Onconetix, Inc. quarterly report, Q2 FY2023

Onconetix, Inc. — filing identity and period

Important identity note: The supplied filing is a Form 10-Q for the quarter ended June 30, 2023, filed October 20, 2023, under the name Blue Water Biotech, Inc. It does not identify Onconetix, Inc. as the registrant. Verify that this is the intended filing. The company changed its name from Blue Water Vaccines Inc. to Blue Water Biotech in April 2023.

Business context

The company historically focused on preclinical vaccine research and development. In April 2023 it acquired the FDA-approved ENTADFI product for benign prostatic hyperplasia and began building commercialization capabilities. No segment had generated revenue through June 30, 2023. In the third quarter, the company paused vaccine development activities to focus on ENTADFI commercialization.

Financial results and condition

The company reported no product revenue, so gross profit and gross margin are not applicable. The second-quarter net loss included a $3.5 million impairment of the WraSer acquisition deposit and approximately $0.2 million of interest expense on ENTADFI-related notes.

At June 30, 2023, cash was $9.22 million, working capital was approximately negative $0.7 million, and accumulated deficit was $29.1 million. Total assets were $29.75 million and total liabilities were $16.67 million. Notes payable had a net carrying value of approximately $13.16 million: $8.62 million current and $4.54 million long-term.

For the first six months, operating cash use was $6.23 million, investing cash use was $10.04 million, and financing cash use was $0.26 million, leaving cash down $16.53 million from year-end 2022. Investing outflows included $6.08 million for ENTADFI-related acquisition costs and the $3.5 million WraSer deposit. The filing states that substantial additional capital is required and that substantial doubt about the company’s ability to continue as a going concern is not alleviated by management’s plans.

Material changes versus prior comparable periods

• Second-quarter operating expenses rose 54.8% and net loss widened 61.0% year over year, principally because of the $3.5 million WraSer deposit impairment. Excluding that impairment, operating expenses were lower than in the prior-year quarter.
• For the first half, operating expenses rose 49.2% and net loss widened 53.3%, also primarily reflecting the WraSer impairment. SG&A fell 11.9%, while R&D increased 10.3%.
• Cash fell from $25.75 million at December 31, 2022, to $9.22 million at June 30, 2023. The company also added substantial debt associated with acquiring ENTADFI.
• The ENTADFI acquisition added $1.17 million of inventory and a $17.91 million intangible asset. Initial consideration was $20 million, including $6 million paid at closing and three non-interest-bearing notes with $14 million aggregate principal before subsequent amendments. The agreement also includes up to $80 million in sales-based milestone payments and assumed a 6% royalty and up to $22.5 million of sales milestones payable to Camargo.

Outlook, risks, contingencies, and unusual items

• Funding and going concern: Management expects continuing losses and needs significant additional capital for operations, ENTADFI commercialization, and contractual obligations. No further financing commitments were in place; financing may not be available on acceptable terms or at all.
• WraSer: The company paid a $3.5 million deposit for a proposed acquisition. WraSer filed for Chapter 11 bankruptcy in September 2023; the company later cited manufacturing problems it believed constituted a material adverse effect and said closing may not occur. Recovery of the deposit is considered unlikely because the company is an unsecured creditor. The filing recorded the full impairment in the quarter ended June 30.
• ENTADFI obligations and dilution: A September 2023 amendment satisfied the $4 million note originally due September 30 through a $1 million cash payment and 3,000 Series A preferred shares. Those preferred shares were initially convertible into approximately 5.71 million common shares, subject to adjustment and shareholder-approval limitations. The remaining $10 million of notes was scheduled for 2024.
• Commercial execution: ENTADFI had not yet been successfully commercialized. Launch depends on market acceptance, payer and wholesaler arrangements, licensing, distribution, and third-party manufacturing. The company has no internal manufacturing capability and identifies reliance on single-source suppliers as a risk.
• Subsequent financing and commitments: In August 2023, a warrant exercise inducement transaction generated approximately $2.3 million net proceeds and issued replacement warrants. A commercialization services agreement with fees of up to $29.1 million and a separate data-services agreement were terminated in October; disclosed remaining obligations included a $0.28–$0.69 million termination fee and approximately $0.72 million of subscription fees.
• Governance and controls: The company disclosed personal expenses charged by its former CEO and an accounting employee. A $422,000 reserve was recorded against related-party receivables; the former CEO later repaid a $315,000 net balance and the CBO repaid her balance. The company said the amounts did not require restatement of prior financial statements, but disclosed potential Section 13(k) concerns. Disclosure controls were ineffective, with material weaknesses involving segregation of duties, expense approvals, fraud-risk assessment, monitoring, staffing, IT controls, journal entries, and related-party reporting. Remediation was underway but not established as complete.
• Other risks: Nasdaq notified the company in September 2023 that its stock price did not meet the $1.00 minimum bid-price rule; it had until March 16, 2024, to regain compliance. The filing also says late filing made the company ineligible to file new Form S-3 registration statements. No formal financial guidance was provided.

Most important facts for investors to verify

• Confirm the registrant and ticker: the supplied filing is for Blue Water Biotech, Inc. (BWV), not Onconetix, Inc.
• Review current cash, cash burn, financing availability, and the timing and terms of remaining ENTADFI acquisition payments.
• Check the status and recoverability of the $3.5 million WraSer deposit and any related bankruptcy claims or court proceedings.
• Assess ENTADFI launch progress, actual sales, payer access, manufacturing supply, distribution, and the economics after royalties and milestone obligations.
• Track conversion or other treatment of the Series A preferred shares, warrant dilution, and compliance with Nasdaq listing requirements.
• Confirm whether the disclosed internal-control weaknesses have been remediated and whether subsequent reviews identified further related-party or reporting issues.