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 pre-revenue 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 five compounds from BioLite and
the right to co-develop with BioFirst a medical device (collectively the “ABVC Pipeline Products”) during the period
of January 2017 to July 2017. As such, the Company is a clinical stage biopharmaceutical company with no revenue-generating operations
although in 2017 it licensed three new drug candidates to Rgene Corporation (“Rgene”) for further joint development.
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 Merger 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:
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implement
or execute its current business plan, or generate profits;
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attract
and maintain a skillful management team;
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raise
sufficient funds in the capital markets or otherwise to effectuate its business plan;
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determine
that the processes and technologies that it has developed are commercially viable; and/or
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enter
into contracts with commercial partners, such as licensors and suppliers.
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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 Merger, as a pre-profit biopharmaceutical company, the Company needs to transition at some point 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 a material adverse effect on it.
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. 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.
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 five 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
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 five drug products and one medical device: ABV-1501, ABV-1504, ABV-1505, ABV-1701,
ABV-1702 and ABV-1703. Each of the six 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.
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 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 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:
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decreased
demand for our product candidate or products that we may develop;
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injury
to our reputation and significant negative media attention;
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withdrawal
of clinical trial participants;
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significant
costs to defend resulting litigation;
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substantial
monetary awards to trial participants or patients;
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loss
of revenue;
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reduced
resources of our management to pursue our business strategy; and
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the
inability to commercialize any products that we may develop.
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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.
We
have conducted, and may in the future conduct, clinical trials for certain of our product candidate 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.
Generally, the patient population for any clinical trials conducted outside of the United States must be representative of the
population for whom we intend to seek approval in the United States. 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:
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foreign
regulatory requirements that could restrict or limit our ability to conduct our clinical trials;
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administrative
burdens of conducting clinical trials under multiple foreign regulatory schema;
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foreign
exchange fluctuations; and
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diminished
protection of intellectual property in some countries.
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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:
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be
delayed in obtaining marketing approval for our product candidates;
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not
obtain marketing approval at all;
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obtain
approval for indications or patient populations that are not as broad as we intended or desired;
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obtain
approval with labeling that includes significant use or distribution restrictions or significant safety warnings, including
boxed warnings;
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be
subject to additional post-marketing testing or other requirements; or
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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:
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collaborators
may have significant discretion in determining the efforts and resources that they will apply to these collaborations;
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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;
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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;
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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;
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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;
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collaborators
may infringe the intellectual property rights of third parties, which may expose us to litigation and potential liability;
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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
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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.
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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:
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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, and ABV-1702 to treat Myelodysplastic
syndromes and ABV-1701 Vitargus;
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its
inability to secure appropriate CROs to conduct data analysis, lab research and FDA communication; and
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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.
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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
the 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.
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 four 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.
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 its business, financial condition and results of operations.
With
respect to generic drugs, ABVC ’s sales and marketing function is currently very limited and 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. ABVC will need to maintain the commercial marketing and sales partners and attract others
or be in a position to afford qualified or experienced marketing and sales personnel for its generic drug products.
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.
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.
Risks
Related to the Intellectual Properties
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 their 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.
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 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 may prosecute new
patents of the drug candidates that are invented or discovered within the licensed scope of use under 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:
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ABVC
may not have been the first to make the inventions covered by pending patent applications or issued patents;
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ABVC
may not have been the first to file patent applications for its new drug candidates;
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others
may independently develop identical, similar or alternative products or compositions and uses thereof;
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ABVC’s
disclosures in patent applications may not be sufficient to meet the statutory requirements for patentability;
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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;
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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;
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ABVC’s
methods may not be patentable;
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ABVC’s
licensors may successfully challenge that ABVC’s new patent application fall outside the licensed use of the products;
or
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others
may design around ABVC’s patent claims to produce competitive products which fall outside of the scope of its patents.
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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 Development 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.
The
products the Company are 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:
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Unable
to demonstrate that a product candidate is safe and effective to the satisfaction of the FDA;
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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;
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the
FDA may not approve the formulation of any product candidate;
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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;
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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;
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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;
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the
FDA may disagree with the interpretation of data from the Company’s pre-clinical studies and clinical trials;
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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;
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the
FDA may require development of a Risk Evaluation and Mitigation Strategy, or REMS, as a condition of approval or post-approval;
or
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the
FDA may change its approval policies or adopt new regulations.
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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:
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varying
interpretations of data and commitments by the FDA and similar foreign regulatory agencies; and
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diminishment
of any competitive advantages that such drug candidates may have or attain.
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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:
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delays
or termination in clinical trials or commercialization;
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refusal
by the FDA or similar foreign regulatory agencies to review pending applications or supplements to approved applications;
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product
recalls or seizures;
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suspension
of manufacturing;
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withdrawals
of previously approved marketing applications; and
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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:
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successfully
commercialize its drug candidates with commercial partners;
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discover
and develop new drug candidates that are superior to other products in the market;
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with
its collaborators, obtain required regulatory approvals;
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attract
and retain qualified personnel; and
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obtain
patent and/or other proprietary protection for its product candidates.
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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. BioLite’s and the Company’s competitors may obtain
patent protection, receive FDA approval, and commercialize medicines before it. 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 primary place of business is in Taiwan, Republic of China and the Company has certain key employees, including
its Chief Financial Officer, 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:
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international
economic and political changes;
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the
imposition of governmental controls or changes in government regulations, including tax laws, regulations and treaties;
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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;
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difficulties
in achieving headcount reductions due to unionized labor and works councils;
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restrictions
on transfers of funds and assets between jurisdictions; and
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China-
Taiwan geo-political instability.
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As
the Company continues to operate their business globally, their success will depend in part, on their 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 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 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.
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 publicly stated that he will take 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, 2017 and September 30, 2018, our outstanding current liabilities on a pro forma basis as if the Mergers were
closed then were approximately $8.4 million and $9.3 million, respectively, which consisted primarily of due to related parties.
Our
disclosure controls and procedures were not effective as of September 30, 2018 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 report. 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 September 30, 2018.
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 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 his or her entire investment.
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 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:
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the
new drug candidates we acquire for commercialization;
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the
product candidates we seek to pursue, and our ability to obtain rights to develop those product candidates;
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our
decision to initiate a clinical trial, not to initiate a clinical trial or to terminate an existing clinical trial;
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actual
or anticipated adverse results or delays in our pre-clinical studies and clinical trials;
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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;
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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;
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conditions
or trends in the healthcare, biotechnology and pharmaceutical industries;
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introduction
of new products offered by us or our competitors;
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announcements
of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;
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our
ability to maintain an adequate rate of growth and manage such growth;
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issuances
of debt or equity securities by us;
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sales
of our securities by us or our stockholders in the future, or the perception that such sales could occur;
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trading
volume of our Common Stock or Series A Convertible Preferred Stock;
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ineffectiveness
of our internal control over financial reporting or disclosure controls and procedures;
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general
political and economic conditions in U.S. and other countries and territories where we conduct our business;
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effects
of natural or man-made catastrophic events; and
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adverse
regulatory decisions;
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additions
or departures of key scientific or management personnel;
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changes
in laws or regulations applicable to our product candidates, including without limitation clinical trial requirements for
approvals;
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disputes
or other developments relating to patents and other proprietary rights and our ability to obtain protection for our products;
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our
dependence on third parties, including CROs and scientific and medical advisors;
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failure
to meet or exceed any financial guidance or expectations regarding development milestones that we may provide to the public;
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actual
or anticipated variations in quarterly operating results;
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failure
to meet or exceed the estimates and projections of the investment community;
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other
events or factors, many of which are beyond our control.
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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.
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 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 price for our Common
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 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.
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 and individual indemnification agreements
we intend to enter with each of our directors and executive officers 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.
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
Currently,
ABVC is a holding company operating through its wholly owned subsidiary, BriVision. BriVision was incorporated in 2015 in the
State of Delaware. It is a biotechnology company focused on the development of new drugs and innovative medical devices in the
areas of oncology, central nervous system and Ophthalmology. Following a share exchange transaction with ABVC’s predecessor,
Metu Brands, Inc., the Company abandoned its prior business plan and is now pursuing BriVision’s historical businesses and
proposed businesses, which focus on the development of new drugs and innovative medical devices. The Company’s business
model is to integrate and develop research trial results from schools and research-oriented institutions, to conduct clinical
trials of translational new drug candidates for POC, to out-license post-POC stage drug candidates to pharmaceutical companies.
ABVC
currently has six products, including five new drug candidates and one new medical device, that are licensed to it for further
clinical development:
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ABV-1504
MDD
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ABV-1505
ADHD
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ABV-1501 Triple
Negative Breast Cancer - Combination therapy for TNBC
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ABV-1703
Pancreatic Cancer
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ABV-1702
Myelodysplastic syndromes or MDS
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ABV-1701
Vitreous Substitute for Vitrectomy
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All
of the five new drug candidates as listed above have received IND approval from the FDA and are in or are available to begin phase
II clinical study. ABVC started ABV-1504 phase II clinical study in both the U.S and Taiwan. ABV-1505 received its IND Phase II
clinical trial approval by the FDA in January 2016 and ABV-1501 Phase II IND was approved in March 2016. ABV-1702 Phase II IND
was approved in Jul. 2016. ABV-1703 Phase II IND was approved in August 2017. The feasibility clinical study of ABV-1701 was approved
in November, 2015 by the TGA (Therapeutic Goods Administration) in Australia.
Recent
Developments
Forward
Stock Split
On
March 21, 2016, ABVC’s Board of Directors approved an amendment to its 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 became effective on April 8, 2016. The amendment to ABVC’s Articles of Incorporation was approved by the majority
of the shareholders of the Company.
Collaborative
Agreement
On
July 24, 2017, BriVision entered into the BioFirst Agreement with BioFirst, 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, ABVC’s controlling shareholder, are under common control of the controlling beneficiary shareholder
of YuanGene.
According
to the BioFirst Agreement, ABVC and BriVision should co-develop and commercialize ABV-1701 with BioFirst and should pay BioFirst
$3,000,000 in cash or Common Stock of ABVC on or before September 30, 2018 in two installments. As of the date of this prospectus,
we have not made the payment of $3,000,000 to BioFirst. BriVision is entitled to receive 50% of the future net licensing income
or net sales profit when BFC-1401 is sublicensed or commercialized.
On
May 26, 2017, BriVision entered into the ABVC-Rgene Co-development Agreement with 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 HER2/neu Positive Breast Cancer Combination Therapy, ABV-1511 Pancreatic Cancer Combination Therapy and
ABV-1527 Ovary Cancer Combination Therapy.
Pursuant
to the ABVC-Rgene Co-development Agreement, Rgene should 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 efforts
and contributions made by BriVision 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 $3,000,000, 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 and under common control by a controlling beneficiary shareholder of YuanGene Corporation and 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 Rgene was in the process of issuing
its Common Stock in the equivalent value of $2,550,000.
Revenue
Generation
All
of ABVC’s products are still on the development and trial stage. Therefore, ABVC generated no revenue and does not expect
any revenue in the near term.
Research
and Development
During
the year ended September 30, 2017 (prior to ABVC’s change of year end), ABVC spent approximately $3,151,162 on research
and development. During the three months ended December 31, 2017, ABVC spent approximately $45,701 on research and development.
ABVC changed its fiscal year end from September 30 to December 31 and filed a current report on form 8-k with the SEC on February
14, 2018.
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 “ABVC
Management’s Discussion and Analysis of Financial Condition and Results of Operation.”
Basis
of Presentation
The
accompanying 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
ABVC
changed its fiscal year from the period beginning on October 1
st
and ending on September 30
th
to
the period beginning on January 1
st
and ending on December 31
st
, beginning January 1, 2018. As a result,
the current fiscal period is a three-month transition period ended on December 31, 2017. In these consolidated statements, including
the notes thereto, the current period financial results ended December 31, 2017 are for a three-month period. Audited results
for the twelve months ended September 30, 2017 and 2016 are both for twelve-month periods. In addition, the Company’s consolidated
statements of operations and consolidated statements of cash flows include unaudited comparative amounts for the three-month period
ended December 31, 2016. All references herein to a fiscal year prior to December 31, 2017 refer to the twelve months ended
September 30
th
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.
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 of ABVC approved an amendment to its 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. The majority of the shareholders of ABVC approved the amendment to its Articles of Incorporation.
Fair
Value Measurements
The
Company applies the provisions of ASC Subtopic 820-10, “Fair Value Measurements”, for fair value measurements
of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed
at fair value in the financial statements. ASC 820 also establishes a framework for measuring fair value and expands disclosures
about fair value measurements.
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. When determining the fair value measurements for assets and liabilities,
the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market
participants would use when pricing the asset or liability.
ASC
820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. ASC 820 establishes three levels of inputs to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements)
and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of
the fair value hierarchy are as follows:
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Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
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Level
2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs
that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial
instruments.
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Level
3 inputs to the valuation methodology are unobservable and significant to the fair value.
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The
carrying values of certain assets and liabilities of the Company, such as cash and cash equivalents, accounts receivable, due
from related parties, accrued expenses, and due to related parties approximate fair value due to their relatively short maturities.
The carrying value of the Company’s convertible notes payable and accrued interest approximates their fair value as the
terms of the borrowing are consistent with current market rates.
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 September 30, 2018 and December 31, 2017, the Company’s cash and cash equivalents amounted to $4,389 and $93,332, respectively.
The Company’s cash deposits are held in financial institutions located in both Taiwan and the United States of America where
there are currently regulations mandated on obligatory insurance of bank accounts. The Company believes these financial institutions
are of high credit quality.
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.
Receivable
from Collaboration Partners
Receivable
from collaboration partners is stated at carrying value less estimates made for doubtful receivables. An allowance for impairment
of receivable from collaboration partners is established if the collection of a receivable becomes doubtful. Such receivable becomes
doubtful when there is objective evidence that ABVC 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. An impairment loss is recognized in the statement of operations,
as are subsequent recoveries of previous impairments.
Research
and Development Expenses
The
Company accounts for R&D costs in accordance with FASB ASC 730, “Research and Development” (the “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.
Stock-based
Compensation
The
Company measures expense 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 and nine months ended September 30, 2018 and 2017.
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 $7,575 and $132,110 for the three months ended September 30, 2018 and 2017, respectively. Total non-employee stock-based
compensation expenses were $23,401 and $138,038 for the nine months ended September 30, 2018 and 2017, 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
ABVC
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
ASC 740, 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 December 31, 2017 and for the years ended September 30, 2017 and September, 30, 2016. GAAP also provides
guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures and transition.
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. To the extent that a company’s accounting
for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record
a provisional estimate to be included in the financial statements. 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 our interpretations and assumptions, additional guidance that may be issued
by the I.R.S., and actions we may take.
ABVC
is continuing to gather additional information to determine the final impact.
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
ABVC
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 assets 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 February
2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-02, Leases (Topic 842), which amends the existing accounting standards for leases. The new standard requires lessees
to record a right-of-use asset and a corresponding lease liability on the balance sheet (with the exception of short-term leases).
For lessees, leases will continue to be classified as either operating or financing in the income statement. This ASU becomes
effective in the first quarter of fiscal year 2019 and early adoption is permitted. This ASU is required to be applied with a
modified retrospective approach and requires application of the new standard at the beginning of the earliest comparative period
presented. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. In issuing ASU No. 2018-11, the FASB decided
to provide another transition method in addition to the existing transition method by allowing entities to initially apply the new
leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings
in the period of adoption. The Company is currently evaluating the impact that ASU 2016-02 and ASU 2018-11 will
have on its condensed consolidated financial statements.
In
March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations
(Reporting Revenue Gross versus Net). In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic
606): Identifying Performance Obligations and Licensing. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with
Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients and ASU 2016-11, Revenue Recognition (Topic 605) and
Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant
to Staff Announcements at the March 3, 2016 EITF Meeting. In December 2016, the FASB issued ASU 2016-20, Technical Corrections
and Improvements to Topic 606, Revenue from Contracts with Customers. In September 2017, the FASB issued ASU 2017-13, Revenue
Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842). These
amendments provide additional clarification and implementation guidance on the previously issued ASU 2014-09, Revenue from Contracts
with Customers (Topic 606). The amendments in ASU 2016-08 clarify how an entity should identify the specified good or service
for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. ASU
2016-10 clarifies the following two aspects of ASU 2014-09: identifying performance obligations and licensing implementation guidance.
ASU 2016-11 rescinds several SEC Staff Announcements that are codified in Topic 605, including, among other items, guidance relating
to accounting for consideration given by a vendor to a customer, as well as accounting for shipping and handling fees and freight
services. ASU 2016-12 provides clarification to Topic 606 on how to assess collectability, present sales tax, treat noncash consideration,
and account for completed and modified contracts at the time of transition. ASU 2016-12 clarifies that an entity retrospectively
applying the guidance in Topic 606 is not required to disclose the effect of the accounting change in the period of adoption.
Additionally, ASU 2016-20 clarifies certain narrow aspects within Topic 606 including its scope, contract cost accounting, and
disclosures. The new guidance requires enhanced disclosures, including revenue recognition policies to identify performance obligations
to customers and significant judgments in measurement and recognition. The effective date and transition requirements for these
amendments are the same as the effective date and transition requirements of ASU 2014-09, which is effective for fiscal years,
and for interim periods within those years, beginning after December 15, 2017. The Company is currently evaluating the overall
impact that ASU 2014-09 and its related amendments will have on the Company’s condensed consolidated financial statements.
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”).
To the extent that a company’s
accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must
record a provisional estimate to be included in the financial statements. 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 has accounted for the tax effects of the Tax Cuts
and Jobs Act under the guidance of SAB 118, on a provisional basis. The Company’s accounting for certain income tax effects
is incomplete, but the Company has determined reasonable estimates for those effects The Company is continuing to gather additional
information to determine the final impact on its condensed consolidated financial statements.
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. The Company is currently
evaluating the effect this standard will have on its condensed consolidated financial statements.
In
June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718), Improvements to Nonemployee Share-based Payments
(“ASU 2018-07”). This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring
goods and services from nonemployees. The effective date for the standard is for interim periods in fiscal years beginning after
December 15, 2018, with early adoption permitted, but no earlier than the Company’s adoption date of Topic 606. U
nder
the new guidance, the measurement of nonemployee equity awards is fixed on the grant date.
The
new guidance is required to be applied retrospectively with the cumulative effect recognized at the date of initial application.
The Company is currently evaluating the effect ASU 2018-07 will have on the condensed 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 (“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
There
is no historical financial information about ABVC upon which to base an evaluation of its performance. As of the date
of this filing, ABVC has not generated any revenues from operations. ABVC cannot guarantee it will be successful in its business
operations. ABVC’s business is subject to risks inherent in the establishment of a new business enterprise, including
limited capital resources, possible delays in the launching of our games and market or wider economic downturns. ABVC does not
believe it has sufficient funds to operate our business for the next 12 months.
ABVC
has no assurance that future financing will be available to it on acceptable terms, or at all. If financing is not
available on satisfactory terms, ABVC may be unable to continue, develop or expand its operations. Equity financing
could result in additional dilution to existing shareholders.
If
ABVC is unable to raise additional capital to maintain its operations in the future, ABVC may be unable to carry out its full
business plan or it may be forced to cease operations.
The
following discussion and analysis should be read in conjunction with ABVC’s audited financial statements for the three
months ended December 31, 2017 and for the year ended September 30, 2017 and accompanying notes that appear in this prospectus
on Form S-4.
Results
of Operation
ABVC’s
financial statements have been prepared assuming that ABVC 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 ABVC
be unable to continue in operation. ABVC expects it will require additional capital to meet its long term operating requirements.
ABVC expects to raise additional capital through, among other things, the sale of equity or debt securities, but it cannot guarantee
that it will be able to achieve the same.
Results
of Operations — Three Months Ended December 31, 2017 Compared to Three Months Ended December 31, 2016.
The
following table presents, for the period indicated, our consolidated statements of operations information.
|
|
Three Months Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
(Restated and unaudited)
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
289,731
|
|
|
|
185,188
|
|
Research and development expenses
|
|
|
45,701
|
|
|
|
25,198
|
|
Stock based compensation expenses
|
|
|
17,362
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(352,794
|
)
|
|
|
(210,386
|
)
|
|
|
|
|
|
|
|
|
|
Other income(expenses)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
80
|
|
|
|
49
|
|
Gain on exchange differences
|
|
|
-
|
|
|
|
-
|
|
Interest expense
|
|
|
(28,500
|
)
|
|
|
-
|
|
Total other income (expenses)
|
|
|
(28,420
|
)
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before provision income tax
|
|
|
(381,214
|
)
|
|
|
(210,337
|
)
|
|
|
|
|
|
|
|
|
|
Provision income tax
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(381,214
|
)
|
|
$
|
(210,337
|
)
|
Revenues.
ABVC
did not generate any revenue during the three months ended December 31, 2017 and 2016. As such, ABVC did not incur any cost associated
with revenues during the same periods.
Operating
Expenses.
ABVC’s operating expenses were $352,794 for the three months ended December 31, 2017 as compared to $210,386
for the three months ended December 31, 2016. The increase in operating expenses in the amount of $142,408 or 67.68% in the three
months ended December 31, 2017 was primarily caused by the increase in professional service fees and consulting fees.
Interest
Expense.
The interest expense was $28,500 for three months ended December 31, 2017 as compared to $0 for the three-month
period ended December 31, 2016. The increase of interest expenses by $28,500 was attributable to the loan in the principal amount
of $950,000 from BioFirst Corporation.
Net
Loss.
As a result of the above factors, the net loss was $381,214 and $210,337 for the three months ended December 31,
2017 and 2016. The increase of net loss in the three months ended December 31, 2017 as compared to the same period ended December
31, 2016 was in an amount of $170,877 or by 81.23%.
Liquidity
and Capital Resources
Working
Capital Summary
|
|
As of December 31,
2017
($)
|
|
|
As of December 31,
2016
($)
|
|
|
|
|
|
|
(Restated and unaudited)
|
|
Current Assets
|
|
|
2,643,332
|
|
|
|
18,645
|
|
Current Liabilities
|
|
|
4,400,247
|
|
|
|
6,538,100
|
|
Working Capital
|
|
|
(1,756,915
|
)
|
|
|
(6,519,455
|
)
|
Cash
Flows
|
|
Three Months Ended
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
(Unaudited and Restated)
|
|
|
|
|
|
(Restated)
|
|
Cash Flows Used in Operating Activities
|
|
$
|
(111,519
|
)
|
|
$
|
(224,892
|
)
|
|
$
|
(1,598,686
|
)
|
|
$
|
(3,474,707
|
)
|
Cash Flows Provided by Financing Activities
|
|
|
-
|
|
|
|
70,000
|
|
|
|
1,630,000
|
|
|
|
2,653,414
|
|
Net (Decrease) Increase in Cash During Period
|
|
$
|
(111,519
|
)
|
|
$
|
(154,892
|
)
|
|
$
|
31,314
|
|
|
$
|
(821,293
|
)
|
Cash
Flow from Operating Activities
Net
cash used in operating activities was $111,519 during the three months ended December 31, 2017 (the transition period) compared
to $224,892 in the 2016 comparable period, representing a decrease of $113,373, or 50.41%. This decrease was primarily driven
by the increase in due to related parties and accrued expenses, partially offset by the increase in net loss.
During
the years ended September 30, 2017 and 2016, the net cash used in operating activities were $1,598,686 and $3,474,707, respectively,
reflecting a decrease of $1,876,021 or 54.0%. Such decrease was primarily caused by the change in due to related parties during
the year ended September 30, 2016.
Cash
Flow from Investing Activities
There
was no net cash used or generated from investing activities during the three months ended December 31, 2017 and 2016 and during
the years ended September 30, 2017 and 2016.
Cash
Flow from Financing Activities
During
the three months ended December 31, 2017 and 2016, net cash generated from financing activities was $0 and $70,000. The decrease
in net cash generated from financing activities was because the amount of $70,000 was generated by a one-time consulting service
provided to LionGene Corporation during the three months ended September 30, 2016.
During
the years ended September 30, 2017 and 2016, the net cash provided by financing activities were $1,630,000 and $2,653,414, respectively,
representing a decrease of $1,023,414 or 38.6%. The decrease in cash flow provided by financing activities during the year ended
September 30, 2017 as compared to the year of 2016 was mainly due to the reduced amounts of equity private placements, partially
offset by the increase in capital contribution and loans from related parties during the twelve-month period ended September 30,
2017.
Results
of Operations — Fiscal Year Ended September 30, 2017 Compared to the Year Ended September 30, 2016.
Prior
to the change of ABVC’s fiscal year end, its fiscal year ended on September 30. The following table presents, for the period
indicated, the Company’s consolidated statements of operations information.
|
|
For The Years Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
(Restated)
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
-
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
-
|
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
707,142
|
|
|
|
599,303
|
|
Research and development expenses
|
|
|
3,151,162
|
|
|
|
10,000,000
|
|
Stock based compensation expenses
|
|
|
138,038
|
|
|
|
397,960
|
|
Loss from operations
|
|
|
(3,996,342
|
)
|
|
|
(10,997,295
|
)
|
|
|
|
|
|
|
|
|
|
Other income(expenses)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
149
|
|
|
|
361
|
|
Gain on exchange differences
|
|
|
-
|
|
|
|
141
|
|
Interest expense
|
|
|
(74,960
|
)
|
|
|
(10,170
|
)
|
Total other expenses
|
|
|
(74,811
|
)
|
|
|
(9,668
|
)
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before provision income tax
|
|
|
(4,071,153
|
)
|
|
|
(11,006,963
|
)
|
|
|
|
|
|
|
|
|
|
Provision income tax
|
|
|
830
|
|
|
|
836
|
|
Net Loss
|
|
$
|
(4,071,983
|
)
|
|
$
|
(11,007,799
|
)
|
Revenues.
ABVC
did not generate any revenue during the years ended September 30, 2017 and 2016. As such, it did not incur any cost associated
with revenues during the same periods.
Operating
Expenses.
ABVC’s operating expenses were $3,996,342 for the year ended September 30, 2017 as compared to $10,997,263
for the year ended September 30, 2016. The decrease in operating expenses in the amount of $7,000,921 or 63.7% in the year of
2017 was primarily caused by the payment of $10,000,000 for the Milestone payment in 2016.
Interest
Expense.
The interest expense was $74,960 for the year ended September 30, 2017 as compared to $10,170 for the period
ended September 30, 2016. The increase of interest expenses by $64,790 or 637.1% was attributable to the loan in the principal
amount of $950,000 from BioFirst Corporation.
Net
Loss.
The net loss was $4,071,983 and $11,007,799 for the years ended September 30, 2017 and 2016. The result of decrease
of net loss in the current year in an amount of $6,935,816 or by 63.0% was mainly because that ABVC paid off the Milestone payment
incurred during the year ended September 30, 2016.
Liquidity
and Capital Resources
Working
Capital Summary
|
|
As of September 30, 2017
($)
|
|
|
As of September 30, 2016
($)
|
|
|
|
|
|
|
(Restated)
|
|
Current Assets
|
|
|
2,754,851
|
|
|
|
173,537
|
|
Current Liabilities
|
|
|
4,147,914
|
|
|
|
6,556,470
|
|
Working Capital
|
|
|
(1,393,063
|
)
|
|
|
(6,382,933
|
)
|
Cash
Flows
|
|
As of September 30, 2017
($)
|
|
|
As of September 30, 2016
($)
|
|
|
|
|
|
|
(Restated)
|
|
Cash Flows Used in Operating Activities
|
|
|
(1,598,686
|
)
|
|
|
(3,474,707
|
)
|
Cash Flows Provided by Financing Activities
|
|
|
1,630,000
|
|
|
|
2,653,414
|
|
Net (Decrease) Increase in Cash During Period
|
|
|
31,314
|
|
|
|
(821,293
|
)
|
Cash
Flow from Operating Activities
During
the years ended September 30, 2017 and 2016, the net cash used in operating activities were $1,598,686 and $3,474,707, respectively,
reflecting a decrease of $1,876,021 or 54.0%. Such decrease was primarily due to related parties during the year ended September
30, 2016.
Cash
Flow from Investing Activities
During
the years ended September 30, 2017 and 2016, there were no net cash used in or generated from investing activities.
Cash
Flow from Financing Activities
During
the years ended September 30, 2016 and 2017, the net cash from financing activities were $1,630,000 and $2,653,414, respectively,
representing a decrease of $1,023,414 or 38.6%. The decrease in cash flow from financing activities during the year ended September
30, 2017 as compared to the year of 2016 was mainly due to the reduced amounts of equity private placements, partially offset
by the increase in capital contribution and loans from related parties during the year ended September 30, 2017.
Results
of Operations
—
Nine Months Ended September 30, 2018 Compared to September 30, 2017.
|
|
Nine Months Ended
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
520,256
|
|
|
|
521,954
|
|
Research and development expenses
|
|
|
135,006
|
|
|
|
3,125,964
|
|
Stock-based compensation
|
|
|
23,401
|
|
|
|
138,038
|
|
Total operating expenses
|
|
|
678,663
|
|
|
|
3,785,956
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(678,663
|
)
|
|
|
(3,785,956
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
-
|
|
|
|
100
|
|
Interest expense
|
|
|
(114,682
|
)
|
|
|
(74,960
|
)
|
Total other income (expenses)
|
|
|
(114,682
|
)
|
|
|
(74,860
|
)
|
|
|
|
|
|
|
|
|
|
Loss from operations before income taxes
|
|
|
(793,345
|
)
|
|
|
(3,860,816
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
1,850
|
|
|
|
830
|
|
|
|
|
|
|
|
|
|
|
Net Loss and Comprehensive Loss
|
|
$
|
(795,195
|
)
|
|
$
|
(3,861,646
|
)
|
Revenues.
We generated zero in revenues and zero in cost of sales for the nine months ended September 30, 2018 and 2017, respectively.
Operating
Expenses.
Our operating expenses were $678,663 in the nine months ended September 30, 2018 as compared to $3,785,956 in
the nine months ended September 30, 2017. Our total operating expenses decreased by $3,107,293, or (82.1)% during the nine-month
period ended September 30, 2018 from the comparable period of 2017. Such decrease in operating expenses was mainly attributable
to the decrease in research and development expenses and stock-based compensation.
Our
selling, general and administrative expenses for the nine months periods ended September 30, 2018 and 2017 did not change substantially.
Our research and development expenses decreased by $2,990,958 or (95.7)% to $135,006 during the nine months ended September 30,
2018 from $3,125,964 in the nine months ended September 30, 2017 primarily because we recognized research and development expenses
of $3,000,000 pursuant to BioFirst Collaborative Agreement during the nine months ended September 30, 2017.
Interest
Expense.
The interest expense was $114,682 in the nine months ended September 30, 2018 as compared to $74,960
in the nine months ended September 30, 2017. The increase of $39,722, or 53.0% in interest expenses was primarily because the
Company made the interest payments for various related-party loans and two convertible promissory notes.
Net
Loss.
The net loss was $795,195 for the nine months ended September 30, 2018 compared to $3,861,646 for the nine months
ended September 30, 2017. The Company’s net loss decreased by $3,066,451 or (79.4)% during the nine-month period ended September
30, 2018 from the comparable period in 2017 because of to the changes in its operating expenses as described above.
Liquidity
and Capital Resources
Working
Capital
|
|
As
of
September 30,
2018
($)
|
|
|
As
of December 31,
2017
($)
|
|
|
|
(Unaudited)
|
|
|
|
|
Current
Assets
|
|
|
2,594,389
|
|
|
|
2,643,332
|
|
Current
Liabilities
|
|
|
4,478,531
|
|
|
|
4,400,247
|
|
Working
Capital (deficit)
|
|
|
(1,884,142
|
)
|
|
|
(1,756,915
|
)
|
Cash
Flows
Cash
Flow from Operating Activities
During
the nine months ended September 30, 2018 and 2017, the net cash used in operating activities were $531,943 and $1,376,794, respectively.
The decrease in the amount of $844,851 was primarily due to the decreased net loss and increased in accrued expenses and other
current liabilities, partially offset by the decrease in due to related parties.
Cash
Flow from Investing Activities
During
the nine months ended September 30, 2018 and 2017, there was no net cash used in or generated from investing activities.
Cash
Flow from Financing Activities
During
the nine months ended September 30, 2018 and 2017, the net cash provided by financing activities were $443,000 and $1,563,000,
respectively. The net cash provided by financing activities declined by $1,120,000 during the compared periods because we repaid
a related party loan in the principal amount of $157,000, borrowed another related-party loan in the principal amount of $50,000,
and issued two promissory notes in aggregate of $550,000 during the nine months ended September 30, 2018.
Going
Concern Consideration
ABVC
has incurred losses since its inception resulting in an accumulated deficit of $16,571,793 (unaudited) and $15,776,598 as of September
30, 2018 and December 31, 2017, respectively, and net losses of $795,195 and a decreased cash flow of $88,943 during the nine
months ended September 30, 2018. These conditions raise substantial doubt about ABVC’s ability to continue as a going concern
for the next twelve months.
ABVC
expects to finance operations primarily through capital contributions from principal shareholders. In the event that ABVC requires
additional funding to finance the growth of its current and expected future operations as well as to achieve its strategic objectives,
ABVC principal shareholders have indicated the intent and ability to provide additional equity financing.
Off-Balance
Sheet Arrangements
As
of September 30, 2018, ABVC does 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.
Changes
and disagreements with accountants on accounting and financial disclosure
As
of September 30, 2018, ABVC has no changes and disagreements with accountants on accounting and financial disclosure.
Quantitative
and Qualitative Disclosures about Market Risks
Not
applicable.
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.
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 are 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.
Oncology/
Hematology
BioLite
currently has exclusive global rights to develop four innovative botanical drugs, BLI- 1301 to treat Myelodysplastic syndromes,
BLI-1401-1 designed to treat solid tumors, BLI-1401-2 for the treatment of TNBC and BLI-1501 intended to treat 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 and plan to commence the Phase II trial of
such product in 2017 subject to the sufficiency of working capital. We are currently co-developing BLI-1501 candidate with Memorial
Sloan Kettering Cancer Center (“MSKCC”) to conduct preclinical studies. 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 IBD and BLI-1007 for 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
— BioLite follows 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 2017 and 2016. 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.
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.
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.
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,
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 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.
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 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 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. The Company 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 equity investments were $0 and $91,047 for the three months ended
September 30, 2018 and 2017, respectively. Other-than-temporary impairments of equity investments were $0 and $4,379,456 for
the nine months ended September 30, 2018 and 2017, respectively.
|
Post-retirement
and post-employment benefits —
BioLite Taiwan adopted the government mandated defined contribution plan pursuant
to the Labor Pension Act (the “Labor Pension 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 Labor Pension Act, the Company makes monthly contribution equal to 6% of employees’ salaries to the employees’
pension fund. The Company has no legal obligation for the benefits beyond the contributions made. The total amounts for such employee
benefits, which were expensed as incurred, were $4,806 and $5,978 for the three months ended September 30, 2018 and 2017, respectively.
The total amounts for such employee benefits, which were expensed as incurred, were $14,827 and $20,535 for the nine months ended
September 30, 2018 and 2017, respectively. Other than the above, the Company 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 its revenue
during all periods presented.
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 the Company 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 the Company
will collect the consideration the Company is entitled to in exchange for the goods or services the Company transfers to the customers.
At inception of the contract, once the contract is determined to be within the scope of ASC 606, the Company 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. The Company 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.
Collaboration
Revenue —
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.
|
(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 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.
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.
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.
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 605-10-25-1, “Revenue Recognition”. 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 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, 2017 and 2016, management considered that BioLite had
no uncertain tax positions, and will continue to evaluate for uncertain positions in the future.
Share-Based
Compensation —
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.
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, BioLite used an expected dividend yield of zero.
|
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 was 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 (loss) as a component of stockholders’ equity (deficit).
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 $256,682 and $823,046 for
the years ended December 31, 2017 and 2016, respectively. Research and development expense were $10,213 and $52,293 for the three
months ended September 30, 2018 and 2017, respectively. Research and development expense were $224,316 and $232,613 for the nine
months ended September 30, 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 $842 and $38,792 for the years ended December 31, 2017 and 2016, respectively. Promotional
and advertising costs were $173 and $675 for the nine months ended September 30, 2018 and 2017, respectively.
Statement
of Cash Flows
—
Cash 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.
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).
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.
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 ASU will be effective for BioLite beginning January 1, 2019, including interim periods in the fiscal year 2019.
Early adoption is permitted. BioLite is in the process of determining the method of adoption and assessing the impact of this
ASU on its consolidated results of operations, cash flows, financial position and disclosures.
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”).To the extent that a company’s accounting for certain income tax
effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate
to be included in the financial statements. 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 the Company may take. The Company is continuing to gather additional information to determine the final impact.
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. The Company is currently evaluating the impact of adopting this new guidance
on its financial position, results of operations, statement of comprehensive income, and cash flows.
In
June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718), Improvements to Nonemployee Share-based Payments
(“ASU 2018-07”). This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring
goods and services from nonemployees. The effective date for the standard is for interim periods in fiscal years beginning after
December 15, 2018, with early adoption permitted, but no earlier than the Company’s adoption date of Topic 606. U
nder
the new guidance, the measurement of nonemployee equity awards is fixed on the grant date.
The
new guidance is required to be applied retrospectively with the cumulative effect recognized at the date of initial application.
The Company is currently evaluating the effect ASU 2018-07 will have on the condensed 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. The Company is currently evaluating the effect, if any, that the ASU will
have on its financial statements.
Results
of Operations- Year Ended December 31, 2017 compared to Year Ended December 31, 2016
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.
|
|
2017
|
|
|
2016
|
|
Net
revenue
|
|
|
|
|
|
|
Merchandise
sales
|
|
$
|
940
|
|
|
$
|
2,812
|
|
Merchandise
sales-related parties
|
|
|
2,256
|
|
|
|
3,253
|
|
Collaborative
revenue
|
|
|
-
|
|
|
|
982,083
|
|
Total
net revenue
|
|
|
3,196
|
|
|
|
988,148
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
2,249
|
|
|
|
24,318
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
947
|
|
|
|
963,830
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
Research
and development expenses
|
|
|
256,682
|
|
|
|
823,046
|
|
Selling,
general and administrative expenses
|
|
|
1,735,931
|
|
|
|
1,752,168
|
|
Total
operating expenses
|
|
|
1,992,613
|
|
|
|
2,575,214
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(1,991,666
|
)
|
|
|
(1,611,384
|
)
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
7,207
|
|
|
|
3,429
|
|
Interest
expense
|
|
|
(222,060
|
)
|
|
|
(7,602
|
)
|
Rental
income
|
|
|
11,814
|
|
|
|
11,884
|
|
Impairment
loss
|
|
|
-
|
|
|
|
(1,470,378
|
)
|
Loss
on disposition of equity securities
|
|
|
(34,139
|
)
|
|
|
-
|
|
Loss
on foreign exchange changes
|
|
|
(409,170
|
)
|
|
|
(85,398
|
)
|
Loss
on investment in equity securities
|
|
|
(4,443,876
|
)
|
|
|
(3,560,325
|
)
|
Other
income (expenses)
|
|
|
51,574
|
|
|
|
67,328
|
|
Total
other income (expenses)
|
|
|
(5,038,650
|
)
|
|
|
(5,041,062
|
)
|
Loss
before income taxes
|
|
|
(7,030,316
|
)
|
|
|
(6,652,446
|
)
|
Provision
for income taxes expense (benefit)
|
|
|
(360,395
|
)
|
|
|
(60,660
|
)
|
Net
loss
|
|
|
(6,669,921
|
)
|
|
|
(6,591,786
|
)
|
Net
loss attributable to noncontrolling interests, net of tax
|
|
|
1,621,650
|
|
|
|
1,669,024
|
|
Net
loss attributable to BioLite, Inc.
|
|
|
(5,048,271
|
)
|
|
|
(4,922,762
|
)
|
Foreign
currency translation adjustment
|
|
|
695,573
|
|
|
|
61,754
|
|
Comprehensive
Loss
|
|
$
|
(4,352,698
|
)
|
|
$
|
(4,861,008
|
)
|
Revenue
For
the year ended December 31, 2017, BioLite had total revenue of $3,196 compared to the total revenue of $988,148 for the year ended
December 31, 2016, representing a decrease of $984,952.
|
|
2017
|
|
|
2016
|
|
Net revenue
|
|
|
|
|
|
|
Merchandise sales
|
|
$
|
940
|
|
|
$
|
2,812
|
|
Merchandise sales-related parties
|
|
|
2,256
|
|
|
|
3,253
|
|
Collaborative revenue
|
|
|
-
|
|
|
|
982,083
|
|
Total net revenue
|
|
|
3,196
|
|
|
|
988,148
|
|
BioLite’s
revenue decreased substantially in the fiscal year of 2017 compared to the same period in 2016 mainly because no collaborative
revenues were generated in the fiscal year of 2017.
Cost
of Revenue
Total
cost of revenue, which comprises mainly cost of merchandise sold, was $2,249 for the year ended December 31, 2017 compared to
$24,318 for the year ended December 31, 2016. The significant year-to-year decrease is in line with the year-to-year decline in
our revenue. The main drive of the decrease in cost of revenue is from the recognition of loss on obsolete inventory.
Expenses
The
following table sets forth the breakdown of BioLite’s operating expenses for the years ended December 31, 2017 and 2016,
respectively:
|
|
2017
|
|
|
2016
|
|
Operating expenses:
|
|
|
|
|
|
|
Research and development expenses
|
|
|
256,682
|
|
|
|
823,046
|
|
Selling, general and administrative expenses
|
|
|
1,735,931
|
|
|
|
1,752,168
|
|
Research
and development costs consist of clinical trials, sponsored research, and miscellaneous expenditures in laboratories. Research
and development expenses were $256,682 during the year ended December 31, 2017 as compared to that of $823,046 in the fiscal year
of 2016, which represents a decrease of $566,364 or (68)%. Such decrease was primarily attributed to less research and development
costs spent on BLI-1005 and BLI 1006 products. In addition, the headcounts at research and development department decreased to
4 persons in 2017 compared to11 persons. During the fiscal year of 2017, the majority R&D expenses derived from BLI-1005 product
the preparation of clinical sites and the drug stability studies. In the year of 2016, the R&D expenses were incurred by the
expenditure on BioLite’s in-house R&D team that documented, revised, edited and prepared for the IND submissions and
subsequent amendments to the IND packages in response to the FDA comments.
BioLite
incurred $1,735,931 in selling, general and administrative expenses for the fiscal year of 2017 as compared to $1,752,168 during
the fiscal year of 2016. The amounts of operating expenses for the year of 2017 did not change substantially from that of 2016
but the percentage of selling, general and administrative expenses counted for the operating expenses increased from the year
ended December 31, 2016 as compared to the year ended December 31, 2017 due to the significant decrease of the research and development
expenses.
Other
income and expense
The
following table sets forth the breakdown of our other income for the years ended December 31, 2017 and 2016, respectively:
|
|
2017
|
|
|
2016
|
|
Other income (expense)
|
|
|
|
|
|
|
Interest income
|
|
|
7,207
|
|
|
|
3,429
|
|
Interest expense
|
|
|
(222,060
|
)
|
|
|
(7,602
|
)
|
Rental income
|
|
|
11,814
|
|
|
|
11,884
|
|
Impairment loss
|
|
|
-
|
|
|
|
(1,470,378
|
)
|
Investment loss
|
|
|
(34,139
|
)
|
|
|
-
|
|
Loss on foreign exchange changes
|
|
|
(409,170
|
)
|
|
|
(85,398
|
)
|
Loss on investment in equity securities
|
|
|
(4,443,876
|
)
|
|
|
(3,560,325
|
)
|
Other income (expenses)
|
|
|
51,574
|
|
|
|
67,328
|
|
Total other income (expenses)
|
|
|
(5,038,650
|
)
|
|
|
(5,041,062
|
)
|
Other income or expenses
BioLite
incurred interest expenses in the amounts of $222,060 and $7,602 during the years ended December 31, 2017 and 2016, respectively,
which reflected an increase of $214,558. Such increase in interest expenses was due to the increase in loans from related parties.
BioLite
recorded impairment loss in the amounts of $1,470,378 in the fiscal year of 2016 and $0 in the fiscal year of 2017. BioLite’s
decrease of impairment loss in an amount of $1,470,378 was primarily caused by the impairment of accounts receivable due from
ABVC at December 31, 2016.
BioLite
recognized $34,139 and $0 in investment loss during the years ended December 31, 2017 and 2016, which showed an increase of $34,139
in loss on disposition of equity securities. We contributed such increase to the loss from sale of equity securities in BioFirst
during the year ended December 31, 2017.
BioLite’s
position on loss on investment in equity securities greatly increased, from $3,560,325 in 2016 to $4,443,876 in 2017, representing
an increase of 24%, or $883,551. This increase was primarily attributable to the increase in other-than-temporary impairments
of non-marketable equity investments during the year ended December 31, 2017.
Net
income (loss)
As
a result of the above, BioLite’s net loss for the year ended December 31, 2017 was $6,669,921 as compared to a net loss
of $6,591,786 for the year ended December 31, 2016. The increase reflects a 1.2%, or $78,135 in net loss resulted from our significant
decline in revenue s in the fiscal year of 2017.
Cash
Flows
The
following table summarizes BioLite’s cash flows for the year ended December 31, 2017 and for the year ended December 31,
2016:
|
|
2017
|
|
|
2016
|
|
Net Cash Used In Operating Activities
|
|
|
(1,683,497
|
)
|
|
|
(1,028,900
|
)
|
Net Cash Used In Investing Activities
|
|
|
(7,494,318
|
)
|
|
|
(3,252,937
|
)
|
Net Cash Provided By Financing Activities
|
|
|
9,325,297
|
|
|
|
2,934,504
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
8,979
|
|
|
|
22,730
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
156,461
|
|
|
|
(1,324,603
|
)
|
Cash and cash equivalents, ending balance
|
|
$
|
256,925
|
|
|
$
|
100,464
|
|
Operating
activities
Net
cash used in operating activities was $1,683,497 for the year ended December 31, 2017, an increase of $654,597 from cash used
in operating activities of $1,028,900 for the year ended December 31, 2016. The increase is mainly due to the increase in due
from related parties and the decrease in accrued expenses and other current liabilities.
Investing
activities
Net
cash used in investing activities for the year ended December 31, 2017 was $7,494,318, an increase of $4,241,381 as compared to
net cash used in investing activities of $3,252,937 for the year ended December 31, 2016. BioLite used substantially more net
cash in investing activities primarily because of the increase in investments in collaborative partners in Asia during the year
ended December 31, 2017.
Financing
activities
Net
cash provided by financing activities for the year ended December 31, 2017 was $9,325,297, an increase of $6,390,793, from net
cash used in financing activities of $2,934,504 for the year ended December 31, 2016. The increase of net cash provided by financing
activities was mainly attributable to the net proceeds from the issuance of Common Stock and borrowings from related parties.
Results
of Operations - Nine Months Ended September 30, 2018 compared to Nine Months Ended September 30, 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.
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Net revenue
|
|
|
|
|
|
|
Merchandise sales
|
|
$
|
3,976
|
|
|
$
|
937
|
|
Merchandise sales-related parties
|
|
|
-
|
|
|
|
1,624
|
|
Total net revenue
|
|
|
3,976
|
|
|
|
2,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
2,856
|
|
|
|
1,589
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,120
|
|
|
|
972
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
|
224,316
|
|
|
|
232,613
|
|
Selling, general and administrative expenses
|
|
|
693,057
|
|
|
|
1,531,815
|
|
Total operating expenses
|
|
|
917,373
|
|
|
|
1,764,428
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(916,253
|
)
|
|
|
(1,763,456
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
3,761
|
|
|
|
6,098
|
|
Interest expense
|
|
|
(231,300
|
)
|
|
|
(171,389
|
)
|
Rental income
|
|
|
8,997
|
|
|
|
8,835
|
|
Investment loss
|
|
|
(287,513
|
)
|
|
|
(34,043
|
)
|
Gain (loss) on foreign currency changes
|
|
|
7,403
|
|
|
|
(406,778
|
)
|
Gain (loss) on investment in equity securities
|
|
|
(164,649
|
)
|
|
|
(4,379,650
|
)
|
Other income (expenses)
|
|
|
(4,305
|
)
|
|
|
48,500
|
|
Total other income (expenses)
|
|
|
(667,606
|
)
|
|
|
(4,928,427
|
)
|
Loss before income taxes
|
|
|
(1,583,859
|
)
|
|
|
(6,691,883
|
)
|
Provision for income taxes expense (benefit)
|
|
|
(242,092
|
)
|
|
|
(224,762
|
)
|
Net loss
|
|
|
(1,341,767
|
)
|
|
|
(6,467,121
|
)
|
Net loss attributable to noncontrolling interests, net of tax
|
|
|
332,596
|
|
|
|
1,574,038
|
|
Net loss attributable to BioLite Holding, Inc.
|
|
|
(1,009,171
|
)
|
|
|
(4,893,083
|
)
|
Foreign currency translation adjustment
|
|
|
(81,100
|
)
|
|
|
(597,136
|
)
|
Comprehensive Loss
|
|
$
|
(1,090,271
|
)
|
|
$
|
(5,490,219
|
)
|
Revenue
For
the nine-month period ended September 30, 2018, BioLite had total net revenue of $3,976 compared to the total net revenue of $2,561
for the nine-month period ended September 30, 2017, representing an increase of $1,415. Such increase in revenues during the comparable
nine months ended September 30, 2018 and 2017 was primarily due to increased sales of the dietary supplements to customers.
|
|
Nine
Months Ended
September
30,
(Unaudited)
|
|
|
|
2018
|
|
|
2017
|
|
Net revenue
|
|
|
|
|
|
|
Merchandise sales
|
|
$
|
3,976
|
|
|
$
|
937
|
|
Merchandise sales-related parties
|
|
|
-
|
|
|
|
1,624
|
|
Total net revenue
|
|
$
|
3,976
|
|
|
$
|
2,561
|
|
Cost
of Revenue
Total
cost of revenue, which comprises mainly cost of merchandise sold, was $2,856 for the nine months ended September 30, 2018 compared
to $1,589 for the nine months ended September 30, 2017. The main drive of the increase in cost of revenue was from the purchase
of another carton of dietary supplements in the second fiscal quarter of 2018.
Expenses
The
following table sets forth the breakdown of BioLite’s operating expenses for the nine-month periods ended September 30,
2018 and 2017, respectively:
|
|
Nine Months Ended
September
30,
(Unaudited)
|
|
|
|
2018
|
|
|
2017
|
|
Operating expenses
|
|
|
|
|
|
|
Research and development expenses
|
|
|
224,316
|
|
|
|
232,613
|
|
Selling, general and administrative expenses
|
|
|
693,057
|
|
|
|
1,531,815
|
|
Total operating expenses
|
|
|
917,373
|
|
|
|
1,764,428
|
|
Research
and development costs consist of clinical trials, sponsored research, and miscellaneous expenditures in laboratories. Research
and development expenses were $224,316 during the nine months ended September 30, 2018 as compared to that of $232,613 in the
comparable period of 2017. The decrease of $8,297 in research and development expenses was not a substantial change.
BioLite
incurred $693,057 in selling, general and administrative expenses for the nine months ended September 30, 2018 as compared to
$1,531,815 during the comparable period of 2017. The amounts of operating expenses for the nine months ended September 30, 2018
decreased by $838,758 or (54.76)% from that of 2017 primarily because BioLite reduced the number of employees and rental expenses
in the nine months ended September 30, 2018 as compared to the comparable period of 2017.
Other
income and expense
The
following table sets forth the breakdown of our other income for the nine months ended September 30, 2018 and 2017, respectively:
|
|
Nine
Months Ended
September
30,
(Unaudited)
|
|
|
|
2018
|
|
|
2017
|
|
Other income (expense)
|
|
|
|
|
|
|
Interest income
|
|
|
3,761
|
|
|
|
6,098
|
|
Interest expense
|
|
|
(231,300
|
)
|
|
|
(171,389
|
)
|
Rental income
|
|
|
8,997
|
|
|
|
8,835
|
|
Investment loss
|
|
|
(287,513
|
)
|
|
|
(34,043
|
)
|
Gain (loss) on foreign currency changes
|
|
|
7,403
|
|
|
|
(406,778
|
)
|
Gain (loss) on investment in equity securities
|
|
|
(164,649
|
)
|
|
|
(4,379,650
|
)
|
Other income (expenses)
|
|
|
(4,305
|
)
|
|
|
48,500
|
|
Total other income (expenses)
|
|
|
(667,606
|
)
|
|
|
(4,928,427
|
)
|
BioLite
incurred interest expenses in the amounts of $231,300 and $171,389 during the nine months ended September 30, 2018 and 2017, respectively,
which reflected an increase of $59,911, or 34.96%. Such increase in interest expenses was mainly due to the increase in loans
from related parties.
BioLite
recorded investment loss in the amounts of $287,513 during the nine months ended September 30, 2018 and $34,043 in the comparable
period of 2017. BioLite’s increase of investment loss in an amount of $253,470, or 744.55% was primarily caused by sales
of the securities in order to acquire some cash for daily operation.
BioLite’s
position on loss on investment in equity securities greatly decreased, from $4,379,650 for the nine months ended September 30,
2017 to $164,649 in the comparable period of 2018, representing a decrease of $4,215,001, or (96.24) %. This decrease was primarily
attributable to the recognition of impairment loss on ABVC by BioLite in 2017 in the amount of approximately $4,000,000.
Net
income (loss)
As
a result of the above, BioLite’s net loss for the nine months ended September 30, 2018 was $1,341,767 as compared to a net
loss of $6,467,121 for the nine months ended September 30, 2017. BioLite’s net loss decreased approximately $5,125,354,
or (79.25)% primarily because the decrease of loss on investment in equity securities and general and administrative expense.
Cash
Flows
The
following table summarizes BioLite’s cash flows for the nine months ended September 30, 2018 and for the nine months ended
September 30, 2017:
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
(UNAUDITED)
|
|
2018
|
|
|
2017
|
|
Net
cash provided by (used in) operating activities
|
|
|
(636,357
|
)
|
|
|
(417,683
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
370,306
|
|
|
|
(8,313,623
|
)
|
Net
cash provided by financing activities
|
|
|
195,197
|
|
|
|
9,037,596
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(2,718
|
)
|
|
|
7,783
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(73,572
|
)
|
|
|
314,073
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
256,925
|
|
|
|
100,464
|
|
Ending
|
|
$
|
183,353
|
|
|
$
|
414,537
|
|
Operating
activities
Net
cash used in operating activities was $636,357 for the nine months ended September 30, 2018 as compared to net cash of $417,683
used in operating activities for the nine months ended September 30, 2017, reflecting an increase of $218,674 in net cash used
in operating activities. Such increase was mainly due to the increase in expenses on the MDD trial conducted at Stanford University
and other expenses related to FDA filings.
Investing
activities
Net
cash provided by investing activities for the nine months ended September 30, 2018 was $370,306 as compared to net cash used in
investing activities of $8,313,623 for the nine months ended September 30, 2017, representing an increase of $8,683,929 of net
cash provided by investing activities. Such increase in net cash provided by investing activities was primarily caused by the
investment on ABVC in 2017.
Financing
activities
Net
cash provided by financing activities for the nine months ended September 30, 2018 was $195,197, a decrease of $8,842,399, from
net cash provided by financing activities of $9,037,596 for the nine months ended September 30, 2017. The decrease of net cash
provided by financing activities was mainly caused by a series of stock exchange that BioLite conducted with BioLite BVI and BioLite
Taiwan, two subsidiaries of BioLite.
Contractual
Obligations and Commitments
Operating
lease commitment:
BioLite’s
operating leases include lease contracts of office spaces, laboratory space, and employees’ dormitory. Future minimum lease
payments under the operating leases are summarized as follows:
As
of September 30,
|
|
Amount
|
|
2019
|
|
$
|
57,684
|
|
2020
|
|
|
12,546
|
|
Total
|
|
$
|
70,230
|
|
For
the nine months ended September 30, 2018 and 2017, BioLite incurred expenses of approximately $9,553 and $28,103 on leasing its
offices from a related party, respectively. The lease with the related party was terminated on March 31, 2018.
BioLite’s
In-Licensing Contractual Obligations under the collaborative agreements are as follows:
(1)
|
On
January 1, 2011, BioLite through BioLite Taiwan entered into a collaborative agreement with PITDC, a Taiwanese Company. Pursuant
to the collaborative agreement, PITDC granted BioLite the sole licensing right for drug and therapeutic use of depressive
disorders related patent and technology expired in November 2026. The total consideration for obtaining such grant was NT$17,000,000
(equivalent approximately $557,600), of which NT$3,400,000 (equivalent approximately $111,520) was due within 30 days upon
signing the agreement and the remaining balance of NT$13,600,000 (equivalent approximately $446,080) would be due pursuant
to a milestone payment schedule. In addition, BioLite is required to pay PITDC 10% of sublicensing revenues net of related
research and development cost and royalties at a range from 1% to 3% of sales of drugs.
|
BioLite
Taiwan paid the upfront payment of NT$3,400,000 (equivalent approximately $111,520) in 2011, the first milestone payment of NT$2,550,000
(equivalent approximately $83,640) in 2012, and the third milestone payment of NT$2,125,000 (equivalent approximately $69,700)
in 2013. BioLite Taiwan recorded these amounts as research and development expenses when incurred.
