Tonix Pharmaceuticals Holding Corp. — Q3 2012 Form 10-Q
Reporting period: Quarter ended September 30, 2012; filed November 14, 2012. The unaudited statements cover Tonix, a development-stage CNS pharmaceutical company with no commercial products or revenue. The company is developing reformulations of known drugs and is focused primarily on TNX-102 SL, a sublingual cyclobenzaprine candidate.
Financial performance and position
| Metric | Three months ended Sept. 30 | Nine months ended Sept. 30 |
|---|---|---|
| Revenue | None in 2012 or 2011 | None in 2012 or 2011 |
| Research and development expense | $658,143 vs. $492,024 | $1,883,559 vs. $634,496 |
| General and administrative expense | $1,076,199 vs. $522,462 | Approximately $2,862,086 vs. $1,249,500 |
| Operating loss | $1,734,342 vs. $1,014,486 | $4,745,645 vs. $1,883,996 |
| Net loss | $1,732,027 vs. $1,014,478 | $6,820,705 vs. $1,883,944 |
| Basic and diluted loss per share | $0.05 vs. $0.05 | $0.20 vs. $0.10 |
With no revenue, operating and profit margins are not meaningful. Nine-month net loss included a $1,177,026 loss from remeasuring warrant liabilities and substantial financing-related charges. The warrant liability was reclassified to equity after related reset provisions expired in June 2012.
At September 30, 2012, total assets were $190,004, including cash of $35,653 and restricted cash of $60,244. Total liabilities were $864,340 and stockholders’ deficiency was $674,336. Working capital deficit was $758,068. No convertible debentures remained outstanding at quarter-end, compared with $2,075,000 at December 31, 2011. Accounts payable were $697,383 and accrued expenses were $136,303.
Nine-month operating cash use was $4,207,624, versus $1,170,873 in 2011; investing cash use was $35,740. Financing provided $4,237,894, primarily from the 2012 stock-and-warrant financing, net of $150,000 in debenture repayments. Cash declined by $5,470 from year-end 2011. The filing reports no debt at quarter-end, but describes subsequent borrowings below.
Material changes and unusual items
- Compared with the first nine months of 2011, R&D expense rose 197% and G&A expense rose 129%, reflecting expanded TNX-102 development, personnel and compensation, investor relations, market research, and public-company costs. Net loss increased 262%.
- In January and March 2012, the company raised $4,692,765 in cash through unit sales and exchanged $1,925,000 of prior debentures for units. The financing included common shares and warrants; the company reported 34,278,432 common shares outstanding at September 30, versus 27,066,667 at year-end 2011.
- At September 30, 7,390,292 warrants were outstanding, generally exercisable at $1.00 or $1.25 per share. The company also had 3,500,000 employee options outstanding at a $1.50 exercise price.
- Related-party consulting expense was $246,083 for the first nine months of 2012. The filing identifies the CEO and a director as founders and describes consulting arrangements with affiliated entities.
Outlook, risks, and subsequent events
Management planned to initiate a pivotal TNX-102 SL fibromyalgia efficacy trial in Q1 2013, subject to raising funds, and expected a PTSD proof-of-concept trial in 2013 following an October 2012 pre-IND meeting with FDA. The company reported prior Phase 2 fibromyalgia findings and pharmacokinetic results as supportive, but these are not assurances of regulatory approval or commercial success. Management expected R&D expense to increase significantly over the next 12–24 months.
The filing states that recurring losses, negative operating cash flow, a working-capital deficit, lack of products and need for additional financing raise substantial doubt about the company’s ability to continue as a going concern. Management estimated existing cash would fund approximately three months of operations and capital needs and estimated approximately $2 million would be needed for the next 12 months. It warned that unavailable or unacceptable financing could require delays, program reductions, or cessation of operations; equity financing could further dilute shareholders. Clinical, safety, recruitment, regulatory, competition, and market-demand risks could also delay or prevent development.
After quarter-end, COO Benjamin Selzer was terminated effective October 26, 2012, and 500,000 unvested options were cancelled. Between October and November, the company borrowed $320,000 from affiliated investors through demand notes. On November 14, it issued $390,000 of additional convertible debentures for cash and exchanged the $320,000 notes for debentures. The debentures bear 8% interest, mature by November 14, 2013 or upon a qualifying financing, and are convertible at the holder’s option at a 25% discount to a subsequent financing price or $1.00 per share.
Important facts for investors to verify
- Whether the company secured sufficient capital after quarter-end to cover its stated funding needs and extend its short runway.
- Whether TNX-102 SL trials began on schedule and whether clinical, safety, and regulatory results support continued development.
- The terms, conversion effects, and dilution from the November 2012 debentures and outstanding warrants and options.
- The scope and ongoing cost of related-party arrangements, and the company’s ability to manage increasing operating expenses.