Filing summary
Entity and period: The supplied filing is Heatwurx, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2014—not a filing for Processa Pharmaceuticals, Inc. Heatwurx describes itself as a development-stage asphalt repair equipment and technology company.
Financial performance
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Revenue | $20,345 | $19,200 |
| Gross profit / margin | $11,205 / approximately 55% | $7,075 / approximately 37% |
| Operating expenses | $1,295,432 | $808,192 |
| Operating loss | $1,284,227 | $801,117 |
| Net loss | $1,344,276 | $816,365 |
| Net loss attributable to common shareholders | $1,382,824 | $915,307 |
| Operating cash used | $987,738 | $592,973 |
Revenue consisted of $7,445 in equipment sales and $12,900 in service revenue. The filing reports little revenue relative to operating costs. Selling, general and administrative expense rose to $805,004, principally from higher employee and office costs, partly offset by lower consulting, legal, offering-related, investor-relations, and promotion costs. Research and development expense increased to $99,769, primarily due to patent-related legal fees. A $390,659 goodwill impairment was recorded following the Dr. Pave acquisition.
Liquidity, debt and balance sheet
- Cash fell from $186,864 at December 31, 2013 to $82,248 at March 31, 2014. Management reported spending approximately $250,000 per month and said cash on hand was inadequate for the next 12 months.
- Total assets were $2.91 million; total liabilities were $1.88 million; stockholders’ equity was $1.03 million. Current assets were $478,307 against current liabilities of $784,502.
- Total liabilities increased from $1.27 million at year-end, including $728,908 of long-term unsecured notes and a $229,980 revolving line of credit. Current liabilities included $500,000 of notes payable.
- Financing provided $893,539 net cash during the quarter, including $1.0 million of unsecured-note proceeds, offset by $250,000 paid on the senior subordinated note and other repayments. The company also raised $153,996 net from Series D preferred shares.
- Management stated that at least $3 million of additional funding was needed to meet the next 12 months’ cash requirements. The filing says substantial doubt exists about the company’s ability to continue as a going concern and that operations depend on raising further capital.
Material changes, outlook and risks
- Heatwurx acquired Dr. Pave, a service business controlled by CEO David Dworsky, effective for accounting purposes January 1, 2014. Consideration was 58,333 common shares valued at $175,000; the company also assumed $215,659 of net liabilities. The resulting $390,659 goodwill was immediately impaired. Shares were issued to entities or individuals associated with the CEO and a director.
- After quarter-end, the company reported receiving $570,000 in April under a $3 million debt offering. It also made the final $250,000 required principal payment on its senior subordinated note on April 15, 2014.
- The company had approximately $2.157 million remaining to raise under its Series D preferred offering, which was scheduled to close May 30, 2014. Management said that if it could raise $3 million in the debt offering, together with anticipated revenues, it believed funding could cover operations and expected capital expenditures for 12 months; this was not assured.
- Key risks identified include dependence on a small group of financing sources, limited revenue, inability to obtain financing, competition and industry conditions, regulatory and environmental compliance, litigation, and product development and commercialization risks. The filing provides no formal revenue or earnings guidance.
- Other obligations include approximately $90,000 of remaining lease commitments through July 2015 and approximately $70,000 committed to outsourced equipment manufacturing.
Important facts for investors to verify
- Confirm the issuer: the supplied document is Heatwurx, Inc., despite the request metadata naming Processa Pharmaceuticals, Inc.
- Verify subsequent proceeds and whether the company completed its debt and Series D offerings; the filing described the amounts raised as uncertain.
- Assess the company’s cash runway against its reported monthly spending and the going-concern warning.
- Review debt maturities, 12% interest terms, warrant issuance and potential dilution, and the payment status of obligations due in 2014.
- Examine the related-party Dr. Pave acquisition, its operating performance, and the immediate impairment of all recorded goodwill.