Exicure, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. Exicure is a clinical-stage biotechnology company developing therapeutics using its spherical nucleic acid (SNA) platform. It had no approved products or product sales.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $0.057 million | $2.497 million | $0.112 million | $7.624 million |
| Research and development expense | $4.001 million | $3.121 million | $11.111 million | $9.910 million |
| General and administrative expense | $1.919 million | $1.270 million | $5.952 million | $4.806 million |
| Operating loss | $5.863 million | $1.894 million | $16.951 million | $7.092 million |
| Net loss | $5.324 million | $1.932 million | $17.658 million | $7.568 million |
| Loss per share | $0.13 | $1.12 | $0.44 | $41.27 |
Amounts are shown as losses where applicable. The filing does not present a meaningful product gross margin; revenue was collaboration revenue. The sharp revenue decline primarily reflects the absence of prior-year recognition of Purdue upfront-fee amortization, as well as lower reimbursed research costs. Q3 revenue fell 98% and nine-month revenue fell 99% year over year. The 2017 loss-per-share comparisons are affected by substantially different weighted-average share counts following the 2017 merger and should not be read as directly comparable operating measures.
- Cash and liquidity: Cash and cash equivalents were $32.446 million at September 30, 2018, versus $25.764 million at December 31, 2017. Working capital was $25.062 million.
- Cash flow: Operating cash use was $13.524 million for the first nine months, compared with $14.447 million in 2017. Investing cash use was $0.065 million; financing provided $20.271 million, mainly from the August stock placement. Cash increased $6.682 million.
- Debt: Debt carrying value was $4.926 million, classified entirely as current. The $4.999 million principal balance is due at maturity in September 2019; amortization payments were deferred through December 2018 and were scheduled to resume in January 2019.
- Equity and liabilities: Total assets were $35.526 million, total liabilities $10.328 million, and stockholders’ equity $25.198 million. Accumulated deficit was $50.239 million on the balance sheet; the notes report a cumulative deficit since inception of $69.076 million.
Material changes and unusual items
- R&D expense rose 28% in Q3 and 12% for the nine months, reflecting increased clinical-program, platform, and employee costs. Management expected R&D expense to increase in Q4 2018 and 2019.
- G&A expense rose 51% in Q3 and 24% for the nine months, including higher public-company costs and compensation.
- Exicure raised $22.001 million gross, or $20.070 million net, in an August 2018 private placement by issuing 4,889,217 shares at $4.50 per share. Shares outstanding increased from 39.301 million at year-end 2017 to 44.358 million at September 30, 2018.
- On adopting ASC 606, Exicure recorded a $1.034 million reduction to accumulated deficit and deferred revenue at January 1, 2018. Adoption reduced nine-month 2018 revenue, operating loss, and net loss by $1.034 million each; it did not affect Q3 results or September 30 balance-sheet totals.
- The filing describes immaterial prior-period errors in the timing of clinical-trial R&D expense and presents revised 2017 comparative figures. The company said the corrections reduced 2017 nine-month R&D expense and net loss by $1.369 million.
- Other income in Q3 included a noncash gain from remeasuring warrant liabilities; nine-month other expense included a noncash warrant-liability loss. The warrant liability was $0.984 million at quarter-end.
Outlook, operations, and risks
- Runway and going concern: Management said existing working capital was expected to fund current plans into the first quarter of 2020, but stated that substantial doubt exists about the company’s ability to continue as a going concern because of recurring losses and the need for additional financing. Additional equity, partnerships, licensing, or other funding is not assured; further equity financing could dilute shareholders.
- Clinical programs: Exicure expected to dose the first patient in its AST-008 Phase 1b/2 combination trial with pembrolizumab in late 2018 and anticipated preliminary Phase 1b data in late 2019. XCUR17 completed dosing of 21 mild-to-moderate psoriasis patients; topline Phase 1 results were expected by year-end 2018. AST-005’s Purdue-sponsored Phase 1b study did not show a statistically significant effect on a key psoriasis efficacy measure.
- Purdue collaboration: Purdue declined in April 2018 to exercise its option to develop AST-005 at that time, while retaining certain target and exclusivity rights; it had not indicated plans to pursue AST-005. Potential milestones and royalties remain contingent and are not assured.
- Key risks: The company faces clinical and regulatory uncertainty, dependence on third-party research and manufacturing providers, limited collaboration revenue, and substantial future funding needs. It reported no material legal proceedings and no material off-balance-sheet arrangements.
- Internal controls: Management concluded disclosure controls were not effective due to a material weakness involving review and communication controls for R&D contracts and expense timing. Remediation was underway, with management expecting remediation by year-end 2018; the weakness was not yet considered remediated.
Important facts for investors to verify
- Whether cash use, clinical spending, and financing availability remain consistent with the stated runway into Q1 2020.
- Progress and results for AST-008 and XCUR17, including timing of trial updates and any changes to development plans.
- Any further Purdue decisions regarding AST-005, retained rights, or collaboration economics.
- Debt repayment schedule, maturity obligations, and the company’s ability to meet them or refinance.
- Whether the R&D-contract control weakness was remediated and whether subsequent reporting identified further errors.
- Potential dilution and market liquidity: the filing notes registered resale shares and that common stock was quoted on OTCQB.