Processa Pharmaceuticals, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; comparative figures are for 2016. The company’s business changed materially in October 2017: Heatwurx acquired Promet Therapeutics’ assets, Promet became the accounting acquirer in a reverse acquisition, and the combined company adopted the Processa name and drug-development strategy. Results before the transaction primarily reflect Promet, not Heatwurx’s former business.
Business context
Processa is a pre-revenue, clinical-stage pharmaceutical company pursuing treatments for serious conditions with unmet medical need. Its lead candidate, CTP-499 (also referred to in the filing as PCS-499), was being developed for necrobiosis lipoidica and radiation-induced fibrosis. The company had no approved products, sales, or marketing capabilities and relied on third parties for research, clinical work, and manufacturing.
Financial results and position
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $926,117 | $1,536,996 |
| General and administrative expense | $876,316 | $384,524 |
| Total operating expenses | $1,802,433 | $1,921,520 |
| Net loss | $1,856,315 | $1,917,066 |
| Net loss per share | $0.06 | $0.07 |
| Net cash used in operating activities | $1,654,617 | $2,155,037 |
| Cash and cash equivalents at year-end | $2,847,429 | $1,071,894 |
For the fourth quarter of 2017, revenue was $0, operating expenses were $575,306, and net loss was $633,860. Gross margin and operating margin are not meaningful because the company had no revenue. Total assets at December 31, 2017 were $2,982,940; total liabilities were $2,609,776; and stockholders’ equity was $373,164.
At year-end, the company had $2.58 million of 8% senior secured convertible notes outstanding, reported at $2,448,570 net of issuance costs, plus $35,693 accrued interest. Notes mature or convert within one year of issuance, are secured by company assets, and have anti-dilution and other investor protections. Contractual obligations were reported as $3,853,668, including notes and interest, leases, and $895,740 of purchase obligations; research and development contracts generally were cancellable subject to amounts incurred and possible cancellation fees.
Changes versus 2016
- Net loss narrowed by 3.2% to $1.86 million, while operating expenses declined 6.2%. Lower R&D spending reflected completion and termination of the Drexel peptide program and the timing of the CTP-499 license; higher G&A reflected public-company, staffing, rent, and transaction costs.
- Operating cash use fell to $1.65 million from $2.16 million. Cash increased partly because the company raised $2.58 million through convertible notes and redeemed certificates of deposit.
- The October reverse acquisition replaced the former business plan with pharmaceutical development. Promet shareholders received approximately 90% of the post-transaction shares before the reverse split.
Outlook, risks, and unusual items
- Funding and going concern: The auditor and management disclosed substantial doubt about the company’s ability to continue as a going concern. Management said year-end cash was expected to meet needs only until approximately October 2018 and elsewhere said it would not be sufficient for one year or more after issuance of the financial statements. No committed credit facility or other committed financing was disclosed; additional capital was necessary.
- Development plans: After an FDA pre-IND meeting in October 2017, management expected to submit an IND for necrobiosis lipoidica in Q3 2018 and begin a Phase 2 study in Q4 2018. These were plans, not reported outcomes. The company also planned further FDA engagement on radiation-induced fibrosis and was evaluating other drug candidates.
- CTP-499 license: In March 2018, after year-end, the option agreement was amended and the license was exercised and assigned to Processa. Consideration included transfer of approximately 2.09 million Processa shares to CoNCERT and, under the amended terms, 15% of sublicense revenue until specified conditions are met. The license carries sales royalties and development obligations; loss of the rights would materially harm the plan.
- Cybersecurity fraud: In January 2018, the company incurred a $144,200 loss from a cybersecurity breach. It reported no insurance coverage and considered recovery remote; it described remedial controls but could not assure against recurrence.
- Controls and governance: Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2017. Material weaknesses included insufficient accounting personnel and control deficiencies highlighted by the later fraud. The company reported no auditor attestation on internal controls. It also had no audit or compensation committee, and all directors were deemed non-independent under Nasdaq standards.
- Other risks: Clinical, regulatory, manufacturing, intellectual-property, reimbursement, competition, dilution, and key-personnel risks are substantial. Shares traded over the counter and were described as illiquid; ownership was concentrated. The company reported no material pending legal proceedings and no off-balance-sheet arrangements.
Most important facts for investors to verify
- Current cash, subsequent financing, actual cash burn, and runway relative to the going-concern disclosure.
- Whether the amended CTP-499 license remains in good standing, including equity consideration, royalties, sublicense economics, milestones, and development duties.
- Actual FDA/IND and clinical-trial progress versus the stated 2018 timetable, and whether the candidate naming and indication descriptions are consistent.
- Remediation of the accounting-staff and cybersecurity control weaknesses, and the impact of the $144,200 fraud loss.
- The terms and potential dilution from conversion of the secured notes, including anti-dilution provisions and any later financings.