Propanc Biopharma, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2018 (fiscal second quarter); filed February 14, 2019. The interim financial statements are unaudited. Propanc is a pre-revenue, development-stage biotechnology company; its lead candidate, PRP, is in preclinical development.
Key financial metrics
| Metric | Three months ended Dec. 31, 2018 | Six months ended Dec. 31, 2018 | Comparable 2017 period |
|---|---|---|---|
| Revenue | $0 | $0 | $0 |
| Operating expenses | $757,820 | $1,206,691 | $1,437,070 / $2,641,045 |
| Net loss | $1,450,038 | $3,574,974 | $2,201,979 / $4,125,722 |
| Net loss per share, basic and diluted | $(0.08) | $(0.02) | $(0.20) / $(0.49) |
| Net cash used in operating activities | Not presented by quarter | $1,056,786 | $1,071,326 |
- At December 31, cash was $124,538; current assets were $388,055 and current liabilities were $4,616,633, leaving a $4,228,578 working-capital deficit. Total assets were $712,597 and stockholders’ deficit was $3,904,036.
- Net convertible notes and accrued interest were reported as $2,798,624 on the balance sheet. Accounts payable were $1,062,609; accrued expenses and other payables were $296,922.
- Six-month financing cash flow was $1,225,892, primarily from convertible-note proceeds and common-stock issuance. Cash increased by $104,617 to $124,538.
- Gross margin is not meaningful because the company reported no revenue.
Changes versus comparable periods
- Six-month net loss narrowed by about 13% from $4.13 million to $3.57 million. Operating expenses fell 54%, principally because prior-year PRP process-development and manufacturing-preparation work was largely completed; research and development expense decreased from $1.60 million to $151,000.
- Six-month results included a $1.93 million loss from changes in derivative fair value, versus a $230,000 loss in 2017, and a $614,000 foreign-currency transaction loss, versus $9,000. A $1.17 million gain on debt extinguishment also benefited 2018 results.
- Common shares issued increased substantially through note conversions and equity-line draws. The company reported 273.3 million shares issued at December 31, compared with 46.4 million at June 30; 333.9 million shares were issued and outstanding as of February 14, 2019.
Outlook, risks and unusual items
- Management states that substantial doubt exists about the company’s ability to continue as a going concern. It says available cash and current financing commitments are insufficient for the next 12 months, and operations depend on raising additional capital.
- Management planned to begin a Phase Ib study in advanced solid-tumor patients during calendar 2019, subject to funding, with estimated costs of approximately $2.5 million. Phase IIa studies were envisioned for 2021; management estimated reaching a Phase IIa proof-of-concept milestone in three to four years, subject to financing, regulatory approvals and development results. These are plans, not assured outcomes.
- The October 2018 equity purchase agreement provides a potential commitment of up to $10 million, but draws are optional and subject to conditions, including registration effectiveness, share-reserve requirements and trading limits. The filing says the company had reached the maximum shares available under the line and would need another registration statement to continue using it. Financing availability is not assured.
- Many outstanding notes carry 8% interest and conversion prices at substantial discounts to recent trading prices; some provide for default interest as high as 24% and penalties. The company disclosed defaults on notes with $597,435 of principal and accrued interest at their stated maturity dates and said it was negotiating extensions. It also prepaid certain notes and incurred penalties, including $51,380 on the JSJ note.
- Note conversions and equity-line issuances create substantial dilution risk. The company reserved 806.2 million shares for lender requirements at December 31; the equity-line agreement separately required a large share reserve. Authorized common shares had been increased to 4 billion.
- Management concluded disclosure controls were not effective and reported material weaknesses, including no written control documentation, insufficient segregation of duties, no audit committee and inadequate financial-reporting review. Planned remediation depends in part on obtaining funding.
- Other disclosed exposures include an IRS penalty of $30,000 plus interest for late filings, a related-party office lease, and anticipated Amatsigroup manufacturing payments of $2.5 million to $5 million over three years. The filing reported no material pending or threatened litigation.
Important facts for investors to verify
- Reconcile the balance-sheet convertible-note amount of $2,798,624 with Note 5’s reported net amount of $2,789,624; the filing text does not explain the $9,000 difference.
- Confirm the status of the $597,435 of matured notes disclosed as in default, any maturity extensions, and the terms and availability of subsequent financing.
- Verify the equity-line share capacity, registration requirements, subsequent proceeds and share issuance. The filing’s statement that the company had reached the line’s share limit “as of February 2018” appears inconsistent with the October 2018 agreement and later activity; clarify the intended date.
- Assess the potential dilution from discounted convertible-note conversions, lender share reservations and equity-line issuances, including shares issued after December 31.
- Confirm funding, regulatory and manufacturing readiness for the planned PRP clinical program, including the estimated Phase Ib cost and timing.
- Review the reported loss-per-share calculations and weighted-average share counts, given the large increase in shares during the six-month period.