Citius Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2016; filed February 14, 2017. Comparative results are for the three months ended December 31, 2015. Amounts are in U.S. dollars.
Business context
Citius is a development-stage specialty pharmaceutical company focused on critical-care products. It reported no revenue in either comparative quarter. After discontinuing Suprenza in July 2016, management said it was focusing on Phase 3 development of Mino-Lok, an antibiotic lock solution for catheter-related bloodstream infections, and Phase 2b development of Hydro-Lido for hemorrhoids.
Key financial metrics
| Metric | Three months ended Dec. 31, 2016 | Three months ended Dec. 31, 2015 |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $1,411,159 | $829,156 |
| General and administrative expense | $1,132,183 | $294,221 |
| Total operating expenses | $2,784,856 | $1,244,676 |
| Operating loss | $(2,784,856) | $(1,244,676) |
| Net loss | $(2,175,898) | $(1,220,721) |
| Net loss per share, basic and diluted | $(0.03) | $(0.04) |
| Cash used in operating activities | $(1,314,792) | $(697,086) |
There were no revenues, so revenue margins are not meaningful. A $622,186 noncash gain from revaluing derivative warrant liabilities reduced the reported loss; the comparable gain was $23,940. Interest expense was $13,228, versus none in the prior period.
At December 31, 2016, cash and cash equivalents were $46,764, versus $294,351 at September 30, 2016. Working capital was negative $5,828,421. Total assets were $21,482,323, including $19.4 million of in-process research and development and $1.59 million of goodwill. Current liabilities were $6,318,711; stockholders’ equity was $15,163,612. Related-party notes payable were $1,492,970, and accrued interest was $44,099. The filing presents current liabilities but does not provide a separate total-debt figure.
Changes and financing
- Net loss increased by $955,177 year over year. R&D expense rose $582,003, primarily reflecting $1,343,635 of LMB Mino-Lok development costs, partly offset by lower spending on the hemorrhoid product and Suprenza. G&A rose $837,962, mainly due to LMB-related compensation, financing and corporate-development consulting, and investor-relations costs.
- Operating cash use increased by $617,706. Financing provided $1,067,205: $820,000 from notes issued to Chairman Leonard Mazur and $247,205 in net equity proceeds.
- In October 2016, Citius launched an offering of up to 15 million units at $0.40 each, with a potential $2 million oversubscription. In November it sold 975,000 units for $390,000 gross, with one share and one five-year warrant per unit. The offering includes placement-agent commissions, expenses, and warrants.
- Common shares outstanding increased to 74,113,060 at quarter-end from 73,138,060 at September 30, 2016. The company also had 19,131,595 warrants reserved for exercise and 8,732,770 stock options outstanding.
Outlook, risks, and other notable matters
- Going concern: Management stated that limited capital, no revenue, a $5,828,421 working-capital deficit, and recurring operating losses raise substantial doubt about the company’s ability to continue as a going concern. It expected funds to support operations for the next three months, but planned additional equity financing and borrowing and cautioned that funding was not assured or guaranteed on acceptable terms.
- Controls: Management concluded disclosure controls were not effective and identified material weaknesses involving undocumented policies and procedures, reliance on consultants for financial reporting, and inadequate segregation of duties due to limited staff.
- Related-party financing: Chairman Mazur’s notes are generally payable on demand; $1.32 million of a board-authorized $2.5 million revolving facility was outstanding at quarter-end. The company subsequently issued him another $260,000 in January 2017.
- Development and licensing obligations: Mino-Lok is licensed from Novel Anti-Infective Therapeutics. The agreement includes maintenance fees, royalties, up to $1.05 million in regulatory and sales milestone payments, and sublicense-payment obligations.
- Subsequent events: In January 2017, Citius issued 445,932 shares for investor-relations services. In February, it sold another 399,750 offering units for $159,900 gross and granted related placement-agent warrants.
- The filing reported no legal proceedings, defaults upon senior securities, or off-balance-sheet arrangements. It stated that risk factors had not changed from the September 30, 2016 Form 10-K.
Important facts for investors to verify
- Current cash runway, near-term obligations, and whether additional financing was secured after the filing.
- Progress, costs, timelines, and regulatory milestones for Mino-Lok and Hydro-Lido.
- Terms and proceeds of subsequent equity offerings and related-party borrowing, including the resulting dilution and repayment exposure.
- Whether the company remediated the disclosed material weaknesses in financial reporting controls.
- Valuation assumptions for the derivative warrant liability and the carrying value and impairment status of the acquired in-process research and development and goodwill.