ADVANCED BIOMEDICAL TECHNOLOGIES, INC. Forward Looking Statements
This section of the report includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like: believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events. Actual results could differ materially from those anticipated in these forward looking statements as a result of any number of factors, including those set forth in this Quarterly Report, and in the Company's most recent Annual Report on Form 10-K filed onJanuary 29, 2021 . All written and oral forward-looking statements made in connection with this Quarterly Report on Form 10-Q that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given the uncertainties that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements, which apply only as of the date of this quarterly report. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or our predictions. Overview
The following discussion is an overview of the important factors that management focuses on in evaluating our businesses, financial condition and operating performance and should be read in conjunction with the financial statements included in this Quarterly Report on Form 10-Q.
The Company is subject to a number of risks similar to other companies in the medical device industry. These risks include but are not limited to rapid technological change, uncertainty of market acceptance of our products, uncertainty of regulatory approval, competition from substitute products and larger companies, the need to obtain additional financing, compliance with government regulation, protection of proprietary technology, product liability, and the dependence on key individuals. Our Business
We are engaged in the business of designing, developing, manufacturing and marketing of biomaterial internal fixation devices. We hold one Class III medical device permit from theNational Medical Products Administration of the PRC ("NMPA") for our product - polymer orthopaedic internal fixation screws, one Class II permit and one Class I permit. We hold four patents issued by theState Intellectual Property Office of the P.R.C . ("SIPO"). Our polyamide materials, their uses and manufacturing processes are protected by Patent No. ZL201511006236.7 and ZL971190739. Patent No. ZL201410647464.1 titled "Bone Fracture Plate Made of High Polymer Materials" and patent No. ZL201511005531.0 titled "Composite fiber, manufacturing method and orthopaedic binding wire" were granted to us in 2018 and 2020 respectively. Our polyamide materials are used in producing screws, binding wires, rods and related products. These products are used in a variety of applications including orthopaedic trauma, sports related medical treatment, or cartilage injuries, and reconstructive dental procedures. At this time, our company is the sole patent holder and market permit holder of PA technologies inChina , as well as the only company currently engaged in clinical trials, manufacturing and marketing for PA orthopaedic internal fixation devices in the PRC. Our products are made of a very unique material called PA6-P(MMA-CO-NVP)-HA ("PA"). Our PA products, such as screws, binding wires, rods, suture anchors and rib-pins consist of enhanced fibers and high molecular polymers which are designed to facilitate quick healing of complex fractures in many areas of the human skeletal system. 4
Our products offer a number of significant advantages over existing metal implants and the first generation of degradable implants (i.e. PLLA) for patients, surgeons and other customers including:
1. A notably reduced need for a secondary surgery to remove implant due to
post-operative complications, therefore avoiding unnecessary risk and expense
on all patient care;
2. Enhancing the performance of the materials by manufacturing them to be easily
fitted to each patient, forming an exact fit;
3. Improving the biological activity of materials. Clinical trial results have
shown that PA implants promote a progressive shift of load to the new bone
creating micro-motion and thereby avoiding bone atrophy due to 'stress
shielding';
4. Reducing the chance of post-operative infection;
5. Stimulate bone tissues to facilitate effective biological integration,
benefitting the regeneration of bone;
6. Ease of post-operative care i.e. no distortion during x-ray imaging;
7. Simple and cost-effective to manufacture.
Our products are designed to replace the traditional internal fixation device
made of stainless steel and titanium and overcome the limitations of previous
generations of products such as PLA and PLLA. Our laboratory statistics show
that our PA products have a higher mechanical strength, last longer in
degradation ratio and are more evenly absorbed form outer layer inwards as
compared with similar materials such as PLA and PLLA. Thus PA allows increased
restoration time for bone healing and re-growth. The Company's polymer
orthopaedic internal fixation screws received approval from the National Medical
Products Administration of the PRC ("NMPA") in April 2018 . We launched our sales
campaign at the end of our fiscal year ended October 31, 2019 and achieved a
milestone in the Company's history by generating revenue through the salesof our PA Screws.
