Processa Pharmaceuticals, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited. Processa is an early-stage pharmaceutical developer with no product revenue. Comparisons with 2017 should be viewed in light of the reverse acquisition in October 2017: pre-acquisition financial results reflect Promet’s operations.
Financial results and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development | $1.08 million | $161,000 | $1.87 million | $311,000 |
| General and administrative | $351,000 | $119,000 | $854,000 | $193,000 |
| Net loss | $1.21 million | $278,000 | $2.30 million | $501,000 |
| Loss per share, basic and diluted | $0.03 | $0.01 | $0.06 | $0.02 |
Operating margins are not meaningful because the company had no revenue. Six-month operating cash use was $2.23 million, versus $356,000 in 2017; investing cash use was $498,000, and financing provided $2.73 million. Cash and cash equivalents were $2.85 million at June 30, plus $496,000 in certificates of deposit maturing in September 2018. The filing also reports a $107,490 note receivable for stock-sale proceeds received July 6.
Total assets were $14.44 million, including a net $10.82 million PCS-499 license intangible asset. Total liabilities were $3.13 million, including a $2.48 million deferred tax liability and $224,000 of net current convertible notes. Stockholders’ equity was $11.31 million. The company reported a $6.16 million accumulated deficit.
Material changes and financing
- Operating expenses rose substantially year over year: R&D increased by $917,000 in Q2 and $1.55 million for the half year, primarily from PCS-499 licensing, manufacturing-site work, testing and $223,000 of six-month intangible amortization. G&A increased by $231,000 in Q2 and $661,000 for the half year, including public-company professional fees and higher staffing costs.
- In March, Processa exercised its exclusive PCS-499 license option. CoNCERT received 2,090,301 shares owned by Promet, valued at $8 million, plus a contractual share of certain sublicense revenue. Processa recorded the license and related deferred tax liability; the license is amortized over an estimated 14 years.
- Private placements in May and June raised approximately $3.2 million gross through 1,402,442 common-stock units, each with a warrant. Separately, $2.35 million of senior notes and accrued interest converted into shares and warrants, leaving $230,000 of notes outstanding at June 30. The remaining notes were awaiting Canadian regulatory filings before conversion.
- An investor committed $1.8 million toward clinical-study costs in exchange for shares and warrants. Payments are made directly to the contract research organization (CRO), not to Processa; no payments had been made by June 30. Costs above the commitment remain Processa’s responsibility.
Outlook, risks and unusual items
- The FDA granted PCS-499 orphan-drug designation for Necrobiosis Lipoidica (NL) on June 22. Management planned to begin a Phase 2a NL trial in Q4 2018. The filing also identifies radiation-induced fibrosis as a potential indication.
- Management expects continued operating losses and negative operating cash flow, and plans fundraising efforts in the first half of 2019. It states that available cash is not expected to fund operations for one year or more after the financial statements became available without additional funding. The filing concludes that substantial doubt exists about the company’s ability to continue as a going concern.
- Failure to obtain financing could delay, reduce or stop development. Other stated risks include clinical and regulatory uncertainty, commercialization and competition, intellectual-property protection, dependence on third parties, and limited operating history. No revenue or immediate sales prospects were reported.
- The company recorded a $144,200 cybersecurity-fraud loss in January, with no insurance coverage and recovery considered remote. Management reported material weaknesses in financial-reporting controls, including insufficient accounting resources and cybersecurity-related deficiencies; remediation was ongoing and the weaknesses had not been resolved as of the filing.
- The company reported approximately $110,000 of purchase obligations at June 30, no material legal proceedings, and no off-balance-sheet arrangements. Common-stock issuances are subject to full-ratchet anti-dilution provisions in specified circumstances, creating potential dilution.
Important facts for investors to verify
- Current cash runway, planned fundraising timing and terms, and whether financing can be secured before liquidity is exhausted.
- Whether the $1.8 million clinical commitment is funded and available as CRO invoices arise, and whether trial costs exceed the commitment.
- Whether the planned Q4 2018 Phase 2a NL trial began, its funding and milestones, and any subsequent regulatory or clinical updates.
- The terms and potential dilution from outstanding warrants, anti-dilution protections, and the remaining $230,000 senior-note balance.
- Progress in remediating the disclosed material weaknesses and the effectiveness of cybersecurity controls.