Processa Pharmaceuticals, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; comparative figures are for 2017. Processa is a clinical-stage pharmaceutical company with no product sales. Because of the 2017 reverse acquisition, pre-combination results reflect Promet Therapeutics, not the former Heatwurx operating business.
Key financial results and position
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | None | None |
| Research and development expense | $3.09 million | $0.96 million |
| General and administrative expense | $1.44 million | $0.84 million |
| Operating loss | $4.52 million | $1.80 million |
| Net loss | $3.77 million | $1.86 million |
| Basic and diluted loss per share | $0.10 | $0.06 |
| Net cash used in operating activities | $3.71 million | $1.65 million |
- Cash and cash equivalents were $1.74 million at year-end, down from $2.85 million. Current assets were $2.02 million versus current liabilities of $0.65 million; these figures do not remove the substantial going-concern uncertainty.
- Year-end total assets were $13.21 million, including $10.44 million of net intangible assets, principally the PCS-499 license. Total liabilities were $3.51 million, including a $2.13 million net deferred tax liability.
- $230,000 of senior convertible notes remained outstanding, plus $20,343 accrued interest. The notes bear 8% interest and were expected to convert after Canadian regulatory matters were resolved.
- No operating margin is meaningful because the company had no revenue. Net loss included a $902,801 income-tax benefit related to the acquired license’s book-tax basis difference; it did not reflect operating profitability.
Material changes and unusual items
- R&D expense rose by $2.12 million, primarily from PCS-499 development, clinical and manufacturing work, and $621,647 of intangible-asset amortization after exercising the CoNCERT license.
- G&A expense increased by $601,354, including higher public-company, professional-fee and staffing costs. A January 2018 cybersecurity fraud caused a $144,200 loss; recovery was considered remote.
- In 2018, the company raised approximately $3.2 million gross through a private placement and converted $2.35 million of senior notes and accrued interest into common stock and warrants. These transactions involved dilution and full-ratchet anti-dilution provisions on certain shares.
- The CoNCERT license was acquired for $8 million of stock, with royalties on future sales and a potential 15% sublicense-revenue payment under specified conditions. No product revenue or sales outlook was provided.
Business, outlook and risks
- PCS-499 is the lead candidate, initially being developed for Necrobiosis Lipoidica (NL), a condition with no approved therapy. FDA orphan-drug designation was granted in June 2018 and the IND was cleared in September 2018. The 12-patient Phase 2a safety/tolerability study began dosing in January 2019; five patients had received at least one dose by March 15, 2019, and management hoped to enroll all 12 by June 2019. Early tolerability observations are not evidence of efficacy.
- A prior Phase 2 study in diabetic kidney disease did not meet its 24-week primary endpoint. Some 48-week measures favored PCS-499 but were not statistically significant; a smaller proportion of PCS-499 patients had a 50% or greater serum-creatinine increase (1.5% versus 10.3%; p=0.026).
- Management estimated the NL Phase 2a trial would cost $1.6–$1.8 million and believed the $1.8 million PoC Capital commitment would fund it. The commitment is not ordinary cash on hand: payments are generally made directly to the CRO, and trial costs above the commitment are the company’s responsibility.
- Management expected to need additional capital before the end of Q2 2019 to fund future operations, beyond the planned NL trial. The company reported substantial doubt about its ability to continue as a going concern; the auditor’s report included a going-concern paragraph. Failure to raise funds could delay, reduce or end development programs.
- Other significant risks include clinical and regulatory failure, dependence on third-party CROs and manufacturers, potential high PCS-499 manufacturing costs, reliance on licensed intellectual property, competition, dilution, and illiquid OTC trading. Management reported ineffective disclosure controls and material weaknesses involving entity-level controls, segregation of duties, and documentation of policies and procedures; remediation was in progress.
Important facts for investors to verify
- Current cash runway, timing and terms of any subsequent financing, and actual cash needs beyond the PoC-funded trial.
- Utilization and remaining availability of the $1.8 million clinical-trial commitment, including reimbursement of company-paid CRO costs and any costs above the commitment.
- Enrollment, safety, completion timing and results of the Phase 2a NL study; distinguish tolerability updates from efficacy evidence.
- Manufacturing supply, cost and capacity for PCS-499, and the royalty and sublicense obligations under the CoNCERT license.
- Share-count discrepancy in the filing: the cover page reports 35,272,626 shares outstanding as of March 15, 2019, while Item 5 reports 38,674,265 shares as of that date; the balance sheet reports 38,674,265 at December 31, 2018.
- Progress in remediating internal-control material weaknesses and whether subsequent filings report any changes to control effectiveness.