424B2 1 f424b2080819_americanbri.htm PROSPECTUS SUPPLEMENT

Filed Pursuant to Rule 424(b)(2)

Registration Statement 333-228387

 

PROSPECTUS DATED AUGUST 7, 2019

 

 

Minimum Offering: 1,428,571 Shares of Series A Convertible Preferred Stock

Convertible into 1,428,571 Shares of Common Stock

 

Maximum Offering: 3,285,714 Shares of Series A Convertible Preferred Stock

Convertible into 3,285,714 Shares of Common Stock

 

This is a “best efforts” public offering of securities of American BriVision (Holding) Corporation (referred to herein as “we”, “us”, “our”, “ABVC”, “Registrant”, or the “Company”). We are selling a minimum of 1,428,571 and a maximum of 3,285,714 shares of Series A Convertible Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”) for an aggregate of $10,000,000 dollars at minimum and $23,000,000 dollars at maximum.

 

Subject to the laws of Nevada, we will pay cumulative dividends on the Series A Convertible Preferred Stock on each anniversary from the date of original issue for a period of four calendar years. We will reserve twenty percent (20%) of the fund raised from this offering (the “Dividend Reserve”) in an escrow account (the “Escrow Account”) maintained by Sutter Securities Clearing, LLC (the “Escrow Agent”) and distribute five percent (5%) of the Dividend Reserve in cash at each anniversary for four years to each holder of Series A Convertible Preferred Stock. The Series A Convertible Preferred Stock will rank senior to our outstanding common stock, par value $0.001 (the “Common Stock”) with respect to dividend rights, rights upon liquidation, dissolution or winding up in the amount of accrued but unpaid dividend. Holders of the Series A Convertible Preferred Stock will have the same voting rights as our Common Stock holders. Each share of Series A Convertible Preferred Stock is initially convertible at any time at the option of the holder into one share of Common Stock and automatically converts into one share of Common Stock on the four-year anniversary of its issuance.

 

Our Common Stock is quoted on the OTC Markets under the symbol “ABVC.” On August 1, 2019, the last reported sale price per share of our Common Stock was $11.50. The recent market price of our Common Stock set forth herein will not be used to determine the offering price of the Series A Convertible Preferred Stock. There is no established public market for the Series A Convertible Preferred Stock. The offering price of the Series A Convertible Preferred Stock will be arbitrarily determined and will not necessarily bear any relationship to our assets, results of operations, or book value, or to any other generally accepted criteria of valuation. The offering price is determined through negotiations with the underwriters. The underwriters and the Company have set $7.00 per share for the offering price, which will be finalized prior to closing of the offering. We intend to list both our Common Stock and Series A Convertible Preferred Stock on the Nasdaq Stock Market (“Nasdaq”). The Common Stock will be traded under the same symbol and the Series A Convertible Preferred Stock will be traded under the symbol “[●]”, subject to Nasdaq approval. Currently there is no established public trading market for either our Common Stock or Series A Convertible Preferred Stock and the prices quoted on the OTCQB may not be indicative of the market price of our Common Stock or Series A Convertible Preferred Stock on Nasdaq. If the application to Nasdaq is approved, trading of our Common Stock and Series A Convertible Preferred Stock is expected to begin within five (5) days after the date of issuance of the Series A Convertible Preferred Stock registered herein. We cannot assure you that either of our application to list the Common Stock or Series A Convertible Preferred Stock will be approved; however, we will not complete this offering without a listing approval letter of our Series A Convertible Preferred Stock and Common Stock from Nasdaq.

 

 

 

 

Boustead Securities, LLC (“Boustead” or the “Underwriter”) has agreed to act as our exclusive underwriter to offer shares of Series A Convertible Preferred Stock to prospective investors on a best efforts basis. The Underwriter is not purchasing any shares of Series A Convertible Preferred Stock offered by us and is required to sell at least $10,000,000 of Series A Convertible Preferred Stock in the offering for this offering to close. In connection with the sale of the Series A Convertible Preferred Stock, Boustead will be deemed to be an “underwriter” within the meaning of the Securities Act of 1933, as amended, or “Securities Act,” and the compensation of Boustead will be deemed to be underwriting commissions.

 

The offering will terminate at the earlier of (i) the date at which $23,000,000 of Series A Convertible Preferred Stock has been sold; (ii) the date on which this offering is terminated by the Company in its sole discretion; or (iii) one hundred and eighty (180) days from the effectiveness of this Registration Statement. Until the offering terminates, the proceeds of the offering will be held in the offering deposit account (“Offering Deposit Account”) and FinTech Clearing, LLC will serve as the Deposit Account Agent.

 

You should read this prospectus, together with additional information described under the headings “Incorporation of Certain Information by Reference” and “Where You Can Find More Information”, carefully before you invest in any of our securities.

 

Investing in our securities involves a high degree of risk. See “Risk Factors” starting on page 11 of this prospectus.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

    Number of Shares of Series A
 Convertible Preferred Stock
Offered by Us
    Public
Offering
Price per Share
    Total Initial
Public
Offering
Price
    Underwriting
Commissions (1)
    Proceeds to Our
Company Before
Expenses and
Dividend Reserve
 
Minimum     1,428,571     $ 7.00     $ 10,000,000     $ 700,000     $ 9,300,000  
Maximum     3,285,714       7.00     $ 23,000,000     $ 1,545,000       21,455,000  

 

Delivery of the shares of our Series A Convertible Preferred Stock is expected to be made on or about ___, 2019.

 

(1) We have agreed to issue warrants, exercisable in whole or in part, commencing on the closing date of the offering contemplated in this registration statement and expiring on the five-year anniversary thereof, representing 7% of the number of shares of Common Stock to be issued upon conversion of the Series A Preferred Stock issued in the offering to the Underwriter. For a description of other terms of the Underwriter Warrants and a description of the other compensation to be received by the Underwriter, please see “Underwriting” beginning on page 113.

 

The date of this prospectus is August 7, 2019

 

 

 

 

 

TABLE OF CONTENTS

 

PROSPECTUS CONVENTIONS   ii
INDUSTRY AND MARKET DATA   ii
MERGERS   iii
PROSPECTUS SUMMARY   1
THE OFFERING   6
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION   8
RISK FACTORS   11
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS   32
USE OF PROCEEDS   34
DIVIDEND POLICY   35
CAPITALIZATION   36
DILUTION   37
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   38
BIOLITE’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   52
BIOKEY’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   66
BUSINESS   75
MANAGEMENT   91
EXECUTIVE COMPENSATION   95
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT   97
UNAUDITED CONDENSED CONSOLIDATED COMBINED PRO FORMA FINANCIAL INFORMATION   98
RELATED PARTY TRANSACTIONS OF DIRECTORS AND EXECUTIVE OFFICERS OF THE COMBINED COMPANY   104
DESCRIPTION OF SECURITIES   107
SHARES ELIGIBLE FOR FUTURE SALE   111
UNDERWRITING   113
LEGAL MATTERS   119
EXPERTS   119
WHERE YOU CAN FIND MORE INFORMATION   119

 

You should rely only on the information contained in this prospectus or in any free writing prospectus that we may specifically authorize to be delivered or made available to you. We and our Underwriter have not authorized anyone to provide you with any information other than that contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus may only be used where it is legal to offer and sell our securities. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our securities. Our business, financial condition, results of operations and prospects may have changed since that date. We are not making an offer of these securities in any jurisdiction where the offer is not permitted.

 

Unless the context otherwise requires, the terms “ABVC,” “we,” “us” and “our” in this prospectus refer to American BriVision (Holding) Corporation, and “this offering” refers to the offering contemplated in this prospectus.

 

i

 

 

PROSPECTUS CONVENTIONS

 

Except where the context otherwise requires and for purposes of this prospectus only: 

 

“Common Stock” is the Common Stock of American BriVision (Holding) Corporation, par value US$0.001 per share;

 

“Series A Convertible Preferred Stock” is the Series A convertible preferred stock of American BriVision (Holding) Corporation, par value US$0.001 per share;

 

“APR” or “annual percentage rate” refers to the annual rate that is charged to borrowers, including a fixed interest rate and a transaction fee rate, expressed as a single percentage number that represents the actual yearly cost of borrowing over the life of a loan;

 

The terms “we,” “us,” “our,” “the Company,” “our Company” or “ABVC” refers to American BriVision (Holding) Corporation, a Nevada corporation, and all of the Subsidiaries as defined herein unless the context specifies;

 

The “Board” or “Board of Directors” refers to the board of directors of the Company including the new directors appointed as a result of the Merger which closed on February 8, 2019;

 

“Subsidiary” or “Subsidiaries,” refer to American BriVision Corporation, sometimes referred to as “BriVision”, BioLite Holding, Inc. or BioLite and BioKey, Inc. or BioKey;

 

American BriVision Corporation refers to a Delaware corporation and wholly-owned subsidiary of ABVC;

 

BioLite means BioLite Holding, Inc. refers to a Nevada corporation and a wholly-owned subsidiary of ABVC;

 

BioKey means BioKey, Inc. refers to a California corporation and wholly-owned subsidiary of ABVC;

 

BioLite Acquisition Corp. or Merger Sub 1 refers to a Nevada corporation, which was a direct wholly-owned subsidiary of ABVC prior to the completion of the Mergers;

 

BioKey Acquisition Corp. or Merger Sub 2, refers to a California corporation, which was a direct wholly-owned subsidiary of ABVC prior to the completion of the Mergers;

 

The Merger Agreement means the Agreement and Plan of Merger dated as of January 31, 2018, pursuant to which the Company, BioLite, BioKey, Merger Sub 1, and Merger Sub 2 completed a business combination on February 8, 2019 where ABVC acquired BioLite and BioKey via the issuance of additional shares of Common Stock to the shareholders of BioLite and BioKey;

 

“China”, “mainland China” and “P.R.C.” refer to the People’s Republic of China, excluding Taiwan, Hong Kong or Macau for purposes of this prospectus;

 

“R.O.C.” or “Taiwan” refers to Taiwan, the Republic of China;

 

All references to “NTD” and “New Taiwan Dollars” are to the legal currency of R.O.C.; and

 

All references to “U.S. dollars”, “dollars”, and “$” are to the legal currency of the U.S.

 

This prospectus specifies certain NTD amounts and in parenthesis the approximate U.S. dollar amounts at the exchange rate on the date of this prospectus. The conversion rates regarding NTD and U.S. dollars are subject to change and, therefore, we can provide no assurance that U.S. dollar amounts specified in this prospectus will not change.

 

For clarification, this prospectus follows English naming convention of first name followed by last name, regardless of whether an individual’s name is Chinese or English.

 

INDUSTRY AND MARKET DATA

 

This prospectus includes information with respect to market and industry conditions and market share from third-party sources or based upon estimates using such sources when available. We have not, directly or indirectly, sponsored or participated in the publication of any of such materials. We believe that such information and estimates are reasonable and reliable. We also assume the information extracted from publications of third-party sources has been accurately reproduced. We understand that the Company would be liable for the information included in this prospectus if any part of the information was incorrect, misleading or imprecise to a material extent.

 

ii

 

 

MERGERS

 

As disclosed in a registration statement on Form S-4 filed with the Securities and Exchange Commission (the “SEC”) on July 23, 2018, as amended from time to time, the Company, BioLite Holding, Inc. (“BioLite”), BioKey, Inc. (“BioKey”), BioLite Acquisition Corp., a direct wholly-owned subsidiary of the Company (“Merger Sub 1”), and BioKey Acquisition Corp., a direct wholly-owned subsidiary of the Company (“Merger Sub 2”) were in the process of completing a business combination pursuant to the Agreement and Plan of Merger (the “Merger Agreement”) dated as of January 31, 2018 where ABVC would acquire BioLite and BioKey via the issuance of additional shares of Common Stock of ABVC to the shareholders of BioLite and BioKey.

 

On February 8, 2019, the parties of the Merger Agreement consummated the merger transactions. Pursuant to the terms of the Merger Agreement, BioLite and BioKey became two wholly-owned subsidiaries of the Company on February 8, 2019. The Company issued an aggregate of 104,558,777 shares (prior to the stock reverse split) of Common Stock as consideration to the shareholders of BioLite and BioKey pursuant to the registration statement (the “Registration Statement on S-4”) on Form S-4 Amendment No. 3 filed with the SEC on January 16, 2019 which became effective by operation of law on or about February 5, 2019.

 

iii

 

 

PROSPECTUS SUMMARY

 

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our securities, you should carefully read this entire prospectus, including our financial statements and the related notes and the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in each case included elsewhere in this prospectus.

 

Company Overview

 

ABVC is a clinical stage biopharmaceutical company focused on utilizing its licensed technology to (i) further the development of pharmaceutical products with focuses on cancer and central nervous system (“CNS”) indications and medical devices for eye indications, (ii) seek regulatory approvals for their drug and medical device candidates, (iii) after receiving necessary regulatory approval, collaborate with selected pharmaceutical companies to commercialize such pharmaceutical products in various markets, and (iv) provide pharmaceutical and nutraceutical services. ABVC’s business model includes the following stages: 1) engaging qualified medical research institutions to conduct clinical trials of translational drug candidates for Proof of Concept (“POC”) on behalf of the Company; 2) retaining ownership of the research results by the Company, and 3) out-licensing the research results and data to qualified pharmaceutical companies that will develop its research results to commercially ready pharmaceutical products. The Company currently concentrates on, among other things, clinical research and development of six new drug candidates and one Class III medical device, which collectively constitute its primary business operations and research projects. As of the date of this prospectus, the Company has not generated substantial revenue from its research and development of new drugs and medical devices. The six new drug candidates were licensed from BioLite, Inc. (“BioLite Taiwan”), a company formed in Taiwan that is a subsidiary of BioLite Holding, Inc. (“BioLite”), a wholly-owned subsidiary of the Company. The six new drug candidates under our development are named as follows: ABV-1504 for the treatment of Major Depressive Disorder, ABV-1505 to treat Attention-Deficit Hyperactivity Disease, ABV-1501 for the treatment of Triple Negative Breast Cancer, ABV-1703 for the treatment of Pancreatic Cancer, ABV-1702 to treat Myelodysplastic syndromes, and ABV-1601 Depression in Cancer Patients. The Class III medical device was licensed from and codeveloped with BioFirst Corporation (“BioFirst”), a company formed under the laws of Taiwan, and a related party to the Company. The internal name of ABVC’s Class III medical device is ABV-1701 Vitargus for the treatments of Retinal Detachment or Vitreous Hemorrhage. ABV-1701 is being co-developed by the Company and BioFirst and the research data, intellectual property and licensing revenue generated from the collaboration will be shared equally between the Company and BioFirst. The Company and BioFirst have the sole license to develop and commercialize ABV-1701 by the end of 2030.

 

BioLite is a clinical stage pharmaceutical company focused on translational research of botanical and natural active pharmaceutical ingredients (“API”) based products in the fields of central nervous system, oncology/ hematology and autoimmune diseases. Because BioLite believes natural substances have many healing powers, BioLite focuses its research resources to the development of botanical products, which include plant materials, algae, macroscopic fungi and combinations thereof. BioLite mostly uses traditional cultivation, fermentation and purification techniques, excluding genetic modifications, to process the active natural constituents of its drug candidates. Its operational activities primarily focus on researching and developing novel botanical and natural drugs utilizing scientific methodology and approaches in compliance with the procedures and protocols prescribed by the U.S. Food and Drug Administration (the “FDA”). BioLite’s primary operations are located in Taiwan.

 

BioKey, Inc., a California corporation and wholly-owned subsidiary of the Company, (“BioKey”), is a specialty pharmaceutical company that has two main business lines: i) platform-based control release technology of active pharmaceutical ingredients and ii) integrated pharmaceutical services, such as clinical research contracting services, generic drug development, drug manufacturing and related pharmaceutical consulting. BioKey’s core expertise is the application of its proprietary oral control release technology to develop generic and branded pharmaceuticals and nutraceuticals. BioKey has four abbreviated new drug applications (“ANDA”s) approved by the FDA and more than ten generic and ANDA product candidates in the pipeline. In addition, BioKey provides integrated pharmaceutical services, including analytical services and pharmaceutical and nutraceutical product development and manufacturing.

 

1

 

 

Upon closing of the Mergers on February 8, 2019, both BioLite and BioKey have become two wholly-owned subsidiaries of ABVC and became integrated into our three strategic business units (“SBUs”), which are the New Drug Development SBU, the Innovative Medical Devices SBU and the CDMO SBU. The following chart illustrates the current corporate structure of ABVC:

 

 

 

Our Mission

 

We devote our resources to building a sophisticated biotech company and becoming a pioneer in the biopharmaceutical industry in the U.S. and Taiwan with a global vision. Dr. Howard Doong, our Chief Executive Officer, and Dr. Tsung-Shann Jiang, the founder and majority shareholder of the Company, understand the challenges and opportunities of the biotech industry in Taiwan and the U.S. ABVC’s mission is to provide therapeutic solutions to significant unmet medical needs and to improve health and quality of human life by developing innovative botanical drugs to treat central nervous system (“CNS”), oncology/ hematology and eye diseases.

 

Recent Developments

 

Collaborative Agreement

 

On July 24, 2017, American BriVision Corporation (“BriVision”), a wholly-owned subsidiary of ABVC, entered into an agreement with BioFirst (the “BioFirst Agreement”), pursuant to which BioFirst granted BriVision the global license to co-develop ABV-1701 Vitreous Substitute for Vitrectomy for medical use. BioFirst is a related party to ABVC because BioFirst and YuanGene Corporation (“YuanGene”), ABVC’s controlling shareholder, are under the common control of the controlling beneficiary shareholder of YuanGene.

 

According to the BioFirst Agreement, ABVC and BriVision agreed to co-develop and commercialize ABV-1701 with BioFirst and ABVC agreed to pay BioFirst $3,000,000 in cash or Common Stock on or before September 30, 2018 in two installments. BioFirst is also entitled to receive 50% of the future net licensing income or net sales profit when ABV-1701 is sublicensed or commercialized. On June 30, 2019, the Company and BioFirst entered into a Stock Purchase Agreement (the “Purchase Agreement”), pursuant to which the Company will issue 428,571 shares of the Company’s common stock to BioFirst in consideration for $3,000,000 owed by the Company to BioFirst in connection with the BioFirst Collaborative Agreement.

  

2

 

 

On May 26, 2017, BriVision entered into a co-development agreement (the “ABVC-Rgene Co-development Agreement”) with Rgene Corporation (“Rgene”) to co-develop and commercialize in the global markets three new drug products that originate from Maitake Combination Therapy. The three drugs licensed from BriVision to Rgene are ABV-1507 HER-2/neu Positive Breast Cancer Combination Therapy, ABV-1703 Pancreatic Cancer Combination Therapy and ABV-1527 Ovarian Cancer Combination Therapy. Rgene shall prepare the IND applications for the Phase II trials of ABV-1507 HER-2/neu Positive Breast Cancer Combination Therapy and ABV-1527 Ovarian Cancer Combination Therapy.

 

Pursuant to the ABVC-Rgene Co-development Agreement, Rgene was to pay to the Company $3,000,000 in cash or stock of Rgene with equivalent value by August 15, 2017 in three installments. The payment is for the compensation of BriVision’s past research before the ABVC-Rgene Co-development Agreement was signed and it does not relate to any future commitments made by BriVision and Rgene in this ABVC-Rgene Co-development Agreement. In addition to the $3,000,000 payment, the Company is entitled to receive 50% of the future net licensing income or net sales profit earned by Rgene, if any, and any development cost shall be equally shared by both BriVision and Rgene.

 

On June 1, 2017, BriVision delivered all research, technical, data and development data to Rgene. Since both Rgene and ABVC are related parties controlled by a controlling beneficiary shareholder of YuanGene, who is also the controlling beneficiary shareholder of the Company, ABVC has recorded the full amount of $3,000,000 in connection with the ABVC-Rgene Co-development Agreement as additional paid-in capital during the year ended September 30, 2017. BriVision and Rgene agreed that Rgene should pay BriVision $450,000 in cash and the rest in Rgene’s stock. As of the date of this prospectus, ABVC received $450,000 in cash and $2,550,000 worth of shares of Rgene’s Common Stock at a per share price of 50NTD (equivalent to $1.62 USD).

 

Conversion of Related Party Debt

 

As described in Related Party Transaction of Directors and Executive Officers of the Combined Company on page 104, the Company had outstanding balance of debts owed to certain related parties. On August 1, 2019, the Company entered into conversion agreements (the “Conversion Agreement”) with each of the nine (9) related parties (the “Related Creditors”) of the Company to convert the debts owed to all of the Related Creditors in an aggregate amount of $4,246,749 to a total of 606,681 shares (the “Conversion Shares”) of the Company’s common stock at a conversion price of $7.00 per share. Pursuant to the Conversion Agreement, each Related Creditor shall receive its respective number of Conversion Shares as set forth therein and therefore release the Company from any debts, liabilities or obligations incurred under the respective original agreement, which is attached in each Conversion Agreement. The Related Creditors include the following parties: BioFirst Corp., AsiaGene Corp., LionGene Corp., YuanGene Corp., Lion Arts Promotion Inc., The Jiangs, and Keypoint Technology Ltd. A copy of the form of the Conversion Agreement was filed with the SEC as an exhibit to the current report on Form 8-K on August 6, 2019.

 

Research Results

 

On May 23, 2019, the Company announced the Phase II clinical study results of ABV-1504 for Major Depression Disorder (“MDD”). The clinical study results showed that PDC-1421, the active pharmaceutical ingredient of ABV-1504, met the pre-specified primary endpoint of the Phase II clinical trial and significantly improved the symptoms of MDD.

 

The Phase II clinical study was a randomized, double-blind, placebo-controlled, multi-center trial, in which 60 adult patients with confirmed moderate to severe MDD were treated with PDC-1421 in either low dose (380 mg) or high dose (2 x 380 mg) compared with placebo administration, three times a day for six weeks. PDC-1421 high dose (2 x 380 mg) met the pre-specified primary endpoint by demonstrating a highly significant 13.2-point reduction in the Montgomery-Åsberg Depression Rating Scale (MADRS) total score by Intention-To-Treat (ITT) analysis, averaged over the 6-week treatment period (overall treatment effect) from baseline, as compared to 9.2-point reduction of the placebo group. By Per-Protocol (PP) analysis, PDC-1421 showed a dose dependent efficacy toward MDD in which high dose (2 x 380 mg) gave 13.4-point reduction in MADRS total score from baseline and low dose (380 mg) gave 10.4-point reduction as compared to a 8.6-point in the placebo group. The Company has decided to use the high dose formula in the Phase III clinical trial of ABV-1504.

 

Strategy

 

Key elements of our business strategy include:

 

  Focusing on completing the Phase I study of ABV-1701 Vitargus for the treatments of Retinal Detachment or Vitreous Hemorrhage, which we expect to generate revenues in the future.
     
  Focusing on licensing ABV-1504 for the treatmnt of major depressive disorder after the succssful completion of its Phase II clinical trials.
     
  Continuing translational medical research form lab research accomplishments for POC clinical trials, which are Phase I and Phase II trials. Major product pipeline includes six investigational new drugs, the INDs of all of which have been approved by the FDA and one Class III medical device, the clinical trial of which is being conducted in Australia. The seven products are comprised of the following: ABV-1504 for the treatment of Major Depressive Disorder, ABV-1505 to treat Attention-Deficit Hyperactivity Disease, ABV-1501 for the treatment of Triple Negative Breast Cancer, ABV-1703 to the treatment of Pancreatic Cancer, ABV-1702 to treat Myelodysplastic syndromes, and ABV-1601 Depression in Cancer Patients, as well as a medical device, ABV-1701 Vitargus for the treatments of Retinal Detachment or Vitreous Hemorrhage.
     
