Business context and reporting period
Filing identity discrepancy: The supplied filing is Heatwurx, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2015; it does not identify Processa Pharmaceuticals, Inc. Heatwurx describes itself as an asphalt-repair equipment and technology company.
The company had sharply reduced operations, was seeking to sell assets or find a merger/acquisition candidate, and disclosed substantial doubt about its ability to continue as a going concern.
Financial results and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $58,165 in 2015; $52,621 in 2014 | $124,795 in 2015; $185,801 in 2014 |
| Gross profit / margin | $15,547 / 26.7% in 2015; $27,332 / 52.0% in 2014 | $41,901 / 33.6% in 2015; $81,180 / 43.7% in 2014 |
| Net loss | $295,743 in 2015; $791,954 in 2014 | $2,991,461 in 2015; $2,987,448 in 2014 |
| Operating cash flow | Not separately reported | $(825,836) in 2015; $(2,236,065) in 2014 |
Nine-month operating expenses included a $1,517,859 impairment of developed technology and an $84,999 impairment of assets held for sale. Cash was $15,097 at September 30, 2015, versus $21,234 at December 31, 2014. Cash used in investing was $1,399; financing provided $821,098, including $753,000 of senior secured note proceeds. Accumulated deficit was $15.9 million and stockholders’ equity was a deficit of $1.6 million.
Total liabilities were $2.12 million, including $2.09 million current liabilities. Current assets were $322,627, compared with current liabilities of $2,088,606. The balance sheet reported $947,361 of senior secured notes, a $229,980 revolving line of credit, $404,212 of unsecured notes net of discount, and equipment-related liabilities.
Material changes versus the prior comparable period
- Nine-month revenue declined about 33%, primarily from lower equipment sales and service revenue; quarterly revenue rose modestly, with higher consumable sales offset by lower service revenue.
- Nine-month SG&A fell to $1.19 million from $2.19 million, and R&D fell to $27,146 from $179,993, reflecting scaled-back operations and reduced staffing, promotion, and development activity.
- Nine-month net loss was nearly unchanged year over year despite lower operating costs, principally reflecting the 2015 technology impairment; the 2014 period included a $390,659 goodwill impairment.
- Assets declined to $498,144 from $2.54 million, largely following impairment of the intangible asset and reclassification of assets for sale. Liabilities increased to $2.12 million from $1.33 million, and equity shifted from positive $1.21 million to a deficit.
Outlook, risks, and unusual items
Management said it had no revenue under contract or immediate sales prospects, could not obtain adequate additional financing, and did not expect revenue to support its cost structure. It estimated ongoing spending at about $10,000 per month after cuts, but said available cash was insufficient. Management intended to seek a merger or acquisition and stated that failure to find a candidate could force the company to cease operations. No financial guidance was provided.
The company disclosed default on interest payments under senior secured notes, with $49,534 interest payable on those notes, and warned lenders could call the debt or foreclose on company assets, including intellectual property. The senior secured notes had been extended to February 15, 2016, but management said it did not expect to meet required principal payments and that lender accommodation was not assured. The revolving credit line was also in default following a missed mandatory payment.
During the quarter, the company listed asphalt-paving assets and intellectual property for sale; proposals received were not considered suitable. Subsequent to quarter end, equipment was sold for $3,500 and assets with estimated fair value of $111,662 were returned to relieve $115,869 of debt. Disclosure controls were deemed ineffective due to a material weakness related to insufficient accounting personnel. The filing also reported that the company’s sole officer and director was affiliated with significant lenders and investors.
Important facts for investors to verify
- Whether the intended filing is Heatwurx’s 2015 Q3 10-Q or a filing for Processa Pharmaceuticals; the supplied document is for Heatwurx.
- Current status of going-concern plans, potential merger or acquisition discussions, and any subsequent cessation or continuation of operations.
- Whether secured lenders waived, amended, accelerated, or enforced debt terms, and the amount and status of all overdue principal and interest.
- Proceeds and final accounting for asset sales, returned collateral, and any disposition of intellectual property.
- Whether the disclosed material weakness in financial reporting controls was remediated and whether management or governance arrangements changed.