As filed with the U.S. Securities and Exchange Commission on July 30, 2018
Registration No. 333- 333-235511
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 3
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Processa Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 2834 | 45-1539785 | ||
(State or other jurisdiction of incorporation or organization) | (Primary Standard Industrial Classification Code | (I.R.S. Employer Identification |
7380 Coca Cola Drive, Suite 106
Hanover, Maryland 21076
(443) 776-3133
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
David Young, Pharm.D.,Pharm.D, Ph.D.
Chairman and Chief Executive Officer
Processa Pharmaceuticals, Inc.
7380 Coca Cola Drive, Suite 106
Hanover, Maryland 21076
(443) 776-3133
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Michael B. Kirwan
John J. Wolfel, Jr.
Foley & Lardner LLP
One Independent Drive, Suite 1300
Jacksonville, Florida 32202
(904) 359-2000
Michael B. Kirwan John J. Wolfel, Jr. Foley & Lardner LLP One Independent Drive, Suite 1300 Jacksonville, Florida 32202 (904) 359-2000 | Jonathan Zimmerman Ariel Greenstein Faegre Drinker Biddle & Reath LLP 2200 Wells Fargo Center 90 S. Seventh Street Minneapolis, Minnesota 55402 (612) 776-7000 |
Approximate date of commencement of proposed sale to the public:From time to time
As soon as practicable after the effective date of this registration statement becomes effective.statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. [X][ ]
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the 1933Securities Act, please check the following box and list the 1933Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the 1933Securities Act, check the following box and list the 1933Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the 1933Securities Act, check the following box and list the 1933Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934. (Check one):Act.
| Large accelerated filer | [ ] | Accelerated filer | [ ] | |||
| Non-accelerated filer | [ ] | Smaller reporting company | [X] | |||
| Emerging growth company | [ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act. [X][ ]
CALCULATION OF REGISTRATION FEE
| Title of each class of securities to be registered | Amount to be registered(1) | Proposed maximum offering price per share | Proposed maximum aggregate offering price | Amount of registration fee | ||||||||||||
| Common stock, par value $0.0001(2) | 3,084,060 | $ | 2.65 | (5) | $ | 8,172,759 | $ | 1,018 | ||||||||
| Common stock, par value $0.0001(3) | 2,142,318 | $ | 2.724 | (6) | $ | 5,835,674 | $ | 727 | ||||||||
| Common stock, par value $0.0001(4) | 1,152,889 | $ | 2.452 | (6) | $ | 2,826,884 | $ | 352 | ||||||||
| Total | 6,379,267 | $ | 16,835,318 | $ | 2,097 | |||||||||||
| Title of Each Class of Securities to be Registered | Proposed Maximum Aggregate | Amount of Registration Fee | ||||||
| Common Stock, $0.0001 par value per share | $ | 16,000,000 | $ | 2,077 | ||||
| Total: | $ | 16,000,000 | $ | 2,077 | (2) | |||
| (1) | |
The Registrantregistrant hereby amends this Registration Statementregistration statement on such date or dates as may be necessary to delay its effective date until the Registrantregistrant shall file a further amendment which specifically states that this Registration Statementregistration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statementthis registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offersnor does it seek an offer to buy these securities in any statejurisdiction where the offer or salessale is not permitted.
PRELIMINARY PROSPECTUS,
SUBJECT TO COMPLETION, DATED JULYSEPTEMBER 30, 20182020
PROCESSA PHARMACEUTICALS, INC.
6,379,267 SHARES OF COMMON STOCK3,200,000Shares of Common Stock
This prospectus relates to the resale by certainis a firm commitment public offering of our stockholders and holders of warrants to purchase our stock named in the section of this prospectus titled “Selling Stockholders” (collectively, the “Selling Stockholders”) of up to 6,379,2673,200,000 shares (collectively, the “Shares”) of our common stock, par value $0.0001. The Shares being offered under this prospectus are comprised of:stock.
(a) 2,010,594 shares ofPrior to this offering, there has been a limited public market for our common stock that were purchased by certain Selling Stockholders in private placements with us pursuant to exemptions from the registration requirements of the Securities Act;
(b) 1,073,466 shares of common stock that were issued to certain Selling Stockholders after conversion of our 8.0% Senior Convertible Notes;
(c) 2,142,318 shares of common stock issuable upon exercise of warrants allowing the holder to purchase shares of common stock at an exercise price of $2.724 per share through June 29, 2021;
(d) 1,152,889 shares of common stock issuable upon exercise of a warrants allowing the holder to purchase shares of common stock at an exercise price of $2.452 per share through June 29, 2021; and
Although we will pay substantially all the expenses incident to the registration of the Shares, we will not receive any proceeds from the sales by the Selling Stockholders. The Selling Stockholders and any underwriter, broker-dealer or agent that participates in the sale of the Shares or interests therein may be deemed “underwriters” within the meaning of Section 2(a)(11) of the Securities Act. Any discounts, commissions, concessions, profit or other compensation any of them earns on any sale or resale of the shares, directly or indirectly, may be underwriting discounts and commissions under the Securities Act. The Selling Stockholders who are “underwriters” within the meaning of Section 2(a)(11) of the Securities Act will be subject to the prospectus delivery requirements of the Securities Act.
Our common stock is presently quoted for trading under the symbol “PCSA” on the OTC Pink Tier ofOTCQB® Market, or OTCQB. On September 28, 2020, the OTC Markets Group, Inc. (the “OTCPink”). On July 25, 2018, the closinglast reported sale price of our common stock as reported on the OTCPinkOTCQB was $2.65$10.98 per share. The Selling StockholdersWe have advised usapplied to list our common stock on the Nasdaq Capital Market, or Nasdaq, under the symbol “PCSA” and our common stock has been approved for listing contingent on the completion of this offering. We have assumed a public offering price of $5.00 per share. There is no assurance that theythis offering will sellbe completed, or as to the terms of this offering. In addition, the closing sales price of our common stock as reported on the OTCQB may not be indicative of the final offering price or market price of our common stock on Nasdaq and there can be no assurance that a trading market will develop for our shares of common stock registered hereunder from time to timeon Nasdaq. The final public offering price will be determined through negotiation between us and the underwriters in the openoffering and the recent market price used throughout this prospectus may not be indicative of the final offering price. In addition, quotes of stock trading prices on an over-the-counter marketplace may not be indicative of the OTCPink,market price on a national securities exchange.
On December 23, 2019, we effected a one-for-7 reverse split of our common stock, or the Reverse Split. Unless otherwise specified or the context otherwise indicates, the information contained in privately negotiated transactions or a combination of these methods, at market prices prevailing at the time of sale, at prices relatedthis prospectus has been adjusted to give effect to the prevailing market prices, at negotiated prices, or otherwise as described under the section of this prospectus titled “Plan of Distribution.”The purchase of the Shares offered through this prospectusReverse Split.
Investing in our common stock is highly speculative and involves a high degree of risk. Please refer toSee “Risk Factors” beginning on page 6.10.
| Per Share | Total | |||||||
| Public offering price | $ | $ | ||||||
| Underwriting discounts and commissions(1) | $ | $ | ||||||
| Proceeds, before expenses, to us | $ | $ | ||||||
(1) See “Underwriting” for a description of compensation payable to the underwriters.
Certain of our officers, directors and existing stockholders have indicated an interest in purchasing shares in this offering on the same terms as those offered to the public. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, fewer or no shares in this offering to any of these officers, directors or stockholders, or any of these officers, directors or stockholders may determine to purchase more, fewer or no shares in this offering. The underwriters will receive the same underwriting discounts and commissions on any shares purchased by these officers, directors and stockholders as they will on any other shares sold to the public in this offering.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacydetermined if this prospectus is truthful or accuracy of this prospectus.complete. Any representation to the contrary is a criminal offense.
The dateDelivery of this prospectusthe shares of common stock is expected to be made on or about , 20182020.
Joint Bookrunning Managers
| Craig-Hallum Capital Group | The Benchmark Company |
Co-Manager
National Securities Corporation
Prospectus dated , 2020
TABLE OF CONTENTS
You should rely only on the information contained in this prospectus or any related prospectus supplement.prospectus. We have not, and the underwriters have not, authorized anyone to provide you with different information. If anyone provides you with differentany information or inconsistentto make any representations other than those contained in this prospectus. We take no responsibility for and can provide no assurance as to the reliability of any other information you should not rely on it.that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date, regardless of its time of delivery or incorporated by reference herein is accurate only on the dateany sale of this prospectus.shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since suchthat date. Other than as required under
For investors outside the federal securities laws,United States: neither we undertake no obligation to publicly updatenor the underwriters have done anything that would permit this offering or revise such information, whether as a resultpossession or distribution of new information, future eventsthis prospectus or any other reason.
Thisfree writing prospectus is not an offerwe may provide to sell, nor is it an offer to buy, these securitiesyou in connection with this offering in any jurisdiction where action for that purpose is required, other than in the offer or sale is not permitted.United States of America. Persons outside the U.S. who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of our common stock and the distribution of this prospectus and any such free writing prospectus outside of the U.S.
Until , all dealers that effect transactions in these securities, whether or not participatingUnless otherwise indicated, information contained in this offering, mayprospectus concerning our industry and the markets in which we operate, including our general expectations, market position and market opportunity, is based on our management’s estimates and research, as well as industry and general publications and research, surveys and studies conducted by third parties. We believe that the information from these third-party publications, research, surveys and studies included in this prospectus is reliable. Management’s estimates are derived from publicly available information, their knowledge of our industry and their assumptions based on such information and knowledge, which we believe to be requiredreasonable. These data involve a number of assumptions and limitations which are necessarily subject to deliver a prospectus. high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause our future performance to differ materially from our assumptions and estimates.
This isprospectus includes trademarks, service marks and trade names owned by us or other companies. All trademarks, service marks and trade names included in additionthis prospectus are the property of their respective owners.
As used in this prospectus, unless the context indicates or otherwise requires, “the Company,” “our Company,” “we,” “us,” and “our” refer to Processa Pharmaceuticals, Inc., a Delaware corporation, and its consolidated subsidiary. For other defined terms, please see the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.Glossary on the following page.
| i |
GLOSSARY OF CERTAIN SCIENTIFIC TERMS
The medical and scientific terms used in this prospectus have the following meanings:
“Active Metabolite”metabolite” means a drug that is metabolizedprocessed by the body into a modifiedan altered form which continueseffects the body.
“Analog” means a compound having a structure similar to producethat of an approved drug but differing from it in respect to a certain component of the molecule which may cause it to have similar or different effects inon the body.
“cGCP” is current Good Clinical Practices. The FDA and other regulatory agencies promulgate regulations and standards, commonly referred to as current Good Clinical Practices, for designing, conducting, monitoring, auditing and reporting the results of clinical trials to ensure that the data and results are accurate and that the rights and welfare of trial participants are adequately protected.
“cGMP” is current Good Manufacturing Practices. The FDA and other regulatory agencies promulgate regulations and standards, commonly referred to as current Good Manufacturing Practices, which include requirements relating to quality control and quality assurance, as well as the corresponding maintenance of records and documentation.
“CRO” means a Contract Research Organization.
“EMA” means the European Medicines Agency.
“FDA” means the Food and Drug Administration.
“IND” means an Investigational New Drug Application. Before testing a new drug on human subjects, the company must file an IND with the FDA. Information must be produced on the absorption, distribution, metabolism, and excretion properties of the drug and detailed protocols for testing on human subjects must be submitted.
“IPR&D”Indication” means In-Process Research and Development.a condition which makes a particular treatment or procedure advisable.
“Moiety” means an active or functional part of a molecule.
“NDA” means a New Drug Application submitted to the FDA. Under the Food, Drug, and Cosmetic Act of 1938, an NDA is submitted to the FDA enumerating the uses of the drug and providing evidence of its safety.
“NL” means Necrobiosis Lipoidica, a chronic, disfiguring condition.
“Osteonecrosis” means the death of bone cells due to decreased blood flow. It can lead to pain and collapse of areas of bone.
“RIF” means Radiation-Induced Fibrosis, a side effect of external beam radiation therapy for the treatment of cancer.
| ii |
This summary highlights certainselected information that we present more fullycontained elsewhere in the rest of this prospectus. This summaryprospectus and does not contain all of the information that you should consider beforein making an investment decision. Before investing in the Shares offered pursuant toour common stock, you should carefully read this prospectus. You should read the entire prospectus, carefully, including our consolidated financial statements and the related notes thereto and the information set forth under the “Risk Factors,”Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, before making an investment decision.sections of this prospectus.
Except where the context otherwise requires and for purposes of this prospectus only, “we,” “us,” “our,” “Company,” and “Processa” refer to Processa Pharmaceuticals, Inc., a Delaware corporation, and its consolidated subsidiaries and include the acquired assets from Promet Therapeutics, LLC, a Delaware limited liability company. For other defined terms, please see the Glossary on page ii.
In 2017, the Company completed a reverse split resulting in a one-for-seven exchange of its shares of common stock in connection with the transaction with Promet (as defined below). All share information outside of our consolidated financial statements and related notes reflect such reverse split as if it occurred when Processa was incorporated.Overview
Organizational History
On October 2, 2017, Heatwurx, Inc. (“Heatwurx”) and Processa entered into an Asset Purchase Agreement with Promet Therapeutics, LLC, a Delaware limited liability company (“Promet”) pursuantOur mission is to which, on October 4, 2017, Heatwurx acquired all of the assets of Promet, in exchange for issuing to Promet approximately 31,745,242 shares of its common stock. Following the closing, Heatwurx changed its name to Processa Pharmaceuticals, Inc. and abandoned Heatwurx’s prior business plan. We are now pursuing Promet’s historical and proposed business.
Processa (formerly Heatwurx) was incorporated under the laws of the State of Delaware on March 29, 2011.
Description of Business
We are an emerging pharmaceutical company focused on the clinical development ofdevelop drug products that are intended to improve the survival and/or quality of life for patients with high unmet medical needs.
Processa Pharmaceuticals, Inc. is a clinical-stage biopharmaceutical company focused on the development of drug products that are intended to provide treatment for and improve the survival and/or quality of life of patients who have a high unmet medical need. Within this group of pharmaceutical products, we currently are developing oneneed condition or who have no alternative treatment. Our most advanced product for two indications (i.e., the use of a drug to treat a particular disease) and searching for additional products for our portfolio.
Our lead product, PCS-499 (previously known as CTP-499),candidate, PCS499, is an oral tablet that is ana deuterated analog of one of the major metabolites of pentoxifylline (PTX or Trental®). We have completed the patient portion of our Phase 2A trial for PCS499 and are in the process of closing the trial, and we plan to begin recruiting for a Phase 2B trial in 2021. We also have four newly licensed drugs (PCS12852, PCS6422, PCS11T and PCS100) and will begin developing these products once adequate funding has been obtained.
Our Strategy
Our vision is to develop drugs with potentially high return on investment and lower risk of development failure. Our portfolio drugs are focused on treating patients who do not have adequate treatment options for their conditions and have some clinical evidence supporting the efficacy of the drug, whether it be evidence with the drug itself or a drug with similar pharmacological properties. Given the prior success of our development team, the regulatory science approach that we employ not only allows us to develop drugs focused on FDA approval, but also allows us to select drugs for our portfolio which may have a greater chance for approval in a population of patients who need treatment options. The key pillars of our strategy to achieve our vision include:
| (i) | identifying drugs that have potential efficacy in patients with an unmet medical need, as demonstrated by some clinical evidence that the targeted pharmacology of the drug provides clinical efficacy in the targeted patient population; |
| (ii) | identifying drug products that have been developed or approved for other indications but can be repurposed to treat those patients who have an unmet medical need; and |
| (iii) | identifying drugs that can be quickly developed such that within 2-4 years, critical value-added clinical milestones can be achieved while advancing the drug closer to commercialization. |
Our Team
Our drug development efforts are driven by our extensive knowledge in applying rigorous regulatory science to the FDA approval pathway. We have assembled a seasoned management team with extensive experience in developing therapies, including advancing product candidates from preclinical research through clinical development and ultimately regulatory approval and commercialization. Together, our management team has completed over 30 FDA approvals. Our team is led by our Chairman and Chief Executive Officer David Young, Pharm.D., Ph.D., who has extensive experience in research, regulatory approval and business development and who served at Questcor for eight years as independent director and Chief Scientific Officer, helping lead to the ultimate sale of Questcor in 2014.
Our Pipeline
The table below summarizes our clinical product pipeline. We have completed the patient portion of our Phase 2A clinical trial for PCS499, however, the finalization of the trial data and its closeout has been delayed due to the ongoing COVID-19 pandemic.
PCS499
Our lead product, PCS499, is an active metaboliteoral tablet that is a deuterated analog of an already approved drug. The advantageone of PCS-499the major metabolites of pentoxifylline (PTX or Trental®). PCS499 is that it potentially may work in many conditions because it hasclassified by FDA as a new molecular entity. PCS499 and its metabolites act on multiple pharmacological targets that it affects that are important in the treatmenta variety of these conditions. The compound has previously been shown to be safe and tolerable with a trend toward efficacy in diabetic nephropathy. Based on the pharmacological activity, weWe have identified other unmet medical need conditions where the use of PCS-499 may result in clinical efficacy. These include Necrobiosis Lipoidica (NL) and Radiation-Induced Fibrosis (RIF) in head and neck cancer patients.as our lead indication for PCS499. NL is a chronic, disfiguring condition for which most patients do not have any treatment options. It developsaffecting the skin and the tissue under the skin typically on the lower extremities with no currently approved FDA treatments. NL presents more commonly in women than in men on the lower extremities, and ulceration can occuroccurs more often in people with diabetes. Ulceration occurs in approximately 30% of NL patients, which maycan lead to more severe complications, such as deep tissue infections and osteonecrosis that can threatenthreatening the life of the limb.
The development of our lead product is in the early stage and we anticipate that we will be required to expend significant time and resources to further develop our technology and determine whether a commercially viable product can be developed. Research and development of new products involves a high degree of risk and there is no assurance that our development activities will result in a commercially viable product. Our ability to generate meaningful revenue from PCS-499 or any products Approximately 22,000 - 55,000 people in the United States depends on obtaining FDA authorization. Even if our productsand more than 120,000 people outside the United States are authorized and approved by the FDA, we must still meet the challenges of successful marketing, distribution and consumer acceptance.
Risk Factorsaffected with ulcerated NL.
Our business operations are subjectThe degeneration of tissue occurring at the NL lesion site may be caused by a number of pathophysiological changes, which has made it extremely difficult to numerous risks, including the riskdevelop effective treatments for this condition. Because PCS499 and its metabolites affect a number of delays in, or discontinuationbiological pathways, several of our research and development due to lack of financing, poor results, inability to commercialize our technologies or to obtain necessary regulatory approvals to market the products, unforeseen safety issues relatingwhich could contribute to the productspathophysiology associated with NL, PCS499 may provide a novel treatment solution for NL, a condition for which there are currently no FDA-approved treatments.
On June 18, 2018, the FDA granted orphan-drug designation for PCS499 for the treatment of NL. On September 28, 2018, the IND for PCS499 in NL became effective, such that we could move forward with a Phase 2A multicenter, open-label prospective trial designed to determine the safety and dependencetolerability of PCS499 in patients with NL. The study initially had a six-month treatment phase and a six-month optional extension phase. In December 2019, we informed patients and sites that the study would conclude after the treatment phase and there would no longer be an extension phase. The first enrolled NL patient in this Phase 2A clinical trial was dosed on third party collaboratorsJanuary 29, 2019 and the study completed enrollment on August 23, 2019. The last patient visit took place in February 2020. Due to conduct researchCOVID-19 related restrictions at certain sites, study closeout and developmentdatabase lock have yet to be completed.
The main objective of the products. Because we are an early stage companytrial was to evaluate the safety and tolerability of PCS499 in patients with NL and to use the collected safety and efficacy data to design future clinical trials. Based on toxicology studies and healthy human volunteer studies, Processa and the FDA agreed that a limited historyPCS499 dose of operations, we are also subject1.8 grams/day would be the highest dose administered to many risks associatedNL patients in this Phase 2A trial. As anticipated, the PCS499 dose of 1.8 grams/day, 50% greater than the maximum tolerated dose of PTX, appeared to be well tolerated with early-stage companies. For a more detailed discussionno serious adverse events reported. All adverse events reported in the study were mild in severity. As expected, gastrointestinal symptoms were the most noted adverse events and reported in four patients, all of somewhich were mild in severity and resolved within 1-2 weeks of the risks you should consider, you are urged to carefully review and consider the section titled “Risk Factors” beginning on page 6 of this prospectus.starting dosing.
Two of the twelve patients in the study presented with more severe ulcerated NL and had ulcers for more than two months prior to dosing. At baseline, the reference ulcer in one of the two patients measured 3.5 cm2 and had completely closed by Month 2 of treatment. The second patient had a baseline reference ulcer of 1.2 cm2 which completely closed by Month 9 during the patient’s treatment extension period. In addition, while in the trial, both patients also developed small ulcers at other sites, possibly related to contact trauma, and these ulcers resolved within one month. However, the other ten patients, presenting with mild to moderate NL and no ulceration, had more limited improvement of the NL lesions during treatment. Historically, less than 20% of all the patients with NL naturally progress to complete healing over many years after presenting with NL. Although the natural healing of the more severe NL patients with ulcers has not been evaluated independently, medical experts who treat NL patients believe that the natural progression of an open ulcerated wound to complete closure would be significantly less than the 20% reported as the maximum percentage of patients who naturally heal over several years after NL presentation.
On March 25, 2020, we met with the FDA and discussed the clinical program, as well as the nonclinical and clinical pharmacology plans to ultimately support the submission of the PCS499 New Drug Application (NDA) in the U.S. for the treatment of ulcers in NL patients. With input from the FDA, we will be designing the next trial as a randomized, placebo-controlled trial to evaluate the ability of PCS499 to completely close ulcers in patients with NL. We initially planned to begin recruiting for the randomized, placebo-controlled trial in the fourth quarter of 2020, but we now expect to begin recruiting patients in 2021 due to the ongoing COVID-19 pandemic. This PCS499 NL study will be a randomized, placebo-controlled Phase 2B study to better understand the potential response of NL patients on drug and on placebo. After obtaining the results from this Phase 2B study, we expect to meet with FDA to discuss our Phase 2B drug and placebo response findings while further discussing the next steps to obtain approval.
PCS12852
On August 19, 2020, we entered into a License Agreement (“Yuhan License Agreement”) with Yuhan Corporation (“Yuhan”), pursuant to which we acquired an exclusive license to develop, manufacture and commercialize PCS12852 (formerly known as YH12852) globally, excluding South Korea.
PCS12852 is a novel, potent and highly selective 5-hydroxytryptamine 4 (5-HT4) receptor agonist. Other 5-HT receptor agonists with less 5-HT4 selectivity have been shown to successfully treat gastrointestinal (GI) motility disorders such as chronic constipation, constipation-predominant irritable bowel syndrome, functional dyspepsia and gastroparesis. Less selective 5-HT4 agonists, such as cisapride, have been either removed from the market or not approved because of the cardiovascular side effects associated with the drugs binding to other receptors, especially 5-HT receptors other than 5-HT4.
We plan to meet with the FDA in early 2021 to further define the clinical development program required for the PCS12852 product and discuss a Phase 2A proof of concept randomized, placebo-controlled study for PCS12852 in a gastrointestinal (GI) motility dysfunction disorder (e.g., post-operative ileus also called gastrointestinal dysfunction (POGD), opioid induced constipation, chronic idiopathic constipation). The purpose of the Phase 2A trial would be to better define a dosage regimen of PCS128552 that could be potentially efficacious and safe in a larger pivotal study. The patients with these types of conditions have an abnormal pattern of GI motility in the absence of mechanical obstruction. For example, POGD is characterized by nausea, vomiting, abdominal distension and/or delated passage of flatus or stool, following surgery (most commonly with abdominal surgery). It is the most common cause of prolonged length of stay in hospital following GI surgery, leading to an increase in healthcare costs. The only FDA-approved drug to treat POGD is a mu-opioid receptor antagonist alvimopan (Entereg®), which is only available through a restricted program for short-term use due to the potential risk of myocardial infarction with long-term use.
Two clinical studies have been previously conducted by Yuhan with PCS12852. In the first-in-human clinical trial (Protocol YH12852-101), the initial safety and tolerability of PCS12852 were evaluated after single and multiple oral doses in healthy subjects. PCS12852 increased stool frequency with faster onset when compared to prucalopride, an FDA approved drug for the treatment of chronic idiopathic constipation. Compared to the group receiving prucalopride (an FDA approved drug for the treatment of chronic idiopathic constipation), the PCS12852 dose groups showed higher stool frequency for 24 hours following single dosing and had faster onset of spontaneous bowel movements (SBMs) with comparable or relatively higher Bristol Stool Form Scale score (lower stool consistency) for 24 hours following first dosing. In addition, based on an increase of ≥ 1 SBM/week from baseline during 7-day multiple dosing, the PCS12852 dose group had a higher percent of patients with an increase than the prucalopride group. All doses of PCS12852 were safe and well tolerated and no serious adverse events (SAE) occurred during the study. The most frequently reported adverse events (AEs) were headache, nausea and diarrhea which were temporal, manageable, and reversible within 24 hours. There were no clinically significant changes in platelet aggregation or ECG parameters including no sign of QTc prolongation in the study. The second study conducted was a Phase 1/2A clinical trial (Protocol YH12852-102) to evaluate the safety, tolerability, pharmacokinetics and pharmacodynamics of PCS12852 immediate release (IR) formulation and delayed release (DR) formulation after multiple oral dosing. PCS12852 was safe and well tolerated after single and multiple administrations. The most frequent AEs for both the IR and DR formulations of PCS12852 were headache, nausea and diarrhea, but the incidences of these AEs were comparable with those of the prucalopride 2 mg group. These AEs, which were transient and mostly mild in severity, are also commonly observed with other 5-HT4 agonists. Both formulations of PCS12852 also showed pharmacologic activity as assessed using various pharmacodynamic parameters for stool assessment.
Yuhan had also conducted extensive toxicological studies for the product that demonstrated that the product is safe for use and can be moved quickly into Phase 2 studies.
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PCS6422
On August 23, 2020, we entered into a License Agreement (“Elion License Agreement”) with Elion Oncology, Inc. (“Elion”), pursuant to which we acquired an exclusive contingent license to develop, manufacture and commercialize PCS6422 globally.
Elion acquired the eniluracil (PCS6422) product from Fennec Pharmaceuticals (formerly known as Adherex Technologies) in 2016. PCS6422 is an oral, potent, selective, and irreversible inhibitor of dihydropyrimidine dehydrogenase (DPD), the enzyme that rapidly metabolizes 5-FU, a common chemotherapy drug, to inactive metabolites, such as α-fluoro-β-alanine (F-Bal). F-Bal is thought to cause the neurotoxicity and Hand–Foot Syndrome (HFS) associated with 5-FU, and greater formation of F-Bal appears to be associated with a decrease in the antitumor activity of 5-FU. HFS can affect daily living activities, quality of life, and requires dose interruptions/adjustments and even therapy discontinuation resulting in suboptimal tumor effects. We believe that the inhibition of DPD by PCS6422 may significantly improve exposure to 5-FU and reduce 5-FU side effects related to F-Bal. One dose of PCS6422 irreversibly blocks DPD activity for up to two weeks until DPD levels recover via de novo synthesis of the DPD enzyme. Thus, we believe inhibition of tumor DPD will result in higher 5-FU intra-tumoral concentration and potentially better tumor response along with the decrease in F-Bal.
Fluoropyrimidines (e.g., 5-FU) are still the cornerstone of treatment for many different types of cancers, either as monotherapy or in combination with other chemotherapy agents by an estimated two million patients annually. Xeloda®, an oral pro-drug of 5-FU, is approved as first-line therapy for metastatic colorectal and breast cancer. However, its use is limited by adverse effects such as the development of HFS in up to 60% of patients.
Elion evaluated the potential for the combination of PCS6422 with capecitabine (Xeloda®, and, together with PCS6422, known as ECAPE) as a treatment of advanced gastrointestinal (GI) tumors. Nonclinical efficacy data indicated that in colorectal cancer models, pretreatment with PCS6422 enhanced the antitumor activity of capecitabine. PCS6422 increased the antitumor potency of capecitabine while not increasing the toxicity. The antitumor efficacy of the combination of PCS6422 and capecitabine was tested in several xenograft animal models with human breast, pancreatic and colorectal cancer cells. These preclinical xenograft models demonstrate that PCS6422 potentiates the antitumor activity of capecitabine and significantly reduces the dose of capecitabine required to be efficacious.
Elion met with the FDA in 2019 and agreed upon the clinical development program required for the combination of PCS6422 and capecitabine as first-line therapy for metastatic colorectal cancer when treatment with fluoropyrimidine therapy alone is preferred. Subsequently, an IND has been granted safe to proceed by FDA on May 17, 2020, for the Phase 1B study. This Phase 1B study will evaluate the safety and tolerability of several dose combinations of PCS6422 and capecitabine in advanced GI tumor patients and should be initiated in the first half of 2021.
Other DPD enzyme inhibitors (e.g. Gimeracil used in Teysuno® approved only outside the US) act as competitive reversible inhibitors. These agents must be present when 5-FU or capecitabine are administered to inhibit 5-FU breakdown by DPD in order to improve the efficacy and safety profiles of 5-FU. Given the reversible nature of their effect on DPD, over time 5-FU metabolism to F-Bal will return, decreasing the amount of 5-FU in the cancer cells and decreasing the potential cytotoxicity on the cancer cells. There is also evidence that administering DPD inhibitors directly with 5-FU may also decrease the antitumor effect of the 5-FU. Because PCS6422 is an irreversible inactivator of DPD, it can be dosed the day before capecitabine administration and its effect on DPD can last longer than the reversible DPD inhibitors and beyond the time 5-FU exists in the cancer cell. We believe this can optimize the potential cytotoxic effect and minimize the metabolism of 5-FU.
Prior to Elion’s involvement, two multicenter Phase 3 studies were conducted in patients with colorectal cancer (CRC) with PCS6422 administered in 10-fold excess to 5-FU. Unfortunately, we believe the dose of PCS6422 during these trials was not optimal, and that PCS6422 was not administered early enough to irreversibly affect the DPD enzyme, thus the regimen tended to produce less antitumor benefit than the control arm with the standard regimen of 5-FU/leucovorin (LV) without PCS6422. Later preclinical work suggested that when PCS6422 was present at the same time as and in excess to 5-FU, it diminished the antitumor activity of 5-FU, which we believe supports the proposal of exploring clinically dosing PCS6422 several hours before 5-FU to allow its clearance before the administration of 5-FU.
PCS11T
On May 24, 2020, we entered into an exclusive License Agreement with Aposense, Ltd., (“Aposense”), pursuant to which we were granted a contingent license in Aposense’s patent rights and know-how to develop and commercialize their next generation irinotecan cancer drug, PCS11T (formerly known as ATT-11T). The grant of license is conditioned on the following being satisfied within 9 months of May 24, 2020 (or the agreement shall terminate): (i) our closing of an equity financing and successful up-listing to Nasdaq and (ii) Aposense obtaining the approval of the Israel Innovation Authority for the consummation of the transactions contemplated by the agreement, which approval was obtained on August 24, 2020.
PCS11T is a novel lipophilic anti-cancer pro-drug that is being developed for the treatment of the same solid tumors as prescribed for irinotecan. This pro-drug is a conjugate of a specific proprietary Aposense molecule connected to SN-38, the active metabolite of irinotecan. The proprietary molecule in PCS11T has been designed to allow PCS11T to bind to cell membranes to form an inactive pro-drug depot on the cell with SN-38 preferentially accumulating in the membrane of tumors cells and the tumor core. This unique characteristic may make the therapeutic window of PCS11T wider than other irinotecan products such that the antitumor effect of PCS11T could occur at a much lower dose with a milder adverse effect profile than irinotecan. Despite the widespread use of commercially marketed irinotecan products in the treatment of metastatic colorectal cancer and other cancers resulting in peak annual sales of approximately $1.1 billion, irinotecan has a narrow therapeutic window and includes an FDA “Black Box” warning for both neutropenia and severe diarrhea. There is, therefore, a substantial unmet need to overcome the limitations of the current commercially marketed irinotecan products, improving efficacy and reducing the severity of treatment emergent adverse events. We believe the potential wider therapeutic window of PCS11T will likely lead to more patients responding with less side effects when on PCS11T compared to other irinotecan products.
Pre-clinical studies conducted to date showed that PCS11T demonstrated tumor eradication at much lower doses than irinotecan across various tumor xenograft models. PCS11T does not affect acetyl choline esterase (AChE) activity in human and rat plasma in vitro, which would suggest that PCS11T will show an improved safety profile, compared to irinotecan, which is known for its cholinergic-related side effects.
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We are currently planning to manufacture the product at a GMP facility, conduct the required toxicological studies required to file the IND and initiate the Phase 1B study in oncology patients with solid tumors in 2022.
ImplicationsPCS100
On August 29, 2019, we entered into an exclusive license agreement with Akashi Therapeutics, Inc. (“Akashi”) to develop and commercialize an anti-fibrotic, anti-inflammatory drug, PCS100 (formerly known as HT-100), which also promotes healthy muscle fiber regeneration. In previous clinical trials in Duchenne Muscular Dystrophy (DMD), PCS100 showed promising improvement in the muscle strength of Beingnon-ambulant pediatric patients. Although the FDA placed a full clinical hold on the DMD trial after a serious adverse event in a pediatric patient, the FDA has partially removed the clinical hold and defined how PCS100 can resume clinical trials in DMD. Once we have obtained adequate funding, we plan to develop PCS100 in rare adult fibrotic related diseases such as focal segmental glomerulosclerosis, idiopathic pulmonary fibrosis or Scleroderma. At the present time, we are evaluating the potential GMP manufacturing facilities and the potential indications for PCS100.
Other Recent Developments
Line of Credit Agreements
On September 20, 2019, we entered into two separate LOC Agreements (“LOC Agreements”) with DKBK Enterprises, LLC (“DKBK”) and CorLyst, LLC (“CorLyst”, and, together with DKBK, collectively, “Lenders”), both related parties, which provide a revolving commitment of up to $700,000 each ($1.4 million total). Under the LOC Agreements, all funds borrowed bear interest at an Emerging Growthannual rate of 8%. The promissory notes issued in connection with the LOC Agreements provide that the Lenders have the right to convert all or any portion of the principal and accrued and unpaid interest into our common stock on the same terms as our 2019 Senior Convertible Notes. Therefore, the Lenders may convert the outstanding debt under the LOC Agreements into our common stock at a conversion price equal to the lower of (i) $14.28 per share, (ii) a price per share equal to a 10% discount to the pre-money valuation of an equity sale of the Company’s common stock for cash, or (iii) at an adjusted price; all as more particularly described in the 2019 Senior Convertible Notes.
Our Chief Executive Officer (“CEO”) is also the CEO and Managing Member of both Lenders. DKBK directly holds 16,166 shares of Processa common stock and CorLyst beneficially owns 1,095,649 shares of our common stock.
In April and June 2020, we drew a total of $500,000 under the LOC Agreement with DKBK. On July 21, 2020, we drew an additional $200,000, bringing the total amount drawn under the LOC Agreement with DKBK to $700,000. We have not drawn any funds under the LOC Agreement with CorLyst. See “Transactions with Related Persons, Promoters and Certain Control Persons.”
DKBK has informed us that they will convert the $700,000 principal amount and related accrued interest outstanding under the LOC Agreement with DKBK simultaneously with the closing of this offering into 156,450 shares of common stock (based on interest accrued through June 30, 2020). This assumes a conversion price of $4.50 per share, which, pursuant to the LOC Agreement, is a 10% discount on an assumed public offering price of $5.00 per share.
Yuhan Investments in Our Company
On July 14, 2020, we executed a non-binding indication of interest with Yuhan USA, a subsidiary of Yuhan. Pursuant to the non-binding indication of interest, Yuhan USA expressed its intent to purchase up to $3.0 million of our common stock in this offering at the public offering price. However, because indications of interest are not binding agreements or commitments to purchase, Yuhan USA may determine to purchase more, fewer or no shares in this offering.
The non-binding indication of interest with Yuhan USA is not a legally binding agreement and may be terminated or changed at any time. Accordingly, there can be no assurance that Yuhan USA will actually purchase any shares in this offering.
As consideration for the Yuhan License Agreement described above, we issued to Yuhan 250,000 shares of common stock (based upon an $8.00 per share price), subject to adjustment based on the offering price in this offering (but not less than 181,818 shares).
Payroll Protection Program Loan
In May 2020, we entered into a promissory note in favor of the Bank of America under the Small Business Administration Paycheck Protection Program of the Coronavirus Aid, Relief and Economic Security Act of 2020 (the “CARES Act”), for a $162,459 loan (“the PPP Loan”). We have used the loan proceeds for covered payroll costs in accordance with the relevant terms and conditions of the CARES Act. We anticipate the PPP Loan will be forgiven, in whole or in part, pursuant to its terms.
Reduction in our Authorized Shares
On June 25, 2020, we amended our Certificate of Incorporation reducing the number of authorized shares of our common stock from 100,000,000 to 30,000,000. We believe 100,000,000 authorized shares of common stock was disproportionately large in relation to the Company’s outstanding common stock and our anticipated future needs, and the reduction will reduce our future Delaware franchise tax.
Update on COVID-19 Impact
The COVID-19 pandemic has been and will likely continue to be extensive in many aspects of society, which has resulted in and will likely continue to result in significant disruptions to businesses and capital markets around the world. The extent to which the coronavirus impacts us will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others.
At present, we have experienced delays from COVID-19 on our business and operations. Although enrolment and treatment of patients in our Phase 2A trial has been completed, we have not been able to visit the clinical sites to close out the study and write the final report. In order to prioritize patient health and that of the investigators at clinical trial sites, enrollment of new patients in our planned clinical trials will be dependent on many factors, including the progression of the pandemic and its impact on patients and the investigators at clinical trial sites. Furthermore, our ability to initiate our planned clinical trials will require collaboration with and permission from each of the clinical trial sites. Over the coming weeks and months, we will continue to carefully monitor the situation with respect to each of our planned clinical trials and follow guidance from local and federal health authorities.
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Risks Associated with our Business and Related to this Offering
We qualify asare a clinical stage biopharmaceutical company with limited operating history. We do not have any drug candidates approved for sale and have not yet generated any revenue from drug sales. We expect to continue to incur significant expenses, operating losses and negative cash flows from operations for the foreseeable future. Our business is subject to a number of risks of which you should be aware before making an “emerging growth company” as definedinvestment decision. These risks are discussed more fully in the Jumpstart Our Business Startups Act“Risk Factors” section of 2012, orthis prospectus. These risks include, but are not limited to the JOBS Act. An emerging growth company may take advantage of relief from certain reporting requirements and other burdens that are otherwise applicable generally to public companies. These provisions include:following:
● an exception from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”);
| ● | We have a history of losses and we may never become profitable; | |
| ● | We have limited cash resources and will require additional financing; | |
| ● | The ongoing COVID-19 pandemic may disrupt our operations and affect our ability to successfully conduct clinical studies and raise capital; | |
| ● | We currently do not have, and may never develop, any FDA-approved, licensed or commercialized products; | |
| ● | We depend entirely on the successful development of our product candidates, which have not yet demonstrated efficacy for their target indications in clinical trials. We may never be able to demonstrate efficacy for our product candidates, thus preventing us from licensing, obtaining marketing approval by any regulatory agency, and/or commercializing our product(s); | |
| ● | We have little corporate history of conducting clinical trials. Our planned clinical trials or those of our collaborators may reveal significant adverse events, toxicities or other side effects not seen in our preclinical studies and may result in a safety profile that could inhibit regulatory approval or market acceptance of any of our product candidates; | |
| ● | We depend on rights to certain pharmaceutical compounds that are or will be licensed to us. We do not own the intellectual property rights to these pharmaceutical compounds and any loss of our rights to them could prevent us from selling our products; | |
| ● | We cannot ensure protection of our licensed intellectual property rights; | |
| ● | Our product candidates may infringe the intellectual property rights of others, which could increase our costs and delay or prevent our development and commercialization efforts; | |
| ● | We have identified material weaknesses in our internal control over financial reporting related to our control environment, which in turn results in a material weakness in our disclosure controls. If we do not remediate the material weaknesses in our internal control over financial reporting, or if we fail to establish and maintain effective internal control, we may not be able to accurately report our financial results, which may cause investors to lose confidence in our reported financial information and may lead to a decline in the market price of our stock; | |
| ● | If you purchase shares of common stock in this offering, you will suffer substantial and immediate dilution of your investment; and | |
| ● | Our common stock price is expected to be volatile. |
● reduced disclosure about our executive compensation arrangements in our periodic reports, proxy statements and registration statements; and
● exemptions from the requirements of holding non-binding advisory votes on executive compensation or golden parachute arrangements.
We may take advantage of these provisions for up to five years or such earlier time that we no longer qualify as an emerging growth company. We would cease to qualify as an emerging growth company if we have more than $1.07 billion in annual revenue, we are deemed to be a “large accelerated filer” under the rules of the SEC, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th or we issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some but not all of these reduced reporting burdens. For example, we may take advantage of the exemption from auditor attestation on the effectiveness of our internal control over financial reporting. To the extent that we take advantage of these reduced reporting burdens, the information that we provide stockholders may be different than you might obtain from other public companies in which you hold equity interests.
In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
Corporate Information
Our principal executive offices are located at 7380 Coca Cola Drive, Suite 106, Hanover, Maryland 21076. Our telephone number is (443) 776-3133. Our website is www.processapharmaceuticals.com. The information found on, or otherwise accessible through, our website is not incorporated into, and does not form a part of, this prospectus or any other report or document we file with or furnish to the U.S. Securities and Exchange Commission (the “SEC”). We have included our website address in this prospectus solely as an inactive textual reference. Investors should not rely on any such information in deciding whether to purchase our common stock.