Pursuant
to the in-licensing collaboration agreement with PITDC, BioLite Taiwan is required to pay PITDC 10% of sublicensing revenues to
PITDC. During the six months ended June 30, 2018 and 2017, BioLite Taiwan paid $0 to PITDC accounting for 10% of sublicensing
revenues net of related research and development cost and royalties. As of June 30, 2018 and December 31, 2017, BioLite Taiwan
has accrued collaboration revenue payable of $275,388 and $282,728 to PITDC, respectively.
(2)
|
On
February 10, 2011, BioLite Taiwan entered into a collaborative agreement (the “ITRI
Collaborative Agreement I”) with ITRI, a Taiwanese Company. Pursuant to the collaborative
agreement, ITRI granted BioLite the sole licensing right for drug and therapeutic use
of colon inflammation related patent and technology expired in February 2031. The total
consideration for obtaining such grant was NT$20,000,000 (equivalent approximately to
$656,000), of which NT$2,000,000 (equivalent approximately $65,600) was due sixth days
upon signing the agreement and the remaining balance of NT$18,000,000 (equivalent approximately
$590,400) was due pursuant to a milestone payment schedule. BioLite Taiwan paid the upfront
payment of NT$2,000,000, equivalent approximately $65,600, in 2011 and the first milestone
payment of NT$2,000,000, equivalent approximately $65,600, in 2016. BioLite Taiwan recorded
these amounts as research and development expenses when incurred.
|
|
Pursuant
to the ITRI Collaborative Agreement I, BioLite Taiwan is also required to pay ITRI 10% of sublicensing revenues net of related
research and development cost and royalties at a range from 3% to 5% of sales of drugs. During the nine months ended September
30, 2018 and 2017, BioLite Taiwan paid $0 to ITRI accounting for 10% of sublicensing revenues net of related research and
development cost and royalties. As of September 30, 2018 and December 31, 2017, BioLite Taiwan has accrued collaboration revenue
payable of $114,594 and $117,872 to ITRI, respectively.
|
(3)
|
On
February 10, 2011, BioLite Taiwan entered into another collaborative agreement (the “ITRI
Collaborative Agreement II”) with Industrial Technology Research Institute (“ITRI”),
a Taiwanese Company. Pursuant to the ITRI Collaborative Agreement II, ITRI granted BioLite
Taiwan the sole licensing right for drug and therapeutic use of rheumatoid arthritis
related patent and technology expired in February 2031. The total consideration for obtaining
such grant was NT$35,000,000, equivalent approximately $1,148,000, of which NT$3,500,000,
equivalent approximately $114,800, was due sixth days upon signing the agreement and
the remaining balance of NT$31,500,000, equivalent approximately $1,033,200, was due
pursuant to a milestone payment schedule. BioLite Taiwan paid the upfront payment of
NT$3,500,000, equivalent approximately $114,800, in 2011. BioLite Taiwan recorded these
amounts as research and development expenses when incurred.
Pursuant
to the ITRI Collaborative Agreement II, BioLite Taiwan is also required to pay ITRI 10% of sublicensing revenues net of
related research and development cost and royalties at a range from 3% to 5% of sales of drugs. As of September 30, 2018
and December 31, 2017, BioLite Taiwan has not sublicensed the licensing right for drug and therapeutic use of rheumatoid
arthritis related patent and technology to any companies.
|
(4)
|
On
December 27, 2016, BioLite Taiwan entered into the Yukiguni Collaborative Agreement with Yukiguni Maitake Co., Ltd (“YUKIGUNI”),
a Japanese company. Pursuant to the Yukiguni Collaborative Agreement, YUKIGUNI granted BioLite Taiwan the right for selling
Maitake dry powder and Maitake extract manufactured by YUKIGUNI, and the right for using Maitake related patent and technology
expired in December 2036 or fifteen years after the date when the new product developed by BioLite Taiwan is first sold, whichever
is earlier. The total consideration for obtaining such grant would be $305,000. During the nine months ended September 30,
2018 and 2017, BioLite Taiwan has paid YUKIGUNI an aggregate of $175,000 and $0, respectively, to obtain some Maitake related
patent and technology.
|
Long-term
Bank Loans
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(UNAUDITED)
|
|
|
|
|
Cathay United Bank
|
|
$
|
64,829
|
|
|
$
|
95,893
|
|
Less: current portion of long-term bank loan
|
|
|
(39,737
|
)
|
|
|
(40,203
|
)
|
Total
|
|
$
|
25,092
|
|
|
$
|
55,690
|
|
On
April 30, 2010, BioLite Taiwan entered into a seven-year bank loan of NT$8,900,000, equivalent to $291,920, with Cathay United
Bank. The term started April 30, 2010 with maturity date at April 30, 2017. On April 30, 2017, BioLite Taiwan extended the original
loan agreement for additional three years with the new maturity date at April 30, 2020. The loan balance bears interest at a floating
rate of prime rate plus variable rates from 0.77% to 1.17%. The prime rate is based on term deposit saving interest rate of Cathay
United Bank. As of September 30, 2018 and December 31, 2017, the actual interest rates per annum were 2.24%. The loan is collateralized
by the building and improvement of BioLite Taiwan, and is also guaranteed by BioLite’s chairman. Interest expenses were
$1,375 and $1,932 for the nine months ended September 30, 2018 and 2017, respectively.
Liquidity
and Capital Resources
BioLite
incurred net losses of $1,341,767 and $6,669,921 from operations during the nine months ended September 30, 2018 and the year
ended December 31, 2017, respectively and losses from time to time in the history of the company and its subsidiaries since its
inception in 2006. BioLite cannot assure you that it shall become or maintain profitability consistently in the future. BioLite
expects that as it continues research efforts and the development of its product candidates, hire additional staff, including
clinical, scientific, operational, financial and management personnel and as a result it will need additional capital to
fund its operations.
BioLite
had a short-term secured bank loan in the amount of NT$7,500,000, equivalent to $246,750, from Cathy United Bank, which were fully
repaid on September 6, 2018, the due date of such loan. BioLite had two short-term saving secured bank loans from CTBC Bank in
the amounts of NT$10,000,000, equivalent to $328,000, and NT$10,000,000, equivalent to $328,000, respectively, both of which were
combined together in February 2018 with the maturity date on January 19, 2019. BioLite has a long-term secured bank loan from
Cathy United Bank with an outstanding balance of $25,092 as of September 30, 2018, which will become due on April 30, 2020. As
of September 30, 2018 and December 31, 2017, BioLite had cash and cash equivalents and restricted cash of $183,353 and $256,925.
BioLite
has incurred losses since its inception resulting in an accumulated deficit of $10,980,204 and $9,971,033 as of September 30,
2018 and December 31, 2017, respectively, and incurred net loss attributable to BioLite Holding Inc. or BioLite of $5,048,271
and $4,922,762 for the years ended December 31, 2017, and 2016, respectively and $1,009,171 for the nine months ended September
30, 2018. BioLite also had working capital deficiency of $4,051,163 at September 30, 2018 and $3,327,457 at December 31, 2017.
Off-Balance
Sheet Arrangements
There
are no off-balance sheet arrangements and BioLite does not participate in transactions that generate relationships with entities,
which would have been established for the purpose of facilitating off-balance sheet arrangements.
BUSINESS
Overview
ABVC
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 ophthalmology diseases. We utilize our licensed technology to (i) further
the development of pharmaceutical products with focuses on cancer and CNS indications, (ii) seek regulatory approvals for their
drug 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 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 five
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 primary operations. The
five new drug candidates were licensed from BioLite Taiwan, a company formed in Taiwan that is a subsidiary of BioLite, a Nevada
company. The Class III medical device was co-developed with BioFirst, a company formed under the laws of Taiwan. The five 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, and ABV-1702 to treat Myelodysplastic syndromes. The internal name of ABVC’s Class III medical
device is ABV-1701 Vitargus for the treatments of Retinal Detachment or Vitreous Hemorrhage. In addition, our CDMO SBU specializes
in generic drug development, platform-based control release technology and provides analytical and drug product development and
manufacturing services.
Our
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. FDA. Because we believe natural substances
have many healing powers, we focus our 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 names of most of our medicinal
products are in an alphanumeric form, starting with “ABV” which are the first three letters of our trading symbol
and followed by Arabic numbers. For example, ABV-1504 is the name of one drug candidate with indication of Major Depressive Disorder.
We seek 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.
CNS
We
through our Subsidiaries 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 Taiwan, one of our Subsidiaries, has successfully
completed the stage 1, Phase II study of ABV-1504 a novel capsule product to treat MDD. We are in the process of recruiting sixty
patients to carry out the stage 2, Phase II trial of ABV-1504. ABV-1504 is intended to treat MDD and we believe that it offers
multiple advantages over currently available antidepressants. The antidepressant market was a 350-million-consumer market globally
in 2012 according to a report published by the WHO. We received from the FDA an approval on the IND application of ABV-1505 for
the treatment of ADHD in January 2016 and are in the process to initiate the study of ABV-1505 at the University of California-San
Francisco (“UCSF”) for Phase II trial of ABV-1505. ABV-1505 is for the treatment of ADHD, the therapeutics market
of which was valued at $3.8 billion in 2010 and was forecast to grow to $7.1 billion by 2018. ABV-1504 and ABV-1505 are two indications
deriving from the same API, PDC-1421, as a result of which, ABV-1505 shares the Phase I clinical trial results of ABV-1504. 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. We have a hypothesis that ABV-1504 and ABV-1505 may be less susceptible
to drug abuse and dependence because we believe both drug candidates will be classified as non-stimulants which are known for
low abuse tendency or dependence. Among CNS medications, patients are more likely to abuse psychostimulants, while non-stimulants
are considered with less or no potential for abuse. As described above, because atomoxetine (Strattera), a type of non-stimulants,
is recognized as with low abuse potential and ABV-1504 acts through the similar mechanism of action as atomoxetine (Strattera),
we believe that ABV-1504 may have low abuse or dependence possibility.
Oncology/
Hematology
BioLite
Taiwan currently has exclusive global rights to develop four innovative botanical drugs, ABV-1702 to treat Myelodysplastic syndromes
(“MDS”), ABV-1502 designed to treat solid tumors, ABV-1501 TNBC and ABV-1503 intended to treat Chronic Lymphocytic
Leukemia, all of which were licensed to ABVC. 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. Among the four new drug candidates, ABVC is actively conducting research on ABV-1702 and ABV-1501.
Myelodysplastic
syndromes 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 received from the FDA an IND approval to conduct Phase II trial of ABV-1702 to treat MDS. A MDS is a relatively
rare type of leukemia. About seven (7) per 100,000 people are affected with about four (4) per 100,000 new people being diagnosed
with MDS each year. If we can prove to the FDA that ABV-1702 has sufficient potential to treat MDS, we may receive an orphan drug
designation for it. As of the date of this prospectus, we were in the process of recruiting MDS patients globally and processing
the application for such orphan drug designation for ABV-1702, which was initiated in 2014.
We
received the FDA IND approval for ABV-1501 for the treatment of TNBC in March 2016 and plan to commence the Phase II trial of
such product by the end of 2018 provided that we have sufficient funding for the research and development of ABV-1501. Our Subsidiary
BioLite was preparing the FDA IND applications for the Phase I clinical trials of ABV-1502.
We
intend to co-develop ABV-1503 with MSKCC with respect to its preclinical studies; however, due to the great number of Leukemia-related
drugs that MSKCC is researching, the collaboration with MSKCC to develop BLI-1501 is pending. We intend to co-develop ABV-1502
with Henry Ford Health System, which was currently evaluating the research project of such drug candidate as of the date of this
Prospectus.
In
addition, ABVC developed a new indication for Pancreatic Cancer from Maitake Extract, which is named as ABV-1703 and out licensed
to it Rgene for the preparation of its IND application with the FDA. On August 25, 2017, ABV-1703’s Phase II trial was approved
by FDA. Pursuant to the ABVC-Rgene Co-development Agreement between ABVC’s wholly-owned subsidiary BriVision and Rgene,
ABVC is responsible for coordinating and conducting the clinical trials of ABV-1703 globally and Rgene shall prepare the related
FDA applications. As of the date of this prospectus, we are negotiating with one clinical site in the U.S. to conduct the phase
II clinical trial. We plan to submit ABV-1703’s phase II clinical trial IND to Taiwan FDA after we commence the clinical
trials in the United States.
In
the future, we will look to acquire and conduct clinical research on additional investigational botanical new drugs to further
the FDA clearance process. Our 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.
Corporate
History and Structure
ABVC
was incorporated under the laws of the state of Nevada on February 6, 2002 and has one wholly-owned Subsidiary BriVision and would
have two additional wholly-owned Subsidiary, BioLite Holding, Inc. and BioKey, Inc. assuming the BioLite Merger and BioKey Merger
were consummated. BriVision was incorporated in July 2015 in the State of Delaware and is in the business of developing pharmaceutical
products in North America.
BioLite
Holding was incorporated under the laws of the state of Nevada on July 27, 2016, with 500,000,000 shares authorized, par value
$0.0001. Its key Subsidiaries include BioLite BVI, Inc. (“BioLite BVI”) that was incorporated in the British Virgin
Islands on September 13, 2016 and BioLite Inc. (“BioLite Taiwan”), a Taiwanese corporation that was founded in February
2006. BioLite Taiwan has been in the business of developing new drugs for over twelve years. Certain shareholders of BioLite Taiwan
exchanged approximately 73% of equity securities in BioLite Taiwan for the Common Stock in BioLite Holding in accordance with
a share purchase/ exchange agreement (the “Share Purchase/ Exchange Agreement”). As a result, BioLite Holding owns
via BioLite BVI approximately 73% of BioLite Taiwan. The other shareholders who did not enter this Share Purchase/ Exchange Agreement
retain their equity ownership in BioLite Taiwan.
Incorporated
in California on November 20, 2000, BioKey has chosen to initially focus on developing generic drugs to ride the opportunity of
the booming industry.
Our
Strategy
Our
business plan is to conduct and complete Phase II clinical trials for the drug candidates in the pipeline in Taiwan and North
America and FDA process for the medical device in Australia. If we obtain satisfactory results in the Phase II clinical trial
for any drug candidate or ABV-1701, we will seek strategic partners to out-license the compounds of such drug candidate or ABV-1701
to established pharmaceutical companies for further development. Furthermore, we will continue to search for potential products
(drugs or medical devices) worldwide to expand our product pipeline for their research and development. Our CDMO SBU supports
our new drug SBU with respect to certain clinical trials and manufacturing of drugs for trial purposes in addition to its contracting
services to companies outside ABVC.
Key
elements of our business strategy include:
|
●
|
Continue Phase II
trials of each of the investigational new drugs, ABV-1504 for the treatment of MDD, ABV-1505 to treat ADHD, ABV-1702 to treat
Myelodysplastic syndromes, and ABV-1501 for the treatment of TNBC.
|
|
●
|
Continue and complete
the orphan drug designation application for ABV-1702 for the treatment of MDS. If we succeed in this process, the research
and development of ABV-1702 will switch to a fast track, the process of which is prescribed by the FDA.
|
|
●
|
Search for additional
competent pharmaceutical companies and/or healthcare agencies to cooperate with BioLite to continue post-Phase II trials of
its new drugs that will have shown positive trial results and have not been licensed out to ABVC. BioLite plans to identify
pharmaceutical companies that are interested in commercializing our investigational new drugs and to work with these co-developers
to clear the FDA process.
|
|
●
|
Screen, identify
and acquire additional new drug candidates from research institutions and universities within the Company’s core botanical
drug focus that have shown low or zero toxicity and health benefits in various aspects.
|
|
●
|
Develop a pipeline
of botanical material-based therapeutics, with a focus on identifying novel products with sufficient pre-clinical proof that
can potentially serve significant unmet medical needs.
|
We
plan to augment our core research and development capability and assets by conducting Phase I and II clinical trials for investigational
botanical new drugs in the fields of CNS and hematology/oncology. We intend to seek additional products that are near Phase I
trials through licensing, co-development, or collaborative commercial arrangements.
Our
management team coming from three groups, ABVC, BioLite and BioKey, has extensive experience across a wide range of new drug development.
Through an assertive product development approach, ABVC expects that it will build a substantial portfolio of oncology/ hematology
and CNS products. It believes the initial two phases of clinical trials add great value to investigational new drug development.
Because ABVC primarily focuses on, among other things, Phase I and II research of new drug candidates and out license the post-Phase-II
products to capable pharmaceutical companies, it expects to devote substantial efforts and resources to building the disease-specific
distribution channels.
Our
Mission
We
devoted our resources to building a sophisticated biotech company and becoming a pioneer in the biopharmaceutical industry in
U.S. and Taiwan with a global vision. Dr. Howard Doong, the CEO, and Dr. Tsung-Shann Jiang, the Chief Strategy Officer, understand
the challenges and opportunities of the biotech industry in Taiwan and 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, oncology/ hematology and ophthalmology diseases.
Our
Approach
ABVC’s
research and development department aims to translating the laboratory research results to new drug candidates ready for Phase
III clinical trials together with its CDMO SBU. Botanical products may be classified as foods, dietary supplements, drugs, medical
devices or cosmetics, depending on their “intended use.” There is a fine line separating drugs from foods and dietary
supplements. We focus primarily on developing botanical drugs, which by definition are intended for use in the diagnosis, cure,
mitigation or treatment of disease in humans. Together with ABVC’s strategic partners, it plans to market, distribute and
sell its drug products internationally, in areas such as the United States, Canada and Japan. ABVC needs to have the drug candidates
comply with the local authorities regulating drugs and foods, for example the FDA and the Taiwan Food and Drug Administration
(“TFDA”), in order to market our drug products in the respective areas. Currently, a lot of countries follow the International
Council for Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human Use (the “ICH”)
guidelines that are published by the European Medicines to provide guidance on quality and safety of pharmaceutical development
and new drug commercialization among Japan, the United States and Europe. Based on ABVC’s new drug development experience,
ABVC made a strategic decision to have its drug candidates go through the FDA process for new drug development first and then
seek regulatory approvals on the FDA approved drugs from the authorities equivalent to the FDA in the jurisdictions where ABVC
plans to market its new drug products.
ABVC
business model is based on the FDA procedures and can be summarized as following:
At
Step 1, ABVC reviews the laboratory research results on potential API from research institutions and selects very few API candidates
to its new drug portfolio for its translational research. ABVC considers safety, efficacy, patent status and potential markets
of new drugs of which the API is a part when it makes the selections for its new drug portfolio. Generally speaking, ABVC filters
out the API candidates that are not covered by patents in any jurisdiction.
After
ABVC licenses in an API and relating data and methodology, it simultaneously begins the preclinical development of the API and
the patent applications on behalf of the patent owner in the jurisdictions where ABVC and its collaborators may in the future
market the new drug of which the API is a key component. Preclinical development, also named preclinical studies and nonclinical
studies, is a stage of research that precedes clinical trials which are testing on humans, and during which important
feasibility, iterative and drug safety data are collected. The main goals of preclinical studies are to determine the safe dose
for a first-in-man study and assess a drug’s safety profile. New drug candidates may undergo pharmacodynamics (what the
drug does to the body), pharmacokinetics (what the body does to the drug), absorption, distribution, metabolism, and excretion
(“ADME”) and toxicology testing. This data allows researchers to allometrically estimate a safe starting dose of the
drug candidate for clinical trials in humans. Most preclinical studies must adhere to GLPs in ICH Guidelines to be acceptable
for submission to the FDA. Studies of a drug’s toxicity include which organs are targeted by that drug, as well as if there
are any long-term carcinogenic effects or toxic effects on mammalian reproduction. After the non-animal preclinical studies, if
ABVC decides to proceed on this drug candidate, it will conduct animal testing of this drug candidate on at least two mammalian
species, including one non-rodent species, in compliance with the FDA guidelines.
If
the preclinical studies meet the regulatory requirements and ABVC’s expectations, ABVC will start preparing an IND submission
for Phase 1 clinical studies. The amount of information needed for Phase 1 IND application depends on various factors unique to
the drug candidate but generally an IND submission includes a description of the new drug candidate (covering botanical raw materials
used and known active constituents or chemical constituents), prior human use experience, CMC of the new drug candidate, placebos,
environmental assessment, non-clinical pharmacology and toxicology, clinical pharmacology and other clinical considerations. After
the approval of IND for Phase I, ABVC will begin on the Phase I clinical research, which consists of two stages, safety and dosage.
ABVC recruits a small number of people, from 20 to 100 healthy volunteers or people with the disease, to participate in Phase
1, which may continue for several months. If the Phase I results meet ABVC’s goals, it will start the IND application for
Phase II trials, which include the data collected from the Phase I studies and preclinical research. Phase II trials focus on
efficacy and side effects of the new drug candidates. Phase II clinical trials may involve up to several hundred human participants,
last for a couple of years and require more resources than Phase I does.
Due
to the limited size of ABVC’s research and development team and equipment, sometimes our SDMO SBU cannot conduct all the
clinical trials as needed and we frequently outsource preclinical development, Phase I and II clinical trials and data analysis
to our trusted co-developers or CROs, such as Amarex Clinical Research LLC (“Amarex”), a limited liability company
with primary offices in Maryland. We have been collaborating with each of these CROs for a substantial period of time. During
the development of ABVC’s drug candidates, ABVC identifies and secures partners to collaborate on the clinical trials and
conduct post-Phase II testing. ABVC generally enters into collaboration agreements with its collaborators and receives milestone
payments for licensing out its research results on its drug candidates. ABVC’s collaborators will either continue post-Phase
II large-scaled clinical trials and commercialize the new drugs independently or find appropriate pharmaceutical companies to
co-develop the drug candidates.
Our
Active Product Pipeline and the Markets
The
table below provides a snapshot of development stage of each drug candidate in ABVC pipeline that are under active research. Details
about the studies on each of ABVC’s active drug candidates and medical devices are described after the table.
Project
Name
|
|
Indication
|
|
Current
Development Status
|
ABV-1504
|
|
Major Depressive Disorder
|
|
●
|
Successfully
completed Phase I clinical study in 2013;
|
|
|
|
|
●
|
Received protocol
approval for Phase II trial from the FDA in March 2014;
|
|
|
|
|
●
|
Received protocol
approval for Phase II trial from Taiwan F.D.A. in June 2014;
|
|
|
|
|
●
|
Conducting Phase
II Part 2 trial studies in both Taiwan and Stanford University in California, U.S.
|
ABV-1701
|
|
Vitreous Substitute for Vitrectomy
|
|
●
|
Conduct Phase I
clinical trial in Australia.
|
ABV-1505
|
|
Attention-Deficit Hyperactivity
Disease
|
|
●
|
Received
an IND approval from the FDA to conduct Phase II clinical trials in January 2016;
|
|
|
|
|
●
|
In the process to
initiate the study of ABV-1505 at the UCSF for the Phase II trial of ABV-1505.
|
ABV-1702
|
|
Myelodysplastic Syndromes
|
|
●
|
Submitted an application
for the orphan drug designation to the FDA in January 2014;
|
|
|
|
|
●
|
Received an IND
approval from the FDA in 2016;
|
|
|
|
|
●
|
Recruit patients
with MDS and plan to initiate the Phase II trial in the fourth quarter of 2018 if we recruit enough patients.
|
ABV-1501
|
|
Triple Negative Breast Cancer
|
|
●
|
Received an IND
approval from FDA to conduct Phase II studies in 2016.
|
|
1.
|
ABV-1504 to treat
major depressive disorder
|
MDD
is a type of mental health disorder characterized by persistently depressed moods that causes significant impairment in people’s
daily life. Its symptoms include lack of interest in activities, lack of appetite, changes in sleeping habits, inability to concentrate,
negative thoughts, or even lack of interest in life. Such MDD symptoms generally last for more than two weeks and affect patients’
daily life. The causes of MDD may include, without limitation, genetics, trauma, and stress. Other psychotic diseases or substance
abuse may also lead to comorbidity with depression. According to the 2017 World Health Organization Fact Sheets, over 300 million
people suffered from depression. The global antidepressants market is forecast to reach $16.8 billion U.S. dollars by 2020 and
the market size is expected to grow at a compounded annual growth rate (CAGR) of 2.5%.
In
human brains, there are various types of neurotransmitters that carry messages between human brains and bodies, such as dopamine,
norepinephrine and serotonin. Norepinephrine is a type of neurotransmitter that acts as a messenger to communicate in the nervous
system. Norepinephrine can constrict blood vessels having an effect of raising blood pressure. Scientific studies have shown that
norepinephrine is linked to stress and depression. However, details of its mechanism of action remain unknown. Researchers found
that norepinephrine reuptake inhibitors have shown inhibitory effects on depression. Inhibition of norepinephrine transporter
increases extracellular concentrations of norepinephrine which allows more neurotransmission. Increased neurotransmission in return
may improve the depression condition since it is a type of disorder that is linked to imbalances of neurotransmitters, including
norepinephrine.
We
are developing and researching ABV-1504, a botanical reuptake inhibitor that targets norepinephrine. Prior to clinical trials,
we, through BioLite Taiwan, conducted radioligand-binding assay tests on ABV-1504. Radioligand-binding assays are used to characterize
the binding effects of a drug to its target receptor. In the case of ABV-1504, the receptors of radioligand-binding assays are
norepinephrine, dopamine and serotonin. The radioligand-binding assay test on norepinephrine was conducted from May 3 to May 8,
2007 and the radioligand-binding assay test on dopamine and serotonin was administered from November 26 to December 5, 2007. The
result of radioligand-binding assay to norepinephrine of ABV-1504was 2.102 μg/ml of IC50, which indicated ABV-1504’s
high inhibitory efficiency on norepinephrine. The results of radioligand-binding assay to dopamine and serotonin were not as good
as to norepinephrine, which indicated lower inhibitory efficiency. Because research has shown that norepinephrine inhibitors can
alleviate the level of depression, our research team saw ABV-1504’s potential to treat depression and decided to commence
the clinical trial process of ABV-1504.
In
2013, ABVC, through BioLite, successfully completed the Phase I clinical trial of ABV-1504. The primary objective of the Phase
I study was to assess the safety profile of ABV-1504. The safety endpoint was assessed based on the results of physical examinations,
vital signs, laboratory data, electrocardiograms (“ECG”), Columbia-Suicide Severity Rating Scale evaluation and a
number of adverse events during the study period. We began recruiting healthy people as subjects for the Phase I trial in Taiwan
on October 30, 2012. For the Phase I trial, we screened 85 healthy volunteers at the Taipei Veterans General Hospital and eventually
enrolled 30 people as trial subjects. We divided the subjects into four cohort groups and administered ABV-1504oral capsules of
380 mg, 1140 mg, 2280 mg, and 3800 mg to the subjects in each cohort group, respectively. BioLite visited the first subject the
first time on November 13, 2012 and the last subject the last time on July 5, 2013. During the said period, no subject had a serious
adverse event nor discontinued the trial due to any adverse events. ABVC did not observe any clinically significant findings in
physical examinations, vital signs, electrocardiogram, laboratory measurements, and C-SSRS throughout the treatment period. However,
ABVC observed the following mild adverse events: two subjects with flatulence and one subject with constipation in the single-dose
380mg cohort of seven subjects; one subject with somnolence and one subject with stomatitis ulcer in the single-dose 2,280 mg
cohort. Comparatively, two subjects with somnolence and one subject with stomatitis ulcer were observed in the placebo group of
seven subjects. ABVC did not observe any suicidal ideation or behavior throughout the trial period. ABV-1504’s Phase I clinical
trial results reflected that the oral administration of ABV-1504 to healthy volunteers was safe and well-tolerated at the dose
levels of from 380 mg to 3,800 mg.
ABVC
received an IND approval to proceed with the Phase II clinical trial of ABV-1504 from the F.D.A. in March 2014 and an IND approval
of its Phase II trial from the Taiwan F.D.A. in June 2014. For the Phase II trial, BioLite plans to administer oral capsules to
72 MDD patients (the trial subjects) in a randomized, double-blind study with a placebo control group to assess ABV-1504’s
efficacy and safety profile, primarily in accordance with the Montgomery-Åsberg Depression Rating Scale (“MADRS”).
ABVC via BioLite began recruiting Phase II subjects in March 2015 at the following study sites, Taipei Veterans General Hospital,
Linkou Chang Gung Memorial Hospital, Taipei City Hospital-Songde Branch, Tri-Service General Hospital, Wan Fang Hospital and started
recruiting MDD patients at Stanford Depression Research Clinic. The first five sites are in Taiwan and the last one is in United
States. The primary endpoint of the Phase II trial is to see changes of the subjects’ MADRS total scores from the baseline
scores of the placebo subjects within the first six weeks. The secondary objectives of the Phase II trial are to evaluate the
efficacy and safety profile of ABV-1504 on other rating scales with secondary endpoints of (i) demonstrating changes in MADRS
total scores from baseline scores within the second to seventh weeks and (ii) showing changes in the total scores on Hamilton
Rating Scale for Depression (HAM-D-17), Hamilton Rating Scale for Anxiety (HAM-A), Depression and Somatic Symptoms Scale (DSSS),
Clinical Global Impression Scale (CGI) from the baseline scores in the second, fourth, sixth and seventh week. ABVC plans to measure
the percentages of partial responders (subjects with a 25% to 50% decrease of total MADRS scores from the baseline score) and
responders (subjects with 50% or more decrease of total MADRS scores from the baseline score) by the second, fourth, sixth and
seventh week. Additionally, ABVC intends to monitor the subjects’ performance in accordance with the Safety Assessments
and Columbia-Suicide Severity Rating Scale from the screening stage to each subject’s last visit as well as to analyze the
differences in the mean changes of MADRS, HAM-D-17, HAM-A, DSSS, CGI and Columbia-Suicide Severity Rating Scale scores of the
subjects administered with ABV-1504 and the placebo group in the second, fourth, sixth and seventh week. As of the date of the
prospectus, ABVC continued the efforts on recruiting suitable subjects for the Phase II trial and had observed zero serious adverse
events during this ongoing Phase II trial.
|
2.
|
ABV-1505 to treat
ADHD
|
ADHD
is a common psychiatric disorder with a consistent pattern of inattention and/or hyperactive impulsivity that interferes with
patients’ daily functioning in at least two settings, such as at school and at home. People with ADHD suffer from functional
impairment in academic, occupational and interpersonal performances. There hadn’t been a global consensus as to the worldwide
ADHD prevalence. A meta-analysis sourced from 175 studies showed ADHD had an estimated overall pooled prevalence of 7.2% globally.
It affects both children and adolescents, with 4-5% prevalence among school-aged children. A recent market report published by
Persistence Market Research stated that revenue from the global ADHD therapeutics market was expected to expand at a compound
annual growth rate of 6.2% during the forecast period from 2015 to 2024 and reach a market value of approximately $5.68 billion
by 2024.
ABVC,
via BioLite, developed the ADHD indication from the same API. Also ABV-1505 shares the similar pharmaceutical mechanism of action
of ABV-1505 inasmuch that ABV-1505 shows the potential of increasing the level of norepinephrine in human’s nervous system
by inhibiting its reabsorption. Because of ABV-1505’s sufficient similarity with ABV-1504, in January 2016 the FDA approved
our IND application to conduct ABV-1505’s Phase II clinical trial based on its pretrial research and Phase I trial results
of ABV-1504.
For
the Phase II trial, ABVC plans to recruit a maximum number of 105 ADHD patients as trial subjects in the United States, to whom
ABVC intends to administer ABV-1505 oral capsules. ABVC together with its CROs designed a randomized, double-blind dose escalation
study with a placebo-controlled group to assess the efficacy and safety profile of ABV-1505, primarily against the ADHD Rating
Scale-IV (“ADHD-RS-IV”). The primary endpoint of the Phase II trial is a 40% or higher improvement on the ADHD-RS-IV
from the respective baseline scores within a period of up to eight weeks. The secondary objective is to determine the efficacy
and safety profile of ABV-1505 on other rating scales with secondary endpoints of (i) improvements of the total ADHD symptom scores
from the respective baseline scores on the Conners’ Adult ADHD Rating Scale-Self Report: Short Version (“CAARS-S:S”)
18-Item for a treatment period of eight weeks at maximum; (ii) achievement of scores of two or lower on both the Clinical Global
Impression-ADHD- Severity (“CGI-ADHD-S”) and Clinical Global Impression-ADHD-Improvement (“CGI-ADHD-I”);
and (iii) changes in the scores of the three Cambridge Neuropsychological Test Automated Battery (“CANTAB”) from the
subjects’ respective baseline scores. As of the date of the prospectus, ABVC conducted the pre-Phase II clinical studies
of and purification of ABV-1505. Subject to our financial resources, ABVC plans to initiate the Phase II trial of ABV-1505 in
the first quarter of 2019 at UCSF, although there is no guaranty that ABVC will actually begin the Phase II clinical trial as
planned.
MDS
are a group of heterogeneous malignant bone marrow disorders characterized by ineffective hematopoiesis (a process of creating
new blood cells), resulting in a lower blood cell volume and higher progression risk to acute myeloid leukemia. Based on the International
Prognostic Scoring System (the “IPSS”), MDS are classified into four levels of risks, which are low, intermediate-1
(“int-1”), intermediate-2 (“int-2”) and high risk. Additionally, Chronic Myelomonocytic Leukemia (“CMML”)
is closely related to MDS and under the French-American-British classification method, is recognized as a type of MDS. We adopt
the French-American-British classification herein and unless specifically stated, include CMML as a type of MDS. Notwithstanding
the complexity of MDS’ classifications, MDS is not deemed common with an estimation of approximately 10,000 new cases every
year. Analysis from Medicare, Surveillance, Epidemiology, and End Results (“SEER”s) showed that the incidence rate
of MDS in the United States was approximately 5.3 cases/100,000 people per year and estimated that there were more than 60,000
MDS patients in the United States.
It
is recognized that insufficient reactive-oxygen species (“ROS”) may cause excessive bactericidal and fungicidal activities
in patients’ respiratory systems, which in turn lead to the dysfunctions of certain types of white blood cells, such as
neutrophils. Under certain conditions, dysfunctions of certain white blood cells may develop into MDS. BioLite believes that Maitake
Extract 404, the API of BLI-1301, has the potential of stimulating white blood cell growth and maturation which leads to improvements
on hematopoiesis. Preclinical studies showed that Matitake Extract 404 can enhance mobilization of white blood cells and increase
the production of certain types of cytokines, the signaling proteins responsible for blood cell proliferation and maturation,
such as granulocyte macrophage colony-stimulating factor (GM-CSF or G-CSF). In addition, Maitake Extract 404 displayed its capacity
of increasing maturation of the ancestor cells (known as hematopoietic progenitor cells (“HPC”)) and enhancing the
recovery of peripheral blood leukocytes. Based on the preclinical studies of Maitake Extract 404, BioLite hypothesizes that BLI-1301
has the potential of increasing ROS and therefore facilitates the treatment of MDS by improving patient’s immune system
and hematopoiesis.
Through
BioLite, ABVC started the preparation for ABV-1702’s Phase II clinical trials after receiving its IND approval from the
FDA in July 2016. ABVC plans to recruit fifty-two subjects in the United States who are diagnosed with either IPSS int-1, IPSS
int-2 or high risk MDS or CMML and may take azacitidine as part of the subjects’ prescription. Azacitidine is an FDA-approved
drug used to treat MDS. ABVC intends to administer ABV-1702 in the oral liquid form along with azacitidine. The Phase II trial
is divided into two parts, where Part 1 is to determine the safety and recommended dose level (“RDL”) of ABV-1702
in combination with azacitidine and Part 2 is to determine whether ABV-1702 under the established RDL reduces bactericidal and
fungicidal infection in the subjects’ respiratory systems. The primary endpoint of Part 1 Phase II trial is to assess the
safety and RDL profile of ABV-1702 administered with azacitidine by measuring ABV-1702’s prohibited toxicity. The secondary
endpoints of Phase II Part 1 are to determine the safety, time-to-first infection after first dose (Day 1) of the first azacitidine
treatment cycle, reduction in treatment requirements and duration of infections, enhancement of immune responses, improvements
of response rates, progression, and survival rates of the subjects under such ABV-1702 - azacitidine combination treatment. The
primary endpoint of Part 2 of Phase II is to determine whether ABV-1702 under the established RDL reduces bactericidal and fungicidal
infection risks in the subjects’ respiratory systems in combination with azacitidine as compared to the control group with
incidence of infections and incidence/frequency of inpatient hospitalization due to infections. The secondary endpoints of Part
II are to determine the safety, time-to-first infection after first dose (Day 1) of the first azacitidine treatment cycle, reduction
in required dosage and duration of infection, enhancement of immune responses, improvement of response rate, progression, and
survival rates of the subjects under the trial conditions.
As
of the date of this prospectus, ABVC planned to commence the Phase II clinical trials of ABV-1702 in the fourth quarter of 2019
although neither BioLite nor ABVC can assure you that the Phase II trial will be initiated as planned. Due to the scarcity of
MDS cases, BioLite applied for the orphan drug designation for ABV-1702 or BLI-1301. In April 2016, BioLite submitted a letter
to the FDA in response to its queries with additional information about the proposed Phase II trial.
|
4.
|
ABV-1501 to treat
TNBC
|
ABVC
through BioLite developed two more drug candidates, ABV-1501 and ABV-1502 (which is not under active research), from Yukiguni
Maitake Extract 404 in the combination cancer therapies to treat two disease indications, triple negative breast cancer and solid
tumors, respectively. In the past few years, immunotherapies enhancing the functions of patients’ own immune systems against
cancers have shown great potential in improving the survival rates of patients with melanoma cancer. Inspired by the immunotherapies
for melanoma cancer, BioLite formed its research focus on immunotherapies on TNBC. We believe that ABV-1501 can enhance the immune
systems of cancer patients and therefore are likely to reduce the side effects of traditional cancer therapies, such as radiotherapy
and chemotherapy. ABVC hopes ABV-1501, as part of the combination therapies, will improve the symptoms and conditions of patients
with TNBC and boost the results of traditional cancer therapies.
Laboratory
studies showed that Maitake Extract 404 can activate a number of antitumor immune factors, such as T cells (a type of lymphocytes
that plays an important role in the immune response), natural killer cells (a type of cytotoxic lymphocyte that plays an important
role in the immune response) and dendritic cells (a type of white blood cell that plays an important role in antigen-specific
immune response). Also Maitake Extract 404 showed its potential to enhance the release of cytokines, cell signaling proteins,
such as TNF-α. In accordance with cancer immunology, dendritic cells can trigger tumor anti-gens which help the immune system
recognize and respond to the formation process of tumors. Certain pro-inflammatory cytokines and activated natural killer cells
can augment systemic anticancer immune responses. T cells will infiltrate tumor sites and facilitate destruction of tumors from
inside. Based on these preclinical studies, ABVC believes Maitake Extract 404, a promising API, to improve various types of cancers,
including TNBC.
We,
through BioLite, received an approval from the FDA on the Phase I/ II trials of ABV-1501 in March 2016. ABVC plans to recruit
at maximum thirty-two subjects who are diagnosed with advanced or metastatic TNBC. We intend to administer ABV-1501 to the subjects
in oral liquid form in the United States. The phase I trial is to determine the safety and RDL of ABV-1501 combined with Docetaxel
with primary endpoint of presence or absence of dose-limiting toxicity (DLT) related to ABV-1501 in each subject during first
cycle of Docetaxel monotherapy. Docetaxel is a commonly used cytotoxic agent for metastatic breast cancer and Docetaxel monotherapy
is deemed an effective treatment for patients with such disease. Patients receive 75 mg/m
2
of Docetaxel intravenously
over one hour per day for twenty-one days, which constitutes one Docetaxel treatment cycle. The Phase II trial is to assess the
efficacy and safety of ABV-1501 combined with Docetaxel at the recommended dose with primary endpoint of overall response rate
after four cycles of the combined therapy of ABV-1501 and Docetaxel. The secondary endpoints of Phase II trials include (i) the
overall response rates after at least one cycle of such combined therapy; (ii) rates of grade 3 or 4 hematological toxicity of
each cycle; (iii) examination of quality of life assessed under the EORTC QLQ-C30 questionnaire in each treatment cycle. We plan
to begin the Phase I study of ABV-1501 in the fourth quarter of 2019; however, there is no assurance that we shall be able to
implement the plan on the contemplated schedule.
5.
ABV-1703 Pancreatic Cancer
In
addition, ABVC developed a new indication for Pancreatic Cancer from Maitake Extract, which is named as ABV-1703 and out licensed
to it Rgene for the preparation of its IND application with the FDA. On August 25, 2017, ABV-1703’s Phase II trial was approved
by FDA. Pursuant to the ABVC-Rgene Co-development Agreement, ABVC is responsible for coordinating and conducting the clinical
trials of ABV-1703 globally and Rgene shall prepare the related FDA applications. As of the date of this prospectus, we are negotiating
with one clinical site in the U.S. to conduct the phase II clinical trial and plan to initiate the phase II trial in the fourth
quarter of 2019. We plan to submit ABV-1703’s phase II clinical trial IND to Taiwan FDA after we commence the clinical trials
in the United States.
6.
ABV-1701 Vitreous Substitute for Vitrectomy
The
vitreous body is a clear, transparent gelatinous substance in the vitreous cavity of the eye that is posterior to the lens and
anterior to the retina. A degenerated or liquefied vitreous body will lead to floater formation, leading to posterior vitreous
detachment or retinal detachment. Vitrectomy has been the standard therapy for severe retinal detachment. A vitreous substitute
is needed after vitrectomy to support the reattached retina. Vitargus is a new investigational medical device as a better alternative
of vitreous substitute. An investigational medical device is one that is the subject of a clinical study designed to evaluate
the effectiveness and/or safety of the device.
On
November 7, 2016, the application of phase I clinical trial prepared and submitted by BioFirst was approved by Human Research
Ethics Committee, Australia (“HREC”), and on November 14, 2016, it was approved by the Therapeutic Goods Administration,
Australia (“TGA”).
Currently,
we are conducting a phase I clinical trial of ABV-1701 at Sydney Retina Clinic and Day Surgery, a clinic located in Sydney, Australia.
This is the only site for this clinical trial. The trial started on November 16, 2016, and is expected to be completed on or before
November 15, 2018. The Protocol Title is “A Phase I, single center, safety and tolerability study of Vitargus in the treatment
of Retinal Detachment.”
The
primary endpoint of this phase I clinical trial is to evaluate the safety and tolerability of a single intravitreal dose of Vitargus
in patients as a vitreous substitute during vitrectomy surgery for retinal detachment. Intravitreal is a route of administration
of a drug or other substance, in which the substance is delivered into the eyes. The secondary endpoint of this phase I clinical
trial is to assess retinal attachment and Virtagus degradation at day 90 and to assess best corrected visual acuity (“BVCA”)
after vitrectomy surgery. BVCA refers to the best possible vision a person can achieve. The primary and second endpoints are required
by HREC for the purpose of evaluation of our Phase I clinical trial application.
We
plan to enroll in an aggregate number of 10 patient subjects in this trial. On November 17, 2016, we received the approval from
the Data and Safety Monitoring Board for the first subject, and nine (9) more subjects have been enrolled. In this trial, Vitargus
is injected into the vitreous cavity of vitrectomised eyes, whose vitreous gel is removed from the vitreous cavity after a vitrectomy
surgery. The clinical testing commenced on November 17, 2016, and has been completed in July 2018. We are in the process of preparing
the final clinical study report.
Collaboration
and Licensing Agreements
As
part of ABVC’s strategy and business model, ABVC obtains licenses of APIs, surrounding technologies and proprietary data
from research institutions, conducts the preclinical and Phase I and II clinical research and licenses out the research results
to collaborators to further develop and commercialize the new drug candidates. The illustration shows the licensing status of
ABVC’s drug candidates.
Project Name
|
|
Indication
|
|
Source
of Technology (Licensor)
|
|
Sub-licensee
|
|
Licensee’s
Territories
|
ABV-1504
|
|
Major Depressive
Disorder
|
|
Medical
and Pharmaceutical Industry Technology and Development Center (“MPITDC”)
|
|
|
|
|
|
|
|
|
|
|
BioHopeKing
|
|
Asia excluding Japan
|
ABV-1505
|
|
Attention-Deficit
Hyperactivity disease
|
|
MPITDC
|
|
BioHopeKing
|
|
Asia excluding Japan
|
ABV-1702
|
|
Myelodysplastic
Syndromes
|
|
Yukiguni
|
|
n/a
|
|
n/a
|
ABV-1501
|
|
Triple
Negative Breast Cancer
|
|
Yukiguni
|
|
n/a
|
|
n/a
|
|
|
|
|
|
|
BioHopeKing
|
|
Asia
excluding Japan
|
On
January 1, 2011, BioLite Taiwan entered into a license agreement with MPITDC (the “MPITDC License Agreement”) pursuant
to which BioLite Taiwan obtained from MPITDC the exclusive global rights to PDC-1421, an API, and its surrounding proprietary
information to develop, manufacture, distribute and sell pharmaceutical products. However, if BioLite Taiwan wants to use, develop,
manufacture, distribute or sell pharmaceutical products that contain PDC-1421 as the API outside Taiwan, BioLite Taiwan needs
to obtain written consent from MPITDC which will make sure such intended action complies with Taiwanese laws and regulations,
particularly on scientific research development. With PDC-1421 as the API, BioLite Taiwan and ABVC are developing two new drug
candidates, ABV-1504 to treat MDD and ABV-1505 for ADHD. In accordance with the terms and conditions of the MPITDC License Agreement,
BioLite Taiwan shall pay a license fee of NTD 17,000,000 (approximately $563,894) to MPITDC on a schedule dictated by the time
when we reach certain milestones, a royalty fee of 3% of net sales of our products containing PDC-1421 as the API in the territories
which MPITDC’s patents cover (the “MPITDC’s Patent Territories”) and 1% of the net sales of our products
containing PDC-1421 as the API in the territories for which MPITDC’s patents are not covered (the “MPITDC’s
Non-patent Territories”) during the term of the MPITDC License Agreement. The MPITDC License Agreement provides MPITDC a
ten per cent (10%) of the net income from BioLite Taiwan’s sublicensing of therapeutic products derived from PDC-1421 (deducting
all development related expenses, such as compliance expenses, travel expenses and taxes) when BioLite Taiwan relicenses the proprietary
data relating to PDC-1421 to a collaborator or third party. The MPITDC License Agreement will expire when the last patent licensed
to us expires in November 2026. As of today, according to the MPITDC License Agreement, BioLite Taiwan has directed BioHopeKing,
the sublicensee of PDC-1421, to transfer 10,049 and 15,073 shares of BioHopeKing’s Common Stock owned by us to National
Science and Technology Development Fund and ITRI, respectively. BioLite Taiwan paid MPITDC the upfront payment of $105,500 in
2011, the first milestone payment of $79,100 in 2012 and the third milestone payment of 65,940 in 2013. Because BioLite Taiwan
received revenue from our collaboration agreements with BioHopeKing and ABVC as described below, BioLite Taiwan has accrued 10%
of the net sublicensing income payable to MPITDC pursuant to the MPITDC License Agreement.
On
May 10, 2013, BioLite Taiwan entered into the Yukiguni License Agreement with Yukiguni, pursuant to which BioLite Taiwan obtained
from Yukiguni the exclusive rights to develop therapeutic use of Yukiguni Maitake Extract 404, an API that has shown promise to
treat various types of cancers, in Asia excluding Japan. Later on December 27, 2016, BioLite Taiwan terminated the Yukiguni License
Agreement and entered into a new license agreement (the “Yukiguni License Agreement 2”) to adjust to changes of new
drug development and business situations. Under the new agreement, BioLite Taiwan has obtained the exclusive and sublicensable
right to develop therapeutic use of the API for cancer treatment and non-exclusive sublicensable right to develop therapeutic
use of the API for treatments not related to cancers. BioLite Taiwan’s license rights are royalty free and global and in
exchange for such licensing, BioLite Taiwan shall pay Yukiguni an aggregate of $305,000 in stages according to a milestone schedule,
which as of December 31, 2016, BioLite Taiwan was not obligated to pay because Yukiguni did not reach any milestone set forth
therein. Pursuant to the Yukiguni License Agreement 2, BioLite Taiwan agrees to purchase first from Yukiguni all the Yukiguni
Maitake Extract 404 that BioLite Taiwan needs to develop our related therapeutic products, which currently include BLI-1301, BLI-1401-1
and BLI-1401-2 and Yukiguni represents that it will provide sufficient quantities of such API. The initial term of Yukiguni License
Agreement 2 is twenty years from the execution date or fifteen years from the first sale of the therapeutic product, whichever
happens earlier, with an automatic renewal of another five year period unless BioLite Taiwan or Yukiguni terminates the Agreement
pursuant to the termination clauses included therein. BioLite Taiwan agreea to subject its sublicenses that involve Yukiguni Maitake
Extract 404 to the expiration terms of the Yukiguni License Agreement 2, excluding the termination terms of such Agreement. ABVC
is currently conducting investigational research on ABV-1501 for TNBC, ABV-1703 for Pancreatic Cancer and ABV-1702 for MDS, the
APIs of which derive from Yukiguni Maitake Extract 404.
On
July 24, 2017, BriVision entered into the BioFirst Agreement with BioFirst, pursuant to which BioFirst granted BriVision the global
license to co-develop ABV-1701 Vitreous Substitute for Vitrectomy for medical purposes. BioFirst is a related party to the Company
because BioFirst and YuanGene Corporation (“YuanGene”), the Company’s controlling shareholder, are under common
control of the controlling beneficiary shareholder of YuanGene.
According
to the BioFirst Agreement, we co-develop and commercialize ABV-1701 with BioFirst and are obligated to pay BioFirst $3,000,000
in cash or Common Stock of the Company on or before September 30, 2018 in two installments. As of the date of this prospectus,
ABVC has not made the payment of $3,000,000 to BioFirst. The Company is entitled to receive 50% of the future net licensing income
or net sales profit when ABV-1701 is sublicensed or commercialized.
On
February 24, 2015, BioLite Taiwan and BioHopeKing entered into a co-development agreement (the “BioHopeKing Collaboration
Agreement for ABV-1501) pursuant to which BioLite Taiwan granted BioHopeKing the rights to use proprietary technology, data and
intellectual property of our project ABV-1501 to develop and commercialize the combination therapy to treat triple negative breast
cancer in Asian countries excluding Japan. Later on July 27, 2016, BioLite Taiwan and BioHopeKing agreed to an addendum (the “BioHopeKing
Addendum”) to revise the milestone payment schedule. In accordance with the terms of the BioHopeKing Collaboration Agreement
for ABV-1501 and the Addendum thereto, BioLite Taiwan may expect to 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 Taiwan’s achievements
of certain milestones and twelve per cent (12%) of net sales of the drug products when ABV-1501 is approved for sale in the licensed
territories. BioHopeKing and BioLite Taiwan shall share the development costs of ABV-1501 equally. BioLite Taiwan received $1
million from BioHopeKing upon execution of the said agreement in 2015 and the first development milestone payment of $983,008
in 2016. The BioHopeKing Collaboration Agreement for ABV-1501 shall expire fifteen (15) years from the first commercial sale of
the ABV-1501 if approved by the local regulatory authorities and may be renewed for another five years without notice.
On
December 8, 2015, BioLite Taiwan and BioHopeKing entered into a co-development agreement (the “BioHopeKing Collaboration
Agreement for ABV-1504”) pursuant to which BioLite Taiwan granted BioHopeKing the rights to use proprietary technology,
data and intellectual property of BioLite Taiwan’s project ABV-1504 to develop and commercialize the medicinal therapy to
treat major depressive disorder in Asian countries, excluding Japan. In accordance with the terms of the BioHopeKing Collaboration
Agreement for ABV-1504, BioLite Taiwan received a payment of a total of NTD 30 million (equal to approximately $995,107) in cash
upon signing the said agreement and expect to receive fifty per cent (50%) of net sublicensing income or net sales of the drug
products in the licensed territories. BioHopeKing and BioLite Taiwan shall share the development cost of ABV-1504 equally. The
BioHopeKing Collaboration Agreement for ABV-1504 shall expire fifteen (15) years from the first commercial sale of the ABV-1504
if approved by the local regulatory agencies and may be renewed for another five years without notice.
The
following table summarizes BioLite Taiwan’s milestone payments, received or expected to receive from BioHopeKing, in accordance
with the terms of three collaboration agreements entered by and between BioLite Taiwan and BioHopeKing as described above.
Payments
From BioHopeKing
|
Product
code
(Territory)
|
Development
or Regulatory Milestone Payments
|
Royalty
Payments
After
Commercialization
|
2015
|
2016
|
2017
(estimated)
|
2018
(estimated)
|
2019
(estimated)
|
2020
(estimated)
|
|
ABV-1501
(Asia
excluding Japan)
|
$1,000,000
(received upon execution of the collaboration agreement)
|
$983,008
(received upon the IND submission for Phase I clinical trials)
|
n/a
|
$1,000,000
(receivable upon completion of the stage 1Phase II trials)
|
$3,000,000
(receivable upon initiation of Phase III trials)
|
$4,000,000
(receivable upon NDA submission)
|
12%
of the net sales
[1]
|
ABV-1504
(Asia
excluding Japan)
|
$995,107
(received upon execution of the collaboration agreement)
|
n/a
|
50%
of net licensing income or net profits from sales [2]
|
[1]
|
In accordance with
the BioHopeKing Collaboration Agreement for ABV-1501, the royalty payments to us shall cease on the fifteenth anniversary
of the first commercial sale of ABV-1501 with the potential of a five-year extension without notice from either party of such
agreement.
|
[2]
|
In accordance with
the BioHopeKing Collaboration Agreement for ABV-1504, the royalty payments to us shall cease on the fifteenth anniversary
of the first commercial sale of BLI-1005 with the potential of a five-year extension without notice from either party of such
agreement.
|
Co-development
Agreement with Rgene
On
May 26, 2017, BriVision entered into the ABVC-Rgene Co-development Agreement with Rgene Corporation, a corporation incorporated
under the laws of Taiwan (“Rgene”), to co-develop and commercialize in the global markets three new drug products
that are included in the Sixth Product as defined in the Addendum. The three drugs licensed 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.
Pursuant
to the ABVC-Rgene Co-development Agreement, Rgene should 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 efforts
and contributions made by BriVision 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 $3,000,000, 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, the Company delivered all research, technical, data and development data to Rgene. Because both Rgene and the Company
are related parties and under common control by a controlling beneficiary shareholder of YuanGene and the Company, the Company
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. As of the date of this prospectus, the Company received $450,000 in cash and certain
number of shares of Rgene’s Common Stock of $2,550,000 at a per share price of 50NTD (equivalent to $1.62 USD). As of date
of this prospectus, no net licensing income and/or net sales profit has occurred.
Control
Release Technologies
ABVC
through BioKey, has developed the proprietary control release systems that may delay the release of drugs into human bodies at
various controlled paces. ABVC has at least ten more drugs in the company’s development pipeline for instance, BK102 Metaxalone
to treat skeletal muscle pain or injury and BK503 Clarithromycin XR for the purpose of treating bacterial infections. In addition
to the existing development in the pipeline, ABVC is reviewing potential drug candidates for potential licensing and co-development
opportunities. ABVC focuses on the drug candidates that meet one or more of the following criteria:
|
●
|
Niche market potential;
|
|
●
|
Reliable control
of API sources with DMF(Drug Master File) readily in place;
|
|
●
|
Competitive pricing
for the APIs;
|
|
●
|
High development
barrier;
|
|
●
|
Strategic co-development
with distributors; and
|
|
●
|
Feasible with the
Company’s skill sets and facility capacity
|
NDA
Products
BK501
:
ABVC through BioKey has developed a new controlled release dosage form of an immediate release antithrombotic drug which has high
frequency of side effects. BK501 will vastly improve patient compliance by reducing side effects. Through this joint venture,
ABVC will pass portion of financial burden to our strategic alliance and expand its product market to Asia.
BK502
:
ABVC through BioKey has acquired exclusive right of the U.S. patent application for BK502 from a Delaware corporation which has
developed a novel multi-component anti-diabetes drug that significantly improves both blood glucose and lipid profiles. This product
is based primarily on Metformin, an oral anti-hyperglycemic drug used in the management of non-insulin-dependent diabetes mellitus,
currently marketed by Bristol-Myers Squibb under the trade name of Glucophage. Metformin lowers blood sugar by keeping the liver
from making too much sugar. However, most type 2 diabetics have problems not only with blood sugar but also with high cholesterol
and triglycerides. BK502 is designed to lower not only the blood sugar but also lower the fatty blood components—triglycerides
and cholesterol in the patient.
ANDA
Products
ABVC
through BioKey has developed the proprietary control release systems that may delay the release of drugs at various controlled
paces. ABVC through BioKey has at least ten more drugs in its development pipeline, such as BK503 Clarithromycin XR for the purpose
of treating bacterial infections, BK504 XL for treating depression, and BK509 for lowering cholesterol. In addition to the existing
development in the pipeline, ABVC constantly reviews potential drug candidates for potential licensing and co-development opportunities.
More candidates screened for the ANDA product pipeline include BK601 for obesity, BK602 for diabetes, BK603 for hypertension,
and BK604 for Schizophrenia and bipolar disorder, etc.
CDMO
Services
ABVC’s
CDMO SBU 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 (from
Phase 1 through Phase 3) and commercial manufacturing of pharmaceutical products.
ABVC’s
CDMO SBU provides a variety of regulatory services tailored to the needs of its customers, which include proofreading and regulatory
review of submission documents related to formulation development, clinical trials, marketed products, generics, nutraceuticals
and OTC products and training presentations. In addition to support ABVC’s new drug development, its CDMO SBU also on behalf
of the outside clients, submits INDs, NDAs, ANDAs, and DMFs to the FDA in compliance with new electronic submission guidelines
of the FDA. ABVC provides regulatory consulting services for the entire lifecycle of its clients’ drug development projects.
