Filing summary
Issuer identity discrepancy: The request identifies Processa Pharmaceuticals, Inc., but the supplied Form 10-Q is for Heatwurx, Inc. The summary below reflects the filing text and should not be attributed to Processa without verification.
Business context and reporting period
This is Heatwurx, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. Heatwurx develops and sells asphalt-repair equipment and technology, and provides asphalt restoration services through its January 2014 acquisition of Dr. Pave, LLC. It also launched a U.S. franchise sales program in the third quarter; the filing says the program was proceeding through regulatory approval.
Financial results and condition
| Metric | Three months ended Sept. 30, 2014 | Three months ended Sept. 30, 2013 | Nine months ended Sept. 30, 2014 | Nine months ended Sept. 30, 2013 |
|---|---|---|---|---|
| Revenue | $52,621 | $125,910 | $185,801 | $242,390 |
| Gross profit | $27,332 | $45,460 | $81,180 | $88,290 |
| Gross margin | About 51.9% | About 36.1% | About 43.7% | About 36.4% |
| Net loss | $791,954 | $718,840 | $2,987,448 | $2,261,776 |
| Net loss attributable to common stockholders | $871,840 | $932,600 | $3,126,488 | $2,500,372 |
- Nine-month operating expenses were $2.77 million, including a $390,659 goodwill impairment related to Dr. Pave. Interest expense was $303,167 for the nine-month period, versus $95,042 in 2013.
- Cash used in operating activities was $2.24 million for the first nine months of 2014, compared with $2.08 million in 2013. Cash at September 30 was $55,734, down from $186,864 at year-end 2013.
- At September 30, current assets were $400,570 and current liabilities were $809,470. Total liabilities were $2.78 million; stockholders’ equity was a deficit of $116,767. The balance sheet reports $1.82 million of long-term unsecured notes, a $229,980 revolving credit line, and $250,000 of current notes payable.
- Management reported operating spending of approximately $275,000 per month, with only a small portion covered by revenue. The company had an accumulated deficit of $10.00 million.
Material changes and notable items
- Nine-month revenue fell about 23% year over year, primarily because of lower equipment sales. Service revenue contributed $79,872 in the 2014 nine-month period; none was reported in the comparable 2013 period.
- SG&A increased to $2.19 million from $2.07 million, while research and development declined to $179,993 from $190,451. The Dr. Pave acquisition added service operations and California office expenses; the acquisition also produced a goodwill impairment charge of $390,659.
- Financing included $2.15 million of proceeds from unsecured notes and $509,963 net proceeds from preferred shares during the first nine months. The company repaid $500,000 of its senior subordinated note during the first half of 2014. Notes in the debt offerings generally carry 12% interest and include warrants.
- After quarter-end, the company began a private equity offering of up to 3,650,807 units at $1.75 per unit. By November 13, it had raised $308,825 in cash and issued shares and warrants; it also reported conversions of Series D preferred shares. A further $75,000 short-term loan was received October 9, bearing 12% interest and due November 15, 2014, subject to an extension option.
- Other subsequent events include the CFO’s resignation effective October 28, 2014, and an October 23 exclusive five-year distribution agreement covering Hong Kong and Macau.
Outlook, risks, and contingencies
Management stated that existing cash was insufficient for the next twelve months and that substantial doubt existed about the company’s ability to continue as a going concern. The filing estimates a need to raise at least $2 million to $3 million to meet twelve-month cash requirements; management said successful fundraising at that level, together with anticipated equipment and service revenue, could fund operations for twelve months. The filing also describes an open debt offering and estimates up to $2.2 million in potential cash proceeds from the new equity offering, but emphasizes that proceeds are not assured and that the company has no definitive commitment for additional funding. Failure to raise capital could require cuts, cessation of operations, or a merger or sale.
Risks cited include limited operating revenue, dependence on a small group of financing sources, competition, regulatory and environmental requirements, financing-market volatility, litigation, and execution risks in commercialization and franchising. The company also disclosed that it missed the required deadline to file a registration statement for shares underlying warrants issued in its Series D offerings. Commitments included approximately $50,000 of lease payments through July 2015 and about $30,000 for equipment under fabrication.
Most important facts for investors to verify
- Confirm the issuer: the supplied filing is for Heatwurx, Inc., not Processa Pharmaceuticals, Inc.
- Check whether the debt and equity offerings raised enough cash to address the stated twelve-month funding need, and confirm subsequent cash balances and runway.
- Review debt balances, 12% interest costs, maturities, collateral and warrant dilution, including the short-term loan due in November 2014.
- Verify share counts and the effects of preferred-stock conversions and new equity issuance; the filing’s balance-sheet share figures warrant reconciliation.
- Assess actual equipment and service sales, franchise approvals and sales, and whether the Hong Kong/Macau distribution agreement generated material orders.