ABVC Biopharma, Inc. (American BriVision (Holding) Corporation) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The filing identifies the registrant as American BriVision (Holding) Corporation. Financial statements are unaudited and in U.S. dollars.
Business context
The company describes itself as a clinical-stage biopharmaceutical and medical-device developer, with drug candidates in oncology and central nervous system indications and a vitreous-substitute device, alongside a contract development and manufacturing (CDMO) business. On February 8, 2019, it completed acquisitions of BioLite and BioKey; BioKey’s results are included from that date. Management says Q1 revenue was mainly from CDMO services.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $212,242 | $0 |
| Gross profit | $210,743 | $0 |
| Operating expenses | $941,309 | $674,199 |
| Operating loss | $(730,566) | $(674,199) |
| Interest expense | $129,886 | $106,854 |
| Net loss | $(873,317) | $(713,622) |
| Net loss attributable to ABVC and subsidiaries | $(791,671) | $(601,387) |
| Basic and diluted loss per share | $(0.05) | $(0.05) |
| Cash used in operating activities | $(599,528) | $(525,510) |
Gross margin was approximately 99% on reported revenue, but the revenue base was small and arose largely from the newly consolidated CDMO business; comparison with the prior-year period is therefore limited. R&D expense rose to $421,956 from $248,111, and SG&A rose to $510,803 from $420,462. Management attributed the higher operating costs and net loss mainly to R&D and professional-services fees; higher interest expense was primarily associated with the Cathay Bank loan.
Cash and cash equivalents were $981,341 at March 31, 2019, with restricted cash of $16,093. Cash, cash equivalents and restricted cash together ended at $997,434. Financing activities provided $1,373,791, including $1 million of Cathay Bank borrowing and $531,147 of stock issued in the acquisition. Investing activities used $17,801.
Total assets were $7.45 million and total liabilities were $12.98 million. Current assets of $1.53 million were substantially below current liabilities of $12.44 million; the balance-sheet working-capital deficit calculates to approximately $10.91 million. Liabilities include $7.59 million due to related parties, $1.89 million of short-term bank loans, $499,284 of notes payable, and $800,000 of convertible notes. Total equity was a deficit of $5.53 million.
Material changes and unusual items
- The February 2019 BioLite and BioKey merger expanded the company’s operations to include BioKey’s CDMO services and added assets, liabilities, and shares. The filing reports acquisition consideration of $44.34 million and goodwill of $43.65 million, then says the goodwill was fully impaired at closing due to the company’s financial condition and uncertain future sales. The write-down was reflected as a reduction in additional paid-in capital, rather than operating expense.
- The company issued shares for the merger and other restructuring-related items. A 1-for-18 reverse stock split became effective May 8, 2019, after quarter-end; share and per-share data in the filing are presented retrospectively for the split. The filing reports 17,693,625 shares outstanding at March 31 and 17,694,156 as of May 20, 2019.
- Adoption of the new lease standard added operating lease right-of-use assets and liabilities. At March 31, these were $505,305 and $525,859, respectively. The filing reports a $21,107 cumulative-effect adjustment to opening accumulated deficit.
- Long-term investments were $3.41 million. The company recorded a $66,205 share of equity-method investment losses, versus $38,567 in Q1 2018.
Outlook, risks and contingencies
The filing provides no specific revenue, earnings, or cash-flow guidance. Management states that additional capital is needed to meet operating requirements and that plans include equity issuance, bank or third-party borrowing, and related-party funding; it gives no assurance these sources will be available or successful. The company reports an accumulated deficit of $13.00 million and a working-capital deficiency, and says these conditions raise substantial doubt about its ability to continue as a going concern.
Liquidity risks include reliance on financing and related parties, significant related-party balances, and short-term obligations. The $1 million Cathay Bank facility matures January 1, 2020, bears interest at prime plus 1%, is secured by substantially all assets of the company and BriVision, and has personal guarantees. Certain other short-term borrowings had passed their stated maturity dates, with extensions still being discussed. Convertible notes bear 8% interest and mature in 2019 or 2020; conversion terms may result in dilution.
Management concluded disclosure controls and procedures were not effective as of March 31, 2019. The filing reports no legal proceedings and no material off-balance-sheet arrangements. Forward-looking statements are subject to risks including competition, pricing and margin pressure, market volatility, financing availability, and penny-stock regulation.
Important facts for investors to verify
- Reconcile the working-capital deficit: the balance sheet yields approximately $10.91 million, while MD&A gives $10,907,793 and also presents comparative figures that appear to match December 31, 2018 rather than March 31, 2018.
- Confirm the treatment and presentation of the $43.65 million goodwill impairment, including its reduction of additional paid-in capital and the merger accounting disclosures.
- Assess cash runway, upcoming debt maturities, overdue borrowings, collateral and guarantee terms, and the company’s ability to secure financing without substantial dilution.
- Review the scale and collectability of related-party balances, including $7.59 million due to related parties, and the terms and governance of related-party arrangements.
- Track CDMO revenue and drug/device development progress separately; Q1 revenue was limited and the filing does not provide specific forward guidance.
- Follow remediation of ineffective disclosure controls and confirm share counts and per-share data after the May 2019 reverse split.