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| Common Stock to be Outstanding After this Offering* | 8,715,447 shares of common stock We have assumed a public offering price of $5.00 per share. | ||
| We intend to use the | |||
| Risk Factors | |||
| Our | |||
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*The number of shares of our common stock to be outstanding after this offering is based on 5,515,447 shares of common stock outstanding excludes as of such date:August 31, 2020 and excludes the following:
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| ● | 324,360 shares of our common stock granted on August 5, 2020 to employees and directors as restricted stock awards under the Omnibus Plan of which restricted stock awards for 214,078 shares of common stock vest upon the successful completion of this offering, with the remaining 110,282 shares of common stock vesting over two years; | |
| ● | 54,083 shares of common stock reserved for issuance pursuant to future awards under the Omnibus Plan; | |
| ● | 47,772 shares of our common stock issuable upon the exercise of outstanding non-qualified stock options granted to our Chief Financial Officer on September 1, 2018, having an exercise price of $19.88 per share, of which 25,172 shares have vested; | |
| ● | 533,959 shares of common stock issuable upon exercise of the outstanding and exercisable stock purchase warrants having a weighted average exercise price of | |
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| ● | 156,450 shares of common stock issuable upon the assumed conversion of | |
| ● | ||
| ● | 400,000 shares of common stock issued to Yuhan in connection with the Yuhan License Agreement, based on an assumed public offering price of $5.00 per share | |
| ● | 700,000 shares of common stock to be issued |
* Unless otherwise indicated, all information in this prospectus gives effect to the Reverse Split.
Certain of our officers, directors and existing stockholders have indicated an interest in purchasing shares in this offering on the same terms as those offered to the public. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, fewer or no shares in this offering to any of these officers, directors or stockholders, or any of these officers, directors or stockholders may determine to purchase more, fewer or no shares in this offering. The underwriters will receive the same underwriting discounts and commissions on any shares purchased by these officers, directors and stockholders as they will on any other shares sold to the public in this offering.
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forthtables summarize our historical consolidated financial data for the periods and as of the dates indicated.
We have derived the following summary historical consolidated financial data for the periods presented below. The summary consolidated financial data as of December 31, 2017 and 2016 and for each of the years in the two-year period ended December 31, 2017 have been derived2019 and 2018 from our audited consolidated financial statements included herein.appearing elsewhere in this prospectus. The summary unaudited condensedhistorical consolidated financial data as of March 31, 2018June 30, 2020 and for the three-month periodsix months ended March 31, 2018 hasJune 30, 2020 and 2019 have been derived from our unaudited condensed consolidated financial statements included herein.
appearing elsewhere in this prospectus and have been prepared on the same basis as our audited consolidated financial statements. Our historical results are not necessarily indicative of the results of operations for future periods. that may be expected in the future.
You should read the following summary consolidated financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors” and our consolidated financial statements and the related notes included elsewhere in this prospectus.
| Balance Sheet Data | As of March 31, 2018 | As of December 31, 2017 | As of December 31, 2016 | |||||||||
| (Unaudited) | ||||||||||||
| Cash and cash equivalents | $ | 1,776,639 | $ | 2,847,429 | $ | 1,071,894 | ||||||
| Total Current Assets | $ | 1,843,512 | $ | 2,951,584 | $ | 2,336,992 | ||||||
| Total Assets | $ | 12,886,250 | $ | 2,982,940 | $ | 2,364,921 | ||||||
| Total Liabilities | $ | 5,609,884 | $ | 2,609,776 | $ | 97,692 | ||||||
| Total Stockholders’ Equity | $ | 7,276,366 | $ | 373,164 | $ | 2,267,229 | ||||||
| Statements of Operations Data | Three Months Ended March 31, 2018 | Year Ended December 31, 2017 | Year Ended December 31, 2016 | |||||||||
| (Unaudited) | ||||||||||||
| Research and development costs | $ | 807,661 | $ | 926,117 | $ | 1,536,996 | ||||||
| General and administrative expenses | $ | 483,955 | $ | 876,316 | $ | 384,524 | ||||||
| Operating Loss | $ | (1,291,616 | ) | $ | (1,802,433 | ) | $ | (1,921,520 | ) | |||
| Net Loss | $ | (1,096,798 | ) | $ | (1,856,315 | ) | $ | (1,917,066 | ) | |||
| Net Loss Applicable to Common Shares – Basic and Diluted | $ | (0.03 | ) | $ | (0.06 | ) | $ | (0.07 | ) | |||
| Weighted average Common Shares Used to Compute Net Loss Applicable to Common Shares – Basic and Diluted | 35,272,626 | 32,595,680 | 29,321,049 | |||||||||
Six Months Ended June 30, | Year Ended December 31, | |||||||||||||||
| 2020 | 2019 | 2019 | 2018 | |||||||||||||
| Operating expenses | ||||||||||||||||
| Research and development | $ | 928,855 | $ | 1,211,655 | $ | 2,320,573 | $ | 3,085,317 | ||||||||
| General and administrative | 859,255 | 807,837 | 1,614,909 | 1,439,623 | ||||||||||||
| Operating loss | (1,788,110 | ) | (2,019,492 | ) | (3,935,482 | ) | (4,524,940 | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Interest income | 846 | 9,383 | 11,548 | 18,297 | ||||||||||||
| Interest expense | (36,450 | ) | (10,702 | ) | (36,658 | ) | (161,205 | ) | ||||||||
| Net operating loss before income tax benefit | (1,823,714 | ) | (2,020,811 | ) | (3,960,592 | ) | (4,667,848 | ) | ||||||||
| Income tax benefit | 215,964 | 300,901 | 602,716 | 902,801 | ||||||||||||
| Net loss and comprehensive loss | $ | (1,607,750 | ) | $ | (1,719,910 | ) | $ | (3,357,876 | ) | $ | (3,765,047 | ) | ||||
| Net loss per share attributable to common stockholders - basic and diluted | $ | (0.29 | ) | $ | (0.31 | ) | $ | (0.70 | ) | $ | (0.71 | ) | ||||
| Weighted average common stock outstanding - basic and diluted | 5,515,447 | 5,525,009 | 5,525,635 | 5,332,141 | ||||||||||||
| As of June 30, 2020 | ||||||||||||
| Actual | Pro Forma (1) | Pro Forma, As Adjusted (2) | ||||||||||
| Balance Sheet Data: | ||||||||||||
| Cash and cash equivalents | $ | 452,654 | $ | 552,654 | ||||||||
| Total Assets | 10,011,456 | 10,111,456 | ||||||||||
| Working Capital (Deficit) (3) | (1,321,086 | ) | (717,063 | ) | ||||||||
| 2019 Senior convertible debt (4) | 859,102 | 859,102 | ||||||||||
| Line of Credit Payable | 504,023 | - | ||||||||||
| Total Liabilities (5) | 3,418,436 | 2,914,413 | ||||||||||
| Total Stockholders’ Equity | 6,593,020 | 7,197,043 | ||||||||||
| (1) | The pro forma consolidated balance sheet data gives effect to the following adjustments, referred to herein as the “Pro Forma Adjustments,” certain of which are based on an assumed public offering price of $5.00 per share: (i) the issuance of 825,397 shares of common stock to stockholders who purchased common stock units in our 2018 Private Placement Transactions as a result of full ratchet anti-dilution provisions; (ii) the assumed conversion of the $700,000 (inclusive of the $200,000 draw on July 21, 2020) principal amount outstanding under the LOC Agreement with DKBK and related accrued interest expected to occur simultaneously with the closing of this offering into 156,450 shares of common stock (based on interest accrued through June 30, 2020); (iii) the issuance of 500,000 shares of common stock to Aposense; (iv) the issuance of 400,000 shares of common stock to Yuhan; and (v) the issuance of 700,000 shares of common stock and payment of $100,000 to Elion. The number of shares of common stock outstanding after giving effect to the Pro Forma Adjustments would be 8,097,294. |
| (2) | Assumes the Pro Forma Adjustments and further gives effect to the issuance of 3,200,000 shares of common stock in this offering and the receipt of $ in net proceeds. The number of outstanding shares on a pro forma as adjusted basis would be . |
| (3) | We define working capital as current assets less current liabilities. |
| (4) | Includes accrued interest totaling $54,459 and a discount of $357. |
| (5) | Our total liabilities at June 30, 2020 include a net deferred tax liability related to our acquisition of the license agreement for PCS499 from CoNCERT Pharmaceuticals, Inc. totaling $1,315,666. |
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An investmentInvesting in our securitiescommon stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, before purchasing anythe section of the Shares. If any of the following risks actually occur, our business, financial condition, or results of operations could be materially adversely affected, the trading price of our common stock could decline, and you may lose all or part of your investment. You should acquire the shares to which this prospectus relates only if you can afford to lose your entire investment. You should also refer to the other information contained in this prospectus, includingentitled “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and our consolidated financial statements and therelated notes, to those statements, and the information set forth under the caption “Cautionary Note Regarding Forward-Looking Statements.”before investing in our common stock. The risks and uncertainties described below and contained in our other periodic reports are not the only ones that we face. Additional risks not presently known to us or that we currently deem immaterial may also adversely affect our business operations. If any of the following risks occur, our business, operating results and prospects could be materially harmed. In that event, the price of our common stock could decline, and you could lose part or all of your investment.
Risks Related to Our Financial Position and Need for Capital
We have a history of losses and we may never become profitable.
We are a clinical stage biopharmaceutical company with a limited operating history. Processa itself as an organization has never had a drug approved by the FDA or any regulatory agency. The likelihood of success of our business plan must be considered in light of the challenges, substantial expenses, difficulties, complications and delays frequently encountered in connection with developing and expanding early-stage businesses and the regulatory and competitive environment in which we operate. Biopharmaceutical product development is a highly speculative undertaking, involves a substantial degree of risk, and is a capital-intensive business. If we cannot successfully execute our plan to develop our pipeline of drug(s), our business may not succeed.
Promet Therapeutics, LLC, whose assets
Since inception, we have incurred significant operating losses. Our net losses were acquired by Processa,$3.4 million for the year ended December 31, 2019 and $1.6 million for the six months ended June 30, 2020. As of June 30, 2020, we had an accumulated deficit of $3.253 million incurred since its inception on August 31, 2015 through$12.6 million. To date, we have financed our operations with the dateproceeds raised from accredited investors in private transactions. We have devoted substantially all of acquisition on October 4, 2017. Subsequentour financial resources and efforts to the date of acquisition, the accumulated deficit increased to approximately $5.0 million at March 31, 2018. The Companyresearch and development. We will incur additional losses as we continue our research and development activities, seek regulatory approvals for our product candidates, and engage in clinical trials.trials and expand our product portfolio. These losses will cause, among other things, our stockholders’ equity and working capital to decrease. Any future earnings and cash flow from operations of our business are dependent on our ability to further develop our products and on revenues and profitability from sales of products or successful joint venture relationships.
There can be no assurance that we will be able to generate sufficient product revenue to become profitable at all or on a sustained basis. Even if we generate revenues, we expect to have quarter-to-quarter fluctuations in revenues and expenses, some of which could be significant, due to research, development, clinical trial, and marketing and manufacturing expenses and activities. We also expect to incur substantial expenses without corresponding revenues, unless and until we are able to obtain regulatory approval and successfully license or commercialize our product candidates. If our product candidates fail in clinical trials or do not gain regulatory approval, or if our products do not achieve market acceptance, we may never become profitable.
We may never be able to obtain regulatory approval for the marketing of our product candidates in any indication in the United States or internationally. As we commercialize and market products, we will need to incur expenses for product marketing and brand awareness and conduct significant research, development, testing and regulatory compliance activities that, together with general and administrative expenses, could result in substantial operating losses for the foreseeable future. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our stock price may decline, and you may lose all or a substantial part of your investment in us.
We have limited cash resources and will require additional financing.
We will require substantial additional capital in the future to further our development and license of our current and any additional products. We have historically relied upon private investments to fund our operations. Delays in obtaining additional funding could adversely affect our ability to move forward with additional studies or in licensing activities.
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Substantial doubt existed at
Since inception, we have not generated any revenue, have incurred net losses, have used net cash in our operations and have funded our business and operations primarily through proceeds from the timeprivate placement of filing ofequity securities and senior secured convertible notes. We expect to continue to require significant future financing to fund our annual report on Form 10-Koperating activities and to use cash in operating activities for the year ended December 31, 2017foreseeable future as we continue our research and our quarterly report on Form 10-Q for the three months ended March 31, 2018 about the Company’s abilitydevelopment activities to continue as a going concern.develop products that can be commercialized to generate revenue. Our ability to obtain additional financing will be subject to a number ofmany factors, including market conditions, our operating performance and investor sentiment. If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates, restrict our operations or obtain funds by entering into agreements on unattractive terms, which would likely have a material adverse effect on our business, stock price and our relationships with third parties with whom we have business relationships, at least until additional funding is obtained. If we do not have sufficient funds to continue operations, we could be required to seek bankruptcy protection or other alternatives that would likely result in our stockholders losing some or all of their investment in us.
We have not had any revenue since our inception, and we do not currently have any credit facilitiesrevenue under contract or any immediate sales prospects. As part of our effort to conserve cash, beginning on August 1, 2019 we have also delayed some of our cash outflows, primarily through the deferred payment of salaries ($210,800 has been included as a source of future funds, and there can be no assurance thataccrued expenses at June 30, 2020) until such time as we will be able to raisehave raised sufficient additional capital on acceptable terms, or at all. funding.
We may seek additional capital through a combination of private and public equity offerings, debt financings and strategic collaborations. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders. Debt, financing, if obtained,receivables and royalty financings may involve agreements that includebe coupled with an equity component, such as warrants to purchase stock, which could also result in dilution of our existing stockholders’ ownership. The incurrence of indebtedness would result in increased fixed payment obligations and could also result in certain restrictive covenants, limiting or restrictingsuch as limitations on our ability to take specific actions, such as incurringincur additional debt, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could increaseadversely impact our expensesability to conduct our business and require thatmay result in liens being placed on our assets secure such debt. Moreover, any debt we incur must be repaid regardless of our operating results.and intellectual property. If we choosewere to pursuedefault on such indebtedness, we could lose such assets and intellectual property. If we raise additional indications and/or geographies forfunds through strategic partnerships and alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates in-license additional developmentor grant licenses on terms that are not favorable to us.
Substantial doubt exists about our ability to continue as a going concern.
Substantial doubt exists about our ability to continue as a going concern as of the date hereof and our auditors included a going concern paragraph in their Report of Independent Registered Public Accounting Firm accompanying our audited financial statements for the year ended December 31, 2019. Our December 31, 2019 consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of recorded assets, or otherwise expand more rapidly thanthe amounts and classification of liabilities that might be different should we presently anticipate,be unable to continue as a going concern based on the outcome of these uncertainties described above.
The ongoing COVID-19 pandemic may disrupt our operations and affect our ability to successfully conduct clinical studies and raise capital.
In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, and created significant volatility and disruption in the financial and capital markets. We are unable to accurately predict the full impact that the ongoing COVID-19 pandemic will have on our results from operations, financial condition, and scientific and clinical activities due to numerous factors that are not within our control, including the duration and severity of the outbreak, stay-at-home orders, business closures, travel restrictions, supply chain disruptions and employee illness or quarantines, which could result in disruptions to our operations and adversely impact our results from operations and financial condition. In addition, the COVID-19 pandemic has resulted in ongoing volatility in the financial and capital markets. If our access to capital is restricted or associated borrowing costs increase as a result of developments in financial markets relating to the COVID-19 pandemic, our operations and financial condition could be adversely impacted. In addition, we have experienced delays in completing the closeout of our Phase 2A clinical trial for PCS499 and any future delays would delay our drug development process.
Raising additional capital may also needcause dilution to our existing stockholders, including purchasers of common stock in this offering, restrict our operations or require us to relinquish rights to our technology or product candidates.
Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of private and public equity financings, debt financings, collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital sooner than expected.through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of existing stockholders. Debt, receivables and royalty financings may be coupled with an equity component, such as warrants to purchase stock, which could also result in dilution of our existing stockholders’ ownership. The incurrence of indebtedness would result in increased fixed payment obligations and could also result in certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business and may result in liens being placed on our assets and intellectual property. If we were to default on such indebtedness, we could lose such assets and intellectual property. If we raise additional funds through strategic partnerships and alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates or grant licenses on terms that are not favorable to us.
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We have a significant amount of intangible assets related to our acquisition of PCS499 recorded on our balance sheet which may lead to potentially significant impairment charges in the future.
We review long-lived assets, including intangible assets, for impairment whenever events or changes in estimates and circumstances indicate that the related carrying amounts may not be recoverable based on the existence of certain triggering events. Intangible assets are also subject to an impairment assessment at least annually. The amount of identifiable intangible assets in our consolidated balance sheet is related to our acquisition of PCS499 and our right of use assets. At June 30, 2020, intangible assets recorded on our consolidated balance sheet was $9.4 million.
We have incurred indebtedness under the CARES Act, which will be subject to review, may not be forgivable in whole or in part and may eventually have to be repaid.
We received funds under the Paycheck Protection Program in May 2020 in the amount of $162,459, serviced by the Bank of America. The application for these funds requires us to, in good faith, certify that the current economic uncertainty made the loan request necessary to support our ongoing operations. This certification further requires us to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on us having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria.
Under the terms of the CARES Act and the corresponding promissory note, the use of the proceeds of the loan is restricted to payroll costs (as defined in the CARES Act), covered rent, covered utility payments and certain other expenditures that, while permitted, would not result in forgiveness of a corresponding portion of the loan. Following recent amendments to the Paycheck Protection Program, after an eight- or twenty-four-week period starting with the disbursement of the loan proceeds, we may apply for forgiveness of some or all of the loan, with the amount which may be forgiven equal to the sum of eligible payroll costs, mortgage interest (not applicable to us), covered rent, and covered utility payments, in each case incurred by us during the eight- or twenty-four-week period following the date of first disbursement. Certain reductions in our payroll costs or full-time equivalent employees (when compared against the applicable measurement period) may reduce the amount of the Loan eligible for forgiveness. The Payroll Protection Program has been amended twice with the latest series of amendments significantly altering the timeline associated with the Payroll Protection Program spending and loan forgiveness. While we believe we have acted in good faith and has complied with all requirements of the Payroll Protection Program, if Treasury or SBA determined that our loan application was not made in good faith or that the we did not otherwise meet the eligibility requirements of the Payroll Protection Program, we may not receive forgiveness of the loan (in whole or in part) and we could be required to return the loan or a portion thereof. Further, there is no guarantee that we will receive forgiveness for any amount and forgiveness will be subject to review by our bank of information and documentation that we submit, as required by SBA and the lender.
Risks Relating to Clinical Development and Commercialization of Our Product Candidates
We currently do not have, and may never develop, any FDA-approved, licensed or commercialized products.
We have not yet sought to obtain any regulatory approvals for any product candidates in the United States or in any foreign market. For us to develop any products that might be licensed or commercialized, we will have to invest further time and capital in research and product development, regulatory compliance and market development. Therefore, we and our licensor(s), prospective business partners and other collaborators may never develop any products that can be licensed or commercialized. All of our development efforts will require substantial additional funding, none of which may result in any revenue.
Our licenses are subject to termination by the licensor in certain circumstances.
Our rights to practice the inventions claimed in the licensed patents and patent applications are subject to our licensors abiding by the terms of those licenses and not terminating them. Our licenses may be terminated by the licensor if we are in material breach of certain terms or conditions of the license agreement or in certain other circumstances. Our license agreements each include provisions that allow the licensor to terminate the license if (i) we breach any payment obligation or other material provision under the agreement and fail to cure the breach within a fixed time following written notice of termination, (ii) we or any of our affiliates, licensees or sublicensees directly or indirectly challenge the validity, enforceability, or extension of any of the licensed patents, or (iii) we declare bankruptcy or dissolve. The majority of license agreements require us to satisfy due diligence milestones that relate to the development of new products containing the licensed drug or the agreement may be terminated by such counterparty. In addition, the grant of the Aposense license and the Elion license are contingent on our ability to successfully complete this offering and up-list to Nasdaq or they will not take effect. Our rights under theses licenses are subject to our continued compliance with the terms of the license, including the payment of royalties due under the license. Termination of any of these licenses could prevent us from marketing some or all of our products. Because of the complexity of our products and the patents we have licensed, determining the scope of the license and related royalty obligations can be difficult and can lead to disputes between us and the licensor. An unfavorable resolution of such a dispute could lead to an increase in the royalties payable pursuant to the license. If a licensor believed we were not paying the royalties due under the license or were otherwise not in compliance with the terms of the license, the licensor might attempt to revoke the license. If such an attempt were successful, we might be barred from producing and selling some or all of our products.
We depend entirely on the successful development of our product candidates, which have not yet demonstrated efficacy for their target indications in clinical trials. We may never be able to demonstrate efficacy for our product candidates, thus preventing us from licensing, obtaining marketing approval by any regulatory agency, and/or commercializing our product(s).
Our product candidates are either in the early stages of clinical development or late stages of preclinical development. Significant additional research and development activity and clinical testing are required before we will have a chance to achieve a viable product for licensing or commercialization from such candidates. Our research and development efforts remain subject to all the risks associated with the development of new biopharmaceutical products and treatments. Development of the underlying technology may be affected by unanticipated technical or other problems, among other research and development issues, and the possible insufficiency of funds needed in order to complete development of these product candidates. Safety, regulatory and efficacy issues, clinical hurdles or other challenges may result in delays and cause us to incur additional expenses that would increase our losses. If we and our collaborators cannot complete, or if we experience significant delays in developing, our potential therapeutics or products for use in potential commercial applications, particularly after incurring significant expenditures, our business may fail, and investors may lose the entirety of their investment.
When we submit an IND or foreign equivalent to the FDA or international regulatory authorities seeking approval to initiate clinical trials in the United States and other countries, we may not be successful in obtaining acceptance from the FDA or comparable foreign regulatory authorities to start our clinical trials. If we do not obtain such acceptance, the time in which we expect to commence clinical programs for any product candidate will be extended and such extension will increase our expenses and increase our need for additional capital. Moreover, there is no guarantee that our clinical trials will be successful or that we will continue clinical development in support of an approval from the FDA or comparable foreign regulatory authorities for any indication. We note that most drug candidates never reach the clinical development stage and even those that do commence clinical development have only a small chance of successfully completing clinical development and gaining regulatory approval. Therefore, our business currently depends entirely on the successful development, regulatory approval, and licensing or commercialization of our product candidates, which may never occur.
We must successfully complete clinical trials for our product candidates before we can apply for marketing approval.
Even if we complete our clinical trials, it does not assure marketing approval. Our clinical trials may be unsuccessful, which would materially harm our business. Even if our initial clinical trials are successful, we are required to conduct additional clinical trials to establish our product candidates’ safety and efficacy, before asubmitting an NDA. Clinical testing is expensive, is difficult to design and implement, can take many years to complete and is uncertain as to outcome. Success in early phases of pre-clinical and clinical trials does not ensure that later clinical trials will be successful, and interim results of a clinical trial do not necessarily predict final results. A failure of one or more of our clinical trials can occur at any stage of testing. We may experience numerous unforeseen events during, or as a result of, the clinical trial process that could delay or prevent our ability to receive regulatory approval or commercialize our product candidates. The research, testing, manufacturing, labeling, packaging, storage, approval, sale, marketing, advertising and promotion, pricing, export, import and distribution of drug products are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, which regulations differ from country to country.
We are not permitted to market our product candidates as prescription pharmaceutical products in the United States until we receive approval of an NDA from the FDA, or in any foreign countries until we receive the requisite approval from such countries. In the United States, the FDA generally requires the completion of clinical trials of each drug to establish its safety and efficacy and extensive pharmaceutical development to ensure its quality before an NDA is approved. Regulatory authorities in other jurisdictions impose similar requirements. Of the large number of drugs in development, only a small percentage result in the submission of an NDA to the FDA and even fewer are eventually approved for commercialization. If our development efforts for our product candidates, including regulatory approval, are not successful for their planned indications, or if adequate demand for our product candidates is not generated, our business will be materially adversely affected.
We cannot guarantee that regulators will agree with our assessment of the results of the clinical trials we intend to conduct in the future or that such trials will be successful. The FDA, EMA and other regulators have substantial discretion in the approval process and may refuse to accept any application or may decide that our data is insufficient for approval and require additional clinical trials, or pre-clinical or other studies. In addition, varying interpretations of the data obtained from pre-clinical and clinical testing could delay, limit or prevent regulatory approval of our product candidates.
We have nolittle corporate history of conducting clinical trials. Our planned clinical trials or those of our collaborators may reveal significant adverse events, toxicities or other side effects not seen in our preclinical studies and may result in a safety profile that could inhibit regulatory approval or market acceptance of any of our product candidatescandidates.
Our operations to date have been limited to financing and staffing, the Company, conducting research and developing our core technologies, and identifying and optimizing our lead product clinical candidates.candidates, performing due diligence on other potential drug in-licensing opportunities, receiving FDA orphan designation on PCS499 in Necrobiosis Lipoidica (NL), improving the manufacturing of PCS499 final product, receiving FDA IND clearance on one indication, conducting a healthy human volunteer trial and presently completing a Phase 2A clinical trial in patients with NL. Although we have recruited a team that has experience with clinical trials in the United States and outside the United States, as a company, we have no corporate experience conductingonly conducted two clinical trials in any jurisdiction and have not had previous experience commercializing product candidates or submitting an investigational new drug application or any Application tothrough the FDA or similar submissions to initiate clinical trials or obtain marketing authorization to foreign regulatory authorities. We cannot be certain that other planned clinical trials will begin or be completed on time, if at all,all; that our planned development programsprogram and studies would be acceptable to the FDA or other regulatory authorities,authorities; or that, if regulatory approval is obtained, our product candidates can be successfully commercialized. Clinical trials and commercializing our product candidates will require significant additional financial and management resources, and reliance on third-party clinical investigators, contract research organizations (“CROs”), consultants and collaborators. Relying on third-party clinical investigators, CROs or collaborators may result in delays that are outside of our control.
Furthermore, we may not have the financial resources to continue development of, or to enter into collaborations for, a product candidate if we experience any problems or other unforeseen events that delay or prevent regulatory approval of, or our ability to commercialize, product candidates.
In order to obtain marketing approval for any ofThrough our product candidates,IND, we must demonstrateare currently evaluating the safety and efficacytolerability of PCS499 in patients with NL. We have developed dosing based on our past experience with the product candidate fordrug in a healthy human volunteer study, the relevant clinical indication or indications through preclinical studies and clinical trials as well as additional supporting data. If our product candidates are associated with undesirable side effects in preclinical studies or clinical trials or have characteristics that are unexpected, we may need to interrupt, delay or abandon their development or limit development to more narrow uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective.
Althoughexperience of CoNCERT Pharmaceuticals had dosed our drug product in healthy human volunteers and patients with diabetic nephropathy studies, and the preclinical toxicology data and studies involving diabetic nephropathy patients. However, we do not know if the dosing will be safe and tolerated in patients wewith NL. Preliminary data from the Phase 2A appears to demonstrate that PCS499 at 1,800 mg/day was generally well tolerated. However, since the number of patients in this study was small, the risks associated with giving PCS499 still exists. Given NL patients are mainly women and multiple pathophysiological changes have occurred in their body from the NL, the NL patients could be more sensitive to the drug, thus decreasing their ability to tolerate PCS499. If this occurs, there may not yet initiatedbe any clinical trials or dosed anyway to differentiate PCS499 from PTX thus making development and commercialization of our product candidatesPCS499 in the targeted population of patients. PreclinicalNL not worth pursuing.
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Some preclinical studies of our product candidates have been completed, but we do not know the predictive value of these studies for our targeted population of patients, and we cannot guarantee that any positive results in preclinical studies will translate successfully to our targeted population of patients. It is not uncommon to observe results in human clinical trials that are unexpected based on preclinical testing, and many product candidates fail in clinical trials despite promising preclinical results. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval for their products. Human patients in clinical trials may suffer significant adverse events or other side effects not observed in our preclinical studies, including, but not limited to, immunogenic responses, organ toxicities such as liver, heart or kidney or other tolerability issues or possibly even death. The observed potency and kinetics of our planned product candidates in preclinical studies may not be observed in human clinical trials. If clinical trials of our planned product candidates fail to demonstrate efficacy to the satisfaction of regulatory authorities or do not otherwise produce positive results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our planned product candidates which may result in complete loss of expenditures which we devote to those products.
If significant adverse events or other side effects are observed in any of our future clinical trials, weWe may have difficulty recruiting patients to the clinical trial, patients may drop out of our trial, or we may be required to abandon the trial or our development efforts of that product candidate altogether. We, the FDA, or other applicable regulatory authorities, or an Institutional Review Board (“IRB”), or other applicable regulatory authorities may suspend clinical trials of a product candidate at any time for various reasons, including a belief that subjects in such trials are being exposed to unacceptable health risks or adverse side effects. Some potential therapeutics developed in the biotechnology industry that initially showed therapeutic promise in early-stage studies have later been found to cause side effects that prevented their further development. Even if the side effects do not preclude the drug from obtaining or maintaining marketing approval, undesirable side effects may inhibit market acceptance of the approved product due to its tolerability versus other therapies. Any of these developments could materially harm our business, financial condition, and prospects.
Further, if any of our product candidates obtains marketing approval, toxicities associated with our product candidates may also develop after such approval and lead to a requirement to conduct additional clinical safety trials, additional warnings being added to the labeling, significant restrictions on the use of the product or the withdrawal of the product from the market. We cannot predict whether our product candidates will cause toxicities in humans that would preclude or lead to the revocation of regulatory approval based on preclinical studies or early stage clinical testing. However, any such event, were it to occur, would cause substantial harm to our business and financial condition and would result in the diversion of our management’s attention.
Even if we receive regulatory approval for any of our product candidates, we may not be able to successfully license or commercialize the product and the revenue that we generate from its sales, if any, may be limited.
If approved for marketing, the commercial success of our product candidates will depend upon each product’s acceptance by the medical community (including physicians, patients and health care payors) and the potential competitive products available to the patients upon commercialization. The degree of market acceptance for any of our product candidates will depend on a number of factors, including:
| ● | demonstration of clinical safety and efficacy; | |
| ● | relative convenience, dosing burden and ease of administration; | |
| ● | the prevalence and severity of any adverse effects; | |
| ● | the willingness of physicians to prescribe our product candidates, and the target patient population to try new therapies; |
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| ● | efficacy of our product candidates compared to competing products; | |
| ● | the introduction of any new products that may in the future become available targeting indications for which our product candidates may be approved; | |
| ● | new procedures or therapies that may reduce the incidences of any of the indications in which our product candidates may show utility; | |
| ● | pricing and cost-effectiveness; | |
| ● | the inclusion or omission of our product candidates in | |
| ● | the effectiveness of our own or any future collaborators’ sales and marketing strategies; | |
| ● | limitations or warnings contained in approved labeling from regulatory authorities; |
| ● | our ability to obtain and maintain sufficient third-party coverage or reimbursement from government health care programs, including Medicare and Medicaid, private health insurers and other third-party payors or to receive the necessary pricing approvals from government bodies regulating the pricing and usage of therapeutics; and | |
| ● | the willingness of patients to pay out-of-pocket in the absence of third-party coverage or reimbursement or government pricing approvals. |
If any of our product candidates are approved, but do not achieve an adequate level of acceptance by physicians, health care payors and patients, we may not generate sufficient revenue and we may not be able to achieve or sustain profitability. Our efforts to educate the medical community and third-party payors on the benefits of our product candidates may require significant resources and may never be successful.
In addition, even if we obtain regulatory approvals, the timing or scope of any approvals may prohibit or reduce our ability to commercialize our product candidates successfully. For example, if the approval process takes too long, we may miss market opportunities and give other companies the ability to develop competing products or establish market dominance. Any regulatory approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render our product candidates not commercially viable. For example, regulatory authorities may approve any of our product candidates for fewer or more limited indications than we request, may not approve the price we intend to charge for any of our product candidates, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve any of our product candidates with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that indication.
Even if we obtain marketing approval for any of our product candidates, we will be subject to ongoing obligations and continued regulatory review, which may result in significant additional expense.
Even if we obtain regulatory approval for any of our product candidates for an indication, the FDA or foreign equivalent may still impose significant restrictions on their indicated uses or marketing or the conditions of approval or impose ongoing requirements for potentially costly and time-consuming post-approval studies, including Phase 4 clinical trials, and post-market surveillance to monitor safety and efficacy. Our product candidates will also be subject to ongoing regulatory requirements governing the manufacturing, labeling, packaging, storage, distribution, safety surveillance, advertising, promotion, recordkeeping and reporting of adverse events and other post-market information. These requirements include registration with the FDA, as well as continued compliance with current Good Clinical Practices regulations, or cGCPs, for any clinical trials that we conduct post-approval. In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP, or current Good Manufacturing Practices regulations, requirements relating to quality control, quality assurance and corresponding maintenance of records and documents.
The FDA has the authority to require a risk evaluation and mitigation strategy, or REMS, as part of an NDA or after approval, which may impose further requirements or restrictions on the distribution or use or marketing of an approved drug, such as limiting prescribing to certain physicians or medical centers that have undergone specialized training, limiting treatment to patients who meet certain safe-use criteria or requiring patient testing, monitoring and/or enrollment in a registry. Any of these requirements or restrictions on approval or marketing could restrict the commercial promotion, distribution, prescription or dispensing of our product candidates. Moreover, product approvals may be withdrawn for non-compliance with regulatory standards or if problems occur following the initial marketing of the product. Any of the foregoing scenarios could materially harm the commercial success of our product candidates.
With respect to sales and marketing activities by us or any future partner, advertising and promotional materials must comply with FDA rules in addition to other applicable federal, state and local laws in the United States and similar legal requirements in other countries. In the United States, the distribution of product samples to physicians must comply with the requirements of the U.S. Prescription Drug Marketing Act. Application holders must obtain FDA approval for product and manufacturing changes, depending on the nature of the change. We may also be subject, directly or indirectly through our customers and partners, to various fraud and abuse laws, including, without limitation, the U.S. Anti-Kickback Statute, U.S. False Claims Act, and similar state laws, which impact, among other things, our proposed sales, marketing, and scientific/educational grant programs. If we participate in the U.S. Medicaid Drug Rebate Program, the Federal Supply Schedule of the U.S. Department of Veterans Affairs, or other government drug programs, we will be subject to complex laws and regulations regarding reporting and payment obligations. All of these activities are also potentially subject to U.S. federal and state consumer protection and unfair competition laws. Similar requirements exist in many of these areas in other countries.
In addition, if any of our product candidates are approved for a particular indication, our product labeling, advertising and promotion would be subject to regulatory requirements and continuing regulatory review. The FDA strictly regulates the promotional claims that may be made about prescription products. In particular, a product may not be promoted for uses that are not approved by the FDA as reflected in the product’s approved labeling. If we receive marketing approval for our product candidates, physicians may nevertheless legally prescribe our products to their patients in a manner that is inconsistent with the approved label. If we are found to have promoted such off-label uses, we may become subject to significant liability and government fines. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant sanctions. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent decrees of permanent injunctions under which specified promotional conduct is changed or curtailed.
If we or a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, problems with the facility where the product is manufactured, or we or our manufacturers fail to comply with applicable regulatory requirements, we may be subject to various administrative or judicial sanctions, such as issuance of warning letters, withdrawal of the product from the market, injections or the imposition of civil or criminal penalties or monetary fines, suspension of any ongoing new clinical trials or suspension or withdrawal of regulatory approval.
The occurrence of any event or penalty described above may inhibit our ability to commercialize our product candidates and generate revenue. Adverse regulatory action, whether pre- or post-approval, can also potentially lead to product liability claims and increase our product liability exposure.
Obtaining and maintaining regulatory approval of our product candidates in one jurisdiction does not mean that we will be successful in obtaining regulatory approval of our product candidates in other jurisdictions.
Obtaining and maintaining regulatory approval of our product candidates in one jurisdiction does not guarantee that we will be able to obtain or maintain regulatory approval in any other jurisdiction, but a failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the regulatory approval process in others. For example, even if the FDA grants marketing approval of a product candidate, comparable regulatory authorities in foreign jurisdictions must also approve the manufacturing, marketing and promotion of the product candidate in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from those in the United States, including additional preclinical studies or clinical trials, as clinical studies conducted in one jurisdiction may not be accepted by regulatory authorities in other jurisdictions. In many jurisdictions outside the United States, a product candidate must be approved for reimbursement before it can be approved for sale in that jurisdiction. In some cases, the price that we intend to charge for our products is also subject to approval.
Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for us and could delay or prevent the introduction of our products in certain countries. If we fail to comply with the regulatory requirements in international markets and/ or to receive applicable marketing approvals, our target market will be reduced and our ability to realize the full market potential of our product candidates will be harmed.
Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our product candidates and affect the prices we may obtain.
In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval for our product candidates, restrict or regulate post-approval activities and affect our ability to profitably sell our product candidates. Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We do not know whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product labeling and post-marketing testing and other requirements.
We could face competition from other biotechnology and pharmaceutical companies, and our operating results would suffer if we fail to innovate and compete effectively.
Our products are used for indications where we believe that there is an unmet medical need. If existing or newly approved drug products, whether approved by the FDA for the indication or not approved, are able to successfully treat the same patients, it may be more difficult to perform clinical studies, to develop our product and/or to commercialize our product, adversely affecting the Processa business. Since the biopharmaceutical industry is characterized by intense competition and rapid innovation, our competitors may be able to develop other compounds or drugs that are able to achieve similar or better results than our product candidates. Our competitors may include major multinational pharmaceutical companies, established biotechnology companies, specialty pharmaceutical companies, and universities and other research institutions. Many of our competitors have substantially greater financial, technical and other resources, such as a larger research and development staff and experienced marketing and manufacturing organizations, established relationships with CROs and other collaborators, as well as established sales forces. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. Mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in our competitors. Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Our competitors, either alone or with collaborative partners, may succeed in developing, acquiring or licensing on an exclusive basis drug or biologic products that are more effective, safer, more easily commercialized or less costly than our product candidates or may develop proprietary technologies or secure patent protection and, in turn, exclude us from technologies that we may need for the development of our technologies and potential products.
Even if we obtain regulatory approval of any of our product candidates, we may not be the first to market and that may negatively affect the price or demand for our product candidates. Additionally, we may not be able to implement our business plan if the acceptance of our product candidates is inhibited by price competition or the reluctance of physicians to switch from existing methods of treatment to our product candidates, or if physicians switch to other new drug or biologic products or choose to reserve our product candidates for use in limited circumstances. Furthermore, for drugs that receive orphan drug designation at the FDA, a competitor could obtain orphan product approval from the FDA with respect to such competitor’s drug product. If such competitor drug product is determined to be the same product as one of our product candidates, we may be prevented from obtaining approval from the FDA for such product candidate for the same indication for seven years, except in limited circumstances, and we may be subject to similar restrictions under non-U.S. regulations.
We are completely dependent on third parties to manufacture our product candidates, and our commercialization of our product candidates could be halted, delayed or made less profitable if those third parties fail to obtain manufacturing approval from the FDA or comparable foreign regulatory authorities, fail to provide us with sufficient quantities of our product candidates or fail to do so at acceptable quality levels or prices.
In 2018, we incurred costs to establish a new site to contract manufacture the tablets of PCS499 needed for our clinical trial since the original CoNCERT tablet manufacturing site could no longer be used. Since PCS499 is a deuterated molecule requiring special facilities and chemicals for manufacturing, the manufacturing costs for PCS499 could result in the cost of goods being too high for the commercial price to be obtainable or too high to even manufacture the amount of drug needed to run the clinical studies prior to approval.
We do not currently have, nor do we plan to acquire, the capability or infrastructure to manufacture the active pharmaceutical ingredient, or API, in our product candidates for use in our clinical trials or for commercial product. In addition, we do not have the capability to formulate any of our product candidates into a finished drug product for commercial distribution. As a result, we will be obligated to rely on contract manufacturers, if and when any of our product candidates are approved for commercialization. We have not entered into an agreement with any contract manufacturers for commercial supply and may not be able to engage a contract manufacturer for commercial supply of any of our product candidates on favorable terms to us, or at all.
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The facilities used by our contract manufacturers to manufacture our product candidates must be approved by the FDA or comparable foreign regulatory authorities pursuant to inspections that will be conducted after we submit an NDA or biologics license application to the FDA or their equivalents to other relevant regulatory authorities. We will not control the manufacturing process of, and will be completely dependent on, our contract manufacturing partners for compliance with cGMPs forto manufacture of both active drug substances and finished drug products. These cGMP regulations cover all aspects of the manufacturing, testing, quality control and record keeping relating to our product candidates. If our contract manufacturers do not successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or others, they will not be able to secure and/or maintain regulatory approval for their manufacturing facilities. If the FDA or a comparable foreign regulatory authority does not approve these facilities for the manufacture of our product candidates or if it withdraws any such approval in the future, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for or market our product candidates, if approved.
Our contract manufacturers will be subject to ongoing periodic unannounced inspections by the FDA and corresponding state and foreign agencies for compliance with cGMPs and similar regulatory requirements. We will not have control over our contract manufacturers’ compliance with these regulations and standards. Failure by any of our contract manufacturers to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure to grant approval to market any of our product candidates, delays, suspensions or withdrawals of approvals, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect our business. In addition, we will not have control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. Failure by our contract manufacturers to comply with or maintain any of these standards could adversely affect our ability to develop, obtain regulatory approval for or market any of our product candidates.
If, for any reason, these third parties are unable or unwilling to perform, we may not be able to terminate our agreements with them, and we may not be able to locate alternative manufacturers or formulators or enter into favorable agreements with them and we cannot be certain that any such third parties will have the manufacturing capacity to meet future requirements. If these manufacturers or any alternate manufacturer of finished drug product experiences any significant difficulties in its respective manufacturing processes for our API or finished products or should cease doing business with us, we could experience significant interruptions in the supply of any of our product candidates or may not be able to create a supply of our product candidates at all. Were we to encounter manufacturing issues, our ability to produce a sufficient supply of any of our product candidates might be negatively affected. Our inability to coordinate the efforts of our third-party manufacturing partners, or the lack of capacity available at our third-party manufacturing partners, could impair our ability to supply any of our product candidates at required levels. Because of the significant regulatory requirements that we would need to satisfy in order to qualify a new bulk or finished product manufacturer, if we face these or other difficulties with our current manufacturing partners, we could experience significant interruptions in the supply of any of our product candidates if we decided to transfer the manufacture of any of our product candidates to one or more alternative manufacturers in an effort to deal with the difficulties.
