Exicure, Inc. — Q2 2018 Form 10-Q
Business context and reporting period. Exicure is a clinical-stage biotechnology company developing gene-regulatory and immuno-oncology therapies using its spherical nucleic acid (SNA) platform. This unaudited report covers the quarter and six months ended June 30, 2018; financial amounts below are in U.S. dollars. The company had no approved products and reported no product sales. Its common stock began trading on OTCQB in May 2018.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $19,000 | $2.695 million | $55,000 | $5.127 million |
| Research and development expense | $3.835 million | $3.301 million | $7.110 million | $6.789 million |
| General and administrative expense | $1.988 million | $2.110 million | $4.033 million | $3.536 million |
| Operating loss | $5.804 million | $2.716 million | $11.088 million | $5.198 million |
| Net loss | $6.825 million | $2.984 million | $12.334 million | $5.636 million |
| Basic and diluted loss per share | $0.17 | $15.70 | $0.31 | $31.31 |
The company reported no gross-profit or margin measure; given minimal collaboration revenue and no product sales, conventional product margins are not meaningful. Q2 operating expenses rose 8%; six-month operating expenses rose 8%.
- Cash flow: Operating cash use was $9.331 million in the first half, versus $10.446 million in the comparable 2017 period. Investing cash use was $60,000; financing provided $7,000. Cash declined $9.384 million to $16.380 million.
- Liquidity: Current assets were $18.073 million and current liabilities $4.267 million at June 30, 2018. Management said existing working capital was not sufficient to fund operations beyond March 31, 2019; the filing identifies substantial doubt about the company’s ability to continue as a going concern.
- Debt: Long-term debt carrying value was $4.903 million, including $1.570 million current and $3.333 million noncurrent. The Hercules loan bears a floating rate with a stated floor of 9.95%, is secured by substantially all assets other than intellectual property, and matures September 1, 2019. Scheduled amortization payments were deferred through December 2018; repayment is to resume in January 2019.
- Equity and other items: Stockholders’ equity was $9.902 million and accumulated deficit was $44.915 million on the balance sheet. The notes separately state accumulated deficit since inception of $63.752 million. The warrant liability increased from $523,000 to approximately $1.565 million, generating a $1.042 million noncash loss in the first half.
Material changes versus the prior comparable period
- Revenue fell approximately 99% in both the quarter and first half. The 2017 comparison included amortization of Purdue’s upfront payment and reimbursed research costs; 2018 revenue principally reflected reimbursable Purdue research activity.
- Net loss more than doubled in Q2 and increased 119% in the first half. Lower revenue and a larger noncash warrant fair-value loss were significant contributors; R&D spending also increased.
- First-half R&D expense rose $321,000, as higher employee and platform costs more than offset lower clinical-program costs, particularly following the end of the Purdue-related AST-005 Phase 1b trial. First-half G&A rose $497,000, including public-company costs, partly offset by lower legal and accounting costs.
- Cash declined from $25.764 million at year-end 2017 to $16.380 million at June 30, 2018. The company issued 145,466 common shares for net proceeds recorded as $436,000 in stockholders’ equity for professional services, and 8,532 options were exercised.
- Upon adopting ASC 606 on January 1, 2018, the company recorded a $1.034 million adjustment to beginning accumulated deficit and deferred revenue. The filing says adoption reduced reported first-half 2018 revenue, operating loss, and net loss by $1.034 million; it had no effect on Q2 2018 totals or cash flows.
Outlook, management commentary, risks and unusual items
- Management expects R&D and public-company G&A costs to increase. It expects to fund operations through additional equity, partnerships, licensing, or other arrangements, but gives no assurance that funding will be available on acceptable terms.
- Clinical programs: Exicure expected the AST-008 Phase 1 trial to complete in Q3 2018 and anticipated preparing and starting a Phase 1b/2 combination trial with checkpoint inhibitors in late 2018. For XCUR17, 19 of 25 patients had been dosed; full enrollment and trial completion were expected in Q4 2018.
- Purdue collaboration: Purdue declined in April 2018 to exercise its option to develop AST-005 at that time, while retaining TNF-related rights, exclusivity, and the possibility of joint development. Purdue may owe up to $776.5 million in contingent milestones and royalties of low single digits up to 10% on qualifying sales, but none of these payments is assured. Exicure reported no milestone or royalty revenue to date.
- Development uncertainty: The AST-005 Phase 1b study showed safety and tolerability at higher doses but did not produce a statistically significant decrease in a key psoriasis efficacy measure. Exicure also described promising preclinical SMA findings and said it intended to pursue further early-stage neurological research.
- Accounting and controls: The company revised comparative periods for an immaterial R&D expense timing error related to a contract research organization. Management concluded disclosure controls were not effective because of a material weakness in review and communication controls over certain R&D contracts. Remediation was underway, with management expecting completion by year-end 2018; it was not yet considered remediated.
- Other risks and commitments: The filing highlights clinical, regulatory, financing, collaboration, intellectual-property, third-party manufacturing, and OTCQB trading/liquidity risks. Operating lease payments totaled $930,000 in future minimum commitments as of June 30, 2018. The company reported no legal proceedings believed to have a material adverse effect and no material subsequent events requiring disclosure.
Important facts for investors to verify
- Whether Exicure secured additional capital or collaboration funding before its stated cash runway ended, and the resulting dilution or financing terms.
- Progress and results of the AST-008 and XCUR17 trials, including whether the stated completion and trial-start expectations were met.
- What Purdue’s retained TNF rights and exclusivity mean for AST-005 and any future anti-TNF development or revenue.
- Whether management remediated the material weakness and whether subsequent filings report further accounting corrections.
- The Hercules loan’s repayment status, maturity obligations, covenants, and potential effect on liquidity.
- The warrant liability’s valuation assumptions and future noncash earnings impact, and the liquidity and resale risks associated with OTCQB trading and registered shares.