X4 Pharmaceuticals, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Financial amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and reporting period
X4 is a clinical-stage biotechnology company developing therapies for rare diseases. Its lead candidate, mavorixafor, is in Phase 3 development for WHIM syndrome; X4P-002 and X4P-003 were in preclinical development. On March 13, 2019, the company completed a reverse merger with Arsanis, with X4 treated as the accounting acquirer, and effected a 1-for-6 reverse stock split. As a result, prior-period results primarily reflect X4, while post-merger results include the combined company; comparisons are not fully like-for-like. The company had no approved products or product-sales revenue.
Key financial metrics
| Metric | Three months ended June 30, 2019 | Six months ended June 30, 2019 | Comparable 2018 period |
|---|---|---|---|
| Revenue | None | None | None in these statements |
| Research and development expense | $8.854 | $14.509 | $4.755 and $9.499 |
| General and administrative expense | $4.560 | $9.343 | $1.621 and $2.987 |
| Total operating expenses / operating loss | $13.414 / $(13.414) | $23.852 / $(23.852) | $6.376 / $(6.376) and $12.486 / $(12.486) |
| Net loss | $(13.383) | $(24.256) | $(6.034) and $(13.401) |
| Net loss per share, basic and diluted | $(1.02) | $(3.32) | $(14.83) and $(32.53) |
| Cash used in operating activities | Not presented quarterly | $(26.042) | $(11.965) for six months |
Gross margin and operating margin are not meaningful because the company had no product revenue. The lower loss per share versus 2018 largely reflects a much larger weighted-average share count following the merger and financing; net loss increased year over year.
- Liquidity at June 30: Cash and cash equivalents were $90.180; restricted cash was $5.461; combined cash, cash equivalents and restricted cash were $95.641. Current assets were $96.649 and current liabilities were $13.204.
- Debt: Principal outstanding was $26.717: $20.000 under the Hercules facility and $6.717 under FFG loans. Reported debt carrying value, including current and long-term portions net of discounts and accretion, was approximately $25.899. Total liabilities were $37.339.
- Cash flows and financing: Six-month financing cash inflow was $86.791, including $79.291 net proceeds from the April equity and warrant offering and $9.849 net loan proceeds. Investing cash inflow of $26.396 was primarily cash acquired in the merger.
- Other balance-sheet items: The company recorded $4.900 of acquired in-process R&D intangible assets and $27.109 of goodwill. It had a $1.708 Austrian R&D incentive receivable.
Material changes versus the prior comparable period
- Q2 R&D expense rose $4.099 million and first-half R&D expense rose $5.010 million, primarily from mavorixafor development and added research and development personnel and operations in Austria.
- Q2 G&A expense rose $2.939 million and first-half G&A expense rose $6.356 million, primarily due to merger-related and public-company professional costs, patent-related legal expenses and added personnel.
- First-half operating cash use increased to $26.042 million from $11.965 million. Cash balances rose substantially after the merger, April financing and June debt refinancing.
- The June Hercules refinancing increased the facility’s maximum borrowing capacity to $35 million. At closing, $20 million was outstanding, including $10 million rolled over and $10 million in new borrowings.
Outlook, management commentary, risks and unusual items
- Management expected June 30 cash and cash equivalents to fund forecast operating expenses, capital expenditures and debt service for at least 12 months from the August 6, 2019 financial statement issuance date. The company stated that additional capital would be needed beyond that period; funding availability and terms are uncertain.
- The pivotal 52-week 4WHIM Phase 3 trial began in June 2019, targeting at least 18 and up to 28 patients; top-line data were expected in 2021. The company planned to start mavorixafor trials in severe congenital neutropenia and Waldenström macroglobulinemia in 2019, with data expected in mid-2020 and the second half of 2020, respectively. Management expected R&D spending to increase.
- In July 2019, the company announced an Abbisko collaboration for mavorixafor combination oncology development in Greater China. It also licensed ASN500 to Evotec and the ASN200 and ASN300 programs to Bravos. Upfront payments and other financial terms are not clearly quantified in the filing text; the company said it was assessing the financial impact for Q3 accounting.
- The Hercules loan bears an 8.75% rate as of June 30, 2019, includes interest-only payments and then principal amortization, and matures July 1, 2023. It is secured by substantially all assets other than intellectual property, subject to stated exceptions, and includes liquidity and other covenants. The filing describes the start of amortization inconsistently: the debt note specifies principal payments beginning February 2022, while MD&A refers to interest-only payments through January 2022 and elsewhere says amortization begins in November 2021.
- The Hercules agreement requires repayment of FFG loans by December 31, 2019. Separately, the FFG settlement accelerated repayment, required a cash reserve of 70% of outstanding principal, and followed allegations of breaches of reporting and other obligations. The company reported covenant compliance at June 30. The MD&A contains a conflicting reference to a June 30, 2019 FFG repayment deadline.
- Other exposures include a CRO early-termination fee of up to $1.0 million for the WHIM trial, potential Genzyme milestones of up to $25 million and royalties, and reliance on a small number of third-party manufacturers. The company reported no material litigation and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the cash runway assumptions, projected clinical spending and timing or need for additional financing.
- Review the Hercules amortization schedule and confirm the FFG repayment deadline, given the inconsistent dates in the filing.
- Assess the impact of restricted cash, lender-accessible cash requirements, FFG reserve obligations and Hercules covenants on usable liquidity.
- Track 4WHIM enrollment and execution, the planned SCN and WM trial starts, and the stated data-readout timelines.
- Review the full economic terms and Q3 accounting for the Abbisko, Evotec and Bravos arrangements; the filing does not clearly state all payment amounts.
- Consider dilution from the April issuance, pre-funded warrants, Class A warrants and outstanding options; 12,430,434 common shares were outstanding as of August 2, 2019.