Xenetic Biosciences, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015. The company is a clinical-stage biopharmaceutical business developing drug-delivery platforms and drug candidates; it reported no commercial products or revenue.
Financial results and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development expense | $0.82 million | $1.91 million | $2.41 million | $3.50 million |
| General and administrative expense | $2.98 million | $1.20 million | $4.72 million | $5.20 million |
| Operating loss | $3.80 million | $3.11 million | $7.13 million | $8.71 million |
| Net loss | $5.32 million | $3.18 million | $8.88 million | $10.00 million |
| Net loss per share | $0.04 | $0.02 | $0.06 | $0.07 |
- For the nine months, operating cash use was $4.19 million, versus $10.02 million in 2014. Financing activities provided $3.00 million, primarily from the July note; cash declined by $1.26 million to $1.25 million. Investing cash flow was approximately zero.
- At September 30, cash was $1.25 million, total current assets $1.51 million, current liabilities $6.11 million, and working capital deficit approximately $4.6 million. Total assets were $14.25 million, total liabilities $9.07 million, and stockholders’ equity $5.18 million.
- The July 2015 financing was a $3.0 million, one-year, 10% senior secured convertible note, convertible at $0.15 per share, with warrants to purchase 10 million shares and a contingent additional warrant. The balance sheet reports a $2.81 million hybrid debt instrument. Its embedded derivative liability was $2.76 million at September 30; remeasurement generated a $1.34 million nine-month loss.
- No meaningful revenue or profit margin was reported. The company incurred no income tax provision. Nine-month share-based compensation was $2.29 million.
Changes versus prior periods
- Q3 net loss increased 67% from 2014, despite lower R&D spending, as G&A rose 148%—mainly from share-based compensation—and the company recorded a $1.34 million derivative remeasurement loss and higher interest expense.
- Nine-month net loss improved 11% and operating loss improved 18%, principally with lower R&D and G&A costs. R&D reductions included a planned deferral of OncoHist preclinical/IND-enabling work because of working-capital constraints. The 2014 comparison included a $1.07 million loss on disposal of subsidiaries, absent in 2015.
- Cash fell from $2.51 million at year-end 2014 to $1.25 million. Current liabilities rose from $2.70 million to $6.11 million, including the new hybrid debt instrument.
Outlook, risks, and unusual items
- Management stated that additional working capital was required to meet obligations over the next 12 months and that the conditions raised substantial doubt about the company’s ability to continue as a going concern. The filing provides no assurance that planned financing will close.
- After quarter-end, the company signed an agreement to acquire worldwide Virexxa development, marketing, and licensing rights, subject to specified geographic/use exclusions. Consideration includes 111.5 million common shares, consisting of 100.5 million shares to Pharmsynthez and 11 million shares for assignment of a U.S. provisional patent application. The agreement also contemplates up to $3.5 million in 10% notes and a further $6.5 million investment tied to a planned capital raise. Management described total contemplated financing of $18.5 million, including at least $8.5 million from other public-offering proceeds; completion and funding were conditional.
- The November agreement was expected to close in Q4 2015. If the other offering proceeds were not raised, management said the resulting $10 million financing could require further fundraising or R&D deferrals. The filing gives no firm revenue or earnings guidance.
- Management did not expect significant collaboration receipts within the next 12 months; potential Baxalta payments depend on clinical-development milestones. ErepoXen out-licensing income was not expected before Q1 2016 at the earliest and was uncertain.
- Other items include a disputed trade payable of approximately $485,000; a $395,000 related-party SynBio loan with collections deferred until the earlier of January 31, 2016 or completion of a $7 million financing; and an increase in authorized common shares to 1.5 billion. The company reported no material legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the Virexxa asset purchase and related bridge-note tranches closed, and whether the planned public offering and total financing were completed on the stated terms.
- Available cash, operating cash burn, debt maturities and note conversion/redemption terms, including the impact of derivative remeasurement and potential warrant dilution.
- Whether the disputed $485,000 payable and SynBio loan were resolved or became due, and whether additional working capital was secured.
- Clinical and regulatory progress, including the effects of deferred OncoHist work, and whether collaboration or out-licensing milestones produce cash receipts.
- The dilution and ownership effects of the 111.5 million proposed Virexxa-related shares, the 1.5 billion authorized-share capacity, and outstanding warrants and equity awards.