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 four unrelated customers, one of which accounted for all of our sales in the quarters ended March 31, 2021 and March 31, 2020. 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 June 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. 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 September 30, 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 three months ended March 31, 2021 and the three months ended March 31, 2020 represents sales to one customer. We believe that our failure to sell products in the second, third and fourth quarters of 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 do not presently have either a marketing staff or any manufacturing facilities. Although we plan to develop a marketing plan to market the product they purchase to our customers, primarily in Hong Kong, Taiwan and the PRC and to develop and supply products to customers, as of the date of this report, we have not taken any action with respect to our marketing plans, and we can provide no assurance that we be able to conduct such activities.

Approximately $280,000 of our inventory at March 31, 2021 has a January 2022 expiration date. None of that inventory has been sold as of date of this report. To the extent that we do not sell the inventory in advance of the expiration date, we will have to write off that inventory. To the extent that we sell products to customers who either sell the product or use the product as an ingredient in their own products, thay may reject products with a January 2022 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.

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 March 31, 2021, we had $24,359 of cash, $868,000 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 months ended March 31, 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 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 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 three months ended March 31, 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 three months ended March 31, 2021 and the lack of revenue in the second, third and fourth quarters of 2020 may affect us and the market for our products 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.

Results of Operations

Three Months Ended March 31, 2021 and 2020

For the three months ended March 31, 2021, we had revenues of $99,500, representing the sale of cordyceps products to one customer, cost of revenue of $70,000, a gross profit of $29,500, operating expenses of $86,491, primarily professional fees relating to our status as a public company, interest expense to a related party of $2,503 and a net loss of $59,494, or $(0.00) per share (basic and diluted).

For the three months ended March 31, 2020, we had revenues of $687,964, representing the sale of cordyceps products to one customer that was the same customer in the quarter ended March 31, 2021, cost of revenue of $528,560, a gross profit of $159,404, operating expenses of $77,847, primarily professional fees relating to our status as a public company, interest expense to a related party of $441 and net income of $81,116, 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 $868,000 at March 31, 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 three months ended March 31, 2021 and 2020:

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 operating activities of $26,014 for the three months ended March 31, 2020 reflected primarily our net income of $81,116 increased primarily by a reduction in inventory of $528,560, and decreased primarily by a $600,000 purchase deposit for inventory, a decrease in deferred revenue of $17,464 and an increase in prepaid expenses of $12,000.

Cash provided by financing activities of $14,616 for the three months ended March 31, 2021 and $35,739 for the three months ended March 31, 2020 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 March 31, 2021, incurred losses from our operations and did not generate cash from its operation for past two years and the three months ended March 31, 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 propose 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 our 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 business. We have been relying on advances from a stockholder and a related party and, until we can generate significant revenue may need to continue to rely on such advances. We cannot assure you that such funding will continue to be available to us.

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.