[Edaily Reporter KIM SAE-MI ] #Xcell Therapeutics Inc. is pursuing a third-party private placement worth 7 to 8 billion won to avoid the risk of negative equity by year-end. This comes after the company raised funds through a 9.5 billion won private placement last year and the sale of its stock holdings this year; however, persistent operating losses have made additional capital raising inevitable.

According to the biotech industry on the 8th, Xcell Therapeutics Inc. is pursuing a third-party private placement worth 7 to 8 billion won.

Aware of the risk of negative equity by year-end, Xcell Therapeutics Inc. is striving to finalize the fundraising by the end of the year. The company is currently conducting multiple investment negotiations simultaneously with strategic investors (SIs) and financial investors (FIs). CEO Lee Eui-il is also reported to be a potential participant in the capital increase.

Capital Erosion Rate Nears 50% in First Half… Net Loss of 3.1 Billion Won in Third Quarter as Well

The risk of capital erosion by year-end is driving Xcell Therapeutics Inc. to expedite its fundraising efforts. In the first half of this year, total capital on a consolidated basis stood at 4.3 billion won, which is about half of the company’s paid-in capital of 8.6 billion won. The capital impairment ratio stood at 49.97%, falling just 0.03 percentage points (p) short of the 50% threshold for designation as a KOSDAQ “monitored stock.” This represents a 32.52 percentage point increase in just six months from the 17.45% ratio recorded at the end of last year.

Under KOSDAQ listing regulations, a capital impairment ratio of 50% or higher at the end of the most recent fiscal year constitutes grounds for designation as a “monitored stock.” In its preliminary earnings report disclosed on the 6th, Xcell Therapeutics Inc. announced that its consolidated operating loss for the third quarter of this year was 3 billion won, a 25.6% increase from the 2.4 billion won loss recorded in the same period last year. Revenue for the same period was 1.1 billion won, a 217.9% increase year-over-year but a 45.1% decrease from the previous quarter. The net loss also rose 32.3% to 3.1 billion won, up from 2.3 billion won in the same period last year.

The cumulative operating loss for the first three quarters of this year was 8.7 billion won, a 13.9% increase from the 7.6 billion won recorded in the same period last year. The cumulative net loss also rose to 8.7 billion won, a 15.7% increase from the 7.6 billion won recorded in the same period last year. If we simply subtract the third-quarter net loss of 3.1 billion won from the consolidated total equity of 4.3 billion won at the end of the first half, total equity decreases to approximately 1.3 billion won. Assuming no other changes in equity, the equity erosion rate reaches 85.3%. However, this is an estimate based on preliminary results.

The planned rights offering of 7.0 to 8.0 billion won is interpreted as funding intended to address the risk of negative equity by year-end. This is because total capital had already fallen to about half the level of paid-in capital by the end of the first half of the year, and a net loss of 3.1 billion won was incurred in the third quarter as well. However, since a common stock capital increase raises not only equity but also paid-in capital, it remains uncertain whether the company will be able to maintain a capital impairment ratio below 50% even if the full target amount is raised.

Whether the fundraising will actually succeed is also a variable. While the company is in final negotiations with some investors, no investment commitments have been finalized yet. Given that it must secure investors and complete the capital increase procedures within the remaining time until year-end, the schedule poses a significant burden.

Risks related to maintaining its listing are also coming to the surface. On the 12th of last month, the Korea Exchange (KRX) issued a warning regarding the possibility of Xcell Therapeutics Inc. being designated as a “monitored stock,” noting that the company’s market capitalization had remained below 20 billion won for 25 consecutive trading days. At the time, the KRX warned that if Xcell Therapeutics Inc.’s market capitalization remained below the threshold for another five trading days, it could trigger the designation as a monitored stock.

Xcell Therapeutics Inc.’s market capitalization rebounded to 20.2 billion won on the 16th of last month, temporarily recovering to the 20 billion won threshold, but subsequently fell below the threshold again. As of the closing price on the 3rd, its market capitalization stood at 17.1 billion won, meaning it has remained below 20 billion won for 12 consecutive trading days since the 19th of last month.

Despite

a 9.5 billion won rights offering last year and a share sale this year… Concerns about recurring cash flow problems

persist The bigger problem is that it remains unclear whether

the company’s cash flow issues

will be fundamentally resolved even if this rights offering is successful. Given that the company’s losses widened in the third quarter, there are

concerns

that even if it succeeds in raising funds this year, additional capital may be needed next year.

Xcell Therapeutics Inc. raised 9.5 billion won through a rights offering last November. In March of this year, the company sold its entire holding of 557,966 shares in Gencurix Inc.(229000), securing 3.2 billion won. At the time, the purpose of the share sale was to secure liquidity and improve operational efficiency.

However, cash and cash equivalents stood at just 3.9 billion won at the end of the first half of this year. Following last year’s operating loss of 10.9 billion won and a negative cash flow from operating activities of 9.5 billion won, the company saw a cash outflow of 5.0 billion won from operating activities in the first half of this year as well. Cash holdings and cash flow from operating activities as of the end of the third quarter were not included in this preliminary earnings announcement.

The average monthly operating cash outflow for the first half of this year was approximately 840 million won. If this rate of cash depletion continues, the 7 to 8 billion won the company is seeking to raise this time will only cover about 8 to 10 months’ worth of operating cash outflows. Given that the company is raising funds again just one year after last year’s large-scale rights offering, observers point out that if operating cash flow does not improve, additional capital injections may be necessary next year as well.

Xcell Therapeutics Inc. plans to improve its loss-making structure by expanding sales. However, it appears that it will take time for the company’s in-house culture medium business to achieve significant sales growth. Last March, the company signed a domestic distribution agreement with global medical device company Becton Dickinson (BD) and has since expanded its distribution business for equipment and reagents. Recently, it has also been pursuing new business ventures, such as recombinant collagen.

The key question is whether the sales growth from the culture medium business and these new ventures will translate into actual cash generation. Xcell Therapeutics Inc.’s cumulative revenue for the first three quarters of this year reached 4 billion won, a 354.2% increase from the 900 million won recorded in the same period last year. However, operating losses also widened during the same period, rising from 7.6 billion won to 8.7 billion won. In particular, third-quarter revenue plummeted from 1.9 billion won in the second quarter to 1.1 billion won. Given that revenue growth is driven more by the distribution of third-party products than by the company’s own culture media, it appears that profitability improvements must be supported separately from overall revenue growth.

A Xcell Therapeutics Inc. official stated, “As we are a materials company, revenue growth naturally takes time,” adding, “Although we are falling short of our initial plans, we are working to bridge the gap with products from companies such as Becton Dickinson.” The official continued, “We need to finalize our funding round by the end of the year, but it is difficult to specify an exact timeline.”