturn in the market in the PRC for products such as ours, and we cannot assure you that the market will improve. We have received orders during the fourth quarter and we anticipate that we will generate revenue from these orders during the quarter. However, we cannot assure you as to whether we will generate any significant revenue or profitable operations during or after the quarter ending September 30, 2019.

At present, we have no full-time employees. 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 we may to seek to raise funds in the equity market, we can give no assurance as to the availability or terms of any such financing. Our failure to generate revenues in the second and third quarters of the current fiscal year, and the absence of purchase orders is likely to make it more difficult for us to raise money in the equity market. There is no active trading market in our common stock, and any sale of our equity securities could result in material dilution to our stockholders. If we are not able to raise the necessary funds, we may be unable to continue in business.

Results of Operations

For the three and nine months ended June 30, 2019 and 2018.

For the three months-ended June 30, 2019, we had no revenues, operating expenses of $68,092, which were mainly professional fees related to our status as a public company, 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 three months ended June 30, 2018 (the “June 2018 quarter”), we generated revenue of $2,199,000, gross profit of $239,900, representing a gross margin of 10.9%, operating expenses of $63,674, income before income taxes of $176,226, income taxes of $59,917, and net income of $116,309, or $0.00 per share (basic and diluted).

For the nine months ended June 30, 2019 (the “June 2019 period”), we had revenues of $1,354,000, all of which were generated during the first quarter of the fiscal year, a gross profit of $135,400, representing a gross margin of 10.0%, operating expenses of $512,493, principally non-cash compensation of $300,089 and professional fees relating to our SEC filings, a loss before income taxes before income taxes of $378,532, an income tax credit of $82,942, and a net loss of $295,590, or $(0.01) per share (basic and diluted).

For the nine months ended June 30, 2018 (the “June 2018 period”), we had revenues of $5,608,000, a gross profit of $580,800, representing a gross margin of 10.3%, operating expenses of $226,336, principally professional fees relating to our SEC filings, income from operations of $354,464, income tax of $88,476, and net income of $265,988, or $0.01 per share (basic and diluted).

One customer accounted for 94% of our revenue for the June 2019 period and 67% of our revenue for the June 2018 period. A second customer accounted for 6% of our revenue for the June 2019 period and 33% of our revenue for the June 2018 period.

Because of our dependence on two customers, our revenue in any quarter is dependent upon both the timing of orders from this customer and the delivery of product from our supplier. Our loss for the June 2019 quarter and the June 2019 period also reflected the amortization of non-cash consulting fees paid to consultants. The consultants accepted stock as compensation in view of our lack of cash.

Our principal current asset is inventory, which was $1,060,000 at June 30, 2019 and $1,146,600 at September 30, 2018. 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 nine months ended June 30, 2019 and 2018:

Cash provided by operating activities of $36,818 for the June 2019 period reflected primarily our net loss of $295,590, increased primarily by stock-based compensation of $300,089, a decrease in inventory of $86,600, decrease in prepaid expenses of $24,000, an increase in deferred revenues of $9,871, and an adjustment in income tax payable of $73,071.

Cash used by operating activities of $136,252 for the June 2018 period reflected primarily our net income of $265,988, reduced by an increase in inventories and purchase deposit to vendor of $439,000, an increase in prepaid expenses of $50,000 and an increase in income tax payable of $88,476.

We did not generate any cash from investing activities for the June 2019 period or the June 2018 period.

Our cash used in financing activities of $37,735 for the June 2019 period represented advances from related parties of $103,601 and repayments to related parties of $141,336. For the June 2018 period, our cash provided by financing activities represented advances from related parties of $104,057.

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.