Business Context and Reporting Period
Processa Pharmaceuticals, Inc., a Delaware corporation and emerging growth company, filed this Form 8-K on September 20, 2019 (signed October 2, 2019). The filing reports the entry into new material definitive agreements and the amendment of an existing investment agreement to secure funding for clinical trial operations.
Key Financial Metrics and Agreements
- New Debt Financing: Entered into two Line of Credit Agreements on September 20, 2019, with DKBK Enterprises, LLC and CorLyst, LLC.
- Total Commitment: $1.4 million total ($700,000 per lender).
- Interest Rate: 8% annual interest, prorated monthly.
- Conversion Rights: Lenders may convert debt and interest into common stock based on terms in the July 2019 Bridge Subscription Agreement.
- Related Party Status: The Company's CEO is the Managing Member of both lenders. CorLyst beneficially owns approximately 17.7% of outstanding voting stock.
- Amended Investment: Amended a May 2018 agreement with PoC Capital, LLC. The investor had funded $900,000 of the pledged $1.8 million. The Company will retain 396,476 shares and associated warrants previously held as collateral for the unfunded portion.
Material Changes and Liquidity
The primary material change is the creation of a direct financial obligation totaling $1.4 million in revolving credit. This action addresses liquidity needs specifically for funding Phase 2a clinical trial costs. The amendment with PoC Capital reflects a partial funding scenario where the Company retains collateral assets (shares and warrants) corresponding to the unfunded $900,000 portion of the original commitment.
Outlook, Risks, and Management Commentary
- Use of Proceeds: Funds from the new Line of Credit Agreements are designated to fund remaining clinical trial costs for the Phase 2a trial as needed.
- Covenants: The Company must furnish certified financial statements to the lenders upon demand while indebted.
- Risks: The agreements involve related parties (CEO and significant shareholder), creating potential conflicts of interest. The debt carries conversion rights that could lead to future dilution of existing shareholders.
Investor Verification Checklist
- Verify the specific conversion price and terms defined in the July 2019 Bridge Subscription Agreement referenced in the Line of Credit Agreements.
- Confirm the exact amount drawn from the $1.4 million credit facility and the current outstanding principal balance.
- Review the status of the Phase 2a clinical trial to assess the burn rate against the new funding.
- Examine the related party transaction disclosures to ensure compliance with corporate governance standards regarding the CEO's dual role.