Citius Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2017. The unaudited consolidated statements include Citius and its wholly owned subsidiaries. Amounts are in U.S. dollars.
Business context
Citius is a development-stage specialty pharmaceutical company focused on critical-care products, including anti-infectives and cancer care. It reported no revenue in the quarter or six-month period. After discontinuing Suprenza in July 2016, management focused 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.
Financial performance and position
| Metric | Three months ended March 31, 2017 | Six months ended March 31, 2017 |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $859,915 | $2,271,074 |
| General and administrative expense | $1,383,771 | $2,515,954 |
| Total operating expenses | $2,543,716 | $5,328,572 |
| Operating loss | $2,543,716 | $5,328,572 |
| Net loss | $2,743,363 | $4,919,261 |
| Basic and diluted loss per share | $0.04 | $0.07 |
- Six-month operating cash use was $2,139,393, versus $1,571,538 in the comparable 2016 period. Cash declined from $294,351 at September 30, 2016 to $61,110 at March 31, 2017.
- At March 31, 2017, current assets were $343,246 and current liabilities were $7,342,498, resulting in a $6,999,252 working capital deficit. Total assets were $21,334,608 and stockholders’ equity was $13,992,110.
- Current related-party notes payable were $2,022,970; accrued interest was $63,950. The notes are owed principally to Chairman Leonard Mazur and bear interest at prime plus 1% or, for certain acquired notes, 12%. The company also reported $426,264 of derivative warrant liabilities.
- No profit margin is meaningful because the company had no revenue and recorded operating and net losses.
Changes versus prior comparable periods
- Quarterly net loss increased to $2,743,363 from $869,454; six-month net loss increased to $4,919,261 from $2,090,175. Management attributed the increases mainly to higher development spending and higher general and administrative costs, including compensation, consulting, financing, and investor-relations expenses.
- Six-month research and development expense rose to $2,271,074 from $628,856, primarily reflecting $2,149,277 of LMB costs for Mino-Lok development. The prior-year quarter included a $292,575 reimbursement from Alpex, producing reported R&D expense of negative $200,300 for that quarter.
- Six-month general and administrative expense rose to $2,515,954 from $1,050,518, and stock-based compensation rose to $541,544 from $236,913.
- The six-month results included a $442,390 gain from revaluation of derivative warrant liabilities, compared with a $173,906 loss in 2016. The gain was primarily associated with a decline in the company’s share price. In the quarter, derivative revaluation was a $179,796 loss.
- Shares outstanding increased to 75,504,242 from 73,138,060 at September 30, 2016, including shares issued in a private offering and for services. The February 2017 offering sold 1,920,250 units at $0.40 each for $768,100 gross proceeds; each unit included a share and a five-year warrant.
Outlook, risks, and unusual items
- Going concern: The filing states that limited capital, no revenue, a working capital deficit, and operating cash use raise substantial doubt about the company’s ability to continue as a going concern. Management expected available funds to support operations for approximately three months and planned to seek equity and debt financing; success and timing were not assured.
- Subsequent financing activity: In April 2017, the company issued an additional $650,000 demand note to its Chairman. In May, it consolidated $2.5 million of Chairman notes into a convertible note maturing June 30, 2018, convertible at the holder’s option at 75% of the price in a planned securities offering. A separate bridge facility allowed up to $1.5 million; $240,000 had been advanced by the filing date. The company also filed an S-1 to register up to approximately $18 million of securities; the offering was not assured and could not proceed until the registration statement became effective.
- Product and licensing obligations: Mino-Lok is licensed from Novel Anti-Infective Therapeutics. The agreement includes annual maintenance fees, royalties, sublicense-payment obligations, and up to $1.39 million in specified regulatory and sales milestones.
- Warrants and dilution: There were 20,171,370 warrants outstanding at March 31, 2017, in addition to outstanding options. Certain warrants had down-round provisions and were recorded as Level 3 derivative liabilities; related anti-dilution rights expired after quarter-end.
- 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.
- The filing reported no legal proceedings, no off-balance-sheet arrangements, and no change in risk factors from the prior Form 10-K. Management said inflation had not materially affected results.
Important facts for investors to verify
- Whether the company secures enough funding, on acceptable terms and in time, to sustain operations and advance its clinical programs.
- Actual cash runway, subsequent borrowing and conversion terms, and the status, effectiveness, and proceeds of the proposed S-1 offering.
- Clinical, regulatory, and development progress for Mino-Lok and Hydro-Lido, and the associated license costs and milestones.
- Potential dilution from warrants, options, convertible related-party debt, and future equity financing.
- Progress in remediating the disclosed material weaknesses in internal controls.