  Out licensing drug candidates and medical device candidates to major pharmaceutical companies for phase III and pivotal clinical trials, as applicable, and further marketing if approved by the FDA.

 

3

 

 

We plan to augment our core research and development capability and assets by conducting Phase I and II clinical trials for investigational new drugs and medical devices in the fields of CNS, Hematology/Oncology and Ophthalmology.

 

Our management team has extensive experiences across a wide range of new drug and medical device development and we have in-licensed new drug and medical device candidates from large research institutes and universities in both the U.S. and Taiwan. Through an assertive product development approach, we expect that we will build a substantial portfolio of Oncology/ Hematology, CNS and Ophthalmology products. We believe the initial two phases of clinical trials add great value to investigational new drug development. Because we primarily focus on Phase I and II research of new drug candidates and out license the post-Phase-II products to pharmaceutical companies, we do not expect to devote substantial efforts and resources to building the disease-specific distribution channels. We expect to continue this strategy which we believe has been effective for the past ten years of our operations.

 

Material Risks and Challenges

 

We face substantial competition from a great many established and emerging pharmaceutical and biotech companies that develop, distribute or sell therapeutics to treat the same indications that our drug candidates are designed to treat. Our current and potential competitors include large pharmaceutical and biotechnology companies, and specialty pharmaceutical and generic drug companies. Many of our current and potential competitors have substantially greater financial, technical and human resources than we do and significantly more experience in the marketing, commercialization, discovery, development and regulatory approvals of products, which could place us at a significant competitive disadvantage or deny our marketing exclusivity rights. Typically, our competitors will most likely have more capital resources to support their products than we do. In addition, you should carefully consider the risks described under the “Risk Factors” section beginning on page 11 before investing in us. Some of these risks are:

 

  Risk associated with our profitability including, but not limited to:

 

  We have never generated revenue and will continue to be unprofitable in the foreseeable future.

 

  Risk associated with clinical trials and the development of our products, including but not limited to:

 

  Clinical trials are expensive and time consuming, and their outcome is uncertain;

 

  Our clinical trials could be delayed or unsuccessful, and we may not be able to obtain regulatory approval for any of our drug candidates when expected, or at all;

 

  We may experience delays in our clinical trials that could adversely affect our business and operations;

 

  We rely on third parties to conduct our preclinical studies and clinical trials and if such third parties do not meet our deadlines or otherwise conduct the studies as required, we may be delayed in progressing, or ultimately may not be able to progress, our drug candidates to clinical trials;

 

  We may not be able to secure and maintain research institutions to conduct our future trials;

 

  We may not be able to secure co-developers or partners to further post-Phase II clinical trials and eventually commercialize our drug candidates;

 

4

 

 

  We may need to prioritize the development of our most promising candidates at the expense of the development of other products; and

 

  Physicians, patients, third-party payors or others in the medical community may not be receptive to our products, and we may not generate any future revenue from the sale or licensing of our products.

 

  Risks associated with intellectual property including but not limited to:

 

  We may not be successful in obtaining or maintaining patent or other relating rights necessary to the development of our drug candidates in the pipeline;
     
  The intellectual property rights underlying our exclusive licensing rights may expire or be terminated due to lack of maintenance;

 

  Risks associated with competition and manufacturing including, but not limited to:

 

  We face competition from entities that have developed or are developing products for our target disease indications, including companies developing novel treatments and technologies similar to ours; and

 

  We depend primarily upon a sole supplier of our key extract for three drug candidates and could incur significant costs and delays if we are unable to promptly find a replacement for such supplier if the supplier fails to deliver the extract pursuant to our orders.

 

  Risks associated with government regulations including without limitation:

 

  If we do not obtain the necessary governmental approvals, we will be unable to sub-license or commercialize our pharmaceutical products; and

 

  Even if we obtain regulatory approval for a drug candidate, our products may remain subject to regulatory scrutiny.

 

  Risk associated with our Series A Convertible Preferred Stock, Common Stock, and this Offering including without limitation:

 

  The market prices and trading volumes of the Common Stock and Series A Convertible Preferred Stock may be volatile and may be affected by economic conditions beyond our control;
     
  There is no established trading market for either our Common Stock or Series A Convertible Preferred Stock and such market may never develop;
     
  There may be arbitrage opportunities due to the trading price differences of the Common Stock and Series A Convertible Preferred Stock;

 

  Investors purchasing shares of the Series A Convertible Preferred Stock will suffer immediate and substantial dilution; and

 

  Currency fluctuations may adversely affect the prices of our Common Stock.

 

These and other risks described in this prospectus could materially and adversely impact our business, financial condition, operating results and cash flow, which could cause the trading price of our Common Stock to decline and could result in a loss of your investment.

 

Corporate Information

 

ABVC was incorporated under the laws of the State of Nevada on February 6, 2002. BriVision was incorporated in the State of Delaware on July 21, 2015. BioLite was incorporated in the State of Nevada on July 27, 2016. BioKey was incorporated in the State of California on November 20, 2000. BriVision, BioLite and BioKey are three operating Subsidiaries wholly owned by the Company.

 

Our principal executive office is located at 44370 Old Warm Springs Blvd., Fremont, CA 94538. Our telephone number at our principal executive office is (845) 291-1291. Our corporate website of BriVision is http://www.ambrivis.com. The information on our corporate website is not part of, and is not incorporated by reference into, this prospectus.

 

5

 

 

THE OFFERING

 

Assumed offering price per share of Series A Convertible Preferred Stock   We currently estimate that the public offering price will be US$7.00 per share (“Public Offering Price”).
     
Series A Convertible Preferred Stock offered by us   A minimum of 1,428,571 shares of Series A Convertible Preferred Stock on a “best-efforts” basis up to a maximum of 3,285,714 shares of Series A Convertible Preferred Stock on a “best efforts” basis at an anticipated offering price of $7.00 per share. If we do not raise the aggregate minimum offering amount of $10,000,000, we will not conduct a closing of our offering and will return to investors all amounts previously deposited by them in escrow, without interest or deduction. Prior to the closing of our offering, all funds delivered as payment for the securities offering hereby shall be deposited in a non-interest bearing escrow account (“Escrow Account”) at Pacific Mercantile Bank maintained by FinTech Clearing, LLC (the “Deposit Account Agent”) as deposit account agent for the investors in the offering.
     
Shares of Common Stock outstanding immediately before and after this offering without giving effect to the conversion (the “Conversion”) of any Series A Convertible Preferred Stock*   17,694,289 shares of Common Stock as of July 18, 2019, after the stock reverse split effective on May 8, 2019 and the issuance of shares of Common Stock pursuant to the Registration Statement on Form S-4 which became effective on or about February 5, 2019.
     
Shares of Series A Convertible Preferred Stock outstanding immediately before this offering   None.
     
Shares of Series A Convertible Preferred Stock outstanding immediately after this offering without giving effect to the Conversion   1,428,571 shares at minimum, and 3,285,714 shares at maximum. Each share of Series A Convertible Preferred Stock is initially convertible at any time at the option of the holder into one share of Common Stock and automatically converts into one share of Common Stock on its four-year anniversary of the original issuance.
     
Gross Proceeds   US$10,000,000 at minimum, and $23,000,000 at maximum.
     
Underwriter Warrants   We have agreed to issue to the Underwriter warrants to purchase up to a total of up to 230,000 shares of Common Stock (equal to 7% of the maximum number of shares of Common Stock convertible from the Series A Preferred Stock sold in this offering assuming the Underwriter exercised its option to increase the maximum size of the offering) and to also register herein such underlying shares. The warrants will be exercisable, in whole or in part, commencing on the closing date of the offering contemplated in this registration statement and expiring on the five-year anniversary of the effective date of this registration statement, and shall be exercisable at a price equal to the Public Offering Price.

 

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Term of Our Offering   The Series A Convertible Preferred Stock is being offered by the Company for a period of one hundred and eighty (180) days commencing on the date of this prospectus. If the minimum amount of the Company’s offering is not raised within such period, all subscription funds in the Offering Deposit Account will be returned to the investors promptly without interest or deduction of any fees. The Company’s offering may close or terminate, as the case may be, on the earlier of (i) the date at which the Maximum Amount of Series A Convertible Preferred Stock has been sold; (ii) the date on which this offering is terminated by the Company in its sole discretion; or (iii) one hundred and eighty (180) days from the effective date of this prospectus, or the expiration date. The Company’s offering shall not be closed unless our Common Stock and Series A Convertible Preferred Stock are listed on the Nasdaq Stock Market.
     
Offering Deposit Account   The gross proceeds from the sale of the shares of the Series A Convertible Preferred Stock in this offering will be deposited in a non-interest bearing escrow account maintained by the deposit account agent, Fintech Clearing, LLC (the “Deposit Account Agent”). The Deposit Account Agent is affiliated with the Underwriter, as the Deposit Account Agent is under the same indirect common ownership as the Underwriter. All checks will be deposited directly into the Offering Deposit Account and all wire transfers will be wired directly to the Offering Deposit Account at Pacific Mercantile Bank. The funds will be held in escrow until the Deposit Account Agent has advised us and the Underwriter that it has received a minimum of $10,000,000, the minimum offering, in cleared funds. If we do not receive the minimum of $10,000,000 by [●], 2019, all funds will be returned to purchasers in this offering on the next business day after the termination of the offering, without charge, deduction or interest. Prior to [●], 2019, in no event will funds be returned to you unless the offering is terminated. You will only be entitled to receive a refund of your subscription price if we do not raise a minimum of $10,000,000 by [●], 2019. No interest will be paid either to us or to you. See “Underwriting — Deposit Account Agent and Deposit of Offering Proceeds.”
     
Use of proceeds   We plan to use the net proceeds we will receive from this offering for general corporate purposes, including without limitation, investment in product research and development, sales and marketing activities, technology infrastructure, team development, capital expenditures, improvement of corporate facilities and other general and administrative matters. We may also use a portion of these proceeds for the acquisition of, or investment in, technologies, solutions or businesses that complement our business, although we have no present commitments or agreements to enter into any acquisitions or investments. See “Use of Proceeds” on page 34 for more information.
     
Risk factors   See “Risk Factors” and other information included in this prospectus for a discussion of the risks relating to investing in our Series A Convertible Preferred Stock and Common Stock. You should carefully consider these risks before deciding to invest in our Series A Convertible Preferred Stock.
     
Listing   We intend to have the Common Stock listed on the Nasdaq under the symbol “ABVC” and Series A Convertible Preferred Stock under the symbol [“●”] However, we cannot assure you that either of our Common Stock or Series A Convertible Preferred Stock will be listed on the Nasdaq. We will not complete this offering without a listing approval letter of our Series A Convertible Preferred Stock and Common Stock from the Nasdaq.

 

* The number of shares of Common Stock outstanding immediately after this offering, as set forth in the table above excludes shares of Common Stock issuable upon the exercise of the Underwriter Warrants.

 

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SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

 

The unaudited pro forma data presented herein reflects events that are directly attributable to the described transactions, factually supportable, and as it relates to the unaudited pro forma condensed consolidated combined statement of operations, expected to have a continuing impact. The unaudited pro forma data presented herein also reflects certain assumptions which management believes are reasonable. Such pro forma data is not necessarily indicative of financial results that would have been attained had the described transactions occurred on the dates indicated above, or the results of the combined company that may be achieved in the future. The adjustments are based on currently available information and certain estimates and assumptions. Therefore, the actual results may differ from the pro forma results indicated herein. However, management believes that the assumptions provide a reasonable basis for presenting the significant effects of the transactions as contemplated and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma condensed consolidated combined financial statements.

 

The unaudited pro forma condensed consolidated combined financial statements are provided for illustrative purposes only and are not intended to represent or be indicative of the consolidated results of operations or consolidated financial position of the combined company that would have been recorded had the Merger been completed as of the dates presented, and they should not be taken as representative of the expected future results of operations or financial position of the combined company. The unaudited pro forma condensed consolidated combined financial statements do not reflect the impacts of any potential operational efficiencies, asset dispositions, cost savings or economies of scale that the combined company may achieve with respect to the operations of the combined company. Additionally, the unaudited pro forma condensed consolidated combined statement of operations does not include non-recurring charges or credits, and the related tax effects, which result directly from the Mergers.

 

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SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED COMBINED BALANCE SHEET DATA
AS OF DECEMBER 31, 2018

 

               Pro Forma      Pro Forma 
   ABVC   BioKey   BioLite   Adjustment   Note  Combined 
ASSETS                       
Current Assets                       
Cash and cash equivalents  $40,044   $636,666   $186,644    -      $863,354 
Restricted cash and cash equivalents   16,093    -    -    -       16,093 
Accounts receivable, net   -    43,204    -    -       43,204 
Accounts receivable - related parties, net   -    147,848    -    -       147,848 
Other receivable   -    -    39,005    -       39,005 
Due from related parties   40,000    -    79,287    (59,810)  {f}   59,477 
Inventory   -    -    1,318    -       1,318 
Prepaid expense and other current assets   136    -    223,759    -       223,895 
Total Current Assets   96,273    827,718    530,013    (59,810)      1,394,194 
                             
Property and equipment, net   -    58,150    510,066            568,216 
Goodwill, net   -    -    -    43,531,445   {e}   43,531,445 
Long-term investments   -    -    3,488,169            3,448,169 
Deferred tax assets   -    -    1,347,995            1,347,995 
Security Deposits   -    10,440    27,418            37,858 
Total Assets  $96,273   $896,308   $5,903,661   $43,471,635      $50,367,877 
                             
LIABILITIES AND EQUITY                            
Current Liabilities                            
Short-term bank loan   -    -    899,250    -       899,250 
Long-term bank loan - current portion   -    -    39,835    -       39,835 
Notes payable   -    -    510,447    -       510,447 
Accrued expenses and other current liabilities   555,449    83,026    687,709    -       1,326,184 
Due to related parties   4,462,775    -    3,341,005    (58,684)  {f}   7,745,096 
Convertible notes payable, current portion   300,000    -    -            300,000 
Convertible notes payable - related parties, current portion   250,000    -    -            250,000 
Total Current Liabilities   5,568,224    83,026    5,478,246    (58,684)      11,070,812 
                             
Long-term bank loan   -    -    15,257    -       15,257 
Tenant security deposit   -    2,880    -    -       2,880 
Convertible notes payable   -    -    -    -       - 
Convertible notes payable - related parties   250,000    -    -    -       250,000 
Accrued interest   27,467    -    -    -       27,467 
                             
Total Liabilities   5,845,691    85,906    5,493,503    (58,684)      11,366,416 
                             
Equity                            
Preferred stock   -    18,633,097    -    (18,633,097)  {c}   - 
Common stock (Pre - reverse stock split)   213,927    774,293    4,121    (4,121)  {a}   318,486 
                   74,998   {a}     
                   (771,793)  {b}     
                   7,428   {b}     
                   22,133   {c}     
Additional paid-in capital   13,914,556    82,265    10,862,995    (70,877)  {a}   59,018,959 
(Pre - reverse stock split)                  (82,265)  {e}     
                   44,312,285   {e}     
                   (10,000,000)  {g}     
Stock subscription receivable   -    (1,667)   -    1,667   {e}   - 
Accumulated deficit   (19,877,901)   (18,677,586)   (11,445,109)   18,677,586   {e}   (12,209,446)
                   6,817,848   {g}     
                   2,295,716   {h}     
                   10,000,000   {g}     
Other comprehensive income   -    -    670,541    (14,689)  {g,h}   655,852 
Treasury stock   -    -    -    (6,750,000)  {g}   (9,100,000)
                   (2,350,000)  {h}     
Total Stockholders’ equity (deficit)   (5,749,418)   810,402    92,548    43,530,319       38,683,851 
Noncontrolling interest   -    -    317,610    -       317,610 
Total Equity   (5,749,418)   810,402    410,158    43,530,319       39,001,461 
                             
Total Liabilities and Equity  $96,273   $896,308   $5,903,661   $43,471,635       50,367,877 

 

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SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS DATA

FOR THE YEAR ENDED DECEMBER 31, 2018

 

               Pro Forma       Pro Forma 
   ABVC   BioKey   BioLite   Adjustment   Note   Combined 
                         
Revenues  $-   $510,197   $6,956                  $517,153 
                               
Cost of revenues   -    4,809    185,280              190,089 
                               
Gross profit   -    505,388    (178,324)             327,064 
                               
Operating expenses                              
Selling, general and administrative expenses   695,148    669,322    893,570              2,258,040 
Research and development expenses   669,668    430,917    319,053              1,419,638 
Stock based compensation   28,800    -    -              28,800 
Total operating expenses   1,393,616    1,100,239    1,212,623              3,706,478 
                               
Loss from operations   (1,393,616)   (594,851)   (1,390,947)             (3,379,414)
                               
Other income (expense)                              
Interest income   93    4,598    5,119              9,810 
Interest expense   (155,930)   -    (306,821)             (462,751)
Rental income   -    -    11,924              11,924 
Impairment loss   -    -    (63,663)             (63,663)
Investment loss   (549)   -    (395,476)             (396,025)
Gain/Loss on foreign exchange changes   -    -    7,307              7,307 
Gain/Loss on investment in equity securities   (2,549,451)   -    (192,463)             (2,741,914)
Other income (expense)   -    630    (5,154)             (4,524)
Total other income (expenses)   (2,705,837)   5,228    (939,227)             (3,639,836)
                               
Loss before provision for income tax   (4,099,453)   (589,623)   (2,330,174)             (7,019,250)
                               
Provision for income tax (benefit)   1,850    800    (366,947)             (364,297)
                               
Net loss   (4,101,303)   (590,423)   (1,963,227)             (6,654,953)
                               
Net loss attributable to noncontrolling interests   -    -    489,151              489,151 
                               
Net loss attributable to ABVC and subsidiaries   (4,101,303)   (590,423)   (1,474,067)             (7,144,104)
Foreign currency translation adjustment   -    -    86,786              86,786 
Comprehensive Income (Loss)  $(4,101,303)  $(590,423)  $(1,560,862)            $(7,230,890)

 

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RISK FACTORS

 

Investing in our securities includes a high degree of risk. Prior to making a decision about investing in our securities, you should consider carefully the specific factors discussed below, together with all of the other information contained in this prospectus. If any of the following risks actually occurs, our business, financial condition, results of operations and future prospects would likely be materially and adversely affected. This could cause the market price of our Common Stock to decline and could cause you to lose all or part of your investment.

 

Risks Related to the Company’s Business

 

The Company is a development stage biopharmaceutical company and is thus subject to the risks associated with new businesses in that industry.

 

The Company acquired the sole licensing rights to develop and commercialize for therapeutic purposes six compounds from BioLite and the right to co-develop with BioFirst a medical device (collectively the “ABVC Pipeline Products”). As such, the Company is a clinical stage biopharmaceutical company with operations that generate unsubstantial revenues. The Company is establishing and implementing many important functions necessary to operate a business, including the clinical research and development of the ABVC Pipeline Products, further establishment of the Company’s managerial and administrative structure, accounting systems and internal financial controls. Before the Mergers, the Company faced costs, uncertainties, delays and difficulties frequently encountered by pre-revenue stage biopharmaceutical companies. Upon completion of the Mergers and full integration of BioLite and BioKey into the Company, the Company will have limited revenue and remain unprofitable for an indefinite period of time.

 

Accordingly, you should consider the Company’s prospects in light of the risks and uncertainties that a pharmaceutical company with a limited operating history and revenue faces. In particular, potential investors should consider that there are significant risks that the Company will not be able to:

 

  implement or execute its current business plan, or generate profits;
     
  attract and maintain a skillful management team;
     
  raise sufficient funds in the capital markets or otherwise to effectuate its business plan;
     
  determine that the processes and technologies that it has developed are commercially viable; and/or
     
  enter into contracts with commercial partners, such as licensors and suppliers.

 

If any of the above risks occurs, the Company’s business may fail, in which case you may lose the entire amount of your investment in the Company. The Company cannot assure that any of its efforts in business operations will be successful or result in the timely development of new products, or ultimately produce any material revenue and profits.

 

In addition, after the Mergers, as a pre-profit biopharmaceutical company, the Company needs to transition from a company with a research and development focus to a company capable of supporting commercial activities. The Company may not be able to reach such transition point or make such a transition, which would have affect our business, financial condition, results of operations and prospects.

 

If the Company fails to raise additional capital, its ability to implement its business model and strategy could be compromised.

 

The Company has limited capital resources and operations. The CDMO Unit generates limited amount of revenue that could partially support the operations of the Company. To date, its operations have been funded partially from the proceeds from financings or loans from its shareholders and management. From time to time, we may seek additional financing to provide the capital required to expand our production facilities, research and development (“R&D”) initiatives and/or working capital, as well as to repay outstanding loans if cash flow from operations is insufficient to do so. We cannot predict with certainty the timing or amount of any such capital requirements. 

 

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If the Company does not raise sufficient capital to fund its ongoing development activities, it is likely that it will be unable to carry out its business plans, including R&D development and expansion of production facilities. The Company may not be able to obtain additional financing on terms acceptable, or at all. Even if the Company obtains financing for near term operations and product development, the Company may require additional capital beyond the near term. If the Company is unable to raise capital when needed, its business, financial condition and results of operations would be materially adversely affected, and it could be forced to reduce or discontinue our operations.

 

The Company has no history in obtaining regulatory approval for, or commercializing, any new drug candidate.

 

With limited operating history, the Company has never obtained regulatory approval for, or commercialized, any new drug candidate. It is possible that the FDA may refuse to accept our planned New Drug Application (or “NDA”) for any of the six drug products for substantive review, or may conclude after review of our data that our application is insufficient to obtain regulatory approval of the new drug candidates or the medical device. Although our CDMO strategic business department has experience in obtaining abbreviated new drug application (or “ANDA”) approvals, the processes and timelines of obtaining an NDA approval and ANDA approval can differentiate substantially. If the FDA does not accept or approve our planned NDA for our product candidates, it may require that we conduct additional clinical, preclinical or manufacturing validation studies, which may be costly. Depending on the FDA required studies, approval of any NDA or application that we submit may be significantly delayed, possibly for several years, or may require us to expend more resources than we have. Any delay in obtaining, or inability to obtain, regulatory approvals of any of our drug candidate will prevent us from sublicensing such product. It is also possible that additional studies, if performed and completed, may not be considered sufficient by the FDA. If any of these outcomes occurs, we may be forced to abandon our planned NDA for such drug candidate, which materially adversely affects our business and could potentially cause us to cease operations. We face similar regulatory risks in a foreign jurisdiction.

 

Our growth is dependent on our ability to successfully develop, acquire or license new drugs.

 

Our growth is supported by continuous investment in time, resources and capital to identify and develop new products or new formulations for the market via geographic expansion and market penetration. If we are unable to either develop new products on our own or acquire licenses for new products from other parties, our ability to grow revenues and market share will be adversely affected. In addition, we may not be able to recover our investment in the development of new drugs and medical devices, given that projects may be interrupted, unsuccessful, not as profitable as initially contemplated or we may not be able to obtain necessary financing for such development. Similarly, there is no assurance that we can successfully secure such rights from third parties on an economically feasible basis.

 

Our current products have certain side effects. If the side effects associated with our current or future products are not identified prior to their marketing and sale, we may be required to withdraw such products from the market, perform lengthy additional clinical trials or change the labeling of our products, any of which could adversely impact our growth.

 

The Company researches and develops the following six drug products and one medical device: ABV-1501, ABV-1504, ABV-1505, ABV-1701, ABV-1702, ABV-1601 and ABV-1703. Each of these seven products may cause serious adverse effects to their users. For example, the API of ABV-1501, ABV-1702 and ABV-1703 is Maitake mushroom extract. Side effects, or adverse events, associated with Maitake mushroom extract include blood bilirubin increase, lymphocyte count decrease, neutrophil count decrease, platelet count decrease, white blood cell decrease, headache, and hyperglycemia. Serious adverse events (collectively, the “SAE”) associated with this compound include leukocytosis, platelet count decrease, eye disorders, abdominal pain, gastrointestinal disorders, aphonia, lung infection, muscle weakness right-sided, confusion, edema cerebral, stroke, dyspnea, wheezing, and pruritus.

