Moleculin Biotech, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; filed August 10, 2018. Unless otherwise noted, financial amounts below are in millions of dollars.
Business context
Moleculin is a clinical-stage oncology drug developer with no product revenue. Its six candidates span three approaches: Annamycin, a chemotherapy candidate for relapsed or refractory AML; the WP1066 portfolio of STAT3 inhibitors; and the WP1122 portfolio of glycolysis inhibitors. The company reported two drugs in three clinical trials. It relies on licensed technology, including from MD Anderson, and outsources manufacturing.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development | $4.231 | $0.515 | $5.469 | $1.199 |
| General and administrative | $1.220 | $0.800 | $2.611 | $1.649 |
| Total operating expenses | $5.458 | $1.320 | $8.095 | $2.856 |
| Operating loss | $(5.458) | $(1.320) | $(8.095) | $(2.856) |
| Net loss | $(5.125) | $(3.424) | $(7.052) | $(3.754) |
| Basic and diluted loss per share | $(0.20) | $(0.19) | $(0.29) | $(0.23) |
There are no meaningful revenue or profit margins to assess. Q2 net loss included a $0.331 million noncash gain from revaluing warrant liabilities; the comparable 2017 quarter included a $3.342 million noncash loss. For the six-month periods, the warrant revaluation was a $1.040 million gain in 2018 versus a $2.283 million loss in 2017. These noncash valuation changes materially affect the net-loss comparison.
- Cash and cash equivalents: $11.722 million at June 30, 2018, versus $7.714 million at December 31, 2017. Current assets were $12.892 million; current liabilities were $4.116 million.
- Cash flow, six months: $6.274 million used in operations; $0.008 million used in investing; $10.284 million provided by financing. Cash increased by $4.008 million.
- Capital raised: February offering generated approximately $8.2 million net; June offering generated approximately $2.1 million net. The offerings issued common shares and warrants, diluting existing shareholders and potentially adding future dilution.
- Liabilities: Total liabilities were $7.318 million, including $3.653 million in warrant liabilities. The balance sheet does not list conventional borrowings or debt.
- Equity and shares: Stockholders’ equity was $16.748 million; 26,861,497 common shares were outstanding at June 30, and the filing reports the same count at August 1.
Material changes and unusual items
- R&D expense increased by $3.716 million in Q2 and $4.270 million in the first half versus 2017. Management attributed the increases principally to additional Annamycin drug production and WP1732 preclinical work, a $1.0 million HPI repurchase-payment accrual, and increased personnel and other development activity.
- The company accrued and expensed a $1.0 million payment to HPI, stating that management considered payment of the option repurchase amount likely in the near term. Under the agreement, payment would allow Moleculin to regain rights and related development data for WP1066; the filing describes a potential alternative outcome if the option is not exercised.
- Cash proceeds from the February and June 2018 offerings strengthened liquidity, but the company continued to incur operating losses and had no revenue.
- The warrant liability rose to $3.653 million from $0.503 million at year-end, reflecting new warrant issuances, partly offset by fair-value gains and exercises. Its valuation relies on Level 3 inputs and models.
- The company recorded $0.581 million of stock-based compensation in the first half. It also formed a wholly owned Australian subsidiary to pursue WP1732 preclinical work and potentially access Australian R&D tax credits.
Outlook, risks and contingencies
- Management estimated that June 30 cash would fund planned operations into the second quarter of 2019, subject to clinical enrollment and drug-product usage. The financial statements nevertheless state that substantial doubt exists about the company’s ability to continue as a going concern, citing its accumulated deficit of $21.5 million, lack of operating revenue and need for additional funding.
- Management expects to need additional capital. Financing may not be available on favorable terms or at all; failure to obtain funds could force delays, reductions or termination of development programs, or cessation of some or all operations.
- US Annamycin Phase I/II treatment began in March 2018, with three US sites recruiting. Poland approved a CTA in June; trial start was expected in the second half of 2018. Recruitment and timely trial progress are not assured. A physician-sponsored WP1066 brain-tumor trial opened for recruitment in July 2018.
- WP1220’s Polish CTA request for CTCL was announced in August 2018, after quarter-end. WP1732 toxicology testing began in Australia in July; management anticipated an IND filing and approval in 2019, without assurance of timing or success. The company expects Australian R&D activity to increase expenses and believes eligible spending may generate tax-credit cash in 2019.
- Important risks include clinical and regulatory failure or delay, patient recruitment, reliance on third-party manufacturers and research providers, financing needs, and dependence on licensed intellectual property. Annamycin’s drug substance is no longer covered by existing patent protection; planned formulation and process patent applications may not succeed.
- The company disclosed that disclosure controls and procedures were not effective because of a material weakness in segregation of accounting duties. It had added accounting staff and begun replacing its accounting system, but remediation was still in progress. Management reported that additional procedures were performed for this filing.
- Other commitments include MD Anderson license, milestone and royalty obligations; a new 66-month office lease with base rent of about $4,300 per month beginning August 2018; and approximately $1.1 million of potential employee termination benefits.
Important facts for investors to verify
- Whether available cash and any subsequent financing support the stated operating runway, and whether the company can raise capital without material dilution.
- Actual enrollment, treatment progress, safety findings and regulatory status for Annamycin and WP1066, including progress of the Poland trial.
- Whether the $1.0 million HPI repurchase payment is made and how the resulting rights and development data are treated.
- Whether WP1732 preclinical work, Australian tax-credit eligibility and anticipated 2019 IND milestones proceed as expected.
- Changes in warrant-liability valuation, outstanding warrants and options, and the resulting potential dilution.
- Progress in remediating the material weakness and improving disclosure controls.