Filing identity and reporting period
Important mismatch: The supplied filing is Heatwurx, Inc.’s Form 10-Q for the quarter ended June 30, 2014—not a filing for Processa Pharmaceuticals, Inc. The summary below reflects Heatwurx’s filing and should not be attributed to Processa.
Heatwurx develops asphalt repair equipment and technology and, following its January 2014 acquisition of Dr. Pave, also provides asphalt restoration services. The filing presents unaudited results for the three and six months ended June 30, 2014, compared with the same 2013 periods.
Financial performance and liquidity
| Metric | Three months ended June 30, 2014 | Six months ended June 30, 2014 |
|---|---|---|
| Revenue | $112,835 | $133,180 |
| Gross profit / margin | $42,643 / 37.8% | $53,848 / 40.4% |
| Operating loss | $738,258 | $2,022,487 |
| Net loss | $851,216 | $2,195,495 |
| Net loss attributable to common stockholders | $912,351 | $2,254,649 |
| Basic and diluted loss per share | $0.11 | $0.27 |
Quarterly revenue rose from $97,280 in 2013; six-month revenue rose from $116,480. Service revenue was $30,975 for the quarter and $43,875 for the half-year, versus none in the comparable 2013 periods. Gross margin improved from 36.8% to 37.8% for the quarter and from 36.8% to 40.4% for the half-year.
Six-month operating cash use was $1,695,826, compared with $1,366,907 in 2013. Cash fell to $39,899 at June 30 from $186,864 at December 31, 2013. Current assets were $466,028 and current liabilities $561,726, a working-capital deficit of $95,698. Total liabilities were $2,161,710, versus $1,267,175 at year-end; total stockholders’ equity was $622,988.
Borrowings included $250,000 of current notes payable, $1,246,335 of long-term unsecured notes, a $229,980 revolving line of credit, and loan payable balances totaling $167,959. Interest expense was $112,935 for the quarter and $173,032 for the half-year. The filing reports no clear standalone debt total in its MD&A.
Material changes and unusual items
- SG&A increased to $1,517,412 for the first half from $1,402,171; R&D increased to $168,264 from $134,986. A $390,659 goodwill impairment related to the Dr. Pave acquisition was recorded in the first quarter.
- Dr. Pave was acquired for 58,333 Heatwurx common shares valued at $175,000, with $215,659 of net liabilities assumed. The acquisition was related-party in nature: Dr. Pave was controlled by Heatwurx’s CEO. Goodwill was immediately impaired, which management attributed to the acquired business’s lack of service revenue in the prior year.
- Financing included $509,963 net proceeds from Series D preferred shares and $1,570,000 of proceeds from unsecured note issuance, partly offset by repayment of the $500,000 senior subordinated note. New notes generally carried 12% interest and were issued with warrants.
- Series B and C preferred shares were converted into common shares in April. Series D preferred shares remained outstanding, with a $2,576,188 liquidation preference at June 30.
Outlook, risks, and contingencies
Management stated that cash on hand was inadequate for the next 12 months and that operations were consuming approximately $275,000 per month, with only a small portion covered by revenue. The filing says additional financing is necessary and raises substantial doubt about the company’s ability to continue as a going concern. It estimates a need for at least $2 million to $3 million over the next 12 months in one disclosure and at least $3 million in the MD&A; financing availability is not assured. Without additional capital, management said it might reduce or cease operations or pursue a merger or acquisition.
After quarter-end, the company received $145,000 in July and $184,000 in August under its $3 million debt offering. Management also described plans to launch a national Dr. Pave franchise program, subject to regulatory approval, with sales expected to begin in early third quarter 2014. These are forward-looking plans, not reported results.
Other disclosed commitments included approximately $65,000 of remaining lease obligations through July 2015 and about $50,000 for equipment being fabricated. Risks include financing dependence, limited revenue, competition, regulatory and litigation risks, and the execution of product commercialization and franchising plans. Management reported effective disclosure controls and no material change in internal control over financial reporting during the period.
Key facts for investors to verify
- Confirm the intended issuer: the provided 10-Q is for Heatwurx, not Processa Pharmaceuticals.
- Assess whether the post-quarter debt proceeds and remaining offering capacity were sufficient to address the stated cash need and going-concern uncertainty.
- Review the terms, maturities, interest burden, and warrant dilution associated with the debt offerings and preferred shares.
- Evaluate whether Dr. Pave service revenue and the proposed franchise program generated results beyond the plans described in this filing.
- Reconcile the differing management estimates of required financing ($2 million to $3 million versus at least $3 million).