Cellectar Biosciences, Inc. (Novelos Therapeutics, Inc.) — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; filed August 12, 2011. The registrant was Novelos Therapeutics, Inc., which acquired Cellectar on April 8, 2011. The transaction was accounted for as a reverse acquisition, with Cellectar treated as the accounting acquirer, so comparisons are affected by the transaction and the change in business focus.
Business context and strategy
The combined company is a development-stage cancer drug company focused on Cellectar’s cancer-targeting compounds: COLD (CLR1401), HOT (131I-CLR1404) and LIGHT (124I-CLR1404). Development of Novelos’s NOV-002 and NOV-205 was suspended. The company reported no product revenue.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | None reported | None reported | None reported | None reported |
| Research and development expense | $962,000 | $963,000 | $1,433,000 | $2,100,000 |
| General and administrative expense | $797,000 | $567,000 | $928,000 | $924,000 |
| Merger costs | $496,000 | None | $746,000 | None |
| Net loss | $2,595,211 | $1,621,808 | $3,560,463 | $3,398,207 |
| Net loss per share | $0.10 | $0.13 | $0.18 | $0.27 |
Operating margins are not meaningful because the company had no revenue. Six-month operating cash use was $2.90 million, versus $2.65 million in the prior-year period. Cash and cash equivalents were $3.31 million at June 30, 2011, compared with $674,000 at December 31, 2010; restricted cash was $55,000, down from $555,000. Working capital was $3.03 million and stockholders’ equity was $7.41 million.
At June 30, 2011, liabilities included $450,000 of long-term Wisconsin Department of Commerce notes and approximately $7,000 of capital lease obligations; the convertible notes had been converted to equity and the bank note had been repaid. The company reported an accumulated deficit of $27.61 million.
Material changes and unusual items
- Q2 net loss increased year over year, principally reflecting $496,000 of merger costs, higher G&A and a $258,000 interest charge related to revised convertible-note conversion terms, as well as a $70,000 loss on derivative warrants.
- Six-month R&D expense fell 32% year over year, primarily reflecting prior cost reductions and completion of the HOT Phase 1a trial in 2010. Management expected clinical and preclinical activity to increase in Q3.
- The April acquisition issued 17.0 million shares to former Cellectar holders, approximately 85% of shares after the transaction and before the concurrent financing. A private placement of shares and warrants raised approximately $5.14 million gross and $4.87 million net. The company also completed a 1-for-153 reverse split immediately before the acquisition.
- Acquisition accounting and the purchase-price allocation were preliminary; the reported $1.68 million excess purchase price over net assets acquired could be reallocated after valuation work.
Outlook, risks and contingencies
Management said existing cash was expected to fund operations into Q4 2011, including commencement of the planned HOT Phase 1b trial. It expected that trial and investigator-sponsored LIGHT Phase 1/2 trials to begin in Q4 2011, and anticipated an IND filing for COLD in late 2012. These are plans, not assurances. The company expected continuing operating losses and said funding beyond Q4 depended on additional financing or a strategic transaction.
A Form S-1 filed July 1, 2011 contemplated an underwritten common-stock offering of up to $15 million, excluding any over-allotment; there was no assurance it would become effective or be completed. The company also faced potential dilution from warrants, options and future financing. It identified substantial going-concern and clinical, regulatory, manufacturing, funding and commercialization risks.
Two material disputes remained outstanding: a securities class action was refiled on August 5, 2011 after an earlier dismissal without prejudice; and BAM asserted counterclaims relating to NOV-002 technology agreements and the Cellectar acquisition. The company disputed both sets of allegations and said it intended to defend them. Management did not anticipate a material financial impact from the litigation, but noted uncertainty. A proposed 1-for-2 to 1-for-10 reverse split was approved by stockholders to help meet national-exchange listing requirements. Management reported disclosure controls were effective; the acquisition and addition of a financial-reporting director materially affected, or could materially affect, internal financial reporting controls.
Important facts for investors to verify
- Whether the proposed public offering was completed, on what terms, and how long subsequent financing extended the cash runway.
- Whether HOT and LIGHT trials began on the stated timetable, and subsequent clinical, safety and efficacy results.
- Final acquisition purchase-price allocation and any material revisions to acquired assets or goodwill.
- Developments and potential financial exposure in the securities class action and BAM dispute.
- Subsequent share-count changes, warrant and option dilution, and the outcome of exchange-listing efforts.