Business context and reporting period
RestorGenex Corporation (the registrant named in the filing; the request metadata says Cervomed Inc.) filed this unaudited Form 10-Q for the quarter ended September 30, 2014. The company had repositioned from entertainment and sports operations to a specialty biopharmaceutical business focused on dermatology, ophthalmology and women’s health. It reported no revenue and was developing products and technologies, including RES-440, RES-529 and RES-102. ProElite operations were discontinued effective March 31, 2014.
Financial performance and position
| Metric | Three months ended September 30, 2014 | Nine months ended September 30, 2014 |
|---|---|---|
| Revenue | $0 | $0 |
| Total expenses | $3.512 million | $9.391 million |
| Net loss from continuing operations | $3.449 million | $9.285 million |
| Net loss per share | $0.18 | $0.76 |
| Research and development expense | $0.930 million | $1.334 million |
- Cash flow: Operating cash used was $7.100 million for the nine months; financing provided $30.633 million, primarily from the private placement. Cash increased $23.533 million to $23.788 million. Investing cash flow was zero.
- Liquidity: Working capital was $23.032 million at September 30, 2014, versus a deficit of $5.880 million at December 31, 2013. Management said cash was expected to fund planned operations at least through December 31, 2015 and into 2016, while cautioning that additional funds might be needed earlier.
- Debt and liabilities: Current liabilities totaled $2.977 million, including $50,000 of notes payable and a $200,000 related-party note that was in default at quarter-end. The related-party note was converted into shares and warrants on October 21, 2014. Total liabilities were $7.748 million, including $4.771 million of deferred taxes on acquisitions.
- Assets and equity: Total assets were $50.547 million, including $12.959 million of intangible assets and $11.525 million of goodwill. Stockholders’ equity was $42.799 million. The filing reports 18,605,625 common shares outstanding on November 10, 2014.
- Margins: Gross and operating margins are not meaningful because the company reported no revenue.
Material changes versus prior comparable periods
- Third-quarter continuing-operations loss increased to $3.449 million from $1.628 million. Nine-month continuing-operations loss increased to $9.285 million from $1.501 million; the prior-year period included large gains from changes in and extinguishment of derivative liabilities.
- Third-quarter expenses rose 111% year over year, including new R&D spending and higher general and administrative costs. Nine-month total expenses declined 21%, in part because the prior year included a $1.936 million impairment charge and substantial stock- and warrant-related expenses.
- The company raised approximately $35.6 million gross and $31.3 million net in a 2014 private placement, issuing 8.896 million shares and warrants for 2.669 million shares. Cash rose from $0.255 million at year-end 2013, and working capital moved from deficit to positive.
- Shares outstanding rose substantially following financing, acquisitions and debt settlements. The nine-month cash flow statement reports $31.773 million of net proceeds from common-stock issuance; management describes approximately $31.3 million of net private-placement proceeds after fees, expenses and certain payables.
Outlook, risks and unusual items
- Management expects continuing losses and higher R&D and personnel costs as it advances product development. CL-214 was expected to be ready for launch in late 2015 or early 2016; planned clinical studies for several candidates were conditional on completing additional preclinical toxicology work.
- The company has no existing credit facility and may need additional equity, debt, collaboration or licensing funding. If financing is unavailable, it could delay or curtail development, relinquish product rights, pursue a sale or merger, or wind down operations.
- Goodwill and intangible assets totaled $24.484 million. Management reported no company-wide impairment at quarter-end but planned reporting-unit impairment testing; it disclosed that a write-down could reach the carrying value of those assets.
- Stock-option grants had a reported total fair value of $11.466 million; $1.075 million was recognized in the first nine months, with $10.390 million expected to be expensed over the following three years.
- A property-damage claim of $393,592 was accrued; the company said a loss was reasonably possible and disputed insurance coverage. Contractual obligations totaled $6.768 million, principally employee contracts and rent.
- Disclosure controls and procedures were deemed ineffective because of insufficient segregation of duties, lack of written controls and weaknesses in accounting-software change controls. Remediation efforts were underway.
Important facts for investors to verify
- Whether cash burn, planned R&D spending and available cash support the stated runway, and whether additional financing will be required sooner.
- Clinical, toxicology and commercialization timelines for the pipeline, including the stated CL-214 launch target.
- Potential dilution from outstanding warrants, options and future financing; confirm current share counts and the terms of equity awards.
- Results of the planned goodwill and intangible-asset impairment testing and the recoverability of acquired assets.
- Progress in remediating ineffective disclosure controls, and the outcome and insurance coverage of the property-damage claim.