Analytical
Services
ABVC’s
analytical laboratory offers HPLC method development and validation, degradation studies, dissolution method development, cleaning
validation and raw material testing. ABVC’s experienced chemists and developers adopt analytical assay methods with various
columns (reversed phase, ion chromatography, and size exclusion) and UV and reflective index detectors to analyze pharmaceutical
compounds that feature with or without chromophores. With respect to degradation studies, ABVC’s senior laboratory researchers
conduct stressed sample degradation studies to determine potential degradants and impurity profiles. ABVC’s degradation
studies generally involve identification process using diode array analysis of peak purity to develop a stability indicating chromatographic
method. In addition, ABVC’s researchers and scientists help the clients to develop and perform dissolution profile studies
for immediate release and extended release of finished products (tablets and capsules) in various media and pH buffer solutions
such as simulated intestinal fluid (“SIF”), simulated gastric fluid (“SGF”), and acetate. ABVC provides
its clients with services of developing and validating sensitive methods for swab samples and rinsing samples and total organic
carbon to test and evaluate the cleanness of certain pharmaceutical equipment. ABVC’s laboratory has the capacity to use
FT-IR to identify materials, such as APIs. ABVC’s laboratory may conduct basic physical/chemical testing according to various
methods such as pH, turbidity, density, solubility profile over pH range, melting point, loss on drying, loss on ignition, viscosity
and conductivity testing.
Product
Development
ABVC
provides services for formulation and process development of pharmaceutical products. ABVC supports its clients with FDA regulatory
process, including sketches to ANDA, IND, and NDA filings. ABVC endeavors to satisfy the needs of its clients in a time-efficient
and cost-saving manner. ABVC’s formulation and process development teams have deep scientific knowledge and extensive experience
in this area. ABVC’s highly trained scientists and researchers endeavor to optimize the performance of its clients’
products, formulations and processes, using flexible scientific approaches, such as Design of Experiments (“DOE”)
and Quality by Design (QbD).
GMP
Manufacturing
ABVC
owns a certified GMP manufacturing facility that is qualified to conduct clinical trials from Phase 1 to Phase 3 of drugs in oral
solid dosage forms. ABVC’s cGMP manufacturing facility can manufacture the following forms of pharmaceutical products and
processes for its clients: direct API or blend fill-in capsules, manual and automated encapsulation, wet granulation or tray drying
process, tablet compression and coating process, packaging solid dosage forms for ANDA and IND submission.
ABVC’s
GMP facility consists of the GMP suite, product development area, analytical laboratory, food processing area, caged area and
receiving area. The facility was established in December 2008 and received its first drug manufacturing license in June 2009.
ABVC’s current drug manufacturing license allows it to manufacture drugs thereon until the expiration of such license on
December 2, 2019. ABVC plans to renew its drug manufacturing license in a timely manner before its expiration.
Patents
and Proprietary Rights
ABVC
have exclusive licenses in certain patents from certain research institutions and its CDMO SBU also develops its own patents.
With respect to the IP licensed from research institutions, we do not own those patents and may develop new technology and register
new patents on our own during the operations. As of the date of this prospectus, approximately 39 patents, granted or pending,
cover ABVC’s new drug candidates in various jurisdictions. The respective licensors of such drug candidates own those patents.
In addition, as of the date of this prospectus, our CDMO SBU has four (4) valid patents in the U.S. and overseas covering various
types of the controlled release systems and technologies.
ABVC
intends to protect its proprietary rights from unauthorized use by third parties to the extent that its proprietary rights are
covered by valid and enforceable patents or are effectively maintained as trade secrets. ABVC’s policy is to file patent
applications and to protect certain technology, inventions and improvements that are commercially important to the development
of ABVC’s business. ABVC’s strategy has been to i) to acquire exclusive licensing rights of key patents for drugs
that it intends to make further development and ii) to apply for and maintain patent protection for inventions and their applications
which it believes has potential commercial value in countries that offer significant market potential.
ABVC
also relies on trade secrets, employee and third-party nondisclosure agreements and other protective measures to protect its intellectual
property rights pertaining to its products and technologies. For example, both BioLite’s and BioKey’s trade logos
are protected under trademark law through registration.
Sales
and Marketing
As
part of ABVC’s strategy and marketing approach, ABVC and BioLite Taiwan serve the marketing and sales function of the new
drug candidates to collaborators and strategic partners in U.S. and Taiwan, respectively, to develop licensing opportunities for
further clinical trials. With respect to generic drugs, ABVC primarily relies on its existing distribution channels to sell FDA-approved
generic drugs.
Competition
The
healthcare industry is highly competitive and subject to significant and rapid technological change as researchers learn more
about diseases and develop new technologies and treatments. Significant competitive factors in our industry include product efficacy
and safety; quality and breadth of an organization’s technology; skill of an organization’s employees and its ability
to recruit and retain key employees; timing and scope of regulatory approvals; the average selling price of products; the availability
of raw materials and qualified manufacturing capacity; manufacturing costs; intellectual property and patent rights and their
protection; and our capabilities of securing competent collaborators. Market acceptance of our current products and product candidates
will depend on a number of factors, including: (i) potential advantages over existing or alternative therapies or tests, (ii)
the actual or perceived safety of similar classes of products, (iii) the effectiveness of sales, marketing, and distribution capabilities,
and (iv) the scope of any approval provided by the FDA or foreign regulatory authorities.
We
are a very small biopharmaceutical company compared to other companies that we are competing against. 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 us marketing exclusivity rights. Typically, our competitors
will most likely have more capital resources to support their products than we do.
We
anticipate that we will face intense and increasing competition as our new drug candidates enter the markets, as advanced technologies
become available and as generic forms of currently branded products become available. Finally, the development of new treatment
methods for the diseases we are targeting could render our products non-competitive or obsolete.
We
cannot assure you that any of our new drug candidates that we successfully develop will be clinically superior or scientifically
preferable to products developed or introduced by our competitors.
The
following chart lists representative biopharmaceutical companies that research, develop, commercialize, distribute or sell drugs
that are in competition with our drug candidates. Please be advised that this list does not necessarily include all competitors
of ours.
Disease
|
|
Drug
Name
|
|
Pharmaceutical
Companies
|
|
Headquarters
|
Major Depressive
Disorder
|
|
Cymbalta oral
|
|
Eli Lilly and Co.,
Inc.
|
|
IN
|
|
|
Lexapro oral
|
|
Forest Laboratories,
Inc.
|
|
NJ
|
|
|
|
|
Pfizer Pharmaceuticals,
Inc.
|
|
CT
|
|
|
|
|
|
|
|
Attention-Deficit
|
|
Adderall XR
|
|
Shire Development
LLC
|
|
MA
|
Hyperactivity
Disease
|
|
Ritalin
|
|
Novartis Pharmaceuticals
Corporation
|
|
NJ
|
|
|
Dexedrine
|
|
Amedra Pharmaceuticals
LLC
|
|
PA
|
|
|
|
|
|
|
|
Myelodysplastic
|
|
Vidaza
|
|
Celgene Corporation
|
|
NJ
|
Syndromes
|
|
Dacogen
|
|
Astex Pharmaceuticals,
Inc.
|
|
CA
|
|
|
|
|
|
|
|
Triple Negative
Breast Cancer
|
|
Avastin
|
|
Genentech, Inc.
|
|
CA
|
|
|
Erbitux (Cetuximab)
|
|
ImClone Systems
Incorporated
|
|
NY
|
|
|
|
|
|
|
|
Pancreatic Cancer
|
|
Abraxane, Abraxis
BioScience LLC
|
|
Los Angeles
|
|
CA
|
|
|
Novartis Pharma
Stein AG
|
|
Stein
|
|
Switzerland
|
|
|
|
|
|
|
|
Vitargus for
the treatments
|
|
Alcon Laboratories,
Inc.
|
|
Fort Worth
|
|
TX
|
of
Retinal Detachment or
Vitreous
Hemorrhage
|
|
Arcadophta
|
|
Toulouse
|
|
France
|
Competitive
Advantages
We
believe that our drug candidates possess their respective competitive advantages over other therapeutic products that are currently
available. However, due to limited information and resources, we cannot compare our drug candidates with all other drug candidates
under development and research by other research institutions and/or biopharmaceutical companies.
The
competitive advantages of our business model include:
1.
Once we successfully complete POC of any product in the pipeline, we will seek strategic partners, such as respected pharmaceutical
companies in the United States and boutique qualified clinics, to co-develop such mature product. In consideration for our licensing
of the mature product, we expect to receive capital which we plan to use for our research and development of other products in
the pipeline or selection of other new drugs or medical devices.
2.
Sublicensing our products that pass Phase II clinic trials to other pharmaceutical companies saves us the time and resources to
conduct Phase III clinical trials and provides a quicker return on our investment in our products.
3.
We have new drug products related to central nervous system, cancers and autoimmune and one new medical device for vitreous substitutes
under development. This development portfolio diversifies our research risks by focusing on three different medical fields.
We
are currently negotiating with potential medical center partners regarding conducting clinical trials on certain compounds in
our pipeline. However, we cannot provide any assurance that we will find a qualified medical center to conduct clinical trials
of any of our new drug products or enter into a definitive licensing agreement with any pharmaceutical companies.
Government
Regulations
While
ABVC is developing pharmaceutical candidates as of the date of this prospectus, it may in the future acquire more proprietary
technologies to expand its drug candidate portfolio. Currently, ABVC is developing eight therapeutic candidates in the fields
of CNS, oncology/hematology and autoimmune, for which regulatory approval must be received before it can market and sell them.
In addition, our c-GMP facility is subject to review by the FDA. Regulatory approval processes and FDA regulations for ABVC’s
current and any future product candidates are discussed below.
Approval
Process for Pharmaceutical Products
FDA
Approval Process for Pharmaceutical Products
In
the U.S., pharmaceutical products are subject to extensive regulation by the FDA. The FDC Act, and other federal and state statutes
and regulations, govern, among other things, the research, development, testing, manufacture, storage, recordkeeping, approval,
labeling, promotion and marketing, distribution, post-approval monitoring and reporting, sampling, and import and export of pharmaceutical
products. Failure to comply with applicable U.S. requirements may subject a company to a variety of administrative or judicial
sanctions, such as FDA refusal to approve pending NDAs, warning letters, product recalls, product seizures, total or partial suspension
of production or distribution, injunctions, fines, civil penalties, and criminal prosecution. Pharmaceutical product development
in the U.S. typically involves the performance of satisfactory nonclinical, also referred to as pre-clinical, laboratory and animal
studies under the FDA’s Good Laboratory Practice, or GLP, regulation, the development and demonstration of manufacturing
processes, which conform to FDA mandated current good manufacturing requirements, or cGMP, including a quality system regulating
manufacturing, the submission and acceptance of an IND application, which must become effective before human clinical trials may
begin in the U.S., obtaining the approval of Institutional Review Boards, or IRBs, at each site where we plan to conduct a clinical
trial to protect the welfare and rights of human subjects in clinical trials, adequate and well-controlled clinical trials to
establish the safety and effectiveness of the drug for each indication for which FDA approval is sought, and the submission to
the FDA for review and approval of an NDA. Satisfaction of FDA requirements typically takes many years and the actual time required
may vary substantially based upon the type, complexity, and novelty of the product or disease.
Pre-clinical
tests generally include laboratory evaluation of a product candidate, its chemistry, formulation, stability and toxicity, as well
as certain animal studies to assess its potential safety and efficacy. Results of these pre-clinical tests, together with chemistry,
manufacturing controls and analytical data and the clinical trial protocol, which details the objectives of the trial, the parameters
to be used in monitoring safety, and the effectiveness criteria to be evaluated, along with other requirements must be submitted
to the FDA as part of an IND, which must become effective before human clinical trials can begin. The entire clinical trial and
its protocol must be in compliance with what are referred to as good clinical practice, or GCP, requirements. The term, GCP, is
used to refer to various FDA laws and regulations, as well as international scientific standards intended to protect the rights,
health and safety of patients, define the roles of clinical trial sponsors and assure the integrity of clinical trial data.
An
IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises concerns
or questions about the intended conduct of the trials and imposes what is referred to as a clinical hold. Pre-clinical studies
generally take several years to complete, and there is no guarantee that an IND based on those studies will become effective,
allowing clinical testing to begin. In addition to FDA review of an IND, each medical site that desires to participate in a proposed
clinical trial must have the protocol reviewed and approved by an independent IRB or Ethics Committee, or EC. The IRB considers,
among other things, ethical factors, and the selection and safety of human subjects. Clinical trials must be conducted in accordance
with the FDA’s GCP requirements. The FDA and/or IRB may order the temporary, or permanent, discontinuation of a clinical
trial or that a specific clinical trial site be halted at any time, or impose other sanctions for failure to comply with requirements
under the appropriate entity jurisdiction.
Clinical
trials to support NDAs for marketing approval are typically conducted in three sequential phases, but the phases may overlap.
In Phase 1 clinical trials, a product candidate is typically introduced either into healthy human subjects or patients with the
medical condition for which the new drug is intended to be used.
The
main purpose of the trial is to assess a product candidate’s safety and the ability of the human body to tolerate the product
candidate. Phase 1 clinical trials generally include less than 50 subjects or patients. During Phase 2 trials, a product candidate
is studied in an exploratory trial or trials in a limited number of patients with the disease or medical condition for which it
is intended to be used in order to: (i) further identify any possible adverse side effects and safety risks, (ii) assess the preliminary
or potential efficacy of the product candidate for specific target diseases or medical conditions, and (iii) assess dosage tolerance
and determine the optimal dose for Phase 3 trials. Phase 3 trials are generally undertaken to demonstrate clinical efficacy and
to further test for safety in an expanded patient population with the goal of evaluating the overall risk-benefit relationship
of the product candidate. Phase 3 trials are generally designed to reach a specific goal or endpoint, the achievement of which
is intended to demonstrate the candidate product’s clinical efficacy and adequate information for labeling of the approved
drug.
The
FDA has 60 days from its receipt of an NDA to determine whether the application will be accepted for filing based on the FDA’s
threshold determination that it is sufficiently complete to permit substantive review. Once the submission is accepted for filing,
the FDA begins an in-depth review. The FDA has agreed to certain performance goals in the review of NDAs. Most such applications
for standard review drug products are reviewed within ten months; most applications for priority review drugs are reviewed in
six months. Priority review can be applied to drugs that the FDA determines offer major advances in treatment, or provide a treatment
where no adequate therapy exists. The review process for both standard and priority review may be extended by the FDA for three
additional months to consider certain late-submitted information, or information intended to clarify information already provided
in the submission. The FDA may also refer applications for novel drug products, or drug products which present difficult questions
of safety or efficacy, to an advisory committee — typically a panel that includes clinicians and other experts — for
review, evaluation, and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendation
of an advisory committee, but it generally follows such recommendations. Before approving an NDA, the FDA will typically inspect
one or more clinical sites to assure compliance with GCP. Additionally, the FDA will inspect the facility or the facilities at
which the drug is manufactured. The FDA will not approve the product unless compliance with cGMP is satisfactory and the NDA contains
data that provide substantial evidence that the drug is safe and effective in the indication studied.
After
the FDA evaluates the NDA and the manufacturing facilities, it issues either an approval letter or a complete response letter.
A complete response letter generally outlines the deficiencies in the submission and may require substantial additional testing
or information in order for the FDA to reconsider the application. If and when those deficiencies have been addressed to the FDA’s
satisfaction in a resubmission of the NDA, the FDA will issue an approval letter. The FDA has committed to reviewing such resubmissions
in two or six months depending on the type of information included. An approval letter authorizes commercial marketing of the
drug with specific prescribing information for specific indications. As a condition of NDA approval, the FDA may require a risk
evaluation and mitigation strategy, or REMS, to help ensure that the benefits of the drug outweigh the potential risks.
REMS
can include medication guides, communication plans for healthcare professionals, and elements to assure safe use, or ETASU. ETASU
can include, but are not limited to, special training or certification for prescribing or dispensing, dispensing only under certain
circumstances, special monitoring, and the use of patient registries. The requirement for a REMS can materially affect the potential
market and profitability of the drug. Moreover, product approval may require substantial post-approval testing and surveillance
to monitor the drug’s safety or efficacy. Once granted, product approvals may be withdrawn if compliance with regulatory
standards is not maintained or problems are identified following initial marketing.
Post-Approval
Regulations
Even
if a product candidate receives regulatory approval, the approval is typically limited to specific clinical indications. Further,
even after regulatory approval is obtained, subsequent discovery of previously unknown problems with a product may result in restrictions
on its use or even complete withdrawal of the product from the market. Any FDA-approved products manufactured or distributed by
us are subject to continuing regulation by the FDA, including record-keeping requirements and reporting of adverse events or experiences.
Further, drug manufacturers and their subcontractors are required to register their establishments with the FDA and state agencies,
and are subject to periodic inspections by the FDA and state agencies for compliance with cGMP, which impose rigorous procedural
and documentation requirements upon us and our contract manufacturers. ABVC cannot be certain that ABVC or its present or future
contract manufacturers or suppliers will be able to comply with cGMP 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.
If
the FDA approves one or more of our product candidates, ABVC must provide certain updated safety and efficacy information. Product
changes, as well as certain changes in the manufacturing process or facilities where the manufacturing occurs or other post-approval
changes may necessitate additional FDA review and approval. The labeling, advertising, promotion, marketing and distribution of
a drug must be in compliance with FDA and Federal Trade Commission, or FTC, requirements which include, among others, standards
and regulations for direct-to-consumer advertising, off-label promotion, industry sponsored scientific and educational activities,
and promotional activities involving the Internet. The FDA and FTC have very broad enforcement authority, and failure to abide
by these regulations can result in penalties, including the issuance of a warning letter directing us to correct deviations from
regulatory standards and enforcement actions that can include seizures, fines, injunctions and criminal prosecution.
Foreign
Regulatory Approval
Outside
of the U.S., ABVC’s ability to market our product candidates will be contingent also upon its receiving marketing authorizations
from the appropriate foreign regulatory authorities, whether or not FDA approval has been obtained. The foreign regulatory approval
process in most industrialized countries generally encompasses risks similar to those ABVC will encounter in the FDA approval
process. The requirements governing conduct of clinical trials and marketing authorizations, and the time required to obtain requisite
approvals, may vary widely from country to country and differ from those required for FDA approval.
ABVC
will be subject to additional regulations in other countries in which we market, sell and import our products, including Canada.
ABVC or its distributors must receive all necessary approvals or clearance prior to marketing and/or importing our products in
those markets.
Other
Regulatory Matters
Manufacturing,
sales, promotion and other activities following product approval are also subject to regulation by numerous regulatory authorities
in addition to the FDA, including, in the U.S., the Centers for Medicare & Medicaid Services, other divisions of the Department
of Health and Human Services, the Drug Enforcement Administration, the Consumer Product Safety Commission, the Federal Trade Commission,
the Occupational Safety &Health Administration, the Environmental Protection Agency and state and local governments. In the
U.S., sales, marketing and scientific/educational programs must also comply with state and federal fraud and abuse laws. Pricing
and rebate programs must comply with the Medicaid rebate requirements of the U.S. Omnibus Budget Reconciliation Act of 1990 and
more recent requirements in the Health Care Reform Law, as amended by the Health Care and Education Affordability Reconciliation
Act, or ACA. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration,
additional laws and requirements apply. The handling of any controlled substances must comply with the U.S. Controlled Substances
Act and Controlled Substances Import and Export Act. Products must meet applicable child-resistant packaging requirements under
the U.S. Poison Prevention Packaging Act. Manufacturing, sales, promotion and other activities are also potentially subject to
federal and state consumer protection and unfair competition laws.
The
distribution of pharmaceutical products is subject to additional requirements and regulations, including extensive recordkeeping,
licensing, storage and security requirements intended to prevent the unauthorized sale of pharmaceutical products.
The
failure to comply with regulatory requirements subjects firms to possible legal or regulatory action. Depending on the circumstances,
failure to meet applicable regulatory requirements can result in criminal prosecution, fines, imprisonment or other penalties,
injunctions, recall or seizure of products, total or partial suspension of production, denial or withdrawal of product approvals,
or refusal to allow a firm to enter into supply contracts, including government contracts. In addition, even if a firm complies
with FDA and other requirements, new information regarding the safety or effectiveness of a product could lead the FDA to modify
or withdraw product approval. Prohibitions or restrictions on sales or withdrawal of future products marketed by us could materially
affect our business in an adverse way.
Changes
in regulations, statutes or the interpretation of existing regulations could impact our business in the future by requiring, for
example: (i) changes to our manufacturing arrangements; (ii) additions or modifications to product labeling; (iii) the recall
or discontinuation of our products; or (iv) additional record-keeping requirements. If any such changes were to be imposed, they
could adversely affect the operation of our business.
Properties
During
the fiscal years ended December 31, 2016 and 2017, ABVC leased its office at the address of 11 Sawyers Peak Drive, Goshen, NY
10924, which is approximately 1,000 square feet without rental expenses. On October 2, 2018, ABVC entered into a sublease agreement
with BioKey pursuant to which ABVC leases one office 110B for a total rent of $800 per month, utilities included. ABVC may terminate
the sublease agreement with one month notice.
Our
Subsidiary BioLite has its laboratories located in Hsinchu Biomedical Science Park, with an address of 20, Sec. 2, Shengyi Rd.,
2
nd
Floor, Zhubei City, Hsinchu County 302, Taiwan (R.O.C.). On January 1, 2015, BioLite Taiwan entered into a lease
agreement with the National Science Park Administrative Office (Hsinchu City) under which it rents two dormitory buildings in
Hsinchu City, Taiwan for a period of five years. The rent increases by a small percentage each year during the term of the lease
agreement. During the fiscal years of 2017 and 2016, BioLite paid approximately $29,200 and $27,500, respectively, and for the
six months ended June 30, 2018, BioLite paid approximately $15,100 for the dormitory, with respect to the dormitory lease. In
addition, BioLite leases four spaces as its laboratories in Hsinchu City, Taiwan. BioLite Taiwan and the National Science Park
Administrative Office (Hsinchu City) entered into four five-year term leases which commenced respectively on May 12, 2014, January
1, 2015, January 1, 2016 and January 1, 2016. The aggregate leasing area amounts to approximately 36,425 square meters (equivalent
to approximately 392,075 square feet), of which BioLite Taiwan leased 678 square meters (equivalent to approximately 7,298 square
feet) on the second floor of the building. The leased space counts for approximately 1.9% of the total space of the building.
In the fiscal year of 2017 and 2016, BioLite incurred rental expenses relating the laboratory spaces in the amount of approximately
$9,000 per month. BioLite rented its office from Lion Art Promotion Inc. (“LION”), a related party of BioLite
and its lease is renewable annually. BioLite paid $37,592 and $35,463 for the years ended December 31, 2017 and 2016, respectively.
The lease from LION was terminated on March 31, 2018 and BioLite paid $9,553 for the nine months ended September 30, 2018.
Another
of our Subsidiary BioKey is headquartered in Fremont, California. BioKey’s office lease will end on February 28, 2021 and
the office occupies approximately 28,186 square feet. BioKey’s space consists of offices, research and production laboratories,
and manufacturing facilities. BioKey has an option to extend the lease for its offices in Fremont a period of five years commencing
February 28, 2021, and BioKey may exercise this option for 5 more years. The total BioKey’s rental expenses were $274,978
and $255,240 for the years ended December 31, 2017 and 2016, and $205,576 for the nine months ended September 30, 2018.
Legal
Proceedings
From
time to time ABVC and its Subsidiaries may become involved in legal proceedings and claims, or be threatened with other legal
actions and claims, arising in the ordinary course of business relating to its intellectual property, product liability, regulatory
compliance and/or marketing and advertising of its products. As of to date, ABVC and its Subsidiaries were not involved or threatened
with any legal actions and regulatory proceedings.
Environment
ABVC
seeks to comply with all applicable statutory and administrative requirements concerning environmental quality. Expenditures for
compliance with federal state and local environmental laws have not had, and are not expected to have, a material effect on ABVC’s
capital expenditures, results of operations or competitive position.
Employees
As
of the date of this prospectus, ABVC, including its subsidiaries, had 38 employees, located in U.S. and Taiwan. The following
table sets forth the number of our employees by function:
|
|
Number of
|
|
Functional Area
|
|
Employees
|
|
Senior management
|
|
|
6
|
|
Research and development
|
|
|
12
|
|
International development
|
|
|
4
|
|
Public relations
|
|
|
4
|
|
Marketing
|
|
|
3
|
|
Internal control
|
|
|
3
|
|
Accounting
|
|
|
6
|
|
Total
|
|
|
32
|
|
ABVC
believes that it maintains a good working relationship with its employees. ABVC offers its employees competitive benefits, including
a pleasant and rewarding work environment, career-oriented training, and career growth opportunities. ABVC believes its employees
are devoted to delivering superb services. ABVC did not experience any significant labor disputes.
WHERE YOU CAN FIND MORE INFORMATION
We are a reporting company and file annual,
quarterly and special reports, and other information with the SEC. Copies of the reports and other information may be read and
copied at the SEC’s Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. You can request copies of such documents
by writing to the SEC and paying a fee for the copying cost. You may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a web site at
http://www.sec.gov
that contains reports, proxy
and information statements and other information regarding registrants that file electronically with the SEC.
This prospectus is part of a registration
statement on Form S-1 that we filed with the SEC. Certain information in the registration statement has been omitted from this
prospectus in accordance with the rules and regulations of the SEC. We have also filed exhibits and schedules with the registration
statement that are excluded from this prospectus. For further information you may:
|
●
|
read a copy of the registration statement, including the exhibits and schedules, without charge at the SEC’s Public Reference Room; or
|
|
●
|
obtain a copy from the SEC upon payment of the fees prescribed by the SEC.
|
We file periodic reports, proxy statements,
and other information with the SEC. These periodic reports, proxy statements, and other information will be available for inspection
and copying at the SEC’s public reference facilities and the website of the SEC referred to above. After the closing of this
offering, you may access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act with the SEC free of charge as soon
as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The information contained
in, or that can be accessed through, our website is not incorporated by reference into this prospectus.
INDEX TO FINANCIAL
INFORMATION
|
Page
|
|
|
American BriVision (Holding) Corporation
and Subsidiaries
|
|
|
|
Report
of Independent Registered Public Accounting Firms
|
F-2 - F-3
|
Consolidated
Balance Sheets at December 31, 2017 and September 30, 2017
|
F-4
|
Consolidated
Statements of Operations for the three months ended December 31, 2017 and for the years ended September 30, 2017 and 2016
|
F-5
|
Consolidated
Statements of Changes in Stockholders’ Equity (Deficit) for the three months ended December 31, 2017 and for the years
ended September 30, 2017 and 2016
|
F-6
|
Consolidated
Statements of Cash Flows for the three months ended December 31, 2017 and for the years ended September 30, 2017 and 2016
|
F-7
|
Notes
to Consolidated Financial Statements
|
F-8 - F-20
|
|
|
Consolidated
Unaudited Balance Sheets at September 30, 2018 and December 31, 2017
|
F-22
|
Consolidated
Unaudited Statements of Operations for the three and nine months ended September 30, 2018 and 2017
|
F-23
|
Consolidated
Unaudited Statements of Cash Flows for the three and nine months ended September 30, 2018 and 2017
|
F-24
|
Notes
to Consolidated Unaudited Financial Statements
|
F-25 - F-38
|
|
|
BioLite
Holding, Inc.
|
|
|
|
Financial
Statements for the Years Ended December 31, 2017 and 2016
|
F-39
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-40
|
Financial
Statements:
|
|
Consolidated
Balance Sheets as of December 31, 2017 and 2016
|
F-41
|
Consolidated
Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2017 and 2016
|
F-42
|
Consolidated
Statements of Equity for the years ended December 31, 2017 and 2016
|
F-43
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2017 and 2016
|
F-44
|
Notes
to Consolidated Financial Statements
|
F-45 - F-69
|
|
|
Consolidated
Unaudited Balance Sheets at September 30, 2018 and December 31, 2017
|
F-71
|
Consolidated
Unaudited Statements of Operations for the three and nine months ended September 30, 2018 and 2017
|
F-72
|
Consolidated
Unaudited Statements of Cash Flows for the three and nine months ended September 30, 2018 and 2017
|
F-73
|
Notes
to Consolidated Unaudited Financial Statements
|
F-74 - F-100
|
|
|
BioKey,
Inc.
|
|
|
|
Financial
Statements for the Years Ended December 31, 2017 and 2016
|
F-101
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-102
|
Balance
Sheets
|
F-103
|
Statements
of Operations and Comprehensive Income (Loss)
|
F-104
|
Statements
of Stockholders’ Equity
|
F-105
|
Statements
of Cash Flows
|
F-106
|
Notes
to the Financial Statements
|
F-107
- F-117
|
|
|
Unaudited
Balance Sheets at September 30, 2018 and December 31, 2017
|
F-119
|
Unaudited
Statements of Operations for the three and nine months ended September 30, 2018 and 2017
|
F-120
|
Unaudited
Statements of Cash Flows for the three and nine months ended September 30, 2018 and 2017
|
F-121
|
Notes
to Unaudited Financial Statements
|
F-122
- F131
|
|
|
A
udit
● T
ax
●
C
onsulting
● F
inancial
A
dvisory
Registered with Public Company Accounting Oversight Board
(PCAOB)
|
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and Shareholders of
American BriVision (Holding) Corporation and Subsidiaries
Opinion on the Financial
Statements
We have audited the accompanying consolidated
balance sheets of American BriVision (Holding) Corporation and subsidiaries (collectively “the Company”) as of December
31, 2017 and September 30, 2017, the related statement of operations, stockholders’ equity, and cash flows for the three
months ended December 31, 2017 and for the year ended September 30, 2017, and the related notes
(collectively
referred to as the “financial statements”)
. In our opinion, the financial statements present fairly, in all
material respects, the consolidated financial position of the Company at December 31, 2017 and September 31,
2017, and the consolidated results of its operations and its cash flows for the three months ended December 31, 2017 and for
the year ended September 30, 2017, in conformity with the U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based
on our audits. We are a public accounting firm registered with the
Public Company Accounting
Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement
, whether due to
error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining,
on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating
the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of
the financial statements. We believe that our audits provide a reasonable basis for our opinion.
The accompanying consolidated financial
statements have been prepared assuming that American BriVision (Holding) Corporation and subsidiaries will continue as a going
concern. As described in Note 4 to the consolidated financial statements, the Company has incurred losses from operations, has
a working capital deficit, and is in need of additional capital to grow its operations so that it can become profitable. These
factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans with
regard to these matters are described in Note 4. The accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ KCCW Accountancy Corp.
|
|
We have served as the Company’s
auditor since 2017.
Diamond Bar, California
March 1, 2018
KCCW Accountancy Corp.
3333 S Brea Canyon Rd. #206, Diamond Bar,
CA 91765, USA
Tel: +1 909 348 7228 ● Fax:
+1 909 895 4155 ● info@kccwcpa.com
|
中正達會計師事務所有限公司
Centurion ZD CPA Limited
Certified Public Accountants (Practising)
|
Unit 1304, 13/F, Two Harbourfront, 22 Tak Fung Street, Hunghom,
Hong Kong.
香港 紅磡 德豐街22號
海濱廣場二期 13樓1304室
Tel 電話: (852) 2126 2388
Fax 傳真: (852) 2122 9078
Email 電郵: info@czdcpa.com
|
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and Shareholders
of American BriVision Corporation and subsidiaries
We have audited the accompanying consolidated
balance sheets of American BriVision Corporation and subsidiaries (“the Company”) as of September 30, 2016 the related
statements of operations, stockholders’ equity and cash flows for the year in the period ended September 30, 2016.
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements
referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2016 and
the results of its operations and its cash flows for the year in the period ended September 30, 2016 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 4 to the consolidated
financial statements, the Company has suffered recurring losses from operations and has a significant accumulated deficit. In addition,
the Company continues to experience negative cash flows from operations. These factors raise substantial doubt about the Company’s
ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
As discussed in Note 2 to the financial
statements, the financial statements for the year ended September 30, 2016 have been restated to correct misstatements in the research
and development expenses and the typographical errors.
/s/ Centurion ZD CPA Limited
Certified Public Accountants
(Practising) Hong Kong
Dated: January 12, 2017
Except for Note 2 which was dated at May 22, 2017
AMERICAN BRIVISION (HOLDING) CORPORATION
AND SUBSIDIARIES
(formerly METU BRANDS, INC.)
CONSOLIDATED BALANCE SHEETS
|
|
December 31,
2017
|
|
|
September 30,
2017
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash
|
|
$
|
93,332
|
|
|
$
|
204,851
|
|
Receivable from collaboration partners – related
parties
|
|
|
2,550,000
|
|
|
|
2,550,000
|
|
Total Current Assets
|
|
|
2,643,332
|
|
|
|
2,754,851
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
2,643,332
|
|
|
$
|
2,754,851
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
Accrued expense
|
|
$
|
170,927
|
|
|
$
|
34,914
|
|
Due to related parties
|
|
|
4,229,320
|
|
|
|
4,113,000
|
|
Total Liabilities
|
|
$
|
4,400,247
|
|
|
$
|
4,147,914
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit
|
|
|
|
|
|
|
|
|
Common Stock 360,000,000 authorized at $0.001 par
value; shares issued and outstanding 213,746,647 at December 31, 2017 and September 30, 2017
|
|
|
213,747
|
|
|
|
213,747
|
|
Additional paid-in capital
|
|
|
13,805,936
|
|
|
|
13,788,574
|
|
Accumulated deficit
|
|
|
(15,776,598
|
)
|
|
|
(15,395,384
|
)
|
Total stockholders’ deficit
|
|
|
(1,756,915
|
)
|
|
|
(1,393,063
|
)
|
Total Liabilities and Equity
|
|
$
|
2,643,332
|
|
|
$
|
2,754,851
|
|
|
*
|
All
shares outstanding for all periods have been retroactively restated to reflect Company’s 1 to 3:141 forward stock split,
which was effective on April 8, 2016.
|
The accompanying notes are an integral
part of these consolidated financial statements.
AMERICAN BRIVISION (HOLDING) CORPORATION
AND SUBSIDIARIES
(formerly METU BRANDS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Three months ended
|
|
|
Years ended
|
|
|
|
December 31,
2017
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
-
|
|
|
|
-
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
-
|
|
|
|
-
|
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
289,731
|
|
|
|
707,142
|
|
|
|
599,303
|
|
Research and development expenses
|
|
|
45,701
|
|
|
|
3,151,162
|
|
|
|
10,000,000
|
|
Stock based compensation
|
|
|
17,362
|
|
|
|
138,038
|
|
|
|
397,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(352,794
|
)
|
|
|
(3,996,342
|
)
|
|
|
(10,997,295
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
80
|
|
|
|
149
|
|
|
|
361
|
|
Interest expense
|
|
|
(28,500
|
)
|
|
|
(74,960
|
)
|
|
|
(10,170
|
)
|
Gain on exchange differences
|
|
|
-
|
|
|
|
-
|
|
|
|
141
|
|
Total other expenses
|
|
|
(28,420
|
)
|
|
|
(74,811
|
)
|
|
|
(9,668
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision income tax
|
|
|
(381,214
|
)
|
|
|
(4,071,153
|
)
|
|
|
(11,006,963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income tax
|
|
|
-
|
|
|
|
830
|
|
|
|
836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(381,214
|
)
|
|
|
(4,071,983
|
)
|
|
|
(11,007,799
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
213,746,647
|
|
|
|
212,648,770
|
|
|
|
193,981,153
|
|
|
*
|
All
shares outstanding for all periods have been retroactively restated to reflect Company’s 1 to 3:141 forward stock split,
which was effective on April 8, 2016.
|
The accompanying notes are an integral
part of these consolidated financial statements.
AMERICAN BRIVISION (HOLDING) CORPORATION
AND SUBSIDIARIES
(formerly METU BRANDS, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY (DEFICIT)
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Stockholders’
|
|
|
|
Number of
|
|
|
|
|
|
paid-in
|
|
|
Subscription
|
|
|
Accumulated
|
|
|
equity
|
|
|
|
shares
|
|
|
Amount
|
|
|
capital
|
|
|
receivable
|
|
|
deficit
|
|
|
(deficit)
|
|
Balance at July 21, 2015 (inception)
|
|
|
159,622,964
|
|
|
$
|
159,623
|
|
|
$
|
1,087,378
|
|
|
$
|
(350,000
|
)
|
|
$
|
-
|
|
|
$
|
897,001
|
|
Issuance of common shares
|
|
|
6,650,957
|
|
|
|
6,651
|
|
|
|
45,307
|
|
|
|
-
|
|
|
|
-
|
|
|
|
51,958
|
|
Net loss for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(315,602
|
)
|
|
|
(315,602
|
)
|
Balance at September 30, 2015
|
|
|
166,273,921
|
|
|
|
166,274
|
|
|
|
1,132,685
|
|
|
|
(350,000
|
)
|
|
|
(315,602
|
)
|
|
|
633,357
|
|
Reverse merger recapitalization
|
|
|
42,359,253
|
|
|
|
42,359
|
|
|
|
(44,995
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,636
|
)
|
Issuance of common shares
|
|
|
2,031,423
|
|
|
|
2,032
|
|
|
|
3,247,968
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,250,000
|
|
Stock based compensation
|
|
|
157,050
|
|
|
|
157
|
|
|
|
397,803
|
|
|
|
-
|
|
|
|
-
|
|
|
|
397,960
|
|
Receipt of subscription receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
350,000
|
|
|
|
-
|
|
|
|
350,000
|
|
Net loss for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(11,007,799
|
)
|
|
|
(11,007,799
|
)
|
Balance at September 30, 2016
|
|
|
210,821,647
|
|
|
|
210,822
|
|
|
|
4,733,461
|
|
|
|
-
|
|
|
|
(11,323,401
|
)
|
|
|
(6,379,118
|
)
|
Issuance of common shares
|
|
|
2,925,000
|
|
|
|
2,925
|
|
|
|
5,847,075
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,850,000
|
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
138,038
|
|
|
|
-
|
|
|
|
-
|
|
|
|
138,038
|
|
Capital contribution from related parties under common
control
|
|
|
-
|
|
|
|
-
|
|
|
|
3,070,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,070,000
|
|
Net loss for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,071,983
|
)
|
|
|
(4,071,983
|
)
|
Balance at September 30, 2017
|
|
|
213,746,647
|
|
|
$
|
213,747
|
|
|
$
|
13,788,574
|
|
|
$
|
-
|
|
|
$
|
(15,395,384
|
)
|
|
$
|
(1,393,063
|
)
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
17,362
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,362
|
|
Net loss for the three months
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(381,214
|
)
|
|
|
(381,214
|
)
|
Balance at December 31, 2017
|
|
|
213,746,647
|
|
|
$
|
213,747
|
|
|
$
|
13,805,936
|
|
|
$
|
-
|
|
|
$
|
(15,776,598
|
)
|
|
$
|
(1,756,915
|
)
|
|
*
|
All
shares outstanding for all periods have been retroactively restated to reflect Company’s 1 to 3:141 forward stock split,
which was effective on April 8, 2016.
|
The accompanying notes are an integral
part of these consolidated financial statements.
AMERICAN BRIVISION (HOLDING) CORPORATION
AND SUBSIDIARIES
(formerly METU BRANDS, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
|
|
Three Months ended
December 31,
|
|
|
Years ended
September
30,
|
|
|
|
2017
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(381,214
|
)
|
|
$
|
(4,071,983
|
)
|
|
$
|
(11,007,799
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock for compensation and recapitalization
|
|
|
-
|
|
|
|
-
|
|
|
|
1,295,324
|
|
Stock based compensation for nonemployees
|
|
|
17,362
|
|
|
|
138,038
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in prepaid expenses and deposits
|
|
|
-
|
|
|
|
3,815
|
|
|
|
3,815
|
|
Increase (decrease) in accounts payable
|
|
|
-
|
|
|
|
(18,370
|
)
|
|
|
18,370
|
|
Increase (decrease) in accrued expenses and other current liabilities
|
|
|
136,013
|
|
|
|
(3,186
|
)
|
|
|
(261,900
|
)
|
Increase in due to related parties
|
|
|
116,320
|
|
|
|
2,353,000
|
|
|
|
6,477,483
|
|
Net cash used in operating activities
|
|
|
(111,519
|
)
|
|
|
(1,598,686
|
)
|
|
|
(3,474,707
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contribution from related parties under common control
|
|
|
-
|
|
|
|
520,000
|
|
|
|
-
|
|
Borrowings from related parties
|
|
|
-
|
|
|
|
1,110,000
|
|
|
|
-
|
|
Decrease in due to shareholder
|
|
|
-
|
|
|
|
-
|
|
|
|
(46,586
|
)
|
Proceeds from subscription receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
350,000
|
|
Proceeds from issuance of common shares
|
|
|
-
|
|
|
|
-
|
|
|
|
2,350,000
|
|
Net cash provided by financing
activities
|
|
|
-
|
|
|
|
1,630,000
|
|
|
|
2,653,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash
equivalents
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(111,519
|
)
|
|
|
31,314
|
|
|
|
(821,293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
204,851
|
|
|
|
173,537
|
|
|
|
994,830
|
|
Ending
|
|
$
|
93,332
|
|
|
$
|
204,851
|
|
|
$
|
173,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flows
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense paid
|
|
$
|
19,500
|
|
|
$
|
66,500
|
|
|
$
|
-
|
|
Income taxes paid
|
|
$
|
-
|
|
|
$
|
830
|
|
|
$
|
836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing and investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued for due to related parties
|
|
$
|
-
|
|
|
$
|
5,850,000
|
|
|
$
|
-
|
|
Capital contribution from related parties under common
control
|
|
$
|
-
|
|
|
$
|
2,550,000
|
|
|
$
|
-
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
AMERICAN BRIVISION (HOLDING) CORPORATION
AND SUBSIDIARIES
(formerly METU BRANDS, INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2017
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
American BriVision (Holding) Corporation (the “Company” or “Holding entity”), a Nevada corporation, through
the Company’s operating entity, American BriVision Corporation (the “BriVision”), which was incorporated in July
2015 in the State of Delaware, engages in biotechnology and focuses on the development of new drugs and innovative medical devices
to fulfill unmet medical needs. The business model of the Company is to integrate research achievements from world-famous
institutions (such as Memorial Sloan Kettering Cancer Center (“MSKCC”) and MD Anderson Cancer Center), conduct clinical
trials of translational medicine for Proof of Concept (“POC”), out-license to international pharmaceutical companies,
and exploit global markets. BriVision had to predecessor operations prior to its formation on July 21, 2015.
Reverse Merger
On February 8, 2016, a Share Exchange
Agreement (the “Share Exchange Agreement”) was entered into by and among American BriVision (Holding) Corporation,
American BriVision Corporation (“BriVision”), and Euro-Asia Investment & Finance Corp. Limited, a company
incorporated under the laws of Hong Kong Special Administrative Region of the People’s Republic of China (“Euro-Asia”),
being the owners of record of 164,387,376 (52,336,000 pre-stock split) shares of Common Stock of the Company, and the owners of
record of all of the issued share capital of BriVision (the “BriVision Stock”).
Pursuant to the Share Exchange Agreement,
upon surrender by the BriVision Shareholders and the cancellation by BriVision of the certificates evidencing the BriVision Stock
as registered in the name of each BriVision Shareholder, and pursuant to the registration of the Company in the register of members
maintained by BriVision as the new holder of the BriVision Stock and the issuance of the certificates evidencing the aforementioned
registration of the BriVision Stock in the name of the Company, the Company should issue 166,273,921(52,936,583 pre-stock split)
shares (the “Acquisition Stock”) (subject to adjustment for fractionalized shares as set forth below) of the
Company’s Common Stock to the BriVision Shareholders (or their designees), and 163,159,952 (51,945,225 pre-stock split)
shares of the Company’s Common Stock owned by Euro-Asia should be cancelled and retired to treasury. The Acquisition Stock
collectively should represent 79.70% of the issued and outstanding Common Stock of the Company immediately after the Closing,
in exchange for the BriVision Stock, representing 100% of the issued share capital of BriVision in a reverse merger (the “Merger”).
Pursuant to the Merger, all of the
issued and outstanding common shares of BriVision were converted, at an exchange ratio of 0.2536-for-1, into an aggregate of 166,273,921(52,936,583pre-stock
split) common shares of the Company and BriVision has become a wholly owned subsidiary of the Company. The holders of Company’s
Common Stock as of immediately prior to the Merger held an aggregate of 205,519,223(65,431,144 pre-stock split) shares of Company’s
Common Stock. Because of the exchange of the BriVision Stock for the Acquisition Stock (the “Share Exchange”),
BriVision has become a wholly owned subsidiary (the “Subsidiary”) of the Company and there was a change of control
of the Company following the closing. There were no warrants, options or other equity instruments issued in connection
with the share exchange agreement.
Because of the consummation of
the Share Exchange, BriVision is now our wholly owned subsidiary and its shareholders own approximately 79.70%
of our issued and outstanding Common Stock.
Following the Share Exchange, we have abandoned
our prior business plan and we are now pursuing BriVision’s historically proposed businesses, which focus on the
development of new drugs and innovative medical devices to fulfill unmet medical needs. The business model of the Company
is to integrate research achievements from world-famous institutions, conduct clinical trials of translational medicine for Proof
of Concept (“POC”), out-license to international pharmaceutical companies, and exploit global markets.
Accounting Treatment of the Reverse Merger
For financial reporting purposes, the Share
Exchange represents a “reverse merger” rather than a business combination and BriVision is deemed the
accounting acquirer in the transaction. The Share Exchange is being accounted for as a reverse-merger and recapitalization.
BriVision is the acquirer for financial reporting purposes and the Company is the acquired company. Consequently,
the assets and liabilities and the operations reflected in the historical financial statements prior to the Share Exchange will
be those of BriVision and recorded at the historical cost basis of BriVision. In addition, the consolidated financial
statements after completion of the Share Exchange will include the assets and liabilities of the Company and BriVision, and the
historical operations of BriVision and operations of the Combined Company from the closing date of the Share Exchange.
2. CORRECTIONS TO PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL
STATEMENTS
The Company discovered that it had erroneously
stated that the research and development expenses were understated during the year ended September 30, 2016. Instead, our research
and development expenses were $10,000,000 for the year ended September 30, 2016 and were restated in the Adjustments No. 1 column.
Moreover, there were typographical errors on Selling, General and Administration expenses which were corrected in the Adjustments
No. 2 column.
The following tables present the effect
of the corrections discussed above and other adjustments on selected line items of our previously reported consolidated financial
statements as of and for the year ended September 30, 2016,
ITEMS
|
|
Previously
Reported on
Form 10K
|
|
|
Adjustments
No.1
|
|
|
Adjustments
No.2
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to related party
|
|
|
-
|
|
|
|
6,500,000
|
|
|
|
-
|
|
|
|
6,500,000
|
|
Total Liabilities
|
|
|
56,470
|
|
|
|
6,500,000
|
|
|
|
-
|
|
|
|
6,556,470
|
|
Additional paid-in capital
|
|
|
4,733,401
|
|
|
|
-
|
|
|
|
60
|
|
|
|
4,733,461
|
|
Accumulated deficit
|
|
|
(4,823,401
|
)
|
|
|
(6,500,000
|
)
|
|
|
-
|
|
|
|
(11,323,401
|
)
|
Total equity (deficit)
|
|
|
120,882
|
|
|
|
(6,500,000
|
)
|
|
|
-
|
|
|
|
(6,379,118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Operations and Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
4,497,263
|
|
|
|
(3,500,060
|
)
|
|
|
60
|
|
|
|
997,263
|
|
Research and development expenses
|
|
|
-
|
|
|
|
10,000,000
|
|
|
|
-
|
|
|
|
10,000,000
|
|
Net loss from operations
|
|
|
(4,497,295
|
)
|
|
|
(6,499,940
|
)
|
|
|
(60
|
)
|
|
|
(10,997,295
|
)
|
Loss from continuing operations before income taxes
|
|
|
(4,506,963
|
)
|
|
|
(6,499,940
|
)
|
|
|
(60
|
)
|
|
|
(11,006,963
|
)
|
Net Loss
|
|
|
(4,507,799
|
)
|
|
|
(6,499,940
|
)
|
|
|
(60
|
)
|
|
|
(11,007,799
|
)
|
Basic and diluted loss per share
|
|
|
(0.00
|
)
|
|
|
(0.06
|
)
|
|
|
(0.00
|
)
|
|
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Cash Flow
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(4,507,799
|
)
|
|
|
(6,499,940
|
)
|
|
|
(60
|
)
|
|
|
(11,007,799
|
)
|
Issuance of Common Stock for compensation
|
|
|
1,295,324
|
|
|
|
(60
|
)
|
|
|
60
|
|
|
|
1,295,324
|
|
(Decrease) increase in due to related party
|
|
|
(22,517
|
)
|
|
|
6,500,000
|
|
|
|
|
|
|
|
6,477,483
|
|
As a result of the restatement of the consolidated
balance sheet as of September 30, 2016, Due to related party and Total liabilities were increased by $6,500,000; changed from $0
to $6,500,000 and from $56,470 to $6,556,470. Additional paid in capital was increased by $60 and changed from $4,733,401 to $4,733,461.
Accumulated deficit was increased by $6,500,000 and changed from $(4,823,401) to $(11,323,401). Total equity (deficit) was decreased
by $6,500,000 and changed from $120,882 to $(6,379,118).
As a result of the restatement of the consolidated
statement of operations and comprehensive loss for the year ended September 30, 2016, Selling, general and administrative expenses
were decreased by $3,500,000 and changed from $4,497,263 to $997,263. Research and development expenses were increased by $10,000,000
and changed from $0 to $10,000,000. Net loss from operations was increased by $6,500,000 and changed from $(4,497,295) to $(10,997,295).
Loss from continuing operations before taxes was increased by $6,500,000 and changed from $(4,506,963) to $(11,006,963). Net loss
was increased by $6,500,000 and changed from $(4,507,799) to $(11,007,799). Basic and diluted loss per share were also increased
by 0.06 and changed from $0 to $(0.06).
As a result of the restatement of the
consolidated statement of cash flow for the year ended September 30, 2016, Net loss from continuing operations was increased by
$6,500,000; changed from $(4,507,799) to $(11,007,799). Issuance of Common Stock for compensation did not have changes and stated
as $1,295,324. (Decrease) increase in due to related party was increased by $6,500,000 and changed from $(22,517) to $6,477,483.
There were no changes in Net cash used in operating activities.
3. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation
The accompanying 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 1
st
and ending on September 30
th
to the period beginning on January 1
st
and ending on December 31
st
, beginning January 1, 2018. As a result, the current fiscal period is a three-month transition
period ended on December 31, 2017. In these consolidated statements, including the notes thereto, the current period financial
results ended December 31, 2017 are for a three-month period. Audited results for the twelve months ended September 30, 2017 and
2016 are both for twelve-month periods. In addition, the Company’s consolidated statements of operations and consolidated
statements of cash flows include unaudited comparative amounts for the three-month period ended December 31, 2016. All references
herein to a fiscal year prior to December 31, 2017 refer to the twelve months ended September 30
th
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.
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
of the Company approved an amendment to 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. The majority of the shareholders of the Company approved the amendment to Articles of Incorporation.
Fair Value Measurements
The Company applies the provisions of
ASC Subtopic 820-10, “Fair Value Measurements”, for fair value measurements of financial assets and
financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in
the financial statements. ASC 820 also establishes a framework for measuring fair value and expands disclosures about fair
value measurements.
Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. When determining the fair value measurements for assets and liabilities, the Company considers the
principal or most advantageous market in which it would transact and it considers assumptions that market participants would use
when pricing the asset or liability.
ASC 820 establishes a fair value hierarchy
that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair
value. ASC 820 establishes three levels of inputs to measure fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements
involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
|
-
|
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
-
|
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
|
|
-
|
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.
|
There were no assets or liabilities measured
at fair value on a recurring basis subject to the disclosure requirements of ASC 820 as of September 30, 2017 and 2016.
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 December 31, 2017 and September 30, 2017,
the Company’s cash and cash equivalents amounted $93,332 and $204,851, 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.
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’s insurance limits. The Company does not enter into financial instruments for hedging, trading or speculative
purposes. Concentration of credit risk with respect to trade and notes receivables is limited due to the wide variety of customers
and markets in which the Company transacts business, as well as their dispersion across many geographical areas. The Company performs
ongoing credit evaluations of its customers and generally does not require collateral, but does require advance deposits on certain
transactions.
Receivable from Collaboration Partners
Receivable from collaboration partners
is stated at carrying value less estimates made for doubtful receivables. An allowance for impairment of receivable from collaboration
partners is established if the collection of a receivable becomes doubtful. Such receivable becomes doubtful when there is objective
evidence that the Company 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. An impairment loss is recognized in the statement of operations, as are subsequent recoveries of previous impairments.
Research and Development Expenses
The Company accounts for the cost of using
licensing rights in research and development cost according to ASC Topic 730-10-25-1. This guidance provides that 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 when incurred.
Stock-based Compensation
The Company measures expense 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 ASC Topic 718 “Compensation-Stock
Compensation”. Total employee stock-based compensation expenses were $0 for the three months ended December 31, 2017, and
$0 and $397,960 for the years ended September 30, 2017 and 2016, respectively.
The Company accounted for stock-based compensation
to non-employees in accordance with 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 $17,362 for the three months ended December 31, 2017, and $138,038 and $0 for the years ended September 30, 2017 and 2016,
respectively.
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 ASC 740, 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 December 31, 2017 and for the years ended
September 30, 2017 and September, 30, 2016. GAAP also provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosures and transition.
For the three months ended December 31,
2017, the Company’s income tax expense amounted $0. For the years ended September 30, 2017 and 2016, the Company’s
income tax expense amounted $830 and $836, respectively.
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. To the extent that a company’s accounting
for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a
provisional estimate to be included in the financial statements. 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 our interpretations and assumptions, additional guidance that may be issued by the I.R.S.,
and actions we may take. The Company is continuing to gather additional information to determine the final impact.
Loss Per Share of Common Stock
The Company reports loss per share in accordance
with ASC Topic 260-10 “Earnings per Share.” Basic earnings (loss) per share are computed by dividing income (loss)
available to common shareholders by the weighted average number of common shares available.
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 assets 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
Revenue Recognition:
In May
2014, the FASB issued Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers: Topic
606
(ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09
is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration
that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle
and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required
under existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration
to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is
effective for us in our first quarter of fiscal 2018 using either of two methods: (i) retrospective to each prior reporting
period presented with the option to elect certain practical expedients as defined within ASU 2014-09 (full retrospective method);
or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application
and providing certain additional disclosures as defined per ASU 2014-09 (modified retrospective method). We are currently assessing
the materiality of the impact to our consolidated financial statements, and have not yet selected a transition approach.
Disclosure of Going Concern Uncertainties:
In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-15,
Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern
(ASU 2014-15), to provide guidance on management’s
responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern
and to provide related footnote disclosures. ASU 2014-15 is effective for us in our fourth quarter of fiscal 2017 with early adoption
permitted. We do not believe the impact of our pending adoption of ASU 2014-15 on the Company’s financial statements will
be material.
Leases
: In February 2016,
the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-2”), which provides guidance on lease amendments to
the FASB Accounting should Standard Codification. This ASU will be effective for us beginning in May 1, 2019. We are currently
in the process of evaluating the impact of the adoption of ASU 2016-2on our consolidated financial statements.
Stock-based Compensation
:
In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Stock-Based
Payment Accounting (ASU 2016-09). ASU 2016-09 changes how companies account for certain aspects of stock-based awards to employees,
including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in
the statement of cash flows. ASU 2016-09 is effective for us in the first quarter of 2018, and earlier adoption is permitted.
We are still evaluating the effect that this guidance will have on our consolidated financial statements and related disclosures.
Financial Instruments - Credit Losses:
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): The amendments in this Update require
a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected
to be collected. The amendments broaden the information that an entity must consider in developing its expected credit loss estimate
for assets measured either collectively or individually. The use of forecasted information incorporates more timely information
in the estimate of expected credit loss, which will be more decision useful to users of the financial statements. ASU 2016-13 is
effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
Early adoption is allowed as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal
years. The Company is still evaluating the effect that this guidance will have on the Company’s consolidated financial statements
and related disclosures.
Statement of Cash Flows:
In
August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): The amendments in this Update apply to all entities,
including both business entities and not-for-profit entities that are required to present a statement of cash flows under Topic
230. The amendments in this Update provide guidance on the following eight specific cash flow issues. The amendments are an improvement
to GAAP because they provide guidance for each of the eight issues, thereby reducing the current and potential future diversity
in practice described above. ASU 2016-15 is effective for the Company for fiscal years beginning after December 15, 2017, including
interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is
still evaluating the effect that this guidance will have on the Company’s consolidated financial statements and related disclosures.
In November 2016, the FASB issued ASU No.
2016-18, Statement of Cash Flows (Topic 230): “Restricted Cash”(“ASU 2016-18”). ASU 2016-18 requires
that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally
described as restricted cash or restricted cash equivalents. ASU 2016-18 will become effective for us beginning April 1, 2018,
or fiscal 2019. ASU 2016-18 is required to be applied retrospectively. Upon the adoption, amounts described as restricted cash
will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the
statements of cash flows.
Business Combination:
In
January 2017, the FASB issued ASU No. 2017-1 “Topic 805, Business Combinations: Clarifying the Definition of a Business”.
