Filing identity and reporting period
The supplied filing is Heatwurx, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2015, not a filing for Processa Pharmaceuticals, Inc. Heatwurx describes itself as an asphalt-repair equipment and technology company.
Financial results and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue, 2015 | $20,040 | $66,630 |
| Revenue, 2014 | $112,835 | $133,180 |
| Gross profit, 2015 | $9,033 | $26,354 |
| Net loss, 2015 | $2,051,108 | $2,695,715 |
| Net loss, 2014 | $851,216 | $2,195,495 |
| Net loss per common share, 2015 | $(0.19) | $(0.25) |
For the six months, operating cash outflow was $778,610, investing cash outflow was $1,399, and financing cash inflow was $773,968. Cash declined by $6,041 to $15,193. Management reported monthly spending of approximately $170,000, with only a minor amount covered by operating proceeds.
At June 30, total assets were $877,714, total liabilities $2,198,213, and stockholders’ equity was negative $1,320,499. Current liabilities were $2,093,265 versus current assets of $479,195. Current debt included $908,361 of senior secured notes, $389,391 of unsecured notes net of discount, and a $229,980 revolving credit line. The filing reports $1,720,629 in scheduled principal payments, including $1,166,795 in 2015.
Material changes and unusual items
Six-month revenue fell approximately 50% year over year, reflecting lower equipment sales and service revenue; second-quarter revenue fell approximately 82%. Six-month SG&A declined to $1,068,929 from $1,517,412, and research and development declined to $25,432 from $168,264. Despite lower operating expenses, the net loss widened, driven in large part by a $1,517,859 impairment of developed technology. The intangible asset was written down to zero after management estimated no future cash flows. The 2014 comparison included a $390,659 goodwill impairment.
The senior secured notes carry 12% interest and are secured by all company assets, including intellectual property. Heatwurx disclosed missed interest payments and default under the senior secured agreement, creating lender rights to call the notes or foreclose. On August 16, 2015, the secured notes, totaling approximately $947,361 after additional post-quarter borrowing, were extended to February 15, 2016; the interest-payment default remained. The company also missed an August 15 principal payment on the Dr. Pave revolving line of credit, which is secured by subsidiary assets.
Outlook, risks, and management commentary
Management stated that substantial doubt exists about the company’s ability to continue as a going concern. It reported that it could not obtain adequate new financing, did not have contracted revenue or immediate sales prospects, and did not expect to meet 2015 mandatory debt principal payments. The company scaled back operations and listed its asphalt paving assets and intellectual property for sale while seeking a merger or acquisition. Management stated that failure to find a buyer or transaction would require the company to cease operations. No quantitative earnings or revenue guidance was provided.
Subsequent events include the end of the Gardena lease in August, followed by a month-to-month arrangement; the resignation of Interim CEO and CFO Heather Kearns effective August 19, 2015; and ongoing discussions with potential asset purchasers or transaction counterparties. The company reported ineffective disclosure controls and a material weakness related to insufficient accounting personnel; remediation depended on obtaining operating funds.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is for Heatwurx, Inc., not Processa Pharmaceuticals, Inc.
- Verify the status of the secured-note interest default, the February 2016 extension, and the revolving-line default, including any lender enforcement or waiver actions.
- Check whether the company found a buyer, merger partner, or other financing and whether operations continued.
- Confirm the company’s cash runway, outstanding obligations, and ability to satisfy scheduled debt payments.
- Review whether executive and financial reporting leadership was replaced and whether the disclosed control weakness was remediated.