RGC: CEO Figuratively Putting His Money Where His Mouth Is

By Beth Senko, CFA

NASDAQ:RGC

Investors have faced challenging and volatile markets so far in 2022 as they sort through issues of inflation, supply chain disruption, continued covid issues, rising interest rates, and the disruption of the war in Ukraine. The S&P 500 has come close to bear market levels, down 19% in mid-June.

Times of turbulence affect all stocks, large and small. It can be particularly challenging for pre-revenue microcap stocks, where the volatility is often magnified by small changes in perception, whether driven by news or technical trading signals.

We first wrote on Regencell Bioscience RGC and its preliminary trials for ASD/ADHD, in November 2021. At that time, the stock was trading around $20/share. It rose to $40 by mid-February 2022, before dropping back to the low 20s in early April.

While the overall markets continue to be weak, RGC's share price has performed well since April. Shares have since recovered to the high-$30s to $40. In our view, RGC's recent share price recovery stems from encouraging study results for Regencell's RGC-COV19^TM Traditional Chinese Medicine (TCM) formula for treating COVID-19 symptoms, frequent shareholder communication, and support for the shares in the market.

Management's commitment to meet Regencell's strategic goals

Founded in 2014, Hong Kong-based Regencell Bioscience is an early clinical stage bioscience company using traditional Chinese medicine (TCM) approach to develop standardized TCM formulas to holistically treat autism spectrum disorder (ASD) and attention deficit hyperactivity disorder (ADHD) in children, and infectious diseases which affects the immune system such as COVID-19.

The formulae candidates aim to address the fundamental causes of disorders while alleviating symptoms and improving overall health at the same time. Taking a holistic approach, RGC's TCM uses natural ingredients to treat different elements in the body and every bodily function is taken into consideration when preparing the TCM formulae for patients.

Unlike some early-stage companies, where it can be difficult to parse the many ways in which founders and executives may benefit whether or not the company succeeds, RGC has taken a more transparent approach that is well-aligned with shareholders' long-term interests.

• Chairman and CEO support. Since RGC's incorporation in October 2014 up to the IPO, the Company has been fully funded by its Chairman and CEO, Mr. Yat-Gai Au.

◦ Upon the IPO, the Chairman's loan of USD $3.25 million, was converted into ~342,000 common shares at the initial offering price of USD $9.50.

◦ Pledged to not draw salary and bonus of more than USD $1 until the Company reaches USD $1 billion market capitalization;

◦ Will not award share options for himself;

◦ Since the IPO, RGC's Chairman and CEO has purchased over USD $5 million in common shares on the open market. Most recently, he purchased 49,010 shares (~ USD $1.1 million) between April 1 and May 16, 2022, bringing his ownership to 81% of outstanding shares (~10.5 million).

• Billionaire investor backing. Samuel Chen, a successful early Zoom Video Communications ZM investor is one of the major backers of RGC. Last reported 13G filing shows he holds a 7.63% stake in the company.

• Stock option lock-up extended. All directors and employees who were previously granted stock options upon the Company's IPO have agreed to a further lock-up undertaking for a period of six months after their stock options become vested. As their stock options are set to vest on July 16, 2022, their shares will remain locked up until January 16, 2023.

• Royalties. Under the agreement with their strategic partner and TCM practitioner, Mr. Sik-Kee Au, creator of the original TCM formulae that form the basis of RGC's intellectual property, RGC will pay 3% of net revenue, which will in turn be donated to charitable institutions/trusts at the choice of the TCM Practitioner.

Recent news and upcoming catalysts

On May 18, 2022, RGC announced a follow-on study of its investigational liquid formula RGC-COV19^TM in the elimination for COVID-19 symptoms (EARTH-B Trial). The follow-on study built on the promising results reported in the first EARTH trial (EARTH-A Trial), conducted in 2020-2021. Across the two trials, 95.5% of subjects (n=81), reported complete symptom alleviation within six days following treatment, (except for loss or reduce of sense of smell and/or taste (Sensory Dysfunction) or occasional cough).

In the next few months, RGC expects to report data from its second clinical study of its standardized TCM formula for the treatment of ASD and ADHD.

Regencell Bioscience's first clinical trial was designed to establish benchmarks for treatment, dosing, adverse effects (AEs) and measuring patient response in a systematic and repeatable way. The study, conducted in 2018-2019, included seven adolescents, aged five to eleven, with professionally-diagnosed ASD or ADHD. After discontinuing any current therapies and medication, subjects received a customized version of the TCM formula for up to three months. Patients' responses were measured through parental interviews and four validated assessment instruments including the Autism Treatment Evaluation Checklist (ATEC), Gilliam Autism Rating Scale (GARS), Vanderbilt ADHD Diagnostic Parent Rating Scale (VADRS) and Pelham (SNAP)-IV 26-item Parent Rating Scale (SNAP-IV-26). All seven patients showed a lessening of symptoms during the treatment period across all four scales.

The second clinical study evaluates response to three standardized mixtures of the TCM formula (for mild, moderate and severe impairment) on children in the same age group. The study design calls for twice daily dosing for three to 12 months, weekly practitioner meetings and monthly assessments. The results will be used to file for proprietary Chinese medicine (pCm) registration in Hong Kong making the product available to for sale in other clinics as well as over the counter.

Regencell is focused on its clinical studies in order to corroborate its results. These efforts will lead to the building of manufacturing and supply chain infrastructure required to gain pCm registration. Regencell Bioscience has a four-year timeframe to commercialize its standardized formulations and gain pCm registration in Hong Kong. The Company has a number of tasks ahead:

• Completing its second clinical trial and evaluating results.

• Conducting additional clinical trials to support its proprietary formulae in ASD/ADHD and other applications.

• Obtaining patents and other forms of IP protection in Hong Kong and other markets.

• Establishing manufacturing capability and supply chain that will meet registration requirements.

• Assembling and filing documentation for pCm approval.

• Build out its marketing and distribution strategy and infrastructure.

RGC's steady share price ascension in recent weeks may be a sign of greater things to come as its moves towards commercialization, we are encouraged by its thoughtful, systematic approach to developing its therapies, and communicating its progress to shareholders.

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