Citius Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended June 30, 2016; filed August 15, 2016. The company is a pre-revenue specialty pharmaceutical developer focused on cancer-care and critical-care products. The filing’s stated fiscal year ends September 30.
Key financial results
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Nine months ended June 30, 2016 | Nine months ended June 30, 2015 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development | $381,119 | $415,531 | $1,009,975 | $1,174,892 |
| General and administrative | $1,464,551 | $194,651 | $2,515,069 | $705,580 |
| Operating loss | $(2,126,434) | $(773,729) | $(4,042,721) | $(2,261,548) |
| Net loss | $(3,615,929) | $(824,972) | $(5,706,104) | $(1,993,948) |
| Basic and diluted loss per share | $(0.05) | $(0.03) | $(0.12) | $(0.06) |
Margins are not meaningful because the company reported no revenue. The nine-month net loss included a $1,659,738 loss from revaluing derivative warrant liabilities, a non-cash item that fluctuates with valuation assumptions and share price.
Financial position and cash flow
- At June 30, 2016, cash and cash equivalents were $1,626,140, total assets were $23,013,945, and total current liabilities were $4,853,732.
- Working capital deficit was $2,833,164; accumulated deficit was $14,746,653. The company disclosed substantial doubt about its ability to continue as a going concern.
- Nine-month cash used in operating activities was $4,133,433, compared with $1,680,116 in 2015. Financing provided $4,827,688, including net private-placement proceeds; investing provided $255,748, primarily cash acquired with LMB. Ending cash increased by $950,003.
- Current notes payable were $172,970. The company had assumed $772,970 of LMB demand notes in the acquisition and repaid $600,000 plus accrued interest during April 2016.
- There is no clear operating margin or conventional debt-to-equity guidance in the filing; the company’s financing needs and warrant-related liabilities are material considerations.
Material changes and unusual items
- On March 30, 2016, Citius acquired Leonard-Meron Biosciences, Inc. (LMB), issuing 29,136,839 common shares. LMB holders received approximately 41% of the company’s shares at that date. The acquisition added $19.4 million of in-process research and development, primarily associated with Mino-Lok, and $1,586,796 of goodwill. The purchase-price allocation was preliminary.
- Shares outstanding rose from 34,117,886 at September 30, 2015 to 73,038,060 at June 30, 2016, reflecting the LMB acquisition and equity financings. The company also sold 5 million shares to its chairman for $3 million.
- Third-quarter G&A expense increased by $1,269,900 year over year, largely due to LMB-related compensation and increased consulting and investor-relations costs. Nine-month G&A rose by $1,809,489.
- On July 1, 2016, after quarter-end, the company announced it was discontinuing Suprenza and focusing on Phase 3 development of Mino-Lok and Phase 2b development of Hydro-Lido. The company had not earned revenue from Suprenza under its arrangements through June 30.
- Derivative warrant liability was $2,947,601 at June 30, 2016, up from $738,955 at September 30, 2015. The liability is Level 3 fair value and depends on assumptions including volatility and stock price. Some anti-dilution rights expired during the period, resulting in a $649,656 reclassification to equity.
Outlook, risks and contingencies
- Management expected available funds to support operations for only three to six months and planned to raise additional capital. It warned there was no assurance funding would be available, timely, or on acceptable terms.
- Management identified risks including financing needs, clinical-trial success, regulatory approvals, commercial feasibility, competition, and retaining qualified personnel. The filing states that the company had no revenue and relied on equity and debt financing.
- Disclosure controls and procedures were deemed ineffective as of June 30, 2016 because of material weaknesses: lack of documented policies and procedures, reliance on consultants for financial reporting, and inadequate segregation of duties due to limited staff.
- The company disclosed no legal proceedings and no material change to risk factors from its prior Form 10-K. It reported no off-balance-sheet arrangements.
- Stockholders were scheduled to consider, among other matters, increasing authorized common shares from 90 million to 200 million and authorizing a possible 1-for-8 to 1-for-20 reverse split.
Most important facts for investors to verify
- Whether the company secured sufficient financing after the disclosed three-to-six-month cash runway, and on what terms.
- Progress, costs, timelines, and funding needs for Mino-Lok Phase 3 and Hydro-Lido Phase 2b development.
- The final LMB acquisition accounting and any impairment assessment of in-process research and development or goodwill.
- The status and potential dilution of outstanding shares, warrants, options, and any authorized-share or reverse-split proposals.
- Remediation of the disclosed material weaknesses in financial reporting controls.