Xenetic Biosciences, Inc. — 2015 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2015; it is an annual report, not a standalone fourth-quarter report. Xenetic is a clinical-stage biopharmaceutical company developing drug candidates and platform technologies, including PolyXen, Virexxa, OncoHist and ImuXen. No candidate had U.S. marketing approval. The company’s common stock traded on the OTCQB, and the filing describes its market as limited.
Financial performance and position
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $3.43 million | $6.32 million |
| General and administrative expense | $6.39 million | $6.60 million |
| Loss from operations | $9.82 million | $12.92 million |
| Net loss | $12.51 million | $14.31 million |
| Net loss per share, basic and diluted | $0.09 | $0.11 |
| Cash used in operating activities | $5.30 million | $12.68 million |
With no revenue, operating or gross margins are not meaningfully reportable. Operating expenses were $9.82 million in 2015, down from $12.92 million. The lower R&D spend mainly reflected deferral of OncoHist preclinical work because of working-capital constraints; G&A fell modestly.
At December 31, 2015, cash was $132,229 and restricted cash was $66,510. Current assets were $4.19 million, including a $3.74 million prepayment for the pending Virexxa transaction; current liabilities were $7.34 million, producing a working-capital deficit of approximately $3.2 million. Total liabilities were $10.30 million. Current liabilities included a $3.65 million hybrid debt instrument; the July 2015 note carried 10% interest, was convertible at the holder’s option at $0.15 per share, and had a one-year term. The balance sheet also reported $395,000 due to a related party.
Financing activities provided $3.0 million net in 2015, principally from a $3.0 million convertible note. The company ended the year with $132,229 cash, versus $2.51 million at the end of 2014. No dividends were paid.
Changes, developments and outlook
- Net loss narrowed by 12.6% year over year, while operating cash use fell by approximately $7.38 million. Lower operating costs were partly offset by a $2.13 million noncash loss from the increased fair value of embedded derivatives and higher interest expense.
- In November 2015, Xenetic agreed to acquire specified Virexxa intellectual property and development rights for 111.5 million common shares and other consideration. It issued 11 million shares as a prepayment for a U.S. provisional patent assignment; the remaining 100.5 million shares and transfer of the Virexxa rights had not been completed as of March 30, 2016. The company expected completion in Q2 2016.
- The asset purchase agreement included up to $3.5 million in bridge financing and a further $6.5 million financing commitment associated with a planned capital raise and exchange up-listing. Xenetic reported receiving the full $3.5 million bridge amount by March 30, 2016. Its planned financing also contemplated at least $8.5 million in public offering proceeds.
- Virexxa was in an FDA IND-enabled Phase II study for progesterone-receptor-negative endometrial cancer. ErepoXen was in company-sponsored Phase II development, with partner studies also underway. Baxter/Baxalta began a Factor VIII clinical trial in Q1 2016; Xenetic’s potential milestone receipts and royalties depend on partner progress and eventual commercialization.
- OncoHist U.S. trials were planned for late 2017, but the company said additional capital and a suitable cGMP supply source were needed. A Russian OncoHist AML study was on hold after a change in local standard of care.
Risks, contingencies and unusual items
The auditor’s report and management’s disclosures identify substantial doubt about Xenetic’s ability to continue as a going concern because of recurring losses, negative operating cash flows and the need for additional working capital. Management said the company needed more funding to meet obligations for the following 12 months; completion of the planned capital raise was uncertain. Failure to secure financing could require deferring development activities and could impair asset recoverability. The financial statements contain no adjustments for a possible failure to continue as a going concern.
Other key risks include clinical and regulatory failure or delay, reliance on collaborators for development and potential milestone payments, dependence on external manufacturers, intellectual-property challenges, dilution from equity-linked financing, and limited trading liquidity. The Virexxa asset purchase remained conditional at the filing date. The 2015 derivative fair-value charge was driven in part by the stock-price change and involved Level 3 valuation assumptions. No legal proceedings were reported. The auditor gave an unqualified opinion on the financial statements but did not attest to internal control over financial reporting.
Important facts for investors to verify
- Whether the Virexxa asset purchase closed, and whether all promised rights and share consideration were transferred.
- Whether the $6.5 million Pharmsynthez commitment and the minimum $8.5 million public offering were completed on the stated terms, and the company’s resulting cash runway and dilution.
- The maturity, conversion, repayment and warrant terms of the hybrid debt and subsequent bridge notes, including any additional warrants.
- Clinical-trial progress, safety and efficacy results for Virexxa and ErepoXen, and the revised timeline and manufacturing plan for OncoHist.
- Whether operating cash use, working-capital deficits and the going-concern uncertainty improved after year-end.