Processa Pharmaceuticals, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Filed May 15, 2020. Processa is a clinical-stage biopharmaceutical company with no approved products and no revenue. Its lead candidate, PCS499, is being developed for necrobiosis lipoidica (NL); PCS100 is a licensed development candidate.
Financial results and position
| Metric | Q1 2020 / March 31, 2020 | Prior comparable / December 31, 2019 |
|---|---|---|
| Revenue | None | None |
| Research and development expense | $501,771 | $484,750 in Q1 2019 |
| General and administrative expense | $484,353 | $397,766 in Q1 2019 |
| Operating loss | $986,124 | $882,516 in Q1 2019 |
| Net loss | $874,336; $0.16 per share | $750,832; $0.14 per share in Q1 2019 |
| Operating cash used | $546,453 | $607,429 in Q1 2019 |
| Cash and cash equivalents | $142,277 | $691,536 at December 31, 2019 |
| Total assets | $10,012,026 | $10,883,134 at December 31, 2019 |
| Total liabilities | $2,777,955, including $1,403,501 net deferred tax liability | $2,870,584 at December 31, 2019 |
There was no revenue or gross margin to report. Net loss increased by $123,504 year over year. Cash declined by $549,259 during the quarter. Current assets were $356,525 versus current liabilities of $1,246,302, a working-capital deficit of approximately $889,777. The balance sheet reports $803,573 of senior convertible notes, net of issuance costs; the notes had $805,000 principal outstanding and mature December 15, 2020. Operating lease liabilities totaled $206,165.
Changes and operating drivers
- R&D expense rose $17,021, mainly from higher clinical, preclinical, regulatory and consulting costs, partly offset by lower R&D payroll.
- G&A expense rose $86,587, primarily because Delaware franchise tax increased by $116,000 following the December 2019 1-for-7 reverse split; lower professional and other costs partly offset the increase.
- Interest expense increased to $17,170 from $4,600, reflecting the 2019 senior notes and amortization of debt issuance costs; interest income fell to $829 from $5,985.
- Management deferred salary payments to preserve cash; $186,044 was accrued at March 31, 2020.
Outlook, risks and notable items
- Funding and going concern: Management stated that cash and available line-of-credit funding were expected to support operations only into the third quarter of 2020. The company said it needs additional capital and disclosed substantial doubt about its ability to continue as a going concern within one year after the financial statements became available. It lacked resources to fund a Phase 3 trial or develop PCS100 without additional financing.
- Financing: Two related-party revolving credit facilities provide commitments of up to $700,000 each, bearing 8% interest and potentially convertible into shares. The CEO also leads both lenders. Processa borrowed $200,000 from DKBK on April 2, after quarter-end. It received $162,459 under the Paycheck Protection Program on May 5 and was pursuing an underwritten public offering, delayed by COVID-19. Availability and terms of further financing were not assured.
- PCS499: The Phase 2 study completed enrollment in August 2019. The company reported no serious adverse events; reported adverse events were mild. Two ulcerated patients’ reference ulcers closed during treatment, but the filing describes a small, open-label study and only slight lesion change among patients without ulcers. Following an FDA meeting on March 25, 2020, Processa planned to design a Phase 3 study with FDA input through a Special Protocol Assessment, targeting recruitment in 2021 rather than the previously planned fourth quarter of 2020 because of COVID-19. FDA would decide whether a confirmatory trial is needed after reviewing results.
- PCS100: Development in selected rare adult fibrotic diseases is contingent on obtaining adequate funding. The drug’s prior DMD trial had been placed on clinical hold after a serious adverse event; the filing says the FDA subsequently removed the hold and defined how trials could resume.
- COVID-19: The company cited risks to clinical-trial conduct, operations, financing access and development timelines.
- Controls and legal matters: Management concluded disclosure controls were not effective and reported continuing material weaknesses involving entity-level controls, segregation of duties and documentation. The company reported no material legal proceedings and no material change to previously disclosed risk factors other than COVID-19.
Key facts for investors to verify
- Cash runway and whether subsequent financing, including the public offering process, provided sufficient funding; verify the status and terms of the $200,000 related-party draw and PPP proceeds.
- Whether the PCS499 Phase 3 protocol received FDA feedback through the Special Protocol Assessment, when recruitment began, and whether a second trial is required.
- Clinical evidence supporting PCS499 efficacy, including the limited ulcer-patient observations, safety findings and any later trial results.
- Senior-note maturity, conversion and dilution provisions, remaining line-of-credit availability, and related-party terms and governance.
- Progress in remediating the disclosed material weaknesses and improving disclosure controls.