 

ABV-1504 and ABV-1505 have the same API, “Radix Polygala”, which is known as Polygala tenuifolia Willd or PDC-1421 Capsule (“Polygala tenuifolia Willd”). Side effects, or adverse events, associated with ABV-1504 and ABV-1505, coming from administration of the trial medicine or examination procedure such as the procedure of taking blood (fainting, pain and/or bruising), may lead to gastrointestinal disorders (abdominal fullness and constipation), nervous system disorders (drowsiness, sleepiness, and oral ulcer). In addition, long-term use may cause miscarriages.

 

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As of the date of this prospectus, the Company is processing Phase I clinical trial of ABV-1701 and is not aware of any serious side effects associated therewith. However, new serious side effects of ABV-1701 may be uncovered as the clinical trials continue.

 

The occurrence of any of those adverse events would harm our future sales of these medicines and substantially increase the costs and expenses of marketing these medicines, which in turn could cause our revenues and net income to decline. In addition, the reputation and sales of our future medicines could be adversely affected due to the severe side effects discovered.

 

We may be subject to product liability claims in the future, which could divert our resources, cause us to incur substantial liabilities and limit commercialization of any products that we may develop.

 

We face an inherent business risk of exposure to product liability claims in the event that the uses of our products are alleged to have caused adverse side effects. Side effects or marketing or manufacturing problems pertaining to any of our products could result in product liability claims or adverse publicity. These risks will exist for those products in clinical development and with respect to those products that receive regulatory approval for commercial sale. Furthermore, although we have not historically experienced any problems associated with claims by users of our products, we do not currently maintain product liability insurance and there could be no assurance that we are able to acquire product liability insurance with terms that are commercially feasible.

 

We face an inherent risk of product liability claims as a result of the clinical testing of our products and potentially commercially selling any products that we may develop. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during clinical testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidate. Regardless of the merits or eventual outcome, liability claims may result in:

 

  decreased demand for our product candidates or products that we may develop;
     
  injury to our reputation and significant negative media attention;
     
  withdrawal of clinical trial participants;
     
  significant costs to defend resulting litigation;
     
  substantial monetary awards to trial participants or patients;
     
  loss of revenue;
     
  reduced resources of our management to pursue our business strategy; and
     
  the inability to commercialize any products that we may develop.

 

We currently have insurance policies to cover liabilities under the clinic trials but do not maintain general liability insurance; and even if we have a general liability insurance in the future, this insurance may not fully cover potential liabilities that we may incur. The cost of any product liability litigation or other proceeding, even if resolved in our favor, could be substantial. We would need to increase our insurance coverage if and when we begin selling any product candidate that receives marketing approval. In addition, insurance coverage is becoming increasingly expensive. If we are unable to obtain or maintain sufficient insurance coverage at an acceptable cost or to otherwise protect against potential product liability claims, it could prevent or inhibit the development and commercial production and sale of our product candidate, which could adversely affect our business, financial condition, results of operations and prospects.

 

13

 

 

We have conducted, and may in the future conduct, clinical trials for certain of our product candidates at sites outside the United States, and the FDA may not accept data from trials conducted in such locations.

 

We have conducted and may in the future choose to conduct one or more of our clinical trials outside the United States. Although the FDA may accept data from clinical trials conducted outside the United States, acceptance of this data is subject to certain conditions imposed by the FDA. For example, the clinical trial must be well designed and conducted and performed by qualified investigators in accordance with ethical principles. The trial population must also adequately represent the U.S. population, and the data must be applicable to the U.S. population and U.S. medical practice in ways that the FDA deems clinically meaningful. In addition, while these clinical trials are subject to the applicable local laws, FDA acceptance of the data will be dependent upon its determination that the trials also complied with all applicable U.S. laws and regulations. There can be no assurance that the FDA will accept data from trials conducted outside of the United States. If the FDA does not accept the data from any of our clinical trials that we determine to conduct outside the United States, it would likely result in the need for additional trials, which would be costly and time-consuming and delay or permanently halt our development of the product candidate.

 

In addition, the conduct of clinical trials outside the United States could have a significant impact on us. Risks inherent in conducting international clinical trials include:

 

  foreign regulatory requirements that could restrict or limit our ability to conduct our clinical trials;
     
  administrative burdens of conducting clinical trials under multiple foreign regulatory schema;
     
  foreign exchange fluctuations; and
     
  diminished protection of intellectual property in some countries.

 

If clinical trials of our product candidates fail to demonstrate safety and efficacy to the satisfaction of the FDA and comparable non-U.S. regulators, we may incur additional costs or experience delays in completing, or ultimately be unable to complete the development and commercialization of our product candidates.

 

We are not permitted to commercialize, market, promote or sell any product candidate in the United States without obtaining marketing approval from the FDA. Comparable non-U.S. regulatory authorities impose similar restrictions. We may never receive such approvals. We must complete extensive preclinical development and clinical trials to demonstrate the safety and efficacy of our product candidate in humans before we will be able to obtain these approvals.

 

Clinical testing is expensive, difficult to design and implement, can take many years to complete and is inherently uncertain as to outcome. Any inability to successfully complete preclinical and clinical development could result in additional costs to us and impair our ability to generate revenues from product sales, regulatory and commercialization milestones and royalties. In addition, if (1) we are required to conduct additional clinical trials or other testing of our product candidate beyond the trials and testing that we contemplate, (2) we are unable to successfully complete clinical trials of our product candidate or other testing, (3) the results of these trials or tests are unfavorable, uncertain or are only modestly favorable, or (4) there are unacceptable safety concerns associated with our product candidate, we, in addition to incurring additional costs, may:

 

  be delayed in obtaining marketing approval for our product candidates;

 

  not obtain marketing approval at all;

 

  obtain approval for indications or patient populations that are not as broad as we intended or desired;

 

  obtain approval with labeling that includes significant use or distribution restrictions or significant safety warnings, including boxed warnings;

 

  be subject to additional post-marketing testing or other requirements; or

 

  be required to remove the product from the market after obtaining marketing approval.

 

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Even if any of our product candidates receives marketing approval, it may fail to achieve the degree of market acceptance by physicians, patients, third party payors and others in the medical community necessary for commercial success and the market opportunity for the product candidate may be smaller than we estimate.

 

We have never completed a new drug or new medical device FDA application process from Phase I to FDA approval and commercialization. Even if our products are approved by the appropriate regulatory authorities for marketing and sale, they may nonetheless fail to gain sufficient market acceptance by physicians, patients, third party payors and others in the medical community. For example, physicians are often reluctant to switch their patients from existing therapies even when new and potentially more effective or convenient treatments enter the market. Further, patients often acclimate to the therapy that they are currently taking and do not want to switch unless their physicians recommend switching products or they are required to switch therapies due to lack of reimbursement for existing therapies.

 

The potential market opportunities for our products are difficult to estimate precisely. Our estimates of the potential market opportunities are predicated on many assumptions, including industry knowledge and publications, third party research reports and other surveys. While we believe that our internal assumptions are reasonable, these assumptions involve the exercise of significant judgment on the part of our management, are inherently uncertain and the reasonableness of these assumptions has not been assessed by an independent source. If any of the assumptions proves to be inaccurate, the actual markets for our products could be smaller than our estimates of the potential market opportunities.

 

We may seek to enter into collaborations with third parties for the development and commercialization of our product candidates. If we fail to enter into such collaborations, or such collaborations are not successful, we may not be able to capitalize on the market potential of our product candidates.

 

We may seek third-party collaborators for development and commercialization of our products. Our likely collaborators for any marketing, distribution, development, licensing or broader collaboration arrangements include large and mid-size pharmaceutical companies, regional and national pharmaceutical companies, non-profit organizations, government agencies, and biotechnology companies. Our ability to generate revenues from these arrangements will depend on our collaborators’ abilities to successfully perform the functions assigned to them in these arrangements.

 

Collaborations involving our products will pose the following risks to us:

 

  collaborators may have significant discretion in determining the efforts and resources that they will apply to these collaborations;

 

  collaborators may not pursue development and commercialization of our product candidate or may elect not to continue or renew development or commercialization programs based on preclinical or clinical trial results, changes in the collaborators’ strategic focus or available funding, or external factors such as an acquisition that diverts resources or creates competing priorities;

 

  collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing;

 

  collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our product candidate if the collaborators believe that competitive products are more likely to be successfully developed or can be commercialized under terms that are more economically attractive than ours;

 

  collaborators with marketing and distribution rights to one or more products may not commit sufficient resources to the marketing and distribution of such product or products;

 

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  collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential litigation;

 

  collaborators may infringe the intellectual property rights of third parties, which may expose us to litigation and potential liability;

 

  disputes may arise between the collaborators and us that result in the delay or termination of the research, development or commercialization of our product candidate or that result in costly litigation or arbitration that diverts management attention and resources; and

 

  collaborations may be terminated and, if terminated, may result in a need for additional capital to pursue further development or commercialization of the applicable product candidates.

 

Collaborative agreements may not lead to development or commercialization of our product candidate in the most efficient manner or at all. If a collaborator of ours were to be involved in a business combination, the continued pursuit and emphasis on our product development or commercialization program could be delayed, diminished or terminated.

 

ABVC, through BioLite, may not be able to receive the full amounts available under the collaboration agreement by and between BioLite, Inc. and BioHopeKing, which could increase its burden to seek additional capital to fund the business operations.

 

In February and December 2015, BioLite, Inc., a subsidiary of BioLite, entered into a total of three collaboration agreements with BioHopeKing to jointly develop ABV-1501 for TNBC (or BLI-1401-2 as used by BioLite internally) and ABV-1504 for MDD (or BLI-1005 as used by BioLite internally) in most Asian countries and BLI-1006, which has been later replaced with BLI-1008 for ADHD in Asia, excluding Japan. ABVC and BioLite are co-developing ABV-1501 for TNBC and ABV-1504 for MDD pursuant to the Collaboration Agreement and its Addendum entered by and between BriVision and BioLite Taiwan where ABVC and BriVision are responsible for the clinical trials of such two new drug candidates. In accordance with the terms of the BioHopeKing Collaboration Agreement for ABV-1501 or BLI-1401-2 and the Addendum thereto, BioLite shall receive payments of a total of $10 million in cash and equity of BioHopeKing or equity securities owned by it at various stages on a schedule dictated by BioLite’s achievements of certain milestones and twelve per cent (12%) of net sales of the drug products when ABV-1501 or BLI-1401-2 is approved for sale in the licensed territories. If BioLite fails to reach any of the milestones in a timely manner, it may not receive the rest of the payments from BioHopeKing. As a result of BioLite’s potential inability to receive the full payments under those collaboration agreements with BioHopeKing, ABVC may have to seek other sources of financing to fund its operation activities.

 

ABVC and its Subsidiaries may not be successful in establishing and maintaining additional strategic partnerships, which could adversely affect ABVC’s ability to develop and commercialize products, negatively impacting its operating results.

 

In addition to ABVC’s current collaboration with BioHopeKing for selected Asian markets, a part of its strategy is to evaluate and, as deemed appropriate, enter into additional partnerships in the future with major biotechnology or pharmaceutical companies. ABVC’s products may prove to be difficult to effectively license out as planned. Various regulatory, commercial and manufacturing factors may impact ABVC’s ability to seek co-developers of or grow revenues from licensing out any of the six products in the pipeline, none of which has been fully licensed out. Specifically, ABVC may encounter difficulty by virtue of:

 

  its inability to effectively identify and align with commercial partners in the U.S. to collaborate the development of ABV-1504 for the treatment of Major Depressive Disorder, ABV-1505 to treat Attention-Deficit Hyperactivity Disease, ABV-1501 for the treatment of Triple Negative Breast Cancer, ABV-1703 to the treatment of Pancreatic Cancer, ABV-1601 to treat Depression in Cancer Patients and ABV-1702 to treat Myelodysplastic syndromes and ABV-1701 Vitargus for the treatments of Retinal Detachment or Vitreous Hemorrhage;

 

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  its inability to secure appropriate contract research organizations (“CRO”s) to conduct data analysis, lab research and FDA communication; and

 

  its inability to effectively continue clinical studies on and secure positive research results of all of our investigational new drugs to attract additional commercial collaborators outside the U.S.

 

ABVC faces significant competition in seeking appropriate partners for its therapeutic candidates, and the negotiation process is time-consuming and complex. In order for ABVC to successfully partner its autoimmune, CNS and hematology therapeutic candidates, potential partners must view these medicinal candidates as economically valuable in markets they determine to be attractive in light of the terms that ABVC is seeking and compared to other available products for licensing by other companies. Even if ABVC is successful in its efforts to establish new strategic partnerships, the terms that ABVC agrees upon may not be favorable, and it may not be able to maintain such strategic partnerships if, for example, development or approval of an autoimmune therapeutic is delayed or sales of an approved product are disappointing. Any delay in entering into new strategic partnership agreements related to any of ABVC’s therapeutic candidates could delay the development and commercialization of such candidates and reduce its competitiveness even if it reaches the market. 

 

If ABVC fails to establish and maintain additional strategic partnerships or collaboration related to its therapeutic candidates that have not been fully licensed, it will bear all of the risk and costs related to the development of any such drug candidate, and it may need to seek additional financing, hire additional employees and otherwise develop expertise for which it has not budgeted. This could negatively affect the development of any incompletely partnered new drug candidates.

 

ABVC’s licensors may choose to terminate any of the license agreements with ABVC. As a result, ABVC’s research and development of the new drug candidate which contains the underlying API may be terminated abruptly.

 

If ABVC’s Subsidiary BioLite materially breaches any license agreements it has with Yukiguni Maitake Co. (“Yukiguni”), Medical and Pharmaceutical Industry Technology and Development Center (“MPITDC”) or Industrial Technology Research Institute (“ITRI”), or any of such license agreement terminates unexpectedly, BioLite may not be able to continue its research and development of the new drug candidate which contains the underlying API whose license has been terminated. Pursuant to the Yukiguni License Agreement, if BioLite fails to meet the milestone sales requirement or submit certain applications to the appropriate health authorities on a schedule prescribed therein, Yukiguni shall have the right to terminate the Yukiguni License Agreement. If the Yukiguni License Agreement is terminated involuntarily, BioLite will be forced to discontinue its new drug development of ABV-1702, ABV-1502 and ABV-1501 and terminate the collaboration agreements relating to the three new drug candidates. The termination of the right to use the underlying API will materially disrupt the operations of ABVC. Pursuant to the license agreement between BioLite Taiwan and ITRI, if BioLite Taiwan fails to complete the research submission milestones according to the schedule set forth therein without reasons or with reasons unstatisfied with ITRI, ITRI shall have the right to terminate the license agreement with BioLite Taiwan without refund to BioLite Taiwan. BioLite Taiwan and BioLite have submitted the IND for PDC-1421 and subsequently conducted Phase II clinical trials of two drug candidiates developed from PDC-1421 according to the schedule listed in the license agreement between BioLite Taiwan and MPITDC.

 

ABVC’s Subsidiary BioLite depends on one supplier for the API of ABV-1702, ABV-1502 and ABV-1501 and any failure of such supplier to deliver sufficient quantities of the API that meets its quality standard could have a material adverse effect on its research of these three drug candidates.

 

Currently BioLite relies primarily on Yukiguni, a Japanese supplier, to provide Yukiguni Maitake Extract 404, the API which is contained in ABV-1702, ABV-1502 and ABV-1501, three of the six drug candidates in BioLite’s oncology/hematology portfolio. It has entered into the Yukiguni License Agreement, among other things, for the delivery of Yukiguni Maitake Extract 404, which is patented in Japan and China. BioLite agrees to fulfill its demand of the Yukiguni Maitake Extract 404 by purchasing first from Yukiguni respecting the therapeutic products and Yukiguni represents that it will provide sufficient quantities of such API that meets cGMP standards. If the supplies of Yukiguni Maitake Extract 404 were interrupted for any reason, BioLite’s research and development activities of these three drug candidates could be delayed. These delays could be extensive and expensive, especially in situations where a substitution is not readily available.

 

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Although BioLite may negotiate with other vendors that could provide Yukiguni Maitake Extract 404, it cannot guarantee that it will be able to find such vendors. Failure to obtain adequate supplies of high quality Yukiguni Maitake Extract 404 in a timely manner could have a disruptive effect on ABVC and BioLite’s research and development activities of ABV-1702, ABV-1502 and ABV-1501, resulting in a material adverse effect on the Company’s business, financial condition and results of operations.

 

With respect to generic drugs, ABVC’s sales and marketing functions are currently very limited and ABVC currently relies on third parties to promote its products to physicians in the U.S. and rely on its foreign partners with respect to marketing and distribution of its generic drugs outside the U.S. Failure to maintain commercial marketing and sales partners or attract qualified marketing and sales personnel will have material adverse effects on the results of the Company’s operations.

 

ABVC has marketing personnel to develop clientele for its CDMO business line but does not have marketing and sales human capital for its generic drug products. ABVC heavily relies on third parties to promote its products to physicians in the U.S. and rely on its foreign partners to conduct marketing and sales outside the U.S. ABVC will need to maintain its commercial marketing and sales partners and attract others or be in a position to afford qualified or experienced marketing and sales personnel to market its generic drug products. Failure to maintain commercial marketing and sales partners or attract qualified marketing and sales personnel will have material adverse effects on the results of the Company’s operations.

 

ABVC may use hazardous chemicals and biological materials in its business. Any claims relating to improper handling, storage or disposal of these materials could be time consuming and costly.

 

ABVC’s research and development may involve the controlled use of hazardous materials, including chemicals and biological materials. ABVC cannot eliminate the risk of accidental contamination or discharge and any resulting injury from these materials. ABVC may be sued for any injury or contamination that results from its use or the use by third parties of these materials, and its liability may exceed any insurance coverage and its total assets. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these hazardous materials and specified waste products, as well as the discharge of pollutants into the environment and human health and safety matters. Although ABVC makes its best efforts to comply with environmental laws and regulations despite the associated high costs and inconvenience, ABVC cannot guarantee that it will not mishandle any hazardous materials in the future. If it fails to comply with these requirements or any improper handling of hazardous materials occurs, it could incur substantial costs, including civil or criminal fines and penalties, clean-up costs or capital expenditures for control equipment or operational changes necessary to achieve and maintain compliance. In addition, ABVC cannot predict the impact on its business of new or amended environmental laws or regulations or any changes in the way existing and future laws and regulations are interpreted and enforced. 

 

The facilities where the samples of drug candidates are manufactured need to be maintained and monitored in compliance with the good manufacturing practice standards, the failure of such maintenance could contaminate the results of our clinical trials and adversely affect our operations.

 

ABVC’s Subsidiary BioKey operates a laboratory facility that is a certified good manufacturing practice facility (“cGMP”) and some of its contract clinical trial service providers use cGMP facilities to conduct clinical studies. ABVC cannot be certain that ABVC or its present or future contract manufacturers or suppliers will be able to comply with cGMPs regulations and other FDA regulatory requirements. Failure to comply with these requirements may result in, among other things, total or partial suspension of production activities, failure of the FDA to grant approval for marketing, and withdrawal, suspension, or revocation of marketing approvals.

 

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Risks Related to Intellectual Property

 

Pharmaceutical patents and patent applications involve highly complex legal and factual questions, which, if determined adversely to the Company, could negatively impact its respective licensors’ patent position and interrupt its research activities.

 

The patent positions of pharmaceutical companies and research institutions can be highly uncertain and involve complex legal and factual questions. The interpretation and breadth of claims allowed in some patents covering pharmaceutical compositions may be uncertain and difficult to determine, and are often affected materially by the facts and circumstances that pertain to the patented compositions and the related patent claims. The standards of the U.S. Patent and Trademark Office, or USPTO, are sometimes uncertain and could change in the future. Consequently, the issuance and scope of patents cannot be predicted with certainty. Patents, if issued, may be challenged, invalidated or circumvented. U.S. patents and patent applications may also be subject to interference proceedings, and U.S. patents may be subject to re-examination proceedings, post-grant review and/or inter parties review in the USPTO. Foreign patents may be subject to opposition or comparable proceedings in the corresponding foreign patent office, which could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application. In addition, such interference, re-examination, post-grant review, inter parties review and opposition proceedings may be costly. Accordingly, rights under any issued patents may not provide the Company with sufficient protection against competitive products or processes.

 

In addition, changes in or different interpretations of patent laws in the U.S. and foreign countries may permit others to use discoveries of the Company or to develop and commercialize their new drug candidates without providing any compensation thereto, or may limit the number of patents or claims the Company can obtain. The laws of some countries do not protect intellectual property rights to the same extent as U.S. laws and those countries may lack adequate rules and procedures for defending the intellectual property rights of the Company.

 

If the Company fails to obtain and maintain patent protection and trade secret protection of its respective products, the Company could lose their competitive advantages and competition it faces would increase, reducing any potential revenues and adversely affecting its ability to attain or maintain profitability.

 

Developments in patent law could have a negative impact on the Company’s Licensors’ patent positions and the Company’s business.

 

From time to time, the U.S. Supreme Court, other federal courts, the U.S. Congress or the USPTO may change the standards of patentability and any such changes could have a negative impact on the Company’s business.

 

In addition, the Leahy-Smith America Invents Act, or the America Invents Act, which was signed into law in 2011, includes a number of significant changes to U.S. patent law. These changes include a transition from a “first-to-invent” system to a “first-to-file” system, changes the way issued patents are challenged, and changes the way patent applications are disputed during the examination process. These changes may favor larger and more established companies that have greater resources to devote to patent application filing and prosecution. The USPTO has developed regulations and procedures to govern the full implementation of the America Invents Act, and many of the substantive changes to patent law associated with the America Invents Act, and, in particular, the first-to-file provisions, became effective on March 16, 2013. Substantive changes to patent law associated with the America Invents Act may affect the Company, BioLite and BioKey’s ability to obtain patents, and if obtained, to enforce or defend them. Accordingly, it is not clear what, if any, impact the America Invents Act will ultimately have on the cost of prosecuting the Company’s patent applications, its ability to obtain patents based on its discoveries and its ability to enforce or defend its patents.

 

If the Company is unable to protect the confidentiality of its trade secrets, its business and competitive position would be harmed, respectively.

 

In addition to patent protection, because the Company operates in the highly technical field of discovery and development of therapies, it relies in part on trade secret protection in order to protect its proprietary technology and processes. However, trade secrets are difficult to protect. The Company has entered into confidentiality and non-disclosure agreements with its employees, consultants, outside scientific and commercial collaborators, sponsored researchers, and other advisors. These agreements generally require that the other party keep confidential and not disclose to third parties any confidential information developed by the party or made known to the party by the Company during the course of the party’s relationship therewith. These agreements also generally provide that inventions conceived by the party in the course of rendering services to the Company will be ABVC’s exclusive property. However, these agreements may not be honored and may not effectively assign intellectual property rights to the Company.

 

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In addition to contractual measures, the Company tries to protect the confidential nature of its proprietary information using physical and technological security measures. Such measures may not, for example, in the case of misappropriation of a trade secret by an employee or third party with authorized access, provide adequate protection for the Company. The Company’s security measures may not prevent an employee or consultant from misappropriating its trade secrets and providing them to a competitor, and recourse it takes against such misconduct may not provide an adequate remedy to protect the Company’s interests fully. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret can be difficult, expensive, and time-consuming, and the outcome is unpredictable. In addition, courts outside the U.S. may be less willing to protect trade secrets. Trade secrets may be independently developed by others in a manner that could prevent legal recourse by the Company. If the Company’s confidential or proprietary information, such as the trade secrets, were to be disclosed or misappropriated, or if any such information was independently developed by a competitor, its competitive position could be harmed.

