Processa Pharmaceuticals, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. Although the request labels the period “2019 Q4,” this is an annual report covering the full fiscal year. The company is a clinical-stage biopharmaceutical developer with no product sales or revenue.
Business context
Processa’s lead candidate, PCS499, was in a Phase 2a safety and tolerability trial for necrobiosis lipoidica (NL); enrollment was completed in August 2019. In August 2019, the company licensed PCS100, an anti-fibrotic and anti-inflammatory candidate, but said development would depend on obtaining adequate funding. The company also reported searching for additional candidates.
Financial results and liquidity
| Metric | FY2019 / Dec. 31, 2019 | FY2018 / Dec. 31, 2018 |
|---|---|---|
| Revenue | None | None |
| Research and development expense | $2.32 million | $3.09 million |
| General and administrative expense | $1.61 million | $1.44 million |
| Operating loss | $3.94 million | $4.52 million |
| Net loss | $3.36 million | $3.77 million |
| Net loss per share, basic and diluted | $0.70 | $0.71 |
| Cash used in operating activities | $2.75 million | $3.71 million |
| Cash and cash equivalents | $0.69 million | $1.74 million |
| Total assets | $10.88 million | $12.48 million |
| Total liabilities | $2.87 million | $2.78 million |
Margins are not meaningful because the company had no revenue. The FY2019 net loss included a $602,716 income tax benefit, primarily from reducing the deferred tax liability associated with the PCS499 license. The company reported $805,000 of 8% senior convertible notes issued in December 2019 (carrying value net of issuance costs: $802,503); the notes mature December 15, 2020. It also had up to $1.4 million available under two 8% related-party lines of credit, undrawn as of February 28, 2020. Current assets were $1.01 million and current liabilities $1.19 million at year-end. The auditor’s financial-statement opinion was unqualified and included a going-concern paragraph.
Changes versus FY2018
- Net loss narrowed by about $407,000, while operating expenses fell by about $589,000. R&D expense declined by about $765,000, mainly because FY2018 included higher Phase 1 and manufacturing-site costs; G&A rose by about $175,000, including higher payroll and stock compensation.
- Operating cash use decreased by about $958,000, but year-end cash fell by about $1.05 million to $692,000.
- FY2019 financing included the $805,000 senior-note issuance and $900,000 received toward a clinical-trial funding commitment. The remaining $230,000 of 2017 notes and accrued interest converted into shares and warrants in July 2019.
- A one-for-seven reverse stock split took effect December 23, 2019; reported share and per-share figures reflect the split.
Outlook, risks and unusual items
- Management expected available cash and the credit commitments to fund operations into Q3 2020 and to complete the current PCS499 Phase 2a trial. It planned an underwritten public offering in the first half of 2020. These were estimates subject to funding and spending uncertainties, not assured outcomes.
- Management said resources were insufficient to begin PCS100 development without additional financing. It anticipated further operating losses and had no contracted revenue or immediate sales prospects. The filing states that substantial doubt existed about the company’s ability to continue as a going concern.
- Management reported that two patients with more severe ulcerated NL had complete ulcer closure after nine months of treatment; patients without ulcers showed only slight lesion change. The company described the 1.8-gram daily dose as apparently tolerated, with no serious adverse events reported; nine patients at that dose reported mild treatment-related events. One patient had transient QTc prolongation after adding a beta blocker, and the PCS499 dose was reduced. These early observations do not establish efficacy or safety.
- An FDA meeting to discuss PCS499 development and a future trial was scheduled for March 2020. PCS499 had orphan-drug designation for NL. PCS100 had previously been placed on clinical hold after a serious adverse event in a pediatric DMD trial; the FDA had lifted the hold, but Processa planned to pursue adult fibrotic indications after funding.
- The company deferred $122,175 of salaries to preserve cash. It reported a 2018 cybersecurity fraud loss of $144,200 and identified material weaknesses in financial-reporting controls; disclosure controls and internal control over financial reporting were deemed ineffective at year-end. Remediation was ongoing, with completion targeted for 2020.
- The 2019 notes include conversion, warrant, anti-dilution and restrictive-covenant provisions. Their issuance triggered a full-ratchet adjustment for prior investors, entitling them to 28,971 additional shares expected to be issued in 2020. Both credit-line lenders were related parties, and the CEO also led both lenders.
Most important facts for investors to verify
- Subsequent financing, cash runway and whether the planned offering or related-party credit lines funded operations beyond Q3 2020.
- Final PCS499 Phase 2a results, patient numbers and safety findings, and the outcome of FDA discussions about the next trial.
- Whether PCS100 development began and whether its prior serious adverse event affects the development plan.
- Conversion, maturity and dilution consequences of the senior notes, warrants and anti-dilution shares; also confirm the status of the related-party credit facilities.
- Progress in remediating the disclosed material weaknesses and any subsequent changes to the going-concern assessment.