Cellceutix Corporation (CTIX.OB) is a development-stage drug company with a market capitalization near $200 million. Its main attraction to investors is a candidate for the treatment of all kinds of cancer (Kevetrin). It is also developing a treatment for psoriasis (Prurisol). The stock has doubled in the last month, entirely on company press releases. The gist of the press is that Kevetrin hasn't been found toxic in its Phase I clinical trial, and that the company has secured $10 million in funding.
Cellceutix has all the markings of a money-loser for the common shareholder. It trades on the Over the Counter Bulletin Board, and has been heavily hyped, with seven press releases issued by the company and eight mentions on Seeking Alpha in December alone. It is overvalued relative to peers, has hidden traps in the form of dilution and dual-class shares, and has a management structure riddled with conflict of interest and self-enrichment.
Its market capitalization is extreme, currently trading at a level found in companies with approved products trading on major exchanges. Some similar companies are shown below:
|Anavex (AVXL.OB)||Alzheimer's||Phase 1||OTC/Pink||$25 m|
|Protalex (PRTX.OB)||Arthritis||Phase I||OTC/Pink||$16 m|
|Enzon (ENZN)||Cancer||Approved||Nasdaq||$200 m|
|Cellceutix||Cancer||Phase 1||OTC/Pink||$200 m|
Cellceutix has no results showing Kevetrin's effectiveness in human trials, and has lost roughly $5 million per year for the last several years. It has negative working capital and negative shareholder equity. The company's most recent annual report reveals its poor financial condition and arrangements that benefit management over shareholders. Unless otherwise stated, all quotes and factual claims come from the company's 10-K (linked above), filed last October:
The Company intends on financing its future development activities and its working capital needs largely from the issuance of debt and the sale of equity securities, until such time that funds provided by operations are sufficient to fund working capital requirements. There can be no assurance that the Company will be successful at achieving its financing goals at reasonably commercial terms, if at all.
The annual report contains a similar warning from the auditor, Holtz Rubinstein Reminick LLP, regarding shareholder dilution and bankruptcy:
...the Company has no revenues, has suffered significant operating losses, and is dependent upon its stockholders to provide sufficient working capital to meet its obligations and sustain its operations. These circumstances raise substantial doubt about the Company's ability to continue as a going concern.
The dilution threat is not merely the unavoidable response to anticipated needs. The company has already issued "...loans, warrants and options convertible to 51,001,782 shares of common stock outstanding." There are currently slightly less than 100 million shares outstanding, so adding 51 million shares will reduce the current shareholders' stake by 35%. As is common with OTC penny stocks, the main beneficiaries of the dilution are the people who authorized it: management.
The people behind the company are the biggest eye-opener. There are two. That's it. Two employees, who are the only executives, who are also the only directors. No researchers, no secretarial staff, no human resources. No independent accountability. The entire operation is run by two guys. The executive officers, since they are the directors, set their own salaries and award their own bonuses. Leo Ehrlich is the CEO, CFO, and principal accounting officer. Krishna Menon is the president and chief science officer. The "nominal" salary they pay themselves is $367,000 per year. According to the annual report, they also awarded themselves another "$1,097,416 in stock based compensation during the year ended June 30, 2012." It's hard to say what they do for that money, since there is no staff to supervise.
Krishna Menon also diverts investors' money to himself by contracting with himself: "Presently, Kard Scientific, a company controlled by Dr. Krishna Menon, President and Director, provides preclinical and manufacturing services to the Company and leases space to the Company."
These two individuals have also given themselves absolute control of the company, making any sort of activism by the common shareholder impossible. According to the recent annual report, only Class A stock is outstanding. However Menon and Ehrlich own options on Class B stock, which carries 10 votes per share:
Our Class B common stock has ten votes per share on all matters submitted to a vote of our stockholders and our Class A common stock has one vote per share on all matters submitted to a vote of our stockholders. Menon and Ehrlich each have vested options that they can exercise and convert to 18,000,000 shares of Class B common stock. That alone could result in the equivalent of 360,000,000 votes of Class A shares.
Does Leo Ehrlich, the CEO, have an impressive track record that justifies the salary he pays himself for running a company with no revenue and a going concern warning from its auditor? His previous affiliations are CFO and director of Nanoviricides (NNVC.OB), and CEO and director of Statsure Diagnostic (SSUR.PK). Both are Bulletin Board penny stocks. SSUR.PK currently trades for $0.03. NNVC.OB trades for $0.50. That appears to be the entirety of his track record.
There are no real fundamentals to analyze, since the company has no revenue. As of September, the balance sheet showed $120,000 in current assets and $7.8 million in current liabilities. Unsurprisingly, shareholder equity is a negative $7.7 million. Since then, Aspire Capital Fund agreed to buy $10 million in stock over three years, in exchange for 336,625 "commitment" shares. Seeking Alpha contributor KarinCA published an optimistic writeup of that deal last week. Given that the company has negative working capital of $7 million and burns $5 million per year, funding of $10 million spread over three years is paltry. Particularly when there is no independent board of directors to protect shareholder interests.
Investing in highly promoted OTC penny stocks is hazardous for your financial health. Major exchanges have a few protections against insider exploitation of the common shareholder; OTC and Pink Sheet stocks have none. They are easily manipulated, and few professionals scrutinize them. Management knows that the general public isn't skilled at deciphering SEC reports. They tend to be loaded with exotic warrants, convertibles, dual-class structures, and other conflicts of interest. Kevetrin may be legitimate, of course. Figuring these things out is a chess game, but a game the common investor plays lacking a queen and both rooks. In this case, investors have to decide if a research company that employs no researchers, is run by an unproven management team with no legal accountability, and which has a going concern warning from its auditor is worth $200 million.
Disclosure: I am short CTIX.OB via a very small position, as shares are hard to borrow and expensive to maintain.