NMPA Application Process and Approval for Polymer Screws
The Company first submitted its application for PA Screws to the NMPA (formerly the SFDA/CFDA) in 2008. The application has been withheld by the NMPA pending additional clinical trial cases. This is due to the amended NMPA regulations, which unlike previous regulations require the applicant to specify the position on the body where the clinical trial is carried out. Our amended NMPA application has specified the ankle fracture as the body part of our clinical trial. This is because bones around this part carry most of the body weight. Due to the uniqueness of our material, there were no established NMPA Product Standards that we could follow during our application process for our PA Screws. To establish our own Product Standards, the Company had been carrying out extra tests. The Company submitted its Product Standards and supplementary reports to the NMPA in 2014. InDecember 2016 , the Company received a notice from the NMPA requesting supplementary report as part of the review process. The Company completed the supplementary report and submitted it to the NMPA inJune 2017 .
In
Process of Human Trials
As ofApril 30, 2021 , for medical study and comparison purpose, the Company has completed a total of 83 successful clinical human trial cases, including 71 cases on ankle fractures and 57 successful PA Binding Wire trial cases. We have been conducting human trials at the 6 state level hospitals recognized by NMPA for clinical trials in different cities throughoutChina ; includingNanchang ,Changsha ,Luoyang ,Nanning andTianjin . The cities and provinces where our clinical trial hospitals are based will be the initial target regions on our marketing plan. These regions are both densely populated and have experienced high or above medium economic growth. The clinical trials for the Company's PA Screws have been completed with 100 percent success rate. Having gained NMPA approval for PA Screws, the Company is planning to start clinical trials on series of orthopaedic products the Company has developed using the same unique biomaterial. 5 Government Regulation
Medical implant devices/products manufactured or marketed by the Company inChina are subject to extensive regulations by the NMPA. Pursuant to the related laws and acts, as amended, and the regulations promulgated there under (the "NMPA Regulations"), the NMPA regulates the clinical testing, manufacture, labeling, distribution and promotion of medical devices. The NMPA also has the authority to request repair, replacement, or refund of the cost of any device manufactured or distributed by the Company. Under the NMPA Regulations, medical devices are classified into three classes (class I, II or III), the basis of the controls deemed necessary by the NMPA to reasonably assure their safety and efficacy. Under the NMPA's regulations, class I devices are subject to general controls (for example, labeling and adherence to Good Manufacturing Practices ("GMP") requirements) and class II devices are subject to general and special controls. Generally, class III devices are those which must receive premarket approval by the NMPA to ensure their safety and efficacy (for example, life-sustaining, life-supporting and certain implantable devices, or new devices which have not been found substantially equivalent to legally marketed class I or class II devices). The Company is classified as a manufacturer of class III medical devices. Current NMPA enforcement policy prohibits the marketing of approved medical devices for unapproved uses. Before a new device can be introduced into the market inChina , the manufacturer generally must obtain NMPA marketing clearance through clinical trials. Since the Company is classified as a manufacturer of Class III medical devices, the Company must carry out all clinical trials in pre-selected NMPA approved hospitals. Manufacturers of medical devices for marketing inChina are required to adhere to GMP requirements. Enforcement of GMP requirements has increased significantly in the last several years and the NMPA has publicly stated that compliance will be more strictly scrutinized. From time to time the NMPA has made changes to the GMP and other requirements that increase the cost of compliance. Changes in existing laws or requirements or adoption of new laws or requirements could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company will not incur significant costs to comply with applicable laws and requirements in the future or that applicable laws and requirements will not have a material adverse effect upon the Company's business, financial condition and results of operations. Regulations regarding the development, manufacturing and sale of the Company's products are subject to change. The Company cannot predict the impact, if any, that such changes might have on its business, financial condition and results of operations. Results of Operations
The "Results of Operations" discussed in this section merely reflect the
information and results of the Company for the period from
6 Revenues
Our revenue for the three and six months ended
Our management team is continuously looking for fundraising possibilities for sales and marketing expansion, product improvement, machinery upgrades, facility expansions and continuous research and development.