The amendments in this update provide a screen to determine when a set is not a business. The screen requires that when substantially
all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of
similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further
evaluated. The amendments in this update affect all reporting entities that must determine whether they have acquired or sold a
business. Public business entities should apply the amendments in this update to annual periods beginning after December 15, 2017,
including interim periods within those periods. All other entities should apply the amendments to annual periods beginning after
December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. We do not expect the adoption of
ASU 2017-1 to have a material impact on our consolidated financial statements.
From time to time, new accounting pronouncements
are issued by FASB that are adopted by the Company as of the specified effective date. If not discussed, management believes that
the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s financial
statements upon adoption. Management does not believe that any recently issued, but not yet effective accounting pronouncements,
when adopted, will have a material effect on the accompanying financial statements
4. GOING CONCERN
The accompanying consolidated financial
statements have been prepared assuming the Company will continue as a going concern. The Company has incurred losses since its
inception resulting in an accumulated deficit of $15,776,598 and $15,395,384 as of December 31, 2017 and September 30, 2017, respectively,
and incurred net loss of $381,214 for the three months ended December 31, 2017, and $4,071,983 during the year ended September
30, 2017. The Company also had working capital deficiency of $1,756,915 and $1,393,063 at December 31, 2017 and September 30,
2017, respectively. The ability to continue as a going concern is dependent upon the Company generating profitable operations
in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business
operations when they become due. These consolidated financial statements do not include any adjustments to the recoverability
and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company upon
signing of that agreement. On May 6, 2016, the Company and BioLite agreed to amend the BioLite Collaborative Agreement, through
enter into the Milestone Payment Agreement, whereby the Company has agreed to pay the Milestone Payment to BioLite $2,600,000
in cash and $900,000 in newly issued shares of its Common Stock, at the price of $1.60 per share, for an aggregate number of 562,500
shares. The cash payment and shares issuance were completed in June 2016. Pursuant to the BioLite Collaborative Agreement, the
6.5% of total payment, $6,500,000 shall be made upon the first IND submission which was submitted in March 2016. On February 2017,
the Company agreed to pay this amount to BioLite with $650,000 in cash and $5,850,000 in the form of newly issued shares of its
Common Stock, at the price of $2.0 per share, for an aggregate number of 2,925,000 shares. The cash payment and shares issuance
were completed in February 2017. This BioLite Collaborative Agreement shall, once signed by both Parties, remain in effect for
fifteen years as of the first commercial sales of the Product in the Territory and automatically renew for five more years unless
either party gives the other party six month written notice of termination prior to the expiration date of the term.
In
order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s
plans to obtain such resources for the Company include (1) obtaining capital from the sale of its equity securities (2) short-term
and long-term borrowings from banks and third-parties, and (3) short-term borrowings from stockholders or other related party(ies)
when needed. However, management cannot provide any assurance that the Company will be successful in accomplishing any of its plans.
The
ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described
in the preceding paragraph and eventually to secure other sources of financing and attain profitable operations.
5. COLLABORATIVE AGREEMENTS
Collaborative agreement with BioLite
Inc., a related party
On December 29, 2015, American BriVision
Corporation entered into a collaborative agreement (the “BioLite Collaborative Agreement”) with BioLite Inc. (the “BioLite”),
a related party (See Note 7), pursuant to which BioLite granted BriVision sole licensing rights for drug and therapeutic use of
five products, including BLI-1005 CNS-Major Depressive Disorder, BLI-1008 CNS-Attention Deficit Hyperactivity Disorder, BLI-1401-1
Anti-Tumor Combination Therapy-Solid Tumor with Anti-PD-1, BLI-1401-2 Anti-Tumor Combination Therapy-Triple Negative Breast Cancer,
and BLI-1501 Hematology-Chronic Lymphocytic Leukemia, in the U.S.A and Canada. Under the BioLite Collaborative Agreement, BriVision
should pay a total of $100,000,000 in cash or stock of BriVision with equivalent value, according to the following schedule:
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●
|
upfront payment shall upon the signing of this BioLite Collaborative Agreement: 3.5% of total payment. After receiving upfront payment from BriVision, BioLite has to deliver all data to BriVision in one week.
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|
|
|
|
●
|
upon the first IND submission, BriVision shall pay, but no later than December 15, 2016: 6.5% of total payment. After receiving second payment from BriVision, BioLite has to deliver IND package to BriVision in one week.
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|
|
|
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●
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at the completion of first phase II clinical trial, BriVision shall pay, but no later than September 15, 2017: 15% of total payment. After receiving third payment from BriVision, BioLite has to deliver phase II clinical study report to BriVision in three months.
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|
|
|
|
●
|
upon the phase III IND submission, BriVision shall pay, but no later than December 15, 2018: 20% of total payment. After receiving forth payment from BriVision, BioLite has to deliver IND package to BriVision in one week.
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|
|
|
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●
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at the completion of phase III, BriVision shall pay, but no later than September 15, 2019:25% of total payment. After receiving fifth payment from BriVision, BioLite has to deliver phase III clinical study report to BriVision in three months.
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|
|
|
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●
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upon the NDA submission, BriVision shall pay, but no later than December 15, 2020, BriVision shall pay: 30% of total payment. After receiving sixth payment from BriVision, BioLite has to deliver NDA package to BriVision in one week.
|
This BioLite Collaborative Agreement shall,
once signed by both Parties, remain in effect for fifteen years as of the first commercial sales of the Product in the Territory
and automatically renew for five more years unless either party gives the other party six month written notice of termination prior
to the expiration date of the term.
Pursuant to the BioLite Collaborative
Agreement, an upfront payment of $3,500,000 (the “Milestone Payment”), which is 3.5% of total payments due under the
BioLite Collaborative Agreement, was to be paid by the Company upon signing of that agreement. On May 6, 2016, the Company and
BioLite agreed to amend the BioLite Collaborative Agreement, through entry into the Milestone Payment Agreement, whereby the Company
agreed to pay the Milestone Payment to BioLite with $2,600,000 in cash and $900,000 in the form of newly issued shares of its
Common Stock, at the price of $1.60 per share, for an aggregate number of 562,500 shares. The cash payment and shares issuance
were completed in June 2016.
Pursuant to the BioLite Collaborative
Agreement, the 6.5% of total payment, $6,500,000 shall be made upon the first IND submission which was submitted in March 2016.
On February 2017, the Company agreed to pay this amount to BioLite with $650,000 in cash and $5,850,000 in the form of newly issued
shares of its Common Stock, at the price of $2.0 per share, for an aggregate number of 2,925,000 shares. The cash payment and
shares issuance were completed in February 2017.
Pursuant to the BioLite Collaborative Agreement,
the 15% of total payment, $15,000,000 shall be made at the completion of first phase II clinical trial. As of December 31, 2017,
the first phase II clinical trial research has not completed yet.
The Company determined to fully expense
the entire amount of $10,000,000 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 is fully expensed as research and development
expense.
On January 12, 2017, the Company entered
into an Addendum (the “Addendum”) to the BioLite Collaborative Agreement which was previously entered into with BioLite.
Pursuant to the Addendum, the Company and BioLite agreed to include one more product, namely, “Maitake Combination Therapy”
as one of the Products defined in the BioLite Collaborative Agreement (the “Sixth Product’) and defined the Territory
of the Sixth Product to be worldwide and restate the Territory of the Five Products to be the U.S.A and Canada.
Co-Development agreement with Rgene
Corporation, a related party
On May 26, 2017, American BriVision Corporation
entered into a co-development agreement (the “Co-Dev Agreement”) with Rgene Corporation (the “Rgene”),
a related party under common control by controlling beneficiary shareholder of YuanGene Corporation and the Company (See Note 7).
Pursuant to Co-Dev Agreement, BriVision and Rgene agreed to co-develop and commercialize certain products that are included in
the Sixth Product as defined in the Addendum. Under the terms of the Co-Dev Agreement, Rgene should pay the Company $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, 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, the Company has delivered
all research, technical, data and development data to Rgene. Since both Rgene and the Company are related parties and under common
control by a controlling beneficiary shareholder of Yuangene Corporation and the Company, the Company 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. As
of the date of this report, the Company has received $450,000 in cash. The Company is still in discussion with Rgene with respect
to the schedule of the outstanding balance.
Collaborative agreement with BioFirst
Corporation, a related party
On July 24, 2017, American BriVision
Corporation entered into a collaborative agreement (the “BioFirst Collaborative Agreement”) with BioFirst Corporation
(“BioFirst”), pursuant to which BioFirst granted the Company 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 (See Note 7).
Pursuant to the BioFirst Collaborative
Agreement, the Company will co-develop and commercialize the Product with BioFirst and pay BioFirst in a total amount of $3,000,000
in cash or stock of the Company before September 30, 2018. The amount of $3,000,000 is 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,
the Company 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 has delivered
all research, technical, data and development data to BriVision. No payment has been made by the Company as of the date of this
report. 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 is fully expensed as research and development expense during the year ended September 30, 2017.
6. ACCRUED EXPENSES
Accrued expenses as of December 31, 2017
and September 30, 2017 consisted of:
|
|
December 31,
2017
|
|
|
September 30,
2017
|
|
Accrued consulting fee
|
|
$
|
29,075
|
|
|
$
|
2,609
|
|
Accrued professional service fees
|
|
|
13,592
|
|
|
|
-
|
|
Accrued interest expense – related party(Note 7)
|
|
|
17,460
|
|
|
|
8,460
|
|
Accrued payroll
|
|
|
110,800
|
|
|
|
23,845
|
|
Total
|
|
$
|
170,927
|
|
|
$
|
34,914
|
|
7. RELATED PARTIES TRANSACTIONS
The related parties of the company with
whom transactions are reported in these financial statements are as follows:
Name of entity or Individual
|
|
Relationship with the Company and its subsidiaries
|
BioLite Inc. (the “BioLite”)
|
|
Shareholder of the Company; entity controlled by controlling beneficiary shareholder of Yuangene
|
BioFirst Corporation (the “BioFirst”)
|
|
Entity controlled by controlling beneficiary shareholder of Yuangene
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Rgene Corporation (the “Rgene”)
|
|
Shareholder of the Company; entity controlled by controlling beneficiary shareholder of Yuangene
|
Liongene Corporation (the “Liongene”)
|
|
Shareholder of the Company; entity controlled by controlling beneficiary shareholder of Yuangene
|
Yuangene Corporation (the “Yuangene”)
|
|
Controlling beneficiary shareholder of the Company
|
AsianGene Corporation (the “AsianGene”)
|
|
Shareholder; entity controlled by controlling beneficiary shareholder of Yuangene
|
Euro-Asia Investment & Finance Corp Ltd. (the “Euro-Asia”)
|
|
Shareholder of the Company
|
Kimho Consultants Co., Ltd. (the “Kimho”)
|
|
Shareholder of the Company
|
Eugene Jiang
|
|
Former President and Chairman
|
Due to related parties
Amount due to related parties consisted
of the following as of the periods indicated:
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2017
|
|
BioLite Inc.
|
|
$
|
109,220
|
|
|
$
|
-
|
|
BioFirst Corporation
|
|
|
3,957,000
|
|
|
|
3,950,000
|
|
AsianGene Corporation
|
|
|
160,000
|
|
|
|
160,000
|
|
Yuangene Corporation
|
|
|
3,000
|
|
|
|
3,000
|
|
Eugene Jiang
|
|
|
100
|
|
|
|
-
|
|
Total
|
|
$
|
4,229,320
|
|
|
$
|
4,113,000
|
|
Related party transactions
(1)
|
During the three months ended December 31, 2017, BioLite advanced in an aggregate amount of $109,220 to the Company for working capital purpose. The advances bear 0% interest rate and are due on demand. As of December 31, 2017 and September 30, 2017, the outstanding advance balance is $109,220 and $0, respectively.
|
(2)
|
On January 26, 2017, the Company and BioFirst entered into a loan agreement for a total commitment (non-secured indebtedness) of $950,000 to meet its working capital needs. Under the terms of the loan agreement, the loan bears interest at 1% per month (or equivalent to 12% per annum) and the Company is required to pay interest monthly to the lender. The loan will be matured on February 1, 2018. As of December 31, 2017 and September 30, 2017, the outstanding loan balance is $950,000 and $950,000, and accrued interest is $17,460 and $8,460, respectively (See Note 6). Interest expenses in connection with this loan is $28,500 for the three months ended December 31, 2017, and $74,960 and $0 for the years ended September 30, 2017 and 2016, respectively.
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(3)
|
On July 24, 2017, BriVision entered into a collaborative agreement (the “BioFirst Collaborative Agreement”) with BioFirst (See Note 5). In September 2017, BioFirst has delivered all research, technical, data and development data to BriVision, and the Company has recorded full amount of $3,000,000 due to BioFirst. As of December 31, 2017 and September 30, 2017, the outstanding balance is $3,000,000 and $3,000,000, respectively.
|
(4)
|
During the three months ended December 31, 2017, BioFirst also advanced in an aggregate amount of $7,000 to the Company for working capital purpose. The advances bear 0% interest rate and are due on demand. As of December 31, 2017 and September 30, 2017, the outstanding advance balance is $7,000 and $0, respectively.
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(5)
|
In September 2017, AsianGene entered an investment and equity transfer agreement (the “Investment and Equity Transfer Agreement”) with Everfront Biotech Inc. (the “Everfront”), a third party. Pursuant to the Investment and Equity Transfer Agreement, Everfront agreed to purchase 2,000,000 common shares of the Company owned by AsianGene at $1.60 per share in a total amount of $3,200,000, of which $160,000 is due before September 15, 2017 and the remaining amount of $3,040,000 is due before December 15, 2017. AsianGene also agreed to loan the proceeds to the Company for working capital purpose. The non-secured loan bears 0% interest rate and is due on demand. As of December 31, 2017 and September 30, 2017, the outstanding loan balance is $160,000 and $160,000, respectively.
|
(6)
|
During the year ended September 30, 2017, Yuangene Corporation advanced in an aggregate amount of $3,000 to the Company for working capital purpose. The advances bear 0% interest rate and are due on demand. As of December 31, 2017 and September 30, 2017, the outstanding advance balance is $3,000 and $3,000, respectively.
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(7)
|
During the three months ended December 31, 2017, Eugene Jiang, the former President and Chairman of the Company, has advanced in an aggregate amount of $100 to the Company for working capital purpose. The advances bear 0% interest rate and are due on demand. As of December 31, 2017 and September 30, 2017, the outstanding advance balance is $100 and $0, respectively.
|
(8)
|
On May 26, 2017, BriVision entered into a co-development agreement (the “Co-Dev Agreement”) with Rgene (See Note 5). As of December 31, 2017, the Company has received an aggregate amount of $450,000 in cash and has recorded $2,550,000 as receivable from collaboration partners. Since both Rgene and the Company are related parties and under common control by a controlling beneficiary shareholder of Yuangene Corporation, the Company 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.
|
(9)
|
On January 1, 2017, Euro-Asia Investment & Finance Corp Ltd. and the Company entered into a service agreement (the “Euro-Asia Agreement”) for the maintenance of the listing in the U.S. stock exchange market. During the three months ended December 31, 2017 and during the year ended September 30, 2017, the Company recognized non-employee stock based compensation expenses of $5,000 and $55,000 in connection with the terms in the Euro-Asia Agreement, respectively.
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(10)
|
On January 1, 2017, Kimho Consultants Co., Ltd. and the Company entered into a service agreement (the “Kimho Agreement”) for the maintenance of the listing in the U.S. stock exchange market. During the three months ended December 31, 2017 and during the year ended September 30, 2017, the Company recognized non-employee stock based compensation expenses of $10,000 and $80,000 in connection with the terms in the Kimho Agreement, respectively.
|
(11)
|
During the year ended September 30, 2017, the Company provided a one-time consulting service to Liongene Corporation for $70,000. Since both Liongene and the Company are related parties and under common control by a controlling beneficiary shareholder of Yuangene Corporation, the Company has recorded the full amount of $70,000 as additional paid-in capital during the year ended September 30, 2017.
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(12)
|
During the year ended September 30, 2017, the Company entered an operating lease agreement with AsianGene for an office space in Taiwan for the period from October 1, 2016 to July 31, 2017. The monthly base rent is approximately $5,000. Rent expenses under this lease agreement amounted to $52,205 and $0 for the years ended September 30, 2017 and 2016, respectively.
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8. EQUITY
During October 2015, $350,000 of subscription
receivable was fully collected from the shareholders.
On February 8, 2016, a Share Exchange
Agreement (“Share Exchange Agreement”) was entered into by and among American BriVision (Holding) Corporation (the “Company”),
American BriVision Corporation (“BriVision”), Euro-Asia Investment & Finance Corp. Limited, a company incorporated
under the laws of Hong Kong Special Administrative Region of People’s Republic of China (“Euro-Asia”), being
the owners of record of 164,387,376 (52,336,000 pre-stock split) shares of Common Stock of the Company, and the owners of record
of all of the issued share capital of BriVision (the “BriVision Stock”). Pursuant to the Share Exchange Agreement,
upon surrender by the BriVision Shareholders and the cancellation by BriVision of the certificates evidencing the BriVision Stock
as registered in the name of each BriVision Shareholder, and pursuant to the registration of the Company in the register of members
maintained by BriVision as the new holder of the BriVision Stock and the issuance of the certificates evidencing the aforementioned
registration of the BriVision Stock in the name of the Company, the Company should issue 166,273,921(52,936,583 pre-stock split)
shares (the “Acquisition Stock”) (subject to adjustment for fractionalized shares as set forth below) of the
Company’s Common Stock to the BriVision Shareholders (or their designees), and 163,159,952 (51,945,225 pre-stock split)
shares of the Company’s Common Stock owned by Euro-Asia should be cancelled and retired to treasury. The Acquisition Stock
collectively should represent 79.70% of the issued and outstanding Common Stock of the Company immediately after the Closing,
in exchange for the BriVision Stock, representing 100% of the issued share capital of BriVision in a reverse merger, or the Merger.
Pursuant to the Merger, all of the issued and outstanding shares of BriVision’s Common Stock were converted, at an exchange
ratio of 0.2536-for-1, into an aggregate of 166,273,921(52,936,583 pre-stock split) shares of Company’s Common Stock and
BriVision became a wholly owned subsidiary, of the Company. The holders of Company’s Common Stock as of immediately prior
to the Merger held an aggregate of 205,519,223 (65,431,144 pre-stock split) shares of Company’s Common Stock, Because
of the exchange of the BriVision Stock for the Acquisition Stock (the “Share Exchange”), BriVision became a wholly
owned subsidiary (the “Subsidiary”) of the Company and there was a change of control of the Company following the
closing. There were no warrants, options or other equity instruments issued in connection with the share exchange agreement.
On February 17, 2016, pursuant to the 2016
Equity Incentive Plan (the “2016 Plan”), 157,050 (50,000 pre-stock split) shares were granted to the employees.
On March 21, 2016, the Board of Directors
of the Company approved an amendment to Articles of Incorporation to effect a forward split at a ratio of 1 to 3:141 (the “Forward Stock Split”)
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.
The majority of the shareholders of the
Company approved the amendment to Articles of Incorporation.
On May 6, 2016, the Company and BioLite
agreed to amend the BioLite Collaborative Agreement, through entry into the Milestone Payment Agreement, whereby the Company has
agreed to issue shares of our Common Stock, at the price of $1.60 per share, for an aggregate number of 562,500 shares, as part
of our first installation of payment pursuant to the Milestone Payment. The shares issuance was completed in June 2016.
On August 26, 2016, the Company issued
1,468,750 shares (“Shares”) of the Company’s Common Stock, par value $0.001 (the “Offering”) to
BioLite, Inc., a non-U.S. accredited investor (the “Purchaser”) pursuant to a certain Stock Purchase Agreement dated
August 26, 2016 (the “SPA”). The Shares are exempt from the registration requirements of the Securities Act of 1933,
as amended (the “Securities Act”), pursuant to Regulation S of the Securities Act promulgated thereunder. The
purchase price per share of the Offering is $1.60. The net proceeds to the Company from the Offering are approximately $2,350,000.
The proceeds may be used for general corporate purposes.
Pursuant to the BioLite Collaborative
Agreement (See Note 5), BriVision should pay a total of $100,000,000 in cash or stock of the Company with equivalent value according
to the milestone achieved. The agreement requires that 6.5% of total payment, $6,500,000 shall be made upon the first IND submission
which was submitted in March 2016. In February 2017, the Company remitted this amount to BioLite with $650,000 in cash and $5,850,000
in the form of newly issued shares of our Common Stock, at the price of $2.0 per share, for an aggregate number of 2,925,000 shares.
On October 1, 2016, the Company entered
into a consulting agreement with Kazunori Kameyama (“Kameyama”) for the provision of services related to the clinical
trials and other administrative work, public relation work, capital raising, trip coordination, In consideration for providing
such services, the Company agreed to indemnify the consultant in an amount of $150 per hour in cash up to $3,000 per month, and
issue to Kameyama the Company’s Common Stock at $1.00 per share for any amount exceeding $3,000. The Company’s stocks
shall be calculated and issued in December every year. On October 1, 2017, the Company and Kameyama agreed to extend the service
period for one more year expiring on September 30, 2018. As a result, the non-employee stock-based compensation related to this
consulting agreement was $2,362 during the three months ended December 31, 2017 and $3,038 for the year ended September 30, 2017.
On January 1, 2017, Euro-Asia Investment
& Finance Corp Ltd. and the Company entered into a service agreement (the “Euro-Asia Agreement”) for the maintenance
of the listing in the U.S. stock exchange market. During the three months ended December 31, 2017 and during the year ended September
30, 2017, the Company recognized professional fees of $18,000 and $69,000, and non-employee stock based compensation expenses of
$5,000 and $55,000 in connection with the terms in the Euro-Asia Agreement, respectively.
On January 1, 2017, Kimho Consultants Co.,
Ltd. and the Company entered into a service agreement (the “Kimho Agreement”) for the maintenance of the listing in
the U.S. stock exchange market. During the three months ended December 31, 2017 and during the year ended September 30, 2017, the
Company recognized professional fees of $21,000 and $113,000, and non-employee stock based compensation expenses of $10,000 and
$80,000 in connection with the terms in the Kimho Agreement, respectively.
Pursuant to ASC 505-50-30, the transactions
with the non-employees were measured based on the fair value of the equity instruments issued as the Company determined that the
fair value of the equity instruments issued in a stock-based payment transaction with nonemployees was more reliably measurable
than the fair value of the consideration received. The Company measured the fair value of the equity instruments in these transactions
using the stock price on the date at which the commitments Kameyama, Euro-Asia, and Kimho for performance were rendered.
9. INCOME TAX
The Company files income tax returns in
the U.S. federal jurisdiction, and various state and local jurisdictions. The Company is no longer subject to U.S. federal, state
and local income tax examinations by tax authorities for years before 2013.
On December 22, 2017
H.R. 1
,
originally
known as the Tax Cuts and Jobs Act, (the “Tax Act”) was enacted. Among the significant changes to the U.S. Internal
Revenue Code, the Tax Act lowers the U.S. federal corporate income tax rate (“Federal Tax Rate”) from 35% to 21% effective
January 1, 2018
.
The 21% Federal Tax Rate will apply to earnings reported for the full 2018 fiscal
year. In addition, the Company must re-measure its net deferred tax assets and liabilities using the Federal Tax Rate that will
apply when these amounts are expected to reverse. As of December 31, 2017, the Company can determine a reasonable
estimate for certain effects of tax reform and is recording that estimate as a provisional amount. The provisional remeasurement
of the deferred tax assets and allowance valuation of deferred tax assets at December 31, 2017 resulted in a net effect of
$0 discrete tax expenses (benefit) which lowered the effective tax rate by 13% for the year ended December 31, 2017.
The provisional remeasurement amount is anticipated to change as data becomes available allowing more accurate scheduling of the
deferred tax assets and liabilities primarily related to net operating loss carryover.
Components of income tax (benefits) for
the three months ended December 31, 2017, and for the years ended September 30, 2017 and 2016 are as follows:
|
|
Three Months ended
December 31, 2017
|
|
|
Year ended
September 30, 2017
|
|
|
Year ended
September 30, 2016
|
|
|
|
Federal
|
|
|
State
|
|
|
Total
|
|
|
Federal
|
|
|
State
|
|
|
Total
|
|
|
Federal
|
|
|
State
|
|
|
Total
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
830
|
|
|
$
|
830
|
|
|
$
|
-
|
|
|
$
|
836
|
|
|
$
|
836
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
830
|
|
|
$
|
830
|
|
|
$
|
-
|
|
|
$
|
836
|
|
|
$
|
836
|
|
Significant components of the Company’s
deferred tax accounts at December 31, 2017 and September 30, 2017:
Deferred Tax Account - noncurrent:
|
|
December 31,
2017
|
|
|
September 30,
2017
|
|
Tax losses carryforwards
|
|
$
|
594,501
|
|
|
$
|
832,913
|
|
Less: Valuation allowance
|
|
|
(594,501
|
)
|
|
|
(832,913
|
)
|
Total deferred tax account - noncurrent
|
|
$
|
-
|
|
|
$
|
-
|
|
The difference between the effective rate
reflected in the provision for income taxes on loss before taxes and the amounts determined by applying the applicable statutory
U.S. tax rate are analyzed below:
|
|
Three Months ended December 31,
|
|
|
Years ended
September 30,
|
|
|
|
2017
|
|
|
2017
|
|
|
2016
|
|
Statutory federal tax benefit, net of state tax effects
|
|
|
31
|
%
|
|
|
31
|
%
|
|
|
31
|
%
|
State income taxes
|
|
|
8.84
|
%
|
|
|
8.84
|
%
|
|
|
8.84
|
%
|
Provisional remeasurement of deferred taxes
|
|
|
(13
|
)%
|
|
|
-
|
%
|
|
|
-
|
%
|
Nondeductible/nontaxable items
|
|
|
-
|
%
|
|
|
(29
|
)%
|
|
|
(36
|
)%
|
Change in valuation allowance
|
|
|
(26.84
|
)%
|
|
|
(10.84
|
)%
|
|
|
(3.84
|
)%
|
Effective income tax rate
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
10. LOSS PER SHARE
Basic loss per share is computed by dividing
net loss by the weighted-average number of common shares outstanding during the year. Diluted loss per share is computed by dividing
net loss by the weighted-average number of common shares and dilutive potential common shares outstanding during the year.
|
|
Three Months Ended
December 31,
|
|
|
Years Ended
September 30,
|
|
|
|
2017
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(381,214
|
)
|
|
$
|
(4,071,983
|
)
|
|
$
|
(11,007,799
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding - Basic
|
|
|
213,746,647
|
|
|
|
212,648,770
|
|
|
|
193,981,153
|
|
Stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Weighted-average shares outstanding - Diluted
|
|
|
213,746,647
|
|
|
|
212,648,770
|
|
|
|
193,981,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
-Basic
|
|
$
|
(0.00
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.06
|
)
|
-Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.06
|
)
|
Diluted loss per share takes into account
the potential dilution that could occur if securities or other contracts to issue Common Stock were exercised and converted into
Common Stock.
11. COMMITMENTS AND CONTINGENCIES
Operating Commitment
The total future minimum lease payments
under the non-cancellable operating lease with respect to the office as of December 31, 2017 are payable as follows:
As of December 31,
|
|
Amount
|
|
2018
|
|
$
|
4,950
|
|
Total minimum payments
|
|
$
|
4,950
|
|
Rental expense was $2,482 for the three
months ended December 31, 2017. Rental expense was $61,093 and 29,129 for the year ended September 30, 2017 and 2016, respectively.
12. TRANSITION PERIOD COMPARATIVE DATA
The following table presents certain financial
information for the three months ended December 31, 2017 and 2016, respectively:
|
|
Three Months Ended
|
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
289,731
|
|
|
|
185,188
|
|
Research and development expenses
|
|
|
45,701
|
|
|
|
25,198
|
|
Stock based compensation
|
|
|
17,362
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(352,794
|
)
|
|
|
(210,386
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
80
|
|
|
|
49
|
|
Interest expense
|
|
|
(28,500
|
)
|
|
|
-
|
|
Total other income (expenses)
|
|
|
(28,420
|
)
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before provision income tax
|
|
|
(381,214
|
)
|
|
|
(210,337
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income tax
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(381,214
|
)
|
|
|
(210,337
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to Common Stockholders
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
213,746,647
|
|
|
|
210,821,647
|
|
13. SUBSEQUENT EVENT
The Company has evaluated subsequent events
through the date which the financial statements were available to be issued. All subsequent events requiring recognition as of
December 31, 2017 have been incorporated into these financial statements and there are no subsequent events that require disclosure
in accordance with FASB ASC Topic 855, “Subsequent Events.”
******
AMERICAN
BRIVISION (HOLDING) CORPORATION AND SUBSIDIARIES
Financial
Statements for the Nine Months Ended
September 30,
2018 and 2017
AMERICAN
BRIVISION (HOLDING) CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash
|
|
$
|
4,389
|
|
|
$
|
93,332
|
|
Receivable from collaboration
partners – related parties
|
|
|
2,550,000
|
|
|
|
2,550,000
|
|
Other
receivable – related parties
|
|
|
40,000
|
|
|
|
-
|
|
Total
Current Assets
|
|
|
2,594,389
|
|
|
|
2,643,332
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
2,594,389
|
|
|
$
|
2,643,332
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accrued expense
|
|
$
|
436,828
|
|
|
$
|
170,927
|
|
Due to
related parties
|
|
|
4,041,703
|
|
|
|
4,229,320
|
|
Total current liabilities
|
|
|
4,478,531
|
|
|
|
4,400,247
|
|
Noncurrent liabilities
|
|
|
|
|
|
|
|
|
Convertible notes payable
|
|
|
300,000
|
|
|
|
-
|
|
Convertible notes payable –
related parties
|
|
|
250,000
|
|
|
|
-
|
|
Accrued
interest – noncurrent
|
|
|
14,567
|
|
|
|
-
|
|
Total
Liabilities
|
|
|
5,043,098
|
|
|
|
4,400,247
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit
|
|
|
|
|
|
|
|
|
Common
Stock 360,000,000 authorized at $0.001 par value; shares issued and outstanding 213,926,475 and 213,746,647 at September
30, 2018 and December 31, 2017, respectively
|
|
|
213,927
|
|
|
|
213,747
|
|
Additional paid-in capital
|
|
|
13,909,157
|
|
|
|
13,805,936
|
|
Accumulated
deficit
|
|
|
(16,571,793
|
)
|
|
|
(15,776,598
|
)
|
Total
stockholders’ deficit
|
|
|
(2,448,709
|
)
|
|
|
(1,756,915
|
)
|
Total
Liabilities and Equity
|
|
$
|
2,594,389
|
|
|
$
|
2,643,332
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
AMERICAN BRIVISION
(HOLDING) CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general
and administrative expenses
|
|
|
123,846
|
|
|
|
144,212
|
|
|
|
520,256
|
|
|
|
521,954
|
|
Research and development expenses
|
|
|
44,301
|
|
|
|
3,083,314
|
|
|
|
135,006
|
|
|
|
3,125,964
|
|
Stock-based
compensation
|
|
|
7,575
|
|
|
|
132,110
|
|
|
|
23,401
|
|
|
|
138,038
|
|
Total
operating expenses
|
|
|
175,722
|
|
|
|
3,359,636
|
|
|
|
678,663
|
|
|
|
3,785,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(175,722
|
)
|
|
|
(3,359,636
|
)
|
|
|
(678,663
|
)
|
|
|
(3,785,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100
|
|
Interest
expense
|
|
|
(42,851
|
)
|
|
|
(27,460
|
)
|
|
|
(114,682
|
)
|
|
|
(74,960
|
)
|
Total
other income (expenses)
|
|
|
(42,851
|
)
|
|
|
(27,460
|
)
|
|
|
(114,682
|
)
|
|
|
(74,860
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations before income taxes
|
|
|
(218,573
|
)
|
|
|
(3,387,096
|
)
|
|
|
(793,345
|
)
|
|
|
(3,860,816
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
1,850
|
|
|
|
830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss and Comprehensive
Loss
|
|
$
|
(218,573
|
)
|
|
$
|
(3,387,096
|
)
|
|
$
|
(795,195
|
)
|
|
$
|
(3,861,646
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
213,926,475
|
|
|
|
213,746,647
|
|
|
|
213,869,826
|
|
|
|
213,178,790
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
AMERICAN BRIVISION
(HOLDING) CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Nine
Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net loss from continuing
operations
|
|
$
|
(795,195
|
)
|
|
$
|
(3,861,646
|
)
|
Adjustments to reconcile net
loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
23,401
|
|
|
|
138,038
|
|
Change in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
Increase in other receivable
- related parties
|
|
|
(40,000
|
)
|
|
|
-
|
|
Increase in accrued expenses
and other current liabilities
|
|
|
360,468
|
|
|
|
(3,186
|
)
|
Decrease
in due to related parties
|
|
|
(80,617
|
)
|
|
|
2,350,000
|
|
Net
cash used in operating activities
|
|
|
(531,943
|
)
|
|
|
(1,376,794
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Capital contribution from related
parties under common control
|
|
|
-
|
|
|
|
450,000
|
|
Proceeds from convertible notes
|
|
|
550,000
|
|
|
|
-
|
|
Borrowings from related parties
|
|
|
50,000
|
|
|
|
1,113,000
|
|
Repayment
of loan from related parties
|
|
|
(157,000
|
)
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
443,000
|
|
|
|
1,563,000
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(88,943
|
)
|
|
|
186,206
|
|
|
|
|
|
|
|
|
|
|
Cash, beginning of period
|
|
|
93,332
|
|
|
|
18,645
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period
|
|
$
|
4,389
|
|
|
$
|
204,851
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense paid
|
|
$
|
78,444
|
|
|
$
|
66,500
|
|
Income taxes paid
|
|
$
|
1,850
|
|
|
$
|
830
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing and investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued for due
to related parties
|
|
$
|
-
|
|
|
$
|
5,850,000
|
|
Capital contribution from related
parties under common control
|
|
$
|
-
|
|
|
$
|
2,550,000
|
|
Common shares issued to employees
|
|
$
|
80,000
|
|
|
$
|
-
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
AMERICAN BRIVISION
(HOLDING) CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2018
1. ORGANIZATION AND DESCRIPTION
OF BUSINESS
American BriVision (Holding) Corporation
(the “Company” or “Holding entity”), a Nevada corporation, through the Company’s operating entity,
American BriVision Corporation (the “BriVision”), which was incorporated in July 2015 in the State of Delaware, engages
in biotechnology and focuses on the development of new drugs and innovative medical devices to fulfill unmet medical needs. The
business model of the Company is to integrate research achievements from world-famous institutions (such as Memorial Sloan Kettering
Cancer Center (“MSKCC”) and MD Anderson Cancer Center), conduct clinical trials of translational medicine for Proof
of Concept (“POC”), out-license to international pharmaceutical companies, and exploit global markets. BriVision had
to predecessor operations prior to its formation on July 21, 2015.
Reverse Merger
On February 8, 2016, a Share Exchange
Agreement (the “Share Exchange Agreement”) was entered into by and among American BriVision (Holding) Corporation,
American BriVision Corporation (“BriVision”), and Euro-Asia Investment & Finance Corp. Limited, a company
incorporated under the laws of Hong Kong Special Administrative Region of the People’s Republic of China (“Euro-Asia”),
being the owners of record of 164,387,376 (52,336,000 pre-stock split) shares of common stock of the Company, and the owners of
record of all of the issued share capital of BriVision (the “BriVision Stock”).
Pursuant to the Share Exchange Agreement,
upon surrender by the BriVision Shareholders and the cancellation by BriVision of the certificates evidencing the BriVision Stock
as registered in the name of each BriVision Shareholder, and pursuant to the registration of the Company in the register of members
maintained by BriVision as the new holder of the BriVision Stock and the issuance of the certificates evidencing the aforementioned
registration of the BriVision Stock in the name of the Company, the Company should issue 166,273,921(52,936,583 pre-stock split)
shares (the “Acquisition Stock”) (subject to adjustment for fractionalized shares as set forth below) of the
Company’s common stock to the BriVision Shareholders (or their designees), and 163,159,952 (51,945,225 pre-stock split)
shares of the Company’s common stock owned by Euro-Asia should be cancelled and retired to treasury. The Acquisition Stock
collectively should represent 79.70% of the issued and outstanding common stock of the Company immediately after the Closing,
in exchange for the BriVision Stock, representing 100% of the issued share capital of BriVision in a reverse merger (the “Merger”).
Pursuant to the Merger, all of the
issued and outstanding common shares of BriVision were converted, at an exchange ratio of 0.2536-for-1, into an aggregate of 166,273,921(52,936,583pre-stock
split) common shares of the Company and BriVision has become a wholly owned subsidiary of the Company. The holders of Company’s
common stock as of immediately prior to the Merger held an aggregate of 205,519,223(65,431,144 pre-stock split) shares of Company’s
common stock. Because of the exchange of the BriVision Stock for the Acquisition Stock (the “Share Exchange”),
BriVision has become a wholly owned subsidiary (the “Subsidiary”) of the Company and there was a change of control
of the Company following the closing. There were no warrants, options or other equity instruments issued in connection
with the share exchange agreement.
Because of the consummation of
the Share Exchange, BriVision is now the Company’s wholly owned subsidiary and its shareholders own approximately 79.70%
of issued and outstanding common stock of the Company.
Following the Share Exchange, the Company
has abandoned its prior business plan and the Company is now pursuing BriVision’s historically proposed businesses,
which focus on the development of new drugs and innovative medical devices to fulfill unmet medical needs. The business
model of the Company is to integrate research achievements from world-famous institutions, conduct clinical trials of translational
medicine for Proof of Concept (“POC”), out-license to international pharmaceutical companies, and exploit global markets.
Accounting Treatment of the Reverse Merger
For financial reporting purposes, the
Share Exchange represents a “reverse merger” rather than a business combination and BriVision is deemed
the accounting acquirer in the transaction. The Share Exchange is being accounted for as a reverse-merger and recapitalization.
BriVision is the acquirer for financial reporting purposes and the Company is the acquired company. Consequently,
the assets and liabilities and the operations reflected in the historical financial statements prior to the Share Exchange will
be those of BriVision and recorded at the historical cost basis of BriVision. In addition, the consolidated financial
statements after completion of the Share Exchange will include the assets and liabilities of the Company and BriVision, and the
historical operations of BriVision and operations of the Combined Company from the closing date of the Share Exchange.
Mergers Subject to Completion
On January 31, 2018, the Company entered
into an agreement and plan of merger (the “Merger Agreement”) with BioLite Holding, Inc. (“BioLite Holding”),
a Nevada corporation, BioKey, Inc. (“BioKey”), a California corporation, BioLite Acquisition Corp. (“Merger
Sub 1”), a Nevada corporation and wholly-owned subsidiary of the Company, and BioKey Acquisition Corp. (“Merger Sub
2”), a California corporation and wholly-owned subsidiary of the Company. Pursuant to the Merger Agreement, on or before
the Closing of the Merger, each issued and outstanding share of BioLite Holding shall be converted into the right to receive one
point eighty-two (1.82) validly issued, fully-paid and non-assessable shares of the Company and all shares of BioLite Holding
shall be cancelled and cease to exist. Also on or before the Closing of the Merger, each issued and outstanding share of BioKey
shall be converted into the right to receive one (1) validly issued, fully-paid and non-assessable share of the Company and all
shares of BioKey shall be cancelled and cease to exist. Simultaneously upon Closing, BioLite Holding and Merger Sub 1 shall merge
together with Merger Sub 1’s articles of incorporation and bylaws as the surviving corporation’s (the “BioLite
Surviving Corporation”) articles of incorporation and bylaws and all shares of Merger Sub 1 shall be converted into one
share of common stock of the BioLite Surviving Corporation, which shall remain a wholly-owned subsidiary of the Company. In addition,
upon Closing, BioKey and Merger Sub 2 shall merge together with Merger Sub 2’s articles of incorporation and bylaws as the
surviving corporation’s (the “BioKey Surviving Corporation’s”) articles of incorporation and bylaws and
all shares of Merger Sub 2 shall be converted into one share of common stock of the BioKey Surviving Corporation, which shall
remain a wholly-owned subsidiary of the Company. BioLite Holding, through its majority-owned subsidiaries, is a biopharmaceutical
company focusing on Phase I and Phase II clinical trials of new drugs in the areas of oncology, central nervous system and immune
system. BioKey is a California-based pharmaceutical company with FDA-approved therapeutic products and a GMP facility. BioLite
Holding and the Company are related parties because the two companies are under common control.
The Merger Agreement requires the parties
to consummate the Mergers after all of the conditions to the consummation of the Mergers contained therein are satisfied or waived,
including approval by the shareholders of BioLite Holding and BioKey, respectively. The BioLite Merger will become effective upon
the filing of Articles of Merger with the Secretary of State of the State of Nevada or at such later time as is agreed by the
Company and BioLite Holding and specified in the Articles of Merger. The BioKey Merger will become effective upon the filing of
an agreement of merger with the Secretary of State of the State of California and the Secretary of State of the State of Nevada
or at such later time as is agreed by the Company and BioKey and specified in the Certificate of Merger.
None of the Company, BioLite Holding
or BioKey can predict the exact timing of the consummation of the Mergers. Immediately after the effective time of the BioLite
Merger, Merger Sub 1 will merge with and into BioLite Holding, with BioLite Holding surviving as a wholly-owned subsidiary of
the Company. Immediately after the effective time of the BioKey Merger, Merger Sub 2 will merge with and into BioKey, with BioKey
surviving as a wholly-owned subsidiary of the Company.
On July 23, 2018, the Company filed
a prospectus on Form S-4 under the Securities Act of 1933, as amended (the “Securities Act”). The Closing of the Mergers
will be subject to the “Conditions to Completion of the Merger” pursuant to the Merger Agreement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation
The accompanying consolidated unaudited
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 1
st
and ending on September 30
th
to the period beginning
on January 1
st
and ending on December 31
st
, beginning January 1, 2018. All references herein to
a fiscal year prior to December 31, 2017 refer to the twelve months ended September 30
th
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.
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 Articles of Incorporation to effect a forward split
at a ratio of 1 to 3.141 and increase the number of its 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.
Fair Value Measurements
The Company applies the provisions
of FASB ASC Topic 820, “Fair Value Measurements and Disclosures” (the “ASC 820”), for fair value
measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized
or disclosed at fair value in the financial statements. ASC 820 also establishes a framework for measuring fair value
and expands disclosures about fair value measurements.
Fair value is defined as the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. When determining the fair value measurements for assets and liabilities, the Company considers
the principal or most advantageous market in which it would transact and it considers assumptions that market participants would
use when pricing the asset or liability.
ASC 820 establishes a fair value hierarchy
that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair
value. ASC 820 establishes three levels of inputs to measure fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements
involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
|
-
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
-
|
Level
2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs
that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial
instruments.
|
|
-
|
Level
3 inputs to the valuation methodology are unobservable and significant to the fair value.
|
The carrying values of certain assets
and liabilities of the Company, such as cash and cash equivalents, accounts receivable, due from related parties, accrued expenses,
and due to related parties approximate fair value due to their relatively short maturities. The carrying value of the Company’s
convertible notes payable and accrued interest approximates their fair value as the terms of the borrowing are consistent with
current market rates.
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 September 30, 2018 and December
31, 2017, the Company’s cash and cash equivalents amounted to $4,389 and $93,332, respectively. The Company’s cash
deposits are held in financial institutions located in both Taiwan and the United States of America where there are currently
regulations mandated on obligatory insurance of bank accounts. The Company believes these financial institutions are of high credit
quality.
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.
Receivable from Collaboration Partners
Receivable from collaboration partners
is stated at carrying value less estimates made for doubtful receivables. An allowance for impairment of receivable from collaboration
partners is established if the collection of a receivable becomes doubtful. Such receivable becomes doubtful when there is objective
evidence that the Company 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. An impairment loss is recognized in the statement of operations, as are subsequent recoveries of previous
impairments.
Research and Development Expenses
The Company accounts for R&D costs
in accordance with FASB ASC 730, “Research and Development” (the “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.
Stock-based Compensation
The Company measures expense 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 and nine months ended September 30,
2018 and 2017.
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 $7,575 and $132,110 for the three
months ended September 30, 2018 and 2017, respectively. Total non-employee stock-based compensation expenses were $23,401 and
$138,038 for the nine months ended September 30, 2018 and 2017, 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 nine months ended September 30, 2018 and 2017. GAAP also provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosures and transition.
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 nine months ended September
30, 2018 and 2017, the Company’s income tax expense amounted $1,850 and $830, 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 assets 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 February 2016, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases
(Topic 842), which amends the existing accounting standards for leases. The new standard requires lessees to record a right-of-use
asset and a corresponding lease liability on the balance sheet (with the exception of short-term leases). For lessees, leases
will continue to be classified as either operating or financing in the income statement. This ASU becomes effective in the first
quarter of fiscal year 2019 and early adoption is permitted. This ASU is required to be applied with a modified retrospective
approach and requires application of the new standard at the beginning of the earliest comparative period presented. In July 2018,
the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. In issuing ASU No. 2018-11, the FASB decided
to provide another transition method in addition to the existing transition method by allowing entities to initially apply the new
leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings
in the period of adoption. The Company is currently evaluating the impact that ASU 2016-02 and ASU 2018-11 will
have on its condensed consolidated financial statements.
In March 2016, the FASB issued ASU
2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus
Net). In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance
Obligations and Licensing. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope
Improvements and Practical Expedients and ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815):
Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the
March 3, 2016 EITF Meeting. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606,
Revenue from Contracts with Customers. In September 2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue
from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842). These amendments provide additional clarification
and implementation guidance on the previously issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments
in ASU 2016-08 clarify how an entity should identify the specified good or service for the principal versus agent evaluation and
how it should apply the control principle to certain types of arrangements. ASU 2016-10 clarifies the following two aspects of
ASU 2014-09: identifying performance obligations and licensing implementation guidance. ASU 2016-11 rescinds several SEC Staff
Announcements that are codified in Topic 605, including, among other items, guidance relating to accounting for consideration
given by a vendor to a customer, as well as accounting for shipping and handling fees and freight services. ASU 2016-12 provides
clarification to Topic 606 on how to assess collectability, present sales tax, treat noncash consideration, and account for completed
and modified contracts at the time of transition. ASU 2016-12 clarifies that an entity retrospectively applying the guidance in
Topic 606 is not required to disclose the effect of the accounting change in the period of adoption. Additionally, ASU 2016-20
clarifies certain narrow aspects within Topic 606 including its scope, contract cost accounting, and disclosures. The new guidance
requires enhanced disclosures, including revenue recognition policies to identify performance obligations to customers and significant
judgments in measurement and recognition. The effective date and transition requirements for these amendments are the same as
the effective date and transition requirements of ASU 2014-09, which is effective for fiscal years, and for interim periods within
those years, beginning after December 15, 2017. The Company is currently evaluating the overall impact that ASU 2014-09 and its
related amendments will have on the Company’s condensed consolidated financial statements.
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”).
To the extent that a company’s accounting for certain
income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional
estimate to be included in the financial statements. 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 has accounted for the tax effects of the Tax Cuts and Jobs Act under the guidance
of SAB 118, on a provisional basis. The Company’s accounting for certain income tax effects is incomplete, but the Company
has determined reasonable estimates for those effects The Company is continuing to gather additional information to determine
the final impact on its condensed consolidated financial statements.
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. The Company is currently evaluating the effect this standard will have
on its condensed consolidated financial statements.
In
June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718), Improvements to Nonemployee Share-based Payments
(“ASU 2018-07”). This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring
goods and services from nonemployees. The effective date for the standard is for interim periods in fiscal years beginning after
December 15, 2018, with early adoption permitted, but no earlier than the Company’s adoption date of Topic 606. U
nder the
new guidance, the measurement of nonemployee equity awards is fixed on the grant date.
The
new guidance is required to be applied retrospectively with the cumulative effect recognized at the date of initial application.
The Company is currently evaluating the effect ASU 2018-07 will have on the condensed 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 (“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.
3. GOING CONCERN
The accompanying consolidated unaudited
financial statements have been prepared assuming the Company will continue as a going concern. The Company has incurred losses
since its inception resulting in an accumulated deficit of $16,571,793 as of September 30, 2018 and has incurred net losses of
$795,195 during the nine months ended September 30, 2018. The Company also had a working capital deficiency of $1,884,142 at September
30, 2018. The ability to continue as a going concern is dependent upon the Company generating profitable operations in the
future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business
operations when they become due. These unaudited consolidated financial statements do not include any adjustments to the recoverability
and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company deem
so.
In
order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s
plans to obtain such resources for the Company include (1) obtaining capital from the sale of its equity securities (2) short-term
and long-term borrowings from banks and third-parties, and (3) short-term borrowings from stockholders or other related party(ies)
when needed. However, management cannot provide any assurance that the Company will be successful in accomplishing any of its
plans.
The
ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described
in the preceding paragraph and eventually to secure other sources of financing and attain profitable operations.
4. COLLABORATIVE AGREEMENTS
Collaborative agreement with
BioLite Inc., a related party
On December 29, 2015, American BriVision
Corporation entered into a collaborative agreement (the “BioLite Collaborative Agreement”) with BioLite Inc. (the
“BioLite”), a related party (See Note 7), pursuant to which BioLite granted BriVision sole licensing rights for drug
and therapeutic use of five products, including BLI-1005 CNS-Major Depressive Disorder, BLI-1008 CNS-Attention Deficit Hyperactivity
Disorder, BLI-1401-1 Anti-Tumor Combination Therapy-Solid Tumor with Anti-PD-1, BLI-1401-2 Anti-Tumor Combination Therapy-Triple
Negative Breast Cancer, and BLI-1501 Hematology-Chronic Lymphocytic Leukemia (collectively, the “Five Products”),
in the U.S.A and Canada. Under the BioLite Collaborative Agreement, BriVision should pay a total of $100,000,000 in cash or stock
of BriVision with equivalent value, according to the following schedule:
|
●
|
upfront payment
shall upon the signing of this BioLite Collaborative Agreement: 3.5% of total payment. After receiving upfront payment from
BriVision, BioLite has to deliver all data to BriVision in one week.
|
|
|
|
|
●
|
upon the first
IND submission, BriVision shall pay, but no later than December 15, 2016: 6.5% of total payment. After receiving second payment
from BriVision, BioLite has to deliver IND package to BriVision in one week.
|
|
|
|
|
●
|
at the completion
of first phase II clinical trial, BriVision shall pay, but no later than September 15, 2017: 15% of total payment. After receiving
third payment from BriVision, BioLite has to deliver phase II clinical study report to BriVision in three months.
|
|
|
|
|
●
|
upon the phase
III IND submission, BriVision shall pay, but no later than December 15, 2018: 20% of total payment. After receiving fourth
payment from BriVision, BioLite has to deliver IND package to BriVision in one week.
|
|
|
|
|
●
|
at the completion
of phase III, BriVision shall pay, but no later than September 15, 2019:25% of total payment. After receiving fifth payment
from BriVision, BioLite has to deliver phase III clinical study report to BriVision in three months.
|
|
|
|
|
●
|
upon the NDA
submission, BriVision shall pay, but no later than December 15, 2020, BriVision shall pay: 30% of total payment. After receiving
sixth payment from BriVision, BioLite has to deliver NDA package to BriVision in one week.
|
This BioLite Collaborative Agreement
shall, once signed by both Parties, remain in effect for fifteen years as of the first commercial sales of any of the five drug
candidates in the Territory and automatically renew for five more years unless either party gives the other party six month written
notice of termination prior to the expiration date of the term.
Pursuant to the BioLite Collaborative
Agreement, an upfront payment of $3,500,000 (the “Milestone Payment”), which is 3.5% of total payments due under the
BioLite Collaborative Agreement, was to be paid by the Company upon signing of that agreement. On May 6, 2016, the Company and
BioLite agreed to amend the BioLite Collaborative Agreement, through entry into the Milestone Payment Agreement, whereby the Company
agreed to pay the Milestone Payment to BioLite with $2,600,000 in cash and $900,000 in the form of newly issued shares of its
common stock, at the price of $1.60 per share, for an aggregate number of 562,500 shares. The cash payment and shares issuance
were completed in June 2016.
Pursuant to the BioLite Collaborative
Agreement, the 6.5% of total payment, $6,500,000 shall be made upon the first IND submission which was submitted in March 2016.
On February 2017, the Company agreed to pay this amount to BioLite with $650,000 in cash and $5,850,000 in the form of newly issued
shares of its common stock, at the price of $2.00 per share, for an aggregate number of 2,925,000 shares. The cash payment and
shares issuance were completed in February 2017.
Pursuant to the BioLite Collaborative
Agreement, the 15% of total payment, $15,000,000 shall be made at the completion of first phase II clinical trial. As of September
30, 2018, the first phase II clinical trial research has not completed yet.
The Company determined to fully expense
the entire amount of $10,000,000 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 is fully expensed as research and development
expense when incurred.
On January 12, 2017, the Company entered
into an Addendum (the “Addendum”) to the BioLite Collaborative Agreement. Pursuant to the Addendum, BioLite has agreed
to license one more product “Maitake Combination Therapy” (the “Sixth Product’) to the Company’s
wholly-owned subsidiary and defined the Territory of the Sixth Product to be worldwide and restate the Territory of the Five Products
to be the U.S.A and Canada.
Co-Development agreement with
Rgene Corporation, a related party
On May 26, 2017, American BriVision
Corporation entered into a co-development agreement (the “Rgene ABVC-Rgene Co-development Agreement”) with Rgene Corporation
(the “Rgene”), a related party under common control by the controlling beneficiary shareholder of YuanGene Corporation
and the Company (See Note 7). Pursuant to the Rgene ABVC-Rgene Co-development Agreement, BriVison and Rgene agreed to co-develop
and commercialize certain products that are included in the Sixth Product as defined in the Addendum. Under the terms of the Rgene
ABVC-Rgene Co-development Agreement, Rgene should pay the Company $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 Rgene ABVC-Rgene Co-development Agreement was signed and it does not relate to any future commitments made by BriVision
and Rgene in this Rgene ABVC-Rgene Co-development Agreement. Besides the $3,000,000, 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, the Company has delivered
all research, technical, data and development data to Rgene. Since both Rgene and the Company are related parties and under common
control by a controlling beneficiary shareholder of YuanGene Corporation and the Company, the Company has recorded the full amount
of $3,000,000 in connection with the Rgene ABVC-Rgene Co-development Agreement as additional paid-in capital during the year ended
December 31, 2017. During the nine months ended September 30, 2017, the Company has received $450,000 in cash. As of the date
of this report, the Company is still in discussion with Rgene with respect to the schedule of the outstanding balance of $2,550,000.
Collaborative agreement with
BioFirst Corporation, a related party
On July 24, 2017, American BriVision
Corporation entered into a collaborative agreement (the “BioFirst Collaborative Agreement”) with BioFirst Corporation
(“BioFirst”), pursuant to which BioFirst granted the Company 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 (See Note 7).
Pursuant to the BioFirst Collaborative
Agreement, the Company shall co-develop and commercialize ABV-1701 with BioFirst and pay BioFirst in a total amount of $3,000,000
in cash or stock of the Company before September 30, 2018. The amount of $3,000,000 is 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,
the Company 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 has
delivered all research, technical, data and development data to BriVision. No payment has been made by the Company as of the date
of this report. 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 has been fully expensed as research and development expense during the year ended September 30,
2017.
5. ACCRUED EXPENSES
Accrued expenses as of September 30,
2018 and December 31, 2017 consisted of:
|
|
September
30,
2018
|
|
|
December
31,
2017
|
|
Accrued consulting fee
|
|
$
|
38,411
|
|
|
$
|
29,075
|
|
Accrued professional service fees
|
|
|
8,560
|
|
|
|
13,592
|
|
Accrued interest expense – related party (Note
7)
|
|
|
39,131
|
|
|
|
17,460
|
|
Accrued payroll
|
|
|
346,500
|
|
|
|
110,800
|
|
Accrued operating expenses
|
|
|
4,226
|
|
|
|
-
|
|
Total
|
|
$
|
436,828
|
|
|
$
|
170,927
|
|
6. CONVERTIBLE NOTES PAYABLE
On May 9, 2018, t
he
Company issued an eighteen-month term unsecured convertible promissory note (the “Yu and Wei Note”) in an
aggregate principal amount of $300,000 to Guoliang Yu and Yingfei Wei Family Trust (the “Yu and Wei”), pursuant to
which
the Company received $300,000. The Yu and Wei Note bears interest at 8% per annum. The Company shall pay to
the
Yu and Wei
an amount in cash representing all outstanding principal
and accrued and unpaid interest on the Eighteenth (18) month anniversary of the issuance date of the
Yu
and Wei Note
, which is on November 8, 2019. In the event that the Company raises gross proceeds from the sale of its
common stock of at least $5,000,000 (an “Equity Offering”) then within five days of the closing for such offering,
the Company must repay the outstanding amount of this Yu and Wei Note. At any time from the date hereof until this Yu and Wei
Note has been satisfied, the Yu and Wei may convert the unpaid and outstanding principal plus any accrued and unpaid interest
and or default interest, if any, into shares of the Company’s common stock at a conversion price (the “Conversion
Price”) equal to the lower of (i) $2.00 per share (the “Fixed Conversion Price”), subject to adjustment or (ii)
80% of the per share offering price (the “Alternative Conversion Price”) of any completed equity offering of the Company
in an amount exceeding $500,000 that occurs when any part of the Yu and Wei Note is outstanding, subject to adjustments set forth
in the Yu and Wei Note. In accordance with FASB ASC 470-20, the Company recognized none of the intrinsic value of embedded beneficial
conversion feature present in the Yu and Wei Note as of September 30, 2018.
