Xenetic Biosciences, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. The filing was signed November 14, 2016. Xenetic is a clinical-stage biopharmaceutical company developing drug-delivery platforms and oncology candidates, including Virexxa, OncoHist and ErepoXen. No candidate had regulatory approval, and the company recognized no collaboration revenue in the nine-month periods presented.
Financial performance and position
| Metric | Q3 / September 30, 2016 | Comparable period / prior balance date |
|---|---|---|
| Revenue | None reported | None reported in the comparable nine-month periods |
| Net loss | $2.47 million for Q3 | $5.32 million for Q3 2015 |
| Net loss, nine months | $53.81 million | $8.88 million for nine months 2015 |
| Operating loss, nine months | $47.37 million | $7.13 million for nine months 2015 |
| Cash used in operations, nine months | $4.16 million | $4.19 million for nine months 2015 |
| Cash and restricted cash | $211,896 cash; $66,510 restricted cash | $132,229 cash; $66,510 restricted cash at December 31, 2015 |
| Total liabilities | $7.91 million | $10.30 million at December 31, 2015 |
Q3 loss per share was $0.28, compared with $1.26 in Q3 2015. For the nine months, loss per share was $7.54, versus $2.10. Profit margins are not meaningful given the absence of revenue and continuing losses.
Current assets were $1.21 million and current liabilities were $4.97 million. The balance-sheet amounts imply a working-capital deficit of approximately $3.76 million; MD&A separately describes the deficit as approximately $3.5 million. The filing does not reconcile this difference. Current liabilities included $1.14 million of hybrid debt and $153,000 due to related parties. Total assets were $13.87 million and stockholders’ equity was $5.95 million.
Changes versus prior periods and unusual items
- Q3 net loss narrowed by about 54%, primarily alongside a $1.62 million decrease in general and administrative expense. Research and development expense rose 9% to $892,000, which management attributed mainly to initial scaling of Virexxa clinical development.
- Nine-month net loss increased substantially, principally because the Virexxa asset acquisition produced a $39.5 million in-process research and development charge. The charge included a $3.74 million prepayment made in 2015; the filing says the acquired IPR&D had no alternative future use.
- Nine-month results also included a $6.19 million loss on debt conversion, a $1.69 million loss on issuance of hybrid debt, and a $2.15 million gain from changes in derivative fair value. The derivative gain and significant acquisition and debt charges affected reported earnings but were largely non-cash.
- The company converted $6.5 million of Pharmsynthez convertible notes, plus accrued interest, into 1,373,036 common shares in April. It also issued additional convertible notes and warrants during the period.
- A 1-for-33 reverse stock split became effective in June 2016; share information in the filing reflects the split. Common shares outstanding were 8,288,644 as of November 14, 2016.
Liquidity, outlook and risks
Operating cash use was $4.16 million for the first nine months, while financing provided $4.26 million, including $4.5 million of promissory-note proceeds and repayments of related-party loans. The company reported substantial doubt about its ability to continue as a going concern as of September 30, 2016. It stated that a subsequent financing was expected to address that concern.
On November 7, 2016, after quarter-end, Xenetic closed an approximately $10 million underwritten offering of units consisting of Series B preferred stock and warrants. The offering included $6 million from Pharmsynthez. The filing says management believed the proceeds would settle obligations and support operations for 12 months from issuance of the financial statements. Period notes were settled at closing: the Pharmsynthez note converted to common stock, the CEO note was settled in cash, and further Pharmsynthez notes converted into offering units. These events occurred after the reporting date and are not reflected in September 30 cash or liabilities.
Management expects continued reliance on capital markets until commercialization or material, recurring collaboration or licensing receipts. It reported no significant collaboration receipts expected within the next five months and said timing and receipt of potential Shire payments were uncertain and contingent on clinical outcomes. The company also could not predict when ErepoXen out-licensing might generate an agreement or income.
Key risks include the need for additional working capital, clinical-development and regulatory uncertainty, dependence on collaboration outcomes and financing, competition, supply availability, and intellectual-property claims. Management reported effective disclosure controls at reasonable assurance and no material change in internal control over financial reporting. It reported no material legal proceedings.
Important facts for investors to verify
- Whether the November 2016 offering proceeds and subsequent note settlements delivered the stated 12-month operating runway, and the company’s updated cash burn and obligations.
- The exact working-capital deficit: MD&A reports approximately $3.5 million, while the September balance-sheet figures imply approximately $3.76 million.
- Current and potential dilution from Series A and Series B preferred stock, warrants, note conversions, and the November offering; confirm the post-offering share count and conversion terms.
- Virexxa’s clinical-development progress and costs, and the timing and contingency of any Shire collaboration payments or ErepoXen licensing proceeds.
- The assumptions and valuation of Level 3 derivative liabilities and the carrying values of goodwill and indefinite-lived intangible assets.