Xenetic Biosciences, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Xenetic is a clinical-stage biopharmaceutical company developing orphan oncology candidates and biologic-drug technologies. Its lead internal candidate is XBIO-101; its PolyXen platform is partnered with Shire. No candidate had regulatory approval, and the company reported no collaboration revenue for the quarter.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 / prior balance |
|---|---|---|
| Revenue | No collaboration revenue recognized | No collaboration revenue recognized |
| Research and development expense | $1.22 million | $0.43 million |
| General and administrative expense | $1.63 million | $1.42 million |
| Operating loss | $2.86 million | $1.85 million |
| Net loss | $2.87 million | $3.57 million |
| Loss per share, basic and diluted | $0.34 | $0.78 |
| Cash and restricted cash | $4.39 million | $4.11 million at Dec. 31, 2016 |
| Working capital | Approximately $4.2 million | Approximately $6.5 million at Dec. 31, 2016 |
| Total liabilities | $4.93 million | $4.80 million at Dec. 31, 2016 |
Operating cash flow was positive $0.28 million, compared with cash used of $1.77 million in Q1 2016. The 2017 result primarily reflected collection of a $3.0 million Shire milestone receivable, substantially offset by operating losses and approximately $0.6 million of net vendor prepayments. Investing cash use was $5,429; there were no financing cash flows. No hybrid debt instruments were outstanding at quarter-end, and interest expense was minimal. Margins are not meaningful because the filing reports no Q1 revenue.
Material changes and business developments
- R&D expense rose 184.5%, primarily due to XBIO-101 Phase 2 trial initiation, higher share-based compensation, and the Chief Scientific Officer’s appointment. Excluding share-based compensation, R&D increased approximately 78.5%.
- G&A expense increased 14.9%, mainly from personnel costs, share-based compensation, travel, and increased investor and public-relations activity.
- Net loss narrowed by approximately 19.8% year over year, despite the higher operating loss. Q1 2016 included a $1.58 million hybrid-debt issuance loss and substantial related interest expense; those instruments were settled in 2016.
- The $3.0 million Shire milestone was earned in December 2016 and received in January 2017; it was not Q1 revenue. Xenetic may qualify for further Shire milestones, with total potential milestones under the collaboration of up to $100 million plus royalties.
- Common shares outstanding were 8,652,541 at March 31, 2017. The company issued 125,397 shares to controlling stockholder Pharmsynthez in March in connection with conversion of its $500,000 note and accrued interest.
Outlook, risks, and contingencies
Management expected existing resources and anticipated first-half 2017 revenue to fund planned operations and commitments only through the first half of 2017, and said additional working capital would be needed in the near future. The company had no committed financing. Management stated that failure to raise capital could require cuts or suspension of development programs, reduced expenses, asset or rights dispositions, restructuring, or cessation of operations. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern.
Management expected continued losses. A possible additional 2017 Shire milestone depended on clinical-development outcomes and was not assured; even if received, management expected further capital would still be required. Xenetic was also seeking an out-license for ErepoXen but could not predict whether or when an agreement or revenue would result. Key risks include financing availability, clinical and regulatory outcomes, collaborator performance and milestone timing, and reliance on Shire, which accounted for more than 90% of milestone revenue received to date. No material changes to previously disclosed risk factors were reported. No material legal proceedings were reported.
Important facts for investors to verify
- Available cash, working-capital needs, and the timing, terms, and dilution of any future financing.
- Actual spending and enrollment progress in the XBIO-101 Phase 2 program; the filing anticipated recruitment would begin in Q2 2017.
- Shire’s SHP656 development progress and whether any further milestone conditions are achieved.
- Whether operating cash flow can be sustained without further milestone receipts, given the absence of recurring collaboration revenue and management’s going-concern warning.
- Share-count and dilution implications of outstanding warrants to purchase approximately 3.52 million shares, at a weighted-average exercise price of $4.30.