ABVC Biopharma, Inc. (filing registrant: American BriVision (Holding) Corporation) — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; unaudited. The filing describes a clinical-stage biopharmaceutical and medical-device business, alongside BioKey’s contract development and manufacturing (CDMO) services. It reports a February 2019 acquisition of BioLite and BioKey. Unless otherwise noted, amounts are U.S. dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $191,782 | $3,229 | $404,024 | $3,229 |
| Gross profit | $178,430 | $910 | $389,173 | $910 |
| Gross margin | 93.0% | 28.2% | 96.3% | 28.2% |
| Operating expenses | $667,238 | $525,342 | $1,608,547 | $1,199,541 |
| Operating loss | $(488,808) | $(524,432) | $(1,219,374) | $(1,198,631) |
| Net loss | $(614,453) | $(736,040) | $(1,487,770) | $(1,449,662) |
| Net loss attributable to ABVC | $(557,576) | $(632,170) | $(1,349,247) | $(1,233,557) |
| Basic and diluted loss per share | $(0.03) | $(0.05) | $(0.08) | $(0.11) |
Management attributed the revenue increase primarily to BioKey research and development services. Six-month R&D expense rose 67% to $509,725, which management linked to pipeline progress, related milestone costs and a Vitreous Substitute for Vitrectomy research project. Six-month SG&A increased about 23% to $1,082,472, mainly due to salaries. Interest expense rose 17% to $262,572. Q2 net loss narrowed year over year, while the six-month net loss increased modestly.
Cash flow, balance sheet and debt
- At June 30, 2019, cash and cash equivalents were $540,308, with $16,123 of restricted cash. Total current assets were $1.23 million and current liabilities were $10.11 million, producing a working-capital deficit of $8.87 million. The company reported total assets of $7.14 million, total liabilities of $10.28 million and a total stockholders’ deficit of $3.14 million.
- Six-month operating cash use was $1.40 million, compared with $958,016 in 2018. Investing activities used $20,976; financing activities provided $1.73 million, including $1.0 million of bank borrowing and $160,000 of convertible-note proceeds. Cash, cash equivalents and restricted cash ended at $556,431.
- Current short-term bank loans were $1.89 million; notes payable were $246,652; convertible notes were $960,000; and amounts due to related parties were $4.98 million. The $1.0 million Cathay Bank revolving loan matures January 1, 2020, bears interest at prime plus 1%, and is secured by substantially all assets of the company and BriVision, with personal guarantees. The Kuo convertible note is $160,000 at 20% annual interest, due May 2020, and has conversion terms tied to the company’s equity offering.
- Common shares outstanding were 18,122,196 at June 30 (18,122,860 as of August 7). A 1-for-18 reverse split became effective May 8, 2019. On June 30, the company agreed to issue BioFirst 428,571 shares in settlement of $3 million owed.
Material developments, outlook and risks
- The BioLite and BioKey transactions closed February 8, 2019. BioKey was recorded as a business combination with $43.65 million of goodwill, which was fully written down at closing due to the company’s financial condition and uncertainty about achieving the sales growth needed for future operating income. BioLite was treated as a restructuring under common control.
- Management states that the company has incurred recurring losses and depends on profitable operations and/or additional financing to meet obligations. It plans to seek equity, bank or third-party borrowing, and related-party financing, but gives no assurance that these sources will be available. The filing concludes that substantial doubt exists about the company’s ability to continue as a going concern.
- After quarter-end, on August 1, 2019, the company entered agreements to convert $4,246,749 of debt owed to nine related parties into 606,681 common shares at $7 per share, subject to issuance of the shares and creditor releases.
- The company designated 3.5 million shares of Series A convertible preferred stock on June 28. The shares carry cumulative dividends for four years, senior dividend and liquidation rights, common-equivalent voting rights, and one-for-one conversion provisions. The June 30 balance sheet reports no preferred shares issued and outstanding.
- Management concluded disclosure controls and procedures were not effective as of June 30, 2019. It reported no material change in internal control over financial reporting during the quarter. The filing lists no legal proceedings and no material off-balance-sheet arrangements.
- Risks include continued cash burn and financing dependence, potential equity dilution, related-party financing and transactions, clinical and regulatory uncertainty, investment valuation risk, foreign-currency exposure, and the possibility that forward-looking plans will not be achieved. No quantified financial guidance is provided.
Important facts for investors to verify
- Review the going-concern disclosure and near-term debt maturities against available cash and the company’s financing capacity.
- Confirm completion and accounting treatment of the post-quarter $4.25 million related-party debt conversion, including share issuance and creditor releases.
- Assess dilution and preferences associated with common-stock issuances, convertible notes and the Series A designation; confirm the preferred shares actually issued, if any.
- Evaluate related-party balances, lending terms, collateral and guarantees, and the recoverability of receivables and investments in related entities.
- Reconcile apparent filing inconsistencies: the Q2 statements report SG&A of $571,669, while the MD&A comparison table shows $58,445 for Q2 2018 despite the financial statements reporting $458,445; the MD&A cash-flow narrative also describes increased operating cash use as a “decrease.”