Estimate current production lines in full capacity
Our facility is located inShenzhen, China , which is built to meet the GMP standards. Our facility covers about 865 square meters, which includes the combined facilities of offices, laboratories, and workshops. There is one production line for the PA Screw and another production line for the PA Binding Wire. The annual production capabilities of each production line are 100,000 pieces for PA Screw, and 240,000 packs for the PA Binding Wires. Both production lines, at their maximum production capacities are capable of generating approximately$30,000,000 in annual revenue. Total Turnover Output Quantity (Max.) Price at ex-factory ($) ($) PA Screw 100,000 (piece) 180 18,000,000 PA Binding Wire 240,000 (pack) 50 12,000,000 Total: 30,000,000
We have established long term relationships with many hospitals and national distributors inChina . Ms.Hui Wang , the Company's CEO, has over 25 years' sales experience in medical distribution. Professor Shangli Liu, our chief medical advisor, is one of the highest ranked orthopedic doctors inChina as well as being highly renowned in the rest of the world. He will assist the Company in nationwide product promotion and joint projects with associated academic institutions and medical schools. During product development and clinical trial stages, we developed close relationships with many major national hospitals. We expect these relationships to boost our revenue generation.
- Patients - Advanced technology level
- Performance and price of the materials
China has gradually entered theOld Age Society . It is expected that there will be 245 million people over 60 years of age by 2020, and, according to the survey of 50 years old, the incidence of osteoporosis is as high as 60%, accompanied by osteoporosis, fracture, bone necrosis, disability and other diseases, resulting in continued high demand of orthopaedic implant medical devices. (Source: The UN;Shenwan Hongyuan Securities research report). 7
The Company has advantages and more opportunities over others competitors due to:
- No other similar patent registrations in
- We are the only company to receive market approval and permission to perform PA clinical trials by the NMPA to the best of our knowledge.
- We have a timing advantage over other Chinese companies; other companies would need to successfully complete preclinical testing for the NMPA in order to obtain clinical trial permits.
- Under new regulations by the NMPA, it will take at least 5-10 years for clinical trials of new materials.
- Our patented material enables us to rapidly diversify our product line according to market trend and demand.
Number of Hospitals at the end of
Statistic and Census report by theNational Health Commission of the People's Republic of China (March 2021) Increase / March 2021 March 2020 (Decrease) Total No. of Hospitals 35,519
34,349 1,170
Public Hospital 11,840 11,916 (76 )
Private Hospital 23,679 22,433 1,246
Hospital Rating
AAA 3,044 2,779 265
AA 10,483 9,805 678
A 12,300 11,266 1,034
Unrated 9,692 10,499 (807 )
In general, technological advancements and the marketing potential within Asia
are the biggest factors in driving significant growth within the global
orthopedic devices market. Another major factor that positively influences this
market is the growing number of aging baby boomers with active lifestyles. This
sector represents a large portion of the total population.
Cost of Sales
Cost of sales for the three and six months ended April 30, 2021 and 2020 were
$32 , ($116 ), $10,179 and $33,011 respectively. The main components of cost of
sales are expenses for attending exhibitions/trade shows and staff costs.
