Processa Pharmaceuticals, Inc. — Q3 2018 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2018. Processa is a pre-revenue clinical-stage pharmaceutical company developing PCS-499, with necrobiosis lipoidica (NL) as its lead indication. The FDA cleared the IND for PCS-499 in NL on September 28, 2018; a Phase 2a trial was planned to begin in Q4 2018. The company’s October 2017 reverse acquisition changed its operating business, so comparisons with 2017 reflect different business histories.
Key financial results and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development | $611,612 | $457,632 | $2,477,481 | $772,533 |
| General and administrative | $451,359 | $255,219 | $1,305,511 | $454,592 |
| Net loss | $852,822 | $711,567 | $3,155,874 | $1,222,453 |
| Net loss per share, basic and diluted | $0.02 | $0.02 | $0.09 | $0.04 |
| Operating cash used | Not separately provided | Not separately provided | $3,243,938 | $978,823 |
At September 30, 2018, cash and cash equivalents were $2.42 million, current assets $2.80 million, current liabilities $691,186, total liabilities $2.96 million, and stockholders’ equity $10.51 million. Total assets of $13.46 million included $10.64 million of net intangible assets, primarily the PCS-499 license. The company reported no product revenue, so operating margins are not meaningful.
Financing activities provided $2.84 million in net cash during the first nine months, chiefly from a private placement. Cash decreased by $423,206 over the period. The company had $230,000 of senior convertible notes outstanding at quarter-end, reported net of debt issuance costs at $227,772, plus $15,743 accrued interest. The notes bear 8% interest and are secured; most of the original $2.58 million principal was converted to equity in May 2018.
Material changes versus the prior comparable period
- Nine-month net loss increased by $1.93 million; R&D expense rose $1.70 million and G&A rose $851,000. R&D growth reflected PCS-499 development, Phase 1 work, manufacturing scale-up and $422,814 of license amortization.
- Cash used in operations increased by $2.27 million year over year, while cash on hand declined from $2.85 million at December 31, 2017 to $2.42 million at September 30, 2018.
- The company recognized an approximately $11.0 million PCS-499 license intangible in March 2018, primarily in exchange for $8.0 million of existing company shares transferred by Promet to CoNCERT, plus a $3.04 million deferred tax liability and transaction costs. The license agreement also provides for 15% of specified sublicense revenue until contractual conditions are met.
- In May 2018, $2.35 million of senior notes and accrued interest converted into 1,206,245 common shares and warrants. A further $3.2 million gross private placement issued 1,402,442 shares with warrants. Common shares outstanding increased to 38,674,265 from 35,272,626 at year-end 2017.
- The company recorded income tax benefits of $212,015 for Q3 and $771,332 for the first nine months of 2018, versus none in 2017. These are deferred tax benefits associated with tax losses and the acquired license-related deferred tax liability, not operating revenue.
Outlook, risks and unusual items
- Funding and going concern: Management stated that substantial doubt exists about the company’s ability to continue as a going concern. Based on its plan and resources, including a $1.8 million clinical-trial funding commitment, it expected to need additional capital before the end of Q2 2019. Management said current resources should cover the planned Phase 2a trial, but not other future trials. Additional financing may be unavailable or require dilution, unfavorable debt terms, or relinquishment of product rights.
- Trial funding and costs: The Phase 2a trial was estimated to cost approximately $1.6–$1.8 million. PoC Capital’s $1.8 million commitment is paid directly to the CRO against invoices, rather than to Processa; costs above the commitment are Processa’s responsibility. Trial costs and timing may vary, and the CRO agreement could involve up to approximately $1.8 million of future services.
- Operating risks: The company has no revenue, sales or marketing capability and expects continued losses and negative operating cash flow. Development, FDA approval, patent protection, competition, third-party manufacturing and CRO reliance, and access to capital are key risks. Management expected R&D and G&A costs to increase.
- Unusual loss and controls: A January 2018 cybersecurity fraud caused a $144,200 loss; the company had no insurance coverage and said recovery was remote. Management reported disclosure controls were ineffective due to material weaknesses, including inadequate accounting staffing and the cybersecurity breach. A CFO was hired in September, but the staffing-related weakness had not been remediated by filing; security procedures and systems changes had been implemented.
- Other items: No material legal proceedings or off-balance-sheet arrangements were reported. The company had approximately $41,000 of purchase obligations excluding the contingent CRO trial agreement. No formal financial guidance was provided.
Important facts for investors to verify
- Whether the planned Phase 2a NL trial began on schedule, its enrollment and results, and whether committed funding covers actual CRO and manufacturing costs.
- Cash runway, the timing and terms of the anticipated capital raise, and whether management’s Q2 2019 funding need changed.
- The status and conversion terms of the remaining $230,000 of notes, including the Canadian regulatory matters, and the potential dilution from warrants and full-ratchet anti-dilution protections.
- The valuation, useful life and impairment assumptions for the PCS-499 license, and the conditions governing CoNCERT’s 15% sublicense revenue share.
- Progress in remediating material weaknesses in financial reporting controls and the effectiveness of cybersecurity safeguards after the fraud loss.