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.
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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.
· The effect of COVID-19 on the ability of our customers and potential
customers to manufacture products.
· The financial health of our potential customers.
· Since our customers use our products as an ingredient in their products,
the inability of the customer to obtain other ingredients may affect their
willingness or ability to purchase our product.
· The ability of our customers to ship their products to China and the
ability of their customers to distribute product to retail markets.
· The willingness or ability of the ultimate purchasers in the PRC and any
other countries to which our customers sell products to purchase products
with our ingredients and their perception as to whether the products may
have beneficial effects to them.
· The extent to which any quarantine which may be imposed affects the
willingness or ability of consumers to purchase products with our
ingredients.
· The perceived benefit, if any, to consumers of products with our
ingredients.
· The extent to which the purchase of products with our ingredients is a low
priority item for a population whose disposable income may have decreased
as a result of COVID-19 and the steps taken by governments to curb the
spread of infection.
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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.
Liquidity and Capital Resources
The following table summarizes our changes in working capital from December 31,
2019 to March 31, 2020:
March 31, December 31,
2020 2019 Change % Change
Current assets $ 972,636 $ 879,471 $ 93,165 10.6 %
Current liabilities $ 123,449 $ 111,541 $ 11,908 10.7 %
Working capital $ 849,187 $ 767,930 $ 81,257 10.6 %
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:
Three Months Ended March 31,
2020 2019
Cash (used in) operating activities $ (26,014 ) $ (52,335 )
Cash provided by financing activities
35,739 15,140
Cash and cash equivalents end of period 10,636 412
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.
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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.
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ACRO BIOMEDICAL CO., LTD. 
