Cellceutix Corp (OTCQB:CTIX) is based in Beverly, Massachusetts and is a clinical stage biotech company. Kevetrin is their lead drug and may also lead in the next generation of cancer treatments. Kevetrin has demonstrated in animals the ability to activate p53 without the major toxic effects Roche Holding (OTCQX:RHHBY) ran into when they tried it.
A phase I trial in humans is currently being conducted by Harvard University's Dana Farber Cancer Institute and partner Beth Israel Deaconess Medical Center. The first cohort didn't show the usual toxic side effects of chemotherapy. Those patients are now receiving a second cycle of dosing. A second cohort has started at escalated doses.
Additional studies are being conducted at Beth Israel Deaconess to research Kevetrin in conjunction with two Pfizer, Inc. (PFE) multikinase inhibitors as potential new therapies for renal cancer and melanoma. In 2013, we expect to start a clinical trial against blood tumors, sponsored by a European university.
The product pipeline includes eight drugs.
The presentation seeking financing at Rodman & Renshaw may shed some light on why Cellceutix was able to find financing under favourable terms.
All public companies require capital to operate and execute their business goals. When a company announces funding it is important to read the financing documents companies are required to release as an attachment to their SEC Form 8K. Careful reading of the financing documents may give an investor a pretty accurate projection of the future stock price. Last week Cellceutix announced a funding agreement with Aspire Capital Fund, LLC for $10 million. In a press release dated Monday December 10, 2012 it stated,
Aspire has committed to purchase up to $10 million of Cellceutix's common stock over the next three years at prices based on the market price at the time of each sale. Cellceutix will use the net proceeds from the Purchase Agreement to advance the Company's pipeline development, including…… "We are very pleased to have reached this agreement under such favorable terms with Aspire," says Leo Ehrlich, Chief Executive Officer of Cellceutix.
After the announcement CTIX shares rose that day from $1.21 to $1.41 and finished the week at $1.45. It was very unusual compared to most other financing announcements where the borrower's stock price often declines because of anticipated dilution. In order to better understand why the markets looked so favourably on the CTIX funding one needs to better understand the other types of equity line financing available.
An example of an unfavourable financing agreement would be:
Facility Amount: The investor shall commit to purchase up to $5,000,000 of the company's stock over the course of 24 months after a registration statement of the stock has been declared effective ("Effective Date") by the Securities and Exchange Commission ("SEC").
Put Amount: The amount that the company shall be entitled to request from each purchase "Put" shall be up to $100,000.
Pricing Period: The five trading days preceding the closing date.
Market Price: The lowest daily Volume Weighted Average Price (VWAP) of the stock during the pricing period.
Purchase Price: The purchase price shall be set at 80% of the market price.
Put Date: The date that the investor receives put notice of draw down by company.
Closing Date: Seven business days after the put date.
Document Preparation Fee: The company agrees to pay a non-refundable document preparation fee of $15,000 in cash for the preparation of the Investment Agreement and Registration Rights Agreement.
Commitment Shares: 5% of the facility account payable in company stock. All shares are due upon the execution of this term sheet.
In this type of financing investors need to pray for a miracle that the share price will appreciate. Think about it. The lender was given a significant amount of free trading shares (the Commitment Shares) upfront at no cost. The borrower will need to give the lender seven days advance notice for the draw down, and the lender will fund based on volume weighted average price of the stock for the five days preceding the closing price. Off that, the lender will take a 20% discount. It would seem the more the stock is hedged (shorted) the more money can be made by the lender. Definitely not a good deal for the borrower or its shareholders.
Another type of equity financing is the issuance of preferred shares to lenders.
1. A typical deal would include a commission of 5%-10% upfront.
2. A 20% discount on VWAP.
3. The VWAP computation would be a date prior to the conversion date.
In this type of financing the lender who has preferred shares can always convert to free trading shares based on a prior stock price. For example, the lender can hedge the stock selling a significant amount thus driving down the price, and the next day convert at a 20% discount based on the prior day's price. The lender makes good on the hedge (short sale) and has just pocketed a nice profit while the share price has gone down. Definitely not a good deal for the borrower or its shareholders.
Now back to the Cellceutix funding. A reading of the loan documents reveals:
1. The company issued upfront to Aspire restricted shares and received $100,000.
2. Yes, the financing has a pricing structure based on prior trading but there is no discount to that amount.
3. No advance notice is given to Aspire that Cellceutix will draw on the equity line.
In this financing, Cellceutix has the advantage. No advance notice is given to Aspire. If it is advantageous to Cellceutix, they will request funding. For example, say the stock has been trading in the range of $1.40-$1.50 during the pricing period. Cellceutix on any trading day can issue after 4pm a notice to sell stock to Aspire. Aspire has no advance notice to hedge (short) and funding will occur at a price in that range. Basically, Aspire and Cellceutix are hoping the price per share will rise. That's good for Cellceutix shareholders and Aspire, and seems to be an excellent negotiated deal. It takes a lot of confidence for Aspire to agree to such a deal. Aspire obviously sees tremendous promise in Cellceutix.
One of the many things I like is the fact that the beneficial owners hold 72.41% of the outstanding common shares as of June 30, 2012. This can be seen on page 63 of the form 10K filed October 12, 2012.
I'll be curious to see which of the large pharmaceutical companies makes an offer to buyout CTIX if Phase I does for humans what it does for animals. The last buyout PFE did of a publicly traded company was in 2011. For RHHBY.OB it was also in 2011. I'm speculating about these two companies since there is an ongoing trial of Kevetrin using two PFE multikinase inhibitors as potential new therapies. RHHBY.OB has spent a lot of time and money trying to activate p53 without toxic side effects to no avail. Both RHHBY.OB and PFE will be watching these trials closely. (See article published December 10, 2012 titled Watch Cellceutix Closely For Potential Catalysts In 2013 for more information on them.)
Being an OTC stock under $5 without full trial data on humans completed, there is risk. However, there is also the potential for greater reward. And I tend to follow the money. The fact that insiders hold more than 70% of the outstanding shares reduces risk dramatically.
Disclosure: I am long OTCQB:CTIX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I'm not an investment advisor and suggest you consult a Broker or Tax advisor before making any purchases.