ACBM Arco Biomedical Company Ltd (CE)

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 and December 31, 2019, which were our only sales in the year ended December 31, 2019. We did not have any sales during the 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, commencing 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. 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 our present inventory and the purchase deposit for inventory of $600,000 at March 31, 2020 are for cordyceps products. 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 quarter ended March 31, 2020 represents sales to one customer. We believe our failure to generate sales during three quarters of 2019 and a modest level of sales for the three months ended March 31, 2020 reflects a downturn in the market in the PRC for cordyseps products, 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.  The market may also be affected by the COVID-19 pandemic and steps taken by the governments to reduce the spread of the virus.

At present, we have no full-time employees. Our only employee is our chief executive officer who work for us on a part-time basis. 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, 2020, we had $10,636 cash and cash equivalents, $350,000 of inventory of cordyceps products and a $600,000 purchase deposit for cordyceps products, which we received subsequent to March 31, 2020. 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 first nine months of 2019 followed by 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, 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.

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 may 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 may affect us and the market for our products include, but are not limited to, the following.

Results of Operations

Three Months Ended March 31, 2020 and 2019.

For the three months ended March 31, 2020, we had revenue of $687,964, representing sales of cordyceps products from one customer. Our cost of revenue was $528,560, and our gross profit was $159,404. Our gross margin was 16.1%. Operating expenses for the three months ended March 31, 2020 were $77,847, primarily expenses relating to our status as a public company and a storage facility expense. Our income before income tax was $81,116. We had no income tax expense because of our loss carryforward and our net income was $81,116, or $0.00 per share (basic and diluted).

We had no sales in the three months ended March 31, 2019. Our operating expenses for the period were $214,766, principally non-cash compensation to two consultants for marketing services ($148,395) and professional fees relating to our SEC filings. Our loss before income taxes was $214,874. We had an income tax credit of $45,124, and a net loss of $169,750, or $(0.00) per share (basic and diluted).

Because of our dependence on a few customers, our revenue in any quarter is dependent upon both the timing of orders from customers and the delivery of product from our supplier.

Our principal current asset is inventory, which was $350,000 at March 31, 2020 and $878,560 at December 31, 2019, and purchase deposit for inventory which was $600,000 at March 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, 2020 and 2019: 

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 used by operating activities of $52,335 for the three months ended March 31,2019 reflected primarily our net loss of $169,750, increased primarily by stock-based compensation of $148,395 and an increase in deferred revenue of $20,000, and reduced by an increase in deferred tax asset of $45,124 and an increase in prepaid expenses of $9,000

We did not generate any cash from investing activities for the three months ended March 31, 2020 or 2019.

Our cash provided by financing activities of $35,739 and $15,140 represented advances from related parties for the three months ended March 31, 2020 and 2019, respectively.

Going Concern

The accompanying unaudited financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. The Company had minimal cash as of March 31, 2020 and did not generate cash from its operation for the three months ended March 31, 2020. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The Company proposes to fund operations through sales of its 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 its common stock, its financial condition and its lack of an operating history, the Company may not be able to raise funds for capital expenditures, working capital and other cash requirements. If the Company cannot generate revenue from its products, it 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.