May 9, 2014: Radient Pharmaceuticals (RXPC) had an interesting afternoon on 6 May. Both the company and the stock have had their troubles over the past four years or so; interest has declined dramatically, along with stock price. Thanks to the filing of an 8-K that seems to have been entirely misunderstood by many penny players, RXPC, which has an average daily volume of 36.66 million shares, traded a surprising 479 million, closing up 50% at $0.0003, having hit an intraday high of $0.0004.
|RXPC intraday chart, 5/6/2014|
The filing consisted of two items of interest. First, four new board members, including a new chairman, were appointed, and two new officers--Dennis Charter as CEO and Darren Brown as CFO and COO--were in turn named by the board. The former chairman, Douglas MacLellan, and the only other former board member, Michael Christiansen, resigned, as did the former CFO and COO, Akio Ariura.
That news is what gave encouragement to long time shareholders and new speculators. But it was, or should have been, overshadowed by what came next:
On April 15, 2014, the Company executed an Offer of Settlement with the Securities and Exchange Commission (“Commission”) pursuant to Section 12(j) of the Securities Exchange Act of 1934, revoking the registration of the Company’s securities.Radient's registration is about to be revoked by the SEC. As anyone who follows the pennies ought to know, that's the end of the road. Once the Commission signs off on the settlement agreement, RXPC will cease to trade. Its ticker will disappear, and its shareholders will own stock in a private company.
Instead of dumping, traders bought, unaccountably believing that all this heralded a new beginning for Radient. In a sense it does, but if buyers ever profit, it will not be for a very long while.
The fateful 8-K came as a surprise to all. The company has been a delinquent filer for two years; its last financial report, an amended 10-K for the fiscal year ended 31 December 2011, was filed on 9 July 2012. It once traded on the American Stock Exchange (now NYSE MKT), but was delisted to the OTCBB on 23 June 2011.
Radient's flagship product is a test kit called Onko-Sure. According to the company, Onko-Sure "enables physicians and their patient to detect and/or monitor the treatment/recurrence of solid tumors by measuring the accumulation of specific breakdown products in the blood." It's marketed in Europe and Asia, where's it's used as a general screening test. In the United States, it's only been cleared by the FDA for detecting colorectal cancer. Nonetheless, most of the company's sales are in the U.S.
In 2011, RXPC's net revenues were $313,550; its gross profit was $261,783. Its net loss from operations for that year was a staggering $86 million. As the company put it: "Historically, our operations have not been a source of liquidity." Unsurprisingly, Radient had a great deal of debt, in the form of convertible notes, warrants and preferred stock issued to financiers and service providers. It noted in its 10-K for fiscal year 2011 that it was experiencing severe working capital shortages. To that point it had held its creditors at bay, but only barely: by the end of the year "substantially all of the holders of approximately $14.0 million of our notes and redeemable preferred shares had previously declared defaults and demanded repayment of these obligations, which we were unable to pay." Conversions had caused a significant drop in stock price: in the first quarter of 2011, RXPC traded at a high of $41.75; by the fourth quarter, the high was a mere $0.30.
By the end of 2011, the situation was not yet completely out of control, but that was about to change. As of 10 February 2012, there were 29,911,602 shares outstanding; a modest number by OTC standards.
By 15 June, just prior to the filing of the 10-K, there were 1.4 billion shares outstanding. The company filed no further financial reports with the SEC, but an 8-K from 11 June 2013 revealed that the outstanding had risen to an appalling 4,508,746,417 shares. The stock price had sunk to the low triple zeros.
That is a graphic illustration of the effect of convertible debt. They don't call it toxic financing for nothing.
The class action
2011 was an eventful year for RXPC, and not in a good way. In March, a class action was filed against the company and several of its officers, with the Rosen Law Firm acting as lead attorneys. At the heart of the class's case was a press release alleged to be fraudulent.
According to the complaint (and as subsequently acknowledged by RXPC), during 2010, the company had begun to default on its loans. It was sued by Hudson Bay Fund, Whalehaven Capital, and Alpha Capital Anstalt. In desperation, the class action plaintiffs contended, Radient issued the mendacious press release on 18 January 2011. In it, the company announced "progress on its clinical study with Mayo Clinic ("Mayo") for the validation of [its] US FDA-cleared Onko-Sure® in vitro diagnostic (IVD) cancer test as a useful tool in the detection of colorectal cancer…" It went on to mention Mayo as its partner in the trial several more times. TheStreet.com's Adam Feuerstein was skeptical, and emailed the clinic.
A Mayo spokesperson, Kathy Anderson, sent a statement in reply. In it, she said that "Mayo is not engaged in clinical studies with Radient and does not have a partnership agreement with Radient." Anderson added that the clinic "does have a collaboration agreement with Radient whereby Mayo Validation Support Services provided bio specimens from our Bio Specimen Bank to Radient for clinical studies," but that did not mean Mayo was RXPC's partner in any of those clinical trials. A subsidiary of the clinic was merely supplying necessary materials.