Gross Profits
Gross profits for the three and six months ended
Operating Expenses
Operating expenses for the three and six months ended
Research and Development
Research and development costs related to both present and future products are expensed as incurred. Total expenditure on research and development charged to general and administrative expenses for the three and six months endedApril 30, 2021 and 2020 were$56,647 ,$41,305 ,$123,453 and$98,085 . The main component of research and development costs is staff costs of the technical personnel on product improvements to enhance industrial design. We expect research and development expenses to grow as we continue to invest in basic research, clinical trials, product development and in our intellectual property. The Company will be working closely with medical institutions and research universities to expedite future clinical trials of upcoming series of polymer fixation devices, including Intramedullary Nailing Fixation, Binding Wires, Micromodule Screws & Plates, Maxillofacial & Craniofacial Plates, and Rib Pins. Marketing Strategy The Company has been conductingPre-Market Research before its PA Screws application was approved by the NMPA inApril 2018 . The research is intended to estimate the potential market success of the company's products that can be expected. The research also beyond the Company's initial market -China , and covers international markets. Based on the results of ourPre-Market Research and the positive feedbacks we have received from trade shows and industrial conferences, it is the Company's intention to apply for additional international regulatory approvals in due course. 8
The Company will market its products through a hybrid sales force comprised of a
managed network of independent regional distributors/sales agents (80%) and
direct sales representatives (20%) in
There are two ways the Company will generate revenue, 1) through our nationwide and regional distributors and 2) through our direct sales channels.
Impact of COVID-19 Outbreak
The Company's primary business is carried out through its subsidiary,
The Company has identified the following areas that had been adversely affected by COVID-19:
1. Operation: Our facilities in
lockdown, travel restrictions and quarantine requirements. This affected our
accounting and marketing departments mostly because a large number of staff
could not come back to office as they were not allowed to travel or have
14-day quarantine before they came back to work. Our operation gradually came
back to normal with the easing of COVID-19 restrictions in
third and fourth quarter of 2020.
2. Manufacturing: We had sufficient raw material stock for 2 months, however,
our production was affected by staff shortage and facilities closure during
lockdown.
3. Marketing: We launched our sales campaign in late 2019 and we generated
revenue the first time in the history of the Company at the end of 2019
fiscal year. Our sales and marketing plans were disrupted by COVID-19
pandemic because almost all the hospitals in
and non-essential operations were postponed or cancelled.
The Company has been working with its business partners and workforce through crisis planning, effective communication and co-operation to minimize the negative impact of the COVID-19 pandemic.
Other Income and Expenses
Total other (expenses) income, for the three and six months endedApril 30, 2021 and 2020 were ($75,939 ), ($89,318 ), ($159,341 ) and ($53,462 ) respectively. There was no significant changes in total other income and expenses for the three and six months endedApril 30, 2021 except that during the six months ended30 April 2020 , the Company received a Biomedical Incentive Award ofUS$125,566 from the government ofShenzhen Longgang District where our facilities are located, in recognition of the Company's achievement of obtaining a Class III medical device permit fromChina's NMPA. The remaining other expenses comprised mainly interest expenses with no significant differences between the relevant periods of 2021 and 2020. Finance Costs As ofApril 30, 2021 andOctober 31, 2020 , a stockholder and four related parties had loaned a total of$6,253,722 and$5,585,620 respectively to the Company as unsecured loans repayable on demand and interest is charged at 7% per annum on the amount due. Total interest expenses on advances from a stockholder and the related parties accrued for the three and six months endedApril 30, 2021 and 2020 were$75,678 ,$80,077 ,$148,696 and$160,331 respectively. As ofApril 30, 2021 andOctober 31, 2020 , the Company owed$345,027 and$308,031 respectively to the directors for advances made on an unsecured basis, repayable on demand. Total imputed interest expenses on advances from the directors, calculated at 5% per annum, recorded as additional paid-in capital amounted to$3,826 ,$3,407 ,$7,379 and$6,796 for the three and six months endedApril 30, 2021 and 2020 respectively. 9 Net Loss The net loss attributable to common stockholders for the three and six months endedApril 30, 2021 and 2020 were$189,089 ,$209,652 ,$361,133 and$273,441 respectively. We started to generate revenue at the end of our fiscal year from inception toOctober 31, 2019 before our sales campaign was disrupted by the COVID-19 pandemic, but we have to incur operating expenses for the upkeep of the Company and the clinical trials.
