Xenetic Biosciences, Inc. — Form 10-Q Summary
Reporting period: Three months ended November 30, 2013. The company was then operating a helicopter rental business and developing an online advertising business; the proposed acquisition of Xenetic Biosciences plc had not closed. The interim financial statements are unaudited.
Financial results and position
| Metric | Three months ended Nov. 30, 2013 | Comparable 2012 period |
|---|---|---|
| Revenue, net of cost of sales | $2,169 | $32,964 |
| Operating expenses | $78,936 | $44,246 |
| Operating loss | $(76,767) | $(11,282) |
| Interest expense | $(5,695) | $(3,197) |
| Net loss | $(82,462) | $(14,479) |
| Basic and diluted loss per share | $(0.00) | $(0.001) |
| Net cash used in operating activities | $(173,144) | $0 |
Revenue fell approximately 93%, primarily because the helicopter was out of service for its required overhaul. Professional fees rose to $60,608 from $7,245; depreciation and amortization rose to $18,283 from $5,313. The filing does not provide a clear operating-margin measure beyond the reported operating loss.
At November 30, 2013, cash was $40,078, current assets were $53,404, and current liabilities were $340,716, resulting in a $287,312 working-capital deficit. Total assets were $448,987; total liabilities were $713,529; and stockholders’ deficit was $264,542. Debt included a $212,813 aircraft note at 6% and a $160,000 line-of-credit draw at 9.5%; accrued interest was $32,078.
Cash declined by $13,144 during the quarter: $160,000 of financing proceeds partly offset operating cash use. Cash paid for interest and taxes was reported as zero. The company had 135 million common shares outstanding at November 30, 2013.
Material developments, outlook, and risks
- The company expected the helicopter overhaul to finish before the end of January 2014, with approximately $40,000 of additional costs anticipated. Management was negotiating a new lease at $200 per hour, with a 40-hour monthly minimum; the agreement was not described as signed.
- The company proposed acquiring all of Xenetic Biosciences plc through a UK scheme of arrangement. On December 17, 2013, the required shareholder resolutions passed, including support representing 99.9% by value of the shares held by shareholders who voted. Court sanction and confirmation of a related capital reduction remained outstanding; the hearing was expected January 23, 2014. Completion was not assured.
- Under a related “Hive Out” agreement, major shareholder Oxbridge was to receive the company’s aircraft and advertising subsidiaries and $430,000 in cash in exchange for cancellation of its 100 million shares, subject to the acquisition becoming effective. The proposed acquisition was expected to issue about 130.5 million shares to Xenetic plc shareholders; a planned 1-for-10 reverse split and share cancellation were also contemplated.
- Management explicitly cited recurring losses, negative working capital, expected negative cash flows, and dependence on financing or equity sales as raising substantial doubt about the company’s ability to continue as a going concern. The financial statements include no related going-concern adjustments.
- Disclosure controls were reported as not effective because of limited staffing, inadequate segregation of duties, and reconciliation and control procedures not regularly performed. A later passage in the controls discussion says controls were effective at a reasonable-assurance level, creating an apparent inconsistency.
- No pending legal proceedings or off-balance-sheet arrangements were reported. The filing says quarterly results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether the court approved the scheme and the acquisition, subsidiary transfer, cash payment, share issuance, reverse split, and cancellation of Oxbridge’s shares were completed as described.
- Whether the helicopter overhaul was completed on schedule and within the expected additional cost, and whether the proposed lease was executed and generated the anticipated revenue.
- How the company funded its substantial operating cash needs and working-capital deficit, and whether it made scheduled interest payments and other debt obligations.
- The status of the disclosed control weaknesses and the conflicting statements about control effectiveness.
- The filing gives the latest-practicable-date share count as “135,000,000 as of January 3, 2013,” which predates this report; investors should confirm the intended date and current share count.