Processa Pharmaceuticals, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; filed May 14, 2019. Processa is an emerging clinical-stage biopharmaceutical company developing PCS-499, with necrobiosis lipoidica (NL) as its lead indication. It reported no revenue and has no approved products for sale.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | None | None |
| Research and development expense | $484,750 | $821,388 |
| General and administrative expense | $397,766 | $470,228 |
| Operating loss | $882,516 | $1,291,616 |
| Net loss | $750,832 | $1,096,798 |
| Basic and diluted loss per share | $0.02 | $0.03 |
| Cash used in operating activities | $492,429 | $1,069,008 |
At March 31, cash and cash equivalents were $1.25 million, down from $1.74 million at year-end 2018. Current assets were $1.54 million and current liabilities $725,000. Total liabilities were $2.95 million, including a $2.00 million deferred tax liability; stockholders’ equity was $9.12 million. The company had $230,000 of senior convertible notes outstanding, plus accrued interest, and operating lease liabilities with a present value of $283,885. The filing reports no investing cash use or financing cash flow in Q1.
The $130,299 income tax benefit reflects deferred tax accounting associated with the PCS-499 license, not operating revenue. Intangible-asset amortization was $198,832 and is included in R&D expense. The company reported no material impairment loss.
Changes versus the prior comparable period
- Net loss improved by $345,966, while operating expenses fell by $409,100.
- R&D expense decreased by $336,638, primarily because Q1 2018 included higher Phase 1 and manufacturing-site costs. Q1 2019 included higher license amortization, partly offset by lower preclinical and clinical costs.
- G&A expense decreased by $72,462. Q1 2018 included an approximately $144,000 cybersecurity fraud loss; Q1 2019 included increased payroll and $58,559 of stock-based compensation.
- Interest expense fell to $4,600 from $87,740, reflecting the conversion of $2.35 million of senior notes in May 2018 and the absence of prior-period debt-issuance-cost amortization.
- Operating cash use declined by $576,579 year over year. The company adopted ASC 842 on January 1, 2019, recognizing a right-of-use asset and lease liabilities without materially affecting the income statement.
Outlook, risks and contingencies
- Clinical program: The FDA cleared the PCS-499 IND for a Phase 2a safety and dose-tolerability trial in NL in September 2018; first patient dosing was January 29, 2019. As of May 1, 2019, nine patients had enrolled, one had discontinued for trial inconvenience without reported adverse effects, and the other eight were receiving 1.8 g daily without dose-limiting side effects. Management expected to enroll all 12 planned patients by June 2019 and request an FDA meeting before year-end to discuss further development. Management cautioned that visible lesion changes may take at least six months.
- Funding and going concern: Management concluded substantial doubt existed about the company’s ability to continue as a going concern. It had $1.25 million cash and approximately $1.7 million remaining under a $1.8 million PoC Capital clinical-trial funding commitment at quarter-end. PoC Capital paid $115,000 directly to the CRO during Q1 and another $216,965 after quarter-end. Management said additional capital would be needed before the end of Q2 2019 for future operations; the commitment was expected to cover the current Phase 2a trial, but not other future trials. Financing may be unavailable or dilutive, and trial costs may exceed estimates.
- Debt and commitments: The $230,000 convertible notes held by Canadian individuals cannot convert until the Alberta Securities Commission permits issuance of the related securities; otherwise, approximately $255,000 of principal and accrued interest would be repayable. CRO and subcontractor purchase obligations were approximately $23,000 at March 31 and were generally cancellable subject to terms.
- Controls and legal matters: Management found disclosure controls ineffective and stated that previously identified material weaknesses—entity-level controls, inadequate segregation of duties, and insufficiently documented accounting and reporting procedures—remained. Remediation was ongoing. The company reported no material legal proceedings and no material changes to the risk factors in its 2018 Form 10-K.
No formal financial guidance was provided. Management expected R&D spending to increase as the Phase 2a trial continued, including costs to manufacture additional clinical material, and expected G&A expenses to rise with staffing and public-company requirements.
Important facts for investors to verify
- Whether the company raised the additional capital it said it needed by the end of Q2 2019, and the terms and dilution associated with any financing.
- Whether PoC Capital fulfilled the remaining trial-funding commitment and whether that funding covered actual Phase 2a costs.
- Subsequent enrollment, safety, tolerability and efficacy observations in the 12-patient trial, and the timing and outcome of any FDA meeting.
- Whether the Canadian note conversion was approved or repayment became necessary.
- Progress in remediating the disclosed material weaknesses and improving disclosure controls.