On June 27, 2018, t
he
Company issued an eighteen-month term unsecured convertible promissory note (the “Keypoint Note”) in the aggregate
principal amount of $250,000 to Keypoint Technology Ltd. (“Keypoint”), a related party (See Note 7), pursuant to which
the
Company received $250,000. The Keypoint Note bears interest at 8% per annum. The Company shall pay to the Keypoint an amount in
cash representing all outstanding principal and accrued and unpaid interest on the Eighteenth (18) month anniversary of the issuance
date of the Keypoint
Note
, which is on December 26, 2019. In the event that
the Company raises gross proceeds from the sale of its common stock of at least $5,000,000 (an “Equity Offering”)
then within five days of the closing for such offering, the Company must repay the outstanding amount of this Keypoint Note. At
any time from the date hereof until this Keypoint Note has been satisfied, Keypoint may convert the unpaid and outstanding principal
plus any accrued and unpaid interest and or default interest, if any, into shares of the Company’s common stock at a conversion
price (the “Conversion Price”) equal to the lower of (i) $2.00 per share (the “Fixed Conversion Price”),
subject to adjustment or (ii) 80% of the per share offering price (the “Alternative Conversion Price”) of any completed
equity offering of the Company in an amount exceeding $500,000 that occurs when any part of the Keypoint Note is outstanding,
subject to adjustments set forth in the Keypoint Note. In accordance with FASB ASC 470-20, the Company recognized none of the
intrinsic value of embedded beneficial conversion feature present in the Keypoint Note as of September 30, 2018.
As of September 30, 2018, the aggregate
carrying values of the convertible debentures and accrued convertible interest were $550,000 and $14,567, respectively. Interest
expense was $14,567 and $0 for the nine months ended September 30, 2018 and 2017, respectively.
7. RELATED PARTIES TRANSACTIONS
The related parties of the company
with whom transactions are reported in these financial statements are as follows:
Name
of entity or Individual
|
|
Relationship
with the Company and its subsidiaries
|
BioLite Inc. (the “BioLite”)
|
|
Shareholder of the Company; entity controlled
by controlling beneficiary shareholder of YuanGene
|
BioFirst Corporation (the “BioFirst”)
|
|
Entity controlled by controlling beneficiary
shareholder of YuanGene
|
BioFirst (Australia) Pty Ltd. (the BioFirst
(Australia)”)
|
|
100% owned by BioFirst; Entity controlled
by controlling beneficiary shareholder of YuanGene
|
Rgene Corporation (the “Rgene”)
|
|
Shareholder of the Company; entity controlled
by controlling beneficiary shareholder of YuanGene
|
YuanGene Corporation (the “YuanGene”)
|
|
Controlling beneficiary shareholder of the
Company
|
AsianGene Corporation (the “AsianGene”)
|
|
Shareholder of the Company; entity controlled
by controlling beneficiary shareholder of YuanGene
|
Eugene Jiang
|
|
Chairman, Interim Chief Financial Officer,
and former President
|
Keypoint Technology Ltd. (the “Keypoint’)
|
|
The Chairman of
Keypoint is Eugene Jiang’s mother.
|
Other receivable - related parties
Amount due from related parties consisted
of the following as of the periods indicated:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
BioFirst (Australia)
|
|
$
|
40,000
|
|
|
$
|
-
|
|
Total
|
|
$
|
40,000
|
|
|
$
|
-
|
|
Due to related parties
Amount due to related parties consisted
of the following as of the periods indicated:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
BioLite, Inc.
|
|
$
|
21,603
|
|
|
$
|
109,220
|
|
BioFirst Corporation
|
|
|
3,807,000
|
|
|
|
3,957,000
|
|
AsianGene Corporation
|
|
|
160,000
|
|
|
|
160,000
|
|
YuanGene Corporation
|
|
|
53,000
|
|
|
|
3,000
|
|
Eugene Jiang
|
|
|
100
|
|
|
|
100
|
|
Total
|
|
$
|
4,041,703
|
|
|
$
|
4,229,320
|
|
Related party transactions
(1)
|
As of September
30, 2018 and December 31, 2017, BioLite had an outstanding balance of $21,603 and $109,220 due from the Company for working
capital purpose, respectively. The advances bear 0% interest rate and are due on demand.
|
(2)
|
As of September
30, 2018, the Company has advanced an aggregate amount of $40,000 to BioFirst (Australia) for working capital purpose. The
advances bear 0% interest rate and are due on demand.
|
(3)
|
On January 26,
2017, the Company and BioFirst entered into a loan agreement for a total commitment (non-secured indebtedness) of $950,000
to meet its working capital needs. Under the terms of the loan agreement, the loan bears interest at 1% per month (or equivalent
to 12% per annum) and the Company is required to pay interest monthly to the lender. The loan matured on February 1, 2018.
On February 2, 2018, the Company and BioFirst agreed to extend the maturity date of loan to February 1, 2019 with the same
terms of the original loan agreement. As of September 30, 2018 and December 31, 2017, the outstanding loan balance was $793,000
and $950,000 and accrued interest was $25,297 and $17,460 (See Note 5), respectively. Interest expenses in connection with
this loan were $82,336 and $74,960 for the nine months ended September 30, 2018 and 2017, respectively.
|
(4)
|
On
July 24, 2017, BriVision entered into a collaborative agreement (the “BioFirst Collaborative Agreement”) with
BioFirst (See Note 4). On September 25, 2017, BioFirst has delivered all research, technical, data and development data to
BriVision, and the Company has recorded the full amount of $3,000,000 due to BioFirst. No payment has been made by the Company
as of the date of this report.
|
(5)
|
As
of September 30, 2018 and December 31, 2017, BioFirst has advanced an aggregate amount of $14,000 and $7,000 to the Company
for working capital purpose, respectively. The advances bear 0% interest rate and are due on demand.
|
(6)
|
In
September 2017, AsianGene entered an investment and equity transfer agreement (the “Investment and Equity Transfer Agreement”)
with Everfront Biotech Inc. (the “Everfront”), a third party. Pursuant to the Investment and Equity Transfer Agreement,
Everfront agreed to purchase 2,000,000 common shares of the Company owned by AsianGene at $1.60 per share in a total amount
of $3,200,000, of which $160,000 is due before September 15, 2017 and the remaining amount of $3,040,000 is due before December
15, 2017. As of September 30, 2018 and December 31, 2017, Everfront only paid $160,000 to AsianGene. AsianGene also agreed
to loan the proceeds to the Company for working capital purpose. On January 16, 2018, AsianGene and the Company entered into
a loan agreement. Pursuant to the loan agreement, the loan bears interest at 1% per month (or equivalent to 12% per annum)
and the Company is required to pay interest monthly to the lender. The maturity date of this loan is January 15, 2019. As
of September 30, 2018 and December 31, 2017, the outstanding loan balance was $160,000 and accrued interest was $9,626 and
$0 (See Note 5), respectively. Interest expenses in connection with this loan were $13,571 and $0 for the nine months ended
September 30, 2018 and 2017, respectively.
|
|
|
(7)
|
As
of September 30, 2018 and December 31, 2017, YuanGene Corporation has advanced an aggregate amount of $3,000 to the Company
for working capital purpose. The advances bear 0% interest rate and are due on demand.
|
(8)
|
On
January 18, 2018, the Company and YuanGene entered into a loan agreement for a total of $50,000 to meet its working capital
needs. Under the terms of the loan agreement, the loan bears interest at 1% per month (or equivalent to 12% per annum) and
the Company is required to pay interest monthly to the lender. The maturity date of this loan is January 19, 2019. As of September
30, 2018 and December 31, 2017, the outstanding loan balance was $50,000 and $0, and accrued interest was $4,208 and $0 (See
Note 5), respectively. Interest expenses in connection with this loan were $4,208 and $0 for the nine months ended September
30, 2018 and 2017, respectively.
|
(9)
|
As
of September 30, 2018 and December 31, 2017, the Chairman of the Company has advanced an aggregate amount of $100 to the Company
for working capital purpose. The advances bear 0% interest rate and are due on demand.
|
(10)
|
On
May 26, 2017, BriVision entered into a co-development agreement (the “ABVC-Rgene Co-development Agreement”) with
Rgene (See Note 4). As of September 30, 2018 and December 31, 2017, the Company has received an aggregate amount of $450,000
in cash and has recorded $2,550,000 as receivable from collaboration partners. Since both Rgene and the Company are related
parties and under common control by a controlling beneficiary shareholder of YuanGene Corporation, the Company has recorded
the full amount of $3,000,000 in connection with the Rgene ABVC-Rgene Co-development Agreement as additional paid-in capital
during the year ended September 30, 2017.
|
(11)
|
On
June 27, 2018, t
he Company issued an eighteen-month term unsecured convertible
promissory note (the “Keypoint Note”) in the aggregate principal amount of $250,000 to Keypoint Technology Ltd.
(“Keypoint”) (See Note 6).
The Company received $250,000 which bears interest at 8% per annum. Interest
expense in connection with this Keypoint Note was $5,167 and $0 for the nine months ended September 30, 2018 and 2017, respectively.
|
(12)
|
The
Company entered into an operating lease agreement with AsianGene for an office space in Taiwan for the period from October
1, 2016 to July 31, 2017. The monthly base rent is approximately $5,000. Rent expenses under this lease agreement amounted
to $0 and $35,000 for the nine months ended September 30, 2018 and 2017, respectively.
|
8. EQUITY
During October 2015, $350,000 of subscription
receivable was fully collected from the shareholders.
On February 8, 2016, a Share Exchange
Agreement (“Share Exchange Agreement”) was entered into by and among American BriVision (Holding) Corporation (the “Company”),
American BriVision Corporation (“BriVision”), Euro-Asia Investment & Finance Corp. Limited, a company incorporated
under the laws of Hong Kong Special Administrative Region of People’s Republic of China (“Euro-Asia”), being the owners
of record of 164,387,376 (52,336,000 pre-stock split) shares of common stock of the Company, and the owners of record of all of
the issued share capital of BriVision (the “BriVision Stock”). Pursuant to the Share Exchange Agreement, upon
surrender by the BriVision Shareholders and the cancellation by BriVision of the certificates evidencing the BriVision Stock as
registered in the name of each BriVision Shareholder, and pursuant to the registration of the Company in the register of members
maintained by BriVision as the new holder of the BriVision Stock and the issuance of the certificates evidencing the aforementioned
registration of the BriVision Stock in the name of the Company, the Company should issue 166,273,921(52,936,583 pre-stock split)
shares (the “Acquisition Stock”) (subject to adjustment for fractionalized shares as set forth below) of the
Company’s common stock to the BriVision Shareholders (or their designees), and 163,159,952 (51,945,225 pre-stock split)
shares of the Company’s common stock owned by Euro-Asia should be cancelled and retired to treasury. The Acquisition Stock
collectively should represent 79.70% of the issued and outstanding common stock of the Company immediately after the Closing,
in exchange for the BriVision Stock, representing 100% of the issued share capital of BriVision in a reverse merger, or the Merger.
Pursuant to the Merger, all of the issued and outstanding shares of BriVision’s common stock were converted, at an exchange
ratio of 0.2536-for-1, into an aggregate of 166,273,921(52,936,583 pre-stock split) shares of Company’s common stock and
BriVision became a wholly owned subsidiary, of the Company. The holders of Company’s common stock as of immediately prior
to the Merger held an aggregate of 205,519,223 (65,431,144 pre-stock split) shares of Company’s common stock, Because
of the exchange of the BriVision Stock for the Acquisition Stock (the “Share Exchange”), BriVision became a wholly
owned subsidiary (the “Subsidiary”) of the Company and there was a change of control of the Company following the
closing. There were no warrants, options or other equity instruments issued in connection with the share exchange agreement.
On February17, 2016, pursuant to the
2016 Equity Incentive Plan (the “2016 Plan”), 157,050 (50,000 pre-stock split) shares were granted to the employees.
On March 21, 2016, the Board of Directors
and the majority of the shareholders of the Company approved an amendment to Articles of Incorporation to effect a forward split
at a ratio of 1 to 3.141 (the “Forward Stock Split”) and increase the number of its 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.
On May 6, 2016, the Company and BioLite
agreed to amend the BioLite Collaborative Agreement, through entry into the Milestone Payment Agreement, whereby the Company has
agreed to issue shares of its common stock, at the price of $1.60 per share, for an aggregate number of 562,500 shares of the
Company’s common stock, as part of the first installation of payment pursuant to the Milestone Payment. The issuance of
shares was completed in June 2016.
On August 26, 2016, the Company issued
1,468,750 shares of the Company’s common stock, par value $0.001 (the “Offering”) to BioLite, Inc., a non-U.S.
accredited investor (the “Purchaser”) pursuant to a certain Stock Purchase Agreement dated August 26, 2016 (the “SPA”).
The sale of the Shares was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities
Act”), pursuant to Regulation S of the Securities Act promulgated thereunder. The purchase price per share of the Offering
was $1.60. The net proceeds to the Company from the Offering were approximately $2,350,000. The proceeds were used for working
capital purposes.
Pursuant to the BioLite Collaborative
Agreement (See Note 4), BriVision is obliged to pay up to a total of $100,000,000 in cash or stock of the Company with equivalent
value according to the milestone achieved. The agreement requires that 6.5% of total payment, $6,500,000 shall be made upon the
first IND submission which was submitted in March 2016. In February 2017, the Company remitted this amount to BioLite with $650,000
in cash and $5,850,000 in the form of newly issued shares of its common stock, at the price of $2.00 per share, for an aggregate
number of 2,925,000 shares.
On October 1, 2016, the Company entered
into a consulting agreement with Kazunori Kameyama (“Kameyama”) for the provision of services related to the clinical
trials and other administrative work, public relation work, capital raising, trip coordination, In consideration for providing
such services, the Company agreed to indemnify the consultant in an amount of $150 per hour in cash up to $3,000 per month, and
issue the Company’s common stock to Kameyama at $1.00 per share for any amount exceeding $3,000. The Company’s stocks
shall be calculated and issued in December every year. On October 1, 2017, the contract was extended for one year ending at September
30, 2018. During the nine months ended September 30, 2018, the Company recognized stock-based compensation expenses of $23,401.
On March 28, 2018, the Company issued 4,828 shares of the Company’s common stock at $1.60 per share in a total of $7,725
to Kameyama in connection with this consulting agreement.
On January 1, 2017, Euro-Asia Investment
& Finance Corp Ltd. (the “Euro-Asia”) and the Company entered into a one-year service agreement (the “Euro-Asia
Agreement”) for the maintenance of the listing in the U.S. stock exchange market. On March 28, 2018, the Company issued
50,000 shares of the Company’s common stock at $1.60 per share in a total of $80,000 to Euro-Asia in connection with the
Euro-Asia Agreement.
On January 1, 2017, Kimho Consultants
Co., Ltd. (the “Kimho”) and the Company entered into a one-year service agreement (the “Kimho Agreement”)
for the maintenance of the listing in the U.S. stock exchange market. On March 28, 2018, the Company issued 75,000 shares of the
Company’s common stock at $1.60 per share in a total of $120,000 to Kimho in connection with the Kimho Agreement.
Pursuant to ASC 505-50-30, the transactions
with the non-employees were measured based on the fair value of the equity instruments issued as the Company determined that the
fair value of the equity instruments issued in a stock-based payment transaction with nonemployees was more reliably measurable
than the fair value of the consideration received. The Company measured the fair value of the equity instruments in these transactions
using the stock price on the date at which the commitments Kameyama, Euro-Asia, and Kimho for performance were rendered.
On March 28, 2018, the Company also
issued an aggregate of 50,000 shares of the Company’s common stock at $1.60 per share for salaries in a total of $80,000
to three officers.
9. INCOME TAX
The Company files income tax returns
in the U.S. federal jurisdiction, and various state and local jurisdictions. The Company is no longer subject to U.S. federal,
state and local income tax examinations by tax authorities for years before 2013.
On December 22, 2017
H.R. 1
,
originally
known as the Tax Cuts and Jobs Act, (the “Tax Act”) was enacted. Among the significant changes to the U.S. Internal
Revenue Code, the Tax Act lowers the U.S. federal corporate income tax rate (“Federal Tax Rate”) from 35% to 21% effective
January 1, 2018
.
The 21% Federal Tax Rate will apply to earnings reported for the full 2018 fiscal
year. In addition, the Company must re-measure its net deferred tax assets and liabilities using the Federal Tax Rate that will
apply when these amounts are expected to reverse. As of September 30, 2018 and December 31, 2017, the Company can
determine a reasonable estimate for certain effects of tax reform and recorded that estimate as a provisional amount. The provisional
remeasurement of the deferred tax assets and allowance valuation of deferred tax assets at September 30, 2018 and December 31,
2017 resulted in a net effect of $0 discrete tax expenses (benefit) which lowered the effective tax rate by 14% for
the nine months ended September 30, 2018 and for the year ended December 31, 2017. The provisional remeasurement amount is anticipated
to change as data becomes available allowing more accurate scheduling of the deferred tax assets and liabilities primarily related
to net operating loss carryover.
Components of income tax (benefits)
for the nine months ended September 30, 2018 and 2017 are as follows:
|
|
For
the Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Federal
|
|
|
State
|
|
|
Total
|
|
|
Federal
|
|
|
State
|
|
|
Total
|
|
Current
|
|
$
|
-
|
|
|
$
|
1,850
|
|
|
$
|
1,850
|
|
|
$
|
-
|
|
|
$
|
830
|
|
|
$
|
830
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
-
|
|
|
$
|
1,850
|
|
|
$
|
1,850
|
|
|
$
|
-
|
|
|
$
|
830
|
|
|
$
|
830
|
|
Significant components of the Company’s
deferred tax accounts at September 30, 2018 and December 31, 2017:
|
|
September
30,
2018
|
|
|
December
31,
2017
|
|
Deferred Tax Account - noncurrent:
|
|
|
|
|
|
|
Tax losses carryforwards
|
|
$
|
756,189
|
|
|
$
|
594,501
|
|
Less:
Valuation allowance
|
|
|
(756,189
|
)
|
|
|
(594,501
|
)
|
Total deferred
tax account - noncurrent
|
|
$
|
-
|
|
|
$
|
-
|
|
The difference between the effective
rate reflected in the provision for income taxes on loss before taxes and the amounts determined by applying the applicable statutory
U.S. tax rate are analyzed below:
|
|
For
the Nine Months Ended
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
Statutory federal tax benefit, net
of state tax effects
|
|
|
19
|
%
|
|
|
31
|
%
|
State income taxes
|
|
|
8.84
|
%
|
|
|
8.84
|
%
|
Nondeductible/nontaxable items
|
|
|
(2
|
)%
|
|
|
(4
|
)%
|
Change in valuation allowance
|
|
|
(25.84
|
)%
|
|
|
(35.84
|
)%
|
Effective income tax rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
10. LOSS PER SHARE
Basic loss per share is computed by
dividing net loss by the weighted-average number of common shares outstanding during the year. Diluted loss per share is computed
by dividing net loss by the weighted-average number of common shares and dilutive potential common shares outstanding during the
three and nine months ended September 30, 2018 and 2017.
|
|
For
the Three Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(218,573
|
)
|
|
|
(3,387,096
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
- Basic
|
|
|
213,926,475
|
|
|
|
213,746,647
|
|
Stock options
|
|
|
-
|
|
|
|
-
|
|
Weighted-average shares outstanding
- Diluted
|
|
|
213,926,475
|
|
|
|
213,746,647
|
|
|
|
|
|
|
|
|
|
|
Loss per share
|
|
|
|
|
|
|
|
|
-Basic
|
|
|
(0.00
|
)
|
|
|
(0.02
|
)
|
-Diluted
|
|
|
(0.00
|
)
|
|
|
(0.02
|
)
|
|
|
For
the Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(795,195
|
)
|
|
|
(3,861,646
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
- Basic
|
|
|
213,869,826
|
|
|
|
213,178,790
|
|
Stock options
|
|
|
-
|
|
|
|
-
|
|
Weighted-average shares outstanding
- Diluted
|
|
|
213,869,826
|
|
|
|
213,178,790
|
|
|
|
|
|
|
|
|
|
|
Loss per share
|
|
|
|
|
|
|
|
|
-Basic
|
|
|
(0.00
|
)
|
|
|
(0.02
|
)
|
-Diluted
|
|
|
(0.00
|
)
|
|
|
(0.02
|
)
|
Diluted loss per share takes into account
the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into
common stock. As the Company has incurred net losses for the three and nine months ended September 30, 2018 and 2017, the Company
did not include dilutive common equivalent shares in the computation of diluted net loss per share because the effect would have
been anti-dilutive.
11. COMMITMENTS AND CONTINGENCIES
Operating Commitment
The Company leased an office space
in Taiwan under non-cancelable operating leases expired on June 30, 2018. As of September 30, 2018, there was no future minimum
lease payments under non-cancelable operating and capital leases.
Rental expense was $0 and $8,793 for
the three months ended September 30, 2018 and 2017, respectively. Rental expense was $5,097 and $46,763 for the nine months ended
September 30, 2018 and 2017, respectively.
12. SUBSEQUENT EVENT
The Company has evaluated subsequent
events through the date which the financial statements were available to be issued. All subsequent events requiring recognition
as of September 30, 2018 have been incorporated into these financial statements and there are no subsequent events that require
disclosure in accordance with FASB ASC Topic 855, “Subsequent Events.”
******
BIOLITE
HOLDING, INC.
Financial
Statements for the Years Ended
December
31, 2017 and 2016
|
|
A
udit
●
T
ax
● C
onsulting
● F
inancial
A
dvisory
Registered
with Public Company Accounting Oversight Board (PCAOB)
|
Report
of Independent Registered Public Accounting Firm
To
the Board of Directors and Shareholders of BioLite Holding, Inc.
Opinion
on the Financial Statements
We
have audited the accompanying consolidated balance sheets of BioLite Holding, Inc. and its subsidiaries. ( collectively referred
to as “the Company”) as of December 31, 2017 and 2016, the related statements of operations and comprehensive income(loss),
stockholders’ equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to
as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects,
the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and
its cash flows for the years ended December 31, 2017 and 2016, in conformity with the U.S. generally accepted accounting
principles.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
The
accompanying consolidated financial statements have been prepared assuming that BioLite Holding, Inc. and its subsidiaries will
continue as a going concern. As described in Note 2 to the consolidated financial statements, the Company has incurred losses
from operations, has a working capital deficit, and is in need of additional capital to grow its operations so that it can become
profitable. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s
plans with regard to these matters are described in Note 2. The accompanying consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/
KCCW Accountancy Corp.
|
|
|
|
We
have served as the Company’s auditor since 2017.
|
|
Diamond
Bar, California
|
|
April
30, 2018
|
|
|
|
|
KCCW
Accountancy Corp.
|
|
3333
S Brea Canyon Rd. #206, Diamond Bar, CA 91765, USA
|
|
Tel: +1
909 348 7228 ● Fax: +1 909 895 4155 ● info@kccwcpa.com
|
BIOLITE
HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
256,925
|
|
|
$
|
100,464
|
|
Restricted cash
|
|
|
56,579
|
|
|
|
66,944
|
|
Accounts Receivable - related parties
|
|
|
3,475
|
|
|
|
1,265
|
|
Receivable from collaboration partners – related parties
|
|
|
-
|
|
|
|
5,037,500
|
|
Due from related parties
|
|
|
153,953
|
|
|
|
258
|
|
Inventory, net
|
|
|
199,708
|
|
|
|
185,951
|
|
Prepaid expenses and other current assets
|
|
|
90,333
|
|
|
|
43,376
|
|
Total Current Assets
|
|
|
760,973
|
|
|
|
5,435,758
|
|
Restricted cash - noncurrent
|
|
|
-
|
|
|
|
185,436
|
|
Property and equipment, net
|
|
|
570,576
|
|
|
|
563,253
|
|
Long-term investments
|
|
|
4,185,969
|
|
|
|
3,594,241
|
|
Deferred tax assets
|
|
|
1,017,897
|
|
|
|
593,021
|
|
Security Deposits
|
|
|
68,876
|
|
|
|
48,811
|
|
Total Assets
|
|
$
|
6,604,291
|
|
|
$
|
10,420,520
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Short-term bank loan
|
|
|
927,800
|
|
|
|
231,481
|
|
Long-term bank loan - current portion
|
|
|
40,203
|
|
|
|
119,773
|
|
Notes payable
|
|
|
202,429
|
|
|
|
-
|
|
Accrued expenses
|
|
|
511,212
|
|
|
|
724,327
|
|
Other payable
|
|
|
16,288
|
|
|
|
168,551
|
|
Due to related parties
|
|
|
2,390,498
|
|
|
|
319,910
|
|
Total Current Liabilities
|
|
|
4,088,430
|
|
|
|
1,564,042
|
|
|
|
|
|
|
|
|
|
|
Noncurrent Liabilities
|
|
|
|
|
|
|
|
|
Long-term bank loan
|
|
|
55,690
|
|
|
|
-
|
|
Total Noncurrent Liabilities
|
|
|
55,690
|
|
|
|
-
|
|
Total Liabilities
|
|
|
4,144,120
|
|
|
|
1,564,042
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
Common Stock, $0.0001 par value, 500,000,000 shares
authorized, 20,000,000 and 41,207,444 shares issued and outstanding
|
|
|
4,121
|
|
|
|
2,000
|
|
Additional paid-in capital
|
|
|
10,862,995
|
|
|
|
11,303,457
|
|
Accumulated deficit
|
|
|
(9,971,033
|
)
|
|
|
(4,922,762
|
)
|
Other comprehensive income
|
|
|
757,327
|
|
|
|
61,754
|
|
Total Stockholders’ Equity
|
|
|
1,653,410
|
|
|
|
6,444,449
|
|
Noncontrolling Interest
|
|
|
806,761
|
|
|
|
2,412,029
|
|
Total Equity
|
|
|
2,460,171
|
|
|
|
8,856,478
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity
|
|
$
|
6,604,291
|
|
|
$
|
10,420,520
|
|
The
accompanying notes are an integral part of these financial statements.
BIOLITE
HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR
THE YEARS ENDED DECEMBER 31, 2017 AND 2016
|
|
2017
|
|
|
2016
|
|
Net revenue
|
|
|
|
|
|
|
Merchandise sales
|
|
$
|
940
|
|
|
$
|
2,812
|
|
Merchandise sales-related parties
|
|
|
2,256
|
|
|
|
3,253
|
|
Collaborative revenue
|
|
|
-
|
|
|
|
982,083
|
|
Total net revenue
|
|
|
3,196
|
|
|
|
988,148
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
2,249
|
|
|
|
24,318
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
947
|
|
|
|
963,830
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
|
256,682
|
|
|
|
823,046
|
|
Selling, general and administrative expenses
|
|
|
1,735,931
|
|
|
|
1,752,168
|
|
Total operating expenses
|
|
|
1,992,613
|
|
|
|
2,575,214
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,991,666
|
)
|
|
|
(1,611,384
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
7,207
|
|
|
|
3,429
|
|
Interest expense
|
|
|
(222,060
|
)
|
|
|
(7,602
|
)
|
Rental income
|
|
|
11,814
|
|
|
|
11,884
|
|
Impairment loss
|
|
|
-
|
|
|
|
(1,470,378
|
)
|
Investment loss
|
|
|
(34,139
|
)
|
|
|
-
|
|
Loss on foreign exchange changes
|
|
|
(409,170
|
)
|
|
|
(85,398
|
)
|
Loss on investment in equity securities
|
|
|
(4,443,876
|
)
|
|
|
(3,560,325
|
)
|
Other income (expenses)
|
|
|
51,574
|
|
|
|
67,328
|
|
Total other income (expenses)
|
|
|
(5,038,650
|
)
|
|
|
(5,041,062
|
)
|
Loss before income taxes
|
|
|
(7,030,316
|
)
|
|
|
(6,652,446
|
)
|
Provision for income taxes expense (benefit)
|
|
|
(360,395
|
)
|
|
|
(60,660
|
)
|
Net loss
|
|
|
(6,669,921
|
)
|
|
|
(6,591,786
|
)
|
Net loss attributable to noncontrolling interests, net of tax
|
|
|
1,621,650
|
|
|
|
1,669,024
|
|
Net loss attributable to BioLite Holding, Inc.
|
|
|
(5,048,271
|
)
|
|
|
(4,922,762
|
)
|
Foreign currency translation adjustment
|
|
|
695,573
|
|
|
|
61,754
|
|
Comprehensive Loss
|
|
$
|
(4,352,698
|
)
|
|
$
|
(4,861,008
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to Common Stockholders
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(0.16
|
)
|
|
$
|
(0.25
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
30,720,246
|
|
|
|
20,000,000
|
|
The
accompanying notes are an integral part of these financial statements.
BIOLITE
HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF EQUITY
FOR THE
YEARS ENDED DECEMBER 31, 2017 AND 2016
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common Stocks
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Non-controlling
|
|
|
|
|
|
|
Shares
|
|
|
Amounts
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
Interest
|
|
|
Total
|
|
Balance at July 27, 2016 (inception)
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Capital Contribution
|
|
|
20,000,000
|
|
|
|
2,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,000
|
|
Effects from restructuring
|
|
|
-
|
|
|
|
-
|
|
|
|
11,303,457
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,081,053
|
|
|
|
15,384,510
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,922,762
|
)
|
|
|
61,754
|
|
|
|
(1,669,024
|
)
|
|
|
(6,530,032
|
)
|
Balance at December 31, 2016
|
|
|
20,000,000
|
|
|
|
2,000
|
|
|
|
11,303,457
|
|
|
|
(4,922,762
|
)
|
|
|
61,754
|
|
|
|
2,412,029
|
|
|
|
8,856,478
|
|
Capital Contribution
|
|
|
21,207,444
|
|
|
|
2,121
|
|
|
|
7,679,786
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,681,907
|
|
Effects from restructuring
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,120,248
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
16,382
|
|
|
|
(8,103,866
|
)
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,048,271
|
)
|
|
|
-
|
|
|
|
(1,621,650
|
)
|
|
|
(6,669,921
|
)
|
Cumulative translation adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
695,573
|
|
|
|
-
|
|
|
|
695,573
|
|
Balance at December 31, 2017
|
|
|
41,207,444
|
|
|
$
|
4,121
|
|
|
$
|
10,862,995
|
|
|
$
|
(9,971,033
|
)
|
|
$
|
757,327
|
|
|
$
|
806,671
|
|
|
$
|
2,460,171
|
|
The
accompanying notes are an integral part of these financial statements.
BIOLITE
HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2017 AND 2016
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,669,921
|
)
|
|
$
|
(6,591,786
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation & amortization
|
|
|
43,996
|
|
|
|
43,777
|
|
Investment loss
|
|
|
34,139
|
|
|
|
-
|
|
Impairment losses for doubtful account
|
|
|
-
|
|
|
|
1,470,378
|
|
Loss on investment in equity securities
|
|
|
4,443,876
|
|
|
|
3,560,325
|
|
Deferred tax
|
|
|
(360,395
|
)
|
|
|
(60,660
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable
|
|
|
(724
|
)
|
|
|
(533
|
)
|
Decrease (increase) in receivable from collaboration revenue
|
|
|
1,054,913
|
|
|
|
-
|
|
Decrease (increase) in due from related parties
|
|
|
(167,197
|
)
|
|
|
11,580
|
|
Decrease (increase) in inventory
|
|
|
3,469
|
|
|
|
19,166
|
|
Decrease (increase) in prepaid expenses and other deposits
|
|
|
(56,973
|
)
|
|
|
72,408
|
|
Increase (decrease) in accrued expenses and other current liabilities
|
|
|
(338,236
|
)
|
|
|
151,147
|
|
Increase (decrease) in due to related parties
|
|
|
329,556
|
|
|
|
295,298
|
|
Net Cash Used In Operating Activities
|
|
|
(1,683,497
|
)
|
|
|
(1,028,900
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
213,808
|
|
|
|
(181,997
|
)
|
Net proceeds from sale of investment in equity securities
|
|
|
128,480
|
|
|
|
-
|
|
Loan to related parties
|
|
|
(32,893
|
)
|
|
|
-
|
|
Long-term equity investment
|
|
|
(7,803,713
|
)
|
|
|
(3,070,940
|
)
|
Net Cash Used In Investing Activities
|
|
|
(7,494,318
|
)
|
|
|
(3,252,937
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Net proceeds from the issuance of Common Stock
|
|
|
7,681,907
|
|
|
|
2,000
|
|
Proceeds from loan from related parties
|
|
|
914,427
|
|
|
|
-
|
|
Capital contribution from related parties under common control
|
|
|
6,579
|
|
|
|
2,642,823
|
|
Net proceeds from short-term bank loans
|
|
|
657,861
|
|
|
|
232,728
|
|
Net proceeds from short-term borrowing from third-parties
|
|
|
98,679
|
|
|
|
93,091
|
|
Repayment of long-term bank loans
|
|
|
(34,156
|
)
|
|
|
(36,138
|
)
|
Net Cash Provided By Financing Activities
|
|
|
9,325,297
|
|
|
|
2,934,504
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
8,979
|
|
|
|
22,730
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
156,461
|
|
|
|
(1,324,603
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
100,464
|
|
|
|
1,425,067
|
|
Ending
|
|
$
|
256,925
|
|
|
$
|
100,464
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flows
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Income tax
|
|
$
|
-
|
|
|
$
|
-
|
|
Interest expense
|
|
$
|
92,238
|
|
|
$
|
7,602
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing and investing activities
|
|
|
|
|
|
|
|
|
Capital contribution from related parties under
common control
|
|
$
|
1,316
|
|
|
$
|
6,750,000
|
|
The
accompanying notes are an integral part of these financial statements
BIOLITE
HOLDING, INC. AND SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2017 AND 2016
NOTE
1. ORGANIZATION AND BUSINESS
BioLite
Holding, Inc. (the “BioLite Holding”) was incorporated under the laws of the State of Nevada on July 27, 2016. BioLite
BVI, Inc. (the “BioLite BVI”), a wholly owned subsidiary of BioLite Holding, was incorporated in the British Virgin
Islands on September 13, 2016. BioLite Holding and BioLite BVI are holding companies and have not carried out substantive business
operations of their own.
BioLite,
Inc., (the “BioLite Taiwan”) was incorporated on February 13, 2006 under the laws of Taiwan. BioLite is in the business
of developing and commercialization of new botanical drugs with application in central nervous system, autoimmunity, inflammation,
hematology, and oncology. In addition, BioLite Taiwan distributes dietary supplements made from extracts of Chinese herbs and
Maitake mushroom.
In
January 2017, BioLite Holding, BioLite BVI, BioLite Taiwan, and certain shareholders of BioLite Taiwan entered into a share purchase
/ exchange agreement (the “BioLite Share Purchase / Exchange Agreement”). Pursuant to the BioLite Share Purchase /
Exchange Agreement, the shareholder participants to the BioLite Share Purchase / Exchange Agreement have sold their equity in
BioLite Taiwan and were using the proceeds from such sales to purchase shares of Common Stock of BioLite Holding at the same price
per share, resulting in their owning the same number of shares of Common Stock as they owned in the BioLite Taiwan. Upon closing
of the Share Purchase/ Exchange Agreement in August 2017, BioLite Holding ultimately owns via BioLite BVI approximately 73% of
BioLite Taiwan. The other shareholders who did not enter this Share Purchase/ Exchange Agreement retain their equity ownership
in BioLite Taiwan.
The
fiscal year of BioLite Holding, BioLite BVI, and BioLite Taiwan (collectively referred to as “the Company”) ends on
December 31st.
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation and Principles of Consolidation
— The accompanying consolidated financial statements, including
the accounts of BioLite Holding, BioLite BVI, and BioLite Taiwan, have been prepared in conformity with accounting principles
generally accepted in the United States of America. Since BioLite Holding, BioLite BVI, and BioLite Taiwan are the entities under
Dr. Tsung-Shann Jiang’s common control prior to the Share Purchase / Exchange Agreement, the transaction is accounted for
as a restructuring transaction. All the assets and liabilities of BioLite Taiwan were transferred to BioLite Holding at their
respective carrying amounts on the closing date of Share Purchase / Exchange transaction. The Company has recast prior period
financial statements to reflect the conveyance of BioLite Taiwan’s common shares as if the restructuring transaction had
occurred as of the earliest date of the financial statements. All material intercompany accounts, transactions, and profits have
been eliminated in consolidation. The nature of and effects on earnings per share (EPS) of nonrecurring intra-entity transactions
involving long-term assets and liabilities is not required to be eliminated and EPS amounts have been recast to include the earnings
(or losses) of the transferred net assets.
The
functional currency of BioLite Taiwan is the New Taiwan dollars, however the accompanying consolidated financial statements have
been translated and presented in United States Dollars ($). In the accompanying financial statements and notes, “$”,
“US$” and “U.S. dollars” mean United States dollars, and “NT$” and “NT dollars”
mean New Taiwan dollars.
Going
Concern
— The accompanying consolidated financial statements have been prepared assuming the Company will continue
as a going concern. The Company has incurred losses since its inception resulting in an accumulated deficit of $9,971,033 and
$4,922,762 as of December 31, 2017 and 2016, respectively, and incurred net loss attributable to BioLite Holding, Inc. of $5,048,271
and $4,922,762 for the years ended December 31, 2017, and 2016, respectively. The Company also had working capital deficiency
of $3,327,457 at December 31, 2017. The ability to continue as a going concern is dependent upon the Company generating profitable
operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from
normal business operations when they become due. These consolidated financial statements do not include any adjustments to the
recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the
Company upon signing of that agreement.
In
order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s
plans to obtain such resources for the Company include (1) obtaining capital from the sale of its equity securities (2) short-term
and long-term borrowings from banks and third-parties, and (3) short-term borrowings from stockholders or other related party(ies)
when needed. However, management cannot provide any assurance that the Company will be successful in accomplishing any of its
plans.
The
ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described
in the preceding paragraph and eventually to secure other sources of financing and attain profitable operations.
Segment
Reporting
— The Company follows 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 the Company’s reportable segments. ASC Topic 280, “Segment Reporting,” also requires
disclosures about products or services, geographic areas, and major customers. The Company’s management reporting structure
provided for only one segment in 2017 and 2016. 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.
Concentration
of Credit Risk
— The Company’s financial instruments that are exposed to concentrations of credit risk consist
primarily of cash and cash equivalents and restricted cash. The Company 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. The Company 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 the Company
transacts business, as well as their dispersion across many geographical areas. The Company 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 —
The Company 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 the Company 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. 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.
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
—The Company 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 the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. The Company 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.
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 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.
Long-term
Equity Investment
— The Company acquires these equity investments to promote business and strategic objectives.
The Company accounts for non-marketable equity and other equity investments for which the Company does not have control over the
investees as:
|
●
|
Equity
method investments when the Company 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 the Company’s non-marketable equity investments,
and therefore the Company 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. The Company’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.
Other-Than-Temporary
Impairment
— The Company’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. The Company 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 $4,277,708 and $3,122,123 for the years ended December 31, 2017 and
2016, respectively.
|
Post-retirement
and post-employment benefits —
The Company 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, the Company makes monthly contribution equal to 6% of employees’ salaries to the employees’ pension fund.
The Company has no legal obligation for the benefits beyond the contributions made. The total amounts for such employee benefits,
which were expensed as incurred, were $26,263 and $32,561 for the years ended December 31, 2017 and 2016, respectively. Other
than the above, the Company does not provide any other post-retirement or post-employment benefits.
Revenue
Recognition —
Revenues consist of merchandise sales and collaboration revenue.
Merchandise
sales
—
Revenue from distribution of dietary supplements are recognized when persuasive evidence of an arrangement
exists, delivery has occurred, the sales price is determinable, and collectability of the sales price is reasonably assured.
Collaboration
Revenue —
The Company recognizes collaboration revenue accounting for the various payment flows under its collaborative
agreements with BioHopeKing Corporation (the “BHK”) and American BriVision Corporation (the “BriVision”)
(See NOTE 3).
|
(i)
|
Estimated
Performance Periods
|
The
collaborative agreements contain multiple elements and deliverables, and required evaluation pursuant to ASC 605-25, “Revenue
Recognition — Multiple-Element Arrangements.” The Company 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 the Company’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, the
Company’s experience in conducting clinical development, regulatory and manufacturing activities. The Company 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.
The
Company 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 the Company’s
obligations under the collaborative agreement with collaboration partners, and (b) events which do not involve the performance
of the Company’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 the Company 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 the Company, (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, the Company recognizes any revenue from these milestone payments in the period
in which the underlying triggering event occurs.
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(iii)
|
Multiple
Element Arrangements
|
The
Company analyzes multiple element arrangements based on the guidance in ASC Topic 605-25,
Revenue Recognition—Multiple
Element Arrangements,
or ASC 605-25. Pursuant to the guidance in ASC 605-25, the Company 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, the Company
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. The Company 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).
The
Company recognizes arrangement consideration allocated to each unit of accounting when all of the revenue recognition criteria
in ASC 605 are satisfied for that particular unit of accounting. In the event that a deliverable does not represent a separate
unit of accounting, the Company recognizes revenue from the combined unit of accounting over the Company’s contractual or
estimated performance period for the undelivered elements, which is typically the term of the Company’s research and development
obligations. If there is no discernible pattern of performance or objectively measurable performance measures do not exist, then
the Company recognizes revenue under the arrangement on a straight-line basis over the period the Company 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 the Company 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.
At
the inception of an arrangement that includes milestone payments, the Company 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 the Company’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. The Company 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, the Company is entitled to receive royalties on sales of products,
which is at certain percentage of the net sales. The Company recognizes revenue from these events based on the revenue recognition
criteria set forth in ASC 605-10-25-1, “Revenue Recognition”. Based on those criteria, the Company 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 the Company 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, the Company’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, the Company 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 for information related to income taxes, including the recorded
balances of its valuation allowance related to deferred tax assets.
The
Company 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 the Company’s liability for income taxes. Any such
adjustment could be material to the Company’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, 2017 and 2016, management considered that the Company
had no uncertain tax positions, and will continue to evaluate for uncertain positions in the future.
Share-Based
Compensation —
The Company 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. The Company 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.
The Company 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 the Company’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,
the Company’s stock-based compensation expense could be materially different in the future.
These assumptions and estimates are as
follows:
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●
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Fair
value of the underlying Common Stock. Because the Company’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) the Company’s actual
operating and financial performance, and current business conditions and projections;
d) the Company’s hiring
of key personnel and the experience of our management;
e) the Company’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
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●
|
Expected term. The expected term represents the period that the stock-based compensation awards are expected to be outstanding. Since the Company 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.
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●
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Expected volatility.
As the Company 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.
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●
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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.
|
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●
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Expected dividend yield. The Company 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.
|
The valuations are highly complex and
subjective. Following the completion of this offering, Common Stock valuations will no longer be necessary as the Company will
rely on market prices to determine the fair value of its Common Stock.
Foreign-currency
Transactions
— For the Company’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 was 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’ deficit.
Research
and Development
— The Company 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 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.
Research and development expense was $256,682 and $823,046 for
the years ended December 31, 2017 and 2016, 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 the Company
and its products, including its corporate website. Promotional and advertising costs were $842 and $38,792 for the years ended
December 31, 2017 and 2016, respectively.
Statement
of Cash Flows
—
Cash flows from the Company’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.
Comprehensive
Income
— Comprehensive income includes accumulated foreign currency translation gains and losses. The Company has
reported the components of comprehensive income in its statements of operations and comprehensive income (loss).
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 ASU will be effective for the Company beginning
January 1, 2019, including interim periods in the fiscal year 2019. Early adoption is permitted. The Company is in the process
of determining the method of adoption and assessing the impact of this ASU on its consolidated results of operations, cash flows,
financial position and disclosures.
In
March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations
(Reporting Revenue Gross versus Net). In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic
606): Identifying Performance Obligations and Licensing. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with
Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients and ASU 2016-11, Revenue Recognition (Topic 605) and
Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant
to Staff Announcements at the March 3, 2016 EITF Meeting. In December 2016, the FASB issued ASU 2016-20, Technical Corrections
and Improvements to Topic 606, Revenue from Contracts with Customers. In September 2017, the FASB issued ASU 2017-13, Revenue
Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842). These
amendments provide additional clarification and implementation guidance on the previously issued ASU 2014-09, Revenue from Contracts
with Customers (Topic 606). The amendments in ASU 2016-08 clarify how an entity should identify the specified good or service
for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. ASU
2016-10 clarifies the following two aspects of ASU 2014-09: identifying performance obligations and licensing implementation guidance.
ASU 2016-11 rescinds several SEC Staff Announcements that are codified in Topic 605, including, among other items, guidance relating
to accounting for consideration given by a vendor to a customer, as well as accounting for shipping and handling fees and freight
services. ASU 2016-12 provides clarification to Topic 606 on how to assess collectability, present sales tax, treat noncash consideration,
and account for completed and modified contracts at the time of transition. ASU 2016-12 clarifies that an entity retrospectively
applying the guidance in Topic 606 is not required to disclose the effect of the accounting change in the period of adoption.
Additionally, ASU 2016-20 clarifies certain narrow aspects within Topic 606 including its scope, contract cost accounting, and
disclosures. The new guidance requires enhanced disclosures, including revenue recognition policies to identify performance obligations
to customers and significant judgments in measurement and recognition. The effective date and transition requirements for these
amendments are the same as the effective date and transition requirements of ASU 2014-09, which is effective for fiscal years,
and for interim periods within those years, beginning after December 15, 2017. The Company is currently evaluating the overall
impact that ASU 2014-09 and its related amendments will have on the Company’s financial statements.
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”).To the extent that a company’s accounting for certain income tax
effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate
to be included in the financial statements. 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 our interpretations and assumptions, additional guidance that may be issued by the I.R.S.,
and actions we may take. The Company is continuing to gather additional information to determine the final impact.
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. The Company is currently evaluating
the effect this standard will have on its Consolidated Financial Statements.
NOTE
3. COLLABORATIVE AGREEMENTS
(a)
|
Collaborative
agreements with BHK
|
(i)
On February 24, 2015, BioLite Taiwan and BioHopeKing Corporation (the “BHK”) entered into a co-development agreement,
(the “BHK Co-Development Agreement”), pursuant to which it is collaborative with BHK to develop and commercialize
BLI-1401-2 (Botanical Drug) Triple Negative Breast Cancer (TNBC) Combination Therapy (BLI-1401-2 Products) in Asian countries
excluding Japan for all related intellectual property rights, and has developed it for medicinal use in collaboration with outside
researchers. The development costs shall be shared 50/50 between BHK and the Company. 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:
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●
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Upon
the signing of the BHK Co-Development Agreement: $1 million, or 10% of total payment
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●
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Upon
the first Investigational New Drug (IND) submission and BioLite Taiwan will deliver all data to BHK according to FDA Reviewing
requirement: $1 million, or 10% of total payment
|
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●
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At
the completion of first phase II clinical trial: $1 million, or 10% of total payment
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|
●
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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 has paid a non-refundable upfront cash payment of $1 million, or 10% of $10,000,000, upon the signing of 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 has 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 report, the Company has not completed the first phase II clinical trial.
In
addition to the milestone payments, BioLite Taiwan is entitled to receive royalty on 12% of BHK’s net sales related
to BLI-1401-2 Products. As of December 31, 2017 and 2016, the Company has not earned the royalty 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 it is collaborative 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 for all related intellectual property rights, and has developed it for medicinal use in collaboration with
outside researchers. The development costs shall be shared 50/50 between BHK and the Company. 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.
In
2015, the Company recognized the 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. 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 payment as collaboration revenue when all research, technical, data and development data was delivered to BHK. The cash receipt
is for the compensation of past research efforts and contributions made by BioLite Taiwan before this BHK Collaborative Agreements
was signed and it does not relate to any future commitments made by BioLite Taiwan and BHK in this 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 December 31, 2017 and 2016, the Company has not earned the royalty
under the BHK Collaborative Agreements.
(b)
|
Collaborative
Agreement with BriVision
|
On
December 29, 2015, BioLite Taiwan and BriVision entered into a collaborative agreement (the “BriVision Collaborative Agreement”),
pursuant to which it is collaborative with BriVision to develop and commercialize five products, including BLI-1005 CNS-Major
Depressive Disorder, BLI-1008 CNS-Attention Deficit Hyperactivity Disorder, BLI-1401-1 Anti-Tumor Combination Therapy –
Solid Tumor with Anti-PD-1, BLI-1401-2 Anti-Tumor Combination Therapy – Triple Negative Breast Cancer, and BLI-1501 Hematology-Chronic
Lymphocytic Leukemia ( collectively “Five Products”) in the United States of America and Canada for all related intellectual
property rights, and has developed it for medicinal use in collaboration with outside researchers. On January 12, 2017, BioLite
Taiwan entered into an Addendum (the “Addendum”) to the BriVision Collaborative Agreement, pursuant to which BioLite
Taiwan and BriVision agreed to include one more product, namely, “Maitake Combination Therapy” as one of the Products
defined in the BioLite Collaborative Agreement (the “Sixth Product”) and defined the Territory of the Sixth Product
to be worldwide and restate the Territory of the Five Products to be the U.S.A and Canada. The BriVision Collaborative Agreement
will remain in effect for fifteen years from the date of first commercial sale of the Five Products in the North America Region.
Either party may terminate upon thirty days’ prior written notice for breach or insolvency.
Under
the BioLite Collaborative Agreement, BriVision should pay a total of $100,000,000 in cash or stock of BriVision with equivalent
value, according to the following schedule:
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●
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Upfront
payment shall be made upon the signing of this BioLite Collaborative Agreement: 3.5% of total payment. After receiving upfront
payment from BriVision, BioLite Taiwan has to deliver all data to BriVision in one week
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●
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Upon
the first IND submission, BriVision shall pay, but no later than December 15, 2016: 6.5% of total payment. After receiving
second payment from BriVision, BioLite has to deliver IND package to BriVision in one week.
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●
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At
the completion of first phase II clinical trial, BriVision shall pay, but no later than September 15, 2017: 15% of total payment.
After receiving third payment from BriVision, BioLite has to deliver phase II clinical study report to BriVision in three
months.
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●
|
Upon
the phase III IND submission, BriVision shall pay, but no later than December 15, 2018: 20% of total payment. After receiving
forth payment from BriVision, BioLite has to deliver IND package to BriVision in one week.
|
|
●
|
At
the completion of phase III, BriVision shall pay, but no later than September 15, 2019:25% of total payment. After receiving
fifth payment from BriVision, BioLite has to deliver phase III clinical study report to BriVision in three months.
|
|
●
|
Upon
the NDA submission, BriVision shall pay, but no later than December 15, 2020, BriVision shall pay: 30% of total payment. After
receiving sixth payment from BriVision, BioLite has to deliver NDA package to BriVision in one week.
|
An
upfront payment of $3,500,000 (the “Milestone Payment”), or 3.5% of $100,000,000, was due in December 2015 under the
BriVision Collaborative Agreement. On May 6, 2016, BioLite Taiwan and BriVision amended the payment terms under the BriVision
Collaborative Agreement, whereby BriVision has agreed to pay the upfront payment to the Company $2,600,000 in cash and $900,000
in newly issued shares of Common Stock of BriVision’s holding company, American BriVision (Holding) Corporation (“ABVC”),
a Nevada company, at the price of $1.60 per share, for an aggregate number of 562,500 shares. The cash payment and shares issuance
were completed in June 2016. 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. 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 BriVision in this collaborative agreement.
In March 2016, BioLite Taiwan
has submitted the first IND and delivered the IND package to BriVision. In February 2017, BriVision agreed to pay the 6.5% of
total payment, $6,500,000 to BioLite Taiwan with $650,000 in cash and $5,850,000 in the form of newly issued shares of Common
Stock of ABVC, at the price of $2.0 per share based on the quoted price (for the shares) provided by OTC Markets Group Inc., for
an aggregate number of 2,925,000 shares. Since the Common Stock shares of ABVC are lightly traded in the over-the-counter market,
the Company considered to utilize other fair value inputs, such as the bid-ask spread, in determining the fair value of the shares
as of December 31, 2017 and 2016. As of December 31, 2017, the first phase II clinical trial research has not completed yet.
Since
both BioLite Taiwan, BriVision, and ABVC are related parties and under common control by Dr. Tsung-Shann Jiang, the Company has
recorded the full amount of $6,500,000 and $3,500,000 in connection with the BriVision Collaborative Agreement as additional paid-in
capital during the years ended December 31, 2016 and 2015, respectively.
Under
the Collaborative Agreement, BioLite Taiwan is also entitled to 5% of net sales of the Products. There have not been any commercial
sales since the Collaborative Agreement became effective.
The
Company evaluated the Collaboration Agreement in accordance with the provisions of ASC, Topic 605-25,
Revenue Recognition—Multiple
Element Arrangements
. The Company’s arrangement with BHK contains the following deliverables: (i) the license right
to develop and use proprietary technology and confidential information for BLI-1401-2 Products, and its related intellectual property
rights (the “BLI-1401-2 Deliverable”), (ii) ) the license right to develop and use proprietary technology
and confidential information for BLI-1005 Products, and its related intellectual property rights (the “BLI-1005 Deliverable”),
and (iii) ) the license right to develop and use proprietary technology and confidential information for BLI-1006 Products,
and its related intellectual property rights (the “BLI-1006 Deliverable”). The Company’s arrangement with BriVision
contains the license right to develop and use proprietary technology and confidential information for the Five Products and the
Sixth Product, and their related intellectual property rights (the “Five Products and the Sixth Product Deliverable).
The
Company has concluded that each of herein deliverables identified at the inception of the arrangement has standalone value from
each of the elements based on their nature. Factors considered in this determination included, among other things, the capabilities
of the collaboration partner, whether any other vendor sells the item separately, whether the value of the deliverable is dependent
on the other elements in the arrangement, whether there are other vendors that can provide the items and if the customer could
use the item for its intended purpose without the other deliverables in the arrangement. Additionally, the Collaboration Agreement
does not include a general right of return. Accordingly, each of herein deliverables included in the BHK and BriVision arrangements
qualifies as a separate unit of accounting. Therefore, the Company has identified seven units of accounting in connection with
its obligations under the collaboration arrangement with BHK and BriVision as follows: (i) BLI-1005 Products, (ii) BLI-1006 Products,
(iii) BLI-1008 Products, (iv) BLI-1401-1 Products, (v) BLI-1401-2 Products, (vi) BLI-1401-2 Products, and (vii) Maitake Product
(the Sixth Product).
NOTE
4. INVENTORY
Inventory
consists of the following:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Merchandise
|
|
$
|
4,951
|
|
|
$
|
7,784
|
|
Finished goods
|
|
|
104,454
|
|
|
|
95,556
|
|
Work-in-process
|
|
|
20,885
|
|
|
|
19,106
|
|
Raw materials
|
|
|
69,418
|
|
|
|
63,505
|
|
Inventory, net
|
|
$
|
199,708
|
|
|
$
|
185,951
|
|
NOTE
5. LONG-TERM INVESTMENTS
(1)
|
The
ownership percentages of each investee are listed as follows:
|
|
|
Ownership percentage
|
|
|
|
|
|
As of December 31,
|
|
|
|
Name of related party
|
|
2017
|
|
|
2016
|
|
|
Accounting treatment
|
Braingenesis Biotechnology Co., Ltd.
|
|
|
0.23
|
%
|
|
|
0.23
|
%
|
|
Cost Method
|
Genepharm Biotech Corporation
|
|
|
0.98
|
%
|
|
|
0.98
|
%
|
|
Cost Method
|
BioHopeKing Corporation
|
|
|
9.60
|
%
|
|
|
9.87
|
%
|
|
Cost Method
|
BioFirst Corporation
|
|
|
21.51
|
%
|
|
|
22.11
|
%
|
|
Equity Method
|
American BriVision (Holding) Corp.
|
|
|
2.32
|
%
|
|
|
0.96
|
%
|
|
Equity Method
|
Rgene Corporation
|
|
|
13.04
|
%
|
|
|
-
|
|
|
Equity Method
|
(2)
|
The
extent the investee relies on the company for its business are summarized as follows:
|
Name
of related party
|
|
The
extent the investee relies on the company for its business
|
Braingenesis
Biotechnology Co., Ltd.
|
|
No
specific business relationship
|
Genepharm
Biotech Corporation
|
|
No
specific business relationship
|
BioHopeKing
Corporation
|
|
Collaborating
with the Company to develop and commercialize drugs
|
American
BriVision (Holding) Corp.
|
|
Collaborating
with the Company to develop and commercialize drugs
|
Rgene
Corporation
|
|
Loan
to the investee
|
BioFirst
Corporation
|
|
Loan
from the investee and provide research and development support service
|
(3)
|
Long-term
investment mainly consists of the following:
|
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Non-marketable Cost Method Investments
|
|
|
|
|
|
|
Braingenesis Biotechnology Co., Ltd.
|
|
$
|
7,442
|
|
|
$
|
6,808
|
|
Genepharm Biotech Corporation
|
|
|
22,720
|
|
|
|
20,785
|
|
BioHopeKing Corporation (See NOTE 3 & 12)
|
|
|
2,261,524
|
|
|
|
2,068,875
|
|
Sub total
|
|
|
2,291,686
|
|
|
|
2,096,468
|
|
Equity Method Investments
|
|
|
|
|
|
|
|
|
BioFirst Corporation (NOTE 12)
|
|
|
1,894,283
|
|
|
|
1,497,773
|
|
American BriVision (Holding) Corp. (See NOTE 3 & 12)
|
|
|
-
|
|
|
|
-
|
|
Rgene Corporation (NOTE 12)
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
4,185,969
|
|
|
$
|
3,594,241
|
|
(a)
|
BioFirst
Corporation (the “BioFirst):
|
The
Company holds an equity interest in BioFirst Corporation, (the “BioFirst”), accounting for its equity interest using
the equity method to accounts for its equity investment as prescribed in ASC 323, Investments—Equity Method and Joint Ventures
(“ASC 323”). Equity method adjustments include the Company’s proportionate share of investee’s income
or loss and other adjustments required by the equity method. As of December 31, 2017 and 2016, the Company owns 21.51% and 22.11%
Common Stock shares of BioFirst, respectively.
