X4 Pharmaceuticals, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context and reporting period
X4 is a clinical-stage biotechnology company developing therapies for rare diseases. On March 13, 2019, former Arsanis, Inc. completed its merger with X4 Therapeutics, Inc., changed its name to X4 Pharmaceuticals, Inc., and effected a 1-for-6 reverse stock split. The merger was accounted for as a reverse merger, with X4 as the accounting acquirer. Accordingly, Q1 2019 results include X4 for the full quarter and Arsanis only from the merger closing; Q1 2018 reflects X4’s historical results. The periods are therefore not fully comparable.
The lead candidate, mavorixafor (X4P-001), is being developed for WHIM syndrome, severe congenital neutropenia (SCN), and Waldenström macroglobulinemia (WM). The company had no approved products and generated no product sales revenue.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | None reported | None reported |
| Research and development expense | $5.655 | $4.744 |
| General and administrative expense | $4.783 | $1.366 |
| Total operating expenses / operating loss | $10.438 | $6.110 |
| Net loss | $10.873 | $7.367 |
| Net loss attributable to common stockholders | $11.465 | $8.107 |
| Basic and diluted loss per share | $6.67 | $17.70 |
| Net cash used in operating activities | $11.750 | $6.182 |
Gross margin is not meaningful because the company reported no product revenue. At March 31, 2019, cash and cash equivalents were $22.299; total current assets were $26.223 and current liabilities were $16.450. Total debt principal was $19.546, including $5.298 classified as current; reported long-term debt, net of current portion and discounts, was $13.365. Total liabilities were $33.108 and stockholders’ equity was $29.441. Cash, cash equivalents and restricted cash totaled $23.246.
Material changes versus the prior comparable period
- Operating expenses rose $4.328, with R&D up $0.911 and G&A up $3.417. Management attributed higher R&D mainly to personnel and costs associated with the Vienna research site acquired in the merger. Higher G&A reflected professional fees, including merger-related costs, and increased personnel costs.
- Net loss increased by $3.506. Other expense declined to $0.435 from $1.257, largely because of smaller net fair-value charges on warrant and derivative liabilities; interest expense increased to $0.399 from $0.169.
- Operating cash use increased to $11.750 from $6.182. The $26.406 of investing cash inflow in 2019 was cash and restricted cash acquired in the merger, not operating cash generation.
- Cash and cash equivalents rose from $8.134 at December 31, 2018 to $22.299 at March 31, 2019, principally reflecting the merger and its acquired cash. The merger also added $4.900 of in-process R&D intangible assets and $27.407 of goodwill.
Outlook, risks and unusual items
- Management planned to initiate a Phase 3 pivotal mavorixafor trial in WHIM syndrome in Q2 2019, with top-line results expected in 2021. It also planned Phase 1 mavorixafor trials in SCN and a Phase 1/2 trial in WM during 2019, with data expected in mid-2020 and the second half of 2020, respectively. These are forward-looking plans, not guarantees.
- The company expected R&D and public-company costs to increase. It stated that March 31 cash, the cash acquired in the merger, and approximately $78.9 million of net proceeds from an April 2019 equity offering were expected to fund operations, capital needs and debt service for at least 12 months from the financial statement issuance date. Additional capital will be needed beyond that period, and future financing is not assured.
- The April offering closed April 16 and generated $85.8 million gross proceeds before expenses through common shares, pre-funded warrants and accompanying Class A warrants. The warrants have a $13.20 exercise price and a five-year term; the financing diluted existing holders.
- FFG funding dispute: Arsanis’s Austrian subsidiary settled allegations concerning grant and loan obligations. FFG waived claims other than repayment of loans and regular interest, subject to compliance with the settlement. The $9.546 million principal balance was placed on an accelerated repayment schedule ending June 30, 2021; $2.914 million was due in 2019. The settlement also requires a minimum Austrian cash balance equal to 70% of outstanding loan principal, subject to its terms.
- The Hercules loan bears variable interest; the reported rate was approximately 9.8% at March 31, and the annual effective rate was approximately 14.2%. Principal payments were scheduled to begin in September 2019, with maturity in November 2021. The debt is secured by substantially all personal property and other assets, including intellectual property until a specified financing condition is met, and includes covenants and default provisions.
- Management disclosed risks common to clinical-stage biotechnology companies, including clinical and regulatory uncertainty, need for substantial additional capital, reliance on a limited number of manufacturers, and possible delays or failure in development. The company reported no material legal proceedings. It said no material changes had occurred to previously disclosed risk factors.
- Unusual accounting effects include the merger-related reclassification of preferred-stock warrants from liability to equity and the expiration, without payment due, of a Genzyme change-of-control contingent payment obligation. The company adopted lease accounting guidance in 2019 and recorded lease liabilities and right-of-use assets.
Important facts for investors to verify
- Confirm clinical trial start dates, enrollment progress and data timelines for WHIM, SCN and WM; assess whether trial plans or costs have changed since the filing.
- Track cash burn and runway against the April offering proceeds, debt service, FFG repayment schedule and the FFG minimum-cash requirement.
- Review the Hercules loan covenants, collateral, interest-rate exposure and repayment schedule, including any changes to the stated liquidity requirements.
- Assess dilution from the April offering, pre-funded warrants, Class A warrants, options and other outstanding equity awards.
- Reconcile a narrative inconsistency: the financial statements report Q1 2018 net loss of $7.367 million, while an MD&A passage describes the comparison as $6.2 million. The latter appears to correspond more closely to 2018 operating cash use; the filing text does not explain the discrepancy.