 

Third parties may assert that the Company’s employees or consultants have wrongfully used or disclosed confidential information or misappropriated trade secrets.

 

The Company might employ individuals who were previously employed at universities or other biopharmaceutical companies, including its competitors or potential competitors. Although through certain non-disclosure covenants and employment agreements with its officers and employees, the Company tries to ensure that its employees and consultants do not use the proprietary information or know-how of others in the work for the Company, the Company may be subject to claims that it or its employees, consultants or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of a former employer or other third parties. Litigation may be necessary to defend against these claims. If the Company fails in defending any such claims, in addition to paying monetary damages, the Company may lose valuable intellectual property rights or personnel. Even if the Company is successful in defending against such claims, litigation could result in substantial costs and be a distraction to the Company’s management and other employees.

 

ABVC’s ability to compete may decline if it does not adequately protect its proprietary rights or if it is barred by the intellectual property rights of others.

 

ABVC’s commercial success depends on obtaining and maintaining proprietary rights to its drug candidates as well as successfully defending these rights against third-party challenges. ABVC obtains its rights to use and research certain proprietary information to further develop the drug candidates primarily from three institutions, MPITDC, ITRI and Yukiguni (collectively the “Licensors”). These three institutions own the intellectual property rights in the products that have been licensed to us and may prosecute new patents of the drug candidates that are invented or discovered within the licensed scope of use under the respective license agreements. ABVC will only be able to protect its new drug candidates from unauthorized use by third parties to the extent that its valid and enforceable patents, or effectively protected trade secrets and know-how, cover them.

 

ABVC’s ability to obtain new patent protection for its new drug candidates is uncertain due to a number of factors, including that:

 

  ABVC may not have been the first to make the inventions covered by pending patent applications or issued patents;

 

  ABVC may not have been the first to file patent applications for its new drug candidates;

 

  others may independently develop identical, similar or alternative products or compositions and uses thereof;

 

  ABVC’s disclosures in patent applications may not be sufficient to meet the statutory requirements for patentability;

 

  any or all of ABVC’s pending patent applications may not result in issued patents;

 

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  ABVC may not seek or obtain patent protection in countries that may eventually provide a significant business opportunity;

 

  any patents issued to ABVC may not provide a basis for commercially viable products, may not provide any competitive advantages, or may be successfully challenged by third parties;

 

  ABVC’s methods may not be patentable;

 

  ABVC’s licensors may successfully challenge that ABVC’s new patent application fall outside the licensed use of the products; or

 

  others may design around ABVC’s patent claims to produce competitive products which fall outside of the scope of its patents.

 

Even if ABVC has or obtains new patents covering its new drug candidates, ABVC may still be barred from making, using and selling them because of the patent rights of others. Others may have filed, and in the future may file, patent applications covering products that are similar or identical to ABVC. There are many issued U.S. and foreign patents relating to therapeutic products and some of these relate to ABVC’s new drug candidates. These could materially affect ABVC’s ability to develop its drug candidates. Because patent applications can take many years to issue, there may be currently pending applications unknown to ABVC that may later result in issued patents that its new drug candidates may infringe. These patent applications may have priority over patent applications filed by ABVC.

 

The Company and its respective licensors may not be able to enforce their intellectual property rights throughout the world.

 

The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the U.S. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to pharmaceuticals and medical devices. This could make it difficult for the Company and its respective licensors to stop the infringement of some of the Licensors’ patents, or the misappropriation of their other intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, the Company and its licensors have chosen in the past and may choose in the future not to seek patent protection in certain countries, and as a result the Company will not have the benefit of patent protection in such countries. Moreover, the Company may choose in the future not to seek patent protection in certain countries, and as a result it will not have the benefit of patent protection in such countries.

 

Proceedings to enforce the Company’s and its licensors’ patent rights in foreign jurisdictions could result in substantial costs and divert its efforts and attention from other aspects of the businesses. Accordingly, the efforts to protect the Company’s intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the U.S. and foreign countries may affect the Company’s ability to obtain adequate protection for its technology and the enforcement of intellectual property.

 

Regulatory Risks Relating to Biopharmaceutical Business

 

The Company is subject to various government regulations.

 

The manufacture and sale of human therapeutic and diagnostic products in the U.S. and foreign jurisdictions are governed by a variety of statutes and regulations. These laws require approval of manufacturing facilities, controlled research and testing of products and government review and approval of a submission containing manufacturing, preclinical and clinical data in order to obtain marketing approval based on establishing the safety and efficacy of the product for each use sought, including adherence to current PIC/S Guide to Good Manufacturing Practice for Medicinal products during production and storage, and control of marketing activities, including advertising and labeling.

 

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The products the Company is currently developing will require significant development, preclinical and clinical testing and investment of substantial funds prior to its commercialization. The process of obtaining required approvals can be costly and time-consuming, and there can be no assurance that future products will be successfully developed and will prove to be safe and effective in clinical trials or receive applicable regulatory approvals. Markets other than the U.S. have similar restrictions. Potential investors and shareholders should be aware of the risks, problems, delays, expenses and difficulties which we may encounter in view of the extensive regulatory environment which controls our business.

 

The Company cannot be certain that it will be able to obtain regulatory approval for, or successfully commercialize, any of its current or future product candidates.

 

The Company may not be able to develop any current or future product candidates. The Company’s new drug candidates will require substantial additional clinical development, testing, and regulatory approval before the commencement of commercialization. The clinical trials of the Company’s drug candidates are, and the manufacturing and marketing of our new drug candidates will be subject to extensive and rigorous review and regulation by numerous government authorities in the U.S. and in other countries where the Company intend to test and, if approved, market any new drug candidate. Before obtaining regulatory approvals for the commercial sale of any product candidate, the Company must demonstrate through pre-clinical testing and clinical trials that the product candidate is safe and effective for use in each target indication. This process can take many years and may include post-marketing studies and surveillance, which will require the expenditure of substantial resources. Of the large number of drugs in development in the U.S., only a small percentage successfully completes the FDA regulatory approval process and is commercialized. Accordingly, even if the Company is able to obtain the requisite financing to continue to fund its development and clinical programs, it cannot assure the investors that any of the product candidates will be successfully developed or commercialized.

 

The Company is not permitted to market a therapeutic product in the U.S. until it receives approval of an NDA or ANDA, for that product from the FDA, or in any foreign countries until they receive the requisite approval from such countries. Obtaining approval of an NDA is a complex, lengthy, expensive and uncertain process, and the FDA may delay, limit or deny approval of any product candidate for many reasons, including, among others:

 

  Unable to demonstrate that a product candidate is safe and effective to the satisfaction of the FDA;

 

  the results of the Company’s clinical trials may not meet the level of statistical or clinical significance required by the FDA for marketing approval;

 

  the FDA may not approve the formulation of any product candidate;

 

  the CROs, that BioLite or the Company retains to conduct its clinical trials may take actions outside of its control that materially adversely impact its clinical trials;

 

  delays in patient enrollment, variability in the number and types of patients available for clinical trials, and lower-than anticipated retention rates for patients in clinical trials;
     
  the FDA may find the data from pre-clinical studies and clinical trials insufficient to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks, such as the risk of drug abuse by patients or the public in general;

 

  the FDA may disagree with the interpretation of data from the Company’s pre-clinical studies and clinical trials;

 

  the FDA may not accept data generated at the Company’s clinical trial sites;

 

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  if an NDA, if and when submitted, is reviewed by an advisory committee, the FDA may have difficulties scheduling an advisory committee meeting in a timely manner or the advisory committee may recommend against approval of our application or may recommend that the FDA require, as a condition of approval, additional pre-clinical studies or clinical trials, limitations on approved labeling or distribution and use restrictions;

 

  the FDA may require development of a Risk Evaluation and Mitigation Strategy, or REMS, as a condition of approval or post-approval; or

 

  the FDA may change its approval policies or adopt new regulations.

 

These same risks apply to applicable foreign regulatory agencies from which the Company, through BioLite, may seek approval for any of our new drug candidates.

 

Any of these factors, many of which are beyond the Company’s control, could jeopardize its ability to obtain regulatory approval for and successfully market any new drug candidate. As a result, any such setback in the Company’s pursuit of initial or additional regulatory approval would have a material adverse effect on its business and prospects.

 

If the Company does not successfully complete pre-clinical and Phase I and II clinical development, it will be unable to receive full payments under their respective collaboration agreements, find future collaborators or partners to take the drug candidates to Phase III clinical trials. Even if the Company successfully completes all Phase I and II clinical trials, those results are not necessarily predictive of results of additional trials that may be needed before an NDA for Phase III trials may be submitted to the FDA. Although there are a large number of drugs in development in the U.S. and other countries, only a very small percentage result in commercialization, and even fewer achieve widespread physician and consumer acceptance following the regulatory approval.

 

In addition, the Company may encounter delays or drug candidate rejections based on new governmental regulations, future legislative or administrative actions, or changes in FDA policy or interpretation during the period of product development. If the Company obtains required regulatory approvals, such approvals may later be withdrawn. Delays or failures in obtaining regulatory approvals may result in:

 

  varying interpretations of data and commitments by the FDA and similar foreign regulatory agencies; and

 

  diminishment of any competitive advantages that such drug candidates may have or attain.

 

Furthermore, if the Company fails to comply with applicable FDA and other regulatory requirements at any stage during this regulatory process, the Company may encounter or be subject to:

 

  delays or termination in clinical trials or commercialization;

 

  refusal by the FDA or similar foreign regulatory agencies to review pending applications or supplements to approved applications;

 

  product recalls or seizures;

 

  suspension of manufacturing;

 

  withdrawals of previously approved marketing applications; and

 

  fines, civil penalties, and criminal prosecutions.

 

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The Company faces substantial competition from companies with considerably more resources and experience than the Company has, which may result in others discovering, developing, receiving approval for, or commercializing products before or more successfully than the Company.

 

The Company competes with companies that research, develop, manufacture and market already-existing and new pharmaceutical products in the fields of CNS, hematology/oncology and autoimmune. The Company anticipates that it will face increased competition in the future as new companies enter the market with new drugs and/or technologies and/or their competitors improve their current products. One or more of their competitors may offer new drugs superior to the Company’s and render the Company’s drugs uneconomical. A lot of the Company’s current competitors, as well as many of its respective potential competitors, have greater name recognition, more substantial intellectual property portfolios, longer operating histories, significantly greater resources to invest in new drug development, more substantial experience in product marketing and new product development, greater regulatory expertise, more extensive manufacturing capabilities and the distribution channels to deliver products to customers. If the Company is not able to compete successfully, it may not generate sufficient revenue to become profitable. The Company’s ability to compete successfully will depend largely on its ability to:

 

  successfully commercialize its drug candidates with commercial partners;

 

  discover and develop new drug candidates that are superior to other products in the market;

 

  with its collaborators, obtain required regulatory approvals;

 

  attract and retain qualified personnel; and

 

  obtain patent and/or other proprietary protection for its product candidates.

 

Established pharmaceutical companies devote significant financial resources to discovering, developing or licensing novel compounds that could make the Company’s products and product candidates obsolete. Our competitors may obtain patent protection, receive FDA approval, and commercialize medicines before we do. Other companies are or may become engaged in the discovery of compounds or botanical materials that may compete with the drug candidates the Company is developing.

 

The Company competes with a large number of well-established pharmaceutical companies that may have more resources than the Company does in developing therapeutics in the fields of CNS, oncology/hematology and ophthalmology.

 

Any new drug candidate the Company is developing or commercializing that competes with a currently-approved product must demonstrate compelling advantages in efficacy, convenience, tolerability and/or safety in order to address price competition and be commercially successful. If the Company is not able to compete effectively against its current and future competitors, its business will not grow and its financial condition and operations will suffer.

 

Risks Relating to Doing Business Outside the United States

 

Because part of ABVC’s pharmaceutical research and development is conducted outside of the U.S., the Company is subject to the risks of doing business internationally, including periodic foreign economic downturns and political instability, which may adversely affect the Company’s revenue and cost of doing business in Taiwan.

 

ABVC collaborates with partners whose primary place of business is in Taiwan, Republic of China and the Company has certain key employees in Taiwan. Foreign economic downturns may affect our results of operations in the future. Additionally, other facts relating to the operation of the Company’s business outside of the U.S. may have a material adverse effect on the Company’s business, financial condition and results of operations, including:

 

  international economic and political changes;

 

  the imposition of governmental controls or changes in government regulations, including tax laws, regulations and treaties;

 

  changes in, or impositions of, legislative or regulatory requirements regarding the pharmaceutical industry;

 

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  compliance with U.S. and international laws involving international operations, including the Foreign Corrupt Practices Act and export control laws;

 

  difficulties in achieving headcount reductions due to unionized labor and works councils;

 

  restrictions on transfers of funds and assets between jurisdictions; and

 

  China- Taiwan geo-political instability.

 

As the Company continues to operate its business globally, its success will depend in part, on its ability to anticipate and effectively manage these risks. The impact of any one or more of these factors could materially adversely affect the Company’s business, financial condition and results of operations.

 

The Company may be exposed to liabilities under the U.S. Foreign Corrupt Practices Act (“FCPA”) and Chinese anti-corruption law.

 

The Company is subject to the FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments, foreign government officials and political parties by U.S. persons as defined by the statute for purposes of obtaining or retaining businesses. The Company may have agreements with third parties who may make sales in mainland China and the U.S., during the process of which the Company may be exposed to corruption. Activities in Taiwan create the risk of unauthorized payments or offers of payments by an employee, consultant or agent of the Company, because these parties are not always subject to the Company’s control.

 

Although the Company believes to date it has complied in all material aspects with the provisions of the FCPA and Chinese anti-corruption law, the existing safeguards and any future improvements may prove to be less than effective and any of the Company’s employees, consultants or agents may engage in corruptive conduct for which the Company might be held responsible. Violations of the FCPA or Chinese anti-corruption law may result in severe criminal or civil sanctions against the Company and individuals and therefore could negatively affect the Company’s business, operating results and financial condition. In addition, the Taiwanese government may seek to hold the Company liable as a successor for FCPA violations committed by companies in which the Company invests or acquires.

 

If the Company becomes directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matters. Any unfavorable results from the investigations could harm our business operations, this offering and our reputation.

 

Recently, U.S. public companies that have substantially all of their operations in China, have been subjects of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered on financial and accounting irregularities, lack of effective internal control over financial accountings, inadequate corporate governance and ineffective implementation thereof and, in many cases, allegations of fraud. As a result of enhanced scrutiny, criticism and negative publicity, the publicly traded stocks of many U.S. listed Chinese companies have sharply decreased in value and, in some cases, have become virtually worthless or illiquid. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effects the sector-wide investigations will have on the Company. If the Company becomes a subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, the Company will have to expend significant resources to investigate such allegations and defend the Company. If such allegations were not proven to be baseless, the Company would be severely hampered and the price of the stock of the Company could decline substantially. If such allegations were proven to be groundless, the investigation might have significantly distracted the attention of the Company’s management.

 

International operations expose the Company to currency exchange and repatriation risks, and the Company cannot predict the effect of future exchange rate fluctuations on its business and operating results.

 

The Company has business operations in Taiwan and collaborative activities in the U.S. and Japan. Substantial amounts of revenues are received and expenses are incurred in New Taiwan Dollars and U.S. dollars. Thus, the Company has exposure to currency fluctuations. The Company cannot assure you that the effect of currency exchange fluctuations will not materially affect its revenues and net income in the future.

 

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ABVC’s business could be adversely affected by changes in the U.S. presidential administration.

 

A new U.S. presidential administration came to power in January 2017 and President Trump has taken certain efforts to impose importation tariffs from certain countries such as China and Mexico which could affect the cost of certain ABVC’s product components and the sales of certain ABVC’s products and services. In addition, the Trump Administration has and will appoint and employ many new secretaries, directors and the like into positions of authority in the U.S. Federal government dealing with the pharmaceutical and healthcare industries that may potentially have a negative impact on the prices and the regulatory pathways for certain pharmaceuticals, nutritional supplements and health care products such as those developed, marketed or sold by ABVC and its licensees. Such changes in the regulatory pathways could adversely affect and or delay ABVC’s ability to develop, market and sell their products in the U.S.

 

Risks Related to the Company’s Financial Condition

 

Our existing indebtedness may adversely affect our ability to obtain additional funds and may increase our vulnerability to economic or business downturns.

 

We are subject to a number of risks associated with our indebtedness, including: 1) we must dedicate a portion of our cash flows from operations to pay debt service costs, and therefore we have less funds available for operations and other purposes; 2) it may be more difficult and expensive to obtain additional funds through financings, if available at all; 3) we are more vulnerable to economic downturns and fluctuations in interest rates, less able to withstand competitive pressures and less flexible in reacting to changes in our industry and general economic conditions; and 4) if we default under any of our existing credit facilities or if our creditors demand payment of a portion or all of our indebtedness, we may not have sufficient funds to make such payments. As of December 31, 2018 (on a pro forma basis as if the Mergers were closed then) and March 31, 2019, our outstanding current liabilities were approximately $11 million and $12.4 million, respectively, which consisted primarily of advances due to related parties. On June 30, 2019 and August 1, 2019, we entered into certain agreements to convert certain related party debts in an aggregate amount of $7,246,749 into shares of our common stock at a conversion price of $7.00 per share.

 

Our disclosure controls and procedures were not effective as of March 31, 2019 and as a result of such we do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. The ineffective disclosure controls and procedures may lead to restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial information and have a negative effect on the market prices for our Series A Convertible Preferred Stock and Common Stock.

 

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We maintain a system of internal control over financial reporting, which is defined as a process designed by, or under the supervision of, our principal executive officer and principal financial officer, or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

We maintain disclosure controls and procedures designed to provide reasonable assurance that material information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that the information is accumulated and communicated to our management, including our Chief Executive Officer and interim Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. We performed an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and interim Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this prospectus. Based on their evaluation, our management, including our Chief Executive Officer and interim Chief Financial Officer, concluded that our disclosure controls and procedures were not effective as of March 31, 2019.

 

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We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures is also based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

Our articles of incorporation allow for our board to create new series of preferred stock without further approval by our stockholders, which could adversely affect the rights of the holders of our Common Stock.

 

Our Board of Directors has the authority to fix and determine the relative rights and preferences of preferred stock without stockholder approval. As a result, our Board of Directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of Common Stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our Common Stock. In addition, our Board of Directors could authorize the issuance of a series of preferred stock that has greater voting power than our Common Stock or that is convertible into our Common Stock, which could decrease the relative voting power of our Common Stock or result in dilution to our existing stockholders.

 

We intend to issue Series A Convertible Preferred Stock which has senior dividend rights than Common Stock in this offering. We may create any additional series of preferred stock and issue such shares in the future although we do not have any present intention of doing so.

 

Our independent auditors have issued an audit opinion for our company, which includes a statement describing our going concern status. Our financial status creates a doubt whether we will continue as a going concern.

 

Our auditors have issued a going concern opinion regarding our company. This means there is substantial doubt we can continue as an ongoing business for the next twelve months. The financial statements do not include any adjustments that might result from the uncertainty regarding our ability to continue in business. As such we may have to cease operations and investors could lose part or all of their investment in our company.

 

Our internal computer systems, or those of our third-party contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of our product development programs.

 

Despite the implementation of security measures, our internal computer systems and those of our third-party contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While we do not believe that we have experienced any such system failure, accident, or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a loss of clinical trial data for our new drug candidates which could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach results in a loss of or damage to our data or applications or other data or applications relating to our technology or new drug candidates, or inappropriate disclosure of confidential or proprietary information, we could incur liabilities and the further development of our product candidates could be delayed.

 

This offering is being conducted on a “best efforts” basis and as a result, we may not be able to raise enough funds to fully implement our business plan and our investors may lose their entire investment.

 

This offering is on a “best efforts” basis and requires a Minimum Amount of $10,000,000 to be raised. We need to reserve 20% of the funds raised in this offering in escrow for the distribution of dividend to holders of Series A Convertible Preferred Stock. If we only raise the Minimum Amount, we will only receive $7,300,000 in proceeds before expenses and we may not be able to fund our operations for a period of time as desired, and our growth opportunities may be materially adversely affected. This could increase the likelihood that an investor may lose its, his or her entire investment.

 

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Investors’ funds will be placed in escrow during the offering period and investors will not have use of their funds during the offering period.

 

The Underwriter is offering the Series A Convertible Preferred Stock on a best efforts basis. No commitment by anyone exists to purchase all or any part of the shares offered hereby. Those investor’s funds deposited will be held in escrow pending closing of this offering and such funds may be escrowed for as long as one hundred and eighty (180) days. Investors will not have use of any funds deposited for the shares during the offering period. See “Underwriting.”

 

There is no public market for the Series A Convertible Preferred Stock and prospective investors may not be able to resell their shares at or above the offering price, if at all.

 

There is no market for our Series A Convertible Preferred Stock and no assurance can be given that an active trading market will develop for the Series A Convertible Preferred Stock or, if one does develop, that it will be maintained. In the absence of a public trading market, an investor may be unable to liquidate his investment in our company. The Public Offering Price of this offering is not indicative of future market prices.

 

The stock market in general may experience extreme price and volume fluctuations. Continued market fluctuations could result in extreme volatility in the price of the Common Stock, which could cause a decline in the value of the Common Stock and the Series A Convertible Preferred Stock. Prospective investors should also be aware that price volatility may be worse if the trading volume of the Common Stock or Series A Convertible Preferred Stock is low.

 

We intend to list both our Common Stock and Series A Convertible Preferred Stock on Nasdaq. We cannot assure you that either of our application to list the Common Stock or Series A Convertible Preferred Stock will be approved; however, we will not complete this offering without a listing approval letter of our Series A Convertible Preferred Stock and Common Stock from Nasdaq. The liquidity of the trading market, if any, and future trading prices of the Series A Convertible Preferred Stock will depend on many factors, including, among other things, the market price of our Common Stock, prevailing interest rates, our operating results, financial performance and prospects, the market for similar securities and the overall securities market, and may be adversely affected by unfavorable changes in these factors. It is possible that the market for the Series A Convertible Preferred Stock will be subject to disruptions which may have a negative effect on the holders of the Series A Convertible Preferred Stock, regardless of our operating results, financial performance or prospects.

 

The share price of our Common Stock is volatile, the trading price of our Series A Convertible Preferred Stock could be volatile, and both may be influenced by numerous factors, some of which are beyond our control.

 

There is currently only a limited public market for our Common Stock, which is listed on the OTCQB Market, and there can be no assurance that a trading market will develop further or be maintained for either our Common Stock or Series A Convertible Preferred Stock in the future. The trading price of our Common Stock is likely to be highly volatile, and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this prospectus, these factors include:

 

  the new drug candidates we acquire for commercialization;

 

  the product candidates we seek to pursue, and our ability to obtain rights to develop those product candidates;

 

  our decision to initiate a clinical trial, not to initiate a clinical trial or to terminate an existing clinical trial;

 

  actual or anticipated adverse results or delays in our pre-clinical studies and clinical trials;

 

  our failure to get any of our new drug candidates approved;

 

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  unanticipated serious safety and environmental concerns related to the use and research activities of any of our new drug candidates;

 

  overall performance of the equity markets and other factors that may be unrelated to our operating performance or the operating performance of our competitors, including changes in market valuations of similar companies;

 

  conditions or trends in the healthcare, biotechnology and pharmaceutical industries;

 

  introduction of new products offered by us or our competitors;

 

  announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;

 

  our ability to maintain an adequate rate of growth and manage such growth;

 

  issuances of debt or equity securities by us;

 

  sales of our securities by us or our stockholders in the future, or the perception that such sales could occur;

 

  trading volume of our Common Stock or Series A Convertible Preferred Stock;

 

  ineffectiveness of our internal control over financial reporting or disclosure controls and procedures;

 

  general political and economic conditions in U.S. and other countries and territories where we conduct our business;

 

  effects of natural or man-made catastrophic events; and

 

  adverse regulatory decisions;

 

  additions or departures of key scientific or management personnel;

 

  changes in laws or regulations applicable to our product candidates, including without limitation clinical trial requirements for approvals;

 

  disputes or other developments relating to patents and other proprietary rights and our ability to obtain protection for our products;

 

  our dependence on third parties, including CROs and scientific and medical advisors;

 

  failure to meet or exceed any financial guidance or expectations regarding development milestones that we may provide to the public;

 

  actual or anticipated variations in quarterly operating results;

 

  failure to meet or exceed the estimates and projections of the investment community;

 

  other events or factors, many of which are beyond our control.