Summarized
financial information for the Company’s equity method investee, BioFirst, is as follows:
Balance
Sheet
|
|
|
As
of December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Current
Assets
|
|
$
|
6,903,042
|
|
|
$
|
5,160,082
|
|
|
Noncurrent
Assets
|
|
|
2,730,701
|
|
|
|
1,993,818
|
|
|
Current
Liabilities
|
|
|
318,074
|
|
|
|
460,290
|
|
|
Shareholders’
Equity
|
|
|
9,315,669
|
|
|
|
6,693,610
|
|
Statement
of operation
|
|
|
Year
Ended December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Net
sales
|
|
$
|
3,030,034
|
|
|
$
|
39,015
|
|
|
Gross
Profit
|
|
|
3,003,885
|
|
|
|
11,476
|
|
|
Net
income (loss)
|
|
|
1,665,472
|
|
|
|
(1,646,859
|
)
|
|
Share
of loss from investments accounted for using the equity method
|
|
|
358,243
|
|
|
|
(364,121
|
)
|
(b)
|
American
BriVision (Holding) Corp. (the “ABVC”):
|
Both
ABVC and the Company are under common control by Dr. Tsung-Shann Jiang, the CEO and chairman of the Company. Since Dr. Tsung-Shann
Jiang is able to exercise significant influence, but not control, over the American BriVision (Holding) Corp., (the “ABVC”),
the Company determined to use the equity method to accounts for its equity investment as prescribed in ASC 323, Investments—Equity
Method and Joint Ventures (“ASC 323”). Equity method adjustments include the Company’s proportionate share of
investee’s income or loss and other adjustments required by the equity method. As of December 31, 2017 and 2016, the Company
owns 2.32% and 0.96% Common Stock shares of ABVC, respectively.
Summarized
financial information for the Company’s equity method investee, ABVC, is as follows:
Balance
Sheet
|
|
|
As
of December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Current
Assets
|
|
$
|
2,643,332
|
|
|
$
|
18,645
|
|
|
Current
Liabilities
|
|
|
4,400,247
|
|
|
|
6,538,100
|
|
|
Shareholders’
Equity(Deficit)
|
|
|
(1,756,915
|
)
|
|
|
(6,519,455
|
)
|
Statement
of operation
|
|
|
Year
Ended December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Net
sales
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Gross
Profit
|
|
|
-
|
|
|
|
(32
|
)
|
|
Net
loss
|
|
|
(4,242,860
|
)
|
|
|
(7,716,723
|
)
|
|
Share
of loss from investments accounted for using the equity method
|
|
|
(98,434
|
)
|
|
|
(74,081
|
)
|
(c)
|
Rgene
Corporation (the “Rgene”):
|
Both
Rgene and the Company are under common control by Dr. Tsung-Shann Jiang, the CEO and chairman of the Company. Since Dr. Tsung-Shann
Jiang is able to exercise significant influence, but not control, over the American BriVision (Holding) Corp., (the “ABVC”),
the Company determined to use the equity method to accounts for its equity investment as prescribed in ASC 323, Investments—Equity
Method and Joint Ventures (“ASC 323”). Equity method adjustments include the Company’s proportionate share of
investee’s income or loss and other adjustments required by the equity method. As of December 31, 2017 and 2016, the Company
owns 13.04% and 0% Common Stock shares of Rgene, respectively.
Summarized
financial information for the Company’s equity method investee, Rgene, is as follows:
Balance
Sheet
|
|
|
As
of December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Current
Assets
|
|
$
|
48,557
|
|
|
$
|
33,073
|
|
|
Noncurrent
Assets
|
|
|
81
|
|
|
|
74
|
|
|
Current
Liabilities
|
|
|
3,118,897
|
|
|
|
146,697
|
|
|
Shareholders’
Equity(Deficit)
|
|
|
(3,070,259
|
)
|
|
|
(113,550
|
)
|
Statement
of operation
|
|
|
Year
Ended December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Net
sales
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Gross
Profit
|
|
|
-
|
|
|
|
-
|
|
|
Net
loss
|
|
|
(3,266,696
|
)
|
|
|
(806,020
|
)
|
|
Share
of loss from investments accounted for using the equity method
|
|
|
(425,977
|
)
|
|
|
-
|
|
(4)
|
Gains
(Losses) on Equity Investments
|
The
components of gains (losses) on equity investments for each period were as follows:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
For
the Years Ended
|
|
|
|
|
|
|
Share
of equity method investee losses
|
|
$
|
(166,168
|
)
|
|
$
|
(438,202
|
)
|
Impairments
|
|
|
(4,277,708
|
)
|
|
|
(3,122,123
|
)
|
Total
gains (losses) on equity investments
|
|
$
|
(4,443,876
|
)
|
|
$
|
(3,560,325
|
)
|
NOTE
6. PROPERTY AND EQUIPMENT
Property
and equipment as of December 31, 2017 and 2016 are summarized as follows:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Land
|
|
$
|
374,953
|
|
|
$
|
343,013
|
|
Buildings and leasehold improvements
|
|
|
299,623
|
|
|
|
274,099
|
|
Machinery and equipment
|
|
|
90,130
|
|
|
|
82,451
|
|
Office equipment
|
|
|
21,968
|
|
|
|
20,096
|
|
|
|
|
786,674
|
|
|
|
719,659
|
|
Less: accumulated depreciation
|
|
|
(216,098
|
)
|
|
|
(156,406
|
)
|
Property and equipment, net
|
|
$
|
570,576
|
|
|
$
|
563,253
|
|
Depreciation
expenses were $43,996 and $43,777 for the years ended December 31, 2017 and 2016, respectively.
NOTE
7. BANK LOANS
(1)
|
Short-term
bank loan consists of the following:
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cathay United Bank
|
|
$
|
253,036
|
|
|
$
|
231,481
|
|
CTBC Bank
|
|
|
674,764
|
|
|
|
-
|
|
Total
|
|
$
|
927,800
|
|
|
$
|
231,481
|
|
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 $231,481. 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 more year with the principal amount of NT$7,500,000, equivalent to $253,036. The new maturity date is September 6, 2018. As
of December 31, 2017 and 2016, the effective interest rates per annum were 2.22%. The loan is collateralized by the building and
improvement of BioLite Taiwan, and is also personal guaranteed by the Company’s chairman.
Interest
expenses were $4,096 and $2,211 for the years ended December 31, 2017 and 2016, respectively.
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 $337,382, and NT$10,000,000, equivalent to $337,382,
respectively. Both two loans with the same maturity date at January 19, 2018. 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.
Interest
expenses were $4,849 and $0 for the years ended December 31, 2017 and 2016, respectively.
(2)
|
Long-term
bank loan consists of the following:
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cathay United Bank
|
|
$
|
95,893
|
|
|
$
|
119,773
|
|
Less: current portion of long-term bank loan
|
|
|
(40,203
|
)
|
|
|
(119,773
|
)
|
Total
|
|
$
|
55,690
|
|
|
$
|
-
|
|
On
April 30, 2010, BioLite Taiwan entered a seven-year bank loan of NT$8,900,000, equivalent to $300,270, with Cathay United Bank.
The term started April 30, 2010 with maturity date at April 30, 2017. On April 30, 2017, BioLite Taiwan extended the original
loan agreement for additional three years with the new maturity date at April 30, 2020. The loan balance bears interest at a floating
rate of prime rate plus variable rates from 0.77% to 1.17%. The prime rate is based on term deposit saving interest rate of Cathay
United Bank. As of December 31, 2017 and 2016, the actual interest rates per annum were 2.24%. The loan is collateralized by the
building and improvement of BioLite Taiwan, and is also personal guaranteed by the Company’s chairman.
Interest
expenses were $2,305 and $3,277 for the years ended December 31, 2017 and 2016, respectively.
NOTE
8. NOTES PAYABLE
On
November 27, 2017, BioLite Taiwan and Cheng-Chi International Co., Ltd., a Taiwanese company, entered into a promissory note for
borrowing an aggregate amount of NT$6,000,000, equivalent to $202,429, for the period from November 27, 2017 to January 11, 2018.
The principal of promissory note bears interest at 12% per annum. This promissory note is secured by 700,000 Common Stock shares
of ABVC and is also personal guaranteed by the Company’s chairman. As of the date of this report, the principal and accrued
interest totaling NT$6,090,000, equivalent to $205,465, has been paid in full.
NOTE
9. ACCRUED EXPENSES
Accrued
expenses mainly consist of the following:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Accrued salaries and bonus
|
|
$
|
45,862
|
|
|
$
|
114,026
|
|
Accrued employee benefits and pension expenses
|
|
|
9,390
|
|
|
|
14,582
|
|
Accrued sales tax
|
|
|
-
|
|
|
|
327
|
|
Accrued professional service fees
|
|
|
8,300
|
|
|
|
26,342
|
|
Accrued research and development expenses
|
|
|
2,656
|
|
|
|
87,577
|
|
Accrued cost of collaboration revenue payable
|
|
|
400,600
|
|
|
|
436,681
|
|
Others
|
|
|
44,404
|
|
|
|
44,792
|
|
|
|
$
|
511,212
|
|
|
$
|
724,327
|
|
NOTE
10. OTHER PAYABLE
Other
payable mainly consists of the following:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Other payable
|
|
$
|
4,532
|
|
|
$
|
65,877
|
|
Taiwan income tax withholding payable
|
|
|
11,756
|
|
|
|
10,081
|
|
Borrowing from third party
|
|
|
-
|
|
|
|
92,593
|
|
|
|
$
|
16,288
|
|
|
$
|
168,551
|
|
On
December 5, 2016, the Company entered a loan agreement bearing interest at a fixed rate at 13.6224% per annum with a third party
to advance NT$3,000,000, equivalent to $92,593, for working capital purpose. The term of the loan started from December 5, 2016
with maturity date on February 4, 2017. Interest expense was $0 and $1,057 for the years ended December 31, 2017 and 2016, respectively.
NOTE
11. SHARE-BASED COMPENSATION
On
November 15, 2013, the Board of Directors of BioLite Taiwan approved the adoption of the 2013 Stock Option and Incentive Plan,
(the “2013 Plan”), providing for the issuance under 2013 Plan of options and rights to purchase up to two million
seventy thousand (2,070,000) shares of Common Stock. Awards of incentive options may be granted under the 2013 Plan until December
31, 2017. As of December 31, 2017 and 2016, there were 487,000 shares available for issuance under the 2013 Plan, which provides
for the grant of share-based awards to employees and officers.
Plan
Administration
─ The 2013 Plan may be administered by the full Board of Directors of BioLite Taiwan. The Board of
BioLite Taiwan has full power to select, from among the individuals eligible for awards, the individuals to whom awards will be
granted, to make any combination of awards to participants, and to determine the specific terms and conditions of each award,
subject to the provisions of the 2013 Plan.
Eligibility
─
Persons eligible to participate in 2013 Plan will be those full time employees and officers of the Company as
selected from time to time by the Board of BioLite Taiwan in its discretion.
Limits
─
Under 2013 Plans, stock options granted to any individual employee cannot exceed 25% of the Plan, neither to exceed
3% of the total Common Stock shares issued by BioLite Taiwan.
Stock
Options ─
The option exercise price of each option under both plans was determined by the Company’s status
at the date of grant: (i) before public offering date: the option exercise price would be NT$12.5, equivalent to $0.39, per share
and NT$15.0, equivalent to $0.46, per share for the 2013 Plan, respectively, (ii) after public offering date: the exercise price
would be decided by the Board of BioLite Taiwan, and not less than the book value per share on the latest financial report before
the date of grant, (iii) after been listed on the secondary market, the option exercise price would be the market price, but not
less than the par value of the Common Stock. The exercise price of an option may not be reduced after the date of the option grant,
other than to appropriately reflect changes in our capital structure. The term of the option was determined by the Board of Directors
of BioLite Taiwan, under the 2013 Plan, employees could exercise 50%, 75%, and 100% of the options at 6 months, 12 months and
24 months after the date of grant. In general, unless otherwise permitted by the Board of BioLite Taiwan, no option granted under
2013 Plan are transferable by the optionee other than by will or by the laws of descent and distribution, and options may be exercised
during the optionee’s lifetime only by the optionee, or by the optionee’s legal representative or guardian in the
case of the optionee’s incapacity.
Under
2013 Plan, upon exercise of options, the option exercise price must be paid in full either in cash, by certified or bank check,
or other instrument acceptable to the Board BioLite Taiwan. Subject to applicable law, the exercise price may also be delivered
to BioLite Taiwan by a broker pursuant to irrevocable instructions to the broker from the optionee. To qualify as incentive options,
options must meet additional tax requirements.
Tax
Withholding ─
Participants in the 2013 Plan are responsible for the payment of any taxes that BioLite Taiwan is
required by law to withhold upon the exercise of options or vesting of other awards. Subject to approval by the Board, participants
may elect to have the minimum tax withholding obligations satisfied by authorizing BioLite Taiwan to withhold shares of Common
Stock to be issued pursuant to the exercise or vesting.
Amendments
and Termination ─
The Board of Directors of BioLite Taiwan may at any time amend or discontinue the 2013 Plan, and
the Board of BioLite Taiwan may at any time amend or cancel any outstanding award for the purpose of satisfying changes in the
law or for any other lawful purpose. However, no such action may adversely affect any rights under any outstanding award without
the holder’s consent. Any amendments that materially change the terms of 2013 Plan will be subject to approval by the administrative
authorities.
The
following table summarizes the stock option activity under the 2013 Plan, and related information:
Options
Outstanding
|
|
|
Number
of
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Shares
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
Underlying
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Outstanding
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Life
(Years)
|
|
|
Value
|
|
Outstanding
– January 1, 2016
|
|
|
487,000
|
|
|
$
|
0.4600
|
|
|
|
2.13
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
or cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
– December 31, 2016
|
|
|
487,000
|
|
|
$
|
0.4600
|
|
|
|
2.13
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
or cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
– December 31, 2017
|
|
|
487,000
|
|
|
$
|
0.4600
|
|
|
|
2.13
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
– December 31, 2017
|
|
|
487,000
|
|
|
$
|
0.4600
|
|
|
|
2.13
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and expected to vest – December 31, 2017
|
|
|
487,000
|
|
|
$
|
0.4600
|
|
|
|
2.13
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
– December 31, 2016
|
|
|
487,000
|
|
|
$
|
0.4600
|
|
|
|
2.13
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and expected to vest – December 31, 2016
|
|
|
487,000
|
|
|
$
|
0.4600
|
|
|
|
2.13
|
|
|
$
|
-
|
|
Compensation
expense related to share-based transactions is measured and recognized in general and administrative expenses in the financial
statements based on the fair value of the awards granted. The share-based compensation expense, net of forfeitures, is recognized
on a straight-line basis over the requisite service periods of the awards, which is generally a half year to two years. As of
December 31, 2017 and 2016, all stock options under 2013 Plan were fully vested. Accordingly, the Company recognized stock based
compensation expense of $0 and $0 for the years ended December 31, 2017 and 2016, respectively.
NOTE
12. RELATED-PARTY TRANSACTION
Related
parties:
(1)
|
Lion
Arts Promotion Inc. (hereinafter, “LION”) was incorporated on March 17, 1997 under the laws of Taiwan. LION is
in the business of art related promotion and is a controlling shareholder of BioLite Taiwan.
|
(2)
|
BioFirst
Corporation (hereinafter, “BioFirst”) was incorporated on November 7, 2006 under the laws of Taiwan. BioFirst
is in the business of researching, developing, manufacturing, and marketing of innovative patented medical products. As of
December 31, 2017 and 2016, the Company owns 21.51% and 22.11% Common Stock shares of BioFirst (See NOTE 5), respectively.
|
(3)
|
BioHopeKing
Corporation (hereinafter, “BHK”) was incorporated on September 1, 2014 under the laws of Taiwan. BHK is in the
business of research and development of various cancer drugs and the innovation of medical devices. In 2015, BHK has entered
one co-development and two collaborative agreements with the Company (See NOTE 3). In December 2015, the Company acquired
900,000 shares of Common Stock of BHK for NT$54,000,000 (equivalent approximately $1,822,000) in cash. In August 2016, the
Company acquired additional 407,000 shares of Common Stock of BHK for NT$28,490,000, (equivalent approximately $961,200) in
cash. As of December 31, 2017 and 2016, the Company owned 9.60% and 9.87% Common Stock of BHK, respectively (See NOTE 5).
|
(4)
|
American
BriVision Corporation (hereinafter, “BriVision”) was incorporated on July 21, 2015 in the State of Delaware, engaging
in biotechnology and focuses on the development of new drugs and innovative medical devices to fulfill unmet medical needs.
In 2015, BriVision entered a collaborative agreement with the Company (See NOTE 3). On May 6, 2016, the Company and BriVision
entered into an addendum to the collaborative agreement, whereby BriVision has agreed to pay the upfront payment to the Company
$2,600,000 in cash and $900,000 in newly issued shares of Common Stock of BriVision’s holding company, American BriVision
(Holding) Corporation (“ABVC”), a Nevada company, at the price of $1.60 per share, for an aggregate number of
562,500 shares. In August 2016, the Company made additional equity investment of $2,350,000 in cash to acquire 1,468,750 shares
of Common Stock of ABVC. In February 2017, the Company received $650,000 in cash and $5,850,000
in
the form of newly issued 2,925,000 shares of Common Stock of ABVC, at the price of $2.0 per share for the first milestone
payment. As of December 31, 2017 and 2016,
the Company owned 2.32% and 0.96% Common Stock of ABVC, respectively (SEE
NOTE 5).
|
(5)
|
Regene
Corporation (hereinafter, “Rgene”) was incorporated on June 24, 2010 under the laws of Taiwan. Rgene is in the
business of research and development and innovation of various drugs. On March 23, 2017, the Company acquired 600,000 shares
of Common Stock of Rgene for NT$15,000,000 (equivalent approximately $506,000) in cash. As of December 31, 2017 and 2016,
the Company owned 13.04% and 0% Common Stock of Rgene, respectively (See NOTE 5).
|
(6)
|
AsianGene
Corporation (hereinafter, “AsianGene”) was incorporated on December 16, 2013 under the laws of Taiwan. Rgene is
in the business of real estate development. AsianGene is one of the shareholders of the Company.
|
(7)
|
Mr.
Tsung-Shann Jiang is the chairman and CEO of the Company and the President and a member of board of directors of BioFirst.
Mr. Jiang is also the controlling beneficiary shareholder of ABVC, BriVision, and Rgene. Ms. Shu-Ling Jiang, Mr. Tsung-Shann
Jiang’s wife, is the chairman of LION and BioFirst, and a member of board of directors of the Company. Mr. Eugene Jiang
is Mr. and Ms. Jiang’s son. Mr. Eugene Jiang is a member of board of directors of the Company, and is also the chairman,
and majority shareholder of ABVC. Mr. Tsung-Shann Jiang, Ms. Shu-Ling Jiang, and Mr. Eugene Jiang hereinafter are collectively
called “JIANGS”.
|
Related
party transactions:
For
the year ended and at December 31, 2017, the related party transactions are summarized as follows:
|
|
|
|
|
|
|
|
Merchandise Sales /
|
|
|
|
|
|
|
|
|
Receivable from
|
|
|
|
|
|
|
|
|
|
Amounts
|
|
|
Amounts
|
|
|
Service
|
|
|
Accounts
|
|
|
Collaboration
|
|
|
collaboration
|
|
|
Loan to
|
|
|
Rent
|
|
|
|
due from
|
|
|
due to
|
|
|
Revenue
|
|
|
receivable
|
|
|
Revenue (a)
|
|
|
Partners (a)
|
|
|
(Loan from)
|
|
|
Expenses (b)
|
|
LION
|
|
$
|
-
|
|
|
$
|
23,171
|
|
|
$
|
2,256
|
|
|
$
|
1,350
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
37,592
|
|
BioFirst
|
|
|
-
|
|
|
|
1,118,361
|
|
|
|
7,894
|
|
|
|
2,125
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(937,922
|
)
|
|
|
-
|
|
BHK
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
ABVC & BriVision
|
|
|
115,168
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Rgene
|
|
|
3,316
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33,738
|
|
|
|
-
|
|
AsianGene
|
|
|
1,731
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
JIANGS
|
|
|
-
|
|
|
|
311,044
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
120,215
|
|
|
$
|
1,452,576
|
|
|
$
|
10,150
|
|
|
$
|
3,475
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(904,184
|
)
|
|
$
|
37,592
|
|
For
the year ended and at December 31, 2016, the related party transactions are summarized as follows:
|
|
|
|
|
|
|
|
Merchandise Sales /
|
|
|
|
|
|
|
|
|
Receivable from
|
|
|
|
|
|
|
|
|
|
Amounts
|
|
|
Amounts
|
|
|
Service
|
|
|
Accounts
|
|
|
Collaboration
|
|
|
collaboration
|
|
|
Loan to
|
|
|
Rent
|
|
|
|
due from
|
|
|
due to
|
|
|
Revenue
|
|
|
receivable
|
|
|
Revenue (a)
|
|
|
Partners (a)
|
|
|
(Loan from)
|
|
|
Expenses (b)
|
|
LION
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,121
|
|
|
$
|
617
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
35,463
|
|
BioFirst
|
|
|
258
|
|
|
|
-
|
|
|
|
9,536
|
|
|
|
648
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
BHK
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
982,083
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
ABVC & BriVision
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,037,500
|
|
|
|
-
|
|
|
|
-
|
|
Rgene
|
|
|
-
|
|
|
|
-
|
|
|
|
132
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
AsianGene
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
JIANGS
|
|
|
-
|
|
|
|
319,910
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
258
|
|
|
$
|
319,910
|
|
|
$
|
12,789
|
|
|
$
|
1,265
|
|
|
$
|
982,083
|
|
|
$
|
5,037,500
|
|
|
$
|
-
|
|
|
$
|
35,463
|
|
(b)
|
The
Company leases its office from LION, which automatically renews the lease agreement annually. The monthly base rent is approximately
$3,000. Rent expense under this lease agreement amounted to $37,592 and $35,463 for the years ended December 31, 2017 and
2016, respectively
|
NOTE
13. INCOME TAX
U.S.A
BioLite
Holding, Inc. files income tax returns in the U.S. federal jurisdiction, and state and local jurisdictions.
On December
22, 2017
H.R. 1
,
originally known as the Tax Cuts and Jobs Act, (the “Tax Act”) was enacted.
Among the significant changes to the U.S. Internal Revenue Code, the Tax Act lowers the U.S. federal corporate income tax rate
(“Federal Tax Rate”) from 35% to 21% effective January 1, 2018
.
The 21% Federal
Tax Rate will apply to earnings reported for the full 2018 fiscal year. In addition, the Company must re-measure its
net deferred tax assets and liabilities using the Federal Tax Rate that will apply when these amounts are expected to reverse.
As of December 31, 2017, the Company can determine a reasonable estimate for certain effects of tax reform and
is recording that estimate as a provisional amount. The provisional remeasurement of the deferred tax assets and allowance valuation
of deferred tax assets at December 31, 2017 resulted in a net effect of $0 discrete tax expenses (benefit) which lowered
the effective tax rate by 14% for the years ended December 31, 2017. The provisional remeasurement amount is anticipated
to change as data becomes available allowing more accurate scheduling of the deferred tax assets and liabilities primarily related
to net operating loss carryover.
British
Virgin Islands
BioLite
BVI, Inc. was incorporated in British Virgin Islands, which does not tax income.
Taiwan
BioLite
Inc. was incorporated in Taiwan. According to the amendments to the “Income Tax Act” enacted by the office of the
President of the R.O.C. on February 7, 2018, an increase in the statutory income tax rate from 17% to 20% and decrease in the
undistributed earning tax from 10% to 5% are effective from January 1, 2018. This increase in the statutory income tax rate does
not affect the amounts of the current taxes recognized as of December 31, 2017 and for the year then ended. No income tax liabilities
existed as of December 31, 2017 due to the Company’s continuing operating losses. As of December 31, 2017, we had deferred
tax assets related to tax loss and credit carryforwards totaling $1,017,897 that begin to expire in 2025.
Provision
for income tax consists of the following:
|
|
2017
|
|
|
2016
|
|
Current provision
|
|
|
|
|
|
|
U.S.A
|
|
$
|
-
|
|
|
$
|
-
|
|
Taiwan
|
|
|
-
|
|
|
|
-
|
|
Sub total
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred provision
|
|
|
|
|
|
|
|
|
U.S.A
|
|
$
|
-
|
|
|
$
|
-
|
|
Taiwan
|
|
|
(360,395
|
)
|
|
|
(60,660
|
)
|
Total provision for income tax(benefit)
|
|
$
|
(360,395
|
)
|
|
$
|
(60,660
|
)
|
The
components of deferred tax assets consisted of the following
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
U.S.A
|
|
|
|
|
|
|
Tax loss and credit carryforwards
|
|
$
|
155,612
|
|
|
$
|
105,000
|
|
Less: Valuation allowance
|
|
|
(155,612
|
)
|
|
|
(105,000
|
)
|
Subtotal
|
|
|
-
|
|
|
|
-
|
|
Taiwan
|
|
|
|
|
|
|
|
|
Loss on disposal of assets
|
|
$
|
694,810
|
|
|
$
|
540,279
|
|
Tax loss and credit carryforwards
|
|
|
1,017,897
|
|
|
|
593,021
|
|
Less: Valuation allowance
|
|
|
(694,810
|
)
|
|
|
(540,279
|
)
|
Subtotal
|
|
|
1,017,897
|
|
|
|
593,021
|
|
Total deferred tax assets
|
|
$
|
1,017,897
|
|
|
$
|
593,021
|
|
The
difference between the combined effective income tax rate reflected in the provision for income tax on income (loss) before taxes
and the amounts determined by applying the applicable the U.S. statutory income tax rate and Taiwan unified income tax rate
for
the years ended December 31, 2017 and 2016
are analyzed below:
|
|
For the Years Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
U.S. statutory income tax rate
|
|
|
35
|
%
|
|
|
35
|
%
|
Taiwan unified income tax rate
|
|
|
17
|
%
|
|
|
17
|
%
|
Provisional remeasurement of deferred taxes (U.S. & Taiwan)
|
|
|
(11
|
)%
|
|
|
-
|
%
|
Changes in valuation allowance
|
|
|
(46
|
)%
|
|
|
(53
|
)%
|
Effective combined income tax rate
|
|
|
(5
|
)%
|
|
|
(1
|
)%
|
NOTE
14. COMMITMENTS
Operating
lease commitment:
The
Company’s operating leases include lease contracts of office spaces, laboratory space, and employees’ dormitory. Future
minimum lease payments under the operating leases are summarized as follows:
Fiscal Year
|
|
Amount
|
|
2018
|
|
$
|
75,511
|
|
2019
|
|
|
51,359
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
126,870
|
|
In-Licensing
collaborative agreement commitment:
(1)
|
On
January 1, 2011, the Company entered a collaborative agreement with Medical and Pharmaceutical Industry Technology and Development
Center (“PITDC”), a Taiwanese Company. Pursuant to the collaborative agreement, PITDC granted the Company the
sole licensing right for drug and therapeutic use of depressive disorders related patent and technology expired in November
2026. The total consideration for obtaining such grant was NT$17,000,000(equivalent approximately $573,500), of which NT$3,400,000(equivalent
approximately $114,710) is due within 30 days upon signing the agreement and the remaining balance of NT$13,600,000 (equivalent
approximately $458,000) is due pursuant to a milestone payment schedule. In addition, the Company is required to pay PITDC
10% of sublicensing revenues net of related research and development cost and royalties at a range from 1% to 3% of sales
of drugs.
|
The
Company paid the upfront payment of NT$3,400,000 (equivalent approximately $114,710) in 2011, the first milestone payment of NT$2,550,000
(equivalent approximately $86,000) in 2012, and the third milestone payment of NT$2,125,000 (equivalent approximately $71,700)
in 2013. The Company recorded these amounts as research and development expenses when incurred.
Pursuant
to the in-licensing collaboration agreement with PITDC, the Company is required to pay PITDC 10% of sublicensing revenues to PITDC.
During the years ended December 31, 2017 and 2016, the Company has paid $0 and $46,773 (equivalent to NT$1,507,320) to PITDC accounting
for 10% of sublicensing revenues net of related research and development cost and royalties. As of December 31, 2017 and 2016,
the Company accrued milestone payments payable of $282,728 and $258,744 to PITDC.
(2)
|
On
February 10, 2011, the Company entered a collaborative agreement with Industrial Technology Research Institute (“ITRI”),
a Taiwanese Company. Pursuant to the collaborative agreement, ITRI granted the Company the sole licensing right for drug and
therapeutic use of colon inflammation related patent and technology expired in February 2031. The total consideration for
obtaining such grant was NT$20,000,000 (equivalent approximately to $674,700), of which NT$2,000,000 (equivalent approximately
$67,400) is due sixth days upon signing the agreement and the remaining balance of NT$18,000,000(equivalent approximately
$607,300) is due pursuant to a milestone payment schedule. In addition, the Company is required to pay ITRI 10% of sublicensing
revenues net of related research and development cost and royalties at a range from 3% to 5% of sales of drugs.
|
The
Company paid the upfront payment of NT$2,000,000(equivalent approximately$67,400) in 2011 and the first milestone payment of NT$2,000,000
(equivalent approximately $67,400) in 2016. The Company recorded these amounts as research and development expenses when incurred.
Pursuant
to the in-licensing collaboration agreement with ITRI, the Company is required to pay ITRI 10% of sublicensing revenues to ITRI.
During the years ended December 31, 2017 and 2016, the Company has paid $0 and $62,060 (equivalent to NT$2,000,000) to ITRI accounting
for 10% of sublicensing revenues net of related research and development cost and royalties.
(3)
|
On
February 10, 2011, the Company entered a collaborative agreement with Industrial Technology Research Institute (“ITRI”),
a Taiwanese Company. Pursuant to the collaborative agreement, ITRI granted the Company the sole licensing right for drug and
therapeutic use of rheumatoid arthritis related patent and technology expired in February 2031. The total consideration for
obtaining such grant was NT$35,000,000(equivalent approximately $1,180,000), of which NT$3,500,000(equivalent approximately
$118,000) is due sixth days upon signing the agreement and the remaining balance of NT$31,500,000(equivalent approximately
$1,062,000) is due pursuant to a milestone payment schedule. In addition, the Company is required to pay ITRI 10% of sublicensing
revenues net of related research and development cost and royalties at a range from 3% to 5% of sales of drugs.
|
The
Company paid the upfront payment of NT$3,500,000(equivalent approximately $118,000) in 2011. The Company recorded these amounts
as research and development expenses when incurred. As of December 31, 2017 and 2016, the Company has not sublicensed the licensing
right for drug and therapeutic use of rheumatoid arthritis related patent and technology to any companies.
(4)
|
On
December 27, 2016, the Company entered a collaborative agreement with Yukiguni Maitake Co., Ltd (“YUKIGUNI”),
a Japan company. Pursuant to the collaborative agreement, YUKIGUNI granted the Company the right for selling Maitake dry powder
and Maitake extract manufactured by YUKIGUNI, and the right for using Maitake related patent and technology expired in December
2036 or fifteen years after the date when the new product developed by the Company is first sold, whichever is earlier. The
total consideration for obtaining such grant would be $305,000. As of December 31, 2016, the Company is not obligated to pay
the licensing payment pursuant as YUKIGUNI has not completed any of milestones specified in the agreement.
|
NOTE
15. SUBSEQUENT EVENT
The
Company has evaluated subsequent events through the date which the financial statements were available to be issued. All subsequent
events requiring recognition as of December 31, 2017 have been incorporated into these financial statements and there are no subsequent
events that require disclosure in accordance with FASB ASC Topic 855, “Subsequent Events.”
******
BIOLITE HOLDING, INC.
Financial Statements for the Nine
Months Ended
September 30, 2018 and 2017
BIOLITE HOLDING,
INC. AND SUBSIDAIRIES
CONSOLIDATED BALANCE SHEETS
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
ASSETS
|
|
(UNAUDITED)
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
183,353
|
|
|
$
|
256,925
|
|
Restricted cash
|
|
|
-
|
|
|
|
56,579
|
|
Accounts receivable
|
|
|
2,050
|
|
|
|
-
|
|
Accounts receivable
- related parties
|
|
|
656
|
|
|
|
3,475
|
|
Due from related
parties
|
|
|
129,567
|
|
|
|
153,953
|
|
Inventory, net
|
|
|
183,065
|
|
|
|
199,708
|
|
Prepaid
expenses and other current assets
|
|
|
185,252
|
|
|
|
90,333
|
|
Total
Current Assets
|
|
|
683,943
|
|
|
|
760,973
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
522,067
|
|
|
|
570,576
|
|
Long-term investments
|
|
|
3,316,878
|
|
|
|
4,185,969
|
|
Deferred tax assets
|
|
|
1,227,334
|
|
|
|
1,017,897
|
|
Security
deposits
|
|
|
47,280
|
|
|
|
68,876
|
|
Total
Assets
|
|
$
|
5,797,502
|
|
|
$
|
6,604,291
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Short-term bank
loan
|
|
|
656,000
|
|
|
|
927,800
|
|
Long-term bank
loan - current portion
|
|
|
39,737
|
|
|
|
40,203
|
|
Notes payable
|
|
|
497,248
|
|
|
|
202,429
|
|
Accrued expenses
|
|
|
639,719
|
|
|
|
511,212
|
|
Other payable
|
|
|
145,338
|
|
|
|
16,288
|
|
Due
to related parties
|
|
|
2,757,064
|
|
|
|
2,390,498
|
|
Total
Current Liabilities
|
|
|
4,735,106
|
|
|
|
4,088,430
|
|
Noncurrent Liabilities
|
|
|
|
|
|
|
|
|
Long-term
bank loan
|
|
|
25,092
|
|
|
|
55,690
|
|
Total
Noncurrent Liabilities
|
|
|
25,092
|
|
|
|
55,690
|
|
Total
Liabilities
|
|
|
4,760,198
|
|
|
|
4,144,120
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
Common Stock, $0.0001
par value, 500,000,000 shares authorized, 41,207,444 shares issued and outstanding at September 30, 2018 and December 31,
2017
|
|
|
4,121
|
|
|
|
4,121
|
|
Additional paid-in capital
|
|
|
10,862,995
|
|
|
|
10,862,995
|
|
Accumulated deficit
|
|
|
(10,980,204
|
)
|
|
|
(9,971,033
|
)
|
Other
comprehensive income
|
|
|
676,227
|
|
|
|
757,327
|
|
Total
Stockholders’ Equity
|
|
|
563,139
|
|
|
|
1,653,410
|
|
Noncontrolling
Interest
|
|
|
474,165
|
|
|
|
806,761
|
|
Total
Equity
|
|
|
1,037,304
|
|
|
|
2,460,171
|
|
Total
Liabilities and Equity
|
|
$
|
5,797,502
|
|
|
$
|
6,604,291
|
|
The accompanying
notes
are an integral part of these financial statements.
BIOLITE HOLDING,
INC. AND SUBSIDAIRIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME(LOSS)
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2018 AND 2017
(UNAUDITED)
|
|
Three Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise
sales
|
|
$
|
747
|
|
|
$
|
314
|
|
|
$
|
3,976
|
|
|
$
|
937
|
|
Merchandise
sales-related parties
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
1,624
|
|
Total
net revenue
|
|
|
747
|
|
|
|
318
|
|
|
|
3,976
|
|
|
|
2,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
537
|
|
|
|
5
|
|
|
|
2,856
|
|
|
|
1,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
210
|
|
|
|
313
|
|
|
|
1,120
|
|
|
|
972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
|
10,213
|
|
|
|
52,293
|
|
|
|
224,316
|
|
|
|
232,613
|
|
Selling,
general and administrative expenses
|
|
|
210,560
|
|
|
|
401,429
|
|
|
|
693,057
|
|
|
|
1,531,815
|
|
Total
operating expenses
|
|
|
220,773
|
|
|
|
453,722
|
|
|
|
917,373
|
|
|
|
1,764,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(220,563
|
)
|
|
|
(453,409
|
)
|
|
|
(916,253
|
)
|
|
|
(1,763,456
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1,507
|
|
|
|
1,048
|
|
|
|
3,761
|
|
|
|
6,098
|
|
Interest expense
|
|
|
(79,475
|
)
|
|
|
(76,315
|
)
|
|
|
(231,300
|
)
|
|
|
(171,389
|
)
|
Rental income
|
|
|
2,909
|
|
|
|
2,963
|
|
|
|
8,997
|
|
|
|
8,835
|
|
Investment loss
|
|
|
(201,590
|
)
|
|
|
(104
|
)
|
|
|
(287,513
|
)
|
|
|
(34,043
|
)
|
Gain (loss) on foreign currency
changes
|
|
|
(67
|
)
|
|
|
1,702
|
|
|
|
7,403
|
|
|
|
(406,778
|
)
|
Gain (loss) on investment in equity
securities
|
|
|
(39,166
|
)
|
|
|
64,774
|
|
|
|
(164,649
|
)
|
|
|
(4,379,650
|
)
|
Other income
(expenses)
|
|
|
(1,357
|
)
|
|
|
370
|
|
|
|
(4,305
|
)
|
|
|
48,500
|
|
Total
other income (expenses)
|
|
|
(317,239
|
)
|
|
|
(5,562
|
)
|
|
|
(667,606
|
)
|
|
|
(4,928,427
|
)
|
Loss before income taxes
|
|
|
(537,802
|
)
|
|
|
(458,971
|
)
|
|
|
(1,583,859
|
)
|
|
|
(6,691,883
|
)
|
Provision
for income taxes expense (benefit)
|
|
|
(69,075
|
)
|
|
|
(64,900
|
)
|
|
|
(242,092
|
)
|
|
|
(224,762
|
)
|
Net loss
|
|
|
(468,727
|
)
|
|
|
(394,071
|
)
|
|
|
(1,341,767
|
)
|
|
|
(6,467,121
|
)
|
Net loss attributable to
noncontrolling interests, net of tax
|
|
|
116,491
|
|
|
|
93,562
|
|
|
|
332,596
|
|
|
|
1,574,038
|
|
Net loss attributable to BioLite
Holding, Inc.
|
|
|
(352,236
|
)
|
|
|
(300,509
|
)
|
|
|
(1,009,171
|
)
|
|
|
(4,893,083
|
)
|
Foreign
currency translation adjustment
|
|
|
(12,040
|
)
|
|
|
(1,166,855
|
)
|
|
|
(81,100
|
)
|
|
|
(597,136
|
)
|
Comprehensive
Loss
|
|
$
|
(364,276
|
)
|
|
$
|
(1,467,364
|
)
|
|
$
|
(1,090,271
|
)
|
|
$
|
(5,490,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable
to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
|
41,207,444
|
|
|
|
41,207,444
|
|
|
|
41,207,444
|
|
|
|
27,224,514
|
|
The accompanying notes are an integral
part of these financial statements.
BIOLITE HOLDING,
INC. AND SUBSIDAIRIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER
30, 2018 AND 2017
(UNAUDITED)
|
|
2018
|
|
|
2017
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,341,767
|
)
|
|
$
|
(6,467,121
|
)
|
Adjustments to reconcile net
loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
33,240
|
|
|
|
32,903
|
|
Loss on sale
of investment
|
|
|
287,513
|
|
|
|
34,043
|
|
Loss on investment
in equity securities
|
|
|
164,649
|
|
|
|
4,379,650
|
|
Deferred
tax
|
|
|
(242,092
|
)
|
|
|
(224,762
|
)
|
Foreign currency
exchange (gain) loss
|
|
|
-
|
|
|
|
364,764
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease
(increase) in accounts receivable
|
|
|
685
|
|
|
|
-
|
|
Decrease
(increase) in receivable from collaboration revenue
|
|
|
-
|
|
|
|
687,165
|
|
Decrease
(increase) in due from related parties
|
|
|
70,600
|
|
|
|
(1,717
|
)
|
Decrease
(increase) in inventory
|
|
|
11,293
|
|
|
|
2,243
|
|
Decrease
(increase) in prepaid expenses and other deposits
|
|
|
(79,172
|
)
|
|
|
(37,345
|
)
|
Increase
(decrease) in accounts payable
|
|
|
-
|
|
|
|
(98
|
)
|
Increase
(decrease) in accrued expenses and other current liabilities
|
|
|
200,010
|
|
|
|
(250,703
|
)
|
Increase
(decrease) in due to related parties
|
|
|
258,684
|
|
|
|
1,063,295
|
|
Net
cash used in operating activities
|
|
|
(636,357
|
)
|
|
|
(417,683
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
56,012
|
|
|
|
219,009
|
|
Net proceeds
from sale of investment in equity securities
|
|
|
314,294
|
|
|
|
128,117
|
|
Loan to related
parties
|
|
|
-
|
|
|
|
(32,800
|
)
|
Long-term
equity investment
|
|
|
-
|
|
|
|
(8,627,949
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
370,306
|
|
|
|
(8,313,623
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Issuance
of common stock for cash
|
|
|
-
|
|
|
|
7,681,907
|
|
Capital contribution
from related parties under common control
|
|
|
-
|
|
|
|
5,904
|
|
Net proceeds
of loan from related parties
|
|
|
91,850
|
|
|
|
820,000
|
|
Net proceeds
from (repayment of) short-term bank loans
|
|
|
(250,500
|
)
|
|
|
656,000
|
|
Net proceeds
from (repayment of) short-term borrowing from third-parties
|
|
|
382,764
|
|
|
|
(98,400
|
)
|
Repayment
of long-term bank loans
|
|
|
(28,917
|
)
|
|
|
(27,815
|
)
|
Net
cash provided by financing activities
|
|
|
195,197
|
|
|
|
9,037,596
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(2,718
|
)
|
|
|
7,783
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(73,572
|
)
|
|
|
314,073
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
256,925
|
|
|
|
100,464
|
|
Ending
|
|
$
|
183,353
|
|
|
$
|
414,537
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of
cash flows
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Income
tax
|
|
$
|
-
|
|
|
$
|
-
|
|
Interest
expense
|
|
$
|
58,842
|
|
|
$
|
89,359
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing and investing
activities
|
|
|
|
|
|
|
|
|
Equity
securities received in exchange for payments of collaboration revenues
|
|
$
|
-
|
|
|
$
|
5,850,000
|
|
The accompanying notes are an integral
part of these financial statements.
BIOLITE HOLDING,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2018
NOTE 1. ORGANIZATION AND BUSINESS
BioLite Holding, Inc. (the “BioLite
Holding”) was incorporated under the laws of the State of Nevada on July 27, 2016. BioLite BVI, Inc. (the “BioLite
BVI”), a wholly owned subsidiary of BioLite Holding, was incorporated in the British Virgin Islands on September 13, 2016.
BioLite Holding and BioLite BVI are holding companies and have not carried out substantive business operations of their own.
BioLite, Inc., (the “BioLite Taiwan”)
was incorporated on February 13, 2006 under the laws of Taiwan. BioLite is in the business of developing and commercialization
of new botanical drugs with application in central nervous system, autoimmunity, inflammation, hematology, and oncology. In addition,
BioLite Taiwan distributes dietary supplements made from extracts of Chinese herbs and Maitake mushroom.
In January 2017, BioLite Holding, BioLite
BVI, BioLite Taiwan, and certain shareholders of BioLite Taiwan entered into a share purchase / exchange agreement (the “BioLite
Share Purchase / Exchange Agreement”). Pursuant to the BioLite Share Purchase / Exchange Agreement, the shareholder participants
to the BioLite Share Purchase / Exchange Agreement have sold their equity in BioLite Taiwan and were using the proceeds from such
sales to purchase shares of common stock of BioLite Holding at the same price per share, resulting in their owning the same number
of shares of common stock as they owned in the BioLite Taiwan. Upon closing of the Share Purchase/ Exchange Agreement in August
2017, BioLite Holding ultimately owns via BioLite BVI approximately 73% of BioLite Taiwan. The other shareholders who did not
enter this Share Purchase/ Exchange Agreement retain their equity ownership in BioLite Taiwan.
The fiscal year of BioLite Holding,
BioLite BVI, and BioLite Taiwan (collectively referred to as “the Company”) ends on December 31st.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation and Principles
of Consolidation
— The accompanying consolidated financial statements, including the accounts of BioLite Holding,
BioLite BVI, and BioLite Taiwan, have been prepared in conformity with accounting principles generally accepted in the United
States of America. Since BioLite Holding, BioLite BVI, and BioLite Taiwan are the entities under Dr. Tsung-Shann Jiang’s
common control prior to the Share Purchase / Exchange Agreement, the transaction is accounted for as a restructuring transaction. All
the assets and liabilities of BioLite Taiwan were transferred to BioLite Holding at their respective carrying amounts on the closing
date of Share Purchase / Exchange transaction. The Company has recast prior period financial statements to reflect the conveyance
of BioLite Taiwan’s common shares as if the restructuring transaction had occurred as of the earliest date of the financial
statements. All material intercompany accounts, transactions, and profits have been eliminated in consolidation. The nature of
and effects on earnings per share (EPS) of nonrecurring intra-entity transactions involving long-term assets and liabilities is
not required to be eliminated and EPS amounts have been recast to include the earnings (or losses) of the transferred net assets.
The functional currency of BioLite
Taiwan is the New Taiwan dollars, however the accompanying consolidated financial statements have been translated and presented
in United States Dollars ($). In the accompanying financial statements and notes, “$”, “US$” and
“U.S. dollars” mean United States dollars, and “NT$” and “NT dollars” mean New Taiwan dollars.
Going Concern
—
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. The
Company has incurred losses since its inception resulting in an accumulated deficit of $10,980,204 and $9,971,033 as of September
30, 2018 and December 31, 2017, respectively. The Company also had working capital deficiency of $4,051,163 and $3,327,457 at
September 30, 2018 and December 31, 2017, respectively. The ability to continue as a going concern is dependent upon the Company
generating profitable operations in the future and/or obtaining the necessary financing to meet its obligations and repay its
liabilities arising from normal business operations when they become due. These consolidated financial statements do not include
any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might
be necessary should the Company upon signing of that agreement.
In order to continue as a going concern,
the Company will need, among other things, additional capital resources. Management’s plans to obtain such resources for
the Company include (1) obtaining capital from the sale of its equity securities (2) short-term and long-term borrowings from
banks and third-parties, and (3) short-term borrowings from stockholders or other related party(ies) when needed. However, management
cannot provide any assurance that the Company will be successful in accomplishing any of its plans.
The ability of the Company to continue
as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and
eventually to secure other sources of financing and attain profitable operations.
Segment Reporting
—
The Company follows 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 the Company’s reportable segments. ASC Topic 280, “Segment Reporting,” also requires disclosures
about products or services, geographic areas, and major customers. The Company’s management reporting structure provided
for only one segment during the nine months ended September 30, 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.
Concentration of Credit Risk
— The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily
of cash and cash equivalents and restricted cash. The Company 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. The Company 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 the Company
transacts business, as well as their dispersion across many geographical areas. The Company 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 —
The
Company 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 and Other
Receivables —
Accounts receivable and other receivables are stated at carrying value less estimates made for doubtful
receivables. An allowance for impairment of trade receivable and other receivables is established if the collection of a receivable
becomes doubtful. Such receivable becomes doubtful when there is objective evidence that the Company 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. 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.
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
—The Company 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 the Company be
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
The Company 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.
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 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.
Long-term Equity Investment
—
The Company acquires these equity investments to promote business and strategic objectives. The Company accounts for non-marketable
equity and other equity investments for which the Company does not have control over the investees as:
|
●
|
Equity
method investments when the Company 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 the Company’s non-marketable equity investments, and therefore
the Company 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. The Company’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.
Other-Than-Temporary Impairment
— The Company’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 the Company’s ability and
intent to hold the investment for a sufficient period of time to allow for recovery of
value in the foreseeable future. The Company also considers 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. The Company records
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 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 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. The Company 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 equity investments
were $0 and $91,047 for the three months ended September 30, 2018 and 2017, respectively.
Other-than-temporary impairments of equity investments were $0 and $4,379,456 for the
nine months ended September 30, 2018 and 2017, respectively.
|
Post-retirement and post-employment
benefits —
BioLite Taiwan adopted the government mandated defined contribution plan pursuant to the Labor Pension
Act (the “Labor Pension 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 Labor
Pension Act, the Company makes monthly contribution equal to 6% of employees’ salaries to the employees’ pension
fund. The Company has no legal obligation for the benefits beyond the contributions made. The total amounts for such employee
benefits, which were expensed as incurred, were $4,806 and $5,978 for the three months ended September 30, 2018 and 2017, respectively.
The total amounts for such employee benefits, which were expensed as incurred, were $14,827 and $20,535 for the nine months ended
September 30, 2018 and 2017, respectively. Other than the above, the Company does not provide any other post-retirement or post-employment
benefits.
Revenue Recognition —
During the fiscal year 2018, the Company 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 the Company’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 the Company’s review of existing collaborative agreements as of January 1, 2018,
the Company concluded that the adoption of the new guidance did not have a significant change on the Company’s revenue during
all periods presented.
Pursuant to ASC 606, the Company recognizes
revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the
Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the
Company determines is within the scope of ASC 606, the Company 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) the Company satisfies
a performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company will
collect the consideration the Company is entitled to in exchange for the goods or services the Company transfers to the customers.
At inception of the contract, once the contract is determined to be within the scope of ASC 606, the Company 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. The Company 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
the Company recognizes revenue based on the types of payments the Company receives.
Merchandise Sales
—
The Company recognizes net revenues from dietary supplements product sales when customers obtain control of the Company’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
:
The Company generally provides invoice discounts on product sales to its customers for prompt payment. The Company 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
:
The Company 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. The Company’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, the Company believes that returns of its products will continue to
be minimal.
Collaborative Revenues
—
The Company recognizes collaborative revenues generated through collaborative research, development and/or commercialization
agreements. The terms of these agreements typically include payment to the Company 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, the Company 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, the Company 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.
The Company 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 the Company’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, the Company’s experience in conducting clinical development, regulatory
and manufacturing activities. The Company 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.
|
(v)
|
Nonrefundable
upfront payments
|
If a license to the Company’s
intellectual property is determined to be distinct from the other performance obligations identified in an arrangement, the Company
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 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 the Company before
the collaborative agreements entered into and it does not relate to any future obligations and commitments made between the Company
and the collaboration partners in the collaborative agreements.
The Company 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 the Company’s obligations
under the collaborative agreement with collaboration partners, and (b) events which do not involve the performance of the Company’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 the Company 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 the Company, (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, the Company recognizes any revenue from these milestone payments in the period in which the underlying
triggering event occurs.
|
(vii)
|
Multiple
Element Arrangements
|
The Company 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, the Company
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. The Company 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).
The Company 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, the Company recognizes
revenue from the combined unit of accounting over the Company’s contractual or estimated performance period for the undelivered
elements, which is typically the term of the Company’s research and development obligations. If there is no discernible
pattern of performance or objectively measurable performance measures do not exist, then the Company recognizes revenue under
the arrangement on a straight-line basis over the period the Company 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 the Company 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.
At the inception of an arrangement
that includes milestone payments, the Company 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 the Company’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. The Company 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.
|
(viii)
|
Royalties
and Profit Sharing Payments
|
Under the collaborative
agreement with the collaboration partners, the Company is entitled to receive royalties on sales of products, which is at certain
percentage of the net sales. The Company recognizes revenue from these events based on the revenue recognition criteria set forth
in ASC 606. Based on those criteria, the Company 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 the Company’s 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 the Company 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, the Company’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 its 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, the Company 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 for information related to income taxes, including the recorded
balances of its valuation allowance related to deferred tax assets.
The Company 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 its 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 the Company’s liability for income taxes. Any such adjustment could be material
to the Company’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 September 30, 2018 and December 31, 2017, management considered that the Company had no uncertain
tax positions, and will continue to evaluate for uncertain positions in the future.
Share-Based Compensation —
The Company 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. The Company 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.
The Company estimates the fair value
of share-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 its common stock. The
assumptions used in the Company’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,
the Company’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 the Company’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 its 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)
|
the Company’s
actual operating and financial performance, and current business conditions and projections;
|
|
d)
|
the Company’s
hiring of key personnel and the experience of its management;
|
|
e)
|
the Company’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 the Company 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 the Company 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. The Company has never declared or paid any cash dividends and do not
presently plan to declare or pay cash dividends in the foreseeable future. Consequently,
the Company used an expected dividend yield of zero.
|
The valuations are highly complex and
subjective. Following the completion of this offering, common stock valuations will no longer be necessary as the Company will
rely on market prices to determine the fair value of its common stock.
Foreign-currency Transactions
— For the Company’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 was 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
(loss) as a component of stockholders’ equity (deficit).
Research and Development
—
The Company accounts for research and development expenses 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 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.
Research and development expense were $10,213 and $52,293 for the
three months ended September 30, 2018 and 2017, respectively. Research and development expense were $224,316 and $232,613 for
the nine months ended September 30, 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 the Company and its products, including its corporate website. Promotional
and advertising costs were $173 and $2 for the three months ended September 30, 2018 and 2017, respectively. Promotional and advertising
costs were $173 and $675 for the nine months ended September 30, 2018 and 2017, respectively.
Statement of Cash Flows
—
Cash flows from the Company’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.
Comprehensive Income (Loss)
— Comprehensive income (loss) includes accumulated foreign currency translation gains and losses. The Company has reported
the components of comprehensive income (loss) in its statements of operations and comprehensive income (loss).
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.
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 ASU will be effective for the Company beginning January 1, 2019, including interim periods
in the fiscal year 2019. Early adoption is permitted. The Company is in the process of determining the method of adoption and
assessing the impact of this ASU on its consolidated results of operations, cash flows, financial position and disclosures.
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”).To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but
it is able to determine a reasonable estimate, it must record a provisional estimate to be included in the financial statements.
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 the Company may take. The Company is continuing
to gather additional information to determine the final impact.
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.
The Company is currently evaluating the impact of adopting this new guidance on its financial position, results of operations,
statement of comprehensive income, and cash flows.
In
June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718), Improvements to Nonemployee Share-based Payments
(“ASU 2018-07”). This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring
goods and services from nonemployees. The effective date for the standard is for interim periods in fiscal years beginning after
December 15, 2018, with early adoption permitted, but no earlier than the Company’s adoption date of Topic 606. U
nder the
new guidance, the measurement of nonemployee equity awards is fixed on the grant date.
The
new guidance is required to be applied retrospectively with the cumulative effect recognized at the date of initial application.
The Company is currently evaluating the effect ASU 2018-07 will have on the condensed 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. The Company is currently evaluating the effect, if any, that the ASU will have on its financial statements.
NOTE 3. COLLABORATIVE AGREEMENTS
|
(a)
|
Collaborative agreements
with BHK
|
(i) On
February 24, 2015, BioLite Taiwan and BioHopeKing Corporation (the “BHK”) entered into a co-development agreement,
(the “BHK Co-Development Agreement”), pursuant to which it is collaborative with BHK to develop and commercialize
BLI-1401-2 (Botanical Drug) Triple Negative Breast Cancer (TNBC) Combination Therapy (BLI-1401-2 Products) in Asian countries
excluding Japan for all related intellectual property rights, and has developed it for medicinal use in collaboration with outside
researchers. The development costs shall be shared 50/50 between BHK and the Company. 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 will deliver all
data to BHK according to FDA Reviewing 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 has
paid a non-refundable upfront cash payment of $1 million, or 10% of $10,000,000, upon the signing of 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 has received the second milestone payment of NT$31,649,000,
approximately equivalent to $1 million, and recognized collaboration revenue in the same year. As of the date of this report,
the Company has not completed the first phase II clinical trial.
In addition to the milestone
payments, BioLite Taiwan is entitled to receive royalty on 12% of BHK’s net sales related to BLI-1401-2 Products. As
of September 30, 2018 and December 31, 2017, the Company has not earned the royalty 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 it is collaborative 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 for all related intellectual property rights, and has developed it for medicinal use in collaboration with
outside researchers. The development costs shall be shared 50/50 between BHK and the Company. The BHK Collaborative Agreements
will remain in effect for fifteen years from the date of first commercial sale of the Product in Asia excluding Japan.
In 2015, the Company recognized
the cash receipt in a total of NT$50 million, approximately equivalent to $1.71 million, as collaboration revenue when all research,
technical, and development data was delivered to BHK. 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 payment as collaboration
revenue when all research, technical, data and development data was delivered to BHK. The cash receipt is 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 this BHK Collaborative Agreements.