Liquidity and Capital Resources
We had a working capital deficit of$8,129,658 and$7,533,045 as ofApril 30, 2021 andOctober 31, 2020 respectively. Our working capital deficit increased as a result of the fact that we only started to market of our NMPA approved PA Screw inChina at the end of 2019 fiscal year, and the company has to put resources to market its products, complete the clinical trials of other products. Although we began to generate revenues at the end of 2019 fiscal year, our marketing campaign was disrupted by the COVID-19 pandemic and the revenue income was not sufficient. Our main source of financing during the year came in the form of PA Screws sales and loan from our related parties and stockholders. Cash Flows
Net cash used in operating activities was$662,072 and$206,897 in the six months endedApril 30, 2021 and 2020 respectively. This amount was attributable primarily to the net loss after adjustment for non-cash items, such as depreciation, loss on disposal of property and equipment, imputed interest on advances from directors, and stock-based compensation expenses. The change in operating assets and liabilities include inventory, other receivables and prepaid expenses and other payables and accrued expenses. In short, cash used in operating activities increased were a result of increased in operating loss, build-up of inventory, increment in other receivables and prepared expenses assets, and reduction in other payables and accrued expenses liabilities. Other items had no significant changes.
We recorded net cash used of$49,495 and$28,270 in investing activities in the six months endedApril 30, 2021 and 2020 respectively. This amount reflected purchases of property and equipment, primarily for research and development
to our facilities.
Net Cash Provided by Financing Activities
Net cash provided by financing activities in the six months endedApril 30, 2021 and 2020 was$510,621 and$240,265 respectively, which represented advances from a stockholder, directors and related parties, payment to operating lease with principal and interest. The significant increase in the cash provided by financing activities was loan from related parties which was the current financing source of the Company.
Operating Capital and Capital Expenditure Requirements
Our ability to continue as a going concern and support the commercialization of current products is dependent upon our ability to market our product while obtaining additional financing in the near term. We anticipate that such funding will be in the form of marketing of our products and equity financing from sales of our common stock. However, there is no assurance that we will be able to raise sufficient funding from the sale of our products and common stock to fund our business plan should we decide to proceed. We anticipate our sales revenue will not meet our financial needs in 2021 and we need to rely on advances from our related parties and stockholders in order to continue to fund our business operations.
We believe that our existing cash, cash equivalents atApril 30, 2021 , will be insufficient to meet our cash needs. Our minimum cash requirement for the next 12 months is projected to be$700,000 . This amount may increase if we decide to start clinical trials on new products. The management is actively pursuing additional funding and strategic partners, which will enable the Company to implement our business plan, business strategy, to continue research and development, clinical trials or further development that may arise. 10 We intend to spend more to support the commercialization of current products and on research and development activities, including new products development, regulatory and compliance, clinical studies, and the enhancement and protection of our intellectual property portfolio.
OFF-BALANCE SHEET ARRANGEMENTS
We do 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 are material to our investors. CRITICAL ACCOUNTING POLICIES The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including but not limited to those related to income taxes and impairment of long-lived assets. We base our estimates on historical experience and on various other assumptions and factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Based on our ongoing review, we plan to adjust to our judgments and estimates where facts and circumstances dictate. Actual results could differ from our estimates. We believe the following critical accounting policies are important to the portrayal of our financial condition and results and require our management's most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain.
1. Property and equipment
Property and equipment are stated at cost, less accumulated depreciation.
Expenditures for additions, major renewals and betterments are capitalized and
expenditures for maintenance and repairs are charged to expense as incurred.