Any manufacturing problem or the loss of a contract manufacturer could be disruptive to our operations and result in lost sales. Additionally, we rely on third parties to supply the raw materials needed to manufacture our potential products. Any reliance on suppliers may involve several risks, including a potential inability to obtain critical materials and reduced control over production costs, delivery schedules, reliability and quality. Any unanticipated disruption to a future contract manufacturer caused by problems at suppliers could delay shipment of any of our product candidates, increase our cost of goods sold and result in lost sales.
We cannot guarantee that our future manufacturing and supply partners will be able to reduce the costs of commercial scale manufacturing of any of our product candidates over time. If the commercial-scale manufacturing costs of any of our product candidates are higher than expected, these costs may significantly impact our operating results. In order to reduce costs, we may need to develop and implement process improvements. However, in order to do so, we will need, from time to time, to notify or make submissions with regulatory authorities, and the improvements may be subject to approval by such regulatory authorities. We cannot be sure that we will receive these necessary approvals or that these approvals will be granted in a timely fashion. We also cannot guarantee that we will be able to enhance and optimize output in our commercial manufacturing process. If we cannot enhance and optimize output, we may not be able to reduce our costs over time.
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Even if we obtain marketing approval for any of our product candidates, we will be subject to ongoing obligations and continued regulatory review, which may result in significant additional expense.
Even if we obtain regulatory approval for any of our product candidates for an indication, the FDA or foreign equivalent may still impose significant restrictions on their indicated uses or marketing or the conditions of approval or impose ongoing requirements for potentially costly and time-consuming post-approval studies, including Phase 4 clinical trials, and post-market surveillance to monitor safety and efficacy. Our product candidates will also be subject to ongoing regulatory requirements governing the manufacturing, labeling, packaging, storage, distribution, safety surveillance, advertising, promotion, recordkeeping and reporting of adverse events and other post-market information. These requirements include registration with the FDA, as well as continued compliance with current Good Clinical Practices (cGCPs) for any clinical trials that we conduct post-approval. In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP regulations, requirements relating to quality control, quality assurance and corresponding maintenance of records and documents. Compliance with such regulations may result in significant costs and expenses.
Obtaining and maintaining regulatory approval of our product candidates in one jurisdiction does not mean that we will be successful in obtaining regulatory approval of our product candidates in other jurisdictions.
Obtaining and maintaining regulatory approval of our product candidates in one jurisdiction does not guarantee that we will be able to obtain or maintain regulatory approval in any other jurisdiction, but a failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the regulatory approval process in others. For example, even if the FDA grants marketing approval of a product candidate, comparable regulatory authorities in foreign jurisdictions must also approve the manufacturing, marketing and promotion of the product candidate in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from those in the United States, including additional preclinical studies or clinical trials, as clinical studies conducted in one jurisdiction may not be accepted by regulatory authorities in other jurisdictions. In many jurisdictions outside the United States, a product candidate must be approved for reimbursement before it can be approved for sale in that jurisdiction. In some cases, the price that we intend to charge for our products is also subject to approval.
Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for us and could delay or prevent the introduction of our products in certain countries. If we fail to comply with the regulatory requirements in international markets and/or to receive applicable marketing approvals, our target market will be reduced and our ability to realize the full market potential of our product candidates will be harmed.
Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our product candidates and affect the prices we may obtain.
In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval for our product candidates, restrict or regulate post-approval activities and affect our ability to profitably sell our product candidates. Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We do not know whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product labeling and post-marketing testing and other requirements.
We could face competition from other biotechnology and pharmaceutical companies, and our operating results would suffer if we fail to innovate and compete effectively.
Our products are used for indications where we believe that there is an unmet medical need. If existing or newly approved drug products, whether approved by the FDA for the indication or not, are able to successfully treat the same patients, it may be more difficult to perform clinical studies, to develop our product and/or to commercialize our product, adversely affecting our business. Since the biopharmaceutical industry is characterized by intense competition and rapid innovation, our competitors may be able to develop other compounds or drugs that are able to achieve similar or better results than our product candidates. Our competitors may include major multinational pharmaceutical companies, established biotechnology companies, specialty pharmaceutical companies, and universities and other research institutions. Many of our competitors have substantially greater financial, technical and other resources, such as a larger research and development staff and experienced marketing and manufacturing organizations, established relationships with CROs and other collaborators, as well as established sales forces. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. Mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in our competitors. Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Our competitors, either alone or with collaborative partners, may succeed in developing, acquiring or licensing on an exclusive basis drug or biologic products that are more effective, safer, more easily commercialized or less costly than our product candidates, or may develop proprietary technologies or secure patent protection and, in turn, exclude us from technologies that we may need for the development of our technologies and potential products.
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Even if we obtain regulatory approval of any of our product candidates, we may not be the first to market and that may negatively affect the price or demand for our product candidates. Additionally, we may not be able to implement our business plan if the acceptance of our product candidates is inhibited by price competition or the reluctance of physicians to switch from existing methods of treatment to our product candidates, or if physicians switch to other new drug or biologic products or choose to reserve our product candidates for use in limited circumstances. Furthermore, for drugs that receive orphan drug designation at the FDA, a competitor could obtain orphan product approval from the FDA with respect to such competitor’s drug product. If such competitor drug product is determined to be the same product as one of our product candidates, we may be prevented from obtaining approval from the FDA for such product candidate for the same indication for seven years, except in limited circumstances, and we may be subject to similar restrictions under non-U.S. regulations.
We expect to rely on third parties to conduct clinical trials for our product candidates. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize any of our product candidates and our business would be substantially harmed.
We expect to enter into agreements with third-party CROs to conduct and manage our clinical programs including contracting with clinical sites to perform our clinical studies. We plan to rely heavily on these parties for execution of clinical studies for our product candidates and will control only certain aspects of their activities. Nevertheless, we will be responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards, and our reliance on CROs and clinical sites will not relieve us of our regulatory responsibilities. We and our CROs will be required to comply with cGCPs, which are regulations and guidelines enforced by the FDA, the Competent Authorities of the Member States of the European Economic Area and comparable foreign regulatory authorities for any products in clinical development. The FDA and its foreign equivalents enforce these cGCP regulations through periodic inspections of trial sponsors, principal investigators and trial sites. If we or our CROs fail to comply with applicable cGCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, upon inspection, the FDA or other regulatory authorities will determine that any of our clinical trials comply with cGCPs. In addition, our clinical trials must be conducted with products produced under cGMP regulations and will require a large number of test subjects. Our failure or the failure of our CROs or clinical sites to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process and could also subject us to enforcement action up to and including civil and criminal penalties.
Although we intend to design the clinical trials for our product candidates in consultation with CROs, we expect that the CROs will manage all of the clinical trials conducted at contracted clinical sites. As a result, many important aspects of our drug development programs would be outside of our direct control. In addition, the CROs and clinical sites may not perform all of their obligations under arrangements with us or in compliance with regulatory requirements. If the CROs or clinical sites do not perform clinical trials in a satisfactory manner, breach their obligations to us or fail to comply with regulatory requirements, the development and commercialization of any of our product candidates for the subject indication may be delayed or our development program materially and irreversibly harmed. We cannot control the amount and timing of resources these CROs and clinical sites will devote to our program or any of our product candidates. If we are unable to rely on clinical data collected by our CROs, we could be required to repeat, extend the duration of, or increase the size of our clinical trials, which could significantly delay commercialization and require significantly greater expenditures.
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If any of our relationships with these third-party CROs or clinical sites terminate, we may not be able to enter into arrangements with alternative CROs or clinical sites. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, any such clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates. As a result, our financial results and the commercial prospects for any of our product candidates would be harmed, our costs could increase and our ability to generate revenue could be delayed.
Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.
Clinical testing of drug product candidates is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. The results of pre-clinical studies and early clinical trials may not be predictive of the results of later-stage clinical trials. We cannot assure you that the FDA or comparable foreign regulatory authorities will view the results as we do or that any future trials of any of our product candidates will achieve positive results. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through pre-clinical studies and initial clinical trials. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials. Any future clinical trial results for our product candidates may not be successful.
In addition, a number of factors could contribute to a lack of favorable safety and efficacy results for any of our product candidates. For example, such trials could result in increased variability due to varying site characteristics, such as local standards of care, differences in evaluation period and surgical technique, and due to varying patient characteristics including demographic factors and health status.
Even though we may apply for orphan drug designation for a product candidate, we may not be able to obtain orphan drug marketing exclusivity.
There is no guarantee that the FDA, EMA or their foreign equivalents will grant any future application for orphan drug designation for any of our product candidates, which would make us ineligible for the additional exclusivity and other benefits of orphan drug designation. Even where orphan drug designation or equivalent status is granted, there is no guarantee of orphan drug marketing exclusivity.
Under the Orphan Drug Act, the FDA may grant orphan drug designation to a drug intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of developing and making a drug available in the Unites States for this type of disease or condition will be recovered from sales of the product. Orphan drug designation must be requested before submitting an NDA. After the FDA grants orphan drug designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan product designation does not convey any advantage in or shorten the duration of regulatory review and approval process. In addition to the potential period of exclusivity, orphan designation makes a company eligible for grant funding of up to $400,000 per year for four years to defray costs of clinical trial expenses, tax credits for clinical research expenses and potential exemption from the FDA application user fee.
If a product that has orphan designation subsequently receives the first FDA approval for the disease or condition for which it has such designation, the product is entitled to orphan drug exclusivity, which means the FDA may not approve any other applications to market the same drug for the same indication for seven years, except in limited circumstances, such as (i) the drug’s orphan designation is revoked; (ii) its marketing approval is withdrawn; (iii) the orphan exclusivity holder consents to the approval of another applicant’s product; (iv) the orphan exclusivity holder is unable to assure the availability of a sufficient quantity of drug; or (v) a showing of clinical superiority to the product with orphan exclusivity by a competitor product. If a drug designated as an orphan product receives marketing approval for an indication broader than what is designated, it may not be entitled to orphan drug exclusivity. ThereWhile the FDA granted orphan-drug designation to PCS499 for the treatment of NL on June 18, 2018, there can be no assurance that we will receive orphan drug designation for any of ouradditional product candidates in the indications for which we think they might qualify, if we elect to seek such applications.
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Although we may pursue expedited regulatory approval pathways for a product candidate, it may not qualify for expedited development or, if it does qualify for expedited development, it may not actually lead to a faster development, or regulatory review or approval process.
Although we believe there may be an opportunity to accelerate the development of certain of our product candidates through one or more of the FDA’s expedited programs, such as fast track, breakthrough therapy, accelerated approval or priority review, we cannot be assured that any of our product candidates will qualify for such programs.
For example, a drug may be eligible for designation as a breakthrough therapy if the drug is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. Although breakthrough designation or access to any other expedited program may expedite the development or approval process, it does not change the standards for approval. If we apply for breakthrough therapy designation or any otheran expedited program for our product candidates, the FDA may determine that our proposed target indication or other aspects of our clinical development plans do not qualify for such expedited program. Even if we are successful in obtaining a breakthrough therapy designation or access to any otheran expedited program, we may not experience faster development timelines or achieve faster review or approval compared to conventional FDA procedures. Access to an expedited program may also be withdrawn by the FDA if it believes that the designation is no longer supported by data from our clinical development program. Additionally, qualification for any expedited review procedure does not ensure that we will ultimately obtain regulatory approval for such product candidate.
Third-party coverage and reimbursement, and health care cost containment initiatives and treatment guidelines may constrain our future revenues.
Our ability to successfully market our product candidates will depend in part on the level of reimbursement that government health administration authorities, private health coverage insurers and other organizations provide for the cost of our products and related treatments. Countries in which any of our product candidates aremay be sold through reimbursement schemes under national health insurance programs frequently require that manufacturers and sellers of pharmaceutical products obtain governmental approval of initial prices and any subsequent price increases. In certain countries, including the United States, government-funded and private medical care plans can exert significant indirect pressure on prices. We may not be able to sell our product candidates profitably if adequate prices are not approved or coverage and reimbursement is unavailable or limited in scope. Increasingly, third-party payors attempt
Legal, regulatory and legislative changes with respect to containreimbursement, pricing and contracting may adversely affect our business and future prospects.
Federal and state governments may adopt policies affecting drug pricing and contracting practices outside of the context of federal programs such as Medicare and Medicaid, which may adversely affect our business. For example, several states have adopted laws that require drug manufacturers to provide advance notice of certain price increase and to report information relating to those price increases. On May 11, 2018, the Department of Health and Human Services requested comments on a “Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs,” which outlines a wide range of proposals and policy considerations intended to improve competition; lower patient out-of-pocket costs; enhance negotiation; and provide incentives for lower manufacturer list prices. Some of the proposals would require Congressional approval, while others could be adopted administratively. There can be no assurances that future changes to Medicare and/or Medicaid prescription drug reimbursement policies, drug pricing and contracting practices, or government drug price regulation programs such as the Medicaid Drug Rebate Program or 340B Drug Pricing Program will not have an adverse impact on our business and future prospects.
We may face product liability exposure, and if successful claims are brought against us, we may incur substantial liability if our insurance coverage for those claims is inadequate.
We face an inherent risk of product liability as a result of the clinical testing of our product candidates and will face an even greater risk if we commercialize any products. This risk exists even if a product is approved for commercial sale by the FDA and manufactured in facilities licensed and regulated by the FDA or an applicable foreign regulatory authority. Our products and product candidates are designed to affect important bodily functions and processes. Any side effects, manufacturing defects, misuse or abuse associated with our product candidates could result in injury to a patient or even death. We cannot offer any assurance that we will not face product liability suits in the future, or that our insurance coverage will be sufficient to cover our liability under any such cases.
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In addition, a liability claim may be brought against us even if our product candidates merely appear to have caused an injury. Product liability claims may be brought against us by consumers, health care costs in ways that are likely to impactproviders, pharmaceutical companies or others selling or otherwise coming into contact with our developmentproduct candidates, among others. If we cannot successfully defend ourselves against product liability claims, we will incur substantial liabilities and reputational harm. In addition, regardless of products including:merit or eventual outcome, product liability claims may result in:
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| ● | product recall or withdrawal from the market or labeling, marketing or promotional restrictions; | |
| ● | substantial costs of any related litigation or similar disputes; | |
| ● | distractions of management’s attention and other resources from our primary business; | |
| ● | substantial monetary awards to | |
| ● | loss of revenue. |
We have obtained product liability insurance coverage for our clinical trials. However, large judgments have been awarded in class action or individual lawsuits based on drugs that had unanticipated side effects and our insurance coverage may not be sufficient to cover all of our product liability related expenses or losses and may not cover us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost, in sufficient amounts or upon adequate terms to protect us against losses due to product liability. We will need to increase our product liability coverage if any of our product candidates receive regulatory approval, which will be costly, and we may be unable to obtain this increased product liability insurance on commercially reasonable terms, or at all. A successful product liability claim or series of claims brought against us could cause our stock price to decline and, if judgments exceed our insurance coverage, could decrease our cash and could harm our business, financial condition, operating results and prospects.
If any of our product candidates are approved for marketing and we are found to have improperly promoted off-label uses, or if physicians misuse our products or use our products off-label, we may become subject to prohibitions on the sale or marketing of our products, product liability claims and significant fines, penalties and sanctions, and our brand and reputation could be harmed.
The FDA and other regulatory agencies strictly regulate the marketing and promotional claims that are made about drug products. In particular, a product may not be promoted for uses or indications that are not approved by the FDA or such other regulatory agencies as reflected in the product’s approved labeling and comparative safety or efficacy claims cannot be made without direct comparative clinical data. If we are found to have promoted off-label uses of any of our product candidates, we may become subject to significant liability, which would materially harm our business. Both federal and state governments have levied large civil and criminal fines against companies for alleged improper promotion and have enjoined several companies from engaging in off-label promotion. If we become the target of such an investigation or prosecution based on our marketing and promotional practices, we could face similar sanctions, which would materially harm our business. In addition, management’s attention could be diverted from our business operations, significant legal expenses could be incurred, and our brand and reputation could be damaged.
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The FDA has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed. If we are deemed by the FDA to have engaged in the promotion of our products for off-label use, we could be subject to FDA regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our business activities constitute promotion of an off-label use, which could result in significant penalties, including criminal, civil or administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs and the curtailment or restructuring of our operations.
We cannot, however, prevent a physician from using our product candidates outside of those indications for use when in the physician’s independent professional medical judgment he or she deems appropriate. Physicians may also misuse our product candidates or use improper techniques, potentially leading to adverse results, side effects or injury, which may lead to product liability claims. If our product candidates are misused or used with improper technique, we may become subject to costly litigation by physicians or their patients. Furthermore, the use of our product candidates for indications other than those cleared by the FDA may not effectively treat such conditions, which could harm our reputation among physicians and patients.
We may choose not to continue developing or commercializing any of our product candidates at any time during development or after approval, which would reduce or eliminate our potential return on investment for those product candidates.
At any time, we may decide to discontinue the development of any of our product candidates or not to continue commercializing one or more of our approved product candidates for a variety of reasons, including changes in our internal product, technology or indication focus, the appearance of new technologies that make our product obsolete, competition from a competing product or changes in or failure to comply with applicable regulatory requirements. If we terminate a program in which we have invested significant resources, we will not receive any return on our investment, and we will have missed the opportunity to have allocated those resources to potentially more productive uses.
Risks Relating to Our Intellectual Property Rights
We depend on rights to certain pharmaceutical compounds that are or will be licensed to us. We do not controlown the intellectual property rights to these pharmaceutical compounds and any loss of our rights to them could prevent us from selling our products.
Within our present pipeline and potentially future pipeline of drugs, our drugs are in-licensed from other biotech or pharmaceutical companies. We do not currently own any intellectual property rights, including the patents that underlie these licenses. Our rights to use the pharmaceutical compounds we license are subject to the negotiation of, continuation of and compliance with the terms of those licenses. Thus, these patents and patent applications are not written by us or our attorneys, and we did not have control over the drafting and prosecution. The former patent owners and our licensors might not have given the same attention to the drafting and prosecution of these patents and applications as we would have if we had been the owners of the patents and applications and had control over the drafting. Moreover, under certain of our licenses, patent prosecution activities remain under the control of the licensor. We cannot be certain that drafting of the licensed patents and patent applications, or patent prosecution, by the licensors have been or will be conducted in compliance with applicable laws and regulations or will result in valid and enforceable patents and other intellectual property rights.
Our rightscurrent patent portfolio consists of the number of patents related to developour drug candidates licensed from each third party licensor. In addition to the international patents and/or international and commercializeU.S. patent applications licensed from our third party licensors, we have licensed at least the following number of U.S. patents:
| CoNCERT | Yuhan | Elion | Aposense | Akashi | Total | |||||||
| U.S. patents | 9 | 4 | 2 | 3 | 2 | 20 |
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Significant additional research and development activity, pre-clinical testing, and/or clinical testing of our drug product candidates are required before we license are subjectwill have a chance to achieve a viable product for licensing or commercialization. Our business currently depends entirely on the validitysuccessful development, regulatory approval, and licensing or commercialization of the owner’s intellectual property rights. our product candidates, which may never occur.
Enforcement of our licensed patents or defense orof any claims asserting the invalidity of these patents is often subject to the control or cooperation of our licensors. Legal action could be initiated against the owners of the intellectual property that we license and an adverse outcome in such legal action could harm our business because it might prevent such companies or institutions from continuing to license intellectual property that we may need to operate our business. In addition, such licensors may resolve such litigation in a way that benefits them but adversely affects our ability to have freedom to operate to develop and commercialize our product candidates.
In addition, our rights to practice the inventions claimed in the licensed patents and patent applications are subject to our licensors abiding by the terms of those licenses and not terminating them. Our licenses may be terminated by the licensor if we are in material breach of certain terms or conditions of the license agreement or in certain other circumstances. CertainWe cannot ensure protection of our licenses contained in our agreements with CoNCERT Pharmaceuticals contain provisions that allow the licensor to terminate the license if (i) we breach any payment obligation or other material provision under the agreement and fail to cure the breach within a fixed time following written notice of termination, (ii) we or any of our affiliates, licensees or sublicensees directly or indirectly challenge the validity, enforceability, or extension of any of the licensed patents, or (iii) we declare bankruptcy or dissolve. Our rights under the licenses are subject to our continued compliance with the terms of the license, including the payment of royalties due under the license. Termination of these licenses could prevent us from marketing some or all of our products. Because of the complexity of our products and the patents we have licensed, determining the scope of the license and related royalty obligations can be difficult and can lead to disputes between us and the licensor. An unfavorable resolution of such a dispute could lead to an increase in the royalties payable pursuant to the license. If a licensor believed we were not paying the royalties due under the license or were otherwise not in compliance with the terms of the license, the licensor might attempt to revoke the license. If such an attempt were successful, we might be barred from producing and selling some or all of our products.
It is difficult and costly to protect our intellectual property rights, and we cannot ensure the protection of these rights.
Our commercial success will depend, in part, on obtainingthe ability of our licensors to obtain and maintainingmaintain patent protection for our licensed technologies, products and processes, successfully defendingdefend these licensed patents against third-party challenges and successfully enforcingenforce these patents against third party competitors. The patent positions of pharmaceutical companies can be highly uncertain and involve complex legal, scientific and factual questions for which important legal principles remain unresolved. Changes in either the patent laws or in interpretations of patent laws may diminish the value of our licensed intellectual property.property rights. Accordingly, we cannot predict the breadth of claims that may be allowable or enforceable in our patents. The existing patentpatents and patent applications relating to our drug product candidates and related technologies may be challenged, invalidated or circumvented by third parties and might not protect us against competitors with similar products or technologies.
The degree of future protection for our proprietary rights is uncertain, because legal means afford only limited protection anduncertain. We may not be able to adequately protect our rights, permit us to gain or keep our competitive advantage, or provide us with any competitive advantage at all. For example, others have filed, and in the future are likely to file, patent applications covering products and technologies that are similar, identical or competitive to any of our product candidates, or important to our business. We cannot be certain that any patent application owned by a third party will not have priority over patent applications licensed or filed by us, or that our licensed intellectual property or intellectual property that we develop in the future will not be involved in interference, opposition or invalidity proceedings before United States or foreign patent offices.
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In the future, we may rely on know-how and trade secrets to protect technology, especially in cases when we believe patent protection is not appropriate or obtainable. However, know-how and trade secrets are difficult to protect. While we intend to require employees, academic collaborators, consultants and other contractors to enter into confidentiality agreements, we may not be able to adequately protect our trade secrets or other proprietary or licensed information. Typically, research collaborators and scientific advisors have rights to publish data and information in which we may also have rights. If we cannot maintain the confidentiality of our licensed or owned proprietary technology and other confidential information, our ability to receive patent protection and our ability to protect valuable information licensed or owned by us may be imperiled. Enforcing a claim that a third-party entity illegally obtained and is using any of our licensed or owned know-how and trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts are sometimes less willing to protect trade secrets than patents. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how.
If we fail to obtain or maintain patent protection or trade secret protection for our product candidates or our technologies, third parties could use our proprietary information,licensed or owned intellectual property, which could impair our ability to compete in the market and adversely affect our ability to generate revenues and attain profitability.
We may also rely on the trademarks we may develop to distinguish our products from the products of our competitors. We cannot guarantee that any trademark applications filed by our licensors, us, or our business partners will be approved. Third parties may also oppose such trademark applications, or otherwise challenge our use of the trademarks. In the event that the trademarks we use are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition, and could require us to devote resources to advertising and marketing new brands. Further, we cannot provide assurance that competitors will not infringe the trademarks we use, or that we, our licensors, or business partners will have adequate resources to enforce these trademarks.
Our product candidates may infringe the intellectual property rights of others, which could increase our costs and delay or prevent our development and commercialization efforts.
Our success depends in part on avoiding infringement of the proprietary technologies of others. The pharmaceutical industry has been characterized by frequent litigation regarding patent and other intellectual property rights. Identification of third partythird-party patent rights that may be relevant to our proprietarylicensed technology is difficult because patent searching is imperfect due to differences in terminology among patents, incomplete databases and the difficulty in assessing the meaning of patent claims. Additionally, because patent applications are maintained in secrecy until the application is published, we may be unaware of third-party patents that may be infringed by commercialization of any of our licensed product candidates or any future product candidate. There may be certain issued patents and patent applications claiming subject matter that we may be required to license in order to research, develop or commercialize any of our product candidates, and we do not know if such patents and patent applications would be available to license on commercially reasonable terms, or at all. Any claims of patent infringement asserted by third parties would be time-consuming and may divert the time and attention of our technical personnel and management.
Third parties may hold proprietary rights that could prevent any of our licensed product candidates from being marketed. Any patent-related legal action against us claiming damages and seeking to enjoin commercial activities relating to any of our product candidates or our processes could subject us to potential liability for damages and require us to obtain a license and pay royalties to continue to manufacture or market any of our product candidates or any future product candidates. We cannot predict whether we would prevail in any such actions or that any license required under any of these patents would be made available on commercially acceptable terms, if at all. In addition, we cannot be sure that we could redesign our product candidates or any future product candidates or processes to avoid infringement, if necessary. Accordingly, an adverse determination in a judicial or administrative proceeding, or the failure to obtain necessary licenses, could prevent us from developing and commercializing any of our product candidates or a future product candidate, which could harm our business, financial condition and operating results.
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A number of companies, including several major pharmaceutical companies, have conducted, or are conducting, research within the therapeuticlicensed fields in which we intend to operate, which has resulted, or may result, in the filing of many patent applications related to this research. If we were to challenge the validity of these or any issued United States patent in court, we would need to overcome a statutory presumption of validity that attaches to every issued United States patent. This means that, in order to prevail, we would have to present clear and convincing evidence as to the invalidity of the patent’s claims. If we were to challenge the validity of these or any issued United States patent in an administrative trial before the Patent Trial and Appeal Board in the United States Patent and Trademark Office, we would have to prove that the claims are unpatentable by a preponderance of the evidence. There is no assurance that a jury and/or court would find in our favor on questions of infringement, validity or enforceability.
General Company-Related Risks
We will need to grow the size of our organization, and we may experience difficulties in managing this growth.
We anticipate having a total of 15-20 full-time or part-time employees or consultants. In particular, we plan to add one main consultant to the development team and other consultants as needed; we also plan to add a CFO and finance/accounting staff. As our development and commercialization plans and strategies develop, we may need to expand the size of our employee and consultant/contractor base. Future growth would impose significant added responsibilities on members of management, including the need to identify, recruit, maintain, motivate and integrate additional employees. In addition, our management may have to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. Our future financial performance and our ability to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to:
| ● | manage all our development efforts effectively, especially our clinical trials; | |
| ● | integrate additional management, administrative, scientific, operation and regulatory personnel; | |
| ● | maintain sufficient administrative, accounting and management information systems and controls; and | |
| ● | hire and train additional qualified personnel. |
We may not be able to accomplish these tasks, and our failure to accomplish any of them could harm our financial results.
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We have identified material weaknesses in our internal control over financial reporting related to our control environment, which in turn results in a material weakness in our disclosure controls. If product liability lawsuits are brought against us,we do not remediate the material weaknesses in our internal control over financial reporting, or if we fail to establish and maintain effective internal control, we may incur substantial liabilitiesnot be able to accurately report our financial results, which may cause investors to lose confidence in our reported financial information and may lead to a decline in the market price of our stock.
We identified a material weakness in our internal control over financial reporting. Our assessment has indicated we have material weaknesses related to certain entity level controls; inadequate segregations of duties throughout the entire year; and our formal documentation of certain policies and procedures, their related controls, and the operation thereof. Such a material weakness in our internal controls results in a material weakness in our disclosure controls. We continue to remediate our material weakness and to improve our internal controls and are in the process of implementing more fully documented formal policies and procedures.
A “material weakness” is a deficiency, or a combination of deficiencies, in internal controls, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements would not be prevented or detected. We cannot assure you that additional material weaknesses in our internal controls will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in additional material weaknesses, or could result in material misstatements in our financial statements. These misstatements could result in restatements of our financial statements, cause us to fail to meet our reporting obligations or cause investors to lose confidence in our reported financial information. Our inability to implement an effective internal control system in the future to prevent and/or detect and correct material misstatements could have a material and adverse effect on our financial condition.
However, while we remain a smaller reporting company, we will not be required to limit commercializationinclude an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with Section 404 of the Sarbanes-Oxley Act within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude, within the prescribed timeframe or at all, that our internal control over financial reporting is effective as required by Section 404 of the Sarbanes-Oxley Act. If we identify one or more material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our product candidates.financial statements.
We have already and are planning to implement additional measures to address the material weaknesses we have identified, including hiring additional accounting personnel or consultants with appropriate expertise. We intend to complete the implementation of our remediation plan in 2021. However, we cannot assure you that we will be successful in remediating the material weaknesses we identified or that our internal control over financial reporting, as modified, will enable us to identify or avoid material weaknesses in the future.
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We cannot assure you that management will be successful in identifying and retaining appropriate personnel; that newly engaged staff or outside consultants will be successful in identifying material weaknesses in the future; or that appropriate personnel will be identified and retained prior to these deficiencies resulting in material and adverse effects on our business.
Any failure to remediate the material weaknesses we identified or develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to remediate the material weaknesses we identified or implement and maintain effective internal control over financial reporting, as well as disclosure controls and procedures, could also adversely affect the results of management reports and independent registered public accounting firm audits of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures, and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the market price of our common stock.
We face a potential risk of product liability as a result of the clinical testing of our product candidates and will face an even greater risk if we commercialize any of our product candidates or any other future product. For example, we may be sued if any product we develop, including any of our product candidates, or any materials that we use in our products allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. In the US, claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:
Our inability to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of products we develop. We intend to obtain product liability insurance covering our clinical trials. However, such insurance is expensive, difficult to obtain and may not be available in the future on acceptable terms, or at all. Although we will maintain such insurance, any claim that may be brought against us could result in a court judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. Our insurance policies also have various exclusions, and we may be subject to a product liability claim for which we have no coverage. We may have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts.
Our limited operating history may make it difficult to evaluate our business and our future viability.
We are in the relatively early stagestages of operations and development and have only a limited operating history as the existing entity on which to base an evaluation of our business and prospects. Even if we successfully obtain additional funding, we are subject to the risks associated with early stage companies with a limited operating history, including: the need for additional financings; the uncertainty of research and development efforts resulting in successful commercial products, as well as the marketing and customer acceptance of such products; unexpected issues with the FDA, other federal or state regulatory authorities or ex-US regulatory authorities; regulatory setbacks and delays; competition from larger organizations; reliance on the proprietary technology of others; dependence on key personnel; uncertain patent protection; fluctuations in expenses; and dependence on corporate partners and collaborators. Any failure to successfully address these risks and uncertainties could seriously harm our business and prospects. We may not succeed given the technological, marketing, strategic and competitive challenges we will face. The likelihood of our success must be considered in light of the expenses, difficulties, complications, problems and delays frequently encountered in connection with the growth of a new business, the continuing development of new drug technology, and the competitive and regulatory environment in which we operate or may choose to operate in the future.
If we suffer negative publicity concerning the safety of our products in development, our sales may be harmed and we may be forced to withdraw such products.
If concerns should arise about the safety of any of our products that are being developed or marketed, regardless of whether or not such concerns have a basis in generally accepted science or peer-reviewed scientific research, such concerns could adversely affect the further development or market for these products. Similarly, negative publicity could result in an increased number of product liability claims, whether or not these claims are supported by applicable law or covered by insurance.
If we lose key management personnel, or if we fail to recruit additional highly skilled personnel, our ability to identify and develop new or next generation product candidates will be impaired, could result in loss of markets or market share and could make us less competitive.
We are highly dependent upon the principal members of our small management team and staff, including David Young, Pharm.D., Ph.D, our Chief Executive Officer, and Sian Bigora, Pharm.D., our Chief Development Officer. The employment of Drs. Young and Bigora may be terminated at any time by either us or Dr. Young or Dr. Bigora. The loss of any current or future team member could impair our ability to design, identify, and develop new intellectual property and product candidates and new scientific or product ideas. Additionally, if we lose the services of any of these persons, we would likely be forced to expend significant time and money in the pursuit of replacements, which may result in a delay in the development of our product candidates and the implementation of our business plan and plan of operations and diversion of our management’s attention. We can give no assurance that we could find satisfactory replacements for our current and future key scientific and management employees on terms that would not be unduly expensive or burdensome to us.
To induce valuable personnel to remain at our Company, in addition to salary and cash incentives, we expect that we will provide stock options, restricted stock units or other equity securities that vest over time upon approval of a plan by the Board of Directors. Despite our efforts to retain valuable employees, members of our management, scientific and development teams may terminate their employment with us on short notice. Although we expect to have employment agreements with our key employees, these employment agreements may still allow these employees to leave our employment at any time, for or without cause. We do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of our other employees. Our success also depends on our ability to continue to attract, retain and motivate highly skilled junior, mid-level and senior managers as well as junior, mid-level and senior scientific and medical and scientific personnel.
ThereWe are a “smaller reporting company,” and the reduced disclosure requirements applicable to us as such may be limitations on the effectiveness ofmake our internal controls,common stock less attractive to our stockholders and a failure of our control systems to prevent error or fraud may materially harm our company.investors.
Proper systems of internal controls over financial accountingWe are a “smaller reporting company” under the federal securities laws and, as such, are subject to scaled disclosure are criticalrequirements afforded to the operation ofsuch companies. For example, as a public company. Assmaller reporting company, we are a start-up company, wesubject to reduced executive compensation disclosure requirements. Our stockholders and investors may be unable to effectively establish such systems. This would leave us without the ability to reliably assimilate and compile financial information aboutfind our company and significantly impair our ability to prevent error and detect fraud, all of which would have a negative impact on our company from many perspectives.
Moreover, we do not expect that disclosure controls or internal control over financial reporting, even if established, will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Currently, we have material weaknesses relating to a lack of accounting staff to implement effective financial reporting, internal controls and disclosure controls. Ascommon stock less attractive as a result of such internal control weakness, weour status as a “smaller reporting company” and our reliance on the reduced disclosure requirements afforded to these companies. If some of our stockholders or investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and the market price of our common stock may be more volatile.
We are exposed to cyber-attacks and data breaches, including the risks and costs associated with protecting our systems and maintaining integrity and security of our business information, as well as personal data of our guests, employees and business partners.
We are subject to cyber-attacks. These cyber-attacks can vary in scope and intent from attacks with the objective of compromising our systems, networks and communications for economic gain to attacks with the objective of disrupting, disabling or otherwise compromising our operations. The attacks can encompass a wide range of methods and intent, including phishing attacks, illegitimate requests for payment, theft of intellectual property, theft of confidential or non-public information, installation of malware, installation of ransomware and theft of personal or business information. The breadth and scope of these attacks, as well as the techniques and sophistication used to conduct these attacks, have grown over time. We experienced a cybersecurity breach in January 2018 that resulted in a fraud loss of $144,200 where the probability of recovery of the loss is remote. While
A successful cyber-attack may target us directly, or it may be the result of a third party’s inadequate care. In either scenario, we may suffer damage to our systems and data that could interrupt our operations, adversely impact our reputation and brand and expose us to increased risks of governmental investigation, litigation and other liability, any of which could adversely affect our business. Furthermore, responding to such an attack and mitigating the risk of future attacks could result in additional operating and capital costs in systems technology, personnel, monitoring and other investments.
In addition, we are taking stepsalso subject to various risks associated with the collection, handling, storage and transmission of sensitive information. In the course of doing business, we collect employee, customer and other third-party data, including personally identifiable information and individual credit data, for various business purposes. These laws continue to develop and may be inconsistent from jurisdiction to jurisdiction. If we fail to comply with the various applicable data collection and privacy laws, we could be exposed to fines, penalties, restrictions, litigation or other expenses, and our business could be adversely impacted.
Any breach, theft, loss, or fraudulent use of employee, third-party or company data, could adversely impact our reputation and expose us to risks of data loss, business disruption, governmental investigation, litigation and other liability, any of which could adversely affect our business. Significant capital investments and other expenditures could be required to remedy the problem and prevent these control weaknesses from reoccurring,future breaches, including costs associated with additional security technologies, personnel, experts and credit monitoring services for those whose data has been breached. Further, if we cannot provide assurance that we will be successful. We are in the early stages of operations and fund raising so we currently lack the financial resources necessaryor our vendors experience significant data security breaches or fail to implement an effective internal control system to prevent and/or detect and correct material misstatements dueappropriately respond to fraud or error. Our inabilitysignificant data security breaches, we could be exposed to implement an effective internal control system in the future to prevent and/or detectgovernment enforcement actions and correct material misstatements could have a material and adverse effect on our financial condition.private litigation.
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Risks Related to Ownership of Our Common Stock and This Offering
You will experience immediate dilution.
Because the price per share of our common stock being offered is substantially higher than the tangible book value per share of our common stock, you will suffer substantial dilution with respect to the common stock you purchase in this offering. Based on the public offering price of $2.65 per share, ifIf you purchase shares of common stock in this offering, you will suffer substantial and immediate dilution of your investment.
You will suffer immediate and substantial dilution in the net tangible book value of $2.68the common stock you purchase in this offering. The public offering price of our common stock will be substantially higher than the net tangible book value per share.share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our net tangible book value per share after this offering. See the “Dilution” on page 24.section of this prospectus for a more detailed description of the dilution to investors participating in the offering.
Future capital raisesYou may dilute our existing stockholders’ ownership and/experience future dilution as a result of future equity offerings, license transactions or have other adverse effects on our operations.acquisitions.
If weIn order to raise additional capital, we may in the future offer additional shares of our common stock or other securities convertible into or exchangeable for our common stock at prices that may not be the same as the price per share in this offering. We may sell shares or other securities in any future offering at a price per share that is less than the price per share paid by investors in this offering, and investors purchasing shares or other securities in the future could have rights superior to existing stockholders. The price per share at which we sell additional shares of our common stock, or securities convertible or exchangeable into our common stock, in future transactions or acquisitions may be higher or lower than the price per share paid by investors in this offering.
In addition, we may engage in one or more potential license transactions or acquisitions in the future, which could involve issuing equityour common stock as some or all of the consideration payable by us to complete such transactions. If we issue common stock or securities linked to our existing stockholders’ percentage ownership will be reduced, and these stockholderscommon stock, the newly issued securities may experience substantial dilution. have a dilutive effect on the interests of the holders of our common stock. Additionally, future sales of newly issued shares used to effect a transaction could depress the market price of our common stock.
We may also issue equity securities that provide for rights, preferences and privileges senior to those of our common stock. If we raise additional funds by issuing debt securities, these debt securities would have rights senior to those of our common stock and the terms of the debt securities issued could impose significant restrictions on our operations, including liens on our assets. If we raise additional funds through collaborations and licensing arrangements, we may be required to relinquish some rights to our technologies or candidate products, or to grant licenses on terms that are not favorable to us.
Our common stock price is expected to be volatile.
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The marketoffering price of our common stock could be subject to significant fluctuations. Market prices for securities of early-stage pharmaceutical, biotechnology and other life sciences companies have historically been particularly volatile. Some of the factors that may cause the market price of our common stock to fluctuate include:
| ● | relatively low trading volume, which can result in significant volatility in the market price of our common stock based on a relatively smaller number of trades and dollar amount of transactions; | |
| ● | changes in estimates or recommendations by securities analysts, if any, who cover our common stock; | |
| ● | the timing and results of our current and any future preclinical or clinical trials of our product candidates; | |
| ● | the entry into or termination of key agreements, including, among others, key collaboration and license agreements; | |
| ● | the results and timing of regulatory reviews relating to the approval of our product candidates; | |
| ● | the initiation of, material developments in, or conclusion of, litigation to enforce or defend any of our intellectual property rights; | |
| ● | failure of any of our product candidates, if approved, to achieve commercial success; | |
| ● | general and industry-specific economic conditions that may affect our research and development expenditures; | |
| ● | the results of clinical trials conducted by others on products that would compete with our product candidates; | |
| ● | issues in manufacturing our product candidates or any approved products; |
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| ● | the introduction of technological innovations or new commercial products by our competitors; | |
| ● | ||
| ● | future sales of our common | |
| ● | a negative outcome in any litigation or potential legal proceeding. | |
| ● | additions and departures of key personnel; | |
| ● | negative publicity or announcements regarding regulatory developments relating to our products; | |
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| ● | our filing for protection under federal bankruptcy laws; or | |
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The stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may also adversely affect the trading price of our common stock.stock, especially in light of the COVID-19 pandemic. In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm our profitability and reputation.
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Our common stock is currently tradedAfter this offering, our executive officers, directors and principal stockholders and their affiliates, if they choose to act together, will have the ability to exercise significant influence over all matters submitted to stockholders for approval, which will limit your ability to influence corporate matters and could delay or prevent a change in the OTC Pink Marketplace and is subject to additional trading restrictions as a “penny stock,” which could adversely affect the liquidity and price of such stock. If our common stock remains subject to the SEC’s penny stock rules, broker-dealers may experience difficulty in completing customer transactions and trading activity in our securities may be adversely affected.corporate control.
OurUpon the closing of this offering, our executive officers and directors, combined with our stockholders who owned more than 5% of our outstanding common stock currently trades in the OTC Pink Marketplace. The OTCPink, the OTC Bulletin Board and Pink Sheets are viewed by most investors as a less desirable, and less liquid, marketplace. As a result, an investor may find it more difficult to purchase, dispose of or obtain accurate quotations as to the value of our common stock.
Because our common stock is not listed on any national securities exchange, such shares will also be subject to the regulations regarding trading in “penny stocks,” which are those securities trading for less than $5.00 per share, and that are not otherwise exempted from the definition of a penny stock under other exemptions provided for in the applicable regulations. The following is a list of the general restrictions on the sale of penny stocks:
Before the sale of penny stock by a broker-dealer to a new purchaser, the broker-dealer must determine whether the purchaser is suitable to invest in penny stocks. To make that determination, a broker-dealer must obtain, from a prospective investor, information regarding the purchaser’s financial condition and investment experience and objectives. Subsequently, the broker-dealer must deliver to the purchaser a written statement setting forth the basis of the suitability finding and obtain the purchaser’s signature on such statement.
A broker-dealer must obtain from the purchaser an agreement to purchase the securities. This agreement must be obtained for every purchase until the purchaser becomes an “established customer.” The Securities Exchange Act of 1934 (the “Exchange Act”) requires that before effecting any transaction in any penny stock, a broker-dealer must provide the purchaser with a “risk disclosure document” that contains, among other things, a description of the penny stock market and how it functions, and the risks associated with such investment. These disclosure rules are applicable to both purchases and sales by investors.
