Propanc Biopharma, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2017 (the company’s fiscal first quarter); unaudited consolidated results, compared with the three months ended September 30, 2016. Amounts are in U.S. dollars unless stated otherwise.
Business context and reporting period
Propanc is a development-stage biopharmaceutical company focused on cancer treatments. Its lead candidate, PRP, is an enhanced pro-enzyme formulation and remained preclinical during the period. The company reported no revenue and has no products on the market. It changed its name from Propanc Health Group Corporation in April 2017.
Financial performance and liquidity
| Metric | Three months ended September 30, 2017 | Prior-year period |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $1,203,975 | $1,174,297 |
| Operating loss | $1,203,975 | $1,174,297 |
| Interest expense | $892,432 | $471,387 |
| Net loss | $1,923,743 | $1,101,969 |
| Basic and diluted loss per share | $0.36 | $0.36 |
| Net cash used in operating activities | $785,668 | $683,598 |
| Net cash provided by financing activities | $894,000 | $614,286 |
- Research and development expense rose to $563,739 from $161,197; administration expense declined to $631,406 from $1,004,503, primarily reflecting lower stock-based compensation.
- Cash was $142,565 at September 30, 2017, up from $69,043 at June 30. Current assets were $149,707 against current liabilities of $6,900,034. The reported working capital deficit was $6,750,327.
- Total assets were $162,512; stockholders’ deficit was $6,737,522, including an accumulated deficit of $40,167,266. Convertible notes and accrued interest, net of discounts and premiums, were $4,653,437; embedded conversion option liabilities were $1,160,865.
- Interest expense included substantial noncash debt discount amortization and accretion of put premiums. The company also reported a $30,274 gain from changes in derivative fair value and a $133,792 foreign-currency transaction gain.
Material changes versus the prior-year quarter
- Net loss increased by approximately $822,000. The company attributed the change principally to higher interest expense and R&D spending, partly offset by changes in derivative valuations and foreign-currency gains.
- Interest expense increased by approximately $421,000 as indebtedness grew. R&D expense increased by approximately $403,000 as PRP development advanced.
- Operating cash use increased by approximately $102,000. Financing proceeds were primarily from convertible promissory notes.
- Common shares outstanding increased during the quarter through debt conversions. The filing reports 6,650,268 shares outstanding at September 30 and 10,392,362 as of November 9, 2017; a 1-for-250 reverse stock split in April 2017 affects share-count comparisons.
Outlook, risks, contingencies and unusual items
- Going concern: Management stated that 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 and committed resources were insufficient for obligations over the next 12 months and that additional financing would be needed. No assurance was given that financing would be available on acceptable terms.
- Convertible financing and dilution: The company used multiple convertible debt arrangements, many with conversion prices tied to discounts to recent market prices, default-rate provisions and potential penalties. Delafield debt maturities were extended to December 15, 2017. The filing says 51,642,075 shares were reserved for future issuance based on lender requirements at September 30.
- Subsequent events: The filing lists further debt conversions through November 8 and reports that the Additional Issuance Debenture was fully converted by November 6. On November 3, the company entered a new Eagle Equities financing involving two $200,000 notes, including a back-end note subject to funding conditions. These events occurred after quarter-end and may materially affect debt and share counts.
- Development outlook: The company reported completing a GLP-compliant 28-day repeat-dose toxicity study on August 2, with no treatment-related findings, and said it intended to submit a UK clinical-trial application in 2018. PRP received U.S. orphan-drug designation for pancreatic cancer; a request for ovarian-cancer designation was pending. The filing does not provide formal financial guidance or a clinical-development budget.
- Commercial and contractual commitments: The Amatsigroup manufacturing agreement is expected to involve $2.5 million to $5.0 million over five years; $1,148,006 had been incurred to date. Future operating lease commitments totaled approximately $111,000. The company also disclosed a $30,000 IRS penalty for late filings, recorded in the prior fiscal year, and no material pending or threatened litigation.
- Controls: Management concluded disclosure controls were ineffective and identified a material weakness involving limited technical accounting expertise and inadequate segregation of duties. No material change in internal control over financial reporting occurred during the quarter.
- Research and patent risks: PRP remained preclinical, and the company depended on further financing, successful development, regulatory progress and patent protection. Some patent applications remained under examination or pending.
Important facts for investors to verify
- Current cash runway, upcoming debt maturities, and whether additional financing is available on workable terms.
- Post-quarter debt conversions, resulting shares outstanding, remaining convertible debt and potential dilution from the 51.6 million-share reserve.
- Status and terms of the December 15, 2017 Delafield maturity extension and the newer Eagle Equities financing.
- Progress, timing, funding and regulatory requirements for GMP manufacturing and the planned 2018 UK clinical-trial application.
- Remediation of the disclosed material weakness and any updated assessment of going-concern risk.