VolitionRX Limited — Q2 2012 Form 10-Q
Business and reporting period. VolitionRX is a development-stage company developing diagnostic products based on acquired intellectual property. This unaudited quarterly report covers the three and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods unless noted.
Financial performance and position
| Metric | Q2 2012 | Six months 2012 |
|---|---|---|
| Revenue | $11,707 | $27,379 |
| Operating expenses | $943,173 | $1,760,589 |
| Net loss | $931,466 | $1,733,210 |
| Basic and diluted loss per share | $0.10 | $0.20 |
Revenue was minimal relative to expenses; the filing does not provide a meaningful gross-margin measure. Q2 operating expenses rose 47% year over year and six-month expenses rose 81%. The six-month net loss increased 78%. Research and development was the largest expense, at $1,070,478 for the half, up $452,755 from 2011, reflecting increased staffing, facilities, services, and materials. Other increases included public-company costs, director fees, option expense, and placement-agent compensation.
- Cash flow: Six-month operating cash use was $1,143,754; investing cash use was $71,121; financing provided $1,287,376, primarily from share issuance. Foreign exchange reduced cash by $34,144. Cash increased $38,357 to $386,249.
- Balance sheet at June 30: Total assets were $2,236,793, including cash of $386,249, prepaid expenses of $287,001, and net intangible assets of $1,438,965. Total liabilities were $1,027,118, including current liabilities of $422,631 and a repayable grant of $604,487. Stockholders’ equity was $1,209,675.
- Liquidity and financing: Management reports a working-capital surplus of $11,176 and says cash reserves were adequate only for a limited period. The balance sheet’s reported current assets of $719,640 less current liabilities of $422,631 imply a different surplus; the MD&A’s working-capital figures are not clearly reconciled. The company raised $1,019,375 in cash in a private placement and converted $184,777 of service obligations into shares and warrants. It reported $268,000 in additional subscriptions received by June 30.
- Debt and obligations: Related-party payables were $250,641, unsecured, non-interest-bearing, and due on demand. The Walloon Region grant may require repayment, with a minimum obligation if the project fails and repayment plus a 6% royalty on relevant sales if successful, subject to a stated cap.
Changes, outlook, and risks
After quarter-end, the company issued 545,434 shares on August 1 for a total stated value of $954,500, comprising $664,250 in cash subscriptions received after June 30 and $22,250 of converted service debt, in addition to the $268,000 received before quarter-end. Management says this provided $686,500 of additional working capital. Common shares outstanding were 9,879,187 as of August 8. The placements and warrants create dilution risk.
The company had accumulated losses of $5,235,786 since inception and substantial doubt about its ability to continue as a going concern. Management expects to rely on further equity or debt financing and possible additional grant funds, which were not assured. It warned that financing delays could postpone research, product development, clinical validation, and regulatory work, and that prolonged inability to raise funds could force it to discontinue operations. No specific revenue or profitability guidance was provided.
A July 2012 agreement with Bonn University covers sample testing over two years, with stated payments of $490,464. The company reported no material legal proceedings and no significant off-balance-sheet arrangements. Disclosure controls were deemed ineffective at June 30 because of material weaknesses, including the absence of an audit committee financial expert and inadequate controls to ensure required disclosures were addressed in the financial statements. Management reported no significant subsequent changes in internal control.
Key facts investors should verify
- How long the reported cash balance can fund operations, and whether additional financing or grant funding is available.
- The apparent mismatch between the MD&A working-capital surplus and the balance-sheet current-asset and current-liability totals.
- The repayment and royalty exposure under the Walloon grant, and the timing and funding of the Bonn University testing commitment.
- The extent of potential dilution from outstanding warrants, options, and subsequent share issuances.
- Whether management remediates the disclosed weaknesses in disclosure controls and strengthens financial reporting oversight.