A dealer that sells penny stock must send to the purchaser, within 10 days after the end of each calendar month, a written account statement including prescribed information relating to the security.
These requirements can severely limit the liquidity of securities in the secondary market because fewer brokers or dealers are likely to be willing to undertake these compliance activities. As a result of our common stock not being listed on a national securities exchange and the rules and restrictions regarding penny stock transactions, an investor’s ability to sell to a third party and our ability to raise additional capital may be limited. We make no guarantee that market-makers will make a market in our common stock, or that any market for our common stock will continue.
Our principal stockholders have significant influence over us, they may have significant influence over actions requiring stockholder approval, and your interests as a stockholder may conflict with the interests of those persons.
Based on the number of outstanding shares of our common stock held by our stockholders as of July 24, 2018, our directors, executive officersthis offering and their respective affiliates, will, in the aggregate, beneficially owned or controlled over 47.12%own shares representing approximately % of our outstanding capital stock, assuming no exercise of the underwriters’ option to acquire additional common stock in this offering and assuming we issue the number of shares of common stock.stock as set forth on the cover page of this prospectus. As a result, thoseif these stockholders have the abilitywere to exert a significant degree ofchoose to act together, they would be able to influence with respect toour management and affairs and potentially control the outcome of matters submitted to our stockholders for approval, including the election of directors and any sale, merger, consolidation, or sale of all or substantially all of our assets. TheThese stockholders acquired their shares of common stock (including shares of common stock issuable upon the conversion of preferred stock) for less than the price of the shares of common stock being acquired in this offering, and these stockholders may have interests, with respect to their common stock, that are different from those of investors in this offering and the concentration of voting power among these personsstockholders may not always coincide with our interests orhave an adverse effect on the interestsprice of our other stockholders.common stock. This concentration of ownership could harmcontrol may adversely affect the market price of our common stock by (i) by:
| ● | delaying, deferring or preventing a change in control; | |
| ● | entrenching our management and the Board of Directors; | |
| ● | impeding a merger, consolidation, takeover or other business combination involving us that other stockholders may desire; | |
| ● | and/or |
See the “Principal Stockholders” section of us. The significant concentration of stockthis prospectus for more information regarding the ownership may adversely affect the trading price of our outstanding common stock due to investors’ perception that conflicts of interest may exist or arise.
Our common stock is highly illiquidby our executive officers, directors, principal stockholders and the public market for the common stock may be minimal; therefore you may find it difficult to sell shares of our common stock you may acquire in this offering.
There is currently very little public trading for our common stock, and trading may not significantly increase in the foreseeable future.
The lack of an active market impairs an investors’ ability to sell their shares at the time they wish to sell them or at a price that they consider reasonable. The lack of an active market may also reduce the fair market value of investors’ shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire additional intellectual property assets by using our shares as consideration.affiliates.
Sales of substantial amounts of our common stock under Rule 144 in the public markets could cause the market price of our common stock to decline.
Substantial amounts of our common stock may be sold under Rule 144 into the public market which may adversely affect prevailing market prices for the common stock and could impair our ability to raise capital in the future through the sale of equity securities. Rule 144 permits a person who presently is not and who has not been an affiliate of ours for at least three months immediately preceding the sale and who has beneficially owned the shares of common stock for at least six months to sell such shares without restriction other than the requirement that there be current public information as set forth in Rule 144. If a non-affiliate has held the shares for more than one year, such person may make unlimited sales pursuant to Rule 144 without restriction. Shares held by directors, executive officers, and other affiliates will also be subject to volume limitations under Rule 144 under the Securities Act. Rule 144 will be availableSee “Shares Eligible for Future Sale.” Further, we have granted registration rights to stockholders beginning on October 18, 2018.certain of our stockholders. See “Shares Eligible for Future Sale,” which also discusses registration rights we have granted to certain of our stockholders.
We do not currently intend to pay dividends to our stockholders in the foreseeable future, and consequently, your ability to achieve a return on your investment will depend on appreciation in the value of our Company.value.
We have never and do not anticipate paying anydeclared or paid cash dividends on our capital stock. We currently intend to retain all of our stockholders infuture earnings, if any, to finance the growth and development of our business. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future. Consequently, investors must rely on sales of their common stock or underlying common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments. There is no guarantee that theour valuation of our Company will appreciate in value or even maintain the valuation at which our stockholders have purchased their shares.
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We may issue preferred stock which may have greater rights than our common stock.
Our Fourth Amended and Restated Certificate of Incorporation allow our Board of Directors to issue up to 10,000,0001,000,000 shares of preferred stock. Currently, no shares of preferred stock are issued and outstanding. However, we can issue shares of our preferred stock in one or more series and can set the terms of the preferred stock without seeking any further approval from the holders of our common stock. Any preferred stock that we issue may rank ahead of our common stock in terms of dividend priority or liquidation premiums and may have greater voting rights than our common stock. In addition, such preferred stock may contain provisions allowing it to be converted into shares of common stock, which could dilute the value of our common stock to thenthe current stockholders and could adversely affect the market price, if any, of our common stock.
If there should be dissolution of our company, you may not recoup all or any portion of your investment.
In the event of a liquidation, dissolution or winding-up of our Company,operations, whether voluntary or involuntary, the proceeds and/or assets of our company remaining after giving effect to such transaction, and the payment of all of our debts and liabilities and distributions required to be made to holders of any outstanding common stock will then be distributed to our stockholders on a pro rata basis. We may incur substantial amounts of additional debt and other obligations such as convertible notes and loans and preferred stock that will rank senior to our common stock, and the terms of our common stock do not limit the amount of such debt or other obligations that we may incur. There can be no assurance that we will have available assets to pay any amount to the holders of common stock, or common stock any amounts, upon such a liquidation, dissolution or winding-up of our Company.winding-up. In this event, you could lose some or all of your investment.
If securities or industry analysts do not publish research or reports about our business, or if they publish negative evaluations of our stock or negative reports about our business, our stock price and trading volume could decline.
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. We may never obtain research coverage by industry or financial analysts. If no or few analysts commence coverage of us, the trading price of our stock would likely decrease. Even if we do obtain analyst coverage, there can be no assurance that analysts will cover us or provide favorable coverage. If one or more of the analysts who covers us downgrades our stock or changes his or her opinion of our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.
We have broad discretion in the use of the net proceeds from this offering and may not use them effectively, which could affect our results of operations and cause our stock price to decline.
Our management will have broad discretion in the application of the net proceeds from this offering, including for any of the purposes described in the “Use of Proceeds” section of this prospectus and you will not have the opportunity to assess whether the net proceeds are being used appropriately as part of your investment decision. Our management could spend the net proceeds from this offering in ways that do not improve our results of operations or enhance the value of our common stock. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business, cause the price of our common stock to decline and delay the development of our product candidates. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.
Provisions in our corporate documents and Delaware law could have the effect of delaying, deferring, or preventing a change in control of us, even if that change may be considered beneficial by some of our stockholders.
The existence of some provisions of our certificate of incorporation or our bylaws or Delaware law could have the effect of delaying, deferring, or preventing a change in control of us that a stockholder may consider favorable. These provisions include:
| ● | providing that the number of members of our Board is limited to a range fixed by our bylaws; | |
| ● | establishing advance notice requirements for nominations of candidates for election to our Board of Directors or for proposing matters that can be acted on by stockholders at stockholder meetings; and | |
| ● | authorizing the issuance of “blank check” preferred stock, which could be issued by our Board of Directors to issue securities with voting rights and thwart a takeover attempt. |
As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the General Corporation Law of the State of Delaware. Section 203 prevents some stockholders holding more than 15% of our voting stock from engaging in certain business combinations unless the business combination or the transaction that resulted in the stockholder becoming an interested stockholder was approved in advance by our Board of Directors, results in the stockholder holding more than 85% of our voting stock (subject to certain restrictions), or is approved at an annual or special meeting of stockholders by the holders of at least 66 2/3% of our voting stock not held by the stockholder engaging in the transaction. Any provision of our certificate of incorporation or our bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and affect the price that some investors are willing to pay for our common stock.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts contained in this prospectus are forward-looking statements. Forward-lookingIn some cases, you can identify forward-looking statements giveby words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words or other comparable terminology. We have based these forward-looking statements on our current expectations or forecasts ofand projections about future events. You can identify these statements by the factevents and trends that they do not relate strictly to historical or current facts. You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “hopes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “would,” “should,” “could,” “may” or other similar expressions in this prospectus. These statementswe believe may be found under the section of this prospectus captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as in prospectus generally. In particular, these include statements relating to future actions, prospective products, applications, customers, technologies, future performance oraffect our financial condition, results of anticipated products, expenses,operations, strategy, short- and long-term business operations and objectives, and financial results.needs. These forward-looking statements are subject to certaina number of risks, uncertainties and uncertainties that couldassumptions, including those described in “Risk Factors” and elsewhere in this prospectus. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from our historical experiencethose contained in any forward-looking statements we may make. In light of these risks, uncertainties and our present expectations or projections. Factors that could causeassumptions, the forward-looking events and circumstances discussed in this prospectus may not occur, and actual results tocould differ materially and adversely from those discussedanticipated or implied in the forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Forward-looking statements include, but are not limited to:to, statements about:
| ● | our | |
| ● | our | |
| ● | our ability to obtain | |
| ● | the impact of the COVID-19 pandemic on our business, operations | |
| ● | our ability to | |
| ● | our ability to contract with third-party suppliers, manufacturers and other service providers and their ability to perform adequately; | |
| ● | the potential market size, opportunity and growth potential for PCS499 and/or our other product candidates, if approved; | |
| ● | our ability to build our own sales and marketing capabilities, or seek collaborative partners, to commercialize PCS499 and/or our other product candidates, if approved; | |
| ● | the initiation, timing, progress and results of our pre-clinical studies and clinical trials, and our research and development programs; | |
| ● | our ability to retain the continued service of our key professionals and to identify, hire and retain additional qualified professionals; | |
| ● | our ability to advance product candidates into, and successfully complete, clinical trials; | |
| ● | our ability to recruit and enroll suitable patients in our clinical trials; | |
| ● | the timing or likelihood of the accomplishment of various scientific, clinical, regulatory filings and approvals and other product development objectives; | |
| ● | the pricing and reimbursement of our product candidates, if approved; | |
| ● | the rate and degree of market acceptance of PCS499 and/or our other product candidates by physicians, patients, third-party payors and others in the medical community, if approved; |
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| ● | the implementation of our business model, strategic plans for our business, product candidates and technology; | |
| ● | the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates and technology; | |
| ● | developments relating to our competitors and our industry; | |
| ● | the accuracy of our estimates regarding expenses, capital requirements and needs for additional financing; and | |
| ● |
TheYou should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are based upon management’s beliefs and assumptions and are madereasonable as of the date of this prospectus.prospectus, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to publicly update or revisepublicly any forward-looking statements included hereinfor any reason after the date of this prospectus to conform these statements to new information, actual results or to update the reasons why actual results could differ from those containedchanges in such statements, whetherour expectations, except as a result of new information, future events or otherwise, except to the extent required by federal securities laws. Actual future results may vary materially as a result of various factors, including, without limitation, the risks disclosed herein. In light of these risks and uncertainties, we cannot assure you that the forward-looking statements contained herein will in fact occur. law.
You should not place undue reliance on these forward-looking statements. Before making a decision to purchase shares of our stock, you should carefully consider all ofread this prospectus and the factors identifieddocuments that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part with the understanding that could causeour actual future results, to differ.
This prospectus also contains estimates, projectionslevels of activity, performance, and other information concerning our industry, our business, and the markets for certain diseases, including data regarding the estimated size of those markets. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated,may be materially different from what we obtained this industry, business, market, and other data from reports, research surveys, studies, and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data, and similar sourcesexpect.
We estimate that we will receive net proceeds of approximately $14.2 million from the sale of the shares of our common stock in this offering, based on an assumed public offering price of $5.00 per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
Each $1.00 increase (decrease) in the assumed public offering price of $5.00 per share would increase (decrease) the net proceeds to us from this offering, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, by approximately $2.9 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of shares we are offering. Similarly, each increase (decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) the net proceeds to us from this offering, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, by approximately $4.6 million, assuming no change in the assumed initial public offering price.
We intend to use the net proceeds from this offering over the next two years to conduct clinical trials and for working capital and other general corporate purposes.
We believe that the net proceeds from this offering, together with our existing cash and cash equivalents, will enable us to fund our operating expenses and capital expenditure requirements through the third quarter of 2022. If we have based our estimates on assumptions that are incorrect, or we increase our anticipated clinical trials, then we could use our available capital resources sooner than we currently expect. We may satisfy our future cash needs through the sale of equity securities, debt financings, working capital lines of credit, corporate collaborations or license agreements, grant funding, interest income earned on invested cash balances or a combination of one or more of these sources.
Opportunities may come to our attention to expand our current business through acquisitions or in-licenses of complementary companies, medicines or technologies. While we have no current agreements, commitments or understandings for any specific acquisitions or in-licenses at this time, we may use a portion of the net proceeds for these purposes.
Pending their use as described above, we plan to invest the net proceeds in short-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or guaranteed obligations of the U.S. government.
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USE OF PROCEEDSMARKET FOR COMMON EQUITY AND DIVIDEND POLICY
This prospectus relatesMarket Information
We have applied to list our common stock on the Nasdaq Capital Market, or Nasdaq, under the symbol “PCSA” and our common stock has been approved for listing contingent on the completion of this offering. There is no assurance that this offering will be completed, or as to the resaleterms of certain sharesthis offering. Our common stock is currently quoted on the OTCQB under the symbol “PCSA.” Quotations on the OTCQB reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. On December 23, 2019, we effected a one-for-7 reverse split of our common stock, that may be offered and sold from timeor the Reverse Split. Unless otherwise specified or the context otherwise indicates, the information contained in this prospectus has been adjusted to time bygive effect to the Selling Stockholders. This prospectus also relates to sharesReverse Split. On September 28, 2020, the closing sale price of our common stock that will be issued toas reported on the Selling Stockholders upon exercise of outstanding Warrants. We will not receive any proceeds from theOTCQB was $10.98 per share. The closing sale of sharesprice of our common stock in this offering. We will receive proceeds fromas reported on the exerciseOTCQB may not be indicative of any Warrants, but cannot predict when or if the warrants will be exercised, and it is possible thatmarket price of our common stock on the warrants may expire and never be exercised. To the extent we do receive any such proceeds they will be used to fund our working capital and for general corporate purposes.Nasdaq Capital Market.
DETERMINATION OF OFFERING PRICE
The Selling Stockholders will determine at what price they may sell the offered shares, and such sales may be made at prevailing market prices, or at privately negotiated prices.Please refer to “PlanHolders of Distribution.”our Common Stock
MARKET PRICE OF OUR COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
Our authorized capital stock consistsAs of 350,000,000August 31, 2020, we had 5,515,447 shares of common stock $0.0001 value per share,issued and 10,000,000 shares of preferred stock, $0.0001 par value per share. As of July 24, 2018, we have 38,674,264 shares of common stock outstanding and no shares of preferred stock outstanding.
Our common stock is quoted on the OTCPink under the symbol “PCSA”. We have one class of common stock. As of July 24, 2018, there were approximately 172 registered204 holders of record of our common stock.
The following table sets forth the high and low sales price of our common stock on the OTCPink during the periods listed below (as adjusted for a 1-7 reverse stock split on December 11, 2017):Transfer Agent
| Quarter Ended | High | Low | ||||||
| June 30, 2018 | $ | 4.70 | $ | 3.00 | ||||
| March 31, 2018 | $ | 5.125 | $ | 2.50 | ||||
| December 31, 2017 | $ | 5.11 | $ | 0.48 | ||||
| September 30, 2017 | $ | 4.69 | $ | 0.98 | ||||
| June 30, 2017 | $ | 0.98 | $ | 0.98 | ||||
| March 31, 2017 | $ | 1.75 | $ | 0.98 | ||||
| December 31, 2016 | $ | 2.31 | $ | 1.12 | ||||
| September 30, 2016 | $ | 2.31 | $ | 1.12 | ||||
| June 30, 2016 | $ | 2.31 | $ | 1.12 | ||||
| March 31, 2016 | $ | 2.80 | $ | 1.05 | ||||
Our transfer agent is Equiniti Trust Company, 3200 Cherry Creek Dr. South Suite 430 Denver, CO 80209; telephone (303) 282-4800.
DIVIDEND POLICYDividend Policy
We have not previouslynever declared or paid anycash dividends on our commoncapital stock. The payment of dividends on our common stockWe currently intend to retain all available funds and future earnings, if any, for use in the future will depend onoperation of our profitability at the time, cash available for those dividends,business and such other factors as our board of directors may consider appropriate. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. Any future determination to declare and pay dividends will be made at the discretion of our Board of Directors and will depend on various factors, including applicable laws, our results of operations, our financial condition, our capital requirements, general business conditions, our future prospects and other factors that our Board of directors may deem relevant. Our ability to pay cash dividends on our capital stock in the future may also be limited by the terms of any preferred securities we may issue or agreements governing any additional indebtedness we may incur. Investors should not purchase our common stock with the expectation of receiving cash dividends.
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The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2020 as follows:
| ● | on an actual basis. | |
| ● | on a pro forma basis after giving effect to the Pro Forma Adjustments based on an assumed public offering price of $5.00 per share. | |
| ● | on a pro forma basis, as adjusted to give further effect to the issuance by us of 3,200,000 shares of our common stock in this offering. |
Our capitalization following the completion of this offering will be adjusted based on the actual public offering price and other terms of the offering determined at pricing. You should read this information together with our audited financial statements and related notes appearing elsewhere in this prospectus and the information set forth under the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section.
| As of June 30, 2020 | ||||||||||||
| Actual | Pro forma | Pro forma, as adjusted | ||||||||||
| Cash and cash equivalents | $ | 452,654 | $ | 552,654 | $ | |||||||
| 2019 Senior Convertible Notes and accrued interest | 859,102 | 859,102 | ||||||||||
| Line of credit payable and accrued interest | 504,023 | - | ||||||||||
| Preferred stock, $0.0001 par value: 1,000,000 shares authorized, no shares issued or outstanding | - | - | ||||||||||
| Common stock $0.0001 par value: 30,000,000 shares authorized, 5,514,447 shares issued and outstanding, actual; 8,097,294 shares issued and outstanding, pro forma and shares issued and outstanding pro forma, as adjusted(1) | 552 | 811 | ||||||||||
| Additional paid-in capital | 19,182,228 | 27,885,992 | ||||||||||
| Accumulated equity | (12,589,760 | ) | (20,689,760 | ) | ||||||||
| Total stockholders’ equity | 6,593,020 | 7,197,043 | ||||||||||
| Total capitalization | $ | 7,956,145 | $ | 8,056,145 | $ | |||||||
(1) The number of shares of our common stock to be outstanding after this offering gives effect to the Pro Forma Adjustments and excludes the following as of June 30, 2020:
| ● | 121,557 shares of our common stock issuable upon the exercise of outstanding stock options issued under the Omnibus Plan, having a weighted-average exercise price of $17.24 per share, of which 33,564 options have vested, having a weighted-average exercise price of $17.50 per share. An additional 34,652 options will vest upon the successful completion of this offering; | |
| ● | 324,360 shares of our common stock granted on August 5, 2020 to employees and directors as restricted stock awards under the Omnibus Plan of which restricted stock awards for 214,078 shares of common stock vest upon the successful completion of this offering, with the remaining 110,282 shares of common stock vesting over two years; | |
| ● | 54,083 shares of common stock reserved for issuance pursuant to future awards under the Omnibus Plan; | |
| ● | 47,772 shares of our common stock issuable upon the exercise of outstanding non-qualified stock options granted to our Chief Financial Officer on September 1, 2018, having an exercise price of $19.88 per share, of which 23,289 shares have vested; | |
| ● | 533,959 shares of common stock issuable upon exercise of the outstanding and exercisable stock purchase warrants having a weighted average exercise price of $18.35 per share; and | |
| ● | 190,989 shares of common stock issuable upon the conversion of $805,000 principal amount of outstanding 2019 Senior Convertible Notes and related accrued interest, based on a conversion price of $4.50 per share, which, pursuant to the 2019 Senior Note Agreement, is a 10% discount on an assumed public offering price of $5.00 per share. |
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At March 31, 2018,If you invest in our common stock in this offering, your interest will immediately be diluted to the extent of the difference between the public offering price per share of our common stock in this offering and the as adjusted net tangible book value was ($981,515), or ($0.03) per share of the outstandingour common stock as adjusted. Netimmediately after this offering.
Our historical net tangible book value is the amount of our total tangible assets less our total liabilities and deferred taxes. Our historical net tangible book value per share is determined by dividing our historical net tangible book value divided by 5,514,447, the total number of shares of common stock outstanding. We will not receive any proceeds from the sales by Selling Stockholders. While we will receive proceeds from the exerciseoutstanding as of Warrants, there can be no assurance that any Warrants will be exercised. Assuming that no Warrants are exercised, ourJune 30, 2020. Our historical net tangible book value will not change after sales byas of June 30, 2020, was $(1,336,104), or $(0.24) per share of common stock.
Our pro forma net tangible book value per share as of June 30, 2020 gives effect to the Selling Stockholders. Assuming sales by the Selling Stockholders occur at thePro Forma Adjustments based on an assumed public offering price of $2.65$5.00 per share whichand is the closing pricecalculated based on an aggregate of 8,097,294 shares of our common stock on July 25, 2018, ouroutstanding.
Our pro forma as adjusted net tangible book value per share gives further effect to the issuance by us of ($0.03) as3,200,000 shares of March 31, 2018 remains,our common stock in this offering and new investors will experiencereceipt of the net proceeds therefrom, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, based on an immediate dilutionassumed public offering price of $2.68 relative to their purchase price.$5.00 per share, and is calculated based on an aggregate of 11,297,294 shares of our common stock outstanding.
The foregoing assumesfollowing table illustrates this per share dilution to investors participating in this offering:
| Assumed public offering price per share | $ | 5.00 | ||||||
| Historical net tangible book value per share as of June 30, 2020, before giving effect to the offering | $ | (0.24 | ) | |||||
| Pro forma change in net tangible book value per share as of June 30, 2020 | 0.15 | |||||||
| Pro forma net tangible book value as of June 30, 2020, before giving effect to the offering | (0.09 | ) | ||||||
| Increase in net tangible book value per share from new investors participating in this offering | 1.29 | |||||||
| Pro forma, as adjusted net tangible book value per share after this offering | 1.20 | |||||||
| Dilution in net tangible book value per share to new investors participating in this offering | 3.80 |
The information discussed above is illustrative only, and the dilution information following this offering will be adjusted based on the actual public offering price and other terms of this offering determined at pricing. A $1.00 increase (decrease) in the assumed public offering price of $5.00 per share would increase (decrease) the pro forma, as adjusted net tangible book value by $0.32 per share and the dilution to investors participating in this offering by $0.68 per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.
We may also increase or decrease the number of shares we are offering. An increase of 1,000,000 shares offered by us would increase the pro forma, as adjusted net tangible book value by $0.27 per share and decrease the dilution to investors participating in this offering by $(0.27) per share, assuming the assumed public offering price of $5.00 per share remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us. Similarly, a decrease of 1,000,000 shares offered by us would decrease the pro forma, as adjusted net tangible book value by ($0.33) per share and increase the dilution to investors participating in this offering by $0.33 per share, assuming the assumed public offering price of $5.00 per share remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.
The number of shares of our common stock to be outstanding after this offering is based on an aggregate of 5,515,447 shares of common stock outstanding as of June 30, 2020, as adjusted for the Pro Forma Adjustments and the issuance of 3,200,000 shares in this offering and excludes the following as of June 30, 2020:
| ● | 121,557 shares of our common stock issuable upon the exercise of outstanding stock options issued under the Omnibus Plan, having a weighted-average exercise price of $17.24 per share, of which 33,564 options have vested, having a weighted-average exercise price of $17.50 per share. An additional 34,652 options will vest upon the successful completion of this offering; | |
| ● | 324,360 shares of our common stock granted on August 5, 2020 to employees and directors as restricted stock awards under the Omnibus Plan of which restricted stock awards for 214,078 shares of common stock vest upon the successful completion of this offering, with the remaining 110,282 shares of common stock vesting over two years; | |
| ● | 54,083 shares of common stock reserved for issuance pursuant to future awards under the Omnibus Plan; | |
| ● | 47,772 shares of our common stock issuable upon the exercise of outstanding non-qualified stock options granted to our Chief Financial Officer on September 1, 2018, having an exercise price of $19.88 per share, of which 23,289 shares have vested; and | |
| ● | 533,959 shares of common stock issuable upon exercise of the outstanding and exercisable stock purchase warrants having a weighted average exercise price of $18.35 per share. | |
| ● | 190,989 shares of common stock issuable upon the conversion of $805,000 principal amount of outstanding 2019 Senior Convertible Notes and related accrued interest, based on a conversion price of $4.50 per share, which, pursuant to the 2019 Senior Note Agreement, is a 10% discount on an assumed public offering price of $5.00 per share. |
To the extent that outstanding warrantsany options are exercised, new options or other securities are issued under our equity incentive plans, or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering. In addition, we may choose to raise additional capital because of market conditions or strategic considerations, even if we believe that we have not been exercised. At March 31, 2018, no warrants were issued.sufficient funds for our current or future operating plans. If we raise additional capital through the sale of equity or convertible debt securities, the issuance of such securities could result in further dilution to our stockholders.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TheYou should read the following discussion and analysis of our financial condition and results of operations should be read in conjunctiontogether with our consolidated financial statements and the related notes and other financial information included elsewhere in this prospectus. In addition to historical financialSome of the information the followingcontained in this discussion and analysis contains forward-looking statements that involve risks uncertainties and assumptions. Ouruncertainties. You should review the section titled “Risk Factors” in this prospectus for a discussion of important factors that could cause actual results and the timing of selected events mayto differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Risk Factors” and elsewhere in this Prospectus.the results described below.
BackgroundOverview
On October 2, 2017 Heatwurx and Processa Therapeutics, LLC, a Delaware limited liability company and a wholly-owned subsidiary of Heatwurx entered into the Acquisition Agreement with Promet pursuant to which, on October 4, 2017, Heatwurx acquired all of the assets of Promet in exchange for issuing to Promet approximately 31,745,242 shares of the common stock of Heatwurx in a reverse acquisition transaction. Following the closing, Heatwurx changed its name to Processa Pharmaceuticals, Inc.
Following the acquisition, we abandoned our prior business plan and are now pursuing Promet’s historical business and proposed business, with a focus on developing drugs to treat patients that have a high unmet medical need. Prior to the acquisition, Heatwurx had nominal net liabilities and operations and it was considered a non-operating public shell corporation. Therefore, because Promet is considered the accounting acquirer and Heatwurx is considered the accounting acquiree (and legal acquirer), we have presented Promet’s information as that of the Company’s, including its operations prior to the closing of the Acquisition Agreement.
We are an emerging pharmaceuticala clinical stage biopharmaceutical company focused on the clinical development of drug products that are intended to improve the survival and/or quality of life for patients who have a highhighly unmet medical need.need condition. Within this group of pharmaceutical products, we currently are developing one product for twomultiple indications (i.e., the use of a drug to treat a particular disease) and will begin developing our newly acquired drugs (PCS12852, PCS6422, PCS11T and PCS100) once adequate funding has been obtained. We continue searching for additional products for our portfolio. portfolio that meet our criteria.
Our lead product, PCS-499,drug portfolio approach is an oral tabletto develop drugs with potentially high return on investment and lower risk of development failure. Our drugs are focused on treating patients who do not have adequate treatment options for their conditions and have some clinical evidence supporting the efficacy of the drug, whether it be evidence with the drug itself or a drug with similar pharmacological properties. Given the prior success of our development team, the regulatory science approach that is an analogwe employ not only allows us to develop drugs focused on FDA approval, but also allows us to select drugs for our portfolio which may have a greater chance for approval in a population of an active metabolitepatients who need treatment options.
Part of an already approved FDA drug. The advantage of PCS-499 is that it may potentially work in many conditions because it has multiple pharmacological targets that it affects that are importantour business strategy is:
| (i) | to identify drugs that have potential efficacy in patients with an unmet medical need, as demonstrated by some clinical evidence that the targeted pharmacology of the drug provides clinical efficacy in the targeted patient population, including published case studies or clinical experience; | |
| (ii) | to identify drug products that have been developed or approved for other indications but can be repurposed to treat those patients who have an unmet medical need; and | |
| (iii) | to identify drugs that can be quickly developed such that within 2-4 years critical value added clinical milestones can be achieved (for example, a pivotal study can be completed in 2 to 4 years or enough clinical data can be obtained to demonstrate the value of the asset to a future licensing partner) while advancing the drug closer to the submission of an NDA to the FDA, or to license the drug to a potential strategic partner just prior to a more expensive and time consuming pivotal study. |
In order to add significant value to our in-licensed drugs within 2 to 4 years, the drugs must be in the treatment of these conditions. Based on itsclinical development stage and not in discovery stage, and during those 2 to 4 years we must be able to obtain clinical data to support the added value. The additional clinical data could range from a clinical proof-of-concept data to further demonstrate that the proposed pharmacology occurs clinically in the targeted patient population in a pivotal well-designed randomized controlled trial.
Our portfolio specifically includes drugs that (i) already have clinical proof-of-concept data demonstrating the desired pharmacological activity in humans or, minimally, clinical evidence in the form of case studies or clinical experience demonstrating the drug or a similar drug pharmacologically can successfully treat patients with the targeted indication, (ii) target indications for which the FDA believes that a single positive pivotal study demonstrating efficacy provides enough evidence that the clinical benefits of the drug and its approval outweighs the risks associated with the drug or the present standard of care (e.g., some orphan indications, many serious life-threatening conditions, some serious quality of life conditions), and/or (iii) target indications where the prevalence of the condition and the likelihood of patients enrolling in a study meet the desired time-frame to demonstrate that the drug can, at some level, treat or potentially treat patients with the condition.
To advance our mission, we have identified other unmet medical need conditions whereassembled an experienced and talented management and product development team. Our team is experienced in developing drug products through all principal regulatory tiers from IND enabling studies to NDA submission. Our combined scientific, development and regulatory experience has resulted in more than 30 drug approvals by the use of PCS-499 may result in clinical efficacy. These include NL and RIF in head and neck cancer patients. We have metFDA, over 100 meetings with the FDA onand involvement with more than 50 drug development programs, including drug products targeted to patients who have an unmet medical need. Although we believe that the NL conditionskills and have developed a strategyexperience of our team in drug development and commercialization is an important indicator of our future success, the past successes of our team in developing and commercializing pharmaceutical products does not guarantee that they will successfully develop and commercialize drugs for movingus. In addition, the program for NL forward starting with a Phase 2 clinical trialgrowth in NL patientsrevenues of companies at which our executive officers and directors served in late 2018.was due to many factors and does not guarantee that they will successfully operate or manage us or that we will experience similar growth in revenues, even if they continue to serve as executive officers and/or directors.
On June 22, 2018,Our ability to generate meaningful revenue from any products depends on our ability to out-license the drugs in the U.S. and/or ex-U.S. before or after we obtain FDA NDA approval. Even if our products are authorized and approved by the FDA, granted orphan-drug designation to our leading clinical compound PCS-499 for treatmentit should be noted that the products must still meet the challenges of NL.successful marketing, distribution and consumer acceptance.
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Going Concern and Management’s Plan
Our consolidated financial statements are prepared using U.S. GAAP and are based on the assumption that the Companywe will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. We face certain risks and uncertainties that are present in many emerging growth companies regarding product development and commercialization, limited working capital, recurring losses and negative cash flow from operations, future profitability, ability to obtain future capital, protection of patents, technologies and property rights, competition, rapid technological change, navigating the domestic and major foreign markets’ regulatory and clinical environment, recruiting and retaining key personnel, dependence on third party manufacturing organizations, third party collaboration and licensing agreements, lack of sales and marketing activities and having no customers or pharmaceutical products to sell or distribute. These risks and other factors raisedraise substantial doubt about our ability to continue as a going concern as of the date of the filing of our annual report on Form 10-K for the year ended December 31, 2017 and our quarterly report on Form 10-Q for the three months ended March 31, 2018.concern.
We have relied exclusivelyprimarily on private placements with a small group of accredited investors to finance our business and operations. We do not have anyAs described in more detail below, we recently entered into two line of credit facilities asagreements with related parties providing a sourcerevolving commitment of future funds.an aggregate of up to $1.4 million. We have not had any revenue since our inception, on August 31, 2015 and we do not currently have any revenue under contract or any immediate sales prospects. As of March 31, 2018, we had an accumulated deficit of approximately $5.0 million incurred since inception. For the threesix months ended MarchJune 30, 2020 and year ended December 31, 2018,2019, we incurred a net loss from continuing operations of approximately $1.1$1.6 million and $3.4 million, respectively; and used approximately $1.1$897,000 and $2.8 million in net cash from operating activities.activities, respectively. We expect our operating costs to be substantial as we incur costs related to the clinical trials for our product candidates and that we will operate at a loss for the foreseeable future. At June 30, 2020, we had cash and cash equivalents totaling $452,654.
As further described under Recent Developments, since December 31, 2017
On September 20, 2019, we entered into two separate Line of Credit Agreements (“LOC Agreements”) to borrow up to $700,000 with current stockholders and related parties DKBK Enterprises, LLC (“DKBK”) and CorLyst, LLC (“CorLyst”) ($1.4 million total). Under the LOC Agreements, all funds borrowed bear an 8% annual interest rate. The lenders have received proceedsthe right to convert all or any portion of approximately $3.1 million dollars from the saledebt and interest into shares of 1,402,441our common stock. Our Chief Executive Officer (CEO) is also the CEO and Managing Member of both lenders. DKBK directly holds 16,166 shares of our common stock and warrantsCorLyst beneficially owns 1,095,649 shares. In April and June 2020, we drew $500,000 under the LOC Agreement with DKBK. On July 21, 2020, we drew an additional $200,000, bringing the total amount drawn under the LOC Agreement with DKBK to purchase the same number of shares of common stock exercisable at $2.724 per share. We also entered into an agreement with an investor for a commitment to fund up to $1.8 million of clinical trial expenses in exchange for 792,952 shares of our common stock and warrants to purchase the same number of shares of common stock exercisable at $2.724 per share. We will use these committed funds for our Phase 2a clinical trial of PCS-499 in patients with NL. Payment under this commitment will be made directly to the CRO based on their invoicing and not to us. Finally, on May 25, 2018, we converted approximately $2.35 million of our 8.0% Convertible Notes into 1,206,245 shares of our common stock.$700,000.
We are lookingIn December 2019 we closed our bridge financing and issued $805,000 of the 2019 Senior Notes to accredited investors. In order to preserve cash, in August 2019 we began delaying some cash outflows, primarily through the deferred payment of certain salaries ($210,800 has been included in accrued expenses at ways to add an additional revenue stream to offset some of our expenses. We are planning on raising additional funds in the first half of 2019. In addition,June 30, 2020) until such time as we are seeking alternative options to add additional cash.have raised sufficient funding.
Recent Developments
Orphan Drug Designation. On June 22, 2018, the FDA granted orphan-drug designation to our leading clinical compound PCS-499 for treatment of NL.
CoNCERT Agreement. On March 19, 2018, Promet, we and CoNCERT Pharmaceuticals Inc. (“CoNCERT”) amended the Option and License Agreement (the “Agreement”) executed in October 2017. The Agreement was assigned to us and we exercised the exclusive option for the PCS-499 compound. The option was exercised in exchange for CoNCERT receiving (i) $8.0 million of our common stock that was owned by Promet (2,090,301 shares), and (ii) 15% of any sublicense revenue we earn for a period equivalent to the royalty term (as defined in the Agreement) until the earliest of: (a) our raising $8.0 million of gross proceeds; and (b) CoNCERT being able to sell the shares of our common stock without restrictions pursuant to the terms of the amended Agreement. All other terms of the Agreement remain unchanged. As a result, we recognized an intangible asset of approximately $11.0 million, additional paid-in capital of $8.0 million resulting from Promet satisfying our liability to CoNCERT, along with a $3.0 million deferred tax liability related to the acquired temporary difference for an asset purchased that is not a business combination and has a nominal tax basis.
PIPE Transaction. OnIn May 15, 2018, and June 29, 2018,2020, we entered into Subscription and Purchase Agreements (the “Purchase Agreements”) with certain accredited investors (who are now parta promissory note in favor of the Selling Stockholders)Bank of America under the Small Business Administration Paycheck Protection Program of the Coronavirus Aid, Relief and conducted closings pursuant to which we sold 1,402,441 sharesEconomic Security Act of common stock at2020 (“the CARES Act”), for a purchase price$162,459 loan (the “PPP Loan”). We have used the loan proceeds for payroll costs in accordance with the relevant terms and conditions of $2.27 per share. In addition, each investor received a warrant to purchase one share of common stock for each share of common stock purchased by such investor at an exercise price equal to $2.724, subject to adjustment thereunder.the CARES Act.
We received total gross proceeds of approximately $3.1 million priorSubstantial doubt existed about our ability to deducting placement agent fees and estimated expenses payable by us. We currently intend to use the proceedscontinue as a going concern as of the Private Placement to fund research and developmentdate of our lead product candidate, PCS-499, including clinical trial activities,annual report for the year ended December 31, 2019 and our auditors included a going concern paragraph in their Report of Independent Registered Public Accounting Firm accompanying our audited financial statements for general corporate purposes.the year ended December 31, 2019. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be different should we be unable to continue as a going concern based on the outcome of these uncertainties described above.
Boustead Securities, Ltd. (“Boustead”) acted as placement agentIt is our current expectation, assuming the receipt of the net proceeds from this offering and received $167,526 and a Placement Agent Warrant to purchase up to 84,146 shares of common stock at an exercise price equal to $2.724.based on current cash flow projections, that the going concern paragraph would be removed in our auditors’ report for the year ending December 31, 2020.
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Clinical Trial Funding. On May 25, 2018, we entered into an agreement with an accredited investor to whom we sold 792,952 sharesComponents of common stock at a purchase price of $2.27 per share for $1.8 million of gross proceeds. We will use these committed funds for our Phase 2a clinical trial of PCS-499 in patients with NL which is planned to begin in the fourth quarter of 2018. The investor will make payments not to us, but rather directly to the CRO conducting our Phase 2 Necrobiosis Lipoidica Trial based on their invoicing. The investor also received warrants to purchase one share of common stock for each share of common stock purchased at an exercise price equal to $2.724.
Boustead acted as placement agent and received $108,000 and a warrant to purchase up to 47,578 shares of common stock at an exercise price equal to $2.724.
Note Conversion. On May 25, 2018, we converted approximately $2.35 million of our mandatory convertible 8.0% Senior Notes and accrued interest of $100,000 into 1,206,245 shares of common stock, at a price of $2.043 per share. The noteholders also received warrants to purchase one share of common stock for each share of common stock purchased at an exercise price equal to $2.452.
Boustead acted as placement agent and received $144,955 and a warrant to purchase up to 79,423 shares of common stock at an exercise price equal to $2.724.
The shares of common stock for both PIPE Transactions and the clinical trial funding were sold in a private placement pursuant to exemptions from the registration requirements of the Securities Act afforded by Rule 506 of Regulation D promulgated thereunder.
The common stock, but not the warrants, issued for the PIPE Transactions, the clinical trial funding and the note conversion have, subject to certain customary exceptions, full ratchet anti-dilution protection. Until we have issued equity securities or securities convertible into equity securities for a total of an additional $20.0 million in cash or assets, including the proceeds from the exercise of the warrants issued above, in the event we issue additional equity securities or securities convertible into equity securities at a purchase price less than $2.27 per share of common stock, the above purchase price shall be adjusted and new shares of common stock issued as if the purchase price was such lower amount (or, if such additional securities are issued without consideration, to a price equal to $0.01 per share).
Results of Operations
On October 4, 2017, we acquired all the net assets of Promet Therapeutics, LLC (“Promet) a private Delaware limited liability company, including the rights to the CoNCERT Agreement in exchange for 4,535,121 shares of our common stock. Immediately following the transaction, the former equity holders of Promet owned approximately 84% and held approximately 6% of the shares for the benefit of CoNCERT in relation to the CoNCERT contribution of the license to Processa as part of the transaction, and our stockholders immediately prior to the transaction owned approximately 10% of our common stock. Promet distributed all 4,236,421 shares of the common stock it held to its partners.
We accounted for the net asset acquisition transaction as a “reverse acquisition” merger under the acquisition method for GAAP, where Promet was considered the accounting acquirer; and for tax purposes, as a tax-free contribution under Internal Revenue Code Section 351. Accordingly, Promet’s historical results of operations replaced our historical results of operations for all periods prior to the merger. Prior to the acquisition, we had nominal net liabilities and operations. We were considered a non-operating public shell corporation.
Comparison of three months ended March 31, 2018 and 2017Revenues
We did not have any revenue in the periods presented below, nor do we currently have any revenue under contract or any immediate sales prospects.
Operating Expenses
Research and Development Expenses.
Our consolidated resultsresearch and development costs are expensed as incurred. Research and development expenses include (i) amortization of operationsthe exclusive license intangible asset and software used in research and development activities, (ii) internal research and development staff related payroll, taxes, stock-based compensation and employee benefits, and (iii) program and testing related expenses, including external consulting and professional fees related to the product testing and our development activities. Non-refundable advance payments for goods and services to be used in future research and development activities are recorded as prepaid expenses and expensed when the research and development activities are performed.
General and Administrative Expenses.
General and administrative expenses primarily consist of payroll, stock-based compensation and employee benefits for general and administrative staff, professional fees for legal, accounting and tax services and other general and administrative costs such as rent, utilities and taxes.
Interest Expense and Interest Income.
Interest expense incurred consists primarily of interest expense related to our 2017 and 2019 Senior Notes. Interest income represents interest earned on funds in our bank accounts and certificates of deposit.
Income Tax Benefit.
We recognize an income tax benefit as a result of our recording and amortizing the deferred tax liability created in connection with our acquisition of CoNCERT’s license and “Know-How” in exchange for Processa stock that had been issued in the Internal Revenue Code Section 351 transaction on March 19, 2018. The Section 351 transaction treated the acquisition of the Know-How for stock as a tax-free exchange. As a result, under ASC 740-10-25-51 Income Taxes, Processa recorded a deferred tax liability of $3,037,147 for the acquired temporary difference between the financial reporting basis of $11,038,929 and the tax basis of $1,782. Each year, the deferred tax liability is decreased for the non-deductibility of the amortization of the intangible asset for the current period. Additionally, the liability is being offset for the deferred tax assets resulting from our net taxable operating losses.
