Radient Pharma: Balance Sheet Blowout

TUSTIN, Calif. ( TheStreet) -- The numbers tell the tale of woe that is Radient Pharmaceuticals ( RXPC):

Current stock price: $0.0042 per share. It doesn't seem fair to call Radient a penny stock because that demeans all the other stocks that actually trade for pennies.

Year-to-date stock performance: -99.6%. When someone asks about stocks that have destroyed shareholder value, make sure Radient is at the top of the list. It is numerically difficult to beat Radient in this category.

Total shares outstanding: 647 million. That's as of Oct. 4 so the current number is higher. And I'm not including the 111 million outstanding warrants and options. Radient's share count has more than tripled since late August.

Cash on hand: $394,000. In June, Radient had $1.7 million in the bank and was burning $500,000 a month. Even assuming draconian expense cuts, Radient is operating today on fumes and prayers.

Radient's numbers are terrible because the company violated a couple of fundamental business rules. First, it made promises about its cancer diagnostics business that it couldn't keep. Second, Radient loaded up on debt that it couldn't repay. Wall Street banks made essentially the same mistakes but they were too big too fail. The U.S. government bailed out the banks. No such life raft is available to save Radient.

I spent a good bit of time this year warning investors away from Radient, demonstrating how nearly everything management said and promised about its colon cancer monitoring test Onko-Sure was exaggerated or simply untrue. The $10 million in forecasted Onko-Sure revenue from a joint venture in India never materialized and the much-hyped Onko-Sure partnership with the Mayo Clinic turned out to be nothing more than a contractual agreement for services rendered.

Biotech, drug, and diagnostic companies can survive, even thrive, with bad business models and management teams that over-promise and under-deliver. Heck, the healthcare sector is rife with do-nothing companies that have no problem raising cash from speculative investors.

Radient is a notable exception to this rule because for the past three years, the company's balance sheet has been a ticking time bomb just waiting to explode. Equity and debt financings with some of Wall Street's savviest and most ruthless vulture investors delivered cash to Radient when its sales team hawking Onko-Sure could not. These financings were negotiated on such onerous conditions, however, that Radient dug its own financial grave.

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The warning signs of Radient's demise were written in the company's SEC filings but a lot of retail investors don't read SEC filings, and if they do, they skip the important parts like the footnotes and detailed explanations about lending terms and stock purchase agreements. Maybe you don't care about Radient but the lesson in the company's collapse applicable to all investors is to read SEC filings and understand that sick balance sheets cannot be cured with a few slick press releases.

Radient is learning that lesson the hard way. Unable to repay creditors with cash, the company is forced to make good on its obligations with sickly dilutive debt-for-equity swaps. And when I say sickly dilutive, I'm talking billions of shares of Radient common stock -- all discounted from market price -- handed over to the company's creditors. Needless to say, these creditors aren't interested in holding the Radient stock received. They're selling shares as fast as they can.

Radient estimates that it will issue another 2.8 billion shares of common stock to its creditors in order to fully make them whole, according to a proxy statement filed last week. Those 2.8 billion shares are on top of the 645 million shares already outstanding and don't even begin to account for stock that Radient may need to sell in order to raise more cash. When your stock trades at a fraction of a penny, you need to sell a lot of stock to raise a small amount of money.

Currently, Radient is only authorized to issue 750 million shares, so the company is asking shareholder to approve a plan in which the company will boost its authorized share count to 5 billion shares. The company also wants permission to implement a 100-for-1 reverse stock split.

With billions of shares of stock remaining to be issued just to claw out from its financial hole, don't be shocked if Radient's stock price falls to one-tenth of a penny or lower. And if the stock does fall that far, a 100-for-1 reverse split will only get Radient back to a penny a share.

Radient would be a penny stock once again. Optimists may call that a small victory for a company on the brink of financial insolvency. I'm not an optimist.

--Written by Adam Feuerstein in Boston.

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Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.