Exicure, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Financial statements are unaudited; amounts below are in millions of dollars except per-share data. Exicure is a clinical-stage biotechnology company developing Spherical Nucleic Acid (SNA) therapeutics and has no approved products or commercial product revenue.
Business context and notable corporate events
On September 26, 2017, private-company Exicure OpCo merged with Max-1 Acquisition Corporation in a reverse merger; Exicure OpCo was the accounting acquirer. Max-1 changed its name to Exicure, Inc. Legacy Exicure OpCo shareholders held approximately 94% of the combined company on a fully diluted basis immediately after closing.
After the merger, the company began a private placement at $3.00 per share. By November 13, 2017, it had sold 10.50 million shares for approximately $31.5 million gross, including $20.3 million at the initial September closing and $11.2 million in subsequent closings. Estimated placement fees and expenses were approximately $4.0 million; placement agents also received or were to receive warrants and shares. The offering included price-based anti-dilution protection for investors, subject to specified terms.
Financial results and position
| Metric | Three months ended Sept. 30 | Nine months ended Sept. 30 |
|---|---|---|
| Revenue, 2017 | $2.50 | $7.62 |
| Revenue, 2016 | $0 | $0.35 |
| Research and development expense, 2017 | $3.50 | $11.28 |
| General and administrative expense, 2017 | $1.27 | $4.81 |
| Operating loss, 2017 | $(2.28) | $(8.46) |
| Net loss, 2017 | $(2.31) | $(8.94) |
| Net loss, 2016 | $(3.53) | $(11.30) |
| Basic and diluted loss per share, 2017 | $(1.34) | $(48.73) |
Q3 2017 operating and net loss margins were approximately -91% and -93%, respectively; nine-month margins were approximately -111% and -117%. These ratios reflect collaboration revenue rather than product sales. Per-share comparisons are affected by the merger-related share conversion and significantly different weighted-average share counts.
All 2017 revenue was collaboration revenue from Purdue; it included $0.43 million of reimbursable research and development activity presented gross. The nine-month 2016 comparison included $0.35 million of government grant income and no Purdue revenue. No Purdue milestone revenue was recognized.
| Balance-sheet item | Sept. 30, 2017 | Dec. 31, 2016 |
|---|---|---|
| Cash and cash equivalents | $22.94 | $19.62 |
| Total current assets | $24.28 | $20.04 |
| Total assets | $25.37 | $20.58 |
| Total current liabilities | $10.53 | $12.16 |
| Long-term debt, including current portion | $5.22 | $5.67 |
| Total liabilities | $13.69 | $18.13 |
| Stockholders’ equity | $11.68 | $2.45 |
Cash was approximately 2.2 times current liabilities at quarter-end. Nine-month cash used in operating activities was $14.45 million, compared with $10.68 million in 2016; capital expenditures were $0.73 million. Financing provided $18.49 million, primarily from the initial offering, partly offset by debt repayment and financing costs. Cash increased $3.31 million to $22.94 million.
Debt principal outstanding was $5.40 million before unamortized discounts and issuance costs. The Hercules loan carries a floating rate with a 9.95% floor, is secured by substantially all tangible assets, and amortizes monthly through its September 2019 maturity. Scheduled principal maturities were $0.61 million for the remainder of 2017, $2.62 million in 2018 and $2.17 million in 2019.
Changes, outlook, risks and unusual items
- Q3 revenue rose from zero to $2.50 million, reflecting recognition of the Purdue upfront payment and reimbursed research activity. Nine-month revenue increased to $7.62 million from $0.35 million.
- R&D expense rose 45% in Q3 and 35% for the nine-month period, mainly from clinical development spending on AST-008, XCUR17 and AST-005. G&A rose 50% in Q3 and 76% for nine months. Nine-month G&A included approximately $1.1 million of legal and accounting costs for an abandoned potential public offering, $0.6 million of additional equity compensation and $0.2 million related to terminating a placement-agent contract.
- Despite higher expenses, net loss narrowed year over year, principally because of collaboration revenue. The nine-month period also included a $0.2 million gain from the termination and fair-value adjustment of preferred-stock warrants in connection with the merger.
- Management stated that quarter-end cash plus approximately $11.2 million gross proceeds from October and November offering closings was expected to fund current operating plans into 2019, excluding potential option exercises. This is an estimate, not a guarantee; management said additional financing may be needed and may not be available on acceptable terms.
- Development plans included expected late-2017 results from the AST-005 Phase 1b psoriasis trial; commencement of a Phase 1 XCUR17 trial in Germany in Q4 2017, with results expected in Q2 2018; and planned commencement of an AST-008 Phase 1 trial in the UK in Q4 2017, with results expected on a rolling basis. Timelines and outcomes are uncertain.
- The Purdue agreement provided a $10 million non-refundable development fee and potential milestone payments of up to $776.5 million, plus royalties from low single digits to a maximum of 10% on future net sales. These contingent amounts are not assured; Purdue controls development and commercialization decisions for collaboration candidates.
- Key risks include early-stage clinical and regulatory uncertainty, the lack of product revenue, continued cash burn and financing needs, dependence on Purdue and third-party research and manufacturing providers, intellectual-property risks, competition, and potential dilution. The company reported no material legal proceedings and no off-balance-sheet arrangements. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the stated funding runway into 2019 remains realistic against actual cash burn, trial costs and subsequent financing needs.
- Clinical progress, enrollment, safety and efficacy data, and timing for AST-005, XCUR17 and AST-008.
- Purdue’s option decisions and whether any research, regulatory or commercial milestones become achievable and payable.
- Final offering costs, placement-agent warrants and shares, anti-dilution provisions, and the status and timing of the promised resale registration statement.
- Hercules loan covenants, required amortization and maturity obligations, and the effect of debt on financing flexibility.
- Potential share dilution, including outstanding options and warrants, registered resale shares, and the impact of merger-related share-count changes on reported loss per share.