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Comparison of the three and six months ended March 31, 2018June 30, 2020 and 2017 were as follows:2019
| Three Months Ended | ||||||||||||||||
| March 31, | Change | |||||||||||||||
| 2018 | 2017 | Dollars | Percent | |||||||||||||
| Operating Expenses | ||||||||||||||||
| Research and development costs | $ | 807,661 | $ | 139,922 | $ | 667,739 | 477.2 | % | ||||||||
| General and administrative expenses | 483,955 | 94,018 | 389,937 | 414.7 | % | |||||||||||
| Total operating expenses | 1,291,616 | 233,940 | 1,057,676 | 452.1 | % | |||||||||||
| Other Income (Expense) | ||||||||||||||||
| Interest Expense | (87,740 | ) | - | (87,740 | ) | |||||||||||
| Interest Income | 1,024 | 1,498 | (474 | ) | ||||||||||||
| Total other income (expense) | (86,716 | ) | 1,498 | (88,214 | ) | |||||||||||
| Net Operating Loss Before Income Tax Benefit | (1,378,332 | ) | (232,442 | ) | 1,145,890 | 493.0 | % | |||||||||
| Income Tax Benefit | 281,534 | - | (281,534 | ) | ||||||||||||
| Net Loss | $ | (1,096,798 | ) | $ | (232,442 | ) | $ | 864,356 | 371.9 | % | ||||||
The following table summarizes our net loss during the periods indicated:
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||||||
| Operating Expenses | ||||||||||||||||||||||||
| Research and development expenses | $ | 427,109 | $ | 726,904 | $ | (299,795 | ) | $ | 928,855 | $ | 1,211,655 | $ | (282,800 | ) | ||||||||||
| General and administrative expenses | 374,878 | 410,072 | (35,194 | ) | 859,255 | 807,837 | 51,418 | |||||||||||||||||
| Operating Loss | (801,987 | ) | (1,136,976 | ) | (1,788,110 | ) | (2,019,492 | ) | ||||||||||||||||
| Other Income (Expense) | ||||||||||||||||||||||||
| Interest expense | (19,280 | ) | (6,102 | ) | (13,178 | ) | (36,450 | ) | (10,702 | ) | (25,748 | ) | ||||||||||||
| Interest income | 18 | 3,398 | (3,380 | ) | 846 | 9,383 | (8,537 | ) | ||||||||||||||||
| Net Operating Loss Before Income Tax Benefit | (821,249 | ) | (1,139,680 | ) | (1,823,714 | ) | (2,020,811 | ) | ||||||||||||||||
| Income Tax Benefit | 87,835 | 170,602 | (82,767 | ) | 215,964 | 300,901 | (84,937 | ) | ||||||||||||||||
| Net Loss | $ | (733,414 | ) | $ | (969,078 | ) | $ | (1,607,750 | ) | $ | (1,719,910 | ) | ||||||||||||
Revenues. To date we
We had no revenue during the three and six months ended June 30, 2020 and 2019. We do not currently have not generated any revenue and do not expect to generateunder contract or any revenue from any drug candidates that we are developing unless and until we obtain regulatory approval and initiate commercialization of these drugs or enter into collaborative agreements.immediate sales prospects.
OperatingResearch and Development Expenses.
Research and Development Expenses. Our research and development costs are expensed as incurred. Research and development expenses consist primarily ofinclude (i) licensing of compounds for product testing and development, (ii) program and testing related expenses, (iii) amortization of the exclusive PCS499 license intangible asset used in research and development activities, and (iv) internal research and development staff related payroll, taxes and employee benefits, external consulting and professional fees related to the product testing and our development activities. Non-refundable advance payments for goods and services to be used in future research and development activities ofare recorded as prepaid expenses and expensed when the Company.research and development activities are performed.
During the three months ended June 30, 2020 and 2019, we incurred total research and development expenses of $427,109 and $726,904, respectively, for the continued development and testing of our lead product, PCS499. Research and development expenses were approximately $929,000 and $1.2 million for the six months ended June 30, 2020 and 2019, respectively. Costs for the three and six months ended June 30, 2020 and 2019 were as follows:
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Amortization of intangible assets | $ | 198,832 | $ | 198,832 | $ | 397,664 | $ | 397,664 | ||||||||
| Research and development salaries and benefits | 114,579 | 160,992 | 254,851 | 319,848 | ||||||||||||
| Preclinical, clinical trial and other costs | 113,698 | 367,080 | 276,340 | 494,143 | ||||||||||||
| Total | $ | 427,109 | $ | 726,904 | $ | 928,855 | $ | 1,211,655 | ||||||||
Overall, during the three months ended June 30, 2020, our research and development costs decreased by $299,795. The decrease was due to a decrease in preclinical, clinical trial and other costs of $253,382 during the three months ended June 30, 2020 when compared to the same period in 2019. This decrease was attributable to decreased costs related to our Phase 2A clinical trial, as we have completed the patient portion of the study. We also had a decrease in research and development salaries and benefits of $46,413 for the three months ended March 31, 2018 increased by $667,729, or 477% to $807,661June 30, 2020 when compared to $139,922 for the three months ended March 31, 2017.
The majoritysame period in 2019 related to the departure of the increase intwo research and development expenses relate to research and development expenses for licensing, program and testing costs related to PCS-499team members in the first quarter of approximately $604,000. This included costs related to the need to establish a new site to manufacture the tablets of PCS-499 since the original CoNCERT tablet manufacturing site could no longer be used. Once a vendor was chosen, the CoNCERT Option and License agreement allowed us to begin the transfer and development of manufacturing and analytical processes. The manufacturing development and initial testing was required to ensure that the consistency of the product was maintained and similar to the PCS-499 tablets manufactured by CoNCERT. As a result of exercising the option, we recognized approximately $25,000 of amortization expense on the intangible asset in 2018 with no similar cost in 2017.
Research and development staff related payroll, taxes and employee benefits also increased $45,000 in 2018 compared to 2017 as a result of an increase in full-time equivalent staff and related costs. Professional fees increased slightly in support of the increased licensing, program and testing activities.2020.
During the first quarter of 2017, the majority of costs we incurred were related to a licensing agreement we had with Drexel University which was terminated in 2017. We did not incur any costs in 2018 related to the Drexel Agreement.
We expect research and development expenses to increase as we advance our lead candidates and pipeline product candidates.
General and Administrative Expenses. General and administrative expenses for the threesix months ended March 31, 2018 increased $389,937 or 414.7% to $483,955 compared to $94,018 for the three months ended March 31, 2017. The increase in general and administrative expenses relate primarily to professional fees for legal, accounting, advisory and consulting costs of approximately $191,000 related to our operations and costs of being a public company; a cybersecurity fraud loss of approximately $144,000 for which we do not have insurance coverage; and an increased internal general and administrative staff related payroll, taxes and employee benefits of approximately $40,000 due to an increase in full-time equivalent staff and related costs to support the growth in our operations and public company reporting requirements. Changes in other general and administrative expenses were not material and accounted for the balance of the increase in general and administrative expenses for the comparable periods.
A stockholder, CorLyst, LLC (“CorLyst”) reimburses us for shared costs related to payroll, health care insurance and rent based on actual costs incurred. We recognize the reimbursement as a reduction of our general and administrative operating expenses. Reimbursements amounts totaled $26,684 and $29,430 for the three months ended March 31, 2018 and 2017, respectively. We had a receivable from CorLyst at March 31, 2018 and December 31, 2017 of $26,684 and $62,709, respectively.
During 2017, CorLyst paid certain operating expenses on our behalf and we reimbursed CorLyst based on actual costs incurred. Accounts payable amounts due to CorLyst at March 31, 2018 and December 31, 2017 were $336 and $336, respectively. In addition, there was $100 due to an officer included in due to related parties as of March 31, 2018 and December 31, 2017.
We expect the general and administrative expenses to continue to increase as we add staff to supportJune 30, 2020, our research and development activities and administration requirements.
Other Income (Expense).
Interest Expense. Interest expense forcosts decreased by $282,800 as compared to the threesix months ended March 31, 2018 consisted of interest expense of $52,000 and the amortization of debt issuance costs of $36,000 related to the $2.58 million 8.0% Senior Convertible Notes we issued in October and November of 2017. On May 25, 2018, $2.35 million of these Notes, along with the related accrued interest were converted into 1,206,245 shares of common stock and warrants to purchase an equivalents number of shares of our common stock at $2.452 per share.
Income Tax Benefit. An income tax benefit of $281,534 and $0 was recognized for the three months ended March 31, 2018 and 2017, respectively. A deferred tax liability was recorded when CoNCERT sold its license and “Know-How” to us for stock in an Internal Revenue Code Section 351 transaction on March 19, 2018. A Section 351 transaction treats the acquisition of the Know-How for stock as a tax-free exchange. As a result, under ASC 740-10-25-51Income Taxes, we recorded a deferred tax liability of approximately $3,037,000 for the acquired temporary difference between the financial reporting basis of approximately $11,039,000 and the tax basis of approximately $2,000. The deferred tax liability may be offset by the deferred tax assets resulting from 2017 and 2018 taxable net operating losses. Under ACS 740-270Income Taxes – Interim Reporting, we are required to project our 2018 federal and state effective income tax rate and apply it to the March 31, 2018 operating loss before income taxes. Based on the projection, we expect to recognize the tax benefit from the 2017 taxable net operating loss carryover and the projected 2018 loss, which resulted in the recognition of a deferred tax benefit shown in the consolidated statements of operations for 2018.
Prior to the asset purchase transaction on October 4, 2017, Promet was treated as a partnership for federal income tax purposes and thus was not subject to income taxes at the entity level. Therefore, no provision/benefit or liability for income taxes was included in the consolidated financial statements through October 4, 2017.
Comparison of years ended December 31, 2017 and 2016
Our consolidated results of operations for the years ended December 31, 2017 and 2016 were as follows:
| For the years ended | ||||||||||||||||
| December 31, | Change | |||||||||||||||
| 2017 | 2016 | Dollars | Percent | |||||||||||||
| Operating Expenses | ||||||||||||||||
| Research and development costs | $ | 926,117 | $ | 1,536,996 | $ | (610,879 | ) | -39.7 | % | |||||||
| General and administrative expenses | 876,316 | 384,524 | 491,792 | 127.9 | % | |||||||||||
| Total operating expenses | 1,802,433 | 1,921,520 | (119,087 | ) | -6.2 | % | ||||||||||
| Other Income (Expense) | ||||||||||||||||
| Interest Expense | (59,063 | ) | - | (59,063 | ) | |||||||||||
| Interest Income | 5,181 | 4,454 | 727 | |||||||||||||
| Total other income (expense) | (53,882 | ) | 4,454 | (58,336 | ) | |||||||||||
| Net Loss | $ | (1,856,315 | ) | $ | (1,917,066 | ) | $ | (60,751 | ) | -3.2 | % | |||||
Revenues. To date we have not generated any revenue and do not expect to generate any revenue from any drug candidates that we develop unless and until we obtain regulatory approval and commercialize these drugs or enter into collaborative agreements.
Operating Expenses.
Research and Development Expenses. Research and development expenses consist primarily of (i) licensing of compounds for product testing and development, (ii) program and testing related expenses, and (iii) internal research and development staff related payroll, taxes and employee benefits, external consulting and professional fees related to our product testing and development activities.
Research and development expenses decreased by approximately $611,000, or 39.7% to $926,000 in 2017 compared to $1,537,000 in 2016.June 30, 2019. The decrease in research and development expenses relate primarilywas due to the substantial completiona decrease in preclinical, clinical trial and other costs of the licensing, program$217,803 and testing costs incurred under the Drexel agreement in 2016. The contract was officially terminated in June 2017 with insignificant costs incurred during 2017. However, the CoNCERT Pharmaceuticals, Inc. license and option agreement for the replacement compound PCS-499 was not executed until October 2017. As a result, research and development expenses were approximately $747,000 less in 2017salaries and benefits of $64,997 during the six months ended June 30, 2020 when compared to 2016. This decline was partially offset by increasedthe same period in 2019 for the same reasons as stated above.
We anticipate our research and development staffcosts to increase significantly in the future as we continue pre-clinical studies and conduct future clinical trials related payroll, taxesto our current drug portfolio. We incurred $181,751 of costs related to our Phase 2A trial during the six months ended June 30, 2020 and employee benefitsexpect to spend an additional $242,000 for the remainder of the trial. We believe, based on our estimates, the total cost of our current Phase 2A trial in NL to be approximately $136,000 in 2017 compared to 2016.$1.5 million. We had a clinical trial funding investor pay for $900,000 of the clinical trial costs and we are covering the remaining $600,000 with funds received from the sale of our 2019 Senior Notes and our LOC Agreements, as necessary.
We expect research and development expenses to increase as we advance our lead candidates and pipeline product candidates. The funding necessary to bring a drug candidate to market is, however, subject to numerous uncertainties. Once a drug candidate is identified, the further development of that drug candidate can be halted or abandoned at any time due to a number of factors. These factors include, but are not limited to, funding constraints, safety or a change in market demand. For each of our drug candidate programs, we periodically assess the scientific progress and merits of the programs to determine if continued research and development is economically viable. Certain of our programs may be terminated due to the lack of scientific progress and lack of prospects for ultimate commercialization. We anticipate our research and development costs to increase in the future as we finalize our Phase 2A clinical trial activities and beginning designing and conducting a Phase 2B trial to evaluate the ability of PCS499 to completely close ulcers in patients with NL and initiate any research activities related to other drug candidates in our portfolio (PCS12852, PCS6422, PCS11T and PCS100). We expect to begin recruiting patients for our Phase 2B trial for NL in early 2021.
Our clinical trial accruals are based on estimates of patient enrollment and related costs at clinical investigator sites, as well as estimates for the services received and efforts expended pursuant to contracts with multiple research institutions and CROs that conduct and manage clinical trials on our behalf.
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We estimate preclinical and clinical trial expenses based on the services performed, pursuant to contracts with research institutions and clinical research organizations that conduct and manage preclinical studies and clinical trials on our behalf. In accruing service fees, we estimate the time-period over which services will be performed and the level of patient enrollment and activity expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we will adjust the accrual accordingly. Payments made to third parties under these arrangements in advance of the receipt of the related series are recorded as prepaid expenses until the services are rendered.
General and Administrative Expenses. General
Our general and administrative expenses for the yearthree months ended December 31, 2017 increasedJune 30, 2020 decreased by approximately $492,000, or 127.9%$35,194 to $876,000$374,878 from $410,072 for the three months ended June 30, 2019. We experienced reductions in 2017 compared to $384,000 in 2016. The increase in general and administrative expenses relate primarily to professional fees for legal, accounting, advisory and consulting costs of approximately $234,000$40,000, as well as decreases in other administrative costs such as office expenses, travel, and taxes and licenses of approximately $25,000. These decreases were offset by an increase in insurance and telephone expenses of $3,800 and increased payroll and related to our operations and costs of being a public company; increased internalapproximately $26,000 (primarily due to an increase in stock-based compensation of approximately $23,000). Reimbursements from CorLyst of $25,894 for rent and other costs during the six months ended June 30, 2020 were comparable to the same period in 2019.
For the six months ended June 30, 2020, general and administrative staff related payroll,expenses increased by $51,418 to $859,255 from $807,837 for the six months ended June 30, 2019. The majority of the increase was due to a $109,000 increase in taxes and employee benefits of approximately $214,000licenses, primarily due to growth in our operations and a full year of expense for 2016 hires; increase in office rent of approximately $55,000Delaware franchise tax as a result of beingour 1-for-7 reverse stock split in December 2019. Delaware used the primary obligorassumed par value method to compute their franchise tax. The reverse stock split increased the assumed par value per share which was assessed on the headquarters lease for a full yearnumber of authorized shares to compute the franchise tax. On June 25, 2020, we amended our certificate of incorporation to reduce the number of authorized shares in 2017 comparedpart to one-quarter in 2016 and sharing office rent costs with CorLyst, a related party of Promet and a shareholder of ours, during the balance of 2016; and, one-time costs incurred in 2017 related to the reverse acquisition of Heatwurx by Promet, which closed on October 4, 2017,decrease our future Delaware franchise tax.
We also experienced increases of approximately $59,000$44,000 in payroll and the impairmentrelated costs (due to an increase in stock-based compensation of softwareapproximately $47,000) and approximately $12,000 in administrative costs for items such as insurance and telephone expenses. The overall increase was offset by decreases in professional fees for legal, accounting, advisory and consulting costs of approximately $15,000 related to obsolete software costs$95,000, as a resultwell as reductions of the reverse acquisition transaction.
CorLyst reimburses us for shared costs related to payroll, health care insuranceapproximately $20,000 in office expenses, travel, continuing education, utilities and rent based on actual costs incurred. We recognize the reimbursement as a reduction of our generalrepairs and administrative operating expenses.maintenance. Reimbursements amounts totaled $111,799 and $32,327 for the years ended December 31, 2017 and 2016, respectively. We had a receivable from CorLyst at December 31, 2017of $50,642 for rent and 2016 of $62,709 and 0, respectively.
During 2016 and 2017, CorLyst paid certain operating expenses on behalf of us and we reimbursed CorLyst based on actualother costs incurred at later dates. The accounts payable amounts due to CorLyst at December 31, 2017 and 2016during the six months ended June 30, 2020 were $336 and $95, respectively. In addition, there was $100 due to an officer included$1,800 less than the same period in due to related parties as of December 31, 2017.2019.
We expect the general and administrative expenses to increase in the future as we add staff to support theour growing research and development activities ofand the Company and administration requirements.required to operate as a public company.
Other Income (Expense)Interest Expense and Interest Income..
Interest Expense. Interest expense was approximately $59,000$19,280 and $0$6,102 for the yearsthree months ended December 31,June 30, 2020 and 2019, respectively, and $36,450 and $10,702 for the six months ended June 30, 2020 and 2019, respectively, related to our $805,000 and $2.58 million of 8% Senior Notes sold in 2019 and 2017, respectively, and 2016, respectively. Interestto the 2020 borrowings on the LOC Agreement with DKBK. Included in interest expense represents accrued interest of approximately $35,700 andis the amortization of debt issuance costs of approximately $23,300 ontotaling $2,140 and $0 for the $2.58 million issuance of 8.0% Senior Convertible Notes issued on October 4, 2017 ($1,250,000)six months ended June 30, 2020 and November 21, 2017 ($1,330,000). The interest accrues monthly at 8.0% annually on the principal balance outstanding and is payable in kind through the issuance of common stock of the Company at maturity, which is not later than one-year from the date of issuance of the Senior Convertible Notes. On May 25, 2018, $2.35 million of these Notes, along with the related accrued interest were converted into 1,206,245 shares of common stock and warrants to purchase an equivalents number of shares of our common stock at $2.452 per share. There was no debt outstanding in 2016.2019, respectively.
Interest Income. Interest income was approximately $5,000$18 and $4,000$3,398 for the yearsthree months ended December 31, 2017June 30, 2020 and 2016,2019, respectively, and $846 and $9,383 for the six months ended June 30, 2020 and 2019, respectively. Interest income represents interest earned on money market funds.
Income Tax Benefit.
We recognized an income tax benefit of $87,835 and $170,602 for the three months ended June 30, 2020 and 2019, respectively, and $215,964 and $300,901 for the six months ended June 30, 2020 and 2019, respectively, as a result of our recording and amortizing the deferred tax liability created in connection with our acquisition of CoNCERT’s license and “Know-How” in exchange for Processa stock that had been issued in the Internal Revenue Code Section 351 transaction on March 19, 2018. The Section 351 transaction treated the acquisition of the Know-How for stock as a tax-free exchange. As a result, under ASC 740-10-25-51 Income Taxes, we recorded a deferred tax liability of $3,037,147 for the acquired temporary difference between the financial reporting basis of $11,038,929 and the tax basis of $1,782. The deferred tax liability will be reduced for the effect of the non-deductibility of the amortization of the intangible asset and may be offset by the deferred tax assets resulting from net operating tax losses. This offset results in the recognition of a deferred tax benefit shown in the condensed consolidated statements of operations.
Comparison of the years ended December 31, 2019 and 2018
The following table summarizes our operations and net loss during the periods indicated:
| Year ended | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Operating Expenses | ||||||||
| Research and development expenses | $ | 2,320,573 | $ | 3,085,317 | ||||
| General and administrative expenses | 1,614,909 | 1,439,623 | ||||||
| Operating Loss | (3,935,482 | ) | (4,524,940 | ) | ||||
| Other Income (Expense) | ||||||||
| Interest expense | (36,658 | ) | (161,205 | ) | ||||
| Interest income | 11,548 | 18,297 | ||||||
| Net Operating Loss Before Income Tax Benefit | (3,960,592 | ) | (4,667,848 | ) | ||||
| Income Tax Benefit | 602,716 | 902,801 | ||||||
| Net Loss | $ | (3,357,876 | ) | $ | (3,765,047 | ) | ||
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Revenues
We had no revenue during the years ended December 31, 2019 and 2018, and we do not currently have any revenue under contract or any immediate sales prospects.
Research and Development Expenses.
During the years ended December 31, 2019 and 2018, we incurred total research and development expenses of $2,320,573, and $3,085,317, respectively, for the continued development and testing of our lead product, PCS499. As a result of exercising the CoNCERT license and option agreement for PCS499 in March 2018, and the purchase of a software license during the second quarter of 2018, we recognized $795,328 and $621,647 of amortization expense during the years ended December 31, 2019 and 2018, respectively. Costs for the years ended December 31, 2019 and 2018 were as follows:
| Year ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Amortization of intangible assets | $ | 795,328 | $ | 621,647 | ||||
| Research and development salaries and benefits | 742,254 | 650,702 | ||||||
| Preclinical, clinical trial and other costs | 782,991 | 1,812,968 | ||||||
| Total | $ | 2,320,573 | $ | 3,085,317 | ||||
Our research and development salaries and benefits increased by $91,552 for the year ended December 31, 2019 when compared to the same period in 2018 related to an increase in stock-based compensation of $113,239, which was offset by a decrease in salaries and related benefits of $21,687. The decrease in salaries and related benefits related to one of our research and development team members having a reduced level of involvement in 2019. We also recognized lower research and development expenses for preclinical, clinical trial and other costs of $1,029,977 during the year ended December 31, 2019 when compared to the same period in 2018. During the year ended December 31, 2019, our focus was on enrolling patients in our trial, along with other trial costs, including providing doses of PCS499 to participants in our Phase 2A clinical trial in NL. In contrast, during the same period in 2018, we experienced significantly higher costs related to a Phase 1 trial for PCS499 and costs related to having to establish a new site to contract manufacture the tablets of PCS499 needed for our clinical trial since the original CoNCERT tablet manufacturing site could no longer be used.
We incurred $554,935 in costs related to our Phase 2A trial during the year ended December 31, 2019 and expect to spend an additional approximately $487,000 through 2020 to complete our current trial. We believe, based on our estimates, the cost of our current Phase 2A trial to be approximately $1.5 million. PoC Capital paid for $900,000 of the clinical trial costs, and we will cover the remaining $600,000 with funds received from the sale of our 2019 Senior Notes and our LOC Agreements, as necessary. During the year ended December 31, 2018, we made payments to our CRO related to our Phase 2A trial of approximately $239,000. We have accounted for these payments as either a prepaid expense or a research and development expense depending on whether the related service has been provided. During the year ended December 31, 2019, PoC Capital made payments directly to our CRO totaling $689,168 for amounts invoiced. PoC Capital also repaid us $210,832 for clinical trial expenses we previously paid to our CRO, $180,119 of which is included in Prepaid and Other on our consolidated balance sheet at December 31, 2019.
General and Administrative Expenses.
Our general and administrative expenses for the year ended December 31, 2019 increased by $175,286 to $1,614,909 from $1,439,623 for the year ended December 31, 2018. The increase related mostly to increased payroll and related costs of approximately $413,000 (including an increase in stock-based compensation of $323,176) as we built our finance team and hired our CFO and Director of Finance and Accounting in the second half of 2018 to support our growth and public company reporting and compliance requirements. We also experienced increases of approximately $47,000 in other administrative costs such as insurance, office, rent, repairs and maintenance, and travel expenses. Our tax expense also increased by approximately $84,000 in 2019 compared to 2018 due to our Delaware franchise taxes.
The above increases were offset by a cybersecurity fraud loss of approximately $144,000, for which we did not have insurance coverage, which occurred during the year ended December 31, 2018. We also had a reduction in professional fees of approximately $222,000, as we established in-house capabilities, and in other administrative expenses of approximately $7,300. Reimbursable expenses from CorLyst of $103,047 for rent and other costs during the year ended December 31, 2019 were approximately $4,400 less than those the same periods in 2018.
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Interest Expense and Interest Income.
Interest expense was $36,658 and $161,205 for the years ended December 31, 2019 and 2018, respectively, related to our 2019 and 2017 Senior Notes. Included in interest expense is the amortization of debt issuance costs totaling $1,783 and $67,069 for the years ended December 31, 2019 and 2018, respectively. In May 2018, $2.35 million of the 2017 Senior Notes were converted into shares of our common stock and stock purchase warrants.
Interest income was $11,548 and $18,297 for the years ended December 31, 2019 and 2018, respectively. Interest income represents interest earned on funds in our bank accounts and certificates of deposit which matured in 2017 and certificates of deposit in 2016.deposit.
Income Tax Benefit.
We recognized an income tax benefit of $602,716 and $902,801 for the years ended December 31, 2019 and 2018, respectively. Our taxable net operating loss for 2019 was $1,043,567 less than that of 2018 as we focus on the Phase 2A clinical trial study and decrease administrative costs such as professional fees.
Financial Condition
TotalAt June 30, 2020, we had $452,654 in cash. We used net cash in our operating activities of $897,029 and $1,414,903 during the six months ended June 30, 2020 and 2019, respectively. The decrease in cash used in operating activities during the first six months of 2020 compared to the comparable period in 2019 was related to a decreased amount of direct cash costs incurred, such as salaries and clinical trial costs.
Our total assets increaseddecreased by approximately $9.9 million$872,000 to $12.9$10 million at March 31, 2018June 30, 2020 compared to $3.0$10.9 million at December 31, 2017.2019. This decrease is a result of the operating costs we incurred during the six months ended June 30, 2020.
At June 30, 2020, our total liabilities, not including the impact of deferred income taxes, increased approximately $764,000 to $2,102,770 when compared to $1,338,954 at December 31, 2019. This increase is primarily attributabledue to increases in accrued expenses related to accrued salary liability, accrued interest related to the acquisition of2019 Senior Notes and other borrowings, funds drawn under the exclusive license intangible asset from CoNCERT Pharmaceuticals, Inc. for the PCS-499 compound in exchange for CoNCERT receiving $8.0 million of our common stock that was owned by PrometLOC Agreement with DKBK and the recognitionpromissory note we entered into with the Bank of approximatelyAmerica under the Paycheck Protection Program.
In connection with exercising the option agreement with CoNCERT, we recognized a $3.0 million$3,037,147 deferred income tax liability since the intangible assets purchased had only a nominal tax basis. Our deferred tax liability related to the acquired temporary difference for the intangible asset between book and tax basis and transaction costs. Management believes the intangible asset is used in research and development activities and has alternative future uses (in research and development projects or otherwise). As a result, the acquisition cost of approximately $11.0 million was capitalizedbeen and is amortized over the intangible asset’s useful life in accordance with Topic 350, Intangibles – Goodwill and Other. The increase is partially offset by (i) the decrease in cash and cash equivalents of approximately $1.1 million used primarilyexpected to fund the loss from operations of approximately $1.4 million and (ii) the decrease in amounts due from CorLyst, a related party, of approximately $36,000.
We expect to continue to require significant future financing to fund our operating activities and to use cash in operating activities for the foreseeable future as we continue our research and development activities to develop products that can be commercialized to generate revenue.
Liabilities increased approximately $3.0 million to $5.6 million at March 31, 2018 compared to $2.6 million at December 31, 2017 related primarily to (i) the recognition of approximately $3.04 million for the deferred tax liability related to the acquired temporary difference for the intangible asset, partially offsetreduced each period by the recognition of approximately $282,000 of income tax benefit related to the releaseeffect of the benefit from net operating losses andcombination of the tax non-deductibility of the amortization of the intangible asset; (ii)asset and an amount up to the increase in accrued interestincome tax effect of approximately $52,000 on the Senior Convertible Notes that is 36)not due until maturity in October and November 2018, but will be paid through issuance of a variable number of common shares based on a valuation of the stock at that date; (iii) the decrease in unamortized debt issuance costs of approximately $36,000 on the Senior Convertible Notes; and (iii) an increase in accounts payable of approximately $54,000 and accrued expenses of approximately $106,000 related primarily to purchase obligations due to contract research organizations and professional fees related to being a public company.
The changes in stockholders’ equity consist of the $1.1 millionour net loss for the three months ended March 31, 2018 in accumulated deficit and the fair value of the Promet common stock of $8.0 million or 2,090,301 shares exchanged with CoNCERT to acquire the exclusive license intangible asset recognized as an increase in additional paid-in capital.loss.
Liquidity and Capital Resources
Since inceptionTo date, we have not generated any revenue, have incurred net losses, have used net cash in our operations and have funded our business and operations primarily through proceeds from the private placement of equity securities and senior secured convertible notes. At March 31, 2018,June 30, 2020, we had approximately $1.8 million$452,654 in cash and cash equivalents compared to approximately $2.9 million in cash and cash equivalents as of$691,536 at December 31, 2017. As a result, substantial doubt existed about2019. We have taken the Company’s abilityfollowing actions to continue as a going concern as of the date of the filing ofaddress our annual report on Form 10-K for the year ended December 31, 2017 and our quarterly report on Form 10-Q for the three months ended March 31, 2018.
As described under Recent Developments, in May and June of 2018 we received proceeds of approximately $3.0 million dollars from the sale of 1,402,441 shares of our common stock and warrants to purchase a similar number of shares of common stock exercisable at $2.724 per share. On May 25, 2018, we also entered into an agreement with an investor for a commitment to fund up to $1.8 million to fund clinical trial expenses in exchange for 792,952 shares of our common stock and warrants to purchase a similar number of shares of common stock exercisable at $2.724 per share. We will use these clinical trial committed funds for our Phase 2a clinical trial of PCS-499 in patients with NL. Payment under this commitment will not be made to us, but rather, directly to the CRO based on their invoicing. Finally, on May 25, 2018 we converted approximately $2.35 million of our 8% convertible debt into 1,206,245 shares of our common stock.liquidity:
| ● | Starting in August 2019, we began deferring the salaries of certain employees. At June 30, 2020 we have deferred a total of $210,800 (which has been included in accrued expenses on the condensed consolidated balance sheet) until such time as we have raised sufficient funding. | |
| ● | On September 20, 2019, we entered into two separate LOC Agreements with current stockholders and related parties DKBK and CorLyst, which provide a revolving commitment of up to $700,000 each ($1.4 million total). Under the LOC Agreements, all funds borrowed will bear an 8% annual interest rate. The Lenders have the right to convert all or any portion of the debt and interest into shares of our common stock. Our CEO is also the CEO and Managing Member of both Lenders. DKBK directly holds 16,166 shares of our common stock, and CorLyst beneficially owns 1,095,649 shares. In April and June 2020, we drew $500,000 under the LOC Agreement with DKBK. On July 21, 2020, we drew an additional $200,000, bringing the total amount drawn under the LOC Agreement with DKBK to $700,000. We have not drawn any funds under the LOC Agreement with CorLyst. | |
| ● | In December 2019, we closed a bridge financing raising $805,000 through the issuance of 2019 Senior Notes to accredited investors. | |
| ● | In May 2020, we received $162,459 from a loan with Bank of America under the Paycheck Protection Program. | |
| ● | Through this offering, we intend to undertake an underwritten capital raise and, upon completion of this offering, list our common stock to the Nasdaq Capital Market. |
Our existing cash and cash equivalents may not be sufficient to meet our anticipated cash needs and we may need additional funds to meet our operational needs and capital requirements for product development sooner than we planned. We currently have no credit facility.
Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, and the extent to which we may enter into additional agreements with third parties to participate in their development and commercialization, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials. Our future capital requirements will depend on many factors, including:
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| ● | the timing and extent of spending on our research and development efforts, including with respect to | |
| ● | the scope, rate of progress, results and cost of our clinical trials, preclinical testing and other related activities; | |
| ● | ||
| ● | the cost of preparing, filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; | |
| ● | the emergence of competing technologies or other adverse market developments; | |
| ● | the introduction of new product candidates and the number and characteristics of product candidates that we pursue; and | |
| ● | the potential acquisition and in-licensing of other technologies, products or assets. |
IfBased on our current plan and assuming we consummate this offering, we believe the net proceeds together with our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements through the third quarter of 2022. The funds will allow us to complete the closeout of our current Phase 2A trial in NL, conduct the Phase 2B clinical trial approved by the FDA and develop our other drug candidates. We may incur costs that we do not currently anticipate in order to develop our drug candidates, requiring us to need additional capital sooner than currently expected. We may satisfy our future cash needs through the sale of equity securities, debt financings, working capital lines of credit, corporate collaborations or license agreements, grant funding, is required, it may not be available to usinterest income earned on acceptable terms,invested cash balances or at all. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scopea combination of or suspend one or more of our clinical trials, or research and development programs. We may seek to raise any necessary additional capital through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing and distribution arrangements. To the extent that we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.sources.
Cash Flows
Three months ended March 31, 2018 and 2017
The following table sets forth the primaryour sources and uses of cash and cash equivalents for each of the periods presented.six months ended June 30, 2020 and 2019:
| For the Three Months Ended | Six months ended | |||||||||||||||
| March 31, | June 30, | |||||||||||||||
| 2018 | 2017 | 2020 | 2019 | |||||||||||||
| Net cash provided by (used in): | ||||||||||||||||
| Net cash (used in) provided by: | ||||||||||||||||
| Operating activities | $ | (1,069,008 | ) | $ | (58,698 | ) | $ | (897,029 | ) | $ | (1,414,903 | ) | ||||
| Investing activities | (1,782 | ) | (882 | ) | - | - | ||||||||||
| Financing activities | - | - | 658,147 | 395,927 | ||||||||||||
| Net decrease in cash and cash equivalents | $ | (1,070,790 | ) | $ | (59,580 | ) | ||||||||||
| Net decrease in cash | $ | (238,882 | ) | $ | (1,018,976 | ) | ||||||||||
Net cash used in operating activities
NetWe used net cash in our operating activities of $897,029 and $1,414,903 during the six months ended June 30, 2020 and 2019, respectively. The decrease in cash used in operating activities was $1.1 million during the threefirst six months ended March 31, 2018 primarily attributableof 2020 compared to our net loss of $1.1 million. This amountthe comparable period in 2019 was offset by various non-cash charges of $61,000 comprised of depreciation and amortization, and increased by a non-cash deferred tax benefit of $281,000. The net change in our operating assets and liabilities of $245,000 is primarily attributablerelated to a $244,000 change indecreased amount of direct cash costs incurred, such as salaries and clinical trial costs. Additionally, prepaid expenses decreased by approximately $218,000, $145,000 of which related to costs for our accrued liabilities accounts payable.Phase 2A clinical trial.
Net cash used in operating activities was $59,000 for the three months ended March 31, 2017, which was primarily attributable to our net loss of $232,000 after adjusting for vendor deposits of $228,000 made in 2016 (that were applied to obligations due for research and development activities in 2017), and a change in our accrued expenses of $83,000.
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WeSince we are in the process of developing our products, we anticipate our research and development efforts and on-going general and administrative costs will continue to generate negative cash flows from operating activities for the foreseeable future and that these amounts will increase in the future. We do not currently sell or distribute pharmaceutical products or have any sales or marketing capabilities.
Net cash used in investing activities
NetWe had no cash used insources or uses for investing activities was insignificant forduring the threesix months ended March 31, 2018 and 2017. The costs incurred related to the transaction costs incurred to acquire the exclusive license from CoNCERT, and for the purchase of property and equipment in 2017.
Net cash provided by (used in) financing activities
There were no financing activities for the three months ended March 31, 2018 and 2017. See recent developments for financing transactions that occurred subsequent to March 31, 2018.
Years ended December 31, 2017 and 2016
The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below.
| For the years ended | ||||||||
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Net cash provided by (used in): | ||||||||
| Operating activities | $ | (1,654,617 | ) | $ | (2,155,037 | ) | ||
| Investing activities | 1,004,952 | (1,043,069 | ) | |||||
| Financing activities | 2,425,200 | 4,270,000 | ||||||
| Net increase in cash and cash equivalents | $ | 1,775,535 | $ | 1,071,894 | ||||
Net cash used in operating activities
Net cash used in operating activities was $1.7 million during the year ended December 31, 2017 primarily attributable to our net loss for the year of $1.9 million. This amount was offset by non-cash charges for depreciation, amortization of debt issue costs and an impairment charge for our software totaling $40,000. The net change in our operating assets and liabilities of $160,000 was primarily attributable to vendor deposits made in 2016 that were applied to obligations due for research and development activities in 2017, offset by changes in our prepaid expenses, accounts payable and accrued expenses totaling $67,000.
Net cash used in operating activities was $2.2 million during the year ended December 31, 2016 primarily attributable to our net loss for the year of $1.9 million. This amount was offset by a nominal amount of non-cash charge for depreciation. The net change in our operating assets and liabilities of $239,000 was primarily attributable to the payment of vendor deposits of $228,000, offset by changes in our prepaid expenses, accounts payable and accrued expenses totaling $12,000.
We anticipate our research and development efforts and on-going general and administrative costs will generate negative cash flows from operating activities for the foreseeable future.June 30, 2020 or 2019.
Net cash provided by (used in) in investing activities
Net cash provided by investing activities was $1.0 million for the year ended December 31, 2017. This was due to proceeds from the maturity of the certificates of deposit purchased in 2016, partially offset by software acquisition costs. Net cash used in investing activities was $1.04 million for the year ended December 31, 2016. This was due primarily to the purchase of certificates of deposit and the purchase of property and equipment and software acquisition costs.
Net cash provided by financing activities
Net cash provided by financing activities during the six months ended June 30, 2020 of $658,147 was $2.43 million for the year ended December 31, 2017from borrowings totaling $500,000 under our LOC Agreement with DKBK and $162,459 we received from the proceedsBank of America pursuant to a promissory note under the issuancePaycheck Protection Program, less transaction costs of $2.58 million of 8.0% Senior Convertible Notes, partially offset by approximately $155,000 of debt issuance costs. Net$4,312 related to our anticipated 2020 offering. During the six months ended June 30, 2019, net cash provided by financing activities was $4.27 million for the year ended December 31, 2016of $395,927 were funds received from the proceedsour clinical trial funding investor in partial satisfaction of the initial issuancehis stock subscription receivable that he paid directly to our CRO.
We expect that we will continue to seek additional capital through a combination of the private placement ofand public equity for Promet.offerings, debt financings, and strategic collaborations to fund future operations. However, no assurance can be given that we will be successful in raising adequate funds needed. Absent additional financing, substantial doubt exists about our ability to continue as a going concern, as noted under “Going Concern” above.
Off Balance Off-balance Sheet Arrangements
At March 31, 2018 December 31, 2017 and December 30, 2016, we didWe do not have any off-balance sheet arrangements.arrangements as defined by Item 303(a)(4) of Regulation S-K.
Contractual Obligations and Commitments
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The following summarizes our contractual obligations and commitments as of December 31, 2017:
| Payments due by period | ||||||||||||||||||||
| Less than | More than | |||||||||||||||||||
| Contractual Obligations | Total | 1 year | 1 - 3 years | 3 - 5 years | 5 years | |||||||||||||||
| Senior convertible notes(1) | $ | 2,786,400 | $ | 2,786,400 | $ | - | $ | - | $ | - | ||||||||||
| Operating lease obligations(2) | 171,528 | 90,061 | 81,468 | - | - | |||||||||||||||
| Purchase obligations(3) | 895,740 | 895,740 | - | - | - | |||||||||||||||
| Total contractual obligations | $ | 3,853,668 | $ | 3,772,201 | $ | 81,468 | $ | - | $ | - | ||||||||||
The equipment lease commenced in June 2017 and expires in August 2020. Monthly rent of $586 over the 39-month lease term includes a monthly operating usage cost allowance of $125. Additional charges for excess usage, as defined in the agreement, are charged quarterly. The lessor charges monthly sales tax of 6 percent.
Critical Accounting Policies and Use of Estimates
TheOur management’s discussion and analysis of our financial condition and results of operations are based on our audited consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues,and expenses and relatedthe disclosure of contingent assets and liabilities. WeOn an ongoing basis, we evaluate our estimates on an ongoing basis.and judgments, including those related to accrued expenses and stock-based compensation. We base our estimates on historical experience, known trends and onevents, and various other assumptionsfactors that we believeare believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following accounting policies and estimates are most critical to aid in understanding and evaluating our financial results reported in our consolidated financial statements.
Valuation of Intangible Assets
Our intangible assets consist of the capitalized costs of $20,500 for a software license and $11,038,929 associated with the exercise of the option to acquire the exclusive license from CoNCERT related to patent rights and know-how to develop and commercialize compounds and products for PCS499 and each metabolite thereof and the related income tax effects. The capitalized costs for the license rights to PCS499, in addition to the fair value of the common stock issued, also includes $1,782 in transaction costs and $3,037,147 associated with the initial recognition of an offsetting deferred tax liability related to the acquired temporary difference for an asset purchased that is not a business combination and has a nominal tax basis in accordance with ASC 740-10-25-51 Income Taxes. In accordance with ASC Topic 730, Research and Development, we capitalized the costs of acquiring the exclusive license rights to PCS499 as the exclusive license rights represent intangible assets to be used in research and development activities that have future alternative uses.
We used a market approach to estimate the fair value of the common stock issued to CoNCERT in this transaction. Our estimate was based on the final negotiated number of shares of stock issued and the volume weighted average price of our common stock quoted on the OTC Pink Marketplace over a 45-day period preceding the mid-February 2018 finalized negotiation of the modification to the option and license agreement with CoNCERT. We believe the fair values used to record intangible assets acquired in this transaction are based upon reasonable estimates and assumptions given the facts and circumstances as of the related valuation dates.