Ouch. In reaction, the company's shares fell 26 percent the day Feuerstein's piece appeared, before an exchange halt was called. (RXPC was still listed on the Amex at the time.)
Rosen characterized the press release as materially false and misleading, intended to boost stock price and attract financing. In fact, just twelve days after the purported news about Mayo was released, Radient successfully completed an $8.4 million private placement.
The class action dragged on for two years, as RXPC's situation became ever more hopeless. Finally, on 12 February 2014, the Rosen Law Firm announced a proposed settlement of the lawsuit. It would, Rosen said, benefit all purchasers of Radient's common stock between 18 January 2011 and 4 March, 2011. The amount of the settlement is $2.5 million, of which $1.23 million will go to Rosen. Needless to say, members of the class will receive pennies on the dollar. The case is not yet over, but no doubt soon will be. The most recent event was a hearing on the settlement held on 22 April; the Court heard arguments and took the matter under consideration.
Revocation of registration
As noted, Radient filed its last financial report, an amended version of the 10-K for fiscal 2011, with the SEC on 9 July 2012. Over the next year and three quarters, it submitted nothing but a handful of 8-Ks. They gave no indication of the company's financial condition, but it cannot be imagined that things had changed for the better.
Anyone who follows SEC enforcement actions is aware that in recent years the agency has been moving aggressively against delinquent filers. It first sends a notice of delinquency to the issuer. The notice is both a warning and an invitation. It warns that an administrative proceeding to revoke registration will be the next move, and invites the issuer to file the missing financial reports or to negotiate a realistic time frame in which it expects to be able to file the reports. If the company doesn't respond, the SEC goes ahead with the admin proceeding.
We don't know exactly what happened with Radient, as the company's explanation in its new 8-K is very brief, and addresses the future rather than the past, but it seems likely that it discussed its options with the SEC, and concluded that it needed to bite the bullet and accept revocation of registration gracefully, rather than be subjected to an involuntary enforcement action.
Other companies have made the same choice. On 27 September 2013, the registration of Universal Travel Group (formerly UTRA) was revoked. In the notice announcing the event, the SEC noted that UTRA had "submitted an Offer of Settlement... which the Commission has determined to accept." In other words, the company had agreed to revocation, "without admitting or denying the findings herein." On the same day, the agency filed a lawsuit against UTRA and certain of its officers, alleging fraud; the defendants had already settled with the agency.
The outcome was different, and more satisfactory, for US Fuel Corporation (formerly USFF). On 8 February 2014, USFF, which had not filed a financial report since its 10-K for the period ended 31 December 2012, announced that in December 2013 the SEC had sent a delinquency notice. Rather than go through an administrative hearing, the company's board resolved to voluntarily submit an offer of settlement consenting to revocation of registration. US Fuel didn't make this announcement until after the revocation had occurred on 6 February; it stated further that it intended to catch up with its paperwork and file a new registration statement. It quickly filed one Form 10-12G, and withdrew it two months later, noting that it had had insufficient time to address questions raised by the Division of Corporation Finance's examiners. It filed a new Form 10 on 1 May. Unless the SEC has new questions which cannot be addressed quickly, US Fuel will once again be a registrant by early July. Forms 10 become automatically effective after 60 days.
What lies in store for Radient and its shareholders is unknown. The 6 May filing made it clear that the company had voluntarily offered to accept revocation of registration. Now the settlement must be ratified by an SEC administrative judge, and then the Commission's secretary will sign the Order. The Order will be posted at the SEC website on the Administrative Proceedings page of the Enforcement section, and on Edgar. According to the company, the settlement was reached on 15 April, so probably registration will be revoked at some time during the next month, likely sooner rather than later.
When that happens, the stock will stop trading altogether. If Radient wishes, at some future time it may, like USFF, file a new registration statement. If that is its intention, it gave no indication in the 8-K.
The 8-K did reference a restructuring of the company. Given RXPC's presumably enormous burden of debt, that will not be an easy task, so any attempt to re-register with the SEC is likely to be delayed for quite awhile, assuming it occurs at all.
Revocation of registration is not a good thing for shareholders. Ever. Those shareholders' stock will show as nothing but a number in their brokerage accounts, with no value attached. Yet astonishingly, many message board posters greeted the news of Radient's voluntary settlement with cries of joy. Thrilled by the appointment of new management (who may have no interest in them) they dismissed the pending revocation as unimportant or even, with an impressive display of illogic, insisted that it wouldn't happen.
At Investor's Hub, RXPC climbed to the top of the Breakout Boards list, surely a first for an issue about to cease trading. In an access of irrational exuberance, traders assured each other that they were "loading," and would load yet more the next day, in anticipation of a big run. Players who'd never heard of Radient before today jumped on the bandwagon without bothering to figure out what was going on. One even proclaimed that RXPC would be a "400 bagger." We hope he was joking.
The reality is that anyone who fails to understand the company's message will become a bagholder. Radient has agreed to revocation of registration; it has elected to stop trading. Perhaps its new status will be temporary, perhaps it will be permanent, but to imagine it will be good for investors, would be foolish.