 

In addition, the stock market in general, and the stocks of small-cap healthcare, biotechnology and pharmaceutical companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our Common Stock, regardless of our actual operating performance. The realization of any of the above risks or any of a broad range of other risks, including those described in these “Risk Factors,” could have a dramatic and material adverse impact on the market price of our Common Stock.

 

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The automatic conversion feature may not adequately compensate holders of Series A Convertible Preferred Stock and may make it more difficult for a party to take over our company or discourage a party from taking over our company.

 

Upon the four-year anniversary of issuance, each share of Series A Convertible Preferred Stock automatically converts into one share of Common Stock. See “Description of Securities.” If the Common Stock price is less than the price paid for each share of Series A Convertible Preferred Stock, the value of the Series A Convertible Preferred Stock will be less than the price paid for the Series A Convertible Preferred Stock excluding the dividends.

 

Our ability to pay dividends is limited by the requirements of Nevada law.

 

Our ability to pay dividends on the Series A Convertible Preferred Stock is limited by the laws of Nevada. Under applicable Nevada law, we, as a Nevada corporation, generally may not make a distribution if i) we would not be able to pay our debts as they become due in the usual course of business, or ii) our total assets would be less than the sum of our total liabilities plus the amount that would be needed, if we were to be dissolved at the time of distribution, to satisfy the preferential rights upon dissolution of stockholders whose preferential rights are superior to those receiving the distribution. Although we will have Dividend Reserve in escrow upon closing of this offering, we cannot guarantee that we can distribute such dividend when due under the laws of Nevada.

 

Dividends on the Series A Convertible Preferred Stock will be taxable.

 

Income from “qualified dividends” payable to U.S. stockholders that are individuals, trusts and estates are generally subject to tax at preferential rates.

 

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and any trading volume could decline.

 

Any trading market for our Common Stock and Series A Convertible Preferred Stock that may develop will depend in part on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on us or our business. If no securities or industry analysts commence coverage of our company, the trading prices for our Common Stock and/ or Series A Convertible Preferred Stock could be negatively affected. If securities or industry analysts initiate coverage, and one or more of those analysts downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our Common Stock and/ or Series A Convertible Preferred Stock could decrease, which might cause our stock price and any trading volume to decline.

 

Future sales and issuances of our Common Stock or rights to purchase Common Stock, including pursuant to our equity incentive plan or otherwise, could result in dilution of the percentage ownership of our stockholders and could cause our stock price to fall.

 

We expect that we will need significant additional capital in the future to continue our planned operations. To raise capital, we may sell Common Stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell Common Stock, convertible securities or other equity securities in more than one transaction, including issuance of equity securities pursuant to any future stock incentive plan to our officers, directors, employees and non-employee consultants for their services to us, investors in a prior transaction may be materially diluted by subsequent sales. Additionally, any such sales may result in material dilution to our existing stockholders, and new investors could gain rights, preferences and privileges senior to those of holders of our Common Stock. Further, any future sales of our Common Stock by us or resales of our Common Stock by our existing stockholders could cause the market price of our Common Stock to decline. Any future grants of options, warrants or other securities exercisable or convertible into our Common Stock, or the exercise or conversion of such shares, and any sales of such shares in the market, could have an adverse effect on the market price of our Common Stock.

 

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The elimination of personal liability against our directors and officers under Nevada law and the existence of indemnification rights held by our directors, officers and employees may result in substantial expenses.

 

ABVC Bylaws eliminate the personal liability of our directors and officers to us and our stockholders for damages for breach of fiduciary duty as a director or officer to the extent permissible under Nevada law. Further, our Bylaws provide that we are obligated to indemnify each of our directors or officers to the fullest extent authorized by Nevada law and, subject to certain conditions, advance the expenses incurred by any director or officer in defending any action, suit or proceeding prior to its final disposition. Those indemnification obligations could expose us to substantial expenditures to cover the cost of settlement or damage awards against our directors or officers, which we may be unable to afford. Further, those provisions and resulting costs may discourage us or our stockholders from bringing a lawsuit against any of our current or former directors or officers for breaches of their fiduciary duties, even if such actions might otherwise benefit our stockholders.

 

Our Common Stock may be subject to the “penny stock” rules of the Securities and Exchange Commission, which may make it more difficult for stockholders to sell our Common Stock.

 

The SEC has adopted Rule 15g-9 which establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require that a broker or dealer approve a person’s account for transactions in penny stocks, and the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

 

In order to approve a person’s account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience objectives of the person, and make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

 

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form sets forth the basis on which the broker or dealer made the suitability determination, and that the broker or dealer received a signed, written agreement from the investor prior to the transaction.

 

Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of the Company’s Common Stock if and when such shares are eligible for sale and may cause a decline in the market value of its stock.

 

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements that involve risks and uncertainties, including statements based on our current expectations, assumptions, estimates and projections about us, our industry and the regulatory environment in which we and companies integral to our ecosystem operate. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. In some cases, these forward-looking statements can be identified by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “potential,” “continue,” “is/are likely to” or other similar expressions. The forward-looking statements included in this prospectus relate to, among others:

 

  risks and uncertainties associated with our research and development activities, including our clinical trials and preclinical studies;

 

  the timing or likelihood of regulatory filings and approvals or of alternative regulatory pathways for our drug candidates;

 

  the potential market opportunities for commercializing our drug candidates;

 

  our expectations regarding the potential market size and the size of the patient populations for our drug candidates, if approved for commercial use, and our ability to serve such markets;

 

  estimates of our expenses, future revenue, capital requirements and our needs for additional financing;

 

  our ability to develop, acquire and advance our product candidates into, and successfully complete, clinical trials and preclinical studies and obtain regulatory approvals;

 

  the implementation of our business model and strategic plans for our business and drug candidates;

 

  the initiation, cost, timing, progress and results of future preclinical studies and clinical trials, and our research and development programs;

 

  the terms of future licensing arrangements, and whether we can enter into such arrangements at all;

 

  timing and receipt or payments of licensing and milestone revenues, if any;

 

  the scope of protection we are able to establish and maintain for intellectual property rights covering our drug candidates and our ability to operate our business without infringing the intellectual property rights of others;

 

  regulatory developments in the United States and foreign countries;

 

  the performance of our third party suppliers and manufacturers;

 

  our ability to maintain and establish collaborations or obtain additional funding;

 

  the success of competing therapies that are currently or may become available;

 

  our ability to continue as a going concern;

 

  our financial performance; and

 

  developments and projections relating to our competitors and our industry.

 

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We caution you that the forward-looking statements highlighted above do not encompass all of the forward-looking statements made in this prospectus or in the documents incorporated by reference in this prospectus.

 

We have based the forward-looking statements contained in this prospectus and in the documents incorporated by reference in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcomes of the events described in these forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and experience to differ from those projected, including, but not limited to, the risk factors described herein and the risk factors set forth in Part I - Item 1A, “Risk Factors”, in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on April 15, 2019, and elsewhere in the documents incorporated by reference into this prospectus. Moreover, we operate in a very competitive and challenging environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus and in the documents incorporated by reference in this prospectus. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

 

The forward-looking statements contained in this prospectus and in the documents incorporated by reference in this prospectus relate only to events as of the date on which the statements are made. We do not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, other strategic transactions or investments we may make.

 

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USE OF PROCEEDS

 

We estimate that we will receive net proceeds from this offering of approximately $9.3 million at minimum, and $21.45 million at maximum from the sale of Series A Preferred Stock, after deducting underwriting commissions and the estimated offering expenses payable by us. We will reserve $2 million at minimum and $4.6 million at maximum in escrow for the distribution of dividends to the holders of Series A Preferred Stock. After deducting the Dividend Reserve and underwriting discounts and commission, we estimate that we will receive proceeds from this offering of approximately $7.3 million at minimum and $16.85 million at maximum. These estimates are based upon an assumed public offering price of US$7.00 per share, the price shown on the front cover page of this prospectus.

 

A $1.00 increase (decrease) in the assumed public offering price of $7.00 per share would increase (decrease) the net proceeds to us from this offering by approximately $1.4 million at minimum and $3.3 million at maximum, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting commissions and offering expenses.

 

We plan to use the net proceeds of this offering for the business development purposes, which may include but not limited to research and development (“R&D”) activities for our six drug candidates and one medical device candidate, marketing, repayment of certain loans, and general working capital. The loans that we intend to repay from the net proceeds of the offering are the credit line (the “Cathay Bank Credit Line”) owed by us to Cathay Bank and three convertible notes (the “Convertible Notes”) purchased by three investors in the aggregate amount of $800,000. As of the date of this prospectus, we drew $1,000,000 under the Cathay Bank Credit Line and expect to use the full credit line of $1,000,000 before the closing of this offering. The Cathay Bank Credit Line provides for a revolving line of credit in the principal amount of $1,000,000 with a maturity date (the “Maturity Date”) of January 1, 2020 and bears an interest rate equal to the sum of one percent (1%) and the prime rate as published in the Wall Street Journal (the “Index”) and the accrued interest are payable each month from February 1, 2019. The Cathay Bank Credit Line is fully disclosed in a current report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on February 1, 2019. As of the date of this prospectus, the Company issued three Convertible Notes that bear an interest rate of 8% per annum for a period of 18 months and may be converted into our Common Stock at the option of the holder at a conversion price equal to the lower of i) $2.00 per share subject to adjustment and ii) 80% of the offering price of any completed equity offering of the Company in an amount exceeding $500,000. One of the holders of the Convertible Note is Keypoint Inc., an entity under control of the Company’s controlling shareholders. As of the date of this prospectus, the principal amount outstanding under Keypoint Inc.’s Convertible Note was $250,000. The Form D related to the offering of the Convertible Notes was filed with the SEC on July 27, 2018.

 

The following chart provides the approximate distribution of proceeds from this offering in the event that we are able to raise $10 million, $15 million, $20 million and $23 million.

 

Use of Proceeds   Capital Raised   $ 10,000,000     $ 15,000,000     $ 20,000,000   $ 23,000,000  
Dividend Reserve       $ 2,000,000     $ 3,000,000     $ 4,000,000   $ 4,600,000  
Net proceeds after deduction of underwriting discounts and Dividend Reserve       $ 7,300,000     $ 10,975,000     $ 14,650,000   $ 16,855,000  
R&D expenses   Estimated cost   $ 1,000,000 (for six months)     $ 2,530,000
(for twelve months)
    $ 4,065,000  (for eighteen months)   $ 6,146,000  
ABV-1701 Vitargus pilot production line   Estimated cost   $ 2,000,000     $ 2,000,000     $ 2,000,000   $ 2,000,000  
Loan repayment   Estimated cost   $ 1,800,000     $ 1,800,000     $ 1,800,000   $ 1,800,000  
Marketing and management expenses   Estimated cost     $ 600,000 (for six months)     $ 2,100,000 
(for twelve months)
    $ 3,600,000 (for eighteen months)   $ 3,600,000  
General working capital   Estimated cost   $ 1,619,000     $ 1,239,000     $ 2,854,000   $ 2,854,000  
Estimated Total Cost       $ 7,019,000     $ 9,669,000     $ 14,319,000   $ 16,400,000  

  

The amounts and timing of our use of the net proceeds from this offering will depend on a number of factors, such as the timing and progress of our research and development efforts, regulatory compliance, the progress of our clinical trials, our licensing development, the progress of any our collaborative or strategic partners, the credit environment in Taiwan and the competitive environment for our new drug candidates. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to us from this offering. Accordingly, our management will have broad discretion in the timing and application of these proceeds. Pending application of the net proceeds as described above, we intend to temporarily invest the proceeds in short-term, interest-bearing instruments.

 

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DIVIDEND POLICY

 

We have never paid our holders of Common Stock any cash dividends, and currently intend to retain future earnings, if any, to finance the expansion of its business. As a result, we do not anticipate paying any cash dividends on our Common Stock in the foreseeable future as we intend to retain any earnings for use in our business. Any future determination to pay dividends to the holders of our Common Stock will be at the discretion of our Board of Directors.

 

We will pay cumulative dividends from the Dividend Reserve on the Series A Convertible Preferred Stock at each anniversary from the date of original issue for a period of four calendar years. We will distribute five percent (5%) of the Dividend Reserve in cash at each anniversary of this offering for four years to each holder of Series A Convertible Preferred Stock. The distribution of dividends on our Series A Convertible Preferred Stock is subject to the laws of Nevada. Section 78.288 of the Revised Nevada Statute provides that no distribution may be made if, after giving it effect, i) a company would not be able to pay its debts as they become due in the usual course of business or ii) the company’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the company were to be dissolved at the time of distribution, to satisfy the preferential rights upon dissolution of stockholders whose preferential rights are superior to those receiving the distribution. As a result of such, our distribution of dividend to Series A Convertible Preferred Stock is subject to the limitations set forth in Section 78.288 of the Revised Nevada Statute.

 

35

 

CAPITALIZATION

 

The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2019. Such information is set forth on the following basis:

 

  on an actual basis;

 

  on a pro forma basis; and

 

 

on a pro forma as adjusted basis to reflect the sale by us of 1,428,571 shares at minimum and 3,285,714 shares at maximum of Series A Convertible Preferred Stock in this offering at a public offering price of $7.00 per share, after deducting underwriting commissions and estimated offering expenses.

 

You should consider this table in conjunction with “Description of Securities” on page 107 and our financial statements and the notes to those financial statements included elsewhere in this prospectus.

 

As of March 31, 2019

 

                Pro Forma  
          Pro Forma     As Adjusted  
    Actual     Minimum     Maximum     Minimum     Maximum  
Cash and cash equivalents   $ 981,341     $ 10,981,341       23,981,341       8,281,341       17,771,341  
Shareholders’ equity:                                        
Share capital:                                        
Share of Series A Convertible Preferred Stock, $.0001 par value per share, 20,000,000 shares authorized, 0 shares issued and outstanding, actual; share of Series A Convertible Preferred Stock issued and outstanding, $.0001 par value per share, 20,000,000 shares authorized, 1,428,571 shares at minimum, and 3,285,714 at maximum issued and outstanding, pro forma; share of Series A Convertible Preferred Stock, $.0001 par value per share, 20,000,000 shares authorized, 1,428,571 shares at minimum and 3,285,714 shares at maximum issued and outstanding, pro forma as adjusted     -       1,389       3,286       1,389       3,286  
Share of Common Stock, $.001 par value per share, 20,000,000 shares authorized, 17,693,625 shares issued and outstanding, actual; share of Common Stock, $.001 par value per share, 20,000,000 shares authorized, 17,693,625 shares issued and outstanding, pro forma; share of Common Stock, $.001 par value per share, 20,000 shares authorized, 17,693,625 shares issued and outstanding, pro forma as adjusted     17,694       17,694       17,694       17,694       17,694  
Additional paid-in capital     15,680,674       25,679,285       38,677,388       22,979,285       32,467,388  
Accumulated deficit     (13,001,117 )     (13,001,117 )     (13,001,117 )     (13,001,117 )     (13,001,177 )
Other comprehensive income     640,439       640,439       640,439       640,439       640,439  
Treasury stock     (9,100,000 )     (9,100,000 )     (9,100,000 )     (9,100,000 )     (9,100,000 )
Noncontrolling interest     235,964       235,964       235,964       235,964       235,964  
Total shareholders’ equity(deficit)     (5,526,346 )     4,473,654       17,473,654       1,773,654       11,263,654  
                                         
Total capitalization   $ 7,450,191     $ 17,450,191     $ 30,450,191     $ 14,750,191     $ 24,240,191  

  

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DILUTION

 

If you invest in our Series A Convertible Preferred Stock, your interest will be diluted to the extent of the difference between the public offering price per share of our Series A Convertible Preferred Stock and the pro forma as adjusted net tangible book value per share of our Series A Convertible Preferred Stock immediately after this offering. The pro forma net tangible book value of our Common Stock as of March 31, 2019 was $ (5.53) million, or $ (0.31) per share. Pro forma net tangible book value per share represents our total tangible assets less our total liabilities, divided by the number of shares of outstanding Common Stock.

 

After giving effect to the receipt of the net proceeds from our sale of 1,428,571 shares at minimum, and 3,285,714 at maximum of Series A Convertible Preferred Stock in this offering at an assumed public offering price of $ 7.00 per share, as set forth on the cover page of this prospectus, after deducting underwriting discounts, Dividend Reserve and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31,2019 would have been $1.77 million at minimum, or $11.26 million at maximum, or $0.10 per share at minimum, or $0.64 per share at maximum. This represents an immediate increase in pro forma as adjusted net tangible book value of $0.41 per share at minimum, or $0.95 per share at maximum to existing stockholders and an immediate dilution of $0.01 per share at minimum, or $0.10 per share at maximum to new investors purchasing Series A Convertible Preferred Stock at a conversion ratio of 1:1 in this offering.

 

The following table illustrates this dilution on a per share basis to new investors:

 

    Per Share  
    Minimum     Maximum  
Assumed public offering price per share   $ 7.00       7.00  
Net tangible book value per share as of March 31, 2019   $ 0.31       0.31  
Pro forma net tangible book value per share of Common Stock   $ 0.25       0.99  
Pro forma net tangible book value per share, after giving effect to this offering   $ 0.23       0.83  
Amount of dilution in pro forma net tangible book value per share of Series A Convertible Preferred Stock to new investors in this Offering   $ 0.09       0.54  

 

A $1.00 increase (decrease) in the assumed public offering price of $7.00 per share of Series A Convertible Preferred Stock, which is set forth on the cover page of this prospectus, would increase (decrease) the pro forma net tangible book value, as adjusted to give effect to this offering, by $0.06 (0.06) per share at minimum, and $0.14 (0.14) per share at maximum, and the dilution to new investors by $0.05 (0.05) per share at minimum, and $0.11 (0.11) per share at maximum, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting commissions and estimated expenses payable by us. Similarly, each increase (decrease) of one million shares in the number of shares of Series A Convertible Preferred Stock offered by us would increase (decrease) the pro forma net tangible book value, as adjusted to give effect to this offering, by $0.35 (0.38) per share at minimum, and $0.28 (0.29) per share at maximum, and the dilution to new investors by $0.26 (0.28) per share at minimum, and $0.21 (0.23) per share at maximum, assuming the assumed public offering price remains the same and after deducting underwriting discounts and commissions and estimated expenses payable by us.

  

37

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read together with our financial statements and the related notes appearing elsewhere in this prospectus. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements and Industry Data” for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

 

Overview

 

We are a clinical stage biopharmaceutical company focused on development of new drugs and medical devices in the fields of oncology, ophthalmology and central nervous system. We operate our business through our wholly owned subsidiaries, American BriVision Corporation (“BriVision”), a Delaware corporation, with a focus on medical device development, BioLite Holding Inc. (“BioLite”), a Nevada corporation, with the key business of new drug development, and BioKey Inc. (BioKey”), a California corporation, a contract service organization.

 

The Company currently concentrates on clinical research and development of six new drug candidates and one Class III medical device, which collectively constitute its primary business operations and research projects. BriVision was incorporated in 2015 in the State of Delaware. It currently focuses on the development of ABV-1701 Vitreous Substitute for Vitrectomy. BioLite was formed in July 2016 under the laws of Nevada. Through BioLite, we conduct clinical research and trials of six new drug candidates which were licensed from BioLite, Inc. (“BioLite Taiwan”), a company formed in Taiwan that is a subsidiary of BioLite. The six new drug candidates under our development are named as follows: ABV-1504 for the treatment of Major Depressive Disorder, ABV-1505 to treat Attention-Deficit Hyperactivity Disease, ABV-1501 for the treatment of Triple Negative Breast Cancer, ABV-1703 for the treatment of Pancreatic Cancer, ABV-1702 to treat Myelodysplastic syndromes and ABV-1601 Depression in Cancer Patients. BioKey was formed under the laws of California in November 2000. It is engaged primarily in research and development, manufacturing, and distribution of generic drugs and nutraceuticals with strategic partners. BioKey provides a wide range of services, including, API characterization, pre-formulation studies, formulation development, analytical method development, stability studies, IND/NDA/ANDA/510K submissions, and manufacturing clinical trial materials (phase I through phase III) and commercial manufacturing. It also licenses out its technologies and initiates joint research and development processes to other biotechnology, pharmaceutical, and nutraceutical companies.

 

As a clinical stage biopharmaceutical company, we utilize our licensed technology to (i) further the development of pharmaceutical products with focuses on oncology, ophthalmology and central nervous system indications, (ii) target patients that may potentially respond to such pharmaceutical products and (iii) obtain regulatory approvals for and commercialize such pharmaceutical products in various markets. The business model of the Company includes the following steps and stages: 1) engaging medical research institutions, such as Memorial Sloan Kettering Cancer Center (“MSKCC”) and MD Anderson Cancer Center, to coordinate clinical trials of translational medicine for Proof of Concept (“POC”) on behalf of the Company; 2) retaining ownership of the research results developed by the Company, and 3) out-licensing the research results and data to pharmaceutical companies who will further develop and commercialize the products.

 

From its inception, the Company has not generated substantial revenue from its medical device and new drug development. For the three months ended March 31, 2019, the Company generated $212,242 in revenue, mainly from its CDMO business unit.

 

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Closing of the Mergers

 

On January 31, 2018, the Company, BioLite, BioKey, BioLite Acquisition Corp., a Nevada company and direct wholly-owned subsidiary of Parent (“Merger Sub 1”), and BioKey Acquisition Corp., a California company and direct wholly-owned subsidiary of Parent (“Merger Sub 2”) entered into a definitive Agreement and Plan of Merger, providing for the acquisition of BioLite and BioKey by ABVC, which we refer to as the “Merger Agreement.” 

 

On February 8, 2019 (the “Closing Date”), the Company closed the transactions contemplated under the Merger Agreement (the “Closing”), pursuant to which BioLite merged with Merger Sub 1 with BioLite as the surviving corporation, which we refer to as the “BioLite Merger,” and BioKey merged with Merger Sub 2 with BioKey as the surviving corporation, which is referred as the “BioKey Merger.” On the Closing Date, BioLite filed the Article of Merger of the BioLite Merger with the State of Nevada, pursuant to which BioLite became a wholly-owned subsidiary of the Company. On the same day, BioKey filed the Agreement of Merger of the BioKey Merger with the State of California, pursuant to which BioKey became a wholly-owned subsidiary of the Company. In addition, in accordance with the terms of the Merger Agreement and as consideration for the acquisition of BioLite and BioKey, the Company issued 1.82 shares of its Common Stock, par value $0.001 per share, for each share of BioLite’s common stock to each BioLite shareholder and one share of ABVC’s Common Stock for each share of BioKey’s capital stock to each BioKey equity holder. The Company issued an aggregate of approximately 104,558,777 shares of Common Stock to both BioLite shareholders and BioKey shareholders under a registration statement on Form S-4 (File Number 333-226285), which became effective by operation of law on or about February 5, 2019.