We determined our intangible assets to have finite useful lives and review them for impairment when facts or circumstances suggest that the carrying value of these assets may not be recoverable.
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Clinical Trial Accruals / Research and Development
As part of the process of preparing our consolidated financial statements, we are required to estimate expenses resulting from our obligations under contracts with vendors, CROs and consultants and under clinical site agreements related to conducting our clinical trials. The financial terms of these contracts vary and may result in payment flows that do not match the period over which materials or services are provided under such contracts.
Our clinical trial accruals are based on estimates of patient enrollment and related costs at clinical investigator sites as well as estimates for the services received and efforts expended pursuant to contracts with multiple research institutions and CROs that conduct and manage clinical trials on our behalf. During a clinical trial, we will adjust the clinical expense recognition if actual results differ from estimates. We make estimates of accrued expenses as of each balance sheet date based on the facts and circumstances known at that time. Our clinical trial accruals are partially dependent on the accurate reporting by the CRO and other third-party vendors. Although we do not expect estimates to differ materially from actual amounts, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that may be too high or too low for any reporting period.
Payments made to third parties under these arrangements in advance of the receipt of the related services are recorded as prepaid expenses until the services are rendered. We expense research and development costs as they are incurred.
Stock-Based Compensation
We account for the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award, determined on the date of grant. Significant assumptions utilized in determining the fair value of our stock options include the volatility rate, estimated term of the options, risk-free interest rate and forfeiture rate. The expense is to be recognized over the period during which an employee is required to provide services in exchange for the award. We estimate forfeitures at the time of grant and make revisions, if necessary, at each reporting period if actual forfeitures differ from those estimates.
Non-employee stock-based compensation awards generally are immediately vested and have no future performance requirements by the non-employee and the total stock-based compensation charge is recorded in the period of the measurement date.
We estimate the fair value of stock option grants using the Black-Scholes option pricing model, and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. The Black-Scholes option-pricing model requires the use of subjective assumptions that include the expected stock price volatility and the fair value of the underlying common stock on the date of grant. See Note 10 – Stock-Based Compensation for information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options granted during the years ended December 31, 2019 and 2018.
All stock-based compensation costs are recorded in general and administrative or research and development costs in the consolidated statements of operations based upon the underlying individual’s role.
Income Taxes
As a result of our reverse acquisition, there was an ownership change as defined by Internal Revenue Code Section 382. Prior to the closing of the transaction, Promet was treated as a partnership for federal income tax purposes and thus was not subject to income taxes at the entity level and no provision or liability for income taxes has been included in the consolidated financial statements through October 4, 2017. In addition, Promet determined that it was not required to record a liability related to uncertain tax positions as a result of the requirements of ASC 740-10-25 Income Taxes.Taxes. The net deferred tax assets of Heatwurx were principally federal and state net operating loss carry forwards, which are significantly limited to the Company following an ownership change as defined by Internal Revenue Code Section 382.
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We account for income taxes in accordance with ASC 740Income Taxes, which provides for deferred taxes using an asset and liability approach. We recognized deferred tax assets and liabilities for the expected future tax consequences of events that have been in our consolidated financial statements and income tax returns. Deferred tax assets and liabilities are determined based on the difference between our consolidated financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than notmore-likely-than-not that a tax benefit will not be realized.
We account for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, we recognize the tax benefit from an uncertain tax position only if it is more likely than notmore-likely-than-not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. Estimated interest and penalties related to uncertain tax positions are included as a component of interest expense and general and administrative expense, respectively. We had no unrecognized tax benefits or uncertain tax positions for any periods presented.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“TCJA”) was signed into law. In December 2017, the SEC issued Staff Accounting Bulletin 118 (“SAB 118”) to provide clarification in implementing the TCJA when registrants do not have the necessary information available to complete the accounting for an element of the TCJA in the period of its enactment. SAB 118 provides for tax amounts to be classified as provisional and subject to remeasurement for up to one year from the enactment date for such elements when the accounting effect is not complete but can be reasonably estimated. We consider our estimates of the tax effects of the TCJA on the components of our tax provision to be reasonable and no provisional estimates subject to remeasurement will be necessary to complete the accounting.
We file U.S. federal income and California and Maryland state tax returns. There are currently no income tax examinations underway for these jurisdictions. However, tax years from and including 20142016 remain open for examination by federal and state income tax authorities.
During the yearyears ended December 31, 2017,2019 and 2018, we incurred net operating losses of approximately $606,400. However, we recorded no$3,960,592 and $4,667,848, respectively. We did not record any income tax benefit for the approximately $347,500$1,205,811 ($95,632 net of tax)331,809 tax effected) and $1,356,840 ($373,368 tax effected) of general and administrative expenses treated as deferred start-up expenditures for tax purposes for the years ended December 31, 2019 and approximately $258,6002018, respectively. We did not record any income tax benefit for the $283,189 of federal orphan drug tax credits for the year ended December 31, 2019. Additionally, we did not record any income tax benefit in 2017 for the $259,049 ($71,155 net of tax)71,284 tax effected) of tax losses resultingincurred in 2017 which resulted in tax loss carryforwards. The benefit was recognized in 2018 in the calculation of the valuation allowance. The 2017 net operating loss carry forwards are available for application against future taxable income for 20 years expiring in 2037. Tax losses incurred after December 31, 2017 have an indefinite carry forward period. However, the tax loss incurred after December 31, 2017 and carried forward can only offset 80 percent of future taxable income.income in any one year (other than in 2020), with any excess losses being carried forward indefinitely. We have recorded the benefit of our 2019 and 2018 net operating losses in our consolidated financial statements as a reduction in the deferred tax liability created by the future financial statement amortization of the intangible asset from the acquired Know-How. The benefit associated with the net operating loss carry forward will more likely than notmore-likely-than-not go unrealized unless future operations are successful. Sincesuccessful except for their offset against the success of future operations is indeterminable, the potential benefits resulting from these net operating losses have not been recorded in the consolidated financial statements. As of December 31, 2016 and through October 4, 2017, the Company had no net operating losses for federal and state income tax purposes since Promet’s members were taxed separately on their proportionate share of Promet’s income, deductions, losses and credits.
Clinical Trial Accruals / Research and Development. As part of the process of preparing our consolidated financial statements, we are required to estimate expenses resulting from our obligations under contracts with vendors, CRO’s and consultants and under clinical site agreements related to conducting our clinical trials. The financial terms of these contracts vary and may result in payment flows that do not match the period over which materials or services are provided under such contracts.
We estimate preclinical and clinical trial expenses based on the services performed, pursuant to contracts with research institutions and clinical research organizations that conduct and manage preclinical studies and clinical trials on our behalf. In accruing service fees, we estimate the time period over which services will be performed and the level of patient enrollment and activity expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we will adjust the accrual accordingly. Payments made to third parties under these arrangements in advance of the receipt of the related series are recorded as prepaid expenses until the services are rendered.
Our clinical trial accruals are based on estimates of patient enrollment and related costs at clinical investigator sites as well as estimates for the services received and efforts expended pursuant to contracts with multiple research institutions and CROs that conduct and manage clinical trials on our behalf. During a clinical trial, we will adjust the clinical expense recognition if actual results differ from estimates. We make estimates of accrued expenses as of each balance sheet date based on the fact and circumstances known at that time. Our clinical trial accruals are partially dependent on the accurate reporting by the CRO and other third party vendors. Although we do not expect estimates to differ materially from actual amounts, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that be too high or too low for any reporting period.
We expense research and development costs as they are incurred.
Valuation of Intangible Assets.Our intangible assets consist of the capitalized costs of $11,038,929, including transaction costs of $1,782, associated with the exercise of the option to acquire the exclusive license from CoNCERT related to patent rights and know-how to develop and commercialize compounds and products for PCS-499 and each metabolite thereof and the related income tax effects. The capitalized costs include $3,037,147 associated with the initial recognition of an offsetting deferred tax liability related tocreated by the acquired temporary difference for an asset purchased that is not a business combinationCoNCERT license and has a nominal tax basis in accordance with ASC 740-10-25-51Income Taxes. In accordance with ASC Topic 730,Research and Development, we capitalized the costs of acquiring the exclusive license rights to PCS-499 as the exclusive license rights represent intangible assets to be used in research and development activities that have future alternative uses. We had no recorded intangible assets as of December 31, 2017.“Know-How.”
We used a market approach to estimate the fair value of the common stock issued to CoNCERT in this transaction. Our estimate was based on the final negotiated number of shares of stock issued and the volume weighted average price of our common stock quoted on the OTCQB over a 45 day period preceding the mid-February 2018 finalized negotiation of the modification to the option and license agreement with CoNCERT. We believe the fair values used to record intangible assets acquired in this transaction are based upon reasonable estimates and assumptions given the facts and circumstances as of the related valuation dates.
We determined our intangible assets to have finite useful lives and review them for impairment when facts or circumstances suggest that the carrying value of these assets may not be recoverable.
Stock-Based Compensation: As of March 31, 2018, no stock-based compensation was outstanding. We account for the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award, determined on the date of grant. Significant assumptions utilized in determining the fair value of our stock options include the volatility rate, estimated term of the options, risk-free interest rate and forfeiture rate. The term of the options will be based on the contractual term of the options as determined by the Board of Directors pursuant to our equity incentive plan. The expense is to be recognized over the period during which an employee is required to provide services in exchange for the award. We estimate forfeitures at the time of grant and makes revisions, if necessary, at each reporting period if actual forfeitures differ from those estimates. We have not estimated future unvested forfeitures since there were no option grants outstanding at March 31, 2018 or December 31, 2017.
Non-employee share-based compensation awards generally are immediately vested and have no future performance requirements by the non-employee and the total share-based compensation charge is recorded in the period of the measurement date.
We record equity instruments at their fair value on the measurement date by utilizing the Black-Scholes option-pricing model. Stock Compensation for all share-based payments, is recognized as an expense over the requisite service period.
Our equity incentive plan approved by the Heatwurx Board of Directors and stockholders in October 2012 has 257,143 shares of common stock reserved for future issuance. The plan is currently being reviewed by our Board of Directors and may be amended or terminated. Amendments are subject to stockholder approval to the extent required by applicable laws and regulations. Unless terminated sooner, the plan will automatically terminate on April 15, 2021. There are currently no outstanding option grants under the plan.
Recently Issued Accounting Pronouncements
See Note 1 to3 of our consolidated financial statements beginning on page F-39 of this prospectus for a description ofnew accounting pronouncements or changes to the recent accounting pronouncements applicable to our consolidated financial statements.during the year ended December 31, 2019.
Jobs Act Accounting ElectionQuantitative and Qualitative Disclosures about Market Risk
We are an “emerging growth company” as that term is definedexposed to market risks in the Jumpstart Our Business Startups Actordinary course of 2012 (the “JOBS Act”). Although Section 102(b)(1)our business. These risks primarily include interest rate risks and inflation risks. Periodically, we maintain deposits in accredited financial institutions in excess of the JOBS Act exempts emerging growth companies from being required to comply with new or revisedfederally insured limits. We deposit our cash in financial accounting standards until private companies (i.e., thoseinstitutions that we believe have high credit quality and have not experienced any losses on such accounts and do not believe we are exposed to any unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
Interest Rate Risk
Our cash consists of cash in readily available checking accounts and short-term money market fund investments. Such interest-earning instruments carry a degree of interest rate risk; however, historical fluctuations in interest income have not been significant.
Effects of Inflation
Inflation generally affects us by increasing our cost of labor and research and development contract costs. We do not believe inflation has had a registration statement declared effective undermaterial effect on our results of operations during the Securities Act, or companies that do not have a class of securities registered under the Exchange Act) are required to comply with such new or revised financial accounting standards, we have elected to opt out of this exemption. We intend to comply with new or revised financial accounting standards as they become applicable to similar public companies.periods presented.
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DESCRIPTION OF BUSINESS
Overview
ProcessaOur mission is an emerging pharmaceutical company focused on the clinical development ofto develop drug products that are intended to improve the survival and/or quality of life for patients with highly unmet medical needs.
We are a clinical-stage biopharmaceutical company focused on the development of drug products that are intended to provide treatment for and improve the survival and/or quality of life of patients who have a highhighly unmet medical need. Within this groupneed condition or who have no alternative treatment. Our most advanced product candidate, PCS499, is an oral tablet that is a deuterated analog of pharmaceuticalone of the major metabolites of pentoxifylline (PTX or Trental®). We have completed the patient portion of our Phase 2A trial for PCS499 and are in the process of closing the trial, and we plan to begin recruiting for a Phase 2B trial in 2021. We also have four newly licensed drugs (PCS12852, PCS6422, PCS11T and PCS100) and will begin developing these products we currentlyonce adequate funding has been obtained.
Our Strategy
Our vision is to develop drugs with potentially high return on investment and lower risk of development failure. Our portfolio drugs are developing one productfocused on treating patients who do not have adequate treatment options for two indications (i.e.,their conditions and have some clinical evidence supporting the useefficacy of the drug, whether it be evidence with the drug itself or a drug with similar pharmacological properties. Given the prior success of our development team, the regulatory science approach that we employ not only allows us to treat a particular disease) and searching for additional productsdevelop drugs focused on FDA approval, but also allows us to select drugs for our portfolio.
Partportfolio which may have a greater chance for approval in a population of patients who need treatment options. The key pillars of our business strategy is:to achieve our vision include:
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Processa’sOur Team
Our drug development efforts are driven by our extensive knowledge in applying rigorous regulatory science to the FDA approval pathway. We have assembled a seasoned management team with extensive experience in developing therapies, including advancing product candidates from preclinical research through clinical development and ultimately regulatory approval and commercialization. Together, our management team has completed over 30 FDA approvals. Our team is led by our Chairman and CEO David Young, Pharm.D., Ph.D. who has extensive experience in research, regulatory approval and business development and who served at Questcor for eight years as independent director and Chief Scientific Officer, helping lead to the ultimate sale of Questcor in 2014.
Our Pipeline
The table below summarizes our clinical product pipeline. We have completed the patient portion of our Phase 2A clinical trial for PCS499, however, the finalization of the trial data and its closeout has been delayed due to the ongoing COVID-19 pandemic.
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PCS499
Our lead product, PCS-499,PCS499, is an oral tablet that is ana deuterated analog of an active metaboliteone of an already approved drug. The advantagethe major metabolites of PCS-499pentoxifylline (PTX or Trental®). PCS499 is that it potentially may work in many conditions because it hasclassified by FDA as a new molecular entity. PCS499 and its metabolites act on multiple pharmacological targets that it affects that are important in the treatmenta variety of these conditions. The compound has previously been shown to be safe and tolerable with a trend toward efficacy in diabetic nephropathy. Based on the pharmacological activity, Processa hasWe have identified other unmet medical need conditions where the use of PCS-499 may result in clinical efficacy. These include NL and RIF in head and neck cancer patients.Necrobiosis Lipoidica (NL) as our lead indication for PCS499. NL is a chronic, disfiguring condition for which most patients do not have any treatment options. It developsaffecting the skin and the tissue under the skin typically on the lower extremities with no currently approved FDA treatments. NL presents more commonly in women than in men on the lower extremities, and ulceration can occuroccurs more often in people with diabetes. Ulceration occurs in approximately 30% of NL patients, which maycan lead to more severe complications, such as deep tissue infections and osteonecrosis that can threatenthreatening the life of the limb. PCS-499 had previously been investigated forApproximately 22,000 - 55,000 people in the United States and more than 120,000 people outside the United States are affected with ulcerated NL.
The degeneration of tissue occurring at the NL lesion site may be caused by a different indication in Phase 2 studies before we exercised an option to license PCS-499 from CoNCERT Pharmaceuticals in March 2018. Based on the diverse pharmacological activitynumber of PCS-499, the Processa teampathophysiological changes, which has defined a strategymade it extremely difficult to develop effective treatments for this product in two indications where physicianscondition. Because PCS499 and patients seek significant medical help. PCS-499 will be investigated forits metabolites affect a number of biological pathways, several of which could contribute to the treatment of two conditions that occur as a result of multiple pathophysiological changes, NL and the adverse effectspathophysiology associated with radiation therapy in theNL, PCS499 may provide a novel treatment of head and neck cancer. Besides the diverse pharmacological properties of PCS-499 targeting many of the physiological changes that occursolution for these two indications, an analog drug with similar pharmacology, presently approvedNL, a condition for a different indication, has been successfully used in some patients for the treatment of these indications but cannot be used in many patients because it has dose limiting side effects, not allowing for higher doses to be administered to obtain adequate efficacy. The PCS-499 dose limiting side effects appear to occur at a much higher dose based on the existing clinical and pre-clinical data for PCS-499, allowing physicians to potentially increase the dose to effectively treat significantly more patients with these two conditions. These two indications do not have anywhich there are currently no FDA-approved treatments, and have the potential to seriously affect a patient’s day-to-day quality of life.
Our team had a successful pre-IND (Investigating New Drug) meeting with the FDA on NL in October 2017, defining the next steps to move PCS-499 into Phase 2 studies and the path to eventual approval. Processa has also entered into an agreement with Integrium, LLC (“Integrium”), a CRO, to conduct the planned Phase 2 clinical study to further evaluate PCS-499 for the treatment of NL. Integrium is a full-service Clinical Proof of Concept firm based in Tustin, California, that specializes in a wide range of therapeutic areas including cardiovascular, metabolic disease and dermatology research. Enrollment in the study is planned on start in late 2018.treatments.
On June 22,18, 2018, the FDA granted orphan-drug designation to our leading clinical compound PCS-499 for PCS499 for the treatment of NL. On September 28, 2018, the IND for PCS499 in NL became effective, such that we could move forward with a Phase 2A multicenter, open-label prospective trial designed to determine the safety and tolerability of PCS499 in patients with NL. The study initially had a six-month treatment phase and a six-month optional extension phase. In December 2019, we informed patients and sites that the study would conclude after the treatment phase and there would no longer be an extension phase. The first enrolled NL patient in this Phase 2A clinical trial was dosed on January 29, 2019 and the study completed enrollment on August 23, 2019. The last patient visit took place in February 2020. Due to COVID-19 related restrictions at certain sites, study closeout and database lock have yet to be completed.
OurThe main objective of the trial was to evaluate the safety and tolerability of PCS499 in patients with NL and to use the collected safety and efficacy data to design future clinical trials. Based on toxicology studies and healthy human volunteer studies, Processa and the FDA agreed that a PCS499 dose of 1.8 grams/day would be the highest dose administered to NL patients in this Phase 2A trial. As anticipated, the PCS499 dose of 1.8 grams/day, 50% greater than the maximum tolerated dose of PTX, appeared to be well tolerated with no serious adverse events reported. All adverse events reported in the study were mild in severity. As expected, gastrointestinal symptoms were the most noted adverse events and reported in four patients, all of which were mild in severity and resolved within 1-2 weeks of starting dosing.
Two of the twelve patients in the study presented with more severe ulcerated NL and had ulcers for more than two months prior to dosing. At baseline, the reference ulcer in one of the two patients measured 3.5 cm2 and had completely closed by Month 2 of treatment. The second patient had a baseline reference ulcer of 1.2 cm2 which completely closed by Month 9 during the patient’s treatment extension period. In addition, while in the trial, both patients also developed small ulcers at other sites, possibly related to contact trauma, and these ulcers resolved within one month. However, the other ten patients, presenting with mild to moderate NL and no ulceration, had more limited improvement of the NL lesions during treatment. Historically, less than 20% of all the patients with NL naturally progress to complete healing over many years after presenting with NL. Although the natural healing of the more severe NL patients with ulcers has not been evaluated independently, medical experts who treat NL patients believe that the natural progression of an open ulcerated wound to complete closure would be significantly less than the 20% reported as the maximum percentage of patients who naturally heal over several years after NL presentation.
On March 25, 2020, we met with the FDA and discussed the clinical program, as well as the nonclinical and clinical pharmacology plans to ultimately support the submission of the PCS499 New Drug Application (NDA) in the U.S. for the treatment of ulcers in NL patients. With input from the FDA, we will be designing the next trial as a randomized, placebo-controlled trial to evaluate the ability of PCS499 to generate meaningful revenuecompletely close ulcers in patients with NL. We initially planned to begin recruiting for the randomized, placebo-controlled trial in the fourth quarter of 2020, but we now expect to begin recruiting patients in 2021 due to the ongoing COVID-19 pandemic. This PCS499 NL study will be a randomized, placebo-controlled Phase 2B study to better understand the potential response of NL patients on drug and on placebo. After obtaining the results from anythis Phase 2B study, we expect to meet with FDA to discuss our Phase 2B drug and placebo response findings while further discussing the next steps to obtain approval.
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PCS12852
On August 19, 2020, we entered into a License Agreement (“Yuhan License Agreement”) with Yuhan Corporation (“Yuhan”), pursuant to which we acquired an exclusive license to develop, manufacture and commercialize PCS12852 (formerly known as YH12852) globally, excluding South Korea.
PCS12852 is a novel, potent and highly selective 5-hydroxytryptamine 4 (5-HT4) receptor agonist. Other 5-HT receptor agonists with less 5-HT4 selectivity have been shown to successfully treat gastrointestinal (GI) motility disorders such as chronic constipation, constipation-predominant irritable bowel syndrome, functional dyspepsia and gastroparesis. Less selective 5-HT4 agonists, such as cisapride, have been either removed from the market or not approved because of the cardiovascular side effects associated with the drugs binding to other receptors, especially 5-HT receptors other than 5-HT4.
We plan to meet with the FDA in early 2021 to further define the clinical development program required for the PCS12852 product and discuss a Phase 2A proof of concept randomized, placebo-controlled study for PCS12852 in a gastrointestinal (GI) motility dysfunction disorder (e.g., post-operative ileus also called gastrointestinal dysfunction (POGD), opioid induced constipation, chronic idiopathic constipation). The purpose of the Phase 2A trial would be to better define a dosage regimen of PCS128552 that could be potentially efficacious and safe in a larger pivotal study. The patients with these types of conditions have an abnormal pattern of GI motility in the absence of mechanical obstruction. For example, POGD is characterized by nausea, vomiting, abdominal distension and/or delated passage of flatus or stool, following surgery (most commonly with abdominal surgery). It is the most common cause of prolonged length of stay in hospital following GI surgery, leading to an increase in healthcare costs. The only FDA-approved drug to treat POGD is a mu-opioid receptor antagonist alvimopan (Entereg®), which is only available through a restricted program for short-term use due to the potential risk of myocardial infarction with long-term use.
Two clinical studies have been previously conducted by Yuhan with PCS12852. In the first-in-human clinical trial (Protocol YH12852-101), the initial safety and tolerability of PCS12852 were evaluated after single and multiple oral doses in healthy subjects. PCS12852 increased stool frequency with faster onset when compared to prucalopride, an FDA approved drug for the treatment of chronic idiopathic constipation. Compared to the group receiving prucalopride (an FDA approved drug for the treatment of chronic idiopathic constipation), the PCS12852 dose groups showed higher stool frequency for 24 hours following single dosing and had faster onset of spontaneous bowel movements (SBMs) with comparable or relatively higher Bristol Stool Form Scale score (lower stool consistency) for 24 hours following first dosing. In addition, based on an increase of ≥ 1 SBM/week from baseline during 7-day multiple dosing, the PCS12852 dose group had a higher percent of patients with an increase than the prucalopride group. All doses of PCS12852 were safe and well tolerated and no serious adverse events (SAE) occurred during the study. The most frequently reported adverse events (AEs) were headache, nausea and diarrhea which were temporal, manageable, and reversible within 24 hours. There were no clinically significant changes in platelet aggregation or ECG parameters including no sign of QTc prolongation in the study. The second study conducted was a Phase 1/2A clinical trial (Protocol YH12852-102) to evaluate the safety, tolerability, pharmacokinetics and pharmacodynamics of PCS12852 immediate release (IR) formulation and delayed release (DR) formulation after multiple oral dosing. PCS12852 was safe and well tolerated after single and multiple administrations. The most frequent AEs for both the IR and DR formulations of PCS12852 were headache, nausea and diarrhea, but the incidences of these AEs were comparable with those of the prucalopride 2 mg group. These AEs, which were transient and mostly mild in severity, are also commonly observed with other 5-HT4 agonists. Both formulations of PCS12852 also showed pharmacologic activity as assessed using various pharmacodynamic parameters for stool assessment.
Yuhan had also conducted extensive toxicological studies for the product that demonstrated that the product is safe for use and can be moved quickly into Phase 2 studies.
PCS6422
On August 23, 2020, we entered into a License Agreement (“Elion License Agreement”) with Elion Oncology, Inc. (“Elion”), pursuant to which we acquired an exclusive contingent license to develop, manufacture and commercialize PCS6422 globally.
Elion acquired the eniluracil (PCS6422) product from Fennec Pharmaceuticals (formerly known as Adherex Technologies) in 2016. PCS6422 is an oral, potent, selective, and irreversible inhibitor of dihydropyrimidine dehydrogenase (DPD), the enzyme that rapidly metabolizes 5-FU, a common chemotherapy drug, to inactive metabolites, such as α-fluoro-β-alanine (F-Bal). F-Bal is thought to cause the neurotoxicity and Hand–Foot Syndrome (HFS) associated with 5-FU, and greater formation of F-Bal appears to be associated with a decrease in the antitumor activity of 5-FU. HFS can affect daily living activities, quality of life, and requires dose interruptions/adjustments and even therapy discontinuation resulting in suboptimal tumor effects. We believe that the inhibition of DPD by PCS6422 may significantly improve exposure to 5-FU and reduce 5-FU side effects related to F-Bal. One dose of PCS6422 irreversibly blocks DPD activity for up to two weeks until DPD levels recover via de novo synthesis of the DPD enzyme. Thus, we believe inhibition of tumor DPD will result in higher 5-FU intra-tumoral concentration and potentially better tumor response along with the decrease in F-Bal.
Fluoropyrimidines (e.g., 5-FU) are still the cornerstone of treatment for many different types of cancers, either as monotherapy or in combination with other chemotherapy agents by an estimated two million patients annually. Xeloda®, an oral pro-drug of 5-FU, is approved as first-line therapy for metastatic colorectal and breast cancer. However, its use is limited by adverse effects such as the development of HFS in up to 60% of patients.
Elion evaluated the potential for the combination of PCS6422 with capecitabine (Xeloda®, and, together with PCS6422, known as ECAPE) as a treatment of advanced gastrointestinal (GI) tumors. Nonclinical efficacy data indicated that in colorectal cancer models, pretreatment with PCS6422 enhanced the antitumor activity of capecitabine. PCS6422 increased the antitumor potency of capecitabine while not increasing the toxicity. The antitumor efficacy of the combination of PCS6422 and capecitabine was tested in several xenograft animal models with human breast, pancreatic and colorectal cancer cells. These preclinical xenograft models demonstrate that PCS6422 potentiates the antitumor activity of capecitabine and significantly reduces the dose of capecitabine required to be efficacious.
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Elion met with the FDA in 2019 and agreed upon the clinical development program required for the combination of PCS6422 and capecitabine as first-line therapy for metastatic colorectal cancer when treatment with fluoropyrimidine therapy alone is preferred. Subsequently, an IND has been granted safe to proceed by FDA on May 17, 2020, for the Phase 1B study. This Phase 1B study will evaluate the safety and tolerability of several dose combinations of PCS6422 and capecitabine in advanced GI tumor patients and should be initiated in the first half of 2021.
Other DPD enzyme inhibitors (e.g. Gimeracil used in Teysuno® approved only outside the US) act as competitive reversible inhibitors. These agents must be present when 5-FU or capecitabine are administered to inhibit 5-FU breakdown by DPD in order to improve the efficacy and safety profiles of 5-FU. Given the reversible nature of their effect on DPD, over time 5-FU metabolism to F-Bal will return, decreasing the amount of 5-FU in the cancer cells and decreasing the potential cytotoxicity on the cancer cells. There is also evidence that administering DPD inhibitors directly with 5-FU may also decrease the antitumor effect of the 5-FU. Because PCS6422 is an irreversible inactivator of DPD, it can be dosed the day before capecitabine administration and its effect on DPD can last longer than the reversible DPD inhibitors and beyond the time 5-FU exists in the cancer cell. We believe this can optimize the potential cytotoxic effect and minimize the metabolism of 5-FU.
Prior to Elion’s involvement, two multicenter Phase 3 studies were conducted in patients with colorectal cancer (CRC) with PCS6422 administered in 10-fold excess to 5-FU. Unfortunately, we believe the dose of PCS6422 during these trials was not optimal, and that PCS6422 was not administered early enough to irreversibly affect the DPD enzyme, thus the regimen tended to produce less antitumor benefit than the control arm with the standard regimen of 5-FU/leucovorin (LV) without PCS6422. Later preclinical work suggested that when PCS6422 was present at the same time as and in excess to 5-FU, it diminished the antitumor activity of 5-FU, which we believe supports the proposal of exploring clinically dosing PCS6422 several hours before 5-FU to allow its clearance before the administration of 5-FU.
PCS11T
On May 24, 2020, we entered into an exclusive License Agreement with Aposense, Ltd., (“Aposense”), pursuant to which we were granted a contingent license in Aposense’s patent rights and know-how to develop and commercialize their next generation irinotecan cancer drug, PCS11T (formerly known as ATT-11T). The grant of license is conditioned on the following being satisfied within 9 months of May 24, 2020 (or the agreement shall terminate): (i) our closing of an equity financing and successful up-listing to Nasdaq and (ii) Aposense obtaining the approval of the Israel Innovation Authority for the consummation of the transactions contemplated by the agreement, which approval was obtained on August 24, 2020.
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PCS11T is a novel lipophilic anti-cancer pro-drug that is being developed for the treatment of the same solid tumors as prescribed for irinotecan. This pro-drug is a conjugate of a specific proprietary Aposense molecule connected to SN-38, the active metabolite of irinotecan. The proprietary molecule in PCS11T has been designed to allow PCS11T to bind to cell membranes to form an inactive pro-drug depot on the cell with SN-38 preferentially accumulating in the membrane of tumors cells and the tumor core. This unique characteristic may make the therapeutic window of PCS11T wider than other irinotecan products such that the antitumor effect of PCS11T could occur at a much lower dose with a milder adverse effect profile than irinotecan. Despite the widespread use of commercially marketed irinotecan products in the United States dependstreatment of metastatic colorectal cancer and other cancers resulting in peak annual sales of approximately $1.1 billion, irinotecan has a narrow therapeutic window and includes an FDA “Black Box” warning for both neutropenia and severe diarrhea. There is, therefore, a substantial unmet need to overcome the limitations of the current commercially marketed irinotecan products, improving efficacy and reducing the severity of treatment emergent adverse events. We believe the potential wider therapeutic window of PCS11T will likely lead to more patients responding with less side effects when on obtaining FDA authorization. Even if our products are authorized and approved by the FDA, we must still meet the challenges of successful marketing, distribution and consumer acceptance.PCS11T compared to other irinotecan products.
To advancePre-clinical studies conducted to date showed that PCS11T demonstrated tumor eradication at much lower doses than irinotecan across various tumor xenograft models. PCS11T does not affect acetyl choline esterase (AChE) activity in human and rat plasma in vitro, which would suggest that PCS11T will show an improved safety profile, compared to irinotecan, which is known for its mission, Processa has assembled an experiencedcholinergic-related side effects.
We are currently planning to manufacture the product at a GMP facility, conduct the required toxicological studies required to file the IND and talented management and product development team. The Processa team is experiencedinitiate the Phase 1B study in developing drug products through all principal regulatory tiers from Initial New Drug (“IND”) enabling studies to NDA submission. The Company’s combined scientific, development and regulatory experience has resultedoncology patients with solid tumors in more than 30 drug approvals by the FDA, over 100 meetings with FDA and involvement with more than 50 drug development programs, including drug products targeted to patients who have an unmet medical need.
In parallel the Processa team is looking to acquire additional drug candidates to help patients who have an unmet medical need. Processa has evaluated over 50 potential assets for acquisition and is presently performing due diligence on a cancer drug and a drug used for a cardiovascular condition that has no approved treatment.2022.
ResearchPCS100
On August 29, 2019, we entered into an exclusive license agreement with Akashi Therapeutics, Inc. (“Akashi”) to develop and Development, Product commercialize an anti-fibrotic, anti-inflammatory drug, PCS100 (formerly known as HT-100), which also promotes healthy muscle fiber regeneration. In previous clinical trials in Duchenne Muscular Dystrophy (DMD), PCS100 showed promising improvement in the muscle strength of non-ambulant pediatric patients. Although the FDA placed a full clinical hold on the DMD trial after a serious adverse event in a pediatric patient, the FDA has partially removed the clinical hold and defined how PCS100 can resume clinical trials in DMD. Once we have obtained adequate funding, we plan to develop PCS100 in rare adult fibrotic related diseases such as focal segmental glomerulosclerosis, idiopathic pulmonary fibrosis or Scleroderma. At the present time, we are evaluating the potential GMP manufacturing facilities and the potential indications for PCS100.
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Manufacturing and Clinical Supplies
We do not own or operate, and currently have no in-house laboratory, drugplans to establish, any manufacturing product manufacturing, or clinical facilities. We currently rely, and expect to continue to rely, on third-partythird party contract labs, animal facilities,manufacturing organizations, or CMOs, for the supply of current good manufacturing practice-grade, or cGMP-grade, clinical facilities,trial materials and drug manufacturers to make the material used to support the developmentcommercial quantities of our product candidates and products, if approved. We require all of our CMOs to executeconduct manufacturing activities in compliance with cGMP. We have assembled a team of experienced employees and consultants to provide the actual studies. However,necessary technical, quality and regulatory oversight of our CMOs.
We anticipate that these CMOs will have the study designscapacity to support both clinical supply and commercial-scale production, but we do not have any formal agreements at this time with any of these CMOs to cover commercial production.
We also may elect to pursue additional CMOs for manufacturing supplies of drug substance and finished drug product in the final evaluation/interpretationfuture. We believe that our standardized manufacturing process can be transferred to a number of other CMOs for the data are made by Processa withproduction of clinical and commercial supplies of our product candidates in the third-party contractors providing the hands-on services to perform the studies. We purchase the material used in our clinical trial activities from various companies and suppliers.ordinary course of business.
Customers and DistributionCompetition
AsMany of our potential competitors may have significantly greater financial resources, a more established presence in the market, and more expertise in research and development, manufacturing, pre-clinical and clinical testing, obtaining regulatory approvals and reimbursement, and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical, biotechnology and diagnostic industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These potential competitors may also compete with us in recruiting and retaining top qualified scientific, sales, marketing and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.
The key competitive factors affecting each of our products, if approved, are likely to include the efficacy, safety, convenience and price of the products relative to other approved products used on-label or off-label for each unmet medical need condition. Although preliminary clinical data exists to support the possibility of improved efficacy and safety profiles for our drugs, more in-depth randomized, controlled studies are required for our products to determine if our preliminary findings will support the approval in the designated unmet medical need indication.
For PCS499, there are currently no FDA-approved drugs for the treatment of patients with NL, and few drugs are used off-label for NL given the lack of efficacy and/or side effect concerns.
For PCS12852, the competitive factors will include establishing marketing penetration against other 5HT4 receptor agonists such as Entereg® and Motegrity®. The market penetration will depend on an improved safety profile potentially due to the very selective 5HT4 receptor binding by PCS12852 and similar or greater efficacy in the treatment of gastrointestinal motility dysfunction disorders.
For PCS6422, the competitive factors will be related to the efficacy and safety of the product when used in combination with existing cytotoxic drugs such as capecitabine and fluoropyrimidines compared to the efficacy and safety when these cytotoxic agents are administered without PCS6422 or with other reversible enzyme inhibitors. The market penetration will depend on how much improvement will occur in the efficacy and safety profiles when administered in combination with PCS6422. Currently, there are no other reversible or irreversible enzyme inhibitor products approved in the US, which may make PCS6422 the first DPD inhibitor available in the US.
For PCS11T, the competitive factors will include establishing marketing penetration against the existing irinotecan product (Camptosar®) and the newer liposomal irinotecan product (Onivyde®). The establishment of that market will be based upon improved efficacy and/or safety of PCS11T. For PCS100, the competitive factors will be contingent on the indication chosen for the product. For the adult fibrotic conditions currently being evaluated, very few treatment options are currently approved and are usually limited in efficacy and/or safety. For the DMD indication, the existing therapies are either limited for use in patients with specific genetic mutations or may show initial improvements in the treatment of DMD, but the improvement diminishes over time and, therefore, new treatments are still needed.
Our commercial opportunity for any of our product candidates could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, less expensive, more convenient or easier to administer, or have fewer or less severe side effects, than any products that we may develop. Our competitors also may obtain FDA, EMA or other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are still inable to enter the process of developing our products, we do not currently sell or distribute pharmaceutical products.market.
Intellectual Property
Our success will depend in large part on our ability and that of our licensors to:
| ● | obtain and maintain international and domestic patent and other legal protections for the proprietary technology, inventions and improvements we consider important to our business; | |
| ● | prosecute and defend our future patents, once obtained; | |
| ● | preserve confidentiality of our | |
| ● | operate without infringing the patents and proprietary rights of other parties. |
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We
Although we rely extensively on licensing patents from third parties, we intend to seek appropriate patent protection for product candidates in our research and development programs, where applicable, and their uses by filing patent applications in the United States and other selected countries. We intend for these patent applications to cover, where possible, claims for compositioncompositions of matter, medical uses, processes for preparation and formulations.
Our current patent portfolio consists of the number of patents related to our drug candidates licensed from each third party licensor. In addition to the international patents and/or international and U.S. patent applications licensed from our third party licensors, we have licensed at least the following number of U.S. patents:
| CoNCERT | Yuhan | Elion | Aposense | Akashi | Total | |||||||
| U.S. patents | 9 | 4 | 2 | 3 | 2 | 20 |
We also rely on trade secrets, proprietary know-how and continuing innovation to develop and maintain our competitive position, especially when we do not believe that patent protection is appropriate or can be obtained. We seek protection of these trade secrets, proprietary know-how and any continuing innovation, in part, through confidentiality and proprietary information agreements. However, these agreements may not provide meaningful protection for, or adequate remedies to protect, our technology in the event of unauthorized use or disclosure of information. Furthermore, our trade secrets may otherwise become known to, or be independently developed by, our competitors.
Asset AcquisitionLicense Agreements
The following descriptions of our license agreements are only summaries. You should also refer to the copies of such agreements which have been filed as part of this registration statement.
License Agreement with CoNCERT Pharmaceuticals, Inc.
On October 4, 2017, Promet entered into a license agreement with CoNCERT (the “CoNCERT Agreement”). On March 19, 2018, we, Promet, and CoNCERT amendedentered into an Amended Option Licensing Agreement (“March Amendment”) that, among other things, assigned the CoNCERT Agreement executed in October 2017. from Promet to us and we exercised the exclusive commercial license option for the PCS499 compound from CoNCERT.
The CoNCERT Agreement was assignedprovides us with an exclusive (including as to ProcessaCoNCERT) royalty-bearing license to CoNCERT’s patent rights and Processa exercised the exclusive option for the PCS-499 compound. The option was exercised in exchange forknow-how to develop, manufacture, use, sub-license and commercialize compounds (PCS499 and each metabolite thereof) and pharmaceutical products with such compounds worldwide. We are required to pay CoNCERT receiving (i) $8.0 million of common stock that was ownedroyalties, on a product by Promet (or 2,090,301 shares),product basis, on worldwide net sales, as follows:
| ● | 4% of the net sales of the portion less than or equal to $100 million; | |
| ● | 5% of the net sales of the portion greater than $100 million and less than or equal to $500 million; | |
| ● | 6% of the net sales of the portion greater than $500 million and less than or equal to $1.0 billion; | |
| ● | 10% of the net sales of the portion greater than $1 billion if such sales are made by us or our affiliates; and with respect to net sales made by us or any of our affiliates, we will pay 10% of net sales and with respect to sales by our sublicensees, we will pay the greater of (i) 6% or (ii) 50% of all payment received by us with respect to such sublicensee. |
We will also pay 15% of any sublicense revenue earned by us for a period equivalent to the royalty term (as defined in the CoNCERT Agreement) until the earliest of (a) our raising $8.0$8 million of gross proceeds;proceeds and (b) CoNCERT canbeing able to sell its shares of our common stock without restrictions pursuant to the terms of the amended CoNCERT Agreement. All other terms of the CoNCERT Agreement remainremained unchanged. As a result, we recognized an intangible asset of approximately $11.0 million, additional paid-in capital of $8.0 million resulting from Promet satisfying our liability
We will incur royalty obligations to CoNCERT alongon a country-by-country and product-by-product basis that expire on a country-by-country and product-by-product basis on the later of (i) expiration or invalidation of the last patent rights covering such product in such country or (ii) the tenth anniversary of the date of the first commercial sale to a non-sublicensee third party of such product in such country.
We are required to use commercially reasonable efforts, at our sole cost and expense, to develop and obtain regulatory approval for one product in the U.S. and at least one other major market and, subject to obtaining regulatory approval in the applicable major market, commercialize one product in the U.S. and at least one other major market. CoNCERT may terminate the agreement if, following written notice and a 60 day opportunity to demonstrate a plan to cure, it believes that we are not using commercially reasonable efforts to develop and obtain regulatory approval for one product in the U.S. and in at least one other major market for any consecutive nine month period.
The term of the CoNCERT Agreement continues in full force and effect until the expiration of the last royalty term. On a country-by-country and product-by-product basis, upon the expiration of the royalty term in such country with respect to such product, we shall have a $3.0 million deferred tax liability relatedfully paid-up, perpetual, irrevocable license to such intellectual property with respect to such product in such country. In the acquired temporary differenceevent of a material breach of the CoNCERT Agreement, either party may terminate the agreement provided such breach is not cured in the 90 days following written notice of the breach (which period is shortened to 15 days for a payment breach). In addition, either party may terminate the agreement upon an asset purchasedassignment for the benefit of creditors or the filing of an insolvency proceeding by or against the other party that is not dismissed within 90 days of such filing.
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License Agreement with Yuhan Corporation
On August 19, 2020, we entered into a business combinationLicense Agreement (the “Yuhan License Agreement”) with Yuhan, pursuant to which we acquired an exclusive license to develop, manufacture and commercialize PCS12852 globally, excluding South Korea.
