Xenetic Biosciences, Inc. — Q1 2016 Form 10-Q
Business and period. Clinical-stage biopharmaceutical company developing drug candidates and delivery platforms, including ErepoXen, Virexxa, OncoHist and ImuXen. This report covers the three months ended March 31, 2016; the financial statements are unaudited. No candidate had received marketing approval, and the company recognized no collaboration revenue in Q1 2016 or Q1 2015.
Financial performance and position
- Revenue and margins: No revenue was reported. Operating margins are not meaningful for the period.
- Operating costs: R&D expense was $429,281, down 58.5% year over year, primarily because of working-capital constraints and reduced program spending. G&A expense rose 52.1% to $1.42 million, reflecting higher share-based compensation and legal and consulting costs, including costs related to the asset purchase and planned offering/uplisting.
- Loss: Operating loss was $1.85 million versus $1.97 million. Net loss increased 46.9% to $3.57 million from $2.43 million, including a $1.58 million loss on issuance of hybrid debt and $245,384 of interest expense. Basic and diluted loss per share was $0.02 in both periods.
- Cash flow: Operating cash use was $1.77 million, compared with $2.04 million in Q1 2015. Financing provided $3.26 million net, principally from $3.5 million of convertible debt proceeds, partly offset by $237,048 in related-party loan payments. Ending cash was approximately $1.61 million, up from $132,229 at year-end.
- Liquidity and debt: Working-capital deficit was approximately $4.7 million, versus $3.2 million at December 31, 2015. Current liabilities were $10.35 million, including $7.00 million of hybrid debt, net; total liabilities were $13.30 million. Management said additional working capital was needed to meet obligations for the next 12 months and disclosed substantial doubt about the company’s ability to continue as a going concern without financing.
- Other balance-sheet items: Total assets were $18.36 million and stockholders’ equity was $5.06 million at March 31, 2016. Restricted cash was $66,510.
Changes, transactions and outlook
- On April 29, 2016, after quarter-end, the company closed the Virexxa asset purchase, acquiring specified intellectual property and worldwide development, marketing and licensing rights for certain uses.
- At closing, it issued Pharmsynthez 100.5 million shares for the asset purchase and 45,310,156 shares to convert $6.5 million of convertible-note principal plus approximately $300,000 of accrued interest, at $0.15 per share. These 145,810,156 shares represent substantial dilution; they were not reflected in March 31 share balances.
- Management described a planned $18.5 million financing package: $3.5 million of notes already drawn, a proposed additional $6.5 million Pharmsynthez investment and at least $8.5 million from a public offering. The company said proceeds were expected to fund operations for 12 months, but stated there was no assurance the financing would close on commercially reasonable terms. If a national exchange listing could not be achieved, Pharmsynthez was to provide up to $6.5 million as a loan; the company said this could still require further financing or deferred R&D.
- The company expects to continue relying on equity or equity-linked financing. It did not expect significant collaboration receipts within the next 12 months; potential Baxalta payments depend on development outcomes. Timing and proceeds from prospective out-licensing were also uncertain.
- Key risks include continued funding needs, clinical and regulatory uncertainty, dependence on collaborations and financing counterparties, and the fact that all drug candidates remain in development. The filing reported no material legal proceedings and no material change to the risk factors referenced in its May 9, 2016 Form S-1.
Important facts for investors to verify
- Whether the planned public offering and Pharmsynthez funding commitment were completed, and the resulting cash runway and going-concern position.
- The post-April transaction share count, fully diluted ownership and effects of the large share issuance and note conversion.
- The terms and status of the Virexxa rights acquired, including any excluded territories or uses and subsequent development plans.
- Whether R&D reductions affected clinical timelines, particularly ErepoXen and Virexxa, and whether any collaboration milestones or out-licensing proceeds became probable.
- The hybrid debt’s remaining balance and terms at March 31, and how the subsequent conversion affected liabilities and future interest expense.