Xenetic Biosciences, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. The unaudited statements reflect the January 2014 reverse acquisition of Xenetic UK; Xenetic UK is the accounting acquirer and the historical financial statement predecessor. Xenetic is a clinical-stage biopharmaceutical company developing drug candidates using its PolyXen, OncoHist and ImuXen platforms. No candidate had received marketing approval.
Key financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $0 | $1.0 million | $0 | $1.0 million |
| Research and development | $1.03 million | $0.96 million | $1.60 million | $1.58 million |
| General and administrative | $1.61 million | $1.08 million | $4.00 million | $1.96 million |
| Operating loss | $2.64 million | $1.03 million | $5.60 million | $2.53 million |
| Net loss | $2.76 million | $0.94 million | $6.82 million | $2.31 million |
| Net loss per share, basic and diluted | $0.02 | $0.01 | $0.05 | $0.02 |
Gross margin was not meaningful in 2014 because there was no revenue or cost of revenue. The 2013 revenue was a one-time $1 million Baxter license fee. No income tax provision was recorded.
- Liquidity at June 30: Cash of $7.61 million, restricted cash of $66,000, current assets of $8.29 million, current liabilities of $2.12 million and working capital of approximately $6.2 million. Cash was $4.84 million and working capital approximately $1.7 million at December 31, 2013.
- Cash flows, six months: $7.05 million used in operating activities; $464,000 used in investing activities, including the $430,000 Hive Out payment; and $10.10 million provided by financing. Financing included Baxter’s $10 million share investment and approximately $102,000 from option exercises. Ending cash was $7.61 million.
- Debt and obligations: $626,000 owed under a related-party loan from SynBio was classified as current; the company paid $286,042 against it in July 2014. The filing also reports a $66,000 lease letter of credit and lease obligations. A clear consolidated total-debt figure is not provided.
Material changes and transactions
- Net loss for the first half more than doubled year over year, reflecting the absence of the prior-year Baxter fee, higher G&A, a $1.07 million loss on disposal of subsidiaries, and foreign-exchange expense. First-half G&A rose 104%, largely due to costs of transitioning to a U.S.-based public company, including accounting, legal, regulatory and investor-relations expenses, as well as share-based compensation.
- R&D spending was nearly flat for the first half, but activity shifted from the U.K. to the U.S. as the company opened a U.S. lab and closed its U.K. lab. Spending on outside services and contract research organizations increased.
- Baxter invested $10 million for approximately 10.7 million common shares in January 2014. Its collaboration offers up to $100 million in potential development, regulatory, sales and deadline-extension payments, plus potential royalties; all are contingent, and no collaboration revenue was recognized in the first half of 2014.
- The reverse acquisition was followed by the Hive Out Agreement: the company transferred its former operating subsidiaries to Oxbridge, paid $430,000 and received 10 million shares back, which were recorded as treasury stock and subsequently canceled. The disposal generated the reported $1.07 million loss.
Outlook, risks and unusual items
Management estimated that available working capital would fund its current business plan only to the middle of the first quarter of 2015. The filing states that this raises substantial doubt about the company’s ability to continue as a going concern beyond that period. Management planned to raise capital by the end of 2014 through debt, equity or a combination, but had no financing commitment and gave no assurance of success or acceptable terms. Failure to raise funds could require reduced overhead, deferred R&D and delayed clinical services.
Management planned accelerated spending, particularly through external providers, to pursue a key preclinical milestone. The company expected 2014 operating cash use to exceed 2013 levels and did not expect significant revenue or milestone receipts during 2014. Development plans included preclinical work supporting a planned OncoHist AML IND filing in late 2014 or early 2015; timing and outcomes are uncertain. ErepoXen was in Phase II trials in Australia and New Zealand, and a MyeloXen trial was ongoing in Russia. The Baxter, SynBio and Serum Institute collaborations had produced no commercial products as of June 30.
Key risks include financing needs, clinical and regulatory uncertainty, dependence on collaboration partners and external suppliers, product safety and efficacy, competition, and foreign-exchange movements. The filing reported no material legal proceedings and no material changes to internal control over financial reporting; management considered disclosure controls effective at a reasonable-assurance level. The company was a smaller reporting company and did not provide the market-risk disclosures otherwise called for in that item.
Important facts for investors to verify
- Whether the company secured additional financing before its projected first-quarter 2015 cash shortfall, and the resulting terms and dilution.
- Actual cash burn and remaining liquidity, particularly given planned accelerated development spending and no expected 2014 milestone receipts.
- Progress and timing of the OncoHist preclinical program and planned IND, and clinical progress for ErepoXen and MyeloXen.
- Whether contingent Baxter milestones or royalties become payable, and the status of other collaboration programs.
- Common-share count and potential dilution: the filing reports 136,052,498 shares outstanding at June 30, while its cover reports 146,740,692 as of August 14, 2014; reconcile this difference and the treatment of treasury shares and subsequent issuances.
- Final acquisition accounting and the carrying values of goodwill and OncoHist in-process R&D; acquisition allocations were provisional, and these assets are subject to impairment assessment.