In addition to the total
of NT$50 million, approximately equivalent to $1.71 million, BioLite Taiwan is entitled to receive 50% of the future net licensing
income or net sales profit. As of September 30, 2018 and December 31, 2017, the Company has not earned the royalty under the BHK
Collaborative Agreements.
|
(b)
|
Collaborative Agreement
with BriVision
|
On December 29, 2015, BioLite
Taiwan and BriVision entered into a collaborative agreement (the “BriVision Collaborative Agreement”), pursuant to
which it is collaborative with BriVision to develop and commercialize five products, including BLI-1005 CNS-Major Depressive Disorder,
BLI-1008 CNS-Attention Deficit Hyperactivity Disorder, BLI-1401-1 Anti-Tumor Combination Therapy-Solid Tumor with Anti-PD-1, BLI-1401-2
Anti-Tumor Combination Therapy-Triple Negative Breast Cancer, and BLI-1501 Hematology-Chronic Lymphocytic Leukemia ( collectively
“Five Products”) in the United States of America and Canada for all related intellectual property rights, and has
developed it for medicinal use in collaboration with outside researchers. On January 12, 2017, BioLite Taiwan entered into an
Addendum (the “Addendum”) to the BriVision Collaborative Agreement, pursuant to which BioLite Taiwan and BriVision
agreed to include one more product, namely, “Maitake Combination Therapy” as one of the Products defined in the BriVision
Collaborative Agreement (the “Sixth Product”) and defined the Territory of the Sixth Product to be worldwide and restate
the Territory of the Five Products to be the U.S.A and Canada. The BriVision Collaborative Agreement will remain in effect for
fifteen years from the date of first commercial sale of the Five Products in the North America Region. Either party may terminate
upon thirty days’ prior written notice for breach or insolvency.
Under the BriVision Collaborative
Agreement, BriVision should pay a total of $100,000,000 in cash or stock of BriVision with equivalent value, according to the
following schedule:
|
·
|
Upfront
payment shall be made upon the signing of this BriVision Collaborative Agreement: 3.5%
of total payment. After receiving upfront payment from BriVision, BioLite Taiwan has
to deliver all data to BriVision in one week.
|
|
·
|
Upon
the first IND submission, BriVision shall pay, but no later than December 15, 2016: 6.5%
of total payment. After receiving second payment from BriVision, BioLite has to deliver
IND package to BriVision in one week.
|
|
·
|
At
the completion of first phase II clinical trial, BriVision shall pay, but no later than
September 15, 2017: 15% of total payment. After receiving third payment from BriVision,
BioLite has to deliver phase II clinical study report to BriVision in three months.
|
|
·
|
Upon
the phase III IND submission, BriVision shall pay, but no later than December 15, 2018:
20% of total payment. After receiving forth payment from BriVision, BioLite has to deliver
IND package to BriVision in one week.
|
|
·
|
At
the completion of phase III, BriVision shall pay, but no later than September 15, 2019:25%
of total payment. After receiving fifth payment from BriVision, BioLite has to deliver
phase III clinical study report to BriVision in three months.
|
|
·
|
Upon
the NDA submission, BriVision shall pay, but no later than December 15, 2020, BriVision
shall pay: 30% of total payment. After receiving sixth payment from BriVision, BioLite
has to deliver NDA package to BriVision in one week.
|
An upfront payment of $3,500,000
(the “Milestone Payment”), or 3.5% of $100,000,000, was due in December 2015 under the BriVision Collaborative Agreement.
On May 6, 2016, BioLite Taiwan and BriVision amended the payment terms under the BriVision Collaborative Agreement, whereby BriVision
has agreed to pay the upfront payment to the Company $2,600,000 in cash and $900,000 in newly issued shares of common stock of
BriVision’s holding company, American BriVision (Holding) Corporation (“ABVC”), a Nevada company, at the price
of $1.60 per share, for an aggregate number of 562,500 shares. The cash payment and shares issuance were completed in June 2016.
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. 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 BriVision in this collaborative agreement.
In March 2016, BioLite Taiwan
has submitted the first IND and delivered the IND package to BriVision. In February 2017, BriVision agreed to pay the 6.5% of
total payment, $6,500,000 to BioLite Taiwan with $650,000 in cash and $5,850,000 in the form of newly issued shares of common
stock of ABVC, at the price of $2.0 per share based on the quoted price (for the shares) provided by OTC Markets Group Inc., for
an aggregate number of 2,925,000 shares. Since the common stock shares of ABVC are lightly traded in the over-the-counter market,
the Company considered to utilize other fair value inputs, such as the bid-ask spread, in determining the fair value of the shares
as of September 30, 2018 and December 31, 2017.
Since both BioLite Taiwan,
BriVision, and ABVC are related parties and under common control by Dr. Tsung-Shann Jiang, the Company has recorded the full amount
of $6,500,000 and $3,500,000 in connection with the BriVision Collaborative Agreement as additional paid-in capital.
As of the date of this report,
the first phase II clinical trial research has not completed yet. Under the BriVision Collaborative Agreement, BioLite Taiwan
is also entitled to 5% of net sales of the Products. There have not been any commercial sales since the BriVision Collaborative
Agreement became effective.
The Company evaluated the
various collaboration agreements in accordance with the provisions of ASC Topic 606. The Company’s arrangement with BHK
contains the following deliverables: (i) the license right to develop and use proprietary technology and confidential information
for BLI-1401-2 Products, and its related intellectual property rights (the “BLI-1401-2 Deliverable”), (ii) the
license right to develop and use proprietary technology and confidential information for BLI-1005 Products, and its related intellectual
property rights (the “BLI-1005 Deliverable”), and (iii) the license right to develop and use proprietary technology
and confidential information for BLI-1006 Products, and its related intellectual property rights (the “BLI-1006 Deliverable”).
The Company’s arrangement with BriVision contains the license right to develop and use proprietary technology and confidential
information for the Five Products and the Sixth Product, and their related intellectual property rights (the “Five Products
and the Sixth Product Deliverable).
The Company has concluded
that each of herein deliverables identified at the inception of the arrangement has standalone value from each of the elements
based on their nature. Factors considered in this determination included, among other things, the capabilities of the collaboration
partner, whether any other vendor sells the item separately, whether the value of the deliverable is dependent on the other elements
in the arrangement, whether there are other vendors that can provide the items and if the customer could use the item for its
intended purpose without the other deliverables in the arrangement. Additionally, the Collaboration Agreements do not include
a general right of return. Accordingly, each of herein deliverables included in the BHK and BriVision arrangements qualifies as
a separate unit of accounting. Therefore, the Company has identified seven units of accounting in connection with its obligations
under the collaboration arrangement with BHK and BriVision as follows: (i) BLI-1005 Products, (ii) BLI-1006 Products, (iii) BLI-1008
Products, (iv) BLI-1401-1 Products, (v) BLI-1401-2 Products, (vi) BLI-1401-2 Products, and (vii) Maitake Product (the Sixth Product).
NOTE 4. INVENTORY
Inventory
consists of the following:
|
|
September
30,
2018
|
|
|
December
31,
2017
|
|
|
|
(UNAUDITED)
|
|
|
|
|
Merchandise
|
|
$
|
4,851
|
|
|
$
|
4,951
|
|
Finished goods
|
|
|
101,045
|
|
|
|
104,454
|
|
Work-in-process
|
|
|
20,305
|
|
|
|
20,885
|
|
Raw materials
|
|
|
56,864
|
|
|
|
69,418
|
|
Inventory, net
|
|
$
|
183,065
|
|
|
$
|
199,708
|
|
NOTE 5. LONG-TERM
INVESTMENTS
|
(1)
|
The ownership percentages of each investee are listed as follows:
|
|
|
Ownership percentage
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
Accounting
|
Name of related party
|
|
2018
|
|
|
2017
|
|
|
treatment
|
Braingenesis Biotechnology Co., Ltd.
|
|
|
0.23
|
%
|
|
|
0.23
|
%
|
|
Cost Method
|
Genepharm Biotech Corporation
|
|
|
0.98
|
%
|
|
|
0.98
|
%
|
|
Cost Method
|
BioHopeKing Corporation
|
|
|
6.93
|
%
|
|
|
9.60
|
%
|
|
Cost Method
|
BioFirst Corporation
|
|
|
21.51
|
%
|
|
|
21.51
|
%
|
|
Equity Method
|
American BriVision (Holding) Corp.
|
|
|
2.32
|
%
|
|
|
2.32
|
%
|
|
Equity Method
|
Rgene Corporation
|
|
|
13.04
|
%
|
|
|
13.04
|
%
|
|
Equity Method
|
|
(2)
|
The extent the investee relies on the company for its business
are summarized as follows:
|
Name
of related party
|
|
The
extent the investee relies on the Company for its business
|
|
|
|
Braingenesis Biotechnology Co.,
Ltd.
|
|
No specific business relationship
|
Genepharm Biotech Corporation
|
|
No specific business relationship
|
BioHopeKing Corporation
|
|
Collaborating with the Company
to develop and commercialize drugs
|
American BriVision (Holding)
Corp.
|
|
Collaborating with the Company
to develop and commercialize drugs
|
Rgene Corporation
|
|
Loaned to the investee
|
BioFirst Corporation
|
|
Loaned from the investee and
provides research and development support service
|
|
(3)
|
Long-term investment mainly consists of the following:
|
|
|
September
30,
2018
|
|
|
December
31,
2017
|
|
Non-marketable Cost Method Investments
|
|
|
(UNAUDITED)
|
|
|
|
|
|
Braingenesis
Biotechnology Co., Ltd.
|
|
$
|
7,235
|
|
|
$
|
7,442
|
|
Genepharm
Biotech Corporation
|
|
|
22,089
|
|
|
|
22,720
|
|
BioHopeKing
Corporation (See NOTE 3)
|
|
|
1,607,639
|
|
|
|
2,261,524
|
|
Sub
total
|
|
|
1,636,963
|
|
|
|
2,291,686
|
|
Equity Method Investments
|
|
|
|
|
|
|
|
|
BioFirst
Corporation (NOTE 12)
|
|
|
1,679,915
|
|
|
|
1,894,283
|
|
American
BriVision (Holding) Corp. (See NOTE 3 & 12)
|
|
|
-
|
|
|
|
-
|
|
Rgene
Corporation (NOTE 12)
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
3,316,878
|
|
|
$
|
4,185,969
|
|
|
(a)
|
BioFirst Corporation (the “BioFirst):
|
The Company holds an equity
interest in BioFirst Corporation, (the “BioFirst”), accounting for its equity interest using the equity method to
accounts for its equity investment as prescribed in ASC 323, Investments—Equity Method and Joint Ventures (“ASC 323”).
Equity method adjustments include the Company’s proportionate share of investee’s income or loss and other adjustments
required by the equity method. As of September 30, 2018 and December 31, 2017, the Company owns 21.51% common stock shares of
BioFirst.
Summarized
financial information for the Company’s equity method investee, BioFirst, is as follows:
Balance
Sheets
|
|
September
30,
2018
|
|
|
December
31,
2017
|
|
|
|
|
(UNAUDITED)
|
|
|
|
|
|
Current Assets
|
|
$
|
7,630,555
|
|
|
$
|
6,903,042
|
|
Noncurrent Assets
|
|
|
1,753,483
|
|
|
|
2,730,701
|
|
Current Liabilities
|
|
|
1,068,368
|
|
|
|
318,074
|
|
Shareholders’ Equity
|
|
|
8,315,670
|
|
|
|
9,315,669
|
|
Statements of operation
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(UNAUDITED)
|
|
Net sales
|
|
$
|
33,304
|
|
|
$
|
3,010,216
|
|
Gross profit
|
|
|
6,590
|
|
|
|
2,991,886
|
|
Net profit (loss)
|
|
|
(766,425
|
)
|
|
|
1,941,848
|
|
Share of profit (losses) from
investments accounted for using the equity method
|
|
|
(164,649
|
)
|
|
|
413,873
|
|
|
(b)
|
American BriVision (Holding) Corp.
(the “ABVC”):
|
Both ABVC and the Company
are under common control by Dr. Tsung-Shann Jiang, the CEO and chairman of the Company. Since Dr. Tsung-Shann Jiang is able to
exercise significant influence, but not control, over the American BriVision (Holding) Corp., (the “ABVC”), the Company
determined to use the equity method to accounts for its equity investment as prescribed in ASC 323, Investments—Equity Method
and Joint Ventures (“ASC 323”). Equity method adjustments include the Company’s proportionate share of investee’s
income or loss and other adjustments required by the equity method. As of September 30, 2018 and December 31, 2017, the Company
owns 2.32% common stock shares of ABVC.
Summarized
financial information for the Company’s equity method investee, ABVC, is as follows:
Balance
Sheets
|
|
September
30,
2018
|
|
|
December
31,
2017
|
|
|
|
|
(UNAUDITED)
|
|
|
|
|
|
Current Assets
|
|
$
|
2,594,389
|
|
|
$
|
2,643,332
|
|
Current Liabilities
|
|
|
4,478,531
|
|
|
|
4,400,247
|
|
Noncurrent Liabilities
|
|
|
564,567
|
|
|
|
-
|
|
Shareholders’ Equity (Deficit)
|
|
|
(2,448,709
|
)
|
|
|
(1,756,915
|
)
|
Statements of operation
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(UNAUDITED)
|
|
Net sales
|
|
$
|
-
|
|
|
$
|
-
|
|
Gross Profit
|
|
|
-
|
|
|
|
-
|
|
Net loss
|
|
|
(795,195
|
)
|
|
|
(3,861,646
|
)
|
Share of loss from investments
accounted for using the equity method
|
|
|
-
|
|
|
|
-
|
|
|
(c)
|
Rgene Corporation (the “Rgene”):
|
Both Rgene and the Company
are under common control by Dr. Tsung-Shann Jiang, the CEO and chairman of the Company. Since Dr. Tsung-Shann Jiang is able to
exercise significant influence, but not control, over the Rgene, the Company determined to use the equity method to accounts for
its equity investment as prescribed in ASC 323, Investments—Equity Method and Joint Ventures (“ASC 323”). Equity
method adjustments include the Company’s proportionate share of investee’s income or loss and other adjustments required
by the equity method. As of September 30, 2018 and December 31, 2017, the Company owns 13.04% common stock shares of Rgene.
Summarized
financial information for the Company’s equity method investee, Rgene, is as follows:
Balance
Sheets
|
|
September
30,
2018
|
|
|
December
31,
2017
|
|
|
|
|
(UNAUDITED)
|
|
|
|
|
|
Current Assets
|
|
$
|
37,543
|
|
|
$
|
48,557
|
|
Noncurrent Assets
|
|
|
14,839
|
|
|
|
81
|
|
Current Liabilities
|
|
|
3,205,516
|
|
|
|
3,118,897
|
|
Shareholders’ Equity (Deficit)
|
|
|
(3,153,134
|
)
|
|
|
(3,070,259
|
)
|
Statements of operation
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(UNAUDITED)
|
|
Net sales
|
|
$
|
-
|
|
|
$
|
-
|
|
Gross Profit
|
|
|
-
|
|
|
|
-
|
|
Net loss
|
|
|
(188,933
|
)
|
|
|
(3,174,653
|
)
|
Share of loss from investments
accounted for using the equity method
|
|
|
-
|
|
|
|
(414,067
|
)
|
|
(4)
|
Disposition of long-term investment
|
During
the nine months ended September 30, 2018, the Company sold 347,000 shares of common stock of BioHopeKing Corporation (the “BHK”)
at prices ranging from NT$25, equivalent $0.84, to NT$30, equivalent $1.00, to two directors of BHK. As a result of the transactions,
the Company recognized investment loss of $287,513 for the same period.
On November
2, 2018, the Company subsequently purchased an aggregate of 366,200 shares of common stock of BHK at NT$50, equivalent $1.67,
from eleven shareholders of BHK. The percentage of ownership accordingly increased to 9.74% as of November 2, 2018.
|
(5)
|
Losses on Equity Investments
|
The components of losses on equity
investments for each period were as follows:
|
|
For
the Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(UNAUDITED)
|
|
Share
of equity method investee losses
|
|
$
|
(164,649
|
)
|
|
$
|
(194
|
)
|
Impairments
|
|
|
-
|
|
|
|
(4,379,456
|
)
|
Total losses
on equity investments
|
|
$
|
(164,649
|
)
|
|
$
|
(4,379,650
|
)
|
NOTE 6. PROPERTY AND
EQUIPMENT
Property
and equipment as of September 30, 2018 and December 31, 2017 are summarized as follows:
|
|
September
30,
2018
|
|
|
December
31,
2017
|
|
|
|
(UNAUDITED)
|
|
|
|
|
Land
|
|
$
|
364,527
|
|
|
$
|
374,953
|
|
Buildings and leasehold improvements
|
|
|
291,291
|
|
|
|
299,623
|
|
Machinery and equipment
|
|
|
87,623
|
|
|
|
90,130
|
|
Office
equipment
|
|
|
21,357
|
|
|
|
21,968
|
|
|
|
|
764,798
|
|
|
|
786,674
|
|
Less:
accumulated depreciation
|
|
|
(242,731
|
)
|
|
|
(216,098
|
)
|
Property
and equipment, net
|
|
$
|
522,067
|
|
|
$
|
570,576
|
|
Depreciation expenses were $10,569
and $11,034 for the three months ended September 30, 2018 and 2017, respectively. Depreciation expenses were $33,240 and $32,903
for the nine months ended September 30, 2018 and 2017, respectively.
NOTE 7. BANK LOANS
|
(1)
|
Short-term bank loan consists of
the following:
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(UNAUDITED)
|
|
|
|
|
Cathay United
Bank
|
|
$
|
-
|
|
|
$
|
253,036
|
|
CTBC
Bank
|
|
|
656,000
|
|
|
|
674,764
|
|
Total
|
|
$
|
656,000
|
|
|
$
|
927,800
|
|
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 $246,000. The term started June 28, 2016 with maturity date at June 28, 2017. The loan balance bore
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 more year through September 6, 2018
with the principal amount of NT$7,500,000, equivalent to $246,000. As of September 30, 2018 and December 31, 2017, the effective
interest rates per annum were 2.22%. The loan is collateralized by the building and improvement of BioLite Taiwan, and is also
personal guaranteed by the Company’s chairman. The Company repaid the principal and interests of this bank loan on September
6, 2018.
Interest expenses were $1,361 and $12
for the three months ended September 30, 2018 and 2017, respectively. Interest expenses were $4,175 and $2,723 for the nine months
ended September 30, 2018 and 2017, respectively.
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 $328,000, and NT$10,000,000, equivalent to $328,000, respectively. Both two loans
had 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. The extended maturity date is January 19, 2019.The loan balances bear interest at a fixed rate of 1.63%
per annum. The loan is guaranteed by the Company’s chairman and BioFirst.
Interest expenses were $2,768 and $2,214
for the three months ended September 30, 2018 and 2017, respectively. Interest expenses were $8,270 and $2,214 for the nine months
ended September 30, 2018 and 2017, respectively.
|
(2)
|
Long-term bank loan consists of
the following:
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(UNAUDITED)
|
|
|
|
|
Cathay United
Bank
|
|
$
|
64,829
|
|
|
$
|
95,893
|
|
Less:
current portion of long-term bank loan
|
|
|
(39,737
|
)
|
|
|
(40,203
|
)
|
Total
|
|
$
|
25,092
|
|
|
$
|
55,690
|
|
On April 30, 2010, BioLite Taiwan entered
into a seven-year bank loan of NT$8,900,000, equivalent to $291,920, with Cathay United Bank. The term started April 30, 2010
with maturity date at April 30, 2017. On April 30, 2017, BioLite Taiwan extended the original loan agreement for additional three
years with the new maturity date at April 30, 2020. The loan balance bears interest at a floating rate of prime rate plus variable
rates from 0.77% to 1.17%. The prime rate is based on term deposit saving interest rate of Cathay United Bank. As of September
30, 2018 and December 31, 2017, the actual interest rates per annum were 2.24%. The loan is collateralized by the building and
improvement of BioLite Taiwan, and is also personal guaranteed by the Company’s chairman.
Interest expenses were $122 and $603
for the three months ended September 30, 2018 and 2017, respectively. Interest expenses were $1,375 and $1,932 for the nine months
ended September 30, 2018 and 2017, respectively.
NOTE 8. NOTES PAYABLE
On November 27, 2017, BioLite Taiwan
and Cheng-Chi International Co., Ltd., a Taiwanese company, entered into a promissory note, (the “Cheng-Chi Promissory Note”),
for borrowing an aggregate amount of NT$6,000,000, equivalent to $196,800, for the period from November 27, 2017 to January 11,
2018. The principal of the Cheng-Chi Promissory Note bore interest at 12% per annum. This Cheng-Chi Promissory Note was secured
by 700,000 common stock shares of ABVC and was also personal guaranteed by the Company’s chairman. On January 11, 2018,
the principal and accrued interest totaling NT$6,090,000, equivalent to $199,752, has been paid in full.
On March 27, 2018, BioLite Taiwan and
two individuals entered into a promissory note, (the “Hsu and Chow Promissory Note”), for borrowing an aggregate amount
of NT$4,660,000, equivalent to $152,848, for the period from March 27, 2018 to June 26, 2018. On September 26, 2018, the company
extended the original loan agreement through December 26, 2018. The principal of the Hsu and Chow Promissory Note bore interest
at 13.6224% per annum. This Hsu and Chow Promissory Note was secured by common stock shares of ABVC and was also personal guaranteed
by the Company’s chairman. Interest expense was $4,581 and $11,106 for the three and nine months ended September 30, 2018,
respectively.
During the nine months ended September
30, 2018, BioLite Taiwan also entered various unsecured loan agreements bearing interest at fixed rates between 12% and 13.6224%
per annum with three individuals to advance in aggregate of NT$10,500,000, equivalent to $344,400, for working capital purpose.
The term of the loan varies from one month to three months with various maturity dates through May 25, 2018. As of the date of
this report, the Company is still in discussion with the three individuals with respect to the terms of extension for the unsecured
loans. Interest expense was $14,422 and $33,500 for the three and nine months ended September 30, 2018, respectively.
NOTE 9. ACCRUED EXPENSES
Accrued expenses mainly consist of the following:
|
|
September
30,
2018
|
|
|
December
31, 2017
|
|
|
|
(UNAUDITED)
|
|
|
|
|
Accrued salaries
and bonus
|
|
$
|
154,073
|
|
|
$
|
45,862
|
|
Accrued employee benefits
and pension expenses
|
|
|
6,919
|
|
|
|
9,390
|
|
Accrued professional service
fees
|
|
|
32,128
|
|
|
|
8,300
|
|
Accrued research and development
expenses
|
|
|
38,116
|
|
|
|
2,656
|
|
Accrued collaboration revenue
payable
|
|
|
389,460
|
|
|
|
400,600
|
|
Others
|
|
|
19,023
|
|
|
|
44,404
|
|
|
|
$
|
639,719
|
|
|
$
|
511,212
|
|
NOTE 10. OTHER PAYABLE
Other payable mainly
consists of the following:
|
|
September
30,
2018
|
|
|
December 31, 2017
|
|
|
|
(UNAUDITED)
|
|
|
|
|
Other payable
|
|
$
|
11,801
|
|
|
$
|
4,532
|
|
Taiwan income tax withholding
payable
|
|
|
50,660
|
|
|
|
11,756
|
|
Litigation payable (a)
|
|
|
7,437
|
|
|
|
-
|
|
Temporary
receipts
|
|
|
75,440
|
|
|
|
-
|
|
|
|
$
|
145,338
|
|
|
$
|
16,288
|
|
|
(a)
|
Contingencies
and legal proceedings
|
In January
2018, a former employee of the Company, (the “Plaintiff”), filed a class action civil complaint against the Company
at Taiwan Hsin-Chu District Court. The Plaintiff alleged the following causes of action under the Labor Standards Act of Taiwan:
(1) failure to pay employees for all hours worked; (2) failure to pay accrued vacation wages; (3) failure to pay severance payments;
and (4) failure to distribute retirement pension to pension trust. The case went to trial on July 12, 2018, and on July 31, 2018,
the court pronounced its judgment that the Company is obligated to pay the compensation amount of NT$226,738, equivalent $7,437
to the Plaintiff. An appeal was filed by the Company in August 2018. The next court session is scheduled in December 2018. As
of September 30, 2018, the Company has recorded the full liability of $7,437 pursuant to ASC 450-20-25-2 under Topic 450, “Contingencies
Loss Contingencies Recognition”.
NOTE 11. SHARE-BASED
COMPENSATION
On November 15, 2013, the Board of
Directors of BioLite Taiwan approved the adoption of the 2013 Stock Option and Incentive Plan, (the “2013 Plan”),
providing for the issuance under 2013 Plan of options and rights to purchase up to two million seventy thousand (2,070,000) shares
of common stock. Awards of incentive options may be granted under the 2013 Plan until December 31, 2017. As of September 30, 2018
and December 31, 2017, there were 0 and 487,000 shares available for issuance under the 2013 Plan, respectively, which provides
for the grant of share-based awards to employees and officers.
Plan Administration
─
The 2013 Plan may be administered by the full Board of Directors of BioLite Taiwan. The Board of BioLite Taiwan has full power
to select, from among the individuals eligible for awards, the individuals to whom awards will be granted, to make any combination
of awards to participants, and to determine the specific terms and conditions of each award, subject to the provisions of the
2013 Plan.
Eligibility
─
Persons
eligible to participate in 2013 Plan will be those full time employees and officers of the Company as selected from time to time
by the Board of BioLite Taiwan in its discretion.
Limits ─
Under
2013 Plans, stock options granted to any individual employee cannot exceed 25% of the Plan, neither to exceed 3% of the total
common stock shares issued by BioLite Taiwan.
Stock Options ─
The option exercise price of each option under both plans was determined by the Company’s status at the date of grant: (i) before
public offering date: the option exercise price would be NT$12.5, equivalent to $0.39, per share and NT$15.0, equivalent to $0.46,
per share for the 2013 Plan, respectively, (ii) after public offering date: the exercise price would be decided by the Board of
BioLite Taiwan, and not less than the book value per share on the latest financial report before the date of grant, (iii) after
been listed on the secondary market, the option exercise price would be the market price, but not less than the par value of the
common stock. The exercise price of an option may not be reduced after the date of the option grant, other than to appropriately
reflect changes in its capital structure. The term of the option was determined by the Board of Directors of BioLite Taiwan, under
the 2013 Plan, employees could exercise 50%, 75%, and 100% of the options at 6 months, 12 months and 24 months after the date
of grant. In general, unless otherwise permitted by the Board of BioLite Taiwan, no option granted under 2013 Plan are transferable
by the optionee other than by will or by the laws of descent and distribution, and options may be exercised during the optionee’s
lifetime only by the optionee, or by the optionee’s legal representative or guardian in the case of the optionee’s
incapacity.
Under 2013 Plan, upon exercise of options,
the option exercise price must be paid in full either in cash, by certified or bank check, or other instrument acceptable to the
Board BioLite Taiwan. Subject to applicable law, the exercise price may also be delivered to BioLite Taiwan by a broker pursuant
to irrevocable instructions to the broker from the optionee. To qualify as incentive options, options must meet additional tax
requirements.
Tax Withholding ─
Participants in the 2013 Plan are responsible for the payment of any taxes that BioLite Taiwan is required by law to withhold
upon the exercise of options or vesting of other awards. Subject to approval by the Board, participants may elect to have the
minimum tax withholding obligations satisfied by authorizing BioLite Taiwan to withhold shares of common stock to be issued pursuant
to the exercise or vesting.
Amendments and Termination ─
The Board of Directors of BioLite Taiwan may at any time amend or discontinue the 2013 Plan, and the Board of BioLite
Taiwan may at any time amend or cancel any outstanding award for the purpose of satisfying changes in the law or for any other
lawful purpose. However, no such action may adversely affect any rights under any outstanding award without the holder’s
consent. Any amendments that materially change the terms of 2013 Plan will be subject to approval by the administrative authorities.
The following table summarizes the
stock option activity under the 2013 Plan, and related information:
Options
Outstanding
|
|
|
|
Number of
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Underlying
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Outstanding
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Life
(Years)
|
|
|
Value
|
|
Outstanding – January 1, 2016
|
|
|
487,000
|
|
|
$
|
0.4600
|
|
|
|
2.13
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
or cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding –
December 31, 2016
|
|
|
487,000
|
|
|
$
|
0.4600
|
|
|
|
2.13
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
or cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding – December 31,
2017
|
|
|
487,000
|
|
|
$
|
0.4600
|
|
|
|
2.13
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
or cancelled
|
|
|
(487,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding – September
30, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable – September
30, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and
expected to vest – September 30, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable – December 31,
2017
|
|
|
487,000
|
|
|
$
|
0.4600
|
|
|
|
2.13
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and
expected to vest – December 31, 2017
|
|
|
487,000
|
|
|
$
|
0.4600
|
|
|
|
2.13
|
|
|
$
|
-
|
|
Compensation expense related to share-based
transactions is measured and recognized in general and administrative expenses in the financial statements based on the fair value
of the awards granted. The share-based compensation expense, net of forfeitures, is recognized on a straight-line basis over the
requisite service periods of the awards, which is generally a half year to two years. The Company recognized stock-based compensation
expense of $0 and $0 for the three and nine months ended September 30, 2018 and 2017, respectively.
NOTE 12. RELATED-PARTY TRANSACTION
Related parties:
|
(1)
|
Lion Arts Promotion Inc. (hereinafter,
“LION”) was incorporated on March 17, 1997 under the laws of Taiwan. LION
is in the business of art related promotion and is a controlling shareholder of BioLite
Taiwan.
|
|
(2)
|
BioFirst Corporation (hereinafter,
“BioFirst”) was incorporated on November 7, 2006 under the laws of Taiwan.
BioFirst is in the business of researching, developing, manufacturing, and marketing
of innovative patented medical products. As of September 30, 2018 and December 31, 2017,
the Company owned 21.51% and 21.51% common stock shares of BioFirst (See NOTE 5), respectively.
|
|
(3)
|
American BriVision Corporation
(hereinafter, “BriVision”) was incorporated on July 21, 2015 in the State
of Delaware, engaging in biotechnology and focuses on the development of new drugs and
innovative medical devices to fulfill unmet medical needs. In 2015, BriVision entered
a collaborative agreement with the Company (See NOTE 3). On May 6, 2016, the Company
and BriVision entered into an addendum to the collaborative agreement, whereby BriVision
has agreed to pay the upfront payment to the Company $2,600,000 in cash and $900,000
in newly issued shares of common stock of BriVision’s holding company, American
BriVision (Holding) Corporation (“ABVC”), a Nevada company, at the price
of $1.60 per share, for an aggregate number of 562,500 shares. In August 2016, the Company
made additional equity investment of $2,350,000 in cash to acquire 1,468,750 shares of
common stock of ABVC. In February 2017, the Company received $650,000 in cash and $5,850,000
in the form of newly issued 2,925,000 shares of
common stock of ABVC, at the price of $2.0 per share for the first milestone payment.
As of September 30, 2018 and December 31, 2017,
the Company owned 2.32% common
stock of ABVC (See NOTE 5).
|
|
(4)
|
Rgene Corporation (hereinafter,
“Rgene”) was incorporated on June 24, 2010 under the laws of Taiwan. Rgene
is in the business of research and development and innovation of various drugs. On March
23, 2017, the Company acquired 600,000 shares of common stock of Rgene for NT$15,000,000,
equivalent approximately $493,500, in cash. As of September 30, 2018 and December 31,
2017, the Company owned 13.04% common stock of Rgene (See NOTE 5).
|
|
(5)
|
AsianGene Corporation (hereinafter,
“AsianGene”) was incorporated on December 16, 2013 under the laws of Taiwan.
AsianGene is in the business of real estate development. AsianGene is one of the shareholders
of the Company.
|
|
(6)
|
LionGene Corporation (hereinafter,
“LionGene”) was incorporated on November 23, 2009 under the laws of Taiwan.
LionGene is in the business of biotechnology services. LionGene and the Company are related
parties and under common control by a controlling beneficiary shareholder of the Company.
|
|
(7)
|
Mr. Tsung-Shann Jiang is the chairman
and CEO of the Company and the President and a member of board of directors of BioFirst.
Mr. Jiang is also the controlling beneficiary shareholder of ABVC, BriVision, and Rgene.
Ms. Shu-Ling Jiang, Mr. Tsung-Shann Jiang’s wife, is the chairman of LION and BioFirst,
and a member of board of directors of the Company. Mr. Eugene Jiang is Mr. and Ms. Jiang’s
son. Mr. Eugene Jiang is a member of board of directors of the Company, and is also the
chairman, interim CFO, and majority shareholder of ABVC. Mr. Tsung-Shann Jiang, Ms. Shu-Ling
Jiang, and Mr. Eugene Jiang hereinafter are collectively called “JIANGS”.
|
Related party transactions:
For the nine months ended and as of September 30,
2018, the related party transactions are summarized as follows:
|
|
Amounts
|
|
|
Amounts
|
|
|
Accounts
|
|
|
Loan to
|
|
|
Rent
|
|
|
|
due
from
|
|
|
due
to
|
|
|
receivable
|
|
|
(Loan
from)
|
|
|
Expenses
(a)
|
|
LION
|
|
$
|
-
|
|
|
$
|
65,689
|
|
|
$
|
656
|
|
|
$
|
-
|
|
|
$
|
9,553
|
|
BioFirst
|
|
|
-
|
|
|
|
372,812
|
|
|
|
-
|
|
|
|
(1,899,807
|
)
|
|
|
-
|
|
ABVC & BriVision
|
|
|
22,009
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Rgene
|
|
|
45,320
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
LionGene
|
|
|
62,238
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
JIANGS
|
|
|
-
|
|
|
|
328,474
|
|
|
|
-
|
|
|
|
(90,282
|
)
|
|
|
-
|
|
Total
|
|
$
|
129,567
|
|
|
$
|
766,975
|
|
|
$
|
656
|
|
|
$
|
(1,990,089
|
)
|
|
$
|
9,553
|
|
As of December 31, 2017, the balances due to and due from
related parties are summarized as follows:
|
|
Amounts
|
|
|
Amounts
|
|
|
Accounts
|
|
|
Loan to
|
|
|
|
due
from
|
|
|
due
to
|
|
|
receivable
|
|
|
(Loan
from)
|
|
LION
|
|
$
|
-
|
|
|
$
|
23,171
|
|
|
$
|
1,350
|
|
|
$
|
-
|
|
BioFirst
|
|
|
-
|
|
|
|
1,118,361
|
|
|
|
2,125
|
|
|
|
(937,922
|
)
|
ABVC & BriVision
|
|
|
115,168
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Rgene
|
|
|
3,316
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33,738
|
|
AsianGene
|
|
|
1,731
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
JIANGS
|
|
|
-
|
|
|
|
311,044
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
120,215
|
|
|
$
|
1,452,576
|
|
|
$
|
3,475
|
|
|
$
|
(904,184
|
)
|
For
the nine months ended September 30, 2017, the related party transactions are summarized as follows:
|
|
Merchandise
Sales
|
|
|
Rent
Expenses (a)
|
|
LION
|
|
$
|
1,624
|
|
|
$
|
28,103
|
|
Total
|
|
$
|
1,624
|
|
|
$
|
28,103
|
|
|
(a)
|
The Company
leased its office from LION. The monthly base rent was approximately $3,000. The lease
was terminated on March 31, 2018. Rent expense under this lease agreement amounted to
$9,553 and $28,103 for the nine months ended September 30, 2018 and 2017, respectively.
|
NOTE 13. INCOME TAX
U.S.A
BioLite Holding, Inc. files income
tax returns in the U.S. federal jurisdiction, and state and local jurisdictions.
On December 22, 2017
H.R. 1
,
originally
known as the Tax Cuts and Jobs Act, (the “Tax Act”) was enacted. Among the significant changes to the U.S. Internal
Revenue Code, the Tax Act lowers the U.S. federal corporate income tax rate (“Federal Tax Rate”) from 35% to 21% effective
January 1, 2018
.
The 21% Federal Tax Rate will apply to earnings reported for the full 2018 fiscal
year. In addition, the Company must re-measure its net deferred tax assets and liabilities using the Federal Tax Rate that will
apply when these amounts are expected to reverse. As of September 30, 2018 and December 31, 2017, the Company can
determine a reasonable estimate for certain effects of tax reform and is recording that estimate as a provisional amount. The
provisional remeasurement of the deferred tax assets and allowance valuation of deferred tax assets at September 30, 2018 and
December 31, 2017 resulted in a net effect of $0 discrete tax expenses (benefit) which lowered the effective tax rate by 14% for
the year ended December 31, 2017. The provisional remeasurement amount is anticipated to change as data becomes available allowing
more accurate scheduling of the deferred tax assets and liabilities primarily related to net operating loss carryover.
British Virgin Islands
BioLite BVI, Inc. was incorporated
in British Virgin Islands, which does not tax income.
Taiwan
BioLite Inc. was incorporated in Taiwan.
According to the amendments to the “Income Tax Act” enacted by the office of the President of the Republic of China
on February 7, 2018, an increase in the statutory income tax rate from 17% to 20% and decrease in the undistributed earning tax
from 10% to 5% are effective from January 1, 2018. This increase in the statutory income tax rate does not affect the amounts
of the current taxes recognized as of December 31, 2017 and for the year then ended. No income tax liabilities existed as of September
30, 2018 and December 31, 2017 due to the Company’s continuing operating losses. As of September 30, 2018 and December 31, 2017,
the Company had deferred tax assets related to tax loss and credit carryforwards totaling $1,227,334 and $1,017,897, respectively,
which begin to expire in 2026.
Provision for income tax
(benefit) consists of the following:
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Current provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.A.
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Taiwan
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Subtotal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.A.
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Taiwan
|
|
|
(69,075
|
)
|
|
|
(64,900
|
)
|
|
|
(242,092
|
)
|
|
|
(224,762
|
)
|
Total provision
for income tax(benefit)
|
|
$
|
(69,075
|
)
|
|
$
|
(64,900
|
)
|
|
$
|
(242,092
|
)
|
|
$
|
(224,762
|
)
|
The components of deferred tax assets
consisted of the following:
|
|
September
30,
2018
|
|
|
December
31, 2017
|
|
|
|
|
(UNAUDITED)
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
U.S.A
|
|
|
|
|
|
|
|
|
Tax loss and credit carryforwards
|
|
$
|
155,612
|
|
|
$
|
155,612
|
|
Less: Valuation allowance
|
|
|
(155,612
|
)
|
|
|
(155,612
|
)
|
Subtotal
|
|
|
-
|
|
|
|
-
|
|
Taiwan
|
|
|
|
|
|
|
|
|
Loss on disposal of assets
|
|
$
|
676,105
|
|
|
$
|
694,810
|
|
Tax loss and credit carryforwards
|
|
|
1,227,334
|
|
|
|
1,017,897
|
|
Less: Valuation allowance
|
|
|
(676,105
|
)
|
|
|
(694,810
|
)
|
Subtotal
|
|
|
1,227,334
|
|
|
|
1,017,897
|
|
Total deferred tax assets
|
|
$
|
1,227,334
|
|
|
$
|
1,017,897
|
|
The difference
between the combined effective income tax rate reflected in the provision for income tax on income (loss) before taxes and the
amounts determined by applying the applicable the U.S. statutory income tax rate and Taiwan unified income tax rate
for
the nine months ended September 30, 2018 and 2017
are analyzed below:
|
|
For
the Nine Months Ended
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(UNAUDITED)
|
|
U.S. statutory
income tax rate
|
|
|
21
|
%
|
|
|
35
|
%
|
Taiwan unified income tax
rate
|
|
|
20
|
%
|
|
|
17
|
%
|
Changes
in valuation allowance
|
|
|
(56
|
)%
|
|
|
(55
|
)%
|
Effective
combined income tax rate
|
|
|
(15
|
)%
|
|
|
(3
|
)%
|
NOTE 14. COMMITMENTS
Operating lease commitment:
The Company’s operating leases
include lease contracts of office spaces, laboratory space, and employees’ dormitory. Future minimum lease payments under
the operating leases are summarized as follows:
As of September
30,
|
|
Amount
|
|
2019
|
|
$
|
57,684
|
|
2020
|
|
|
12,546
|
|
Total
|
|
$
|
70,230
|
|
In-Licensing collaborative agreement commitment:
|
(1)
|
On January 1,
2011, BioLite Taiwan entered into a collaborative agreement (the “PITDC Collaborative
Agreement”) with Medical and Pharmaceutical Industry Technology and Development
Center (“PITDC”), a Taiwanese Company. Pursuant to the PITDC Collaborative
Agreement, PITDC granted BioLite Taiwan the sole licensing right for drug and therapeutic
use of depressive disorders related patent and technology expired in November 2026. The
total consideration for obtaining such grant was NT$17,000,000, equivalent approximately
$557,600, of which NT$3,400,000, equivalent approximately $111,520, was due within 30
days upon signing the agreement and the remaining balance of NT$13,600,000, equivalent
approximately $446,080, is due pursuant to a milestone payment schedule. In addition,
BioLite Taiwan is required to pay PITDC 10% of sublicensing revenues net of related research
and development cost and royalties at a range from 1% to 3% of sales of drugs.
|
BioLite
Taiwan paid the upfront payment of NT$3,400,000, equivalent approximately $111,520, in 2011, the first milestone payment of NT$2,550,000,
equivalent approximately $83,640, in 2012, and the third milestone payment of NT$2,125,000, equivalent approximately $69,700,
in 2013. BioLite Taiwan recorded these amounts as research and development expenses when incurred.
Pursuant
to the PITDC Collaborative Agreement, BioLite Taiwan is also required to pay PITDC 10% of sublicensing revenues to PITDC. During
the nine months ended September 30, 2018 and 2017, BioLite Taiwan paid $0 to PITDC accounting for 10% of sublicensing revenues
net of related research and development cost and royalties. As of September 30, 2018 and December 31, 2017, BioLite Taiwan has
accrued collaboration revenue payable of $274,866 and $282,728 to PITDC, respectively.
|
(2)
|
On February 10,
2011, BioLite Taiwan entered into a collaborative agreement (the “ITRI Collaborative
Agreement I”) with Industrial Technology Research Institute (“ITRI”),
a Taiwanese Company. Pursuant to the ITRI Collaborative Agreement I, ITRI granted BioLite
Taiwan the sole licensing right for drug and therapeutic use of colon inflammation related
patent and technology expired in February 2031. The total consideration for obtaining
such grant was NT$20,000,000, equivalent approximately $656,000, of which NT$2,000,000,
equivalent approximately $65,600, was due sixth days upon signing the agreement and the
remaining balance of NT$18,000,000, equivalent approximately $590,400, was due pursuant
to a milestone payment schedule. BioLite Taiwan paid the upfront payment of NT$2,000,000,
equivalent approximately$65,600, in 2011 and the first milestone payment of NT$2,000,000,
equivalent approximately $65,600, in 2016. BioLite Taiwan recorded these amounts as research
and development expenses when incurred.
|
Pursuant
to the ITRI Collaborative Agreement I, BioLite Taiwan is also required to pay ITRI 10% of sublicensing revenues net of related
research and development cost and royalties at a range from 3% to 5% of sales of drugs. During the nine months ended September
30, 2018 and 2017, BioLite Taiwan paid $0 to ITRI accounting for 10% of sublicensing revenues net of related research and development
cost and royalties. As of September 30, 2018 and December 31, 2017, BioLite Taiwan has accrued collaboration revenue payable of
$114,594 and $117,872 to ITRI, respectively.
|
(3)
|
On February 10,
2011, BioLite Taiwan entered into another collaborative agreement (the “ITRI Collaborative
Agreement II”) with Industrial Technology Research Institute (“ITRI”),
a Taiwanese Company. Pursuant to the ITRI Collaborative Agreement II, ITRI granted BioLite
Taiwan the sole licensing right for drug and therapeutic use of rheumatoid arthritis
related patent and technology expired in February 2031. The total consideration for obtaining
such grant was NT$35,000,000, equivalent approximately $1,148,000, of which NT$3,500,000,
equivalent approximately $114,800, was due sixth days upon signing the agreement and
the remaining balance of NT$31,500,000, equivalent approximately $1,033,200, was due
pursuant to a milestone payment schedule. BioLite Taiwan paid the upfront payment of
NT$3,500,000, equivalent approximately $114,800, in 2011. BioLite Taiwan recorded these
amounts as research and development expenses when incurred.
|
Pursuant
to the ITRI Collaborative Agreement II, BioLite Taiwan is also required to pay ITRI 10% of sublicensing revenues net of related
research and development cost and royalties at a range from 3% to 5% of sales of drugs. As of September 30, 2018 and December
31, 2017, BioLite Taiwan has not sublicensed the licensing right for drug and therapeutic use of rheumatoid arthritis related
patent and technology to any companies.
|
(4)
|
On December 27, 2016, BioLite Taiwan
entered into a collaborative agreement (the “Yukiguni Collaborative Agreement”)
with Yukiguni Maitake Co., Ltd (“YUKIGUNI”), a Japanese company. Pursuant
to the Yukiguni Collaborative Agreement, YUKIGUNI granted BioLite Taiwan the right for
selling Maitake dry powder and Maitake extract manufactured by YUKIGUNI, and the right
for using Maitake related patent and technology expired in December 2036 or fifteen years
after the date when the new product developed by BioLite Taiwan is first sold, whichever
is earlier. The total consideration for obtaining such grant would be $305,000. During
the nine months ended September 30, 2018 and 2017, BioLite Taiwan has paid YUKIGUNI an
aggregate of $175,000 and $0, respectively, to obtain some Maitake related patent and
technology.
|
NOTE 15. SUBSEQUENT
EVENT
The Company has evaluated subsequent
events through the date which the financial statements were available to be issued. All subsequent events requiring recognition
as of September 30, 2018 have been incorporated into these financial statements and there are no subsequent events that require
disclosure in accordance with FASB ASC Topic 855, “Subsequent Events.”
******
BioKey, Inc.
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2017 and 2016
|
|
A
udit
●
T
ax
● C
onsulting
● F
inancial
A
dvisory
Registered with Public Company Accounting Oversight
Board (PCAOB)
|
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of BioKey,
Inc.
Opinion on the Financial
Statements
We have audited the accompanying balance
sheets of BioKey, Inc. ( “the Company”) as of December 31, 2017 and 2016, the related statement of operations and
comprehensive income(loss), stockholders’ equity, and cash flows for the years then ended, and the related notes
(collectively
referred to as the “financial statements”)
. In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of
its operations and its cash flows for the years ended December 31, 2017 and 2016, in conformity with the U.S. generally accepted
accounting principles.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based
on our audits. We are a public accounting firm registered with the
Public Company Accounting
Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance
with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement
, whether due to
error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation
of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/
KCCW Accountancy Corp.
|
|
We have served as the Company’s
auditor since 2018.
Diamond Bar, California
April 27, 2018
|
KCCW
Accountancy Corp.
|
|
3333 S Brea Canyon
Rd. #206, Diamond Bar, CA 91765, USA
|
|
Tel: +1 909 348 7228
● Fax: +1 909 895 4155 ● info@kccwcpa.com
|
BIOKEY, INC.
BALANCE SHEETS
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,225,397
|
|
|
$
|
1,473,262
|
|
Accounts Receivable, net
|
|
|
59,080
|
|
|
|
74,777
|
|
Accounts Receivable - related parties, net
|
|
|
134,312
|
|
|
|
175,900
|
|
Other receivable
|
|
|
-
|
|
|
|
6,000
|
|
Total Current Assets
|
|
|
1,418,789
|
|
|
|
1,729,939
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
37,600
|
|
|
|
41,186
|
|
Security Deposits
|
|
|
10,440
|
|
|
|
10,440
|
|
Total Assets
|
|
$
|
1,466,829
|
|
|
$
|
1,781,565
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,396
|
|
|
$
|
24,485
|
|
Due to shareholders
|
|
|
5,800
|
|
|
|
5,800
|
|
Accrued expenses and other current liabilities
|
|
|
57,576
|
|
|
|
55,612
|
|
Advance from customers
|
|
|
10,985
|
|
|
|
15,452
|
|
Total Current Liabilities
|
|
|
79,757
|
|
|
|
101,349
|
|
|
|
|
|
|
|
|
|
|
Non-current Liabilities
|
|
|
|
|
|
|
|
|
Tenant security deposit
|
|
|
2,880
|
|
|
|
2,880
|
|
Total Liabilities
|
|
|
82,637
|
|
|
|
104,229
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
Preferred stock, no par value, 23,562,000 shares authorized:
|
|
|
|
|
|
|
|
|
7,000,000 shares of Series A issued and outstanding at December 31, 2017
and 2016
|
|
|
3,500,000
|
|
|
|
3,500,000
|
|
1,160,000 shares of Series A issued and outstanding at December 31, 2017
and 2016
|
|
|
1,160,000
|
|
|
|
1,160,000
|
|
13,973,097 shares of Series C issued and outstanding at December 31, 2017
and 2016
|
|
|
13,973,097
|
|
|
|
13,973,097
|
|
Common Stock, no par value; 30,000,000 shares authorized,
6,498,134 shares issued and outstanding at December 31, 2017 and 2016
|
|
|
541,793
|
|
|
|
541,793
|
|
Additional paid-in capital - stock options
|
|
|
296,465
|
|
|
|
296,465
|
|
Accumulated deficit
|
|
|
(18,087,163
|
)
|
|
|
(17,794,019
|
)
|
Total Equity
|
|
|
1,384,192
|
|
|
|
1,677,336
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity
|
|
$
|
1,466,829
|
|
|
$
|
1,781,565
|
|
BIOKEY, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2017
AND 2016
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
983,218
|
|
|
$
|
1,555,594
|
|
Cost of revenues
|
|
|
17,312
|
|
|
|
29,420
|
|
Gross profit
|
|
|
965,906
|
|
|
|
1,526,174
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
|
497,947
|
|
|
|
486,004
|
|
Selling, general and administrative expenses
|
|
|
767,504
|
|
|
|
918,271
|
|
Total operating expenses
|
|
|
1,265,451
|
|
|
|
1,404,275
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(299,545
|
)
|
|
|
121,899
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
6,742
|
|
|
|
7,385
|
|
Other income (expenses)
|
|
|
459
|
|
|
|
1,407
|
|
Total other income (expenses)
|
|
|
7,201
|
|
|
|
8,792
|
|
Income (loss) before income tax
|
|
|
(292,344
|
)
|
|
|
130,691
|
|
Provision for income tax
|
|
|
800
|
|
|
|
800
|
|
Net income (loss) and comprehensive income (loss)
|
|
$
|
(293,144
|
)
|
|
$
|
129,891
|
|
BIOKEY,
INC.
STATEMENTS OF EQUITY
FOR THE YEARS ENDED DECEMBER
31, 2017 AND 2016
|
|
Preferred
Stock
|
|
|
Common
Stocks
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amounts
|
|
|
Shares
|
|
|
Amounts
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2015
|
|
|
22,133,097
|
|
|
$
|
18,633,097
|
|
|
|
6,498,134
|
|
|
$
|
541,793
|
|
|
$
|
296,465
|
|
|
$
|
(17,923,910
|
)
|
|
$
|
1,547,445
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
129,891
|
|
|
|
129,891
|
|
Balance
at December 31, 2016
|
|
|
22,133,097
|
|
|
$
|
18,633,097
|
|
|
|
6,498,134
|
|
|
$
|
541,793
|
|
|
$
|
296,465
|
|
|
$
|
(17,794,019
|
)
|
|
$
|
1,677,336
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(293,144
|
)
|
|
|
(293,144
|
)
|
Balance
at December 31, 2017
|
|
|
22,133,097
|
|
|
$
|
18,633,097
|
|
|
|
6,498,134
|
|
|
$
|
541,793
|
|
|
$
|
296,465
|
|
|
$
|
(18,087,163
|
)
|
|
$
|
1,384,192
|
|
BIOKEY,
INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER
31, 2017 AND 2016
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(293,144
|
)
|
|
$
|
129,891
|
|
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
11,380
|
|
|
|
9,314
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable
|
|
|
57,285
|
|
|
|
43,708
|
|
Decrease (increase) in other receivable
|
|
|
6,000
|
|
|
|
(6,000
|
)
|
Decrease (increase) in prepaid expenses and other deposits
|
|
|
-
|
|
|
|
3,323
|
|
Increase (decrease) in accounts payable
|
|
|
(19,089
|
)
|
|
|
(61,620
|
)
|
Increase (decrease) in accrued expenses and other current liabilities
|
|
|
1,964
|
|
|
|
(14,087
|
)
|
Increase (decrease) in advanced from others
|
|
|
(4,467
|
)
|
|
|
3,642
|
|
Net cash provided by (used in) operating activities
|
|
|
(240,071
|
)
|
|
|
108,171
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
(7,794
|
)
|
|
|
(39,911
|
)
|
Net cash used in investing activities
|
|
|
(7,794
|
)
|
|
|
(39,911
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(247,865
|
)
|
|
|
68,260
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
1,473,262
|
|
|
|
1,405,002
|
|
Ending
|
|
$
|
1,225,397
|
|
|
$
|
1,473,262
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flows
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Income tax
|
|
$
|
800
|
|
|
$
|
800
|
|
Interest expense
|
|
$
|
-
|
|
|
$
|
-
|
|
BIOKEY, INC.
NOTES TO THE FINAICAL STATEMENTS
DECEMBER 31, 2017 AND 2016
NOTE 1. Nature of Business and Significant
Accounting Policies
Nature of business:
BioKey, Inc.,
(hereinafter, “the Company”), was incorporated on August 9, 2000 in the State of California. It is engaged primarily
in research and development, manufacturing, and distribution of generic drugs and nutraceuticals with strategic partners. The
Company 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
1 through phase 3) and commercial manufacturing. The Company also licenses out its technologies and initiates joint research and
development processes with other biotechnology, pharmaceutical, and nutraceutical companies.
A summary of the Company’s significant
accounting policies is as follows:
Basis of presentation:
The accompanying
financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.
Use of estimates:
The preparation
of financial statements in conformity with generally accepted accounting principles of 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 financial statements and reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and cash equivalents:
For
purposes of reporting cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents.
Accounts receivable and other receivable:
Accounts receivable and other receivable are stated at carrying value less estimates made for doubtful receivables. An allowance
for impairment of trade receivable and other receivable is established if the collection of a receivable becomes doubtful. Such
receivable becomes doubtful when there is objective evidence that the Company 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.
Property and equipment:
Property
and equipment are recorded at cost. Depreciation is computed on the straight-line method over the estimated useful lives of the
related assets as follows:
Laboratory
and manufacturing equipment
|
2 ~5
years
|
Office equipment
|
3 years
|
Leasehold improvement
|
3 ~8 years
|
Furniture and fixtures
|
8~15 years
|
Expenditures for major renewals and betterment
that extend the useful lives of property and equipment are capitalized. Expenditures for repairs and maintenance are charged to
expense as incurred. When property and equipment are retired or otherwise disposed of, the asset and accumulated depreciation
are removed from the accounts and the resulting profit or loss is reflected in the statement of income for the period.
Impairment of long-lived assets:
The
Company reviews its long-lived assets whenever events or circumstances indicate that the carrying amount of such assets may not
be recoverable. Impairment is evaluated by comparing the carrying value of the long-lived assets with the estimated future net
undiscounted cash flows expected to result from the use of the assets, including cash flows from disposition. Should the sum of
the expected future net cash flows be less than the carrying value, the Company would recognize an impairment loss at that date.
An impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value (estimated discounted
future cash flows) of the long-lived assets.
Revenue recognition:
The Company’s
revenue recognition policy is in accordance with U.S. GAAP when the following overall fundamental criteria are met: (i) persuasive
evidence of an arrangement exists, (ii) delivery has occurred or the service has been performed, (iii) the Company’s price
to the customer is fixed or determinable and (iv) collection of the resulting accounts receivable is reasonably assured.
Advertising costs:
Advertising
costs are expensed as incurred. The total advertising and marketing expenses were $0 for the years ended December 31, 2017 and
2016.
Research and development:
The Company
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, 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.
Income taxes:
The Company accounts
for income taxes in accordance with ASC 740, Income Taxes, which requires that the Company recognize deferred tax liabilities
and assets based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities,
using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense)
results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when, in the
opinion of management, it is more likely than not that some or all of any deferred tax assets will not be realized. The Company
provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax position.
Valuation of deferred tax assets:
A
valuation allowance is recorded to reduce its 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 the Company 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, the Company’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 its 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, the Company 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 8 for information related to income taxes, including the recorded balances of its valuation
allowance related to deferred tax assets.
The Company 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 its 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 the Company’s liability for income taxes. Any such adjustment could be material
to the Company’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, 207 and 2016, management considered that the Company had no uncertain tax positions,
and will continue to evaluate for uncertain positions in the future.
Concentration of credit risks:
Cash and cash equivalents:
The
Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. Accounts are guaranteed
by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. As of December 31, 2017 and 2016, the Company had $963,763
and $1,083,790 in excess of FDIC insured limits, respectively. The Company has not experienced any losses in such accounts.
Customers
: The Company performs
ongoing credit evaluations of its customers’ financial condition and generally, requires no collateral.