 

Following the Closing, the Company operates as a single entity with three relatively separate but integrated special business units (“SBU”s), which are 1) the New Drug Development SBU, including the new drug pipeline products from BioLite and the patented controlled release drug delivery technology from BioKey, 2) the Innovative Medical Devices SBU, currently focusing on the development of Vitargus, a new invention of a biocompatible vitreous substitute for the treatment of retinal detachment and vitreous hemorrhage, and 3) the CDMO SBU, providing contract services for pharmaceutical companies in the U. S. and as abroad to develop and manufacture new drug products in BioKey’s good manufacturing practice (“GMP”) facility and prepare studies to obtain ANDAs to launch certain new pharmaceutical products in the U.S. While each of these SBUs is operated independently of one another, they report to the same management team and supervised by the board of directors (the “Board”) of the Company and share common resources and functions, including, but not limited to, administration, accounting, human resources, research and development, business development, legal, manufacturing facilities, and office and laboratory spaces. The Board has representatives from each board of directors of BioLite, BioKey and ABVC. The Board consists of the following members: Eugene Jiang, Dr. Tsang Ming Jiang, Dr. Ming-Fong Wu, Norimi Sakamoto, Yen-Hsin Chou, Dr. Tsung-Shann (T.S.) Jiang, Dr. Chang-Jen Jiang, Dr. Shin-Yu Miao, Yoshinobu Odaira, Shih-Chen Tzeng, and Dr. Hwalin Lee.

 

39

 

 

Common Stock Reverse Split 

 

On March 12, 2019, the Board by unanimous written consent in lieu of a meeting approved to i) effect a stock reverse split at the ratio of 1-for-18 (the “Reverse Split”) of both the authorized Common Stock of the Company and the issued and outstanding Common Stock and ii) to amend the articles of incorporation of the Company to reflect the Reverse Split. The Board approved and authorized the Reverse Split without obtaining approval of the Company’s shareholders pursuant to Section 78.207 of Nevada Revised Statutes.

 

On May 3, 2019, the Company filed a certificate of amendment to the Company’s articles of incorporation (the “Amendment”) to effect the Reverse Split with the Secretary of State of the State of Nevada. The Reverse Split took effect on May 8, 2019.

 

Collaborative Agreements

 

Collaborative agreements with BHK

 

(i) On February 24, 2015, BioLite Taiwan and BioHopeKing Corporation (“BHK”) entered into a co-development agreement (the “BHK Co-Development Agreement”) pursuant to which BioLite Taiwan, a subsidiary of the Company, is collaborating with BHK to research, develop and commercialize BLI-1401-2 (Botanical Drug) Triple Negative Breast Cancer (TNBC) Combination Therapy (BLI-1401-2 Products) in Asian countries excluding Japan. The development costs shall be shared 50/50 between BHK and BioLite Taiwan. The BHK Co-Development Agreement will remain in effect for fifteen years from the date of first commercial sale of the Product in in Asia excluding Japan.

 

On July 27, 2016, BioLite Taiwan and BHK agreed to amend the payment terms of the milestone payment in an aggregate amount of $10 million based on the following schedule:

 

Upon the signing of the BHK Co-Development Agreement: $1 million, or 10% of total payment

 

Upon the first Investigational New Drug (IND) submission and BioLite Taiwan delivering all data to BHK according to FDA requirement: $1 million, or 10% of total payment

 

At the completion of first phase II clinical trial: $1 million, or 10% of total payment

 

At the initiation of phase III of clinical trial research: $3 million, or 30% of total payment

 

Upon the New Drug Application (NDA) submission: $4 million, or 40% of total payment

 

In December 2015, BHK paid a non-refundable upfront cash payment of $1 million, or 10% of $10,000,000, pursuant to the BHK Co-Development Agreement. The Company concluded that the deliverables are considered separate units of accounting as the delivered items have value to the customer on a standalone basis and recognized this cash receipt as collaboration revenue when all research, technical, and development data was delivered to BHK in 2015. The receipt is for the compensation of past research efforts and contributions made by BioLite Taiwan before this collaborative agreement was signed and it does not relate to any future commitments made by BioLite Taiwan and BHK in this collaborative agreement.

 

In August 2016, the Company received the second milestone payment of NT$31,649,000, approximately equivalent to $1 million, and recognized collaboration revenue for the year ended December 31, 2016.

 

As of the date of this propsectus, the Company has not completed the first phase II clinical trial.

 

In addition to the milestone payments, BioLite Taiwan is entitled to receive royalties on 12% of BHK’s net sales related to BLI-1401-2 Products. As of March 31, 2019 and December 31, 2018, the Company had not earned any royalties under the BHK Co-Development Agreement.

 

(ii) On December 9, 2015, BioLite Taiwan entered into another two collaborative agreements (the “BHK Collaborative Agreements”), pursuant to which BioLite Taiwan is collaborating with BHK to co-develop and commercialize BLI-1005 for “Targeting Major Depressive Disorder” (BLI-1005 Products) and BLI-1006 for “Targeting Inflammatory Bowel Disease” (BLI-1006 Products) in Asia excluding Japan. The development costs shall be shared 50/50 between BHK and BioLite Taiwan. The BHK Collaborative Agreements will remain in effect for fifteen years from the date of first commercial sale of the Product in in Asia excluding Japan. On May 18, 2018, BioLite Taiwan and BHK amended the BHK Collaborative Agreements to replace the drug candidate from BLI-1006 to BLI-1008 for ADHD.

 

In 2015, BioLite Taiwan recognized a cash receipt in a total of NT$50 million, approximately equivalent to $1.6 million, as collaboration revenue when all research, technical, and development data was delivered to BHK. BioLite Taiwan concluded that the deliverables were considered separate units of accounting as the delivered items had value to the customer on a standalone basis and recognized this payment as collaboration revenue when all research, technical, data and development data was delivered to BHK. The cash receipt was for the compensation of past research efforts and contributions made by BioLite Taiwan before the BHK Collaborative Agreements were signed and it does not relate to any future commitments made by BioLite Taiwan and BHK in the BHK Collaborative Agreements.

 

In addition to the total of NT$50 million, approximately equivalent to $1.60 million, BioLite Taiwan is entitled to receive 50% of the future net licensing income or net sales profit. As of March 31, 2019 and 2018, the Company had not earned any royalties under the BHK Collaborative Agreements.

 

40

 

 

Co-Development agreement with Rgene Corporation, a related party

 

On May 26, 2017, American BriVision Corporation (“BriVision”), a wholly-owned subsidiary of the Company, entered into a co-development agreement (the “Co-Dev Agreement”) with Rgene Corporation (“Rgene”), a related party under control by a controlling beneficiary shareholder of YuanGene Corporation who also controls the Company. Pursuant to the Co-Dev Agreement, BriVision and Rgene agreed to co-develop and commercialize ABV-1507 HER2/ neu Positive Breast Cancer Combination Therapy, ABV-1511 Pancreativc Cancer Combination Therapy and ABV-1527 Ovary Cancer Combination Therapy. Under the terms of the Co-Dev Agreement, Rgene had to pay BriVision $3,000,000 in cash or stock of Rgene with equivalent value by August 15, 2017. The payment is for the compensation of BriVision’s past research efforts and contributions made by BriVision before the Co-Dev Agreement was signed and it does not relate to any future commitments made by BriVision and Rgene in this Co-Dev Agreement. Besides of $3,000,000, BriVision is entitled to receive 50% of the future net licensing income or net sales profit earned by Rgene, if any, and any development cost shall be equally shared by both BriVision and Rgene.

 

On June 1, 2017, BriVision delivered all research, technical, data and development data to Rgene. Since both Rgene and BriVision are related parties and controlled by a controlling beneficiary shareholder of Yuangene Corporation who is also the controlling beneficiary shareholder of the Company, BriVision has recorded the full amount of $3,000,000 in connection with the Co-Dev Agreement as additional paid-in capital during the year ended September 30, 2017. During the year ended December 31, 2017, BriVision received $450,000 in cash. On August 23, 2018, BriVision and Rgene agreed and acknowledged in an Addendum to the Co-Dev Agreement that the remaining balance of the licensing fee owed to BriVision could be paid in stock of Rgene of the equivalent value of $2,550,000. On December 24, 2018, BriVision received the remaining balance of $2,550,000 in the form of newly issued shares of Rgene’s common stock, at the price of NT$50 (approximately equivalent to $1.60 per share), for an aggregate number of 1,530,000 shares, which accounted for equity method long-term investment as of December 31, 2018. During the year ended December 31, 2018, BriVision recognized investment loss of $549. On December 31, 2018, BriVision determined to fully write off this investment based on the Company’s assessment of the severity and duration of the impairment, and qualitative and quantitative analysis of the operating performance of the investee, adverse changes in market conditions and the regulatory or economic environment, changes in the operating structure of Rgene, additional funding requirements, and Rgene’s ability to remain in business. However, all projects that have been initiated and scheduled will be continuously managed and supported by BriVision and Rgene.

 

Collaborative agreement with BioFirst Corporation, a related party

 

On July 24, 2017, BriVision entered into a collaborative agreement (the “BioFirst Collaborative Agreement”) with BioFirst Corporation (“BioFirst”), pursuant to which BioFirst granted BriVision the global licensing right for medical use of the product (the “Product”): BFC-1401 Vitreous Substitute for Vitrectomy. BioFirst is a related party to the Company because a controlling beneficiary shareholder of Yuangene Corporation and the Company is one of the directors and Common Stock shareholders of BioFirst.

 

Pursuant to the BioFirst Collaborative Agreement, BriVision will co-develop and commercialize the Product with BioFirst and pay BioFirst a total amount of $3,000,000 in cash or stock of BriVision before September 30, 2018. The amount of $3,000,000 was in connection with the compensation for BioFirst’s past research efforts and contributions made by BioFirst before the BioFirst Collaborative Agreement was signed and it does not relate to any future commitments made by BioFirst and BriVision in this BioFirst Collaborative Agreement. In addition, BioFirst is entitled to receive 50% of the future net licensing income or net sales profit, if any, and any development cost shall be equally shared by both BriVision and BioFirst.

 

On September 25, 2017, BioFirst delivered all research, technical data and development data to BriVision. No payment has been made by BriVision as of the date of this prospectus. The Company determined to fully expense the entire amount of $3,000,000 since currently the related licensing rights do not have alternative future uses. According to ASC 730-10-25-1, absent alternative future uses the acquisition of product rights to be used in research and development activities must be charged to research and development expenses immediately. Hence, the entire amount of $3,000,000 was fully expensed as research and development expense during the year ended September 30, 2017 of the Company on a consolidated basis.

 

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Loan Agreement

 

Cathay United Bank

 

On June 28, 2016, BioLite Taiwan and Cathay United Bank entered into a one-year bank loan agreement (the “Cathay United Loan Agreement”) in an amount of NT$7,500,000, equivalent to $243,000. The term started June 28, 2016 with maturity date at June 28, 2017. The loan balance bears interest at a floating rate of prime rate plus 1.15%. The prime rate is based on term deposit saving interest rate of Cathay United Bank. On September 6, 2017, BioLite Taiwan extended the Cathay United Loan Agreement for one year, which was due on September 6, 2018, with the principal amount of NT$7,500,000, equivalent to $243,000. On October 1, 2018, BioLite Taiwan extended the Cathay United Loan Agreement with the same principal amount of NT$7,500,000, equivalent to $243,0050 for one year, which is due on September 6, 2019. As of March 31, 2019 and December 31, 2018, the effective interest rates per annum were 2.22%. The loan is collateralized by the building and improvement of BioLite Taiwan, and is also personally guaranteed by the chairman of BioLite Taiwan.

 

CTBC Bank

 

On June 12, 2017 and July 19, 2017, BioLite Taiwan and CTBC Bank entered into short-term saving secured bank loan agreements (the “CTBC Loan Agreements”) in an amount of NT$10,000,000, equivalent to $324,000, and NT$10,000,000, equivalent to $324,000, respectively. Both two loans with the same maturity date at January 19, 2018. In February 2018, BioLite Taiwan combined two loans and extended the loan contract with CTBC for one year. On January 18, 2019, BioLite Taiwan and CTBC Bank agreed to extend the loan with a new maturity date, which is July 18, 2019. The loan balances bear interest at a fixed rate of 1.63% per annum. The loan is secured by the money deposited in a savings account with the CTBC Bank. This loan is also personally guaranteed by the chairman of BioLite Taiwan and BioFirst.

 

Cathay Bank

 

During the three months ended March 31, 2019, the Company received a loan in aggregate of $1,000,000 from Cathay Bank pursuant to a business loan agreement (the “Loan Agreement”) entered by and between the Company and Cathay Bank on January 8, 2019 and a promissory note (the “Note”) executed by the Company on the same day. The Loan Agreement provides for a revolving line of credit in the principal amount of $1,000,000 with a maturity date (the “Maturity Date”) of January 1, 2020. The Note executed in connection with the Loan Agreement bears an interest rate (the “Regular Interest Rate”) equal to the sum of one percent (1%) and the prime rate as published in the Wall Street Journal (the “Index”). Pursuant to the Note, the Company shall pay the entire outstanding principal plus accrued unpaid interest on the Maturity Date and may prepay portion or all of the Note before the Maturity Date without penalty. If the Company defaults on the Note, the default interest rate shall become five percent (5%) plus the Regular Interest Rate.

 

In connection with the Note and Loan Agreement, on January 8, 2019, each of Dr. Tsung Shann Jiang and Dr. George Lee executed a commercial guaranty (the “Guaranty”) to guaranty the loans for the Company pursuant to the Loan Agreement and Note, severally and individually, in the amount not exceeding $500,000 each until the principal amount of the Note and accrued interest is fully paid and satisfied. Dr. Tsung Shann Jiang is a director and the Chief Strategy Officer of the Company, the Chairman and Chief Executive Officer of BioLite, a subsidiary of the Company. Dr. George Lee serves as the Chairman of the board of directors of BioKey, another subsidiary of the Company.

 

In addition, on January 8, 2019, each of the Company and BriVision signed a commercial security agreement (the “Security Agreement”) to secure the loans under the Loan Agreement and the Note. Pursuant to the Security Agreements, each of the Company and BriVision (each, a “Grantor”, and collectively, the “Grantors”) granted security interest in the collaterals as defined therein, comprised of almost all of the assets of each Grantor, to secure such loans for the benefit of Cathay Bank.

 

Revenue Generation

 

Most of our licensed products are still under development and trial stage. During the three months ended March 31, 2019 and 2018, we generated $212,242 and $0 in revenues, respectively, primarily from the CDMO business unit.

 

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Research and Development

 

During the three months ended March 31, 2019 and 2018, we spent approximately $421,956 and $248,111 on research and development, respectively, which consisted primarily of research and development and payroll expenses. Such payroll expenses were settled in both cash and common stock issued by the Company.

 

Critical Accounting Policies and Estimates

 

We believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this “Management’s Discussion and Analysis of Financial Condition and Results of Operation.”

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with the generally accepted accounting principles in the United States of America (the “U.S. GAAP”). All significant intercompany transactions and account balances have been eliminated.

 

This basis of accounting involves the application of accrual accounting and consequently, revenues and gains are recognized when earned, and expenses and losses are recognized when incurred. The Company’s financial statements are expressed in U.S. dollars.

 

Fiscal Year

 

The Company changed its fiscal year from the period beginning on October 1st and ending on September 30th to the period beginning on January 1st and ending on December 31st, beginning January 1, 2018. All references herein to a fiscal year prior to December 31, 2017 refer to the twelve months ended September 30th of such year.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the amount of revenues and expenses during the reporting periods. Actual results could differ materially from those results.

 

Inventory

 

Inventory consists of raw materials, work-in-process, finished goods, and merchandise. Inventories are stated at the lower of cost or market and valued on a moving weighted average cost basis. Market is determined based on net realizable value. The Company periodically reviews the age and turnover of its inventory to determine whether any inventory has become obsolete or has declined in value, and incurs a charge to operations for known and anticipated inventory obsolescence.

 

Reclassifications

 

Certain classifications have been made to the prior year financial statements to conform to the current year presentation. The reclassification had no impact on previously reported net loss or accumulated deficit.

 

Forward Stock Split

 

On March 21, 2016, the Board of Directors and the majority of the shareholders of the Company approved an amendment to the Articles of Incorporation to effect a forward split at a ratio of 1 to 3.141 and increase the number of our authorized shares of common stock, par value $0.001 per share, to 360,000,000, which was effective on April 8, 2016. As a result, all shares outstanding for all periods have been retroactively restated to reflect Company’s 1 to 3.141 forward stock split.

 

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Reverse Stock Split

 

On March 12, 2019, the Board of Directors by unanimous written consent in lieu of a meeting approved resolutions to i) effect a reverse stock split at the ratio of 1-for-18 (the “Reverse Split”) of both the authorized Common Stock and the issued and outstanding Common Stock and ii) to amend the Articles of Incorporation to reflect the Reverse Split. The Board of Directors approved and authorized the Reverse Split without obtaining approval of the Company’s shareholders pursuant to Section 78.207 of Nevada Revised Statutes. On May 3, 2019, the Company filed a certificate of amendment to the Company’s Articles of Incorporation (the “Amendment”) to effect the Reverse Split with the Secretary of State of Nevada. The Financial Industry Regulatory Authority (“FINRA”) informed the Company that the Reverse Split was effective on May 8, 2019. Unless specified otherwise, all shares and related financial information in this prospectus reflect this 1-for-18 reverse stock split.

 

Fair Value Measurements

 

FASB ASC 820, “Fair Value Measurements” defines fair value for certain financial and nonfinancial assets and liabilities that are recorded at fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. It requires that an entity measure its financial instruments to base fair value on exit price, maximize the use of observable units and minimize the use of unobservable inputs to determine the exit price. It establishes a hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy increases the consistency and comparability of fair value measurements and related disclosures by maximizing the use of observable inputs and minimizing the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the assets or liabilities based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy prioritizes the inputs into three broad levels based on the reliability of the inputs as follows:

 

Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Valuation of these instruments does not require a high degree of judgment as the valuations are based on quoted prices in active markets that are readily and regularly available.

 

Level 2 – Inputs other than quoted prices in active markets that are either directly or indirectly observable as of the measurement date, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 – Valuations based on inputs that are unobservable and not corroborated by market data. The fair value for such assets and liabilities is generally determined using pricing models, discounted cash flow methodologies, or similar techniques that incorporate the assumptions a market participant would use in pricing the asset or liability.

 

The carrying values of certain assets and liabilities of the Company, such as cash and cash equivalents, restricted cash, accounts receivable, due from related parties, inventory, prepaid expenses and other current assets, accounts payable, accrued liabilities, and due to related parties approximate fair value due to their relatively short maturities. The carrying value of the Company’s short-term bank loan, convertible notes payable, and accrued interest approximates their fair value as the terms of the borrowing are consistent with current market rates and the duration to maturity is short. The carrying value of the Company’s long-term bank loan approximates fair value because the interest rates approximate market rates that the Company could obtain for debt with similar terms and maturities.

 

Cash and Cash Equivalents

 

The Company considers highly liquid investments with maturities of three months or less, when purchased, to be cash equivalents. As of March 31, 2019 and December 31, 2018, the Company’s cash and cash equivalents amounted to $981,341 and $226,688, respectively. Some of the Company’s cash deposits are held in financial institutions located in Taiwan where there is currently regulation mandated on obligatory insurance of bank accounts. The Company believes this financial institution is of high credit quality.

 

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Restricted Cash Equivalents

 

Restricted cash equivalents primarily consist of cash held in a reserve bank account in Taiwan. As of March 31, 2019 and December 31, 2018, the Company’s restricted cash equivalents amounted to $16,093.

 

Concentration of Credit Risk

 

The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents. The Company places its cash and temporary cash investments in high quality credit institutions, but these investments may be in excess of Taiwan Central Deposit Insurance Corporation and the U.S. Federal Deposit Insurance Corporation’s insurance limits. The Company does not enter into financial instruments for hedging, trading or speculative purposes. 

 

Goodwill

 

The Company evaluates goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate the carrying value may not be recoverable. In testing goodwill for impairment, the Company may elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment indicates that goodwill impairment is more likely than not, the Company performs a two-step impairment test. The Company tests goodwill for impairment under the two-step impairment test by first comparing the book value of net assets to the fair value of the reporting units. If the fair value is determined to be less than the book value or qualitative factors indicate that it is more likely than not that goodwill is impaired, a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. The Company estimates the fair value of the reporting units using discounted cash flows. Forecasts of future cash flows are based on our best estimate of future net sales and operating expenses, based primarily on expected category expansion, pricing, market segment share, and general economic conditions.

 

The Company completed the required testing of goodwill for impairment as of March 31, 2019, and determined that goodwill was impaired because of the current financial condition of the Company and the Company’s inability to generate future operating income without substantial sales volume increases, which are highly uncertain. Furthermore, the Company anticipates future cash flows indicate that the recoverability of goodwill is not reasonably assured.

 

Research and Development Expenses

 

The Company accounts for R&D costs in accordance with FASB ASC 730, “Research and Development” (“ASC 730”). Research and development expenses are charged to expense as incurred unless there is an alternative future use in other research and development projects or otherwise. Research and development expenses are comprised of costs incurred in performing research and development activities, including personnel-related costs, share-based compensation, and facilities-related overhead, outside contracted services including clinical trial costs, manufacturing and process development costs for both clinical and preclinical materials, research costs, upfront and development milestone payments under collaborative agreements and other consulting services. Non-refundable advance payment for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made. In instances where the Company enters into agreements with third parties to provide research and development services, costs are expensed as services are performed. Amounts due under such arrangements may be either fixed fee or fee for service, and may include upfront payments, monthly payments, and payments upon the completion of milestones or receipt of deliverables.

 

For its CDMO business unit, the Company accounts for R&D costs in accordance with ASC 730. Research and development expenses are charged to expense as incurred unless there is an alternative future use in other research and development projects or otherwise. Research and development expenses are comprised of costs incurred in performing research and development activities, including personnel-related costs, facilities-related overhead, and outside contracted services including clinical trial costs, manufacturing and process development costs for both clinical and preclinical materials, research costs, and other consulting services. Non-refundable advance payment for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made. In instances where the Company enters into agreements with third parties to provide research and development services, costs are expensed as services are performed.

 

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Stock-based Compensation

 

The Company measures expenses associated with all employee stock-based compensation awards using a fair value method and recognizes such expense in the consolidated financial statements on a straight-line basis over the requisite service period in accordance with FASB ASC Topic 718 “Compensation-Stock Compensation”. Total employee stock-based compensation expenses were $0 for the three months ended March 31, 2019 and 2018, respectively.

 

The Company accounted for stock-based compensation to non-employees in accordance with FASB ASC Topic 718 “Compensation-Stock Compensation” and FASB ASC Topic 505-50 “Equity-Based Payments to Non-Employees” which requires that the cost of services received from non-employees is measured at fair value at the earlier of the performance commitment date or the date service is completed and recognized over the period the service is provided. Total non-employee stock-based compensation expenses were $8,550 and $5,626 for the three months ended March 31, 2019 and 2018, respectively.

 

Beneficial Conversion Feature

 

From time to time, the Company may issue convertible notes that may contain an imbedded beneficial conversion feature. A beneficial conversion feature exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the remaining unallocated proceeds of the note after first considering the allocation of a portion of the note proceeds to the fair value of the warrants, if related warrants have been granted. The intrinsic value of the beneficial conversion feature is recorded as a debt discount with a corresponding amount to additional paid in capital. The debt discount is amortized to interest expense over the life of the note using the effective interest method.

 

Income Taxes

 

The Company accounts for income taxes using the asset and liability approach which allows the recognition and measurement of deferred tax assets to be based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will expire before the Company is able to realize their benefits, or future deductibility is uncertain.

 

Under FASB ASC Topic 740 “Income Taxes”, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The evaluation of a tax position is a two-step process. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigations based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefits recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer satisfied. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the year incurred. No significant penalty or interest relating to income taxes has been incurred for the three months ended March 31, 2019 and 2018, respectively. GAAP also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures and transition.

