Processa Pharmaceuticals, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. The financial statements are unaudited. Processa is a pre-revenue clinical-stage pharmaceutical company developing treatments for unmet medical needs. Its 2017 comparative results reflect Promet’s operations before the October 2017 reverse acquisition, so the periods are not fully comparable.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $807,661 | $139,922 |
| General and administrative expense | $483,955 | $94,018 |
| Total operating expenses / operating loss | $1,291,616 | $233,940 |
| Interest expense | $87,740 | $0 |
| Income tax benefit | $281,534 | $0 |
| Net loss | $1,096,798 | $232,442 |
| Basic and diluted loss per share | $0.03 | $0.01 |
| Net cash used in operating activities | $1,069,008 | $58,698 |
Operating expenses increased 452% year over year; net loss increased 372%. R&D growth primarily reflected CTP-499 licensing, manufacturing-process transfer and testing, and increased staffing. G&A included approximately $191,000 of professional fees, a $144,200 cybersecurity fraud loss, and higher staffing costs. With no revenue, profit margins are not meaningful.
At March 31, cash and cash equivalents were $1,776,639, down from $2,847,429 at December 31, 2017. Current assets were $1,843,512 and current liabilities were $2,847,629. The company reported $2,580,000 principal of secured convertible notes ($2,484,710 net of unamortized issuance costs), classified as current, plus $87,293 accrued interest. The notes bear 8% interest payable in kind and mature in October or November 2018 unless converted earlier under their terms. Total assets were $12,886,250 and total liabilities were $5,609,884.
Material changes and unusual items
- On March 19, Processa exercised its exclusive CTP-499 license option from CoNCERT. Consideration included 2,090,301 Processa shares transferred by Promet, valued at $8 million, and a 15% share of sublicense revenue subject to stated termination conditions. Total shares outstanding did not change; Promet’s ownership fell from 90% to 84%.
- The license was recorded as an intangible asset at approximately $11.04 million, including an approximately $3.04 million deferred tax liability and transaction costs; the asset is amortized over an estimated 14-year period. Q1 amortization was $25,435.
- In January, the company lost $144,200 to cybersecurity fraud; it had no insurance coverage for this loss and stated recovery was remote.
- Purchase obligations to contract research organizations and subcontractors were approximately $1,006,000 at quarter-end.
- On May 15, 2018, after quarter-end, the company sold 1,112,656 shares at $2.27 per share for approximately $2.5 million gross proceeds and issued one warrant per share, exercisable at $2.724. The placement was part of an offering of up to $8 million; additional closings could occur through June 29, 2018, subject to the offering terms. The common stock includes full-ratchet anti-dilution protection under specified conditions.
Outlook, risks and controls
Management expects continuing operating losses and negative operating cash flow as development advances. It stated that March 31 cash was insufficient to fund operations for one year or more after the financial statements became available, and that existing resources were insufficient to complete the planned PCS-499 Phase 1 study and ongoing corporate costs for that period. The filing therefore identifies substantial doubt about the company’s ability to continue as a going concern. No financing was committed as of the financial-statement issuance date; inability to raise capital could force delays, reductions, or discontinuation of programs.
Management planned to pursue PCS-499 development for necrobiosis lipoidica, including a Phase 2 trial targeted to begin in late 2018, and to meet with the FDA to further define the radiation-induced fibrosis program. The company was also evaluating additional drug assets. These plans depend on funding, clinical results, regulatory approvals, intellectual-property protection, and other risks; no assurance of success is provided.
Disclosure controls were deemed ineffective at the reasonable-assurance level due to material weaknesses involving limited accounting personnel and the cybersecurity fraud incident. The company had begun implementing additional review, approval, and IT-access controls, but had not remedied the staffing-related weakness by the filing date. Management nevertheless stated that the included financial statements were fairly stated in all material respects. The company reported no material legal proceedings and no material change in risk factors from its 2017 Form 10-K.
Key facts for investors to verify
- Cash runway, current funding needs, and progress and net proceeds from the post-quarter private placement and any subsequent closings.
- Potential dilution from the offering warrants, anti-dilution provisions, and the convertible notes’ conversion and maturity terms.
- Clinical and FDA milestones for PCS-499, including the proposed necrobiosis lipoidica Phase 2 trial and the radiation-induced fibrosis program.
- Terms and financial effects of the CoNCERT license, including sublicense revenue sharing and the accounting and tax assumptions underlying the intangible asset.
- Remediation of material weaknesses and the adequacy of controls following the cybersecurity fraud loss.