Business context and reporting period
Processa Pharmaceuticals, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2020. It is a clinical-stage biopharmaceutical company with no approved products, customers, or revenue. Its lead program is PCS499 for ulcerated necrobiosis lipoidica (NL); PCS100 and PCS11T are additional candidates that require further funding for development.
Financial results and liquidity
| Metric | Q2 2020 / June 30, 2020 | Comparable period / prior year-end |
|---|---|---|
| Revenue | None | None in Q2 2019 or first half 2019 |
| Operating expenses | Q2: $802,000; six months: $1.788 million | Q2 2019: $1.137 million; six months 2019: $2.019 million |
| Net loss | Q2: $733,000 ($0.13 per share); six months: $1.608 million ($0.29 per share) | Q2 2019: $969,000 ($0.18 per share); six months 2019: $1.720 million ($0.31 per share) |
| Operating cash flow | Six months: cash used of $897,000 | Six months 2019: cash used of $1.415 million |
| Cash and equivalents | $453,000 | $692,000 at December 31, 2019 |
| Total assets / liabilities | $10.011 million / $3.418 million | $10.883 million / $2.871 million at December 31, 2019 |
There is no meaningful gross margin because the company had no revenue. Current assets were $577,000 against current liabilities of $1.898 million, a working-capital deficit of approximately $1.321 million. The balance sheet included $805,000 of senior convertible notes, $500,000 drawn on a related-party line of credit, and $163,000 of PPP debt. The company drew another $200,000 on the related-party line on July 21, 2020. Total liabilities also include a $1.316 million deferred tax liability.
Changes versus prior periods
- Q2 net loss narrowed by about 24% year over year; six-month net loss narrowed by about 7%. Operating expenses declined, mainly as PCS499 Phase 2A trial costs decreased after patient enrollment and treatment activities were completed.
- Six-month operating cash use improved year over year, partly due to lower direct cash costs and a decrease in prepaid expenses.
- Interest expense increased to $36,000 for the first half from $11,000, reflecting borrowing and related debt costs. G&A rose $51,000 for the first half, primarily due to higher Delaware franchise taxes and stock-based compensation, partly offset by lower professional fees.
- Cash fell by $239,000 from year-end. The company funded operations with $500,000 of related-party credit and a $162,459 PPP loan.
Outlook, risks, and unusual items
- Management stated that available resources were expected to fund operations only into the third quarter of 2020, and that additional capital was necessary to continue planned trials and develop other candidates. The filing states that substantial doubt exists about the company’s ability to continue as a going concern within one year after the financial statements became available. Management was pursuing an underwritten public offering and Nasdaq up-listing; COVID-19 had delayed fundraising and clinical activities.
- The PCS499 Phase 2A patient portion was complete, but site closeout was delayed by COVID-19. In a small open-label study, both of the two patients with ulcerated NL had complete ulcer closure; the filing cautions that the sample was limited. Recruitment for a randomized, placebo-controlled study was expected to begin in early 2021. Whether to pursue Phase 2B or Phase 3 remained undecided and dependent on FDA input, financing, and other considerations.
- The PCS11T license is contingent on an equity financing and successful Nasdaq listing, plus Israeli regulatory approval, within nine months of May 24, 2020; otherwise, the agreement terminates. The company anticipated beginning preparatory work and a Phase 1B study in late 2021, subject to funding. Development of PCS100 was also contingent on adequate funding.
- Related-party lenders are managed by the company’s CEO. The credit lines bear 8% interest and may convert to stock. The $805,000 senior notes mature December 15, 2020, with conversion and anti-dilution provisions. The company had deferred $210,800 of certain employee salaries.
- The $162,459 PPP loan bears 1% interest and may be eligible for forgiveness, but forgiveness was not assured. The filing also reports continuing material weaknesses in internal controls and ineffective disclosure controls. No material legal proceedings or purchase obligations were reported.
Important facts for investors to verify
- Whether the public offering and Nasdaq listing were completed, on what terms, and whether sufficient capital was raised to fund operations and clinical plans.
- Subsequent cash use, financing availability, and the company’s ability to meet the December 2020 senior-note maturity and other obligations.
- Progress and FDA alignment on the design, phase, enrollment timing, and funding of the next PCS499 trial; interpret Phase 2A observations in light of the very small ulcerated-patient sample.
- Whether the conditions for the PCS11T license were satisfied before its deadline, and the resulting equity issuance and future development commitments.
- Reconciliation of apparent filing inconsistencies: first-half 2020 R&D is reported as both $925,855 and $928,855, and June 30 common shares are reported as both 5,514,447 and 5,515,447.