 

46

 

 

On December 22, 2017, the SEC issued Staff Accounting Bulletin (“SAB 118”), which provides guidance on accounting for tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. In March 2018, the FASB issued ASU 2018-05, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (SEC Update), Income Taxes (Topic 740). ASU 2018-05 provides guidance regarding the recording of tax impacts where uncertainty exists, in the period of adoption of the 2017 U.S. Tax Cuts and Jobs Act (the “2017 Tax Act”). In accordance with this guidance, the Company’s financial results reflect provisional amounts for those specific income tax effects of the 2017 Tax Act for which the accounting under ASC Topic 740 is incomplete but a reasonable estimate could be determined. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provision of the tax laws that were in effect immediately before the enactment of the Tax Act. While the Company is able to make reasonable estimates of the impact of the reduction in corporate rate and the deemed repatriation transition tax, the final impact of the Tax Act may differ from these estimates, due to, among other things, changes in its interpretations and assumptions, additional guidance that may be issued by the I.R.S., and actions that the Company may take. The Company is continuing to gather additional information to determine the final impact.

 

For the three months ended March 31, 2019 and 2018, the Company’s income tax expense amounted $0 and $0, respectively.

 

Loss Per Share of Common Stock

 

The Company calculates net loss per share in accordance with ASC Topic 260, “Earnings per Share”. Basic loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common stock equivalents had been issued and if the additional common shares were dilutive. Diluted earnings per share excludes all dilutive potential shares if their effect is anti-dilutive.

 

Commitments and Contingencies

 

The Company has adopted ASC Topic 450 “Contingencies” subtopic 20, in determining its accruals and disclosures with respect to loss contingencies. Accordingly, estimated losses from loss contingencies are accrued by a charge to income when information available before financial statements are issued or are available to be issued indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred. If a loss contingency is not probable or reasonably estimable, disclosure of the loss contingency is made in the financial statements when it is at least reasonably possible that a material loss could be incurred.

 

Recent Accounting Pronouncements

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (“Topic 820”): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The ASU modifies the disclosure requirements in Topic 820, Fair Value Measurement, by removing certain disclosure requirements related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty and adding new disclosure requirements, such as disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and disclosing the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This ASU is effective for public companies for annual reporting periods and interim periods within those annual periods beginning after December 15, 2019. The Company is currently evaluating the effect, if any, that the ASU 2018-13 will have on its financial statements. 

 

Limited Operating History; Need for Additional Capital

 

We have no assurance that future financing will be available to us on acceptable terms, or at all. If financing is not available on satisfactory terms, we may be unable to continue, develop or expand our operations. Equity financing could result in additional dilution to existing shareholders.

 

If we are unable to raise additional capital to maintain our operations in the future, we may be unable to carry out our full business plan or we may be forced to cease operations.

 

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The following discussion and analysis should be read in conjunction with the unaudited financial statements of the Company for the period ended March 31, 2019 and 2018 and accompanying notes that appear in this prospectus and the financial statements included in this Registration Statement.

 

Results of Operations

 

Our financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should we be unable to continue in operation. We expect we will require additional capital to meet our long term operating requirements. We expect to raise additional capital through, among other things, the sale of equity or debt securities, but we cannot guarantee that we will be able to achieve the same.

 

Results of Operations — Year Ended December 31, 2018 Compared to Year Ended December 31, 2017. 

 

The following table presents, for the period indicated, our consolidated statements of operations information, prior to the closing the Mergers.

 

   Year Ended
December 31,
 
   2018   2017 
         
Revenues  $-   $- 
           
Cost of revenues   -    - 
           
Gross profit (loss)   -    - 
           
Operating expenses          
Selling, general and administrative expenses   695,148    811,685 
Research and development expenses   669,668    3,171,665 
Stock based compensation expenses   28,800    155,400 
 Total operating expenses   1,393,616    4,138,750 
           
Loss from operations   (1,393,616)   (4,138,750)
           
Other income(expenses)          
Interest income   93    180 
Interest expense   (155,930)   (103,460)
Investment Loss   (549)   - 
Loss on investment in equity securities   (2,549,451)   - 
Total other income (expenses)   (2,705,837)   103,280 
           
Loss from continuing operations before provision income tax   (4,099,453)   (4,242,030)
           
Provision income tax   1,850    830 
           
Net Loss  $(4,101,303)   (4,242,860)

 

Revenues. We did not generate any revenue during the year ended December 31, 2018 and 2017. As such, we did not incur any cost associated with revenues during the same periods.

 

Operating Expenses. Our operating expenses were $1,393,616 for the year ended December 31, 2018 as compared to $4,138,750 for the year ended December 31, 2017. The decrease in operating expenses in the amount of $2,745,134 or (66.33)% in the year ended December 31, 2018 was primarily caused by the decrease in research and development expense, which was operating at a normal rate in 2018, after the Company has established meaningful collaborative agreements with strategic partners, such as BioFirst.

 

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Loss on investment in equity securities. The loss on investment in equity securities was $2,549,451 for the year ended December 31, 2018 as compared to $0 for the year ended December 31, 2017. The increase of expenses by $2,549,451 was attributable to the other-than temporary impairment on equity investment for Rgene due to the operating performance and adverse changes in market conditions of Rgene. However, all projects that have been initiated and scheduled will be continuously managed and supported by the Company and Rgene.

 

Net Loss. As a result of the above factors, the net loss was $4,101,303 and $4,242,860 for the years ended December 31, 2018 and 2017. The decrease of net loss in the year ended December 31, 2018 as compared to the same period ended December 31, 2017 was in an amount of $141,557 or by (3.34)%.

 

Liquidity and Capital Resources

 

Working Capital Summary

 

   As of December 31, 2018
($)
   As of December 31, 2017
($)
 
         
Current Assets   96,273    2,643,332 
Current Liabilities   5,568,224    4,400,247 
Working Capital (Deficit)   (5,471,951)   (1,756,915)

 

Cash Flows

 

   Years Ended 
   December 31, 
   2018   2017 
         
Cash Flows Used in Operating Activities  $(630,195)  $(1,485,313)
Cash Flows Provided by Financing Activities   593,000    1,560,000 
Net (Decrease) Increase in Cash During Period  $(37,195)  $74,687 

 

Cash Flow from Operating Activities 

 

During the years ended December 31, 2018 and 2017, the net cash used in operating activities were $630,195 and $1,485,313, respectively, reflecting a decrease of $855,118 or (57.57)%. Such decrease was primarily caused by the recognition of loss on investment in equity securities and the change in accrued expenses and due to related parties during the year ended December 31, 2018.

 

Cash Flow from Investing Activities

 

There was no net cash used or generated from investing activities during the years ended December 31, 2018 and 2017.

 

Cash Flow from Financing Activities

 

During the year ended December 31, 2018 and 2017, net cash generated from financing activities was 593,000 and $1,560,000, respectively. The decrease of $967,000 or (61.99)% in net cash generated from financing activities was because the Company borrowed less money from related parties and also made repayments for outstanding loans in the fiscal year of 2018.

 

Critical Accounting Policy and Estimates

 

We believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this “Management’s Discussion and Analysis of Financial Condition and Results of Operation.”

 

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Going Concern Consideration

 

We have incurred losses since its inception resulting in an accumulated deficit of $19,877,901 and $15,776,598 as of December 31, 2018 and 2017, respectively, and net loss of $4,101,303 during the fiscal year ended December 31, 2018. These conditions raise substantial doubt about our ability to continue as a going concern for the next twelve months. 

 

We expect to finance operations primarily through capital contributions from the principal shareholders and other sources. Our continuing operation depends on the success of our financing, including both debt and equity.

 

Off-Balance Sheet Arrangements

 

As of December 31, 2018, we did 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.

 

Results of Operations — Three Months Ended March 31, 2019 Compared to March 31, 2018.

 

The following table presents, for the three months indicated, our consolidated statements of operations information.

 

   March 31,
2019
   March 31,
2018
 
   (Unaudited)   (Unaudited) 
         
Revenues  $212,242   $- 
           
Cost of revenues   1,499    - 
           
Gross profit   210,743    - 
           
Operating expenses          
Selling, general and administrative expenses   510,803    420,462 
Research and development expenses   421,956    248,111 
Stock based compensation   8,550    5,626 
Total operating expenses   941,309    674,199 
           
Loss from operations   (730,566)   (674,199)
           
Other income (expense)          
Interest income   189    1,150 
Interest expense   (129,886)   (106,854)
Rental income, net   (3,891)   3,066 
Gain (loss) on foreign exchange changes   (3)   7,515 
Gain (loss) on investment in equity securities   (66,205)   (38,567)
Other income (expense)   (500)   (15)
Total other income (expenses)   (200,296)   (133,705)
           
Loss before provision for income tax (benefit)   (930,862)   (807,904)
           
Provision for income tax (benefit)   (57,545)   (94,282)
           
Net loss  $(873,317)  $(713,622)
Net loss attributable to noncontrolling interests   (81,646)   (112,235)
Net loss attributable to ABVC and subsidiaries   (791,671)   (601,387)
Foreign currency translation adjustment   (86,786)   64,994 
Comprehensive Income (Loss)  $(878,457)  $(536,393)
           
Net loss per share attributable to common stockholders          
Basic and diluted  $(0.05)  $(0.05)
Weighted average number of common shares outstanding          
Basic and diluted   14,965,665    11,599,911 

 

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Revenues. We generated $212,242 and $0 in revenues; $1,499 and $0 in cost of revenues for the three months ended March 31, 2019 and 2018, respectively.

 

Operating Expenses. Our operating expenses were $941,309 for the three months ended March 31, 2019 as compared to $674,199 for the three months ended March 31, 2018. The increase in operating expenses was primarily caused by R&D expenses that were scheduled for existing drug candidates research.

 

Interest Expense. The interest expense was $129,886 for the three months ended March 31, 2019 as compared to $106,854 for the three months ended March 31, 2018. The increase in interest expense is primarily due to interest incurred on the new business loan from Cathay Bank.

 

Net Loss. The net loss was $873,317 for the three months ended March 31, 2019 compared to $713,622 for the three months ended March 31, 2018. The increase in net loss was primarily caused by professional services fees and R&D expenses.

 

Liquidity and Capital Resources

 

Working Capital

 

   As of 
March 31,
2019
($)
   As of
December 31,
2018
($)
 
   (Unaudited)   (Unaudited) 
Current Assets  $1,527,182   $566,476 
Current Liabilities   12,435,155    10,987,786 
Working Capital (deficit)  $(10,907,793)  $(10,421,310)

 

 

Cash Flows

 

   Three Months Ended 
   March 31, 
   2019   2018 
   (Unaudited) 
Cash Flows Used in Operating Activities  $(599,528)  $(525,510)
Cash Flows Used in Investing Activities   (17,801)   - 
Cash Flows Provided by Financing Activities   1,373,791    349,737 
Effect of exchange rate changes on cash and cash equivalents   (1,809)   (40)
Net (Decrease) Increase in Cash During Period  $754,653   $(175,813)

 

Cash Flow from Operating Activities

 

During the three months ended March 31, 2019 and 2018, the net cash used in operating activities were $599,528 and $525,510, respectively. The increase in the amount of $74,018 is primarily due to net loss of operations.

 

Cash Flow from Investing Activities

 

During the three months ended March 31, 2019 and 2018, the Company spent $17,801 and $0 in investing activities, respectively. The decrease in the amount of $17,801 was due to company stock buyback from a previous employee.

 

Cash Flow from Financing Activities

 

During the three months ended March 31, 2019 and 2018, the net cash provided by financing activities was $1,373,791 and $349,737, respectively, reflecting an increase of $1,024,054. The increase in the net cash provided by financing activities was primarily attributed to the loan in the total amount of $1,000,000 from Cathay Bank.

 

Off-Balance Sheet Arrangements

 

As of March 31, 2019, we did 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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BIOLITE’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with the restated Consolidated Financial Statements and related notes included elsewhere in this prospectus. The following discussion includes certain forward-looking statements. For a discussion of important factors which could cause actual results to differ materially from the results referred to in the forward-looking statements, see “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements”.

 

Overview

 

BioLite is a clinical stage pharmaceutical company focused on translational research of botanical and natural API-based products in the fields of central nervous system, oncology/ hematology and autoimmune diseases. Because we believe natural substances have many healing powers, BioLite focuses its research resources to the development of botanical products, which include plant materials, algae, macroscopic fungi and combinations thereof. We mostly use traditional cultivation, fermentation and purification techniques, excluding genetic modifications, to process the active natural constituents of our drug candidates. The operational activities primarily focus on researching and developing novel botanical and natural drugs utilizing scientific methodology and approaches in compliance with the procedures and protocols prescribed by the FDA. The names of all of our medicinal products are in an alphanumeric form, starting with “BLI” which stands for “BioLite” and followed by Arabic numbers. For example, BLI-1005 is the name of one of our products that is intended to treat certain types of depression. BioLite seeks to add value to new drug development by taking pre-clinical stage new drug candidates to Phase II and proving the concept of the new drug candidates. As a result of the consummation of the Mergers, BioLite became a wholly-owned subsidiary of the Company on February 8, 2019.

 

BioLite’s research and development team is devoted primarily to preclinical studies, Phase I and II clinical trials of new drug candidates in its fields with goals of translating pharmacology-related research results and theories to medicinal drug candidates that are ready for clinical trials on a large scale, such as Phase III trials, and future commercialization. BioLite acquires licenses from universities, government and other research institutes to further preclinical research in order to select new drug candidates for clinical trials, including Phase I and Phase II. BioLite currently focuses on the areas of CNS, oncology/ hematology and autoimmune, where it is seeking to build a portfolio of novel therapeutics that serve large unmet medical needs. As part of the business strategy, BioLite plans to cooperate with well-established pharmaceutical companies in the U.S. and other countries with major medicinal markets to further develop and commercialize the products in its portfolio for which we receive positive clinical trial results from Phase II trials.

 

CNS

 

BioLite acquired exclusive global rights to develop and license two investigational new drugs to treat central nervous system diseases, both of which are based on novel formulas of extracts from Chinese, Korean and Japanese herbs that have shown promise in treating insomnia, anxiety and other mental disorders. BioLite has successfully completed the stage 1, Phase II study of BLI-1005, a novel capsule product to treat MDD. BioLite is in the process of recruiting sixty patients to carry out the stage 2, Phase II trial of BLI-1005. BLI-1005 is intended to treat MDD and we believe that it offers multiple advantages over currently available antidepressants. In addition, BioLite received from the FDA an approval on the IND application of BLI-1008 for the treatment of ADHD in January 2016 and is scheduled to commence the Phase II trial in the foruth quarter of 2018, subject to the availability of sufficient funds. BLI-1005 and BLI-1008 are two indications deriving from the same API, PDC-1421, as a result of which, BLI-1008 shares the BLI-1005 Phase I clinical trial results. The Phase I clinical trial results of both drug candidates showed no serious adverse events and none of the trial subjects, namely healthy volunteers displayed any signs of suicidal intention or behavior. Suicidal intention and behaviors measure suicidal risks which are related to possibility of serious adverse effects. BioLite has a hypothesis that BLI-1005 and BLI-1008 may be less susceptible to drug abuse and dependence because we think both drug candidates will be classified as non-stimulants which are known for low abuse tendency or dependence.

 

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Oncology/ Hematology

 

BioLite currently has exclusive global rights to develop four innovative botanical drugs, BLI- 1301 to treat Myelodysplastic syndromes (“MDS”), BLI-1401-1 designed to treat solid tumors, BLI-1401-2 for the treatment of TNBC and BLI-1501 intended to treat chronic lymphocytic leukemia (“CLL”), all of which constitute our oncology/hematology portfolio. Each of the four investigational new drugs is designed to be used as part of a combination therapy for its targeted cancer because our research results indicate each of the four drugs’ ability to improve cancer patients’ immunity and counter the various types of side effects, respectively, caused by the traditional therapies, such as chemotherapies.

 

MDS are a group of cancers in which immature blood cells in the bone marrow do not mature and therefore do not become healthy blood cells. We have received from the FDA an IND approval to conduct Phase II trial of BLI- 1301 to treat MDS and plan to start such trial in the fourth quarter of 2018 subject to the sufficiency of working capital. A MDS is a relatively rare type of leukemia. If BioLite can prove to the FDA that our BLI-1301 has sufficient potential to treat MDS, BioLite may receive an orphan drug designation for it. Currently BioLite is processing the application for such orphan drug designation for BLI- 1301, which was initiated in 2014.

 

BioLite received the FDA IND approval for BLI-1401-2 for the treatment of TNBC in March 2016. We are currently co-developing BLI-1501 candidate with Memorial Sloan Kettering Cancer Center (“MSKCC”) to conduct preclinical studies. Through collaboration with BHK, BioLite and we are preparing the FDA IND applications for the Phase II clinical trials of BLI-1401-1 and conducting the early stage preclinical studies of BLI-1501.

 

Autoimmune

 

BioLite has a focused pipeline of investigational drugs that are designed for the treatment of autoimmune diseases, including BLI-1006 to treat inflammatory bowel disease (“IBD”) and BLI-1007 for rheumatoid arthritis (“RA”). BioLite has received the exclusive global rights on these two autoimmune products from the Industrial Technology Research Institute in Taiwan which holds patents on both drug candidates in certain Asian, North American and European countries. BioLite is preparing the IND Phase I application for BLI-1006. BioLite is currently conducting preclinical studies of BLI-1007.

 

In the future, BioLite will look to acquire and conduct clinical research on additional investigational botanical new drugs to further the FDA clearance process. BioLite’s management team’s prior experience has involved screening pre-clinical products, compliance with FDA procedures and identifying co-developers to continue the FDA process and commercialize new drugs.

 

Key Factors Affecting BioLite’s Results of Operations

 

BioLite’s core operation activities include research and development of botanic new drug candidates with focuses on preclinical development, Phase I and Phase II clinical trials and license-in and license-out collaboration with research institutions and respected biotech companies, respectively. Any research results or regulatory results have substantial impacts on our operation results and financial performance. In addition, the relationships with BioLite’s licensors, CROs or third party researchers and collaborators are critical to the success of our business operations.

 

Critical Accounting Policies and Significant Judgments and Estimates

 

Segment Reporting — BioLitefollows the provisions of ASC Topic 280, “Segment Reporting”, which establishes standards for reporting information about operating segments, which uses a “management” approach for determining segments. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of BioLite’s reportable segments. ASC Topic 280, “Segment Reporting,” also requires disclosures about products or services, geographic areas, and major customers. BioLite’s management reporting structure provided for only one segment in 2018 and 2017. Accordingly, no separate segment information is presented.

 

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

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Concentration of Credit Risk — BioLite’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and restricted cash. BioLite places its cash and temporary cash investments in high quality credit institutions in Taiwan, but these investments may be in excess of Taiwan Central Deposit Insurance Corporation’s insurance limits. BioLite does not enter into financial instruments for hedging, trading, or speculative purposes. Concentration of credit risk with respect to accounts receivables is limited due to the wide variety of customers and markets in which BioLite transacts business, as well as their dispersion across many geographical areas. BioLite performs ongoing credit evaluations of its customers and generally does not require collateral, but does require advance deposits on certain transactions.

 

Cash and Cash Equivalents — BioLite considers all highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents.

 

Restricted Cash Equivalents — Restricted cash equivalents primarily consist of cash held in a reserve bank account associated with short-term bank loans.

 

Accounts Receivable, Receivable from Collaboration Partners, and Other Receivable — Accounts receivable, receivable from collaboration partners, and other receivables are stated at carrying value less estimates made for doubtful receivables. An allowance for impairment of trade receivable, receivable from collaboration partners, and other receivables is established if the collection of a receivable becomes doubtful. Such receivable becomes doubtful when there is objective evidence that BioLite will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter into bankruptcy or financial reorganization, and default or delinquency in payments are considered indicators that the receivable is impaired. The amount of the allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate.

 

Inventory — Inventory consists of raw materials, work-in-process, finished goods, and merchandise. Inventories are stated at the lower of cost or market and valued on a moving weighted average cost basis. Market is determined based on net realizable value. BioLite periodically reviews the age and turnover of its inventory to determine whether any inventory has become obsolete or has declined in value, and incurs a charge to operations for known and anticipated inventory obsolescence. As of December 31, 2018 and 2017, the allowance for slow-moving inventory was $180,387 and $0, respectively.

 

Property and Equipment — Property and equipment is carried at cost net of accumulated depreciation. Repairs and maintenance are expensed as incurred. Expenditures that improve the functionality of the related asset or extend the useful life are capitalized. When property and equipment is retired or otherwise disposed of, the related gain or loss is included in operating income. Leasehold improvements are depreciated on the straight-line method over the shorter of the remaining lease term or estimated useful life of the asset. Depreciation is calculated on the straight-line method, including property and equipment under capital leases, generally based on the following useful lives:

 

   Estimated Life
in Years
Buildings and leasehold improvements  5 ~ 50
Machinery and equipment  5 ~ 6
Office equipment  3 ~ 6

 

Impairment of Long-Lived Assets —BioLite has adopted Accounting Standards Codification subtopic 360-10, Property, Plant and Equipment (“ASC 360-10”). ASC 360-10 requires that long-lived assets and certain identifiable intangibles held and used by BioLite be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. BioLite evaluates its long lived assets for impairment annually or more often if events and circumstances warrant. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 360-10 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell. Management has determined that no impairments of long-lived assets currently exist.

 

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Fair Value Measurements — FASB ASC 820, “Fair Value Measurements” defines fair value for certain financial and nonfinancial assets and liabilities that are recorded at fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. It requires that an entity measure its financial instruments to base fair value on exit price, maximize the use of observable units and minimize the use of unobservable inputs to determine the exit price. It establishes a hierarchy which prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy increases the consistency and comparability of fair value measurements and related disclosures by maximizing the use of observable inputs and minimizing the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the assets or liabilities based on market data obtained from sources independent of BioLite. Unobservable inputs are inputs that reflect BioLite’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy prioritizes the inputs into three broad levels based on the reliability of the inputs as follows:

 

  Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities that BioLite has the ability to access at the measurement date. Valuation of these instruments does not require a high degree of judgment as the valuations are based on quoted prices in active markets that are readily and regularly available.

 

  Level 2 – Inputs other than quoted prices in active markets that are either directly or indirectly observable as of the measurement date, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
     
  Level 3 – Valuations based on inputs that are unobservable and not corroborated by market data. The fair value for such assets and liabilities is generally determined using pricing models, discounted cash flow methodologies, or similar techniques that incorporate the assumptions a market participant would use in pricing the asset or liability.

 

The carrying values of certain assets and liabilities of BioLite, such as cash and cash equivalents, restricted cash, accounts receivable, other receivable, due from related parties, inventory, prepaid expenses and other current assets, accounts payable, accrued liabilities, and due to related parties approximate fair value due to their relatively short maturities. The carrying value of BioLite’s short-term bank loan and notes payable approximates their fair value as the terms of the borrowing are consistent with current market rates and the duration to maturity is short. The carrying value of BioLite’s long-term bank loan approximates fair value because the interest rates approximate market rates that BioLite could obtain for debt with similar terms and maturities.

 

Long-term Equity Investment — BioLite acquires these equity investments to promote business and strategic objectives. BioLite accounts for non-marketable equity and other equity investments for which BioLite does not have control over the investees as:

 

  Equity method investments when BioLite has the ability to exercise significant influence, but not control, over the investee. Its proportionate share of the income or loss is recognized monthly and is recorded in gains (losses) on equity investments.

 

  Non-marketable cost method investments when the equity method does not apply.

