Processa Pharmaceuticals, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; filed August 14, 2019. Processa is a clinical-stage biopharmaceutical company with no approved products and no revenue. Its lead candidate, PCS-499, is being studied for necrobiosis lipoidica (NL).
Financial results and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development | $726,904 | $1,077,643 | $1,211,655 | $1,865,921 |
| General and administrative | $410,072 | $350,581 | $807,837 | $853,918 |
| Total operating expenses | $1,136,976 | $1,428,224 | $2,019,492 | $2,719,839 |
| Net loss | $969,078 | $1,206,074 | $1,719,910 | $2,302,870 |
| Loss per share, basic and diluted | $0.03 | $0.03 | $0.04 | $0.06 |
With no revenue, profit margins are not meaningful. At June 30, cash and cash equivalents were $721,985, down from $1,740,961 at December 31, 2018. Current assets were $989,907 and current liabilities $783,436. Total assets were $11.31 million, total liabilities $2.80 million (including a $1.83 million deferred tax liability), and stockholders’ equity $8.50 million. The company had $230,000 of senior convertible notes outstanding at quarter-end.
Net cash used in operating activities was $1,018,976 for the first half, compared with $2,233,186 in the prior-year period. There was no investing or financing cash flow in the first half of 2019. The filing reports no revenue, so operating margins are not applicable.
Changes versus prior periods
- First-half net loss narrowed by $582,960 and operating cash use declined by about $1.21 million year over year, primarily reflecting lower R&D spending and investor-paid clinical trial costs.
- First-half R&D expense fell $654,266, mainly because preclinical and clinical costs were lower; the company cited higher 2018 Phase 1 and manufacturing-site costs. Intangible-asset amortization increased to $397,664 from $222,559.
- Q2 G&A expense increased $59,491, including higher payroll and public-company costs, while first-half G&A declined $46,081, partly because 2018 included a $144,200 cybersecurity fraud loss and higher professional fees.
- Lower interest expense reflected the 2018 conversion of most prior notes. A $300,901 first-half income tax benefit was reported, principally from amortization of the deferred tax liability associated with the PCS-499 license; it is not operating revenue.
Outlook, liquidity and risks
- The Phase 2a PCS-499 trial evaluates safety and tolerability. Eleven patients had been dosed as of the filing’s discussion; a twelfth had qualified for screening in August, with dosing anticipated later that month. The company reported no serious adverse events and described treatment-related events as generally mild. It cautioned that meaningful lesion changes may take at least six months to observe.
- Management expected the current trial to cost approximately $1.6–$1.8 million and believed the $1.8 million PoC Capital commitment would cover it. About $1.4 million remained at June 30; PoC had paid $395,927 directly to the CRO during the half and a further $193,299 afterward. Management estimated additional trial spending of about $230,000 during the remainder of 2019 and $711,000 through 2021.
- After quarter-end, Processa received $435,000 from sales of 8% Senior Convertible Notes and expected additional subscriptions. Management said it might need further capital before year-end and lacked resources to conduct future trials beyond the current study without additional financing. The company stated that, absent additional funding, cash would not support operations for one year or more after the financial statements became available; substantial doubt about its ability to continue as a going concern existed.
- The new notes carry 8% interest and include conversion or repayment provisions tied to specified financing, an exchange listing, or maturity on December 15, 2020; associated warrants are issued on a 1:1 basis for shares issued. Terms create potential dilution or repayment obligations. On July 2, the remaining $230,000 of earlier notes and accrued interest converted into 126,741 shares and 126,741 warrants.
- Other risks include clinical and regulatory uncertainty, dependence on additional financing, potential dilution, and reliance on third parties. Management disclosed that disclosure controls were not effective and that previously identified material weaknesses in internal controls remained. No material legal proceedings or material changes to reported risk factors were disclosed.
Important facts for investors to verify
- Progress, enrollment, safety findings and eventual efficacy results from the PCS-499 Phase 2a trial, and the timing and substance of planned FDA discussions.
- Whether the company completes the note financing and secures sufficient capital to fund operations and future trials; assess resulting debt terms and dilution.
- Actual cash burn, CRO payments under the PoC Capital commitment, and whether trial costs remain within management’s estimates.
- Remediation of the disclosed internal-control material weaknesses and effectiveness of disclosure controls.
- Post-quarter conversion of the old notes and the August 2019 reduction in authorized common and preferred shares.