As consideration for the Yuhan License Agreement, we issued to Yuhan 250,000 shares of common stock (based upon an $8.00 per share price), subject to adjustment based on the offering price in this offering (but not less than 181,818 shares). As additional consideration, we will pay Yuhan development and regulatory milestone payments (a portion of which are payable in shares of our common stock based on the volume weighted average trading price during the period prior to such achievement and a portion of which are payable in cash) upon the achievement of certain milestones, which primarily consist of dosing a patient in pivotal trials or having a drug indication approved by a regulatory authority in the United States or another country. The amount of such development and regulatory milestone payments increases if Yuhan does not invest at least $3.0 million in this offering. In addition, we must pay Yuhan one-time sales milestone payments based on the achievement during a calendar year of one or more thresholds for annual sales for products made and pay royalties based on annual licensing sales. We are also required to split any milestone payments received with Yuhan based on any sub-license agreement we may enter into.
We are required to use commercially reasonable efforts, at our sole cost and expense, in conjunction with a joint Processa-Yuhan Board to oversee such commercialization efforts, to research, develop and commercialize products in one or more countries, including meeting specific diligence milestones that consist of: (i) preparing a first draft of the product development plan within 90 days; (ii) requesting an FDA pre-IND meeting for a product within 6 months; (iii) dosing a first patient in a Phase 2A clinical trial with a product within 24 months; and (iv) dosing a first patient with a product in a Phase 2B clinical trial, Phase 3 clinical trial or other pivotal clinical trial with a product within 48 months. Either party may terminate the agreement in the event of a material breach of the agreement that has not been cured following written notice and a nominal tax basis.60-day opportunity to cure such breach (which is shortened to 15 days for a payment breach).
License Agreement with Elion Oncology, Inc.
On August 23, 2020, we entered into the Elion License Agreement with Elion, pursuant to which we acquired an exclusive license to develop, manufacture and commercialize PCS6422 globally.
The grant of license is conditioned on the closing on this offering with at least $15 million in gross proceeds and the successful up-listing to Nasdaq by October 30, 2020. Following the satisfaction of the conditions, we must pay Elion $100,000 and issue Elion 500,000 shares of our common stock, subject to increase in the event the price per share is this offering is less than $8.34 per share. Such shares will be subject to a lock-up, with 50% of such shares released from such lock up after six months and the remaining 25% tranches to be released following 9 months and 12 months, respectively.
As additional consideration, we will pay Elion development and regulatory milestone payments (a portion of which are payable in shares of our common stock and a portion of which are payable in cash) upon the achievement of certain milestones, which include 100,000 shares of common stock due on the first two annual anniversaries of the effective date of the agreement, FDA or other regulatory approval and dosing a patient. In addition, we must pay Elion one-time sales milestone payments based on the achievement during a calendar year of one or more thresholds for annual sales for products made and pay royalties based on annual licensing sales. We are also required to split any milestone payments received with Elion based on any sub-license agreement we may enter into.
We continueare required to evaluate potential assetsuse commercially reasonable efforts, at our sole cost and expense to research, develop and commercialize products in one or more countries, including meeting specific diligence milestones that consist of: (i) dosing a first patient in a Phase 1B clinical trial with a product within 12 months; and (ii) dosing a first patient with a product in a Phase 2 or 3 clinical trial within 48 months. Either party may terminate the agreement in the event of a material breach of the agreement that has not been cured following written notice and a 90-day opportunity to cure such breach (which is shortened to 15 days for acquisition.a payment breach).
Sales
License Agreement with Aposense, Ltd.
On May 24, 2020, we entered into an exclusive License Agreement with Aposense, Ltd., (“Aposense”), pursuant to which we were granted a contingent license in Aposense’s patent rights and Marketingknow-how to develop and commercialize their next generation irinotecan cancer drug, PCS11T (formerly known as ATT-11T).
The Aposense Agreement provides us with an exclusive worldwide license (excluding China), to research, develop and commercialize products comprising or containing PCS11T. The grant of license is conditioned on the following being satisfied within 9 months of May 24, 2020 (or the agreement shall terminate): (i) our closing of an equity financing and successful up-listing to Nasdaq and (ii) Aposense obtaining the approval of the Israel Innovation Authority for the consummation of the transactions contemplated by the Aposense Agreement, which approval was obtained on August 24, 2020.
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Within five business days of satisfying the conditions, we must issue Aposense a number of shares of common stock determined by dividing $2.5 million by the price per share paid by such investors in this offering. Such shares will be subject to a lock-up, with 40% of such shares released from such lock up after six months and the remaining 30% tranches to be released upon completion of the next two subsequent quarters. As additional consideration, we will pay Aposense development and regulatory milestone payments (up to $3.0 million per milestone) upon the achievement of certain milestones, which primarily consist of having a drug indication approved by a regulatory authority in the United States or another country. In addition, we must pay Aposense one-time sales milestone payments based on the achievement during a calendar year of one or more thresholds for annual sales for products made and pay royalties based on annual licensing sales. We are also required to split any milestone payments we receive with Aposense based on any sub-license agreement we may enter into.
We do not currently have salesare required to use commercially reasonable efforts, at our sole cost and expense, to research, develop and commercialize products in one or marketing capabilities. In order to commercially market any pharmaceutical productmore countries, including meeting specific diligence milestones that we successfully advance through preclinical and clinical development andconsist of (i) submitting an IND for which we obtain regulatory approval, we must either develop a sales and marketing infrastructure or collaborate with third parties with sales and marketing capabilities. Becausedrug indication within 30 months following the satisfaction of the early stagelicense conditions above; (ii) dosing of our pharmaceutical development programs, we havea first patient with a product within 42 months following the satisfaction of the license conditions above; (iii) dosing of a first patient with a product in a pivotal clinical trial within 72 months following the satisfaction of the license conditions above and (iv) an NDA submission within 120 months following the satisfaction of the license conditions above. Either party may terminate the agreement in the event of a material breach of the license agreement that has not yet developedbeen cured following written notice and a sales and marketing strategy90-day opportunity to cure such breach (which is shortened to 15 days for any pharmaceutical products that we may successfully develop.a payment breach).
CompetitionLicense Agreement with Akashi Therapeutics, Inc.
On August 29, 2019, we entered into an exclusive license agreement (the “Akashi Agreement”) with Akashi Therapeutics, Inc. (“Akashi”) to develop and commercialize an anti-fibrotic, anti-inflammatory drug, PCS100, which also promotes healthy muscle fiber regeneration. In previous clinical trials in Duchenne Muscular Dystrophy (DMD), PCS100 showed promising improvement in the muscle strength of non-ambulant pediatric patients. Although the FDA placed a clinical hold on the DMD trial after a full serious adverse event in a pediatric patient, the FDA has partially removed the clinical hold and defined how PCS100 can resume clinical trials in DMD. Once we have obtained adequate funding, we plan to develop PCS100 in rare adult fibrotic related diseases such as focal segmental glomerulosclerosis, idiopathic pulmonary fibrosis or Scleroderma.
The biotechnologyAkashi Agreement provides us with a worldwide license to research, develop, make and pharmaceutical industries are extremely competitive. Our potential competitorscommercialize products comprising or containing PCS100. As partial consideration for the license, we paid $10,000 to Akashi upon full execution of the Akashi Agreement. This upfront payment was expensed as a research and development cost. As additional consideration, we will pay Akashi development and regulatory milestone payments (up to $3.0 million per milestone) upon the achievement of certain milestones, which primarily consist of having a drug indication approved by a regulatory authority in the field are many in number and include major pharmaceutical and specialized biotechnology companies. Many of our potential competitors have significantly more financial, technical and other resources than we do, which may give them a competitive advantage.United States or another country. In addition, theywe must pay Akashi one-time sales milestone payments based on the achievement during a calendar year of one or more thresholds for annual sales for products made and pay royalties based on annual licensing sales. We are also required to split any milestone payments we receive with Akashi based on any sub-license agreement we may have substantiallyenter into.
We are required to use commercially reasonable efforts, at our sole cost and expense, to research, develop and commercialize products in one or more experience in effecting strategic combinations, in-licensing technology, developing drugs, obtaining regulatory approvalscountries, including meeting specific diligence milestones that consist of (i) requesting a meeting with the FDA for a first indication within 18 months of the date of the agreement, (ii) submitting an IND for a drug indication on or before June 30, 2022 and manufacturing and marketing products. We cannot give any assurances that we can compete effectively with these other biotechnology and pharmaceutical companies. Our potential competitors in these markets(iii) initiating a Phase 1 or 2 trial for a drug indication on or before December 30, 2022. Either party may succeed in developing products that could render our products and those of our collaborators obsolete or non-competitive. In addition, many of our competitors have significantly greater experience than we doterminate the agreement in the fields in which we compete.event of a material breach of the license agreement that has not been cured following written notice and a 60-day opportunity to cure such breach (which is shortened to 15 days for a payment breach).
Government Regulation
The FDA and comparable regulatory authorities in state and local jurisdictions and in other countries impose substantial and burdensome requirements upon companies involved in the clinical development, manufacture, marketing and distribution of drugs, such as those we are developing. These agencies and other federal, state and local entities regulate, among other things, the research and development, testing, manufacture, quality control, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion, distribution, post-approval monitoring and reporting, sampling and export and import of our product candidates.
Pharmaceutical
U.S. Government Regulation
If we market any pharmaceutical products in the United States, they will be subject to extensive government regulation. Likewise, if we seek to market and distribute any such products abroad, they would also be subject to extensive foreign government regulation.
In the United States, the FDA regulates pharmaceutical products. FDAdrugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and its implementing regulations. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations governrequires the testing, manufacturing, advertising, promotion, labeling, saleexpenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the product development process, approval process or after approval, may subject an applicant to a variety of administrative or judicial sanctions, such as the FDA’s refusal to approve pending NDAs, withdrawal of an approval, imposition of a clinical hold, issuance of warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of pharmaceutical products, and generally require a rigorous process for the approval of new drugs.government contracts, restitution, disgorgement or civil or criminal penalties.
In addition to regulationsThe process required by the FDA before a drug may be marketed in the United States we will be subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution of our future drugs. Whether or not we obtain FDA approval for a drug, we must obtain approval of a drug bygenerally involves the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the drug in those countries. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country.following:
Under European Union regulatory systems, marketing authorizations may be submitted either under a centralized or mutual recognition procedure. The centralized procedure provides for the grant of a single marketing authorization that is valid for all European Union member states. The mutual recognition procedure provides for mutual recognition of national approval decisions. Under this procedure, the holder of a national marketing authorization may submit an application to the remaining member states. Within 90 days of receiving the applications and assessment report, each member state generally must decide whether to recognize approval.
The definition of “rare or orphan disease” differs between the US and other foreign countries, and as such may impact the development program, the regulatory approval process, the exclusivity marketing periods, sales and marketing and the pricing. Since many of the products being developed will be used in rare diseases the differences in the regulations between the US and other foreign countries may add complexity to the development program, the clinical studies, regulatory approval and costing for the product.
Regulation in the United States
The FDA testing and approval process requires substantial time, effort and money. We cannot assure you that any of our products will ever obtain approval. The FDA approval process for new drugs includes, without limitation:
| ● | ||
| ● | submission to the FDA of an |
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| ● | approval by an independent IRB, at each clinical site before each trial may be initiated; | |
| ● | performance of adequate and well-controlled human clinical trials in accordance with good clinical practices (GCP) requirements to establish the safety and efficacy of the | |
| ● | submission to the FDA of an NDA; | |
| ● | satisfactory completion of an FDA advisory committee review, if applicable; | |
| ● | satisfactory completion of | |
| ● | FDA review and approval of the NDA, including consideration of the views of any FDA advisory committee, prior to commercial marketing or sale of the drug in the United States; and | |
| ● |
PreclinicalPre-clinical studies include laboratory evaluation of
Before testing any biological product candidate, including our product candidates, in humans, the product candidate must undergo rigorous pre-clinical testing. The pre-clinical developmental stage generally involves laboratory evaluations of drug chemistry, formulation and stability, as well as animal studies to evaluate toxicity in animals, to assess the potential safetyfor adverse events and effectivenessin some cases to establish a rationale for therapeutic use. The conduct of the product. Most of thesepre-clinical studies is subject to federal regulations and requirements, including GLP regulations for safety/toxicology studies. An IND sponsor must be performed according to good laboratory practices, a system of management controls for laboratories and research organizations to ensuresubmit the consistency and reliability of results. The results of the preclinicalpre-clinical studies, existing clinical and/or human use data (if applicable) together with manufacturing information, and analytical data, are submittedany available clinical data or literature and a proposed clinical protocol, to the FDA as part of the IND.
An IND is a request for authorization from the FDA to administer an IND, which we are requiredinvestigational product to filehumans and must become effective before we can commence anyhuman clinical trials for our product candidates inmay begin. Some long-term pre-clinical testing, such as animal tests of reproductive adverse events and carcinogenicity, may continue after the United States. Clinical trials may beginIND is submitted. An IND automatically becomes effective 30 days after an IND is received,receipt by the FDA, unless before that time, the FDA raises concerns or questions aboutrelated to one or more proposed clinical trials and places the conduct oftrial on clinical hold. In such a case, the clinical trials. If concerns or questions are raised, an IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. As a result, submission of an IND may not result in the FDA allowing clinical trials can proceed. We cannot assure you that submission of any additional IND for any of our preclinical product candidates will result in authorization to commence clinical trials.commence.
Clinical trials
Clinical trials involve
The clinical stage of development involves the administration of the investigational product candidate that is the subject of the trial to healthy volunteers or patients under the supervision of a qualified principal investigator.investigators, generally physicians not employed by, or under control of, the trial sponsor, in accordance with GCPs, which include the requirement that all research patients provide their informed consent for their participation in any clinical trial. Clinical trials are conducted under protocols detailing, among other things, the objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria and the parameters to be used to monitor subject safety and assess efficacy. Each protocol, and any subsequent amendments to the protocol, must be submitted to the FDA as part of the IND. Furthermore, each clinical trial must be reviewed and approved by an independent institutional review board, or IRB atfor each institution at which the studyclinical trial will be conducted.conducted to ensure that the risks to individuals participating in the clinical trials are minimized and are reasonable in relation to anticipated benefits. The IRB will consider, among other things, ethical factors, safetyalso approves the informed consent form that must be provided to each clinical trial subject or his or her legal representative and must monitor the clinical trial until completed. There also are requirements governing the reporting of human subjectsongoing clinical trials and the possible liability of the institution arising from the conduct of the proposedcompleted clinical trial. Also,trial results to public registries. Information about most clinical trials must be performed accordingsubmitted within specific timeframes for publication on the www.clinicaltrials.gov website. Information related to goodthe product, patient population, phase of investigation, study sites and investigators and other aspects of the clinical practices,trial is made public as part of the registration of the clinical trial. Sponsors are also obligated to disclose the results of their clinical trials after completion. Disclosure of the results of these trials can be delayed in some cases for up to two years after the date of completion of the trial. Competitors may use this publicly available information to gain knowledge regarding the progress of development programs.
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Human clinical trials are typically conducted in three sequential phases, which may overlap or be combined:
| ● | Phase 1 clinical trials generally involve a small number of healthy volunteers or disease-affected patients who are initially exposed to a single dose and then multiple doses of the product candidate. The primary purpose of these clinical trials is to assess the metabolism, pharmacologic action, side effect tolerability and safety of the drug. | |
| ● | Phase 2 clinical trials involve studies in disease-affected patients to determine the dose required to produce the desired benefits. At the same time, safety and further pharmacokinetic and pharmacodynamic information is collected, possible adverse effects and safety risks are identified and a preliminary evaluation of efficacy is conducted. | |
| ● | Phase 3 clinical trials generally involve a larger number of patients at multiple sites and are designed to provide the data necessary to demonstrate the effectiveness of the product for its intended use, its safety in use and to establish the overall benefit/risk relationship of the product and provide an adequate basis for product approval. These trials may include comparisons with placebo and/or other comparator treatments. The duration of treatment is often extended to mimic the actual use of a product during marketing. |
Post-approval trials, sometimes referred to as Phase 4 clinical trials, may be conducted after initial marketing approval. These trials are enumeratedused to gain additional experience from the treatment of patients in the intended therapeutic indication, particularly for long-term safety follow up. In certain instances, the FDA regulations and guidance documents.may mandate the performance of Phase 4 clinical trials as a condition of approval of a biologics license application, or BLA.
ClinicalProgress reports detailing the results of the clinical trials typically are conducted in sequential phases: Phases 1, 2must be submitted at least annually to the FDA and 3. The phases may overlap.more frequently if serious adverse events occur. The FDA or the sponsor may require that we suspend or terminate a clinical trialstrial at any time, or the FDA may impose other sanctions on various grounds, including if the FDA makes a finding that the subjects participating in the trialresearch patients are being exposed to an unacceptable health risk. Similarly, an IRB can refuse, suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients.
Concurrently with clinical trials, companies usually complete additional pre-clinical studies and must also develop additional information about the physical characteristics of the biological product as well as finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product candidate and, among other things, the sponsor must develop methods for testing the identity, strength, quality, potency and purity of the final biological product. Additionally, appropriate packaging must be selected and tested, and stability studies must be conducted to demonstrate that the biological product candidate does not undergo unacceptable deterioration over its shelf life.
Marketing Approval
Assuming successful completion of the required clinical testing, the results of the pre-clinical studies and clinical trials, together with detailed information relating to the product’s chemistry, manufacture, controls and proposed labeling, among other things, are submitted to the FDA as part of an NDA requesting approval to market the product for one or more indications. In most cases, the submission of an NDA is subject to a substantial application user fee. Under the Prescription Drug User Fee Act, or PDUFA, guidelines that are currently in effect, the FDA has a goal of ten months from the date of “filing” of a standard NDA for a new molecular entity to review and act on the submission. This review typically takes twelve months from the date the NDA is submitted to FDA because the FDA has approximately two months to make a “filing” decision.
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In Phase 1 clinical trials, a drug is usually tested on patientsaddition, under the Pediatric Research Equity Act of 2003, as amended and reauthorized, certain NDAs or supplements to determinean NDA must contain data that are adequate to assess the safety any adverse effects, proper dosage, absorption, metabolism, distribution, excretion and other drug effects.
In Phase 2 clinical trials, a drug is usually tested on a limited number of subjects to preliminarily evaluate the efficacyeffectiveness of the drug for the claimed indications in all relevant pediatric subpopulations, and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. The FDA may, on its own initiative or at the request of the applicant, grant deferrals for submission of some or all pediatric data until after approval of the product for use in adults, or full or partial waivers from the pediatric data requirements.
The FDA also may require submission of a REMS plan to ensure that the benefits of the drug outweigh its risks. The REMS plan could include medication guides, physician communication plans, assessment plans, and/or elements to assure safe use, such as restricted distribution methods, patient registries, or other risk minimization tools.
The FDA conducts a preliminary review of all NDAs within the first 60 days after submission, before accepting them for filing, to determine whether they are sufficiently complete to permit substantive review. The FDA may request additional information rather than accept an NDA for filing. In this event, the application must be resubmitted with the additional information. The resubmitted application is also subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review. The FDA reviews an NDA to determine, among other things, whether the drug is safe and effective and whether the facility in which it is manufactured, processed, packaged or held meets standards designed to assure the product’s continued safety, quality and purity.
The FDA may refer an application for a novel drug to an advisory committee. An advisory committee is a panel of independent experts, including clinicians and other scientific experts, that reviews, evaluates and provides a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions.
Before approving an NDA, the FDA typically will inspect the facility or facilities where the product is manufactured. The FDA will not approve an application unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving an NDA, the FDA may inspect one or more clinical trial sites to assure compliance with GCP requirements.
After evaluating the NDA and all related information, including the advisory committee recommendation, if any, and inspection reports regarding the manufacturing facilities and clinical trial sites, the FDA may issue an approval letter, or, in some cases, a complete response letter. A complete response letter generally contains a statement of specific targetedconditions that must be met in order to secure final approval of the NDA and may require additional clinical trials or pre-clinical studies in order for FDA to reconsider the application. Even with submission of this additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. If and when those conditions have been met to the FDA’s satisfaction, the FDA will typically issue an approval letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications.
Even if the FDA approves a product, it may limit the approved indications for use of the product, require that contraindications, warnings or precautions be included in the product labeling, require that post-approval studies, including Phase 4 clinical trials, be conducted to further assess a drug’s safety after approval, require testing and surveillance programs to monitor the product after commercialization, or impose other conditions, including distribution and use restrictions or other risk management mechanisms under a REMS, which can materially affect the potential market and profitability of the product. The FDA may prevent or limit further marketing of a product based on the results of post-marketing studies or surveillance programs. After approval, some types of changes to the approved product, such as adding new indications, manufacturing changes, and additional labeling claims, are subject to further testing requirements and FDA review and approval.
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Orphan drug designation
Under the Orphan Drug Act, the FDA may grant orphan designation to a drug or biologic product intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of developing and making the product available in the United States for this type of disease or condition will be recovered from sales of the product in the United States. Orphan drug designation must be requested before submitting a BLA. After the FDA grants orphan drug designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process. Orphan drug designation entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages and user-fee waivers. If a product that has orphan designation subsequently receives the first FDA approval for the disease or condition for which it has such designation, the product is entitled to orphan drug exclusivity, which means that the FDA may not approve any other applications to market the same drug for the same indication for seven years from the date of such approval, except in limited circumstances, such as a showing of clinical superiority to the product with orphan exclusivity by means of greater effectiveness, greater safety, by providing a major contribution to patient care or in instances of drug supply issues. Competitors, however, may receive approval of either a different product for the same indication or the same product for a different indication that could be used “off-label” by physicians in the orphan indication, even though the competitor’s product is not approved in the orphan indication. Orphan drug exclusivity also could block the approval of one of our products for seven years if a competitor obtains approval before we do of the same product, as defined by the FDA, for the same indication we are seeking, or if our product candidate is determined to be contained within the scope of the competitor’s product for the same indication or disease. If one of our products designated as an orphan drug receives marketing approval for an indication broader than that which is designated, it may not be entitled to orphan drug exclusivity. Orphan drug status in the European Union, or EU, has similar, but not identical, requirements and benefits.
Expedited review and approval
The FDA has various programs, including fast track designation, accelerated approval, priority review, and breakthrough therapy designation, which are intended to expedite or simplify the process for the development and FDA review of drugs that are intended for the treatment of serious or life threatening diseases or conditions and demonstrate the potential to address unmet medical needs. The purpose of these programs is to provide important new drugs to patients earlier than under standard FDA review procedures.
To be eligible for a fast track designation, the FDA must determine, dosage tolerancebased on the request of a sponsor, that a product is intended to treat a serious or life-threatening disease or condition and optimal dosage,demonstrates the potential to address an unmet medical need. The FDA will determine that a product will fill an unmet medical need if it will provide a therapy where none exists or provide a therapy that may be potentially superior to existing therapy based on efficacy or safety factors. The FDA may review sections of the NDA for a fast track product on a rolling basis before the complete application is submitted, if the sponsor provides a schedule for the submission of the sections of the NDA, the FDA agrees to accept sections of the NDA and identify possible adverse effectsdetermines that the schedule is acceptable, and safety risks.the sponsor pays any required user fees upon submission of the first section of the NDA.
The FDA may give a priority review designation to drugs that offer major advances in treatment or provide a treatment where no adequate therapy exists. A priority review means that the goal for the FDA to review an application is six months, rather than the standard review of ten months under current PDUFA guidelines. Under the new PDUFA agreement, these six- and ten-month review periods are measured from the “filing” date rather than the receipt date for NDAs for new molecular entities, which typically adds approximately two months to the timeline for review and decision from the date of submission. Most products that are eligible for fast track designation are also likely to be considered appropriate to receive a priority review.
In Phase 3addition, products studied for their safety and effectiveness in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit over existing treatments may be eligible for accelerated approval and may be approved on the basis of adequate and well-controlled clinical trials establishing that the drug product has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity or prevalence of the condition and the availability or lack of alternative treatments. As a condition of approval, the FDA may require a sponsor of a drug receiving accelerated approval to perform post-marketing studies to verify and describe the predicted effect on irreversible morbidity or mortality or other clinical endpoint, and the drug may be subject to accelerated withdrawal procedures.
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Moreover, under the provisions of the Food and Drug Administration Safety and Innovation Act, passed in July 2012, a sponsor can request designation of a product candidate as a “breakthrough therapy.” A breakthrough therapy is usually testeddefined as a drug that is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. Drugs designated as breakthrough therapies are also eligible for accelerated approval. The FDA must take certain actions, such as holding timely meetings and providing advice, intended to expedite the development and review of an application for approval of a larger number of subjects in an expanded patient population and at multiple clinical sites.breakthrough therapy.
Even if a product qualifies for one or more of these programs, the FDA may later decide that the product no longer meets the conditions for qualification or decide that the time period for FDA review or approval will not be shortened. Furthermore, fast track designation, priority review, and breakthrough therapy designation do not change the standards for approval, but may expedite the development or approval process. We cannot assure you that anymay explore some of these opportunities for our current or future clinical trials will result in approval to market our products.product candidates as appropriate.
Post-approval requirements
An NDA must include comprehensiveDrugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and complete descriptionscontinuing regulation by the FDA, including, among other things, requirements relating to recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion and reporting of adverse experiences with the preclinicalproduct. After approval, most changes to the approved product, such as adding new indications or other labeling claims are subject to prior FDA review and approval. There also are continuing, annual user fee requirements for any marketed products and the establishments at which such products are manufactured, as well as new application fees for supplemental applications with clinical data.
The FDA may impose a number of post-approval requirements as a condition of approval of an NDA. For example, the FDA may require post-marketing testing, including Phase 4 clinical trials, and surveillance to further assess and monitor the chemical, manufacturingproduct’s safety and control requirementseffectiveness after commercialization.
In addition, drug manufacturers and other entities involved in the manufacture and distribution of a drug that enableapproved drugs are required to register their establishments with the FDA to determine the drug’s safety and efficacy. A NDA must be submitted, filedstate agencies, and approved by the FDA before any product that we may successfully develop can be marketed commercially in the United States.
The facilities, procedures and operations for any of our contract manufacturers must be determined to be adequate by the FDA before product approval. Manufacturing facilities are subject to periodic unannounced inspections by the FDA and these state agencies for compliance with cGMP licensing specificationsrequirements. Changes to the manufacturing process are strictly regulated and otheroften require prior FDA approval before being implemented. FDA regulations beforealso require investigation and after a NDA has been approved. Foreign manufacturing facilities are also subjectcorrection of any deviations from cGMP requirements and impose reporting and documentation requirements upon the sponsor and any third-party manufacturers that the sponsor may decide to periodic FDA inspections or inspections by foreign regulatory authorities. Among other things,use. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain cGMP compliance.
Once an approval is granted, the FDA may withholdwithdraw the approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the product reaches the market. Later discovery of NDAspreviously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in mandatory revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical trials to assess new safety risks; or imposition of distribution or other product applications if deficienciesrestrictions under a REMS program. Other potential consequences include, among other things:
| ● | restrictions on the marketing or manufacturing of the product; | |
| ● | complete withdrawal of the product from the market or product recalls; |
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| ● | safety alerts, Dear Healthcare Provider letters, press releases or other communications containing warning or other safety information about the product; | |
| ● | fines, warning letters or holds on post-approval clinical trials; | |
| ● | refusal of the FDA to approve pending NDAs or supplements to approved NDAs, or suspension or revocation of product approvals; product seizure or detention, or refusal to permit the import or export of products; or | |
| ● | injunctions or the imposition of civil or criminal penalties. |
The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Drugs may be promoted only for the approved indications and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found at the facility. Vendors thatto have improperly promoted off-label uses may supply us with finished products or components used to manufacture, package and label products are alsobe subject to similar regulations and periodic inspections.significant liability.
In addition, the distribution of prescription pharmaceutical products is subject to the Prescription Drug Marketing Act, or PDMA, which regulates the distribution of drugs and drug samples at the federal level and sets minimum standards for the registration and regulation of drug distributors by the states. Both the PDMA and state laws limit the distribution of prescription pharmaceutical product samples and impose requirements to ensure accountability in distribution.
Other Regulatory Matters
Pharmaceutical companies are subject to additional healthcare regulation and enforcement by the federal government and by authorities in the states and foreign jurisdictions in which they conduct their business. Manufacturing, sales, promotion and other activities following product approval are subject to regulation by numerous regulatory authorities in the United States in addition to the FDA, imposes a numberincluding Centers for Medicare and Medicaid Services (CMS), other divisions of complex regulatory requirements on entities that advertisethe Department of Health and promote pharmaceuticals, including, but not limited to, standardsHuman Services, the Department of Justice, the Drug Enforcement Administration, the Consumer Product Safety Commission, the Federal Trade Commission, the Occupational Safety & Health Administration, the Environmental Protection Agency, and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsoredstate and local governments.
For example, in the United States, sales, marketing and scientific and educational programs also must comply with state and federal fraud and abuse laws, false claims laws, transparency laws, government price reporting, and health information privacy and security laws. These laws include the following:
| ● | the federal Anti-Kickback Statute, which makes it illegal for any person, including a prescription drug manufacturer (or a party acting on its behalf), to knowingly and willfully solicit, receive, offer or pay any remuneration that is intended to induce or reward referrals, including the purchase, recommendation, order or prescription of a particular drug, for which payment may be made under a federal healthcare program, such as Medicare or Medicaid. Moreover, the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the ACA), provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil False Claims Act; | |
| ● | the federal civil and criminal false claims and civil monetary penalties laws, including the civil False Claims Act that can be enforced by private citizens through civil whistleblower or qui tam actions, prohibit individuals or entities from, among other things, knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government; |
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| ● | the Federal Health Insurance Portability and Accountability Act of 1996 (HIPAA) prohibits, among other things, executing or attempting to execute a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters; | |
| ● | HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and their implementing regulations, also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information; | |
| ● | federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers; | |
| ● | the FDCA, which prohibits, among other things, the adulteration or misbranding of drugs, biologics and medical devices; | |
| ● | the federal Physician Payments Sunshine Act requires applicable manufacturers of covered drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program, with specific exceptions, to annually report to CMS information regarding payments and other transfers of value to physicians and teaching hospitals as well as information regarding ownership and investment interests held by physicians and their immediate family members; and | |
| ● | analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws which may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers; state laws that require biotechnology companies to comply with the biotechnology industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government and may require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; state laws that require biotechnology companies to report information on the pricing of certain drug products; and state and foreign laws that govern the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts. |
Pricing and rebate programs must also comply with the Medicaid rebate requirements of the U.S. Omnibus Budget Reconciliation Act of 1990 and more recent requirements in the ACA. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. Products must meet applicable child-resistant packaging requirements under the U.S. Poison Prevention Packaging Act. Manufacturing, sales, promotion and other activities also are potentially subject to federal and promotional activities involving the Internet.state consumer protection and unfair competition laws.
FailureThe distribution of pharmaceutical products is subject to additional requirements and regulations, including extensive record-keeping, licensing, storage and security requirements intended to prevent the unauthorized sale of pharmaceutical products.
The failure to comply with FDA and other governmental regulationsany of these laws or regulatory requirements subjects firms to possible legal or regulatory action. Depending on the circumstances, failure to meet applicable regulatory requirements can result in significant civil, criminal and administrative penalties, including damages, fines, unanticipated compliance expenditures,disgorgement, individual imprisonment, exclusion from participation in government funded healthcare programs, such as Medicare and Medicaid, integrity oversight and reporting obligations, contractual damages, reputational harm, diminished profits and future earnings, injunctions, requests for recall, or seizure of products, total or partial suspension of production, and/denial or distribution, suspensionwithdrawal of product approvals or refusal to allow a firm to enter into supply contracts, including government contracts.
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U.S. Patent-Term Restoration and Marketing Exclusivity
Depending upon the timing, duration and specifics of FDA approval of any future product candidates, some of our U.S. patents may be eligible for limited patent term extension under the Hatch-Waxman Act. The Hatch-Waxman Act permits restoration of the FDA’spatent term of up to five years as compensation for patent term lost during product development and FDA regulatory review process. Patent-term restoration, however, cannot extend the remaining term of NDAs, injunctionsa patent beyond a total of 14 years from the product’s approval date. The patent-term restoration period is generally one-half the time between the effective date of an IND or the issue date of the patent, whichever is later, and criminal prosecution. Anythe submission date of an NDA plus the time between the submission date of an NDA or the issue date of the patent, whichever is later, and the approval of that application, except that the review period is reduced by any time during which the applicant failed to exercise due diligence. Only one patent applicable to an approved drug is eligible for the extension and the application for the extension must be submitted prior to the expiration of the patent. The United States Patent and Trademark Office, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration. In the future, we may apply for restoration of patent term for our currently owned or licensed patents to add patent life beyond its current expiration date, depending on the expected length of the clinical trials and other factors involved in the filing of the relevant NDA.
Market exclusivity provisions under the FDCA also can delay the submission or the approval of certain applications. The FDCA provides a five-year period of non-patent marketing exclusivity within the United States to the first applicant to gain approval of an NDA for a new chemical entity. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action of the drug substance. During the exclusivity period, the FDA may not accept for review an abbreviated new drug application (ANDA) or a 505(b)(2) NDA submitted by another company for another version of such drug where the applicant does not own or have a legal right of reference to all the data required for approval. However, an application may be submitted after four years if it contains a certification of patent invalidity or non-infringement. The FDCA also provides three years of marketing exclusivity for an NDA, 505(b)(2) NDA or supplement to an existing NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, for example, new indications, dosages or strengths of an existing drug. This three-year exclusivity covers only the conditions of use associated with the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the original active agent. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA. However, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the preclinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.
European Union Drug Development
Similar to the United States, the various phases of preclinical and clinical research in the European Union are subject to significant regulatory controls. Although the European Union Clinical Trials Directive 2001/20/EC has sought to harmonize the EU clinical trials regulatory framework, setting out common rules for the control and authorization of clinical trials in the EU, the EU Member States have transposed and applied the provisions of the Directive differently. This has led to significant variations in the member state regimes. Under the current regime, before a clinical trial can be initiated it must be approved in each of the EU countries where the trial is to be conducted by two distinct bodies: the National Competent Authority (NCA) and one or more Ethics Committees (ECs). Under the current regime, all suspected unexpected serious adverse reactions to the investigated drug that occur during the clinical trial have to be reported to the NCA and ECs of the Member State where they occurred.
The EU clinical trials legislation currently is undergoing a transition process mainly aimed at harmonizing and streamlining clinical-trial authorization, simplifying adverse-event reporting procedures, improving the supervision of clinical trials and increasing their transparency. Recently enacted Clinical Trials Regulation EU No 536/2014 ensures that the rules for conducting clinical trials in the EU will be identical. In the meantime, Clinical Trials Directive 2001/20/EC continues to govern all clinical trials performed in the EU.
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European Union Drug Review and Approval
In the European Economic Area (EEA), which is comprised of the 26 Member States of the European Union (including Norway and excluding Croatia), Iceland and Liechtenstein, medicinal products can only be commercialized after obtaining a Marketing Authorization (MA). There are two types of marketing authorizations:
| ● | The Community MA is issued by the European Commission through the Centralized Procedure, based on the opinion of the Committee for Medicinal Products for Human Use (CHMP) of the EMA, and is valid throughout the entire territory of the EEA. The Centralized Procedure is mandatory for certain types of products, such as biotechnology medicinal products, orphan medicinal products, advanced-therapy medicines such as gene-therapy, somatic cell-therapy or tissue-engineered medicines and medicinal products containing a new active substance indicated for the treatment of HIV, AIDS, cancer, neurodegenerative disorders, diabetes, auto-immune and other immune dysfunctions and viral diseases. The Centralized Procedure is optional for products containing a new active substance not yet authorized in the EEA, or for products that constitute a significant therapeutic, scientific or technical innovation or which are in the interest of public health in the European Union. | |
| ● | National MAs, which are issued by the competent authorities of the Member States of the EEA and only cover their respective territory, are available for products not falling within the mandatory scope of the Centralized Procedure. Where a product has already been authorized for marketing in a Member State of the European Union, this National MA can be recognized in another Member States through the Mutual Recognition Procedure. If the product has not received a National MA in any Member State at the time of application, it can be approved simultaneously in various Member States through the Decentralized Procedure. Under the Decentralized Procedure, an identical dossier is submitted to the competent authorities of each of the Member States in which the MA is sought, one of which is selected by the applicant as the Reference Member State (RMS). The competent authority of the RMS prepares a draft assessment report, a draft summary of the product characteristics (SmPC), and a draft of the labeling and package leaflet, which are sent to the other Member States (referred to as the Member States Concerned) for their approval. If the Member States Concerned raise no objections, based on a potential serious risk to public health, to the assessment, SmPC, labeling or packaging proposed by the RMS, the product is subsequently granted a national MA in all the Member States (i.e., in the RMS and the Member States Concerned). |
Under the above described procedures, before granting the MA, EMA or the competent authorities of the Member States of the European Union make an assessment of the risk-benefit balance of the product on the basis of scientific criteria concerning its quality, safety and efficacy. Similar to the U.S. patent term-restoration, Supplementary Protection Certificates (SPCs) serve as an extension to a patent right in Europe for up to five years. SPCs apply to specific pharmaceutical products to offset the loss of patent protection due to the lengthy testing and clinical trials these actionsproducts require prior to obtaining regulatory marketing approval.
Coverage and Reimbursement
Sales of our products will depend, in part, on the extent to which our products will be covered by third-party payors, such as government health programs, commercial insurance, and managed healthcare organizations. There is significant uncertainty related to third-party payor coverage and reimbursement of newly approved products. In the United States, for example, principal decisions about reimbursement for new products are typically made by CMS. CMS decides whether and to what extent a new product will be covered and reimbursed under Medicare, and private third-party payors often follow CMS’s decisions regarding coverage and reimbursement to a substantial degree. However, no uniform policy of coverage and reimbursement for drug products exists. Accordingly, decisions regarding the extent of coverage and amount of reimbursement to be provided for any of our products will be made on a payor-by-payor basis.
Increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. Further, such payors are increasingly challenging the price, examining the medical necessity and reviewing the cost effectiveness of medical product candidates. There may be especially significant delays in obtaining coverage and reimbursement for newly approved drugs. Third-party payors may limit coverage to specific product candidates on an approved list, known as a formulary, which might not include all FDA-approved drugs for a particular indication. We may need to conduct expensive pharmaco-economic studies to demonstrate the medical necessity and cost effectiveness of our products. As a result, the coverage determination process is often a time-consuming and costly process that will require us to provide scientific and clinical support for the use of our products to each payor separately, with no assurance that coverage and adequate reimbursement will be obtained.
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In addition, in most foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing and reimbursement vary widely from country to country. For example, the European Union provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product, or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products. Historically, products launched in the European Union do not follow price structures of the United States and generally prices tend to be significantly lower.
Healthcare Reform
The United States government, state legislatures, and foreign governments have shown significant interest in implementing cost containment programs to limit the growth of government-paid healthcare costs, including price-controls, restrictions on reimbursement, and requirements for substitution of generic products for branded prescription drugs. For example, the ACA was passed in March 2010 which substantially changed the way healthcare is financed by both the government and private insurers, and significantly impacts the U.S. pharmaceutical industry. The ACA contains provisions that may reduce the profitability of drug products through increased rebates for drugs reimbursed by Medicaid programs, extension of Medicaid rebates to Medicaid managed care plans, mandatory discounts for certain Medicare Part D beneficiaries and annual fees based on pharmaceutical companies’ share of sales to federal health care programs.
The Medicaid Drug Rebate Program requires pharmaceutical manufacturers to enter into and have in effect a national rebate agreement with the HHS Secretary as a condition for states to receive federal matching funds for the manufacturer’s outpatient drugs furnished to Medicaid patients. The ACA made several changes to the Medicaid Drug Rebate Program, including increasing pharmaceutical manufacturers’ rebate liability by raising the minimum basic Medicaid rebate on most branded prescription drugs from 15.1% of average manufacturer price (AMP), to 23.1% of AMP and adding a new rebate calculation for “line extensions” (i.e., new formulations, such as extended release formulations) of solid oral dosage forms of branded products, as well as potentially impacting their rebate liability by modifying the statutory definition of AMP. The ACA also expanded the universe of Medicaid utilization subject to drug rebates by requiring pharmaceutical manufacturers to pay rebates on Medicaid managed care utilization and by enlarging the population potentially eligible for Medicaid drug benefits. Effective April 1, 2020, Medicaid rebate liability will be expanded to include the territories of the United States as well. Additionally, for a drug product to receive federal reimbursement under the Medicaid or Medicare Part B programs or to be sold directly to U.S. government agencies, the manufacturer must extend discounts to entities eligible to participate in the 340B drug pricing program. The required 340B discount on a given product is calculated based on the AMP and Medicaid rebate amounts reported by the manufacturer.
Some of the provisions of the ACA have yet to be implemented, and there have been judicial, Congressional and executive branch challenges to certain aspects of the ACA, as well as recent efforts by the Trump administration to repeal or replace certain aspects of the ACA.
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Other legislative changes have been proposed and adopted in the United States since the ACA was enacted. These changes included aggregate reductions to Medicare payments to providers of 2% per fiscal year, effective April 1, 2013, which, due to subsequent legislative amendments, will stay in effect through 2027 unless additional Congressional action is taken. In January 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, reduced Medicare payments to several providers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These new laws may result in additional reductions in Medicare and other healthcare funding, which could have a material adverse effect on us.customers for our drugs, if approved, and accordingly, our financial operations.
Additionally, there has been heightened governmental scrutiny recently over the manner in which drug manufacturers set prices for their marketed products, which has resulted in several Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drug products. For example, at the federal level, the Trump administration released a “Blueprint” to lower prescription drug prices and reduce out-of-pocket costs of drugs that contains additional proposals to increase manufacturer competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products and reduce the out-of-pocket costs of drug products paid by consumers. Additionally, on January 31, 2019, HHS Office of Inspector General proposed modifications to federal Anti-Kickback Statute safe harbors which, among other things, may affect rebates paid by manufacturers to Medicare Part D plan sponsors, Medicaid managed care organizations, and those entities’ pharmacy benefit managers, the purpose of which is to further reduce the cost of drug products to consumers. At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.
