Propanc Biopharma, Inc. — Form 10-Q
Reporting period: Quarter and six months ended December 31, 2017; filed February 8, 2018. Financial statements are unaudited. The filing describes the quarter ended December 31 as the second quarter of the company’s fiscal year.
Business context
Propanc is a development-stage biotechnology company focused on cancer treatments. Its lead candidate, PRP, is a pro-enzyme formulation in preclinical development; the company reported no marketed products, clinical trials, or revenue. It reported progress toward manufacturing PRP for prospective first-in-human studies and intended to submit a clinical trial application in the United Kingdom.
Financial results and position
| Metric | Three months ended Dec. 31, 2017 | Six months ended Dec. 31, 2017 |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $1.437 million | $2.641 million |
| Operating loss | $1.437 million | $2.641 million |
| Net loss | $2.202 million | $4.126 million |
| Basic and diluted loss per share | $0.20 | $0.49 |
| Operating cash used | — | $1.071 million |
For the six months, research and development expense rose to $1.598 million from $328,399 in the comparable period, primarily reflecting PRP purification, manufacturing and process-development work. Administration expense fell to $1.027 million from $2.740 million. The company reported no gross margin because it had no revenue.
At December 31, cash was $112,496, total assets were $129,081, and current liabilities were $7.278 million. Working capital deficit was $7.162 million; stockholders’ deficit was $7.149 million and accumulated deficit was $42.369 million. Convertible notes and related accrued interest, net of discounts and premiums, were $4.417 million; the filing separately states $3.194 million of convertible-note principal. Embedded conversion-option liabilities were $1.002 million.
Operating cash use was $1.071 million, compared with $1.005 million in the prior-year period. Financing provided $1.274 million, all from convertible promissory notes, versus $959,285 in the prior-year period. Foreign-exchange effects reduced cash by $159,221. The filing does not provide a meaningful operating margin or revenue-based margin.
Changes versus the prior comparable period
- Six-month net loss narrowed to $4.126 million from $4.863 million, despite sharply higher R&D spending; lower administration and interest expense contributed to the improvement.
- Quarterly net loss narrowed to $2.202 million from $3.761 million. Quarterly R&D expense increased to $1.035 million from $167,202, while administration expense fell to $395,442 from $1.736 million.
- Six-month derivative fair-value expense was $229,771, compared with a $330,393 gain in the prior-year period. Financing cash inflows increased, but operating cash use also rose modestly.
- Accounts payable increased to $1.439 million from $483,513 at June 30, 2017, while total current liabilities rose to $7.278 million from $5.537 million.
Outlook, risks and unusual items
- Going concern: Management said substantial doubt exists about the company’s ability to continue as a going concern for 12 months from the filing date. It said available cash was insufficient for obligations over the next 12 months and that further financing was necessary; if financing is unavailable, it may reduce R&D and consider licensing, joint ventures or a merger. No assurance of financing or adequate future sales was given.
- Financing and dilution: Numerous notes carry conversion prices based on discounts to recent trading prices, and some include default rates, premiums or penalties. The company reported 47,599,059 potential shares issuable on conversion of notes, excluded from diluted EPS as anti-dilutive, and 77,265,822 shares reserved for future issuance based on lender requirements. Shares outstanding rose from 4,553,806 at June 30 to 17,668,806 at December 31; 21,180,587 were outstanding on February 8, 2018. Stockholders authorized an increase in common shares to 400 million effective January 23, 2018.
- Subsequent financing and debt repayment: In January 2018, Eagle Equities’ $532,435 face-value note generated a stated purchase price of $507,081; proceeds were used to repay Delafield. The company also obtained a $153,000 Power Up note, reporting $150,000 net proceeds. Both financings are convertible and include variable-price or other conversion provisions. The filing reports payment of Delafield debt on January 2, 2018.
- Development and IP: The company reported successful completion of a 28-day toxicity study with no treatment-related findings and said it had developed a process to purify and stabilize PRP’s active substances. PRP had FDA orphan-drug designation for pancreatic cancer; a request for ovarian-cancer designation was denied because estimated prevalence exceeded the applicable threshold. Patent applications remain pending in several jurisdictions.
- Commitments and related parties: Amatsigroup manufacturing payments were anticipated at $2.5 million to $5.0 million over five years; $1.593 million had been incurred to date. The company also disclosed related-party office leasing, director/officer amounts payable and compensation. It recorded $120,000 paid during the half-year toward a previously approved CEO bonus.
- Controls and other risks: Management concluded disclosure controls were ineffective and identified a material weakness involving limited technical accounting expertise and inadequate segregation of duties. The company cited dependence on further financing, development and regulatory milestones, patent protection, third parties and key personnel. It reported no material pending litigation; an IRS penalty of $30,000 plus interest from late filings was being addressed through a proposed payment plan.
Most important facts for investors to verify
- Current cash runway, near-term obligations and whether new financing can support planned development.
- Reconciliation of the reported $3.194 million convertible-note principal with $4.417 million of balance-sheet convertible notes and accrued interest, net of discounts and premiums.
- Actual and potential dilution from variable-price conversions, reserved shares, post-period conversions and the increase in authorized common shares.
- Status, cost and timing of PRP manufacturing, clinical-trial authorization and the company’s stated first-in-human plans.
- Progress in remediating the disclosed material weakness and improving financial-reporting controls.