ABVC BioPharma, Inc. — Q2 2021 Form 10-Q
Business context and reporting period. This unaudited filing covers the three and six months ended June 30, 2021. ABVC is a clinical-stage biotechnology company developing plant-derived drugs and medical devices, with additional contract development and manufacturing (CDMO) and regulatory services through BioKey. The company reported that most first-half revenue came from CDMO services. Its drug and device pipeline remains in clinical development; it has not earned product royalties.
Financial results and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $31,441 | $226,513 | $294,591 | $305,299 |
| Gross profit (gross margin) | $30,795 (97.9%) | $222,277 (98.1%) | $292,700 (99.4%) | $297,104 (97.3%) |
| Operating expenses | $2,066,310 | $1,416,290 | $3,580,960 | $2,662,494 |
| Operating loss | $(2,035,515) | $(1,194,013) | $(3,288,260) | $(2,365,390) |
| Net loss | $(2,052,956) | $(2,184,057) | $(3,248,279) | $(3,493,319) |
| Net loss attributable to ABVC | $(1,971,566) | $(1,849,297) | $(3,100,071) | $(3,096,835) |
| Basic and diluted loss per share | $(0.08) | $(0.09) | $(0.13) | $(0.16) |
Cash flow. For the first half, operating cash use was $2.86 million, investing cash use was $422,000, and financing cash use was $75,000. Cash and cash equivalents were $925,000 at June 30; restricted cash was $732,000, bringing cash plus restricted cash to $1.66 million.
Balance sheet and debt. Current assets were $3.63 million and current liabilities $4.38 million, resulting in a $748,000 working-capital deficit. Total assets were $8.94 million, total liabilities $8.43 million, and total equity $516,000. Reported borrowings included $1.63 million of short-term bank loans, a $100,000 short-term loan, $107,000 of notes payable, $2.50 million of noncurrent convertible notes, and $236,000 of PPP loans. Operating lease liabilities totaled $1.64 million. The $2.50 million convertible note bore 10% interest and was convertible at $2.25 per share; an amendment provided for automatic conversion following conditional Nasdaq listing approval, if obtained.
Material changes versus prior comparable periods
- Q2 revenue fell about 86% year over year, which management attributed mainly to COVID-19 effects on the CDMO business. First-half revenue was down about 4%.
- First-half operating expenses rose 34%, driven by increased R&D and nonemployee stock-based compensation. R&D expense more than doubled to $480,000; nonemployee stock-based compensation was $701,000 versus $600.
- First-half operating cash use increased by $810,000 year over year. Cash and cash equivalents declined from $4.27 million at December 31, 2020 to $925,000 at June 30, 2021.
- First-half net loss narrowed by 7%, partly reflecting the absence of the $944,000 impairment loss recorded in the 2020 comparable period and $124,400 of PPP loan forgiveness recorded as grant income. Loss attributable to ABVC was approximately unchanged year over year for the first half.
Outlook, commentary, risks and unusual items
- Management described COVID-19 as a continuing risk to revenue, operations, supply availability and clinical timelines, and said the impact could not be reasonably estimated. No quantified financial guidance was provided.
- Management expected the ABV-1701 Vitargus pivotal study in Australia and an ABV-1501 study to begin in Q4 2021 or Q1 2022. It also planned to pursue a commercialization partner for Vitargus in 2021, advance ABV-1505, and seek licensing opportunities for drug candidates. These are forward-looking plans, not assurances.
- The company reported that disclosure controls and procedures were not effective as of June 30, 2021. Its remediation plans included additional accounting training and greater use of external consultants.
- Related-party balances were significant: $145,000 of related-party receivables and $710,000 due from related parties, versus $316,000 due to related parties. The company also reported related-party collaboration and investment relationships.
- After quarter-end, ABVC completed a public offering on August 5, 2021 of 1.1 million units at $6.25 each, generating $6.875 million in gross proceeds before discounts and expenses. Each unit included a common share and two warrants. Nasdaq trading began August 3, 2021.
- The filing states that goodwill was impaired following June 30 testing, but the balance sheet reports no goodwill and the income statement reports no 2021 impairment loss. This apparent inconsistency warrants review.
- The company reported no material off-balance-sheet arrangements and no pending or threatened legal proceedings as of the report date. It cautioned that forward-looking-statement safe-harbor protections may not apply at times if it is considered a penny-stock issuer.
Important facts for investors to verify
- Cash runway and financing needs in light of $2.86 million of first-half operating cash use, reduced unrestricted cash, and the working-capital deficit.
- Whether the August offering’s net proceeds, warrant terms and dilution, and the subsequent Nasdaq listing materially changed the company’s liquidity and capital structure.
- The status and conversion terms of the $2.50 million convertible note, including whether the anticipated conversion occurred and what shares or warrants were issued.
- The goodwill disclosure inconsistency, as well as the assumptions supporting deferred tax assets and related-party receivable balances.
- Actual progress against clinical-trial, FDA submission and partnering timelines, including whether COVID-19 or funding constraints affected them.
- Progress and evidence supporting remediation of the ineffective disclosure controls.