For the year ended December 31, 2017,
five customers who accounted for more than 10% of the Company’s total net sales revenues, representing approximately 28%,
15%, 14%, 10%, and 10% of total net sales revenues, and 0%, 8%, 0%, 1%, and 69% of accounts receivable in aggregate at December
31, 2017, respectively:
Customer
|
|
Net Sales for the year
2017
|
|
|
A/R balance as of
December 31,
2017
|
|
A
|
|
$
|
273,966
|
|
|
$
|
-
|
|
B
|
|
$
|
150,450
|
|
|
$
|
15,950
|
|
C
|
|
$
|
141,674
|
|
|
$
|
-
|
|
D
|
|
$
|
98,000
|
|
|
$
|
2,300
|
|
E
|
|
$
|
88,085
|
|
|
$
|
134,312
|
*
|
For the year ended December 31, 2016,
four customers who accounted for more than 10% of the Company’s total net sales revenues, representing approximately 50%,
13%, 11%, and 10% of total net sales revenues, and 70%, 1%, 0%, and 12% of accounts receivable in aggregate at December 31, 2016,
respectively:
Customer
|
|
Net Sales for the year
2016
|
|
|
A/R balance as of
December 31,
2016
|
|
A
|
|
$
|
770,736
|
|
|
$
|
175,900
|
*
|
B
|
|
$
|
201,039
|
|
|
$
|
2,259
|
|
C
|
|
$
|
166,665
|
|
|
$
|
-
|
|
D
|
|
$
|
153,071
|
|
|
$
|
30,506
|
|
*Related party transactions (See Note
3).
Suppliers:
The Company currently
is not entering any significant purchase agreements with suppliers for the years ended December 31, 2017 and 2016.
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, accrued liabilities, and due to related parties, approximate
fair value due to their relatively short maturities.
Stock-based compensation:
The Company
measures expense associated with all employee stock-based compensation awards using a fair value method and recognizes such expense
in the financial statements on a straight-line basis over the requisite service period in accordance with ASC Topic 718 “Compensation-Stock
Compensation”. During the years ended December 31, 2017 and 2016, the Company did not record any employee stock-based compensation
expenses.
The Company accounted for stock-based
compensation to non-employees in accordance with 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. During the years ended December 31, 2017
and 2016, the Company did not record any non-employee stock-based compensation expenses.
Profit sharing plan:
The Company
has a 401 (k) profit sharing plan for employees who have reached the age of twenty-one and have completed one year of eligibility
service. The Company’s contribution is based on management’s discretion. In addition, the Company may make a nonelective
contributions to the plan. The amount of the nonelective contribution is determined by its Board of Directors on an annual basis.
Total contributions that the Company made to the plan were $0 for the years ended December 31, 2017 and 2016.
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 ASU will be effective for the Company beginning January 1, 2019, including interim periods in the fiscal year
2019. Early adoption is permitted. The Company is in the process of determining the method of adoption and assessing the impact
of this ASU on its consolidated results of operations, cash flows, financial position and disclosures.
In March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net).
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations
and Licensing. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements
and Practical Expedients and ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission
of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016
EITF Meeting. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from
Contracts with Customers. In September 2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts
with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842). These amendments provide additional clarification and
implementation guidance on the previously issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments
in ASU 2016-08 clarify how an entity should identify the specified good or service for the principal versus agent evaluation and
how it should apply the control principle to certain types of arrangements. ASU 2016-10 clarifies the following two aspects of
ASU 2014-09: identifying performance obligations and licensing implementation guidance. ASU 2016-11 rescinds several SEC Staff
Announcements that are codified in Topic 605, including, among other items, guidance relating to accounting for consideration
given by a vendor to a customer, as well as accounting for shipping and handling fees and freight services. ASU 2016-12 provides
clarification to Topic 606 on how to assess collectability, present sales tax, treat noncash consideration, and account for completed
and modified contracts at the time of transition. ASU 2016-12 clarifies that an entity retrospectively applying the guidance in
Topic 606 is not required to disclose the effect of the accounting change in the period of adoption. Additionally, ASU 2016-20
clarifies certain narrow aspects within Topic 606 including its scope, contract cost accounting, and disclosures. The new guidance
requires enhanced disclosures, including revenue recognition policies to identify performance obligations to customers and significant
judgments in measurement and recognition. The effective date and transition requirements for these amendments are the same as
the effective date and transition requirements of ASU 2014-09, which is effective for fiscal years, and for interim periods within
those years, beginning after December 15, 2017. The Company is currently evaluating the overall impact that ASU 2014-09 and its
related amendments will have on the Company’s financial statements.
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”). To the extent that a company’s accounting for certain income tax
effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate
to be included in the financial statements. 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 our interpretations and assumptions, additional guidance that may be issued by the I.R.S.,
and actions we may take. The Company is continuing to gather additional information to determine the final impact.
NOTE 2. Property and Equipment
The following is a summary of the Company’s
property and equipment as of December 31, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
Laboratory and manufacturing equipment
|
|
$
|
829,999
|
|
|
$
|
822,205
|
|
Office equipment
|
|
|
6,081
|
|
|
|
6,081
|
|
Leasehold improvements
|
|
|
1,994,585
|
|
|
|
1,994,585
|
|
Furniture and fixtures
|
|
|
106,510
|
|
|
|
106,510
|
|
Subtotal
|
|
|
2,937,175
|
|
|
|
2,929,381
|
|
Less: accumulated depreciation
|
|
|
(2,899,575
|
)
|
|
|
(2,888,195
|
)
|
Property and equipment, net
|
|
$
|
37,600
|
|
|
$
|
41,186
|
|
Total depreciation expense was $11,380
and $9,314 for the years ended December 31, 2017 and 2016, respectively.
NOTE 3. Related Party Transactions
Operating lease
The Company has subleased a portion of
its office space to Amkey Ventures, LLC, (the “Amkey”) since June 21, 2001. The sublease is automatically renewed
on an annual basis. Amkey is incorporated in the State of California on April 23, 2001. Mr. George J Lee, the Chairman of the
Company, is one of managers of Amkey. The sublease is classified as an operating lease and the original lessee shall continue
to account for the original lease as it did before commencement of the sublease. Pursuant to ASC 842-20-35-14, the nature of this
sublease is such that the original lessee is not relieved of the primary obligation under the original lease, the original lessee
(as sublessor) shall continue to account for the original lease. The rental income was $4,800 and $5,600 for the years ended December
31, 2017 and 2016, respectively. Accordingly, the Company recorded the rental income as a reduction of rent expenses for the years
ended December 31, 2017 and 2016.
Related party sales transaction
Genepharm Inc., (the “Genepharm”),
was incorporated on March 6, 2000 in the State of California. Mr. George J Lee is the Chairman of both Genepharm and the Company.
The Company had net sales of $88,085 and $770,736 to Genepharm for the years ended December 31, 2017 and 2016, respectively. As
of December 31, 2017 and 2016, the Company also had accounts receivable of $134,312 and $175,900 due from Genepharm.
Due to shareholders
The Company has advanced funds from its
shareholder and Chairman for working capital purposes. The Company has not entered into any agreement on the repayment terms for
these advances. The advances bear no interest rate and are due upon demand by its shareholder and Chairman. As of December 31,
2017 and 2016, the outstanding advances were $5,800.
NOTE 4. Accrued Expenses and Other
Current Liabilities
Accrued expenses and other current liabilities
as of December 31, 2017 and 2016 consisted of:
|
|
2017
|
|
|
2016
|
|
Accrued professional fees
|
|
$
|
35,756
|
|
|
$
|
37,792
|
|
Accrued vacation
|
|
|
19,541
|
|
|
|
16,136
|
|
Others
|
|
|
2,279
|
|
|
|
1,684
|
|
|
|
$
|
57,576
|
|
|
$
|
55,612
|
|
NOTE 5. Stock-Based Compensation
2000
Stock Plan
The Company’s board of directors
adopted, and its stockholders approved its 2000 Stock Plan (the “2000 Plan”) in August 2000, providing for the issuance
under 2000 Plan of options and rights to purchase up to one million (1,000,000) shares of Common Stock. As of December 31, 2017
and 2016, there were nil shares available for issuance under the Company’s 2000 Plan, which provides for the grant of incentive
stock options and nonstatutory stock options to employees, directors, and consultants.
The exercise price of incentive stock
options under the 2000 Plan may not be less than 100% of the fair market value per share of the Common Stock on the date of grant.
Notwithstanding the above, if an incentive stock option is granted to an employee who owns more than ten percent of the total
combined voting power of all classes of stock of the Company or any subsidiary, the exercise price shall be not less than 110%
of the fair market value per share of the Common Stock on the date of grant. The exercise price of nonstatutory stock options
under the 2000 Plan may not be less than 85% of the fair market value per share of the Common Stock on the date of grant. Notwithstanding
the above, if a nonstatutory stock option is granted to a person who owns more than ten percent of the total combined voting power
of all classes of stock of the Company or any subsidiary, the exercise price shall be not less than 110% of the fair market value
per share of the Common Stock on the date of grant.
All stock options under the 2000 Plan have
a term of no greater than 10 years from the date of grant. However, in the case of an option granted to an optionee who, at the
time the optionee is granted, owns stock representing more than ten percent of the voting power of all classes of stock of the
Company or subsidiary, the term of the option shall be 5 years from the date of grant or such shorter term as may be provided in
the option agreement.
Vesting of stock options is determined
by the board of directors of the Company. No stock option may be exercised subsequent to its termination date. The purchase price
of a right to purchase Common Stock and the termination date of the offer under the 2000 Plan is determined by the board of directors
of the Company. The Company shall have the right to repurchase all or a portion of the shares acquired pursuant to the exercise
of this option in the event that the participant’s continuous service should terminate for any reason whatsoever.
2015
Stock Plan
The Company’s board of directors
adopted, and its stockholders approved its 2015 Stock Plan (the “2015 Plan”) in March 2015, providing for the issuance
under 2015 Plan of options and rights to purchase up to Four million two hundred and fifty thousand (4,250,000) shares of Common
Stock. As of December 31, 2017 and 2016, there were 918,843 shares available for issuance under the Company’s 2015 Plan,
which provides for the grant of incentive stock options and nonstatutory stock options to employees, directors, and consultants.
The exercise price of incentive stock options under the 2015 Plan shall be no less than 100% of the
fair market value per share of the Common Stock on the date of grant. Notwithstanding the above, if an incentive stock option
is granted to an employee who owns more than ten percent of the total combined voting power of all classes of stock of the Company
or any subsidiary, the exercise price shall be no less than 110% of the fair market value per share of the Common Stock on the
date of grant. The exercise price of nonstatutory stock options under the 2015 Plan shall be no less than 100% of the fair market
value per share of the Common Stock on the date of grant.
All stock options under the 2015 Plan
have a term of no greater than 10 years from the date of grant. However, in the case of an option granted to an optionee who,
at the time the optionee is granted, owns stock representing more than ten percent of the voting power of all classes of stock
of the Company or subsidiary, the term of the option shall be 5 years from the date of grant or such shorter term as may be provided
in the option agreement.
Vesting of stock options is determined
by the board of directors of the Company. No stock option may be exercised subsequent to its termination date. The purchase price
of a right to purchase Common Stock and the termination date of the offer under the 2015 Plan is determined by the board of directors
of the Company. The Company shall have the right to repurchase all or a portion of the shares acquired pursuant to the exercise
of this option in the event that the participant’s continuous service should terminate for any reason whatsoever.
The
fair value of each stock option granted under both 2015 and 2000 Plan was estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions:
|
|
Year
Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Weighted average fair
value of Common Stock on date of grant
|
|
$
|
0.30
|
|
|
$
|
0.30
|
|
Weighted average exercise price of the options
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
Weighted average exercise price of options
outstanding at end of period
|
|
$
|
0.14
|
|
|
$
|
0.14
|
|
Expected term of the options (years)
|
|
|
4
|
|
|
|
4
|
|
Expected volatility (%)
|
|
|
30
|
%
|
|
|
30
|
%
|
Risk-free interest rate
|
|
|
4.0
|
%
|
|
|
4.0
|
%
|
Dividend yield
|
|
|
N/A
|
|
|
|
N/A
|
|
Expected forfeiture per year (%)
|
|
|
3
|
%
|
|
|
3
|
%
|
Weighted average fair value of the options
per unit
|
|
$
|
0.30
|
|
|
$
|
0.30
|
|
* No stock options were granted during
the years ended December 31, 2017 and 2016
Compensation
expense related to stock-based transactions is measured and recognized in the financial statements based on the fair value of
the awards granted. The stock-based compensation expense, net of forfeitures, is recognized on a straight-line basis over the
requisite service periods of the awards, which is generally three to four years.
Use
of the Black-Scholes
option pricing model
requires the input of subjective assumptions,
including the fair value of the underlying Common Stock, expected term of the option, expected volatility of the price of the
Common Stock, risk-free interest rates, and expected dividend yield of the Common Stock. The assumptions used in the option-pricing
model represent management’s best estimates.
These
assumptions and estimates are as follows:
Fair
Value of Common Stock
The
fair value of the Common Stock underlying its stock-based awards was primarily based on the latest financing rounds of issuing
equity interest near the option grant date. It was determined by the Company’s board of directors, with input from management
and a third-party valuation firm.
Expected
Term
The
expected term assumptions were determined based on the vesting terms, exercise terms, and contractual lives of the options.
Expected
Volatility
The expected volatility of stock options
is estimated based upon the historical volatility of a number of publicly traded companies in similar stages of development and
comparable industries for a period commensurate with the expected life.
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 option’s expected term.
Dividend
Yield
The
Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the foreseeable future.
Consequently, an expected dividend yield of zero was utilized.
Expected Forfeitures
The Company considers
many factors when estimating expected forfeitures, including economic environment, and historical experience. The Company updates
its estimated forfeiture rate annually.
The following
table summarizes the stock option activity under the 2000 and 2015 Plan and related information:
Options Outstanding
|
|
|
Number of
|
|
|
|
|
|
Weighted-
|
|
|
|
Shares
|
|
|
|
|
|
Average
|
|
|
|
Underlying
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
Outstanding
|
|
|
Average
|
|
|
Contractual
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Life (Years)
|
|
Outstanding – January 1, 2016
|
|
|
49,767
|
|
|
|
0.23
|
|
|
|
6.46
|
|
Granted
|
|
|
-
|
|
|
|
N/A
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
N/A
|
|
|
|
-
|
|
Forfeited or cancelled
|
|
|
(4,000
|
)
|
|
|
N/A
|
|
|
|
-
|
|
Outstanding – December 31, 2016
|
|
|
45,767
|
|
|
|
0.24
|
|
|
|
5.97
|
|
Granted
|
|
|
-
|
|
|
|
N/A
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
N/A
|
|
|
|
-
|
|
Forfeited or cancelled
|
|
|
(32,356
|
)
|
|
|
N/A
|
|
|
|
-
|
|
Outstanding – December 31, 2017
|
|
|
13,411
|
|
|
|
0.25
|
|
|
|
5.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable – December 31, 2017
|
|
|
13,411
|
|
|
$
|
0.25
|
|
|
|
5.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest – December 31, 2017
|
|
|
13,411
|
|
|
$
|
0.25
|
|
|
|
5.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable – December 31, 2016
|
|
|
45,767
|
|
|
$
|
0.24
|
|
|
|
5.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest – December 31, 2016
|
|
|
45,767
|
|
|
$
|
0.24
|
|
|
|
5.97
|
|
The weighted-average
grant-date fair value of options granted during the years ended December 31, 2017 and 2016 was $0.25 and $0.24 per share, respectively.
The total fair value of options vested during the years ended December 31, 2017 and 2016 was $0.
NOTE 6. Operating Lease Obligation
The Company leases its main office in
Fremont, California, under operating leases expiring on February 28, 2021. The monthly rent is approximately $23,600. The Company
also leases an office equipment with monthly payment of approximately $220 expiring on August 31, 2019. The total rent expenses
were $274,978 and $255,240 for the years ended December 31, 2017 and 2016, respectively.
Future minimum lease payments under the
Company’s operating leases are as follows:
As of December 31,
|
|
Amount
|
|
2018
|
|
$
|
298,246
|
|
2019
|
|
|
304,430
|
|
2020
|
|
|
309,942
|
|
2021
|
|
|
51,860
|
|
Total
|
|
$
|
964,478
|
|
NOTE 7. Income Taxes
The Company files income tax returns in
the U.S. federal jurisdiction, and various state and local jurisdictions. The Company is no longer subject to U.S. federal, state
and local income tax examinations by tax authorities for years before 2013.
On December 22, 2017
H.R
.
1, originally
known as the Tax Cuts and Jobs Act, (the “Tax Act”) was enacted. Among the significant changes to the U.S. Internal
Revenue Code, the Tax Act lowers the U.S. federal corporate income tax rate (“Federal Tax Rate”) from 35% to 21% effective
January 1, 2018
.
The 21% Federal Tax Rate will apply to earnings reported for the full 2018
fiscal
year. In addition, the Company must re-measure its net deferred tax assets and liabilities using the Federal Tax Rate that will
apply when these amounts are expected to reverse. As of December 31, 2017, the Company can determine a reasonable
estimate for certain effects of tax reform and is recording that estimate as a provisional amount. The provisional remeasurement
of the deferred tax assets and allowance valuation of deferred tax assets at December 31, 2017 resulted in a net effect of
$0 discrete tax expenses (benefit) which lowered the effective tax rate by 14% for the year ended December 31, 2017.
The provisional remeasurement amount is anticipated to change as data becomes available allowing more accurate scheduling of the
deferred tax assets and liabilities primarily related to net operating loss carryover.
Components of income tax (benefits) for
the years ended December 31, 2017 and 2016 are as follows:
|
|
For the year ended December 31, 2017
|
|
|
For the year ended December 31, 2016
|
|
|
|
Federal
|
|
|
State
|
|
|
Total
|
|
|
Federal
|
|
|
State
|
|
|
Total
|
|
Current
|
|
$
|
-
|
|
|
$
|
800
|
|
|
$
|
800
|
|
|
$
|
-
|
|
|
$
|
800
|
|
|
$
|
800
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
-
|
|
|
$
|
800
|
|
|
$
|
800
|
|
|
$
|
-
|
|
|
$
|
800
|
|
|
$
|
800
|
|
Significant components of the Company’s
deferred tax accounts at December 31, 2017 and 2016:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Deferred Tax Account - noncurrent:
|
|
|
|
|
|
|
Allowance for Doubtful Accounts
|
|
$
|
20,846
|
|
|
$
|
20,618
|
|
Reserve for Obsolete Inventory
|
|
|
177
|
|
|
|
177
|
|
Accrued Vacation
|
|
|
5,468
|
|
|
|
4,515
|
|
Accumulated Depreciation
|
|
|
(2,703
|
)
|
|
|
31,462
|
|
Tax Net Operating Loss Carryforwards
|
|
|
3,740,797
|
|
|
|
3,815,625
|
|
General Business Credit
|
|
|
1,316,980
|
|
|
|
1,253,229
|
|
Less: Valuation allowance
|
|
|
(5,081,565
|
)
|
|
|
(5,125,626
|
)
|
Total deferred tax account - noncurrent
|
|
$
|
-
|
|
|
$
|
-
|
|
The difference between the effective rate
reflected in the provision for income taxes on loss before taxes and the amounts determined by applying the applicable statutory
U.S. tax rate are analyzed below:
|
|
2017
|
|
|
2016
|
|
Statutory tax benefit, net of state effects
|
|
|
31
|
%
|
|
|
31
|
%
|
State income taxes
|
|
|
8.84
|
%
|
|
|
8.84
|
%
|
Provisional remeasurement of deferred taxes
|
|
|
(12
|
)%
|
|
|
-
|
%
|
Nondeductible/nontaxable items
|
|
|
-
|
%
|
|
|
-
|
%
|
Change in valuation allowance
|
|
|
(27.84
|
)%
|
|
|
(39.84
|
)%
|
Effective income tax rate
|
|
|
-
|
%
|
|
|
-
|
%
|
NOTE 8. Subsequent Events
The Company has evaluated subsequent events
through the date which the financial statements were available to be issued. All subsequent events requiring recognition as of
December 31, 2017 have been incorporated into these financial statements and there are no subsequent events that require disclosure
in accordance with FASB ASC Topic 855, “Subsequent Events.”
BioKey, Inc.
FINANCIAL STATEMENTS FOR THE NINE MONTHS
ENDED
SEPTEMBER 30, 2018 and 2017
BIOKEY,
INC.
BALANCE SHEETS
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
733,843
|
|
|
$
|
1,225,397
|
|
Accounts receivable, net
|
|
|
83,479
|
|
|
|
59,080
|
|
Accounts receivable - related parties, net
|
|
|
142,225
|
|
|
|
134,312
|
|
Total Current Assets
|
|
|
959,547
|
|
|
|
1,418,789
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
64,375
|
|
|
|
37,600
|
|
Security deposits
|
|
|
10,440
|
|
|
|
10,440
|
|
Total Assets
|
|
$
|
1,034,362
|
|
|
$
|
1,466,829
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
12,013
|
|
|
$
|
5,396
|
|
Due to shareholders
|
|
|
-
|
|
|
|
5,800
|
|
Accrued expenses and other current liabilities
|
|
|
60,691
|
|
|
|
57,576
|
|
Advance from customers
|
|
|
12,276
|
|
|
|
10,985
|
|
Total Current Liabilities
|
|
|
84,980
|
|
|
|
79,757
|
|
|
|
|
|
|
|
|
|
|
Non-current Liabilities
|
|
|
|
|
|
|
|
|
Tenant security deposit
|
|
|
2,880
|
|
|
|
2,880
|
|
Total Liabilities
|
|
|
87,860
|
|
|
|
82,637
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
Preferred stock, no par value, 23,562,000 shares authorized:
|
|
|
|
|
|
|
|
|
7,000,000 shares of Series A issued and outstanding at September
30, 2018 and December 31, 2017
|
|
|
3,500,000
|
|
|
|
3,500,000
|
|
1,160,000 shares of Series B issued and outstanding at September
30, 2018 and December 31, 2017
|
|
|
1,160,000
|
|
|
|
1,160,000
|
|
13,973,097 shares of Series C issued and outstanding at September
30, 2018 and December 31, 2017
|
|
|
13,973,097
|
|
|
|
13,973,097
|
|
|
|
|
|
|
|
|
|
|
Common stock, no par value; 30,000,000 shares
authorized,7,418,134 and 6,498,134 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively
|
|
|
771,793
|
|
|
|
541,793
|
|
Additional paid-in capital
|
|
|
82,265
|
|
|
|
296,465
|
|
Accumulated deficit
|
|
|
(18,540,653
|
)
|
|
|
(18,087,163
|
)
|
Total Equity
|
|
|
946,502
|
|
|
|
1,384,192
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity
|
|
$
|
1,034,362
|
|
|
$
|
1,466,829
|
|
The
accompanying notes are an integral part of the financial statements.
BIOKEY,
INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME (LOSS)
(UNAUDITED)
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
163,459
|
|
|
$
|
473,359
|
|
|
$
|
382,097
|
|
|
$
|
808,140
|
|
Cost of revenues
|
|
|
744
|
|
|
|
7,456
|
|
|
|
3,215
|
|
|
|
14,092
|
|
Gross profit
|
|
|
162,715
|
|
|
|
465,903
|
|
|
|
378,882
|
|
|
|
794,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
|
144,562
|
|
|
|
124,205
|
|
|
|
337,810
|
|
|
|
373,690
|
|
Selling, general and administrative expenses
|
|
|
118,874
|
|
|
|
206,973
|
|
|
|
498,396
|
|
|
|
596,865
|
|
Total operating expenses
|
|
|
263,436
|
|
|
|
331,178
|
|
|
|
836,206
|
|
|
|
970.555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(100,721
|
)
|
|
|
134,725
|
|
|
|
(457,324
|
)
|
|
|
(176,507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
3,101
|
|
|
|
1,047
|
|
|
|
4,144
|
|
|
|
5,051
|
|
Other income
|
|
|
151
|
|
|
|
46
|
|
|
|
490
|
|
|
|
150
|
|
Total other income
|
|
|
3,252
|
|
|
|
1,093
|
|
|
|
4,634
|
|
|
|
5,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax
|
|
|
(97,469
|
)
|
|
|
135,818
|
|
|
|
(452,690
|
)
|
|
|
(171,306
|
)
|
Provision for income tax
|
|
|
800
|
|
|
|
800
|
|
|
|
800
|
|
|
|
800
|
|
Net income (loss) and comprehensive income (loss)
|
|
$
|
(98,269
|
)
|
|
$
|
135,018
|
|
|
$
|
(453,490
|
)
|
|
$
|
(172,106
|
)
|
The
accompanying notes are an integral part of the financial statements.
BIOKEY,
INC.
STATEMENTS
OF CASH FLOWS
FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
(UNAUDITED)
|
|
2018
|
|
|
2017
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net loss
|
|
$
|
(453,490
|
)
|
|
$
|
(172,106
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
19,486
|
|
|
|
8,618
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable
|
|
|
(32,312
|
)
|
|
|
(199,262
|
)
|
Decrease (increase) in other receivable
|
|
|
-
|
|
|
|
6,000
|
|
Increase (decrease) in accounts payable
|
|
|
6,617
|
|
|
|
154,022
|
|
Increase (decrease) in accrued expenses and other liabilities
|
|
|
3,115
|
|
|
|
5,574
|
|
Increase (decrease) in advanced from others
|
|
|
1,291
|
|
|
|
(4,280
|
)
|
Net cash used in operating activities
|
|
|
(455,293
|
)
|
|
|
(201,434
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
(46,261
|
)
|
|
|
(7,794
|
)
|
Net cash used in investing activities
|
|
|
(46,261
|
)
|
|
|
(7,794
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
10,000
|
|
|
|
0
|
|
Net cash provided by financing activities
|
|
|
10,000
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(491,554
|
)
|
|
|
(209,228
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
1,225,397
|
|
|
|
1,473,262
|
|
Ending
|
|
$
|
733,843
|
|
|
$
|
1,264,034
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flows
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Income tax
|
|
$
|
800
|
|
|
$
|
800
|
|
Interest expense
|
|
$
|
-
|
|
|
$
|
-
|
|
Non-cash financing and investing activities
|
|
|
|
|
|
|
|
|
Capital contribution by shareholders through debt conversion
|
|
$
|
5,800
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of the financial statements.
BIOKEY, INC.
NOTES TO THE UNAUDITED FINAICAL STATEMENTS
SEPTEMBER 30, 2018
NOTE 1. Nature of Business and Significant
Accounting Policies
Nature of Business:
Biokey,
Inc., (hereinafter, “the Company”), was incorporated on August 9, 2000 in the State of California. It is engaged primarily
in research and development, manufacturing, and distribution of generic drugs and nutraceuticals with strategic partners. The
Company 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
1 through phase 3) and commercial manufacturing. The Company also licenses out its technologies and initiates joint research and
development processes with other biotechnology, pharmaceutical, and nutraceutical companies.
A summary of the Company’s significant accounting
policies is as follows:
Basis of presentation:
The accompanying
financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.
Use of Estimates:
The preparation
of financial statements in conformity with generally accepted accounting principles of 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 financial statements and reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and cash equivalents:
For
purposes of reporting cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents.
Accounts receivable and other receivable:
Accounts receivable and other receivables are stated at carrying value less estimates made for doubtful receivables. An allowance
for impairment of trade receivable and other receivables is established if the collection of a receivable becomes doubtful. Such
receivable becomes doubtful when there is objective evidence that the Company 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.
Property and equipment:
Property
and equipment are recorded at cost. Depreciation is computed on the straight-line method over the estimated useful lives of the
related assets as follows:
Laboratory
and manufacturing equipment
|
2
~5 years
|
Office equipment
|
3 years
|
Leasehold improvement
|
3 ~8 years
|
Furniture and
fixtures
|
8~15 years
|
Expenditures for major renewals and
betterment that extend the useful lives of property and equipment are capitalized. Expenditures for repairs and maintenance are
charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the asset and accumulated depreciation
are removed from the accounts and the resulting profit or loss is reflected in the statement of operations for the period.
Impairment of long-lived assets:
The Company reviews its long-lived assets whenever events or circumstances indicate that the carrying amount of such assets
may not be recoverable. Impairment is evaluated by comparing the carrying value of the long-lived assets with the estimated future
net undiscounted cash flows expected to result from the use of the assets, including cash flows from disposition. Should the sum
of the expected future net cash flows be less than the carrying value, the Company would recognize an impairment loss at that
date. An impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value (estimated
discounted future cash flows) of the long-lived assets.
Revenue recognition:
During
the fiscal year 2018, the Company 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 the Company’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 the Company’s review of existing contracts as of January 1, 2018, the Company concluded
that the adoption of the new guidance did not have a significant change on the Company’s revenue during all periods presented.
Pursuant to ASC 606, the Company recognizes
revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the
Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the
Company determines is within the scope of ASC 606, the Company 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) the Company satisfies
a performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company will
collect the consideration the Company is entitled to in exchange for the goods or services the Company transfers to the customers.
At inception of the contract, once the contract is determined to be within the scope of ASC 606, the Company 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. The Company 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. Generally, the Company’s performance obligations
are transferred to customers at a point in time, typically upon delivery.
The Company currently only has one
major revenue source, which is research and development activities services.
Revenues related to research and development
and regulatory activities are recognized when the related services or activities are performed, in accordance with the contract
terms. The Company typically has only one performance obligation at the inception of a contract, which is to perform research
and development services. The Company may also provide its customers with an option to request that the Company provides additional
goods or services in the future, such as active pharmaceutical ingredient, API, or IND/NDA/ANDA/510K submissions. The Company
evaluates whether these options are material rights at the inception of the contract. If the Company determines an option is a
material right, the Company will consider the option a separate performance obligation.
If the Company is entitled to reimbursement
from its customers for specified research and development expenses, the Company accounts for the related services that it provides
as separate performance obligations if it determines that these services represent a material right. The Company also determines
whether the reimbursement of research and development expenses should be accounted for as revenues or an offset to research and
development expenses in accordance with provisions of gross or net revenue presentation. The Company recognizes the corresponding
revenues or records the corresponding offset to research and development expenses as it satisfies the related performance obligations.
The Company then determines the transaction
price by reviewing the amount of consideration the Company is eligible to earn under the contracts, including any variable consideration.
Under the outstanding contracts, consideration typically includes fixed consideration and variable consideration in the form of
potential milestone payments. At the start of an agreement, the Company’s transaction price usually consists of the payments
made to or by the Company based on the number of full-time equivalent researchers assigned to the project and the related research
and development expenses incurred. The Company does not typically include any payments that the Company may receive in the future
in its initial transaction price because the payments are not probable. The Company would reassess the total transaction price
at each reporting period to determine if the Company should include additional payments in the transaction price.
The Company receives payments from
its customers based on billing schedules established in each contract. Upfront payments and fees may be recorded as advance from
customers upon receipt or when due, and may require deferral of revenue recognition to a future period until the Company performs
its obligations under these arrangements. Amounts are recorded as accounts receivable when the right of the Company to consideration
is unconditional. The Company does not assess whether a contract has a significant financing component if the expectation at contract
inception is such that the period between payment by the customers and the transfer of the promised goods or services to the customers
will be one year or less.
Advertising costs:
Advertising
costs are expensed as incurred. The total advertising and marketing expenses were $0 for the three and nine months ended September
30, 2018 and 2017.
Research and Development:
The
Company 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, 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.
Income taxes:
The Company accounts
for income taxes in accordance with ASC 740, Income Taxes, which requires that the Company recognize deferred tax liabilities
and assets based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities,
using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense)
results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when, in the
opinion of management, it is more likely than not that some or all of any deferred tax assets will not be realized. The Company
provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax position.
Valuation of Deferred Tax Assets:
A valuation allowance is recorded to reduce its 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 the Company 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, the Company’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 its 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, the Company 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 7 for information related to income taxes, including the recorded balances of its valuation
allowance related to deferred tax assets.
The Company 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 its 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 the Company’s liability for income taxes. Any such adjustment could be material
to the Company’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 September 30, 2018 and December 31, 2017, management considered that the Company had no uncertain
tax positions, and will continue to evaluate for uncertain positions in the future.
Concentration of credit risks:
Cash and cash equivalents:
The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. Accounts are
guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. As of September 30, 2018 and December 31, 2017,
the Company had $452,776 and $963,763 in excess of FDIC insured limits, respectively. The Company has not experienced any losses
in such accounts.
Customers:
The
Company performs ongoing credit evaluations of its customers’ financial condition and generally, requires no collateral.
For the nine months
ended September 30, 2018, three customers who accounted for more than 10% of the Company’s total net sales revenues, representing
approximately 43.9%, 16.8%, and 12.8% of total net sales revenues, and 17.7%, 0.1%, and 16.9% of accounts receivable in aggregate
at September 30, 2018, respectively:
Customer
|
|
Net sales for the
nine months ended
September 30,
2018
|
|
|
A/R balance
as of
September 30,
2018
|
|
A
|
|
$
|
167,596
|
|
|
$
|
39,843
|
|
B
|
|
$
|
64,355
|
|
|
$
|
200
|
|
C
|
|
$
|
48,972
|
|
|
$
|
38,187
|
|
For the nine months
ended September 30, 2017, five customers who accounted for more than 10% of the Company’s total net sales revenues, representing
approximately 33.9%, 16.5%, 11.8%, 11.3%, and 10.9% of total net sales revenues, and 44.2%, 21%, 0.5%, 1.0%, and 29.5% of accounts
receivable in aggregate at September 30, 2017, respectively:
Customer
|
|
Net sales
for the
nine months ended September 30,
2017
|
|
|
A/R balance
as of
September 30,
2017
|
|
E
|
|
$
|
274,209
|
|
|
$
|
198,960
|
|
F
|
|
$
|
133,600
|
|
|
$
|
94,400
|
|
G
|
|
$
|
95,700
|
|
|
$
|
2,300
|
|
H
|
|
$
|
91,574
|
|
|
$
|
4,308
|
|
I
|
|
$
|
87,960
|
|
|
$
|
132,775
|
*
|
|
*
|
Related party transactions
(See Note 3).
|
Suppliers:
The
Company currently is not entering any significant purchase agreements with suppliers for the nine months ended September 30, 2018
and 2017.
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, accounts receivable, accrued liabilities, and advance from
customers, approximate fair value due to their relatively short maturities.
Stock-Based Compensation:
The
Company measures expense associated with all employees and non-employee directors and consultants’ stock-based compensation
awards using a fair value method and recognizes such expense in the financial statements on a straight-line basis over the requisite
service period in accordance with ASC Topic 718 “Compensation-Stock Compensation”. During the three and nine months
ended September 30, 2018 and 2017, the Company did not record any stock-based compensation expenses.
Profit Sharing Plan:
The Company
has a 401 (k) profit sharing plan for employees who have reached the age of twenty-one and have completed one year of eligibility
service. The Company’s contribution is based on management’s discretion. In addition, the Company may make a nonelective
contributions to the plan. The amount of the nonelective contribution is determined by its Board of Directors on an annual basis.
Total contributions that the Company made to the plan were $0 for the nine months ended September 30, 2018 and 2017.
Recently Issued Accounting Pronouncements:
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Update (“ASU”) No. 2016-02, Leases (Topic 842), which amends the existing accounting standards for leases. The
new standard requires lessees to record a right-of-use asset and a corresponding lease liability on the balance sheet (with the
exception of short-term leases). For lessees, leases will continue to be classified as either operating or financing in the income
statement. This ASU becomes effective in the first quarter of fiscal year 2019 and early adoption is permitted. This ASU is required
to be applied with a modified retrospective approach and requires application of the new standard at the beginning of the earliest
comparative period presented. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. In
issuing ASU No. 2018-11, the FASB decided to provide another transition method in addition to the existing transition
method by allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect
adjustment to the opening balance of retained earnings in the period of adoption. The Company is currently evaluating
the impact that ASU 2016-02 and ASU 2018-11 will have on its condensed financial statements.
In March 2016, the FASB issued ASU
2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus
Net). In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance
Obligations and Licensing. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope
Improvements and Practical Expedients and ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815):
Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the
March 3, 2016 EITF Meeting. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606,
Revenue from Contracts with Customers. In September 2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue
from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842). These amendments provide additional clarification
and implementation guidance on the previously issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments
in ASU 2016-08 clarify how an entity should identify the specified good or service for the principal versus agent evaluation and
how it should apply the control principle to certain types of arrangements. ASU 2016-10 clarifies the following two aspects of
ASU 2014-09: identifying performance obligations and licensing implementation guidance. ASU 2016-11 rescinds several SEC Staff
Announcements that are codified in Topic 605, including, among other items, guidance relating to accounting for consideration
given by a vendor to a customer, as well as accounting for shipping and handling fees and freight services. ASU 2016-12 provides
clarification to Topic 606 on how to assess collectability, present sales tax, treat noncash consideration, and account for completed
and modified contracts at the time of transition. ASU 2016-12 clarifies that an entity retrospectively applying the guidance in
Topic 606 is not required to disclose the effect of the accounting change in the period of adoption. Additionally, ASU 2016-20
clarifies certain narrow aspects within Topic 606 including its scope, contract cost accounting, and disclosures. The new guidance
requires enhanced disclosures, including revenue recognition policies to identify performance obligations to customers and significant
judgments in measurement and recognition. The effective date and transition requirements for these amendments are the same as
the effective date and transition requirements of ASU 2014-09, which is effective for fiscal years, and for interim periods within
those years, beginning after December 15, 2017. The Company has adopted ASC 606 as of January 1, 2018.
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”).
To the extent that a company’s accounting
for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record
a provisional estimate to be included in the financial statements. 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 our interpretations and assumptions, additional guidance that may be issued
by the I.R.S., and actions that the Company may take. The Company has accounted for the tax effects of the Tax Cuts and Jobs Act
under the guidance of SAB 118, on a provisional basis. The Company’s accounting for certain income tax effects is incomplete,
but the Company has determined reasonable estimates for those effects The Company is continuing to gather additional information
to determine the final impact on its condensed financial statements.
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. The Company is currently evaluating the effect this standard will have
on its condensed financial statements.
In
June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718), Improvements to Nonemployee Share-based Payments
(“ASU 2018-07”). This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring
goods and services from nonemployees. The effective date for the standard is for interim periods in fiscal years beginning after
December 15, 2018, with early adoption permitted, but no earlier than the Company’s adoption date of Topic 606. U
nder the
new guidance, the measurement of nonemployee equity awards is fixed on the grant date.
The
new guidance is required to be applied retrospectively with the cumulative effect recognized at the date of initial application.
The Company has adopted this ASU 2018-07 and determined that it does not have a material effect on its financial condition
and condensed statements of operations for the three and nine months ended September 30, 2018.
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. The Company is
currently evaluating the effect, if any, that the ASU will have on its financial statements.
NOTE 2. Property and Equipment
The following is a summary of the Company’s
property and equipment as of September 30, 2018 and December 31, 2017:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
(UNAUDITED)
|
|
|
|
|
Laboratory and manufacturing equipment
|
|
$
|
876,260
|
|
|
$
|
829,999
|
|
Office equipment
|
|
|
6,081
|
|
|
|
6,081
|
|
Leasehold improvements
|
|
|
1,994,585
|
|
|
|
1,994,585
|
|
Furniture and fixtures
|
|
|
106,510
|
|
|
|
106,510
|
|
Subtotal
|
|
|
2,983,436
|
|
|
|
2,937,175
|
|
Less: accumulated depreciation
|
|
|
(2,919,061
|
)
|
|
|
(2,888,195
|
)
|
Property and equipment, net
|
|
$
|
64,375
|
|
|
$
|
37,600
|
|
Total depreciation expense was $19,486
and $8,618 for the nine months ended September 30, 2018 and 2017, respectively.
NOTE3. Related Party Transactions
Operating lease
The Company has subleased a portion
of its office space to Amkey Ventures, LLC, (the “Amkey”), since June 21, 2001. The sublease is automatically renewed
on an annual basis. Amkey is incorporated in the State of California on April 23, 2001. Mr. George J Lee, the Chairman of the
Company, is one of managers of Amkey. The sublease is classified as an operating lease and the original lessee shall continue
to account for the original lease as it did before commencement of the sublease. Pursuant to ASC 842-20-35-14, the nature of this
sublease is such that the original lessee is not relieved of the primary obligation under the original lease, the original lessee
(as sublessor) shall continue to account for the original lease.
The rental income was $3,600 for the
nine months ended September 30, 2018 and 2017. Accordingly, the Company recorded the rental income as a reduction of rent expenses
for the nine months ended September 30, 2018 and 2017.
Related party sales transaction
Genepharm Inc., (the “Genepharm”),
was incorporated on March 6, 2000 in the State of California. Mr. George J Lee is the Chairman of both Genepharm and the Company.
The Company had net sales of $18,900 and $87,960 to Genepharm for the nine months ended September 30, 2018 and 2017, respectively.
As of September 30, 2018 and December 31, 2017, the Company had accounts receivable of $142,225 and $134,312 due from Genepharm,
respectively.
Due to shareholders
The Company has advanced funds from
its shareholder and Chairman for working capital purposes. The Company has not entered into any agreement on the repayment terms
for these advances. The advances bear no interest rate and are due upon demand by its shareholder and Chairman.
During
the nine months ended September 30, 2018, the debt of $5,800 was forgiven by
its shareholder and Chairman
and
the Company recorded the debt forgiveness as additional paid in capital.
As of September 30, 2018 and December 31, 2017,
the outstanding advances were $0 and 5,800, respectively.
NOTE4. Accrued Expenses and Other
Current Liabilities
Accrued expenses and other current
liabilities as of September 30, 2018 and December 31, 2017 consisted of:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
(UNAUDITED)
|
|
|
|
|
Accrued professional fees
|
|
$
|
37,556
|
|
|
$
|
35,756
|
|
Accrued vacation
|
|
|
19,440
|
|
|
|
19,541
|
|
Others
|
|
|
3,695
|
|
|
|
2,279
|
|
|
|
$
|
60,691
|
|
|
$
|
57,576
|
|
NOTE 5. Stock-Based Compensation
2015
Stock Plan
The Company’s board of directors
adopted, and its stockholders approved its 2015 Stock Plan (the “2015 Plan”) in March 2015, providing for the issuance
under 2015 Plan of options and rights to purchase up to Four million two hundred and fifty thousand (4,250,000) shares of common
stock. As of September 30, 2018 and December 31, 2017, there were 308,455 and 918,843 shares available for issuance under the
Company’s 2015 Plan, respectively, which provides for the grant of incentive stock options and nonstatutory stock options
to employees, directors, and consultants.
The exercise price of incentive stock
options under the 2015 Plan shall be no less than 100% of the fair market value per share of the common stock on the date of grant.
Notwithstanding the above, if an incentive stock option is granted to an employee who owns more than ten percent of the total
combined voting power of all classes of stock of the Company or any subsidiary, the exercise price shall be no less than 110%
of the fair market value per share of the common stock on the date of grant. The exercise price of nonstatutory stock options
under the 2015 Plan shall be no less than 100% of the fair market value per share of the common stock on the date of grant.
All stock options under the 2015 Plan
have a term of no greater than 10 years from the date of grant. However, in the case of an option granted to an optionee who,
at the time the optionee is granted, owns stock representing more than ten percent of the voting power of all classes of stock
of the Company or subsidiary, the term of the option shall be 5 years from the date of grant or such shorter term as may be provided
in the option agreement.
Vesting of stock options is
determined by the board of directors of the Company. No stock option may be exercised subsequent to its termination date. The
purchase price of a right to purchase common stock and the termination date of the offer under the 2015 Plan is determined by
the board of directors of the Company. The Company shall have the right to repurchase all or a portion of the shares acquired
pursuant to the exercise of this option in the event that the participant’s continuous service should terminate for any
reason whatsoever.
The
fair value of each stock option granted under 2015 Plan was estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions:
Weighted average fair value of common stock on date of grant
|
|
$
|
0.30
|
|
Weighted average exercise price of the options
|
|
$
|
N/A
|
|
Weighted average exercise price of options outstanding at end of period
|
|
$
|
0.14
|
|
Expected term of the options (years)
|
|
|
4
|
|
Expected volatility (%)
|
|
|
30
|
%
|
Risk-free interest rate(%)
|
|
|
4.0
|
%
|
Dividend yield
|
|
|
N/A
|
|
Expected forfeiture per year (%)
|
|
|
3
|
%
|
Weighted average fair value of the options per unit
|
|
$
|
0.30
|
|
*
No stock options were granted during the three and nine months ended September 30, 2018 and 2017
Compensation
expense related to stock-based transactions is measured and recognized in the financial statements based on the fair value of
the awards granted. The stock-based compensation expense, net of forfeitures, is recognized on a straight-line basis over the
requisite service periods of the awards, which is generally three to four years.
Use
of the Black-Scholes
option pricing model
requires the input of subjective assumptions,
including the fair value of the underlying common stock, expected term of the option, expected volatility of the price of the
common stock, risk-free interest rates, and expected dividend yield of the common stock. The assumptions used in the option-pricing
model represent management’s best estimates.
These
assumptions and estimates are as follows:
Fair
Value of Common Stock
The
fair value of the common stock underlying its stock-based awards was primarily based on the latest financing rounds of issuing
equity interest near the option grant date. It was determined by the Company’s board of directors, with input from management
and a third-party valuation firm.
Expected
Term
The
expected term assumptions were determined based on the vesting terms, exercise terms, and contractual lives of the options.
Expected
Volatility
The expected volatility of stock options
is estimated based upon the historical volatility of a number of publicly traded companies in similar stages of development and
comparable industries for a period commensurate with the expected life.
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 option’s expected term.
Dividend
Yield
The
Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the foreseeable future.
Consequently, an expected dividend yield of zero was utilized.
Expected
Forfeitures
The Company
considers many factors when estimating expected forfeitures, including economic environment, and historical experience. The Company
updates its estimated forfeiture rate annually.
The following
table summarizes the stock option activity under the 2015 Plan and related information:
Options Outstanding
|
|
|
Number of
|
|
|
|
|
|
Weighted-
|
|
|
|
Shares
|
|
|
|
|
|
Average
|
|
|
|
Underlying
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
Outstanding
|
|
|
Average
|
|
|
Contractual
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Life (Years)
|
|
Outstanding – January 1, 2016
|
|
|
49,767
|
|
|
|
0.23
|
|
|
|
6.46
|
|
Granted
|
|
|
-
|
|
|
|
N/A
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
N/A
|
|
|
|
-
|
|
Forfeited or cancelled
|
|
|
(4,000
|
)
|
|
|
N/A
|
|
|
|
-
|
|
Outstanding – December 31, 2016
|
|
|
45,767
|
|
|
|
0.24
|
|
|
|
5.97
|
|
Granted
|
|
|
-
|
|
|
|
N/A
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
N/A
|
|
|
|
-
|
|
Forfeited or cancelled
|
|
|
(32,356
|
)
|
|
|
N/A
|
|
|
|
-
|
|
Outstanding – December 31, 2017
|
|
|
13,411
|
|
|
|
0.25
|
|
|
|
5.72
|
|
Granted
|
|
|
-
|
|
|
|
N/A
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
N/A
|
|
|
|
-
|
|
Forfeited or cancelled
|
|
|
-
|
|
|
|
N/A
|
|
|
|
-
|
|
Outstanding – September 30, 2018
|
|
|
13,411
|
|
|
|
0.25
|
|
|
|
5.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable – December 31, 2017
|
|
|
13,411
|
|
|
$
|
0.25
|
|
|
|
5.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest – December 31, 2017
|
|
|
13,411
|
|
|
$
|
0.25
|
|
|
|
5.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable – September 30, 2108
|
|
|
13,411
|
|
|
$
|
0.25
|
|
|
|
4.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest – September 30, 2018
|
|
|
13,411
|
|
|
$
|
0.25
|
|
|
|
4.97
|
|
The weighted-average
grant-date fair value of options granted during the nine months ended September 30, 2018 and during the year ended December 31,
2017 was $0.25 per share. The total fair value of options vested during the nine months ended September 30, 2018 and 2017 was
$0.
NOTE 6. Operating Lease Obligation
The Company leases its main office
in Fremont, California, under operating leases expiring on February 28, 2021. The monthly rent is approximately $23,600. The Company
also leases an office equipment with monthly payment of approximately $220 expiring on August 31, 2019. The total rent expenses
were $205,576 and $205,278 for the nine months ended September 30, 2018 and 2017, respectively.
Future minimum lease payments under
the Company’s operating leases are as follows:
As of September 30,
|
|
Amount
|
|
2019
|
|
$
|
239,422
|
|
2020
|
|
|
236,951
|
|
2021
|
|
|
98,730
|
|
Total
|
|
$
|
575,103
|
|
NOTE 7. Income Taxes
The Company files income tax returns
in the U.S. federal jurisdiction, and various state and local jurisdictions. The Company is no longer subject to U.S. federal,
state and local income tax examinations by tax authorities for years before 2013.
On
December
22, 2017
H.R
.
1,
originally
known as the Tax Cuts and Jobs Act, (the “Tax Act”) was enacted. Among the significant changes to the U.S. Internal
Revenue Code, the Tax Act lowers the U.S. federal corporate income tax rate (“Federal Tax Rate”) from
35%
to
21%
effective
January 1, 2018.
The
21%
Federal
Tax Rate is applied to earnings reported for the full
2018
fiscal
year. In addition, the Company must re-measure its net deferred tax assets and liabilities using the Federal Tax Rate that will
apply when these amounts are expected to reverse. As of September 30, 2018 and December 31, 2017, the Company can
determine a reasonable estimate for certain effects of tax reform and is recording that estimate as a provisional amount. The
provisional remeasurement of the deferred tax assets and allowance valuation of deferred tax assets at December 31, 2017 resulted
in a net effect of $0 discrete tax expenses (benefit) which lowered the effective tax rate by 14% for the year
ended December 31, 2017.
The provisional remeasurement amount
is anticipated to change as data becomes available allowing more accurate scheduling of the deferred tax assets and liabilities
primarily related to net operating loss carryover.
Components of income tax (benefits)
for the nine months ended September 30, 2018 and 2017 are as follows:
|
|
Nine months ended September 30, 2018
|
|
|
Nine months September 30, 2017
|
|
|
|
Federal
|
|
|
State
|
|
|
Total
|
|
|
Federal
|
|
|
State
|
|
|
Total
|
|
Current
|
|
$
|
-
|
|
|
$
|
800
|
|
|
$
|
800
|
|
|
$
|
-
|
|
|
$
|
800
|
|
|
$
|
800
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
-
|
|
|
$
|
800
|
|
|
$
|
800
|
|
|
$
|
-
|
|
|
$
|
800
|
|
|
$
|
800
|
|
Significant components of the Company’s
deferred tax accounts at September 30, 2018 and December 31, 2017:
Deferred tax account - noncurrent:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
(UNAUDITED)
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
20,849
|
|
|
$
|
20,846
|
|
Reserve for obsolete inventory
|
|
|
177
|
|
|
|
177
|
|
Accrued vacation
|
|
|
5,441
|
|
|
|
5,468
|
|
Accumulated depreciation
|
|
|
(2,263
|
)
|
|
|
(2,703
|
)
|
Tax net operating loss carry forwards
|
|
|
3,764,544
|
|
|
|
3,740,797
|
|
General business credit
|
|
|
1,285,104
|
|
|
|
1,316,980
|
|
Less: Valuation allowance
|
|
|
(5,073,852
|
)
|
|
|
(5,081,565
|
)
|
Total deferred tax account - noncurrent
|
|
$
|
-
|
|
|
$
|
-
|
|
The difference between the effective
rate reflected in the provision for income taxes on loss before taxes and the amounts determined by applying the applicable statutory
U.S. tax rate for the nine months ended September 30, 2018 and 2017 are analyzed below:
|
|
2018
|
|
|
2017
|
|
Statutory tax benefit, net of state effects
|
|
|
19
|
%
|
|
|
31
|
%
|
State income taxes
|
|
|
8.84
|
%
|
|
|
8.84
|
%
|
Nondeductible/nontaxable items
|
|
|
-
|
%
|
|
|
-
|
%
|
Change in valuation allowance
|
|
|
(27.84
|
)%
|
|
|
(39.84
|
)%
|
Effective income tax rate
|
|
|
-
|
%
|
|
|
-
|
%
|
NOTE 8. Subsequent Events
The Company has evaluated subsequent
events through the date which the financial statements were available to be issued. All subsequent events requiring recognition
as of September 30, 2018 have been incorporated into these financial statements and there are no subsequent events that require
disclosure in accordance with FASB ASC Topic 855, “Subsequent Events.”
******
PART II — INFORMATION
NOT REQUIRED IN PROSPECTUS
Item 13.
Other Expenses of Issuance and Distribution
The following table sets forth all expenses
to be paid by the Registrant, other than estimated placement agents’ fees, in connection with our public offering. All amounts
shown are estimates except for the SEC registration fee and the FINRA filing fee:
SEC registration fee
|
|
$
|
2,593.68
|
|
FINRA filing fee
|
|
$
|
|
|
Legal fees and expenses
|
|
$
|
*
|
|
Accounting fees and expenses
|
|
$
|
*
|
|
Transfer agent and registrar fees
|
|
$
|
*
|
|
Miscellaneous fees and expenses
|
|
$
|
*
|
|
Total
|
|
$
|
*
|
|
Item 14.
Indemnification of Directors and Officers
Neither our Articles
of Incorporation nor Bylaws prevent us from indemnifying our officers, directors and agents to the extent permitted under the Nevada
Revised Statute(“NRS”). NRS Section 78.7502 provides that a corporation shall indemnify any director, officer, employee
or agent of a corporation against expenses, including attorneys’ fees, actually and reasonably incurred by him in connection
with any the defense to the extent that a director, officer, employee or agent of a corporation has been successful on the merits
or otherwise in defense of any action, suit or proceeding referred to Section 78.7502(1) or 78.7502(2), or in defense of any claim,
issue or matter therein.
NRS 78.7502(1)
provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by
or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses, including att’rneys’ fees, judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with the action, suit or proceeding if he: (a) is not
liable pursuant to NRS 78.138; or (b) acted in good faith and in a manner which he reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful.
NRS Section 78.7502(2)
provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact
that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against
expenses, including amounts paid in settlement and atto’rneys’ fees actually and reasonably incurred by him in connection
with the defense or settlement of the action or suit if he: (a) is not liable pursuant to NRS 78.138; or (b) acted in good faith
and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation. Indemnification
may not be made for any claim, issue or matter as to which such a person has been adjudged by a court of competent jurisdiction,
after exhaustion of all appeals there from, to be liable to the corporation or for amounts paid in settlement to the corporation,
unless and only to the extent that the court in which the action or suit was brought or other court of competent jurisdiction determines
upon application that in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for
such expenses as the court deems proper.
NRS Section 78.747
provides that except as otherwise provided by specific statute, no director or officer of a corporation is individually liable
for a debt or liability of the corporation, unless the director or officer acts as the alter ego of the corporation. The court
as a matter of law must determine the question of whether a director or officer acts as the alter ego of a corporation.
Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to
the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection
with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy
as expressed hereby in the Securities Act and we will be governed by the final adjudication of such issue.
Articles of Incorporation and Bylaws
Our articles of incorporation, as amended,
do not include specific provisions relating to the indemnification of our directors or officers.
Our bylaws provide that the Company may
indemnify and advance litigation expenses to its directors, officers, employees and agents to the extent permitted by law, the
Company’s Articles or Bylaws, and shall indemnify and advance litigation expenses to its directors, officers, employees and
agents to the extent required by law, the Company’s Articles of Incorporation or Bylaws. The Company’s obligations
of indemnification, if any, shall be conditioned on the Company receiving prompt notice of the claim and the opportunity to settle
and defend the claim. The Company may, to the extent permitted by law, purchase and maintain insurance on behalf of an individual
who is or was a director, officer, employee or agent of the Company.
Item 15.
Recent Sales of Unregistered
Securities
Except that disclosed in ABVC’s quarterly
reports and annual reports filed with the SEC on May 15, 2018, April 13, 2018, December 29, 2017, March 19, 2018, September 22,
2017, August 15, 2016, May 16, 2016, February 23, 2016, we have no sales of unregistered securities during the fiscal years of
2017 and 2016. From January 1, 2018 to the date of this prospectus, the Company issued convertible notes of an aggregate amount
of $800,000 to three non-U.S. investors for the Company’s general working capital purposes in reliance on an exemption from
registration set forth in section 4(2) of the Securities Act, as amended.
Item 16.
Exhibits and Financial Statement Schedules
*
|
To be filed later by Amendment.
|
(1)
|
Filed on Form 10-KT with the Securities and Exchange Commission on April 13, 2018.
|
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during
any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus
required by section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the
prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth
in the “Calculation of Registration Fee” table in the effective registration statement.
(iii) To include any
material information with respect to the plan of distribution not previously disclosed in the registration statement or any material
change to such information in the registration statement;
(2) That, for the purpose
of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration
by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) That, for the purpose
of determining liability under the Securities Act of 1933 to any purchaser:
(i) If the Registrant
is relying on Rule 430B (§230.430B of this chapter):
(A) Each prospectus
filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the
filed prospectus was deemed part of and included in the registration statement; and
(B) Each prospectus
required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B
relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required
by section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of
the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of
securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any
person that is at that date an Underwriter, such date shall be deemed to be a new effective date of the registration statement
relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration
statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by
reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with
a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement
or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date;
or
(ii) If the Registrant
is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering,
other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed
to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however,
that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that
was made in the registration statement or prospectus that was part of the registration statement or made in any such document
immediately prior to such date of first use.
(5) That, for the purpose
of determining liability of the Registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the
securities, the undersigned Registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant
to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities
are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller
to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) Any preliminary
prospectus or prospectus of the undersigned Registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing
prospectus relating to the offering prepared by or on behalf of the undersigned Registrant or used or referred to by the undersigned
Registrant;
(iii) The portion of
any other free writing prospectus relating to the offering containing material information about the undersigned Registrant or
its securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication
that is an offer in the offering made by the undersigned registrant to the purchaser.
The undersigned
Registrant hereby undertakes to provide to the Underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification
for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit, or proceeding)
is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.