CNS Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. The interim financial statements are unaudited. CNS Pharmaceuticals is a development-stage pharmaceutical company focused on anticancer drug candidates; it reported no revenue.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | None reported | None reported | None reported | None reported |
| Operating expenses | $699,094 | $169,905 | $1,309,246 | $673,204 |
| Research and development | $278,903 | $4,600 | $369,940 | $21,267 |
| Net loss | $706,655 | $193,204 | $1,349,863 | $760,386 |
| Basic and diluted loss per share | $0.05 | $0.02 | $0.10 | $0.07 |
With no revenue, gross margin and operating margin are not meaningful. The company had $630,109 in cash and cash equivalents and $269,399 in restricted cash at September 30, 2019. Current assets were $1.390 million against current liabilities of $1.398 million, a working capital deficit of $7,296. Total liabilities were $1.398 million; stockholders’ equity was $216. Current liabilities included $763,249 of SAFE agreements and $300,000 of convertible notes, net of discount. The $35,000 of other notes payable was repaid in January 2019.
For the nine months, operating cash outflow was $1.078 million, compared with $557,000 in 2018. Financing provided $1.431 million, principally from $1.507 million of net common-stock proceeds. Combined cash and restricted cash increased by $344,375 to $899,508. No material capital expenditure commitments were reported.
Changes and material developments
- Net loss increased to $706,655 in Q3 and $1.350 million for the nine-month period. Management attributed the increases to added personnel and activity preparing for the IPO and clinical trials.
- Higher general and administrative costs reflected stock-based compensation and professional fees in Q3; nine-month costs also included investor-relations services and a $102,225 write-off of deferred issuance costs. R&D rose as the company paid patent-maintenance costs and contract labor for Phase II preparation.
- On November 13, 2019, after quarter-end, CNS completed its IPO of 2.125 million shares at $4 per share and subsequently sold another 318,750 shares through the over-allotment option. Gross proceeds were approximately $9.8 million before offering costs. The IPO triggered conversion of the SAFE agreements into 191,151 shares and conversion of $300,000 of convertible notes plus accrued interest into 228,329 shares.
- The IPO also satisfied conditions for release of the $269,399 restricted cash and completed the acquisition of the relevant intellectual property under the HPI agreement. These subsequent events were not reflected in September 30 cash and liabilities.
Outlook, risks and unusual items
- Management said IPO proceeds and cash on hand should fund planned operations beyond the near term and alleviate previously reported substantial doubt about the company’s ability to continue as a going concern. However, it estimated approximately $7 million of additional financing, beyond IPO proceeds, would be needed to complete the planned Berubicin Phase II trial, plus working capital. The company said it would need additional capital within the next two years and could otherwise extend payables, reduce overhead or scale back its plan.
- The plan is primarily to use IPO proceeds to advance Berubicin into Phase II. The FDA indicated the proposed use of the existing lyophilized drug product appeared reasonable, while recommending batch recrystallization before an IND filing. Timing, trial costs, regulatory approval and the usability of the drug supply remain uncertain.
- The company’s exclusive WP744 license and other agreements involve HPI and sublicensees related to founder and largest shareholder Dr. Waldemar Priebe. HPI payments include royalties, development fees and milestones; Berubicin also carries a 2.25% royalty on net sales payable to Reata if commercialized.
- At September 30, the company had 3.84 million warrants and 1.56 million options outstanding, in addition to potential shares from convertible instruments and SAFE agreements. Loss-period share equivalents were excluded from diluted loss per share as anti-dilutive.
- Management concluded disclosure controls and internal control over financial reporting were ineffective, citing lack of segregation of duties and formal documentation. It planned to add experienced finance personnel and consultants when economically feasible. The filing reported no material change to risk factors from those in the company’s October 2019 Form S-1 and no current legal proceedings.
Key facts for investors to verify
- Net IPO proceeds after underwriting discounts, commissions and other offering costs, and the resulting cash runway relative to the estimated $7 million Phase II funding gap.
- Phase II trial design, IND timing, recrystallization and manufacturing costs, and whether the existing Berubicin supply can be used.
- HPI license obligations, related-party arrangements, and continuing compliance with license and sublicense terms.
- Potential dilution from outstanding options, warrants, converted SAFE interests and convertible notes, including IPO-related securities.
- Progress in remediating the disclosed material weaknesses in financial reporting controls.