Business context and reporting period
The supplied filing is Heatwurx, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2016—not a filing identified as Processa Pharmaceuticals, Inc. Heatwurx describes itself as an asphalt repair equipment and technology company. It had discontinued its Dr. Pave operations and scaled back to minimal operations to support one licensee and seek a merger or acquisition.
Financial statement amounts below are in U.S. dollars. The filing also contains inconsistent or potentially confusing disclosures, noted where relevant.
Financial results and position
| Metric | Three months ended Sept. 30, 2016 | Three months ended Sept. 30, 2015 | Nine months ended Sept. 30, 2016 | Nine months ended Sept. 30, 2015 |
|---|---|---|---|---|
| Revenue | $0 | $58,165 | $5,000 | $95,925 |
| Gross profit | $0 | $15,547 | $5,000 | $28,341 |
| Operating loss | $(4,969) | $(124,881) | $(89,465) | $(2,473,953) |
| Net loss | $(68,333) | $(295,743) | $(245,158) | $(2,991,461) |
| Net loss applicable to common stockholders | $(79,157) | $(306,567) | $(277,392) | $(3,023,580) |
| Basic and diluted loss per share | $(0.01) | $(0.03) | $(0.02) | $(0.27) |
Gross margin was approximately 26.7% for the third quarter of 2015 and 29.5% for the first nine months of 2015; no 2016 margin is meaningful given negligible revenue. The 2015 comparative losses included a $1.52 million impairment of intangible assets and other impairment and disposal charges.
- Cash and liquidity: At September 30, 2016, continuing-operations cash was $6,692 and cash classified with discontinued operations was $3,542, or $10,234 combined. The filing elsewhere describes total cash as approximately $4,000, apparently referring to continuing operations; investors should reconcile this wording. Current assets were $35,234 versus current liabilities of $2,284,742.
- Cash flow: For the first nine months of 2016, operating cash use was $27,398 for continuing operations and $8,808 for discontinued operations. Investing activities provided $17,000, mainly from asset sales; financing provided $15,000 in senior secured notes. The cash flow statement reports a $4,206 net decrease in cash.
- Debt and obligations: Current liabilities included $962,361 of related-party senior secured notes, $420,000 of unsecured notes, and $229,980 of revolving credit balances, as well as accrued interest. The notes identify $1,612,341 in principal as due in 2016. Accounts payable and accrued liabilities from continuing operations totaled $294,348.
- Capital and equity: Total assets were $35,234 and stockholders’ deficit was $2,249,508 at September 30, 2016. Common shares outstanding were 11,017,388. Series D preferred shares carried an $843,095 liquidation preference.
Material changes versus the prior comparable period
- Revenue fell to zero in the third quarter and to $5,000 for the nine-month period, from $58,165 and $95,925, respectively. Management attributed 2016 nine-month revenue to equipment sold to its licensee and said it did not expect further equipment sales during 2016.
- Operating expenses declined sharply amid reduced operations: nine-month selling, general and administrative expense was $88,194 versus $905,631, and research and development expense was $6,271 versus $24,246. The lower operating loss and net loss also reflect the absence of the large 2015 intangible-asset impairment.
- Operating cash use declined substantially from 2015, when continuing and discontinued operations used $569,753 and $256,083, respectively. Management attributed the reduction primarily to cuts in staffing and overhead.
- Assets held for sale fell from $42,000 at year-end 2015 to zero after disposals; the company reported a $25,000 receivable from an asset sale to its licensee at September 30, 2016.
Outlook, risks and unusual items
- Going concern: Management stated that substantial doubt existed about the company’s ability to continue as a going concern. It reported little revenue, no revenue under contract or immediate sales prospects, and inability to obtain adequate financing. It said a merger or acquisition was necessary; without one, it would have to cease operations.
- Defaults and collateral: The company disclosed defaults on the senior secured notes and revolving line of credit, and unpaid interest on the notes. The secured lenders could call the debt and foreclose on company assets, including intellectual property. Management said it would seek extensions or debt conversions, with no assurance lenders would agree. The $420,000 unsecured notes had also not been repaid after their January 2016 maturity.
- Business plans and subsequent events: A June 2017 secured-note offering provided $75,000. In July 2017, the company announced a non-binding letter of intent for a reverse merger with Promet Therapeutics, LLC. These events occurred after the 2016 reporting date and do not establish that a transaction was completed.
- Controls and reporting: Management concluded disclosure controls were ineffective because of a material weakness tied to insufficient accounting personnel and budget constraints; the weakness had not been remediated. The filing also states the company had fewer than 300 record holders and that its Exchange Act reporting obligations were automatically suspended, while it continued filing voluntarily.
- Other risks: The filing cites financing, commercialization, competition, regulatory, intellectual-property, litigation, and general market risks. It provides no quantitative market-risk disclosure, citing smaller-reporting-company status.
Important facts for investors to verify
- Confirm the issuer: the supplied document is for Heatwurx, Inc., although the request identifies Processa Pharmaceuticals, Inc.
- Reconcile the filing’s cash disclosure—$10,234 combined cash on the balance sheet and cash-flow statement versus the approximately $4,000 figure stated for total cash in one note.
- Confirm the status, maturity, accrued interest, and any later amendments or payment arrangements for the defaulted secured and revolving debt, and whether any collateral was called or foreclosed upon.
- Verify whether the Promet reverse-merger letter of intent advanced to a definitive or completed transaction; the filing describes it only as non-binding.
- Assess whether the company obtained adequate financing or revenue after the reporting date and whether its going-concern conditions and material weakness were resolved.
- Check the filing’s inconsistent loss figures: the statement of operations reports third-quarter continuing-operations loss of $68,291, while the MD&A and another note give $68,333 or $69,291 in related descriptions.