Depreciation is provided on a straight-line basis, less estimated residual
value over the assets estimated useful lives. The estimated useful lives of
the assets are 5 years. 2. Inventories
Raw materials, work in progress and finished goods are stated at the lower of
cost and net realisable value. Cost comprises direct materials, direct labour
and an applicable proportion of production overheads. Production overheads are
allocated to inventories on the basis of normal operating capacity. Costs are
assigned to individual inventory items on weighted average costs basis. Net
realisable value is the estimated selling price in the ordinary course of
business less the estimated costs of completion and the estimated selling
costs. 3. Long-lived assets
In accordance with FASB Codification Topic 360 (ASC Topic 360), "Accounting
for the impairment or disposal of Long-Lived Assets", long-lived assets and
certain identifiable intangible assets held and used by the Company are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. For purposes of
evaluating the recoverability of long-lived assets, the recoverability test is
performed using undiscounted net cash flows related to the long-lived assets.
The Company reviews long-lived assets to determine that carrying values are
not impaired.
4. Fair value of financial instruments
FASB Codification Topic 825(ASC Topic 825), "Disclosure About Fair Value of
Financial Instruments," requires certain disclosures regarding the fair value
of financial instruments. The carrying amounts of other receivables and
prepaid expenses, other payables and accrued expenses, due to a stockholder,
directors and related parties approximate their fair values because of the
short-term nature of the instruments. The management of the Company is of the
opinion that the Company is not exposed to significant interest or credit
risks arising from these financial statements. 11
5. Government grant
Government grants are recognized when there is reasonable assurance that the
Company complies with any conditions attached to them and the grants will be
received.
6. Revenue recognition
Revenue from contract with customers is recognized when control of goods is
transferred to a customer, at an amount that reflects the consideration to
which the Company expects to be entitled in exchange for those goods. Control
is considered to be transferred when the customer has the ability to direct
the use of and obtain substantially all of the remaining benefits of that
good, generally on delivery of the goods.
Revenues are generated from manufacturing and supply of biomaterial internal
fixation devices, which are sold through its network of distributors/agents
and direct sales channels. Our performance obligations are satisfied at a
point in time. Our contracts have an anticipated duration of less than a
year.
Actual returns and claims in any future period are inherently uncertain and
thus may differ from our estimates. If actual or expected future returns and
claims are significantly greater or lower than the reserves that we have
established, we will record a reduction or increase to net revenue in the
period in which we make such a determination.
7. Stock-based compensation
The fair value of services received, as measured at the fair value of stock
granted at the grant date, is expensed in the statements of operations and
comprehensive loss with a corresponding increase in the common stock and
additional paid-in capital where applicable.
Where the shares are granted for services to be rendered over a period of
time, the fair value of the stock granted is accounted for as a prepayment
with a corresponding increase in the common stock and additional paid-in
capital where applicable. This prepaid stock-based compensation is amortized
as an expense on a straight-line basis over the period for which the services
are rendered.
Where, pursuant to an agreement, the stock of the Company is to be granted
for services being rendered, the fair value of the stock-based compensation
is credited to the stock-based compensation reserve which will be transferred
to common stock and additional paid-in-capital upon the actual granting of
the shares. The stock-based compensation would be amortized as an expense on
a straight-line basis over the period for which the services are rendered.
8. Income taxes
The Company accounts for income taxes under the FASB Codification Topic
740-10-25 ("ASC 740-10-25"). Under ASC 740-10-25, 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. 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. Under ASC 740-10-25, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized as income in
the period included the enactment date.
9. Research and Development
Research and development costs related to both present and future products
are expensed as incurred.
10. Foreign currency translation
The financial statements of the Company's subsidiary denominated in
currencies other than US $ are translated into US $ using the closing rate
method. The balance sheet items are translated into US $ using the exchange
rates at the respective balance sheet dates. The capital and various reserves
are translated at historical exchange rates prevailing at the time of the
transactions while income and expenses items are translated at the average
exchange rate for the year. All exchange differences are recorded within
equity.
RECENT ACCOUNTING PRONOUNCEMENTS
There has been no newly effective accounting pronouncement that has significance, or potential significance, to our consolidated financial statements.
The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoptions of any such pronouncements may be expected to cause a material impact on the financial condition or the results of operations. The Company will carefully analyze these recently accounting pronouncements and take action to adopt them as required. 12
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