10-Q/A: Exicure Files Amended 10-Q After Expense Misclassification, Cites Material Weakness in Internal Controls

Exicure, Inc. has filed an amended 10-Q report to correct a misclassification of approximately $0.6 million in expenses from research and development to general and administrative, revealing a material weakness in internal controls.

Summary

• Exicure, Inc. filed an amended 10-Q report to correct a misclassification of approximately $0.6 million in expenses from research and development to general and administrative for the first quarter of 2023.
• The misclassified expenses primarily related to legal costs and separation payments.
• This correction did not impact the net loss as of March 31, 2023, or any other financial statements in the original report.
• The company identified a material weakness in its internal control over financial reporting as a result of the restatement.
• Management has also concluded that the company did not maintain effective disclosure controls and procedures for the quarter ended March 31, 2023.
• The company is exploring strategic alternatives and requires substantial additional funding in the near term to continue operations.
• The company's cash and cash equivalents were $9.96 million as of March 31, 2023.
• The company believes its existing cash will fund operations into the fourth quarter of 2023, but this estimate is based on assumptions that may prove to be wrong.
• The company is seeking to raise capital in the third quarter of 2023 to fund operations through 2024.
• The company has an accumulated deficit of $195.9 million since inception.

Sentiment

Score: 3

Explanation: The document reveals significant financial and operational challenges, including a restatement, material weakness in internal controls, substantial doubt about going concern, and the need for significant capital raising. The company's future is highly uncertain, leading to a negative sentiment.

Positives

• The misclassification of expenses did not impact the net loss for the quarter.
• The company is actively exploring strategic alternatives to maximize stockholder value.

Negatives

• A material weakness in internal control over financial reporting was identified.
• The company's disclosure controls and procedures were deemed ineffective for the quarter ended March 31, 2023.
• The company has a significant accumulated deficit of $195.9 million.
• The company needs substantial additional financing in the near term to continue operations.
• There is substantial doubt about the company's ability to continue as a going concern.

Risks

• The company's exploration of strategic alternatives may not be successful.
• The company needs to obtain substantial funding in the near term to continue operations.
• The company's controlling stockholder, executive officers, and board members have limited experience controlling or governing a public company in the United States.
• Turnover of senior management could impair the company's ability to implement its business plan.
• The company's common stock may be delisted from Nasdaq.
• The company has a history of losses and expects to continue to incur significant losses.
• The company's internal computer systems may fail or suffer security breaches.
• The company's information technology systems could face disruptions.
• The company's operations are concentrated in one location.
• The company's investment of cash is subject to risks.
• The company may be subject to claims challenging the inventorship or ownership of its patents.
• The company's status as a controlled company could make its stock less attractive to some investors.
• The market price of the company's common stock is highly volatile.
• Raising additional funds may cause dilution to existing stockholders.
• The company is an emerging growth company and may not be as attractive to investors.
• Anti-takeover provisions could make an acquisition of the company more difficult.
• The company's charter designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions.
• The company's ability to use net operating loss carryforwards may be limited.
• FINRA sales practice requirements may limit a stockholder's ability to buy and sell the company's stock.
• If securities or industry analysts do not publish research or reports about the company, the stock price could decline.

Future Outlook

The company is exploring strategic alternatives and requires substantial additional funding in the near term to continue operations. Management believes that the company's existing cash and cash equivalents will fund its operating expenses into the fourth quarter of 2023. The company seeks to raise capital in the third quarter of 2023 to fund its operations through 2024.

Management Comments

• Management believes that, given the Company's current cash position, operating plans and forecasted negative cash flows from operating activities over the next twelve months, there is substantial doubt about the Company's ability to continue as a going concern within one year after the date these financial statements are issued.
• Management believes that the Company's existing cash and cash equivalents will fund its operating expenses into the fourth quarter of 2023.

Industry Context

The company's shift from a biotechnology focus to exploring strategic alternatives in unrelated industries reflects a broader trend of companies seeking new avenues for growth and value creation when their core business faces challenges. This is not uncommon in the biotech sector where companies may pivot or seek mergers when research and development efforts do not yield expected results.

Comparison to Industry Standards

• The restatement due to expense misclassification is a significant issue, as it indicates a weakness in internal controls, which is not ideal for a public company. This is a concern as compared to other public companies that have robust internal controls.
• The company's need for substantial additional funding is a common challenge for early-stage biotech companies, but the lack of a clear path to revenue generation and the uncertainty surrounding strategic alternatives make Exicure's situation more precarious than some of its peers.
• The company's accumulated deficit of $195.9 million is substantial, and the company's ability to raise capital is uncertain, which is a significant concern compared to other companies with stronger financial positions.
• The company's reliance on Nasdaq's controlled company exemptions is not uncommon, but it may make the company less attractive to some investors compared to companies with fully independent boards.

Legal Proceedings

• The company is involved in a putative securities class action lawsuit and several shareholder derivative lawsuits.
• A director of the company designated by CBI USA served a demand on the company to access certain books and records.

Related Party Transactions

• The company paid Alta Companies LTD $218 for consulting services, with Paul Kang, a director of the company, being the President of Alta.

Stakeholder Impact

• Shareholders face significant risks due to the company's financial instability and potential delisting.
• Employees face uncertainty due to potential management turnover and the company's financial challenges.
• Customers and suppliers are not directly impacted by this report, as the company has suspended research and development activities.

Next Steps

• The company will continue to explore strategic alternatives.
• The company will seek to raise capital in the third quarter of 2023.
• The company will work to remediate the material weakness in internal control over financial reporting.
• The company will search for a qualified candidate to add as an independent director to the audit committee.

Key Dates

Keywords

restatement, internal controls, financial reporting, strategic alternatives, going concern, capital raise, expense misclassification, material weakness, Nasdaq, biotechnology