 

Significant judgment is required to identify whether an impairment exists in the valuation of BioLite’s non-marketable equity investments, and therefore BioLite considers this a critical accounting estimate. Its yearly analysis considers both qualitative and quantitative factors that may have a significant impact on the investee’s fair value. Qualitative analysis of its investments involves understanding the financial performance and near-term prospects of the investee, changes in general market conditions in the investee’s industry or geographic area, and the management and governance structure of the investee. Quantitative assessments of the fair value of its investments are developed using the market and income approaches. The market approach includes the use of comparable financial metrics of private and public companies and recent financing rounds. The income approach includes the use of a discounted cash flow model, which requires significant estimates regarding the investees’ revenue, costs, and discount rates. BioLite’s assessment of these factors in determining whether an impairment exists could change in the future due to new developments or changes in applied assumptions.

 

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Other-Than-Temporary Impairment — BioLite’s long-term equity investments are subject to a periodic impairment review. Impairments affect earnings as follows:

 

  Marketable equity securities include the consideration of general market conditions, the duration and extent to which the fair value is below cost, and our ability and intent to hold the investment for a sufficient period of time to allow for recovery of value in the foreseeable future. We also consider specific adverse conditions related to the financial health of, and the business outlook for, the investee, which may include industry and sector performance, changes in technology, operational and financing cash flow factors, and changes in the investee’s credit rating. We record other-than-temporary impairments on marketable equity securities and marketable equity method investments in gains (losses) on equity investments.

 

  Non-marketable equity investments based on our assessment of the severity and duration of the impairment, and qualitative and quantitative analysis of the operating performance of the investee; adverse changes in market conditions and the regulatory or economic environment; changes in operating structure or management of the investee; additional funding requirements; and the investee’s ability to remain in business. A series of operating losses of an investee or other factors may indicate that a decrease in value of the investment has occurred that is other than temporary and that shall be recognized even though the decrease in value is in excess of what would otherwise be recognized by application of the equity method. A loss in value of an investment that is other than a temporary decline shall be recognized. Evidence of a loss in value might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount of the investment or inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment. BioLite records other-than-temporary impairments for non-marketable cost method investments and equity method investments in gains (losses) on equity investments. Other-than-temporary impairments of non-marketable equity investments were $33,532 and $4,277,708 for the years ended December 31, 2018 and 2017, respectively.

 

Post-retirement and post-employment benefits — BioLite adopted the government mandated defined contribution plan pursuant to the Labor Pension Act (the “Act”) in Taiwan. Such labor regulations require that the rate of contribution made by an employer to the Labor Pension Fund per month shall not be less than 6% of the worker’s monthly salaries. Pursuant to the Act, BioLite makes monthly contribution equal to 6% of employees’ salaries to the employees’ pension fund. BioLite has no legal obligation for the benefits beyond the contributions made. The total amounts for such employee benefits, which were expensed as incurred, were $19,486 and $26,263 for the years ended December 31, 2018 and 2017, respectively. Other than the above, BioLite does not provide any other post-retirement or post-employment benefits.

 

Revenue Recognition — During the fiscal year 2018, BioLite adopted Accounting Standards Codification (“ASC”), Topic 606 (ASC 606), Revenue from Contracts with Customers, using the modified retrospective method to all contracts that were not completed as of January 1, 2018, and applying the new revenue standard as an adjustment to the opening balance of accumulated deficit at the beginning of 2018 for the cumulative effect. The results for BioLite’s reporting periods beginning on and after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. Based on BioLite’s review of existing collaborative agreements as of January 1, 2018, BioLite concluded that the adoption of the new guidance did not have a significant change on BioLite’s revenue during all periods presented.

 

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Pursuant to ASC 606, BioLite recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that BioLite expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that BioLite determines is within the scope of ASC 606, BioLite performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) BioLite satisfies a performance obligation. BioLite only applies the five-step model to contracts when it is probable that BioLite will collect the consideration BioLite is entitled to in exchange for the goods or services BioLite transfers to the customers. At inception of the contract, once the contract is determined to be within the scope of ASC 606, BioLite assesses the goods or services promised within each contract, determines those that are performance obligations, and assesses whether each promised good or service is distinct. BioLite then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

 

The following are examples of when BioLite recognizes revenue based on the types of payments BioLite receives.

 

Merchandise Sales — BioLite recognizes net revenues from dietary supplements product sales when customers obtain control of BioLite’s products, which typically occurs upon delivery to customer. Product revenues are recorded at the net sales price, or “transaction price,” which includes applicable reserves for variable consideration, including discounts, allowances, and returns.

 

Trade discount and allowances: BioLite generally provides invoice discounts on product sales to its customers for prompt payment. BioLite estimates that, based on its experience, its customers will earn these discounts and fees, and deducts the full amount of these discounts and fees from its gross product revenues and accounts receivable at the time such revenues are recognized.

 

Product returns: BioLite estimates the amount of each product that will be returned and deducts these estimated amounts from its gross revenues at the time the revenues are recognized. BioLite’s customers have the right to return unopened packages, subject to contractual limitations.

 

To date, product allowance and returns have been minimal and, based on its experience, BioLite believes that returns of its products will continue to be minimal.

 

Collaborative Revenues — BioLite recognizes collaborative revenues generated through collaborative research, development and/or commercialization agreements. The terms of these agreements typically include payment to BioLite related to one or more of the following: nonrefundable upfront license fees, development and commercial milestones, partial or complete reimbursement of research and development costs, and royalties on net sales of licensed products. Each type of payments results in collaborative revenues except for revenues from royalties on net sales of licensed products, which are classified as royalty revenues. To date, we have not received any royalty revenues. Revenue is recognized upon satisfaction of a performance obligation by transferring control of a good or service to the collaboration partners.

 

As part of the accounting for these arrangements, BioLite applies judgment to determine whether the performance obligations are distinct, and develop assumptions in determining the stand-alone selling price for each distinct performance obligation identified in the collaboration agreements. To determine the stand-alone selling price, BioLite relies on assumptions which may include forecasted revenues, development timelines, reimbursement rates for R&D personnel costs, discount rates and probabilities of technical and regulatory success.

 

BioLite had multiple deliverables under the collaborative agreements, including deliverables relating to grants of technology licenses, regulatory and clinical development, and marketing activities. Estimation of the performance periods of BioLite’s deliverables requires the use of management’s judgment. Significant factors considered in management’s evaluation of the estimated performance periods include, but are not limited to, BioLite’s experience in conducting clinical development, regulatory and manufacturing activities. BioLite reviews the estimated duration of its performance periods under its collaborative agreements on an annually basis, and makes any appropriate adjustments on a prospective basis. Future changes in estimates of the performance period under its collaborative agreements could impact the timing of future revenue recognition.

 

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  (i) Nonrefundable upfront payments

 

If a license to BioLite’s intellectual property is determined to be distinct from the other performance obligations identified in an arrangement, BioLite recognizes revenue from the related nonrefundable upfront payments based on the relative standalone selling price prescribed to the license compared to the total selling price of the arrangement. The revenue is recognized when the license is transferred to the collaboration partners and the collaboration partners who are able to use and benefit from the license. To date, the receipt of nonrefundable upfront fees was solely for the compensation of past research efforts and contributions made by BioLite before the collaborative agreements entered into and it does not relate to any future obligations and commitments made between BioLite and the collaboration partners in the collaborative agreements.

 

  (ii) Milestone payments

 

BioLite is eligible to receive milestone payments under the collaborative agreement with collaboration partners based on achievement of specified development, regulatory and commercial events. Management evaluated the nature of the events triggering these contingent payments, and concluded that these events fall into two categories: (a) events which involve the performance of BioLite’s obligations under the collaborative agreement with collaboration partners, and (b) events which do not involve the performance of BioLite’s obligations under the collaborative agreement with collaboration partners.

 

The former category of milestone payments consists of those triggered by development and regulatory activities in the territories specified in the collaborative agreements. Management concluded that each of these payments constitute substantive milestone payments. This conclusion was based primarily on the facts that (i) each triggering event represents a specific outcome that can be achieved only through successful performance by BioLite of one or more of its deliverables, (ii) achievement of each triggering event was subject to inherent risk and uncertainty and would result in additional payments becoming due to BioLite, (iii) each of the milestone payments is nonrefundable, (iv) substantial effort is required to complete each milestone, (v) the amount of each milestone payment is reasonable in relation to the value created in achieving the milestone, (vi) a substantial amount of time is expected to pass between the upfront payment and the potential milestone payments, and (vii) the milestone payments relate solely to past performance. Based on the foregoing, BioLite recognizes any revenue from these milestone payments in the period in which the underlying triggering event occurs.

 

  (iii) Multiple Element Arrangements

 

BioLite evaluates multiple element arrangements to determine (1) the deliverables included in the arrangement and (2) whether the individual deliverables represent separate units of accounting or whether they must be accounted for as a combined unit of accounting. This evaluation involves subjective determinations and requires management to make judgments about the individual deliverables and whether such deliverables are separate from other aspects of the contractual relationship. Deliverables are considered separate units of accounting provided that: (i) the delivered item(s) has value to the customer on a standalone basis and (ii) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially within its control. In assessing whether an item under a collaboration has standalone value, BioLite considers factors such as the research, manufacturing, and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. BioLite also considers whether its collaboration partners can use the other deliverable(s) for their intended purpose without the receipt of the remaining element(s), whether the value of the deliverable is dependent on the undelivered item(s), and whether there are other vendors that can provide the undelivered element(s).

 

BioLite recognizes arrangement consideration allocated to each unit of accounting when all of the revenue recognition criteria in ASC 606 are satisfied for that particular unit of accounting. In the event that a deliverable does not represent a separate unit of accounting, BioLite recognizes revenue from the combined unit of accounting over BioLite’s contractual or estimated performance period for the undelivered elements, which is typically the term of BioLite’s research and development obligations. If there is no discernible pattern of performance or objectively measurable performance measures do not exist, then BioLite recognizes revenue under the arrangement on a straight-line basis over the period BioLite is expected to complete its performance obligations. Conversely, if the pattern of performance in which the service is provided to the customer can be determined and objectively measurable performance measures exist, then BioLite recognizes revenue under the arrangement using the proportional performance method. Revenue recognized is limited to the lesser of the cumulative amount of payments received or the cumulative amount of revenue earned, as determined using the straight-line method or proportional performance method, as applicable, as of the period ending date.

 

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At the inception of an arrangement that includes milestone payments, BioLite evaluates whether each milestone is substantive and at risk to both parties on the basis of the contingent nature of the milestone. This evaluation includes an assessment of whether: (1) the consideration is commensurate with either BioLite’s performance to achieve the milestone or the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from its performance to achieve the milestone, (2) the consideration relates solely to past performance and (3) the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. BioLite evaluates factors such as the scientific, clinical, regulatory, commercial, and other risks that must be overcome to achieve the particular milestone and the level of effort and investment required to achieve the particular milestone in making this assessment. There is considerable judgment involved in determining whether a milestone satisfies all of the criteria required to conclude that a milestone is substantive. Milestones that are not considered substantive are recognized as earned if there are no remaining performance obligations or over the remaining period of performance, assuming all other revenue recognition criteria are met.

 

  (iv) Royalties and Profit Sharing Payments

 

Under the collaborative agreement with the collaboration partners, BioLite is entitled to receive royalties on sales of products, which is at certain percentage of the net sales. BioLite recognizes revenue from these events based on the revenue recognition criteria set forth in ASC 606. Based on those criteria, BioLite considers these payments to be contingent revenues, and recognizes them as revenue in the period in which the applicable contingency is resolved.

 

Income Taxes — Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

Valuation of Deferred Tax Assets — A valuation allowance is recorded to reduce our deferred tax assets to the amount that is more likely than not to be realized. In assessing the need for the valuation allowance, management considers, among other things, projections of future taxable income and ongoing prudent and feasible tax planning strategies. If BioLite determines that sufficient negative evidence exists, then it will consider recording a valuation allowance against a portion or all of the deferred tax assets in that jurisdiction. If, after recording a valuation allowance, BioLite’s projections of future taxable income and other positive evidence considered in evaluating the need for a valuation allowance prove, with the benefit of hindsight, to be inaccurate, it could prove to be more difficult to support the realization of our deferred tax assets. As a result, an additional valuation allowance could be required, which would have an adverse impact on its effective income tax rate and results. Conversely, if, after recording a valuation allowance, BioLite determines that sufficient positive evidence exists in the jurisdiction in which the valuation allowance was recorded, it may reverse a portion or all of the valuation allowance in that jurisdiction. In such situations, the adjustment made to the deferred tax asset would have a favorable impact on its effective income tax rate and results in the period such determination was made. See Note 13 of our Financial Statements for information related to income taxes, including the recorded balances of its valuation allowance related to deferred tax assets.

 

BioLite applied the provisions of ASC 740-10-50, “Accounting For Uncertainty In Income Taxes”, which provides clarification related to the process associated with accounting for uncertain tax positions recognized in our financial statements. Audit periods remain open for review until the statute of limitations has passed. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to BioLite’s liability for income taxes. Any such adjustment could be material to BioLite’s results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. As of December 31, 2018 and 2017, management considered that BioLite had no uncertain tax positions, and will continue to evaluate for uncertain positions in the future.

 

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Share-Based Compensation — BioLite accounts for its stock-based compensation in accordance with ASC 718, Compensation—Stock Compensation, which establishes accounting for stock-based awards granted to employees for services and requires companies to expense the estimated fair value of these awards over the requisite service period. BioLite recognizes share-based compensation expense for share-based compensation awards granted to its employees and officers. Compensation expense for share-based compensation awards granted is based on the grant date fair value estimate for each award as determined by its board of directors. BioLite recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which is generally one to two years. As share-based compensation expense recognized is based on awards ultimately expected to vest, such expense is reduced for estimated forfeitures. During the years ended December 31, 2018 and 2017, BioLite did not record any employee stock-based compensation expenses.

 

BioLite estimates the fair value of stock-based compensation awards at the date of grant using the Black-Scholes option pricing model, which requires the input of highly subjective assumptions, including the fair value of the underlying Common Stock, expected term of the option, expected volatility of the price of its Common Stock, risk-free interest rates, and the expected dividend yield of our Common Stock. The assumptions used in BioLite’s option-pricing model represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, BioLite’s stock-based compensation expense could be materially different in the future.

 

These assumptions and estimates are as follows:

 

  Fair value of the underlying Common Stock. Because BioLite’s stocks are not publicly traded, the assumptions used in the valuation model are based on future expectations combined with management judgment. In the absence of a public trading market, the board of directors, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of our Common Stock as of the date of each option grant, including the following factors:

 

a) contemporaneous valuations performed by unrelated third-party specialists;

b) the lack of marketability of its Common Stock;

c) BioLite’s actual operating and financial performance, and current business conditions and projections;

d) BioLite’s hiring of key personnel and the experience of our management;

e) BioLite’s history and the timing of the introduction of new products and services;

 

In valuing the Common Stock, the fair value of the underlying Common Stock was determined by using the value indications under a combination of valuation approaches, including a discounted cash flow analysis under the income approach, market approaches, and the latest round of equity financing at grant date

 

  Expected term. The expected term represents the period that the stock-based compensation awards are expected to be outstanding. Since BioLite did not have sufficient historical information to develop reasonable expectations about future exercise behavior, it used the simplified method to compute expected term, which represents the average of the time-to-vesting and the contractual life.

 

  Expected volatility. As BioLite does not have a trading history for its Common Stock, the expected stock price volatility for its Common Stock was estimated by taking the mean standard deviation of stock prices for selected companies in biotechnogy industry listed in Taiwan’s stock markets.

 

  Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the expected term of the options.

 

  Expected dividend yield. BioLite has never declared or paid any cash dividends and do not presently plan to declare or pay cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero.

 

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The valuations are highly complex and subjective. Following the completion of this offering, Common Stock valuations will no longer be necessary as BioLite will rely on market prices to determine the fair value of its Common Stock.

 

Foreign-currency Transactions — For BioLite’s subsidiaries in Taiwan, the foreign-currency transactions are recorded in New Taiwan dollars (“NTD”) at the rates of exchange in effect when the transactions occur. Gains or losses resulting from the application of different foreign exchange rates when cash in foreign currency is converted into New Taiwan dollars, or when foreign-currency receivables or payables are settled, are credited or charged to income in the year of conversion or settlement. On the balance sheet dates, the balances of foreign-currency assets and liabilities are restated at the prevailing exchange rates and the resulting differences are charged to current income except for those foreign currencies denominated investments in shares of stock where such differences are accounted for as translation adjustments under Equity.

 

Translation Adjustment — The accounts of BioLite Taiwan were maintained, and its financial statements were expressed, in New Taiwan Dollar (“NT$”). Such financial statements were translated into U.S. Dollars (“$” or “USD”) in accordance ASC 830, “Foreign Currency Matters”, with the NT$ as the functional currency. According to the Statement, all assets and liabilities are translated at the current exchange rate, stockholder’s deficit are translated at the historical rates and income statement items are translated at an average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income as a component of stockholders’ equity.

 

Research and Development — BioLite accounts for R&D costs in accordance with Accounting Standards Codification (“ASC”) 730, Research and Development (“ASC 730”). Research and development expenses are charged to expense as incurred unless there is an alternative future use in other research and development projects or otherwise. Research and development expenses are comprised of costs incurred in performing research and development activities, including personnel-related costs, share-based compensation, and facilities-related overhead, outside contracted services including clinical trial costs, manufacturing and process development costs for both clinical and preclinical materials, research costs, upfront and development milestone payments under collaborative agreements and other consulting services. Non-refundable advance payment for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made. In instances where BioLite enters into agreements with third parties to provide research and development services, costs are expensed as services are performed. Amounts due under such arrangements may be either fixed fee or fee for service, and may include upfront payments, monthly payments, and payments upon the completion of milestones or receipt of deliverables. Research and development expense was $319,053 and $256,682 for the years ended December 31, 2018 and 2017, respectively.

 

Promotional and Advertising Costs Promotional and advertising costs are classified as selling and general and administrative expenses, and are expensed as incurred. Promotional and advertising expenses consist primarily of the costs of designing, producing, and distributing materials promoting BioLite and its products, including its corporate website. Promotional and advertising costs were $419 and $842 for the years ended December 31, 2018 and 2017, respectively.

 

Statement of Cash FlowsCash flows from BioLite’s operations are based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet. In November 2016, the FASB issued ASU 2016-18, Restricted Cash , which requires amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. BioLite adopted ASU 2016-18 in the fourth quarter of 2018 and the impact on its consolidated financial statements is not material as BioLite’s restricted cash balances are immaterial.

 

Comprehensive Income — Comprehensive income includes accumulated foreign currency translation gains and losses. BioLite has reported the components of comprehensive income in its statements of operations and comprehensive income (loss).

 

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Recently Issued Accounting Pronouncements — In February 2016, the FASB issued ASU No. 2016-02, “Leases.” The core principle of the ASU is that a lessee should recognize the assets and liabilities that arise from its leases other than those that meet the definition of a short-term lease. The ASU requires extensive qualitative and quantitative disclosures, including with respect to significant judgments made by management. Subsequently, the FASB issued ASU No. 2017-13, in September 2017 and ASU No. 2018-01, in January 2018, which amends and clarifies ASU 2016-02. The Company adopted FASB Accounting Standards Codification, Topic 842, Leases (“ASC 842”) using the modified retrospective approach, electing the practical expedient that allows the Company not to restate its comparative periods prior to the adoption of the standard on January 1, 2019. As such, the disclosures required under ASC 842 are not presented for periods before the date of adoption. For the comparative periods prior to adoption, the Company presented the disclosures which were required under ASC 840. 

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash. This ASU requires changes in restricted cash during the period to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. If cash, cash equivalents and restricted cash are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the total in the statement of cash flows to the related captions in the balance sheet. This guidance was effective for annual and interim periods of public entities beginning after December 15, 2017. The amendments in this ASU are applied retrospectively to all periods presented. BioLite adopted this guidance in the fourth quarter of 2018. The adoption of this ASU increased BioLite’s beginning and ending cash balances within its consolidated statements of cash flows. The adoption had no other material impacts to its consolidated statements of cash flows and had no impact on its results of operations or financial position.

 

In February 2018, the FASB issued Accounting Standards Update No. 2018-02 (ASU 2018-02), Income Statement - Reporting Comprehensive Income (Topic 220). The guidance in ASU 2018-02 allows an entity to elect to reclassify the stranded tax effects related to the Tax Cuts and Jobs Act (the Tax Act) of 2017 from accumulated other comprehensive income into retained earnings. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. BioLite does not expect the adoption of this standard to have a material effect on its consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (“Topic 820”): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The ASU modifies the disclosure requirements in Topic 820, Fair Value Measurement, by removing certain disclosure requirements related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty and adding new disclosure requirements, such as disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and disclosing the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This ASU is effective for public companies for annual reporting periods and interim periods within those annual periods beginning after December 15, 2019. BioLite is currently evaluating the effect, if any, that the ASU will have on its financial statements.

 

In November 2018, the FASB issued ASU 2018-18, Collaborative arrangements (Topic 808): Clarifying the interaction between Topic 808 and Topic 606. ASU 2018-18 clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606 when the counterparty is a customer and precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. For public business entities, these amendments are effective for fiscal years beginning after December 2019, and interim periods therein. Early adoption is permitted, including adoption in any interim period, for entities that have adopted ASC 606. BioLite is currently evaluating the impact that ASU 2018-18 will have on its consolidated financial statements.

 

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Results of Operations- Year Ended December 31, 2018 compared to Year Ended December 31, 2017

 

The following tables set forth a summary of BioLite’s results of operations for the periods indicated. This information should be read together with BioLite’s financial statements and related notes included elsewhere in this prospectus. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.

 

   2018   2017 
Net revenue        
Merchandise sales  $6,324   $940 
Merchandise sales-related parties   632    2,256 
Total net revenue   6,956    3,196 
           
Cost of revenue          
 Merchandise sales   4,893    2,249 
 Inventory valuation reserve   180,387    - 
 Subtotal   185,280    2,249 
           
Gross profit   (178,324)   947 
           
Operating expenses          
Research and development expenses   319,053    256,682 
Selling, general and administrative expenses   893,570    1,735,931 
Total operating expenses   1,212,623    1,992,613 
           
Loss from operations   (1,390,947)   (1,991,666)
           
Other income (expense)          
Interest income   5,119    7,207 
Interest expense   (306,821)   (222,060)
Rental income   11,924    11,814 
Investment loss   (395,476)   (34,139)
Gain (loss) on foreign exchange changes   7,307    (409,170)
Loss on investment in equity securities   (256,126)   (4,443,876)
Other income (expenses)   (5,154)   51,574 
Total other income (expenses)   (939,227)   (5,038,650)
Loss before income taxes   (2,330,174)   (7,030,316)
Provision for income taxes (benefit)   (366,947)   (360,395)
Net loss   (1,963,227)   (6,669,921)
Net loss attributable to noncontrolling interests, net of tax   489,151    1,621,650 
Net loss attributable to BioLite Holding, Inc.   (1,474,076)   (5,048,271)
Foreign currency translation adjustment   (86,786)   695,573 
Comprehensive Loss  $(1,560,862)  $(4,352,698)

 

Revenue

 

For the year ended December 31, 2018, BioLite had total revenue of $6,956 compared to the total revenue of $3,196 for the year ended December 31, 2017, representing an increase of $3,760, or 117.6%. BioLite’s revenue increased in an insignificant amount during the fiscal year of 2018 mainly because the increased demand from our clients.

 

Cost of Revenue

 

Total cost of revenue, which comprised mainly cost of merchandise sales and inventory valuation reserve, was $185,280 for the year ended December 31, 2018 as compared to $2,249 for the year ended December 31, 2017, reflecting an increase of $183,031 or 8138%. The significant year-to-year increase in cost of revenue was driven by the increase in inventory valuation reserve on inventories.