Moreover, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) established the Medicare Part D program to provide a voluntary prescription drug benefit to Medicare beneficiaries. Under Part D, Medicare beneficiaries may enroll in prescription drug plans offered by private entities that provide coverage of outpatient prescription drugs. Unlike Medicare Part A and B, Part D coverage is not standardized. While all Medicare drug plans must give at least a standard level of coverage set by Medicare, Part D prescription drug plan sponsors are not required to pay for all covered Part D drugs, and each drug plan can develop its own drug formulary that identifies which drugs it will cover and at what tier or level. However, Part D prescription drug formularies must include drugs within each therapeutic category and class of covered Part D drugs, though not necessarily all the drugs in each category or class. Any formulary used by a Part D prescription drug plan must be developed and reviewed by a pharmacy and therapeutic committee. Government payment for some of the costs of prescription drugs may increase demand for products for which we receive marketing approval. However, any negotiated prices for our products covered by a Part D prescription drug plan likely will be lower than the prices we might otherwise obtain. Moreover, while the MMA applies only to drug benefits for Medicare beneficiaries, private third-party payors often follow Medicare coverage policy and payment limitations in setting their own payment rates.
Combination with Heatwurx
On October 2, 2017, Heatwurx, Inc. (“Heatwurx”) entered into a transaction pursuant to the Asset Purchase Agreement with Promet Therapeutics, LLC, a Delaware limited liability company (“Promet”) pursuant to which, on October 4, 2017, Heatwurx acquired all the net assets of Promet, including the rights to the CoNCERT Agreement in exchange for issuing Promet (and CoNCERT) 4,535,121 shares of its common stock. Immediately following the transaction, Promet owned approximately 84% of our common stock and, as part of the Section 351 transaction, held approximately 6% of our common stock for the benefit of CoNCERT, until the CoNCERT transaction had been concluded whereupon CoNCERT took title to their shares. Following the closing, we changed our name from “Heatwurx Inc.” to “Processa Pharmaceuticals Inc.” and abandoned Heatwurx’s prior business plan. We are now pursuing Promet’s historical and proposed business.
We accounted for the net asset acquisition transaction as a reverse acquisition in accordance with U.S. GAAP, Financial Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”) 805-40-45, Foreign RegulationBusiness Combinations – Reverse Acquisitions,
Since we plan to marketwhere Promet was considered the accounting acquirer. Accordingly, Promet’s historical results of operations replaced our products in foreign countries, we may also be subject to a wide varietyhistorical results of foreign regulations governing the development, manufacture and marketing of our products. Whether or not FDA approval has been obtained, approval of a product by the comparable regulatory authorities of foreign countries must still be obtainedoperations for all periods prior to marketing the product in those countries. The approval process varies,transaction. Prior to the acquisition, we had nominal net liabilities and the time needed to secure approval in any region such as the European Union or inoperations. It was considered a country with an independent review procedure may be longer or shorter than that required for FDA approval. We cannot assure you that clinical trials conducted in one country will be accepted by other countries or that an approval in one country or region will result in approval elsewhere.
Additional Regulationnon-operating public shell corporation.
Third-Party Reimbursement
In the United States, physicians, hospitals and other healthcare providers that purchase pharmaceutical products generally rely on third-party payors, principally private health insurance plans, Medicare and, to a lesser extent, Medicaid, to reimburse all or part of the cost of the product and procedure for which the product is being used. Even if a product is approved for marketing by the FDA, there is no assurance that third-party payors will cover the cost of the product and related medical procedures. If they do not, end-users of the drug would not be eligible for any reimbursement of the cost, and our ability to successfully market any such drug would be materially and adversely impacted.
Reimbursement systems in international markets vary significantly by country and, within some countries, by region. Reimbursement approvals must be obtained on a country-by-country basis. In many foreign markets, including markets in which we hope to sell our products, the pricing of prescription pharmaceuticals is subject to government pricing control. In these markets, once marketing approval is received, pricing negotiations could take significant additional time. As in the United States, the lack of satisfactory reimbursement or inadequate government pricing of any of our products would limit their widespread use and lower potential product revenues.
Fraud and Abuse Laws
Federal and state anti-kickback and anti-fraud and abuse laws, as well as the federal Civil False Claims Act may apply to certain drug and device research and marketing practices. The Civil False Claims Act prohibits knowingly presenting or causing to be presented a false, fictitious or fraudulent claim for payment to the United States. Actions under the Civil False Claims Act may be brought by the Attorney General or by a private individual acting as an informer or whistleblower in the name of the government. Violations of the Civil False Claims Act can result in significant monetary penalties. The federal government is using the Civil False Claims Act, and the threat of significant liability, in its investigations of healthcare providers, suppliers and drug and device manufacturers throughout the country for a wide variety of drug and device marketing and research practices and has obtained multi-million-dollar settlements. The federal government may continue to devote substantial resources toward investigating healthcare providers’, suppliers’ and drug and device manufacturers’ compliance with the Civil False Claims Act and other fraud and abuse laws. We may have to expend significant financial resources and management attention if we ever become the focus of such an investigation, even if we are not guilty of any wrong doings.
HIPAA
The Health Insurance Portability and Accountability Act of 1996, or HIPAA, requires the use of standard transactions, privacy and security standards and other administrative simplification provisions, by covered entities which include many healthcare providers, health plans and healthcare clearinghouses. HIPAA instructs the Secretary of the Department of Health and Human Services to promulgate regulations implementing these standards in the United States.
Other LawsBusiness Segments
We are also subjectmanage our business as one segment which includes all activities related to other federal, statethe discovery, development, and local lawscommercialization of general applicability, such as laws regulating working conditions,drug products for the treatment of serious medical conditions. For financial information related to our one segment, see our Consolidated Financial Statements and various federal, state and local environmental protection laws and regulations, including those governing the discharge of material into the environment.related notes.
Employees
As of July 20, 2018,June 30, 2020, we had 14 employees.11 employees (full and part time). None of our employees is subject to a collective bargaining agreement or represented by a labortrade or tradelabor union and we believe that our relationsrelationships with our employees isare good. We believe that we have been successful in attracting skilled and experienced personnel, but competition for personnel is intense and there can be no assurance that we will be able to attract and retain the individuals needed.
Status as an Emerging Growth CompanyFacilities
Our principal executive office is located at 7380 Coca Cola Drive, Suite 106, Hanover, MD 21076. We currently lease approximately 6,500 square feet of office space at this location under a three-year lease agreement until September 2022. We believe our facilities are an “emerging growth company” asadequate for our current needs and that term is defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (i.e., those that have not had a registration statement declared effective under the Securities Act, or do not have a class of securities registered under the Exchange Act) are required to comply with such new or revised financial accounting standards. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we willsuitable additional substitute space would be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. We may still take advantage of all of the other provisions of the JOBS Act, which include, but are not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, the reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and the exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.available if needed.
Legal Proceedings
From time to time, we may bebecome involved in claims arisinglitigation or other legal proceedings. We are not currently a party to any litigation or legal proceedings. Regardless of outcome, any litigation that we may become involved in the ordinary coursecan have an adverse impact on us because of business. To our knowledge, no material legal proceedings, governmental actions, investigations or claims are currently pending against us or involve us that, in the opiniondefense and settlement costs, diversion of our management could reasonably be expected to have a material adverse effect on our businessresources and financial condition.other factors.
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DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONSExecutive Officers and Directors
The following table sets forth the names and ages of the members ofprovides information regarding our executive officers and the positions held by eachdirectors as of July 20, 2018.June 30, 2020:
| Executive Officers: | ||||
| David Young, | Chairman of the Board of Directors and Chief Executive | |||
| Patrick Lin | Chief Business | |||
| Sian Bigora, Pharm.D. | Chief Development Officer | |||
| James Stanker | 62 | Chief Financial Officer | ||
| Wendy Guy | Chief Administrative Officer | |||
| Non-Employee Directors: | ||||
| Justin Yorke | 53 | Director | ||
| Virgil Thompson | 80 | Director | ||
| Geraldine Pannu | 51 | Director |
The following is a brief account of the education and business experience during at least the past five years of each director, executive officer and key employee of our company, indicating the person’s principal occupation during that period, and the name and principal business of the organization in which such occupation and employment were carried out.
Executive Officers
David Young, Pharm.D., Ph.D.
- Dr. Young has served as our Chairman and Chief Executive Officer Interim Chief Financial Officersince October 4, 2017 and Founder
Dr. Young has over 30 years of pharmaceutical research, drug development, and corporate experience. He was a Founder and CEO of Promet Therapeutics, LLC (“Promet”) since its formation in August 2015. Dr. Young was Chief Scientific Officer of Questcor PharmaceuticalsHe served as our interim CFO from 2009-2014 and was responsible for working with the FDA on modernizing the Acthar Gel label and in obtaining FDA approval in Infantile Spasms.October 4, 2017 to September 1, 2018. From 2006-20092006 to 2009, prior to joining the Questcor executive management team, Dr. Young served as an independent Director on the Questcor Board of Directors. As an independent director, Dr. Young, representing Questcor, worked with the FDA in developing a process to obtain approval for Acthar (the only commercial product owned by Questcor) in Infantile Spasms (IS), a deadly and debilitating very rare orphan indication. In 2009, Dr. Young joined the Questcor executive management team as Chief Scientific Officer (CSO) in order to obtain IS FDA approval and market exclusivity by completing the New Drug Application (NDA) process, working with FDA on modernizing the label, and leading all aspects of approval including the Advisory Committee Meeting that voted to approve the NDA for IS. During the eight years that Dr. Young was involved with Questcor as an independent director and as its CSO, Questcor transitioned to an orphan drug specialty pharmaceutical company, moving from an outdated Acthar label and near bankruptcy in 2007 to a valuationmodernized Acthar label that helped it to achieve sales greater than $750 million per year and the ultimate sale of the company for approximately $5.6 billion in 2014. While serving on Questcor’s Board of Directors, Dr. Young was Executive Director & President, U.S. Operations of AGI Therapeutics Plc.plc. Dr. Young has also served as the Executive Vice President of the Strategic Drug Development Division of ICON plc, an international CRO, and was the Founder and CEO of GloboMax LLC, a CRO specializing in FDA drug development, purchased by ICON plc in 2003. Prior to forming GloboMax, Dr. Young was a Tenured Associate Professor at the School of Pharmacy, University of Maryland.Maryland at Baltimore (UMAB), where he led a group of 30 faculty, scientists, postdocs, graduate students and technicians in evaluating the biological properties of drugs and drug delivery systems in animals and humans.
Dr. Young is an expert in small molecule and protein non-clinical and clinical drug development. He has served on FDA Advisory Committees, was Co-Principal Investigator on a FDA fundedFDA-funded Clinical Pharmacology contract, was responsible for the analytical and pharmacokinetic evaluation of all oral products manufactured in the UMAB-FDA contract which leadled to the SUPACScale-up and IVIVCPost-Approval Changes (SUPAC) and in-vitro in-vivo correlation (IVIVC) FDA Guidance’s, for 5 yearsGuidance, taught FDA reviewers as part of the UMAB-FDA contract for five years, has served on NIHNational Institutes of Health (NIH) grant review committees, and was Co-Principal Investigator on a National Cancer Institute contract to evaluate new oncology drugs.
Dr. Young has met more than 100 times with the FDA on more than 50 drug products and has been a key team member on more than 30 NDA/supplemental NDA approvals. Dr. Young has more than 150 presentations-authored publications-book chapters, including formal presentations to the FDA, FDA Advisory Committees, and numerous invited presentations at both scientific and investment meetings.
Dr. Young received his B.S. in Physiology from the University of California at Berkeley, his M.S. in Medical Physics from the University of Wisconsin at Madison, and his Pharm.D. - Ph.D. with emphasis in Pharmacokinetics and Pharmaceutical Sciences from the University of Southern California.
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Patrick Lin
- Mr. Lin has served as our Chief Business and& Strategy Officer since October 4, 2017 and Founder
Mr. Lin has over 20 years of financing and investing experience in the Biopharm Sector. He was Co-Founder and Chairman of the Board of Promet Therapeutics, LLC. He is Founder and, for more than past 15 years, Managing Partner of Primarius Capital, a family office that manages public and private investments focused on small capitalization companies.
For 10 years prior to forming Primarius Capital, Mr. Lin worked at several Wall Street banking and brokerage firms including Robertson Stephens & Co., E*Offering, and Goldman Sachs & Co. Mr. Lin was Co-Founding Partner of E*Offering.
Mr. Lin received an MBA from Kellogg Graduate School of Management, a Master of Engineering Management, and a Bachelor of Science in Business Administration from the University of Southern California. We believe Mr. Lin is qualified to serve on our Board because of his extensive investment experience with publicly traded biotechnology companies.
Sian Bigora, Pharm.D.
- Dr. Bigora has served as our Chief Development Officer since October 4, 2017 and Founder
Dr. Bigora has over 20 years of pharmaceutical research, regulatory strategy and drug development experience working closely with Dr. Young. She was Co-Founder, Director, and Chief Development Officer at Promet Therapeutics, LLC. Prior to Promet, Dr. Bigora was Vice President of Regulatory Affairs at Questcor Pharmaceuticals (acquired by Mallinckrodt Pharmaceuticals in 2014) from 2009-2015, including leading efforts on modernizing the Acthar Gel label and in obtaining FDA approval in Infantile Spasms, events of material importance to Questcor’s subsequent success. During her time at Questcor, she assisted in building an expert regulatory group to address both commercial and development needs for complex products such as Acthar. Dr. Bigora’s role at Questcor included heading up the development of a safety pharmacovigilance group and a clinical quality group.
Prior to her position at Questcor, Dr. Bigora was Vice President of Clinical and Regulatory Affairs, U.S. Operations of AGI Therapeutics, plc. In this role, she was responsible for the development and implementation of Global Phase 3 studies and interactions with regulatory authorities. Previously, she operated her own consulting company, serving as the regulatory and drug development expert team member for multiple small and mid-sized pharmaceutical companies. Dr. Bigora held multiple positions in regulatory affairs, operations and project management ending as VP of Regulatory Affairs at the Strategic Drug Development Division of ICON, plc, an international CRO, and at GloboMax LLC, a CRO specializing in FDA drug development, purchased by ICON plc in 2003. Prior to GloboMax, she worked in the Pharmacokinetics and Biopharmaceutics Laboratory at the School of Pharmacy, University of Maryland on the FDA funded Clinical Pharmacology contract and UMAB-FDA contract as a clinical scientist and instructor for FDA reviewers.
Dr. Bigora received a Pharm.D. from the School of Pharmacy at the University of Maryland at Baltimore. She also completed a Fellowship in Pharmacokinetics and Pediatric Infectious Diseases at the University of Maryland at Baltimore.
James Stanker - Mr. Stanker has served as our Chief Financial Officer since September 5, 2018. Mr. Stanker has over 30 years of financial and executive leadership experience in the areas of accounting principles and audit standards, regulatory reporting, and fiscal management and strategy. He has served in a financial leadership role as an audit partner at Grant Thornton from February 2000 until his retirement in August 2016. His responsibilities included managing the audit quality in the Atlantic Coast Market Territory. From 2009 to 2012, he served as the Global Head of Audit Quality for Grant Thornton International. Prior to joining Grant Thornton, Mr. Stanker served as the Chief Financial Officer for a Nasdaq listed company and for a privately-held life science company. Mr. Stanker is a Certified Public Accountant. He has a Bachelor’s degree in Aeronautics from San Jose State University and a Master’s in Business Administration from California State University, East Bay. He currently serves on the Board of Directors and is Chairman of the Audit Committee of GSE Systems, Inc. Mr. Stanker is also a visiting professor in the George B. Delaplaine School of Business at Hood College.
Wendy Guy
- Ms. Guy has served as our Chief Administrative Officer since October 4, 2017 and Founder
Ms. Guy has more than 20 years of experience in business operations. She has worked closely with Dr. Young over the last 18 years in corporate management and operations, HR,human resources, and finance. She was Co-Founder, Director, and Chief Administrative Officer of Promet Therapeutics, LLC. Prior to Promet, Ms. Guy was employed at Questcor Pharmaceuticals (acquired by Mallinckrodt Pharmaceuticals in 2014) as Senior Manager, Business Operation in charge of the Maryland Office for Questcor. During the five years she spent at Questcor, she built a dynamic administrative and contracts team, grew the Maryland Office from two employees to just under 100, and expanded the facility from 1,200 sq. ft. to 15,000 sq. ft.
Prior to her position at Questcor, Ms. Guy was Senior Manager, U.S. Operations of AGI Therapeutics, plc. In this role, she was responsible for the day to day business and administrative operations of the company. Previously, she held multiple senior level positions with the Strategic Drug Development Division of ICON, GloboMax, and Mercer Management Consulting.
Ms. Guy received an A.A. from Mount Wachusett Community College.
The following table sets forth the names and ages of our Board of Directors as of July 24, 2018. Additional directors are being identified with a plan to have two internal directors and 3-4 independent directors.
Director BiographiesNon-Employee Directors
The biographies of Dr. Young and of Patrick Lin are found above.
Justin W. Yorke
- Mr. Yorke has served as a Director since October 2017. Mr. Yorke has over 25 years of experience as an institutional equity fund manager and senior financial analyst for investment funds and investment banks and was appointed as a director of the CompanyDirector in SeptemberAugust 2017. For more than the past 10 yearyears, he has been a manager of the San Gabriel Fund, JMW Fund and the Richland Fund whose primary activity is investing in public and private companies in the United States. Mr. Yorke served as non-executive Chairman of Jed Oil and a Director/CEO at JMG Exploration. Mr. Yorke was a Fund Manager and Senior Financial Analyst, based in Hong Kong, for Darier Henstch, S.A., a private Swiss bank, where he managed their $400 million Asian investment portfolio. Mr. Yorke was an Assistant Director and Senior Financial Analyst with Peregrine Asset Management, which was a unit of Peregrine Securities, a regional Asian investment bank. Mr. Yorke was a Vice President and Senior Financial Analyst with Unifund Global Ltd., a private Swiss Bank, as a manager of its $150 million Asian investment portfolio.
Mr. Yorke has a B.A. from University of California, Los Angeles. We believe Mr. Yorke is qualified to serve on our Board because of his extensive investment experience.
Virgil Thompson
- Mr. Thompson has served as a Director of the company since October 2017 and previously served on the Board of Directors at Promet Therapeutics, LLC andLLC. He served as a Director of Mallinckrodt Pharmaceuticals (formerly Questcor Pharmaceuticals) where, and Director of GenZ Corporation, both companies he also served on its Human Resources and Compensation Committee.resigned from in 2017. From July 2009 to July 2015, he served as Chief Executive Officer and Director of Spinnaker Biosciences, Inc., and now serves as Chairman of the Board of that company.Board. Mr. Thompson is also theserved as Chairman of the Board of Aradigm Corporation, and a Director of Genz Corporation.
Mr. Thompson served as a Directorwell as of Questcor Pharmaceuticals, Inc., from 1996 and more recently served as Chairman of its board of directors until Questcor was acquired by Mallinckrodt in August 2014. Mr. Thompson served as the President, Chief Executive Officer and as a Director of Angstrom Pharmaceuticals, Inc. from 2002 until 2007. From 2000 until 2002, Mr. Thompson was President, Chief Executive Officer and a Director of Chimeric Therapies, Inc. From 1999 until 2000, Mr. Thompson was President, Chief Operating Officer and, from 1994, a Director of Bio-Technology General Corporation (subsequently Savient Pharmaceuticals, Inc.).
Mr. Thompson obtained a Bachelor’s Degreebachelor’s degree in Pharmacy from the University of Kansas and a J.D. degree from the George Washington University Law School. We believe Mr. Thompson is qualified to serve on our Board because of his extensive industry and Board experience with publicly traded biotechnology companies.
Family Relationships
There is no family relationship between anyGeraldine Liu Pannu - Ms. Pannu has served as a Director since February 13, 2020. Ms. Pannu has over 25 years of our officers.
Board Leadership Structureexperience in investment and Rolefinancial management, fund operations, consulting and marketing. Since January 2020, she has been the Founding and Managing Partner of GLTJ Pioneer Capital, a firm that specializes in Risk Oversight
Our Board evaluates its leadership structureland acquisition, entitlement and rolevertical development of multifamily, student and senior housing in risk oversight on an ongoing basis. At the present time our CEO servesSan Francisco Bay Area. From March 2007 to December 2016, Ms. Pannu was the COO and Managing Partner for ChinaRock Capital Management, a leading hedge and venture capital fund company. She previously worked at McKinsey & Co, Monitor Company as the Chairmanmanagement consultant. She had successfully raised capital for several hedge, venture capital and real estate funds. She also helped start-up companies to expand and diversify business categories, client verticals and grow revenue. Ms. Pannu was born in Shanghai and grew up in Hong Kong. She received her Bachelor of the Board. The Board does not currently have a policy, one way or the other, with respect to whether the same person should serve as both the chief executive officer and chair of the Board or, if the roles are separate, whether the chair of the Board should be selectedBusiness Administration degree from the non-employee directors or should beChinese University of Hong Kong and an employee.
In evaluating director nominees,MBA from Harvard Business School. She is fluent in English, Mandarin, Cantonese and Shanghainese. We believe Ms. Pannu is qualified to serve on our Board considers the following factors, among other things:
Our Company’s goal is to always have a Boardbecause of Directors that brings our Company a variety of perspectives and skills derived from high quality business, professional and personalher extensive investment experience.
Corporate Governance
Board CommitteesComposition
We presently docurrently have five directors on our Board. Our Board of Directors may consider a broad range of factors relating to the qualifications and background of nominees, which may include diversity, which is not only limited to race, gender or national origin. We have an audit committee, compensation committee or nominating committee or committee performing similar functions.no formal policy regarding Board diversity. Our new Board expects to establish an audit or compensation committeeof Directors’ priority in selecting Board members is identification of persons who will further the near future. We envision that the audit committee will be primarily responsible for reviewing the services performed by our independent auditors and evaluating our accounting policies and systems of internal controls. We envision that the compensation committee will be primarily responsible for reviewing and approving our salary and benefits policies and other compensationinterests of our executive officers. Until these committees arestockholders through his or her established these decisions will continuerecord of professional accomplishment, the ability to be made bycontribute positively to the collaborative culture among Board members, knowledge of our Boardbusiness, understanding of Directors.the competitive landscape and professional and personal experiences and expertise relevant to our growth strategy. Our directors hold office until their successors have been elected and qualified or until the earlier of their death, resignation or removal.
Director Independence
The Nasdaq Marketplace Rules require a majority of a listed company’s Board of Directors to be comprised of independent directors within one year of listing. In addition, the Nasdaq Marketplace Rules require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and corporate governance committees be independent and that audit committee members also satisfy independence criteria set forth in Rule 10A-3 under the Exchange Act.
Under Rule 5605(a)(2) of the Nasdaq Marketplace Rules, a director will only qualify as an “independent director” if, in the opinion of our Board of Directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In order to be considered independent for purposes of Rule 10A-3 of the Exchange Act, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the Board of Directors, or any other Board committee, accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the listed company or any of its subsidiaries or otherwise be an affiliated person of the listed company or any of its subsidiaries.
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Our Board of Directors has reviewed the composition of our Board of Directors and the independence of each director. Based upon information requested from and provided by each director concerning his or her background, employment and affiliations, including family relationships, our Board of Directors has determined that Mr.each of Justin Yorke, Virgil Thompson and Geraldine Pannu is an independent director“independent director” as defined under Rule 5605(a)(2) of the term “independent” is definedNasdaq Marketplace Rules. Our Board of Directors also determined that the directors who serve on our audit committee, our compensation committee, and our nominating and corporate governance committee satisfy the independence standards for such committees established by the rulesSEC and the Nasdaq Marketplace Rules, as applicable. In making such determinations, our Board of NASDAQ Rule 5605.
CodeDirectors considered the relationships that each such non-employee director has with our company and all other facts and circumstances our Board of Ethics and Business Conduct
We maintain a Code of Ethics and Business Conduct, which applies to allDirectors deemed relevant in determining independence, including the beneficial ownership of our employees, officers and directors. It establishes standards of conduct for individuals and also individual standards of business conduct and ethics.
Summary Compensation Table
The following sets forth all compensation awarded, earned or paid for services rendered in all capacities to our chief executive officers during prior fiscal years. No executive officer received compensation in excess of $100,000 in 2017. No executive officer or director of Processa received or had vested options to acquire securities of Processa in 2017.
The following table summarizes the compensation paidcapital stock by us in each of the last two recently completed fiscal years for our current and former Chief Executive Officers:
| Name and Principal Position | Year | Base Salary | Option Awards | Other Compensation | Total Compensation | |||||||||||||||
| David Young | 2017 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||
| Chief Executive Officer | ||||||||||||||||||||
| John McGrain | 2017 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||
| Former Interim Chief Executive Officer | 2016 | $ | 1 | $ | 0 | $ | 0 | $ | 1 | |||||||||||
Through June 30, 2018, we have paid $56,000 in salary to our executive officers. Employment agreements will be put in place in the very near future. At this time, we do not provide compensation to our outside directors, although we expect a plan will be put in place in the near future.
Outstanding Equity Awards at Year-End
The Company recognizes the value of providing equity-based incentives to its employees and intends to grant equity incentive awards in the future.non-employee director. There are no currently outstanding equity awards tofamily relationships among any of our nameddirectors or executive officers.
The HeatwurxCommittees of the Board of Directors and stockholders approved the Amended and Restated Heatwurx, Inc. 2011 Equity Incentive Plan (the “Plan”) in October 2012. All prior awards made under the Plan were cancelled and are available for future issuances.
Eligibility.Employees, non-employee directors, advisors, and consultants of the Company and its affiliates are eligible to receive grants under the Plan.
Shares Available. 257,143 shares are reserved for issuanceEach of the below committees will have a written charter approved by our Board of Directors, effective upon completion of this offering. Each of the committees report to our Board of Directors as such committee deems appropriate and as our Board of Directors may request. Upon completion of this offering, copies of each charter will be posted on the investor relations section of our website. Members serve on these committees until their resignation or until otherwise determined by our Board of Directors. In addition, from time to time, special committees may be established under the Plan after the one for seven reverse-split. There are currently no outstanding awards under the Plan. If unexercised options expire or are terminated, the underlying shares will again become available for grants under the Plan.direction of our Board of Directors when necessary to address specific issues.
Audit Committee
Grants under the Plan. The Plan provides for the grantOur audit committee is comprised of options to purchase shares of common stockJustin Yorke, Virgil Thompson and Geraldine Pannu with Justin Yorke serving as chairman of the Company. Options may be incentive stock options, designed to satisfy the requirements of Section 422 of the U.S. Internal Revenue Code, or non-statutory stock options, which do not meet those requirements.
Incentive stock options may only be granted to employees of the Company and its affiliates. Non-statutory stock options may be granted to employees, nonemployee directors, advisors, and consultants of Company and its affiliates.
Outstanding Options. As of December 31, 2017, and the date hereof, there were no outstanding option grants under the Plan.
Administration of the Plan. The Plan provides that it will be administered by the Board or a Committee designated by the Board.committee. Our Board of Directors will administerhas determined that each member of the Plan until such time asaudit committee meets the independence requirements of Rule 10A-3 under the Exchange Act and the applicable Nasdaq Listing Rules and has sufficient knowledge in financial and auditing matters to serve on the audit committee. Our Board appoints a Compensation Committee.of Directors has determined that Justin Yorke is an “audit committee financial expert” within the meaning of the SEC regulations and the applicable Nasdaq Listing Rules. The Board or the Compensation Committee once appointed will have complete discretion to:audit committee’s responsibilities include:
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| ● | establishing procedures for employees to anonymously submit concerns about questionable accounting or audit matters; | |
| ● | considering the effectiveness of our internal controls and internal audit function; | |
| ● | reviewing material related-party transactions or those that require disclosure; and | |
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TermsCompensation Committee
Our compensation committee is comprised of Options. The exercise price for non-statutoryJustin Yorke, Virgil Thompson and incentive stock options grantedGeraldine Pannu with Geraldine Pannu serving as chairman of the committee. Each member of this committee is a non-employee director, as defined by Rule 16b-3 promulgated under the equity compensation plan may not be less than 100%Exchange Act, and an outside director, as defined pursuant to Section 162(m) of the fair market valueInternal Revenue Code of the common stock on the option grant date or 110% in the case of incentive stock options granted to employees who own stock representing more than 10% of the voting power of all classes of common stock of the Company and its parent and subsidiaries. The1986, as amended (the “Code”). Our Board of Directors until a Compensation Committee has been appointed, has the authority to establish the vesting, including the terms under which vesting may be accelerated, and other terms and conditionsdetermined that each member of the options granted. Options can have a term of no more than ten years from the grant date except for incentive stock options granted to 10% stockholders which can have a term of no more than five years from the grant date.
The Plan authorizes the Board of Directors or the Compensation Committee once appointed to provide for accelerated vesting of options upon a “Change in Control,”compensation committee is “independent” as defined in the Plan. A Change in Control includes:Nasdaq Listing Rules. The composition of our compensation committee meets the requirements for independence under the Nasdaq Listing Rules, including the applicable transition rules. The compensation committee’s responsibilities include:
| ● | ||
| ● | ||
| ● | ||
| ● | administering our stock and equity incentive plans; | |
| ● | reviewing and approving or making recommendations to our Board of Directors with respect to, incentive compensation and equity plans; and | |
| ● | reviewing all |
AmendmentNominating and Termination.Governance Committee The
Our nominating and governance committee is comprised of Justin Yorke, Virgil Thompson and Geraldine Pannu with Virgil Thompson as the chairman of the committee. Our Board of Directors may amend or terminatehas determined that each member of the Plannominating and outstanding options at any time withoutcorporate governance committee is “independent” as defined in the consentapplicable Nasdaq Listing Rules. The nominating and corporate governance committee’s responsibilities include:
| ● | identifying and recommending candidates for membership on our Board of Directors; | |
| ● | recommending directors to serve on Board committees; | |
| ● | reviewing and recommending our corporate governance guidelines and policies; | |
| ● | reviewing proposed waivers of the code of conduct for directors and executive officers; | |
| ● | evaluating, and overseeing the process of evaluating, the performance of our Board of Directors and individual directors; and | |
| ● | assisting our Board of Directors on corporate governance matters. |
Leadership Structure and Risk Oversight
Our Board of option holders provided that such actionDirectors is currently chaired by David Young, Pharm.D, Ph.D., who also serves as our Chief Executive Officer. Our Board of Directors does not adversely affect outstanding options. Amendments are subject to stockholder approval tohave a policy regarding the extent required by applicable lawsseparation of the roles of Chief Executive Officer and regulations. Unless terminated sooner,Chairman of the Plan will automatically terminate on April 15, 2021, the tenth anniversaryBoard of April 15, 2011, the date the Plan was adopted byDirectors, as our Board of Directors believes it is in our best interest to make that determination based on our position and approveddirection and the membership of the Board of Directors. Our Board of Directors has determined that having an employee director serve as Chairman is in the best interest of our stockholders at this time because of the efficiencies achieved in having the role of Chief Executive Officer and Chairman combined, and because the detailed knowledge of our day-to-day operations and business that the Chief Executive Officer possesses greatly enhances the decision-making processes of our Board of Directors as a whole. We have a governance structure in place, including independent directors, designed to ensure the powers and duties of the dual role are handled responsibly. We do not have a lead independent director.
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Our Board of Directors oversees the management of risks inherent in the operation of our business and the implementation of our business strategies. Our Board of Directors performs this oversight role by using several different levels of review. In connection with its reviews of our stockholders.operations and corporate functions, our Board of Directors addresses the primary risks associated with those operations and corporate functions. In addition, our Board of Directors reviews the risks associated with our business strategies periodically throughout the year as part of its consideration of undertaking any such business strategies.
Each of our Board committees also oversees the management of our risks that fall within the committee’s areas of responsibility. In performing this function, each committee has full access to management, as well as the ability to engage advisors. Our Chief Executive Officer reports to the audit committee and is responsible for identifying, evaluating and implementing risk management controls and methodologies to address any identified risks. In connection with its risk management role, our audit committee meets privately with representatives from our independent registered public accounting firm and our Chief Executive Officer. The audit committee oversees the operation of our risk management program, including the identification of the primary risks associated with our business and periodic updates to such risks, and reports to our Board of Directors regarding these activities.
Compensation Committee Interlocks and Insider Participation
The table below provides informationNone of the members of our compensation committee has at any time during the prior three years been one of our officers or employees. None of our executive officers currently serves, or in the past fiscal year has served, as a member of the Board of Directors or compensation committee of any entity that has one or more executive officers serving on our Board of Directors or compensation committee.
Code of Business Conduct and Ethics
We maintain a code of business conduct and ethics that applies to all of our employees, officers and directors, including those officers responsible for financial reporting. Our code of business conduct and ethics will be available on our website at www.processapharmaceuticals.com. We intend to disclose any amendments to the numbercode, or any waivers of options outstanding and their weighted average exercise price at December 31, 2017.its requirements, on our website or in a Current Report on Form 8-K.
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EXECUTIVE AND DIRECTOR COMPENSATION
| Number of securities | ||||||||||||
| remaining available for | ||||||||||||
| Number of securities to | Weighted-average | issuance under equity | ||||||||||
| be issued upon exercise | exercise price of | compensation plans | ||||||||||
| of outstanding options, | outstanding options, | (excluding securities | ||||||||||
| warrants and rights | warrants and rights | reflected in column (a)) | ||||||||||
| (a) | (b) | (c) | ||||||||||
| Equity compensation plans approved by security holders | 0 | N/A | 257,143 | |||||||||
| Equity compensation plans not approved by security holders | 0 | N/A | 0 | |||||||||
| Total | 0 | 257,143 | (1) | |||||||||
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTSummary Compensation Table
The following table sets forthand footnotes show information regarding the number of shares oftotal compensation paid or accrued during the years ended December 31, 2019 and 2018 to our common stock beneficially owned as of July 24, 2018 by each director,Chairman and Chief Executive Officer and executive officer and beneficial owners of more than 5% of the outstanding shares of the common stock based on 38,674,264 shares of common stock issued and outstanding as of July 24, 2018. Unless otherwise indicated, the address of each person listed below is c/o 7380 Coca Cola Drive, Suite 106, Hanover, Maryland 21076.officers (our “named executive officers”).
| Name of Beneficial Owner | Shares of Common Stock Beneficially Owned | % of Shares of Common Stock Beneficially Owned | ||||||
| Officers and Directors | ||||||||
| David Young(1), (2) | 7,852,477 | 20.30 | % | |||||
| Sian Bigora(3) | 3,374,441 | 8.73 | % | |||||
| Patrick Lin(7) | 2,365,597 | 6.12 | % | |||||
| Wendy Guy(3) | 2,097,268 | 5.42 | % | |||||
| Virgil Thompson(8) | 607,382 | 1.57 | % | |||||
| Justin Yorke(4) | 1,924,272 | 4.98 | % | |||||
| Total for all Officers and Directors | 18,221,437 | 47.12 | % | |||||
| 5% Stockholders | ||||||||
| Promet Therapeutics, LLC(5) | 13,756,492 | 35.57 | % | |||||
| Young-Plaisance Revoc. Trust(2) | 2,887,019 | 7.46 | % | |||||
| CorLyst, LLC(6) | 2,493,403 | 6.45 | % | |||||
| CoNCERT Pharmaceuticals, Inc. | 2,090,301 | 5.40 | % | |||||
| Name and Principal Position | Year | Salary ($) | Option Awards ($) (2) | All Other Compensation ($) | Total ($) | ||||||||||||||
| David Young | 2019 | - | 163,202 | - | 163,202 | ||||||||||||||
| Chairman and Chief Executive Officer | 2018 | - | - | - | - | ||||||||||||||
| Patrick Lin | 2019 | 52,500 | 163,202 | - | 215,702 | ||||||||||||||
| Chief Business and Strategy Officer | 2018 | 44,479 | - | - | 44,479 | ||||||||||||||
| Sian Bigora | 2019 | 52,500 | 163,202 | - | 215,702 | ||||||||||||||
| Chief Development Officer | 2018 | 50,750 | - | - | 50,750 | ||||||||||||||
| Wendy Guy | 2019 | 87,500 | 163,202 | - | 250,702 | ||||||||||||||
| Chief Administrative Officer | 2018 | 87,500 | - | - | 87,500 | ||||||||||||||
| James Stanker | 2019 | 87,500 | 163,202 | - | 250,702 | ||||||||||||||
| Chief Financial Officer (1) | 2018 | 29,167 | 700,440 | 10,800 | (3) | 740,407 | |||||||||||||
| (1) | ||
| (2) | ||
| (3) | ||
TRANSACTIONS WITH RELATED PERSONS, PROMOTERS
AND CERTAIN CONTROL PERSONSEmployment Agreements
We do not currently have any executive employment agreements with any of our named executive officers in connection with their employment with us other than our employment agreement with James Stanker.
Pursuant to the Company’s employment agreement with James Stanker, Mr. Stanker receives a formal written policybase salary of $87,500. Mr. Stanker’s options shall vest in full upon a Change in Control (as defined in the employment agreement) and if terminated without Cause or for Good Reason (also defined in the employment agreement) in connection therewith, he shall also receive six months of base salary as a severance payment. Mr. Stanker is entitled to participate in all employee benefits available to employees of the Company. The employment agreement also includes confidentiality provisions.
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Processa Pharmaceuticals, Inc. 2019 Omnibus Incentive Plan
We maintain an Omnibus Plan that provides us with the authority to issue up to 500,000 shares of our common stock to eligible participants. The two complementary goals of the Omnibus Plan are to attract and retain outstanding individuals to serve as our officers, directors, employees, and consultants and to increase stockholder value by providing participants incentives to increase stockholder value by offering the opportunity to acquire shares of our common stock, receive monetary payments based on the value of our common stock and receive other incentive compensation on the potentially favorable terms that the Plan provides. The following is a summary of the material provisions of the Omnibus Plan:
Administration. The Omnibus Plan is administered by our Board of Directors, the compensation committee of the Board of Directors, any other committee of the Board, any subcommittee of the compensation committee or one or more of our officers to whom the Board or compensation committee has delegated authority, which are collectively referred to as the “Administrator.” The Administrator has the authority to interpret the Omnibus Plan or award agreements entered into with respect to the Omnibus Plan; make, change, and rescind rules and regulations relating to the Omnibus Plan; make changes to, or reconcile any inconsistency in, the Omnibus Plan or any award or agreement covering an award; and take any other action needed to administer the Omnibus Plan.
Eligibility; Participant Award Limits. The Administrator may designate any of the following as a participant under the Omnibus Plan: any officer or employee, or individuals engaged to become an officer or employee, of our company or our affiliates; consultants of our company or our affiliates; and our directors, including our non-employee directors.
Types of Awards. The Omnibus Plan permits the Administrator to grant stock options, stock appreciation rights, performance units, shares of common stock, restricted stock, restricted stock units, cash incentive awards, dividend equivalent units, or any other type of award permitted under the Omnibus Plan. The Administrator may grant any type of award to any participant it selects, but only our employees or our subsidiaries’ employees may receive grants of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”). Awards may be granted alone or in addition to, in tandem with, or (subject to the repricing prohibition described below) in substitution for any other award (or any other award granted under another plan of our company or any affiliate, including the plan of an acquired entity).
Shares Reserved under the Omnibus Plan. An aggregate of 500,000 shares of our common stock, adjusted for the reviewone for seven reverse stock split completed on December 23, 2019, were initially available for issuance under the Omnibus Plan. We may issue all reserved shares pursuant to the exercise of incentive stock options. The number of shares reserved for issuance under the Omnibus Plan will be reduced on the date of the grant of any award by the maximum number of shares, if any, that may become payable with respect to which such award is granted. However, an award that may be settled solely in cash will not deplete the Omnibus Plan’s share reserve at the time the award is granted. If (a) an award lapses, expires, is canceled, or terminates without issuance of shares or is settled in cash, (b) the Administrator determines that the shares granted under an award will not be issuable because the conditions for issuance will not be satisfied, (c) shares are forfeited under an award, or (d) shares are issued under any award and we reacquire them pursuant to our reserved rights upon the issuance of the shares, then those shares are added back to the reserve and may again be used for new awards under the Omnibus Plan. Shares that are tendered or withheld in payment of the exercise price of a stock option or as a result of the net settlement of an outstanding stock appreciation right, shares we purchase using proceeds from stock option exercises and shares tendered or withheld to satisfy any federal, state, or local tax withholding obligations may not be made available for re-issuance under the Omnibus Plan.
Transferability. Awards are not transferable other than by will or the laws of descent and distribution, unless the Administrator allows a participant to (i) designate in writing a beneficiary to exercise the award or receive payment under the award after the participant’s death, (ii) transfer an award to a former spouse as required by a domestic relations order incident to a divorce, or (iii) otherwise transfer an award without receiving any consideration.
Adjustments. If (i) we are involved in a merger or other transaction in which our shares of common stock are changed or exchanged; (ii) we subdivide or combine shares of common stock or declare a dividend payable in shares of common stock, other securities, or other property (other than stock purchase rights issued pursuant to a stockholder rights agreement); (iii) we effect a cash dividend that exceeds 10% of the fair market value of a share of common stock or any other dividend or distribution in the form of cash or a repurchase of shares of common stock that our Board determines is special or extraordinary, or that is in connection with a recapitalization or reorganization; or (iv) any other event occurs that in the Administrator’s judgment requires an adjustment to prevent dilution or enlargement of the benefits intended to be made available under the Omnibus Plan, then the Administrator will, in a manner it deems equitable, adjust any or all of (A) the number and type of shares subject to the Omnibus Plan and which may, after the event, be made the subject of awards; (B) the number and type of shares of common stock subject to outstanding awards; (C) the grant, purchase, or exercise price with respect to any award; and (D) the performance goals of an award.
In any such case, the Administrator may also provide for a cash payment to the holder of an outstanding award in exchange for the cancellation of all or a portion of the award, subject to the terms of the Omnibus Plan.
The Administrator may, in connection with any merger, consolidation, acquisition of property or stock, or reorganization, authorize the issuance or assumption of awards upon terms and conditions we deem appropriate without affecting the number of shares of common stock otherwise reserved or available under the Omnibus Plan.
Change of Control. To the extent a participant has an employment, retention, change of control, severance, or similar agreement with us or any of our affiliates that discusses the effect of a change of control (as defined in the Omnibus Plan) on the participant’s awards, such agreement will control. Otherwise, unless otherwise provided in an award agreement or by the Administrator prior to the change of control, in the event of a change of control, if the purchaser, successor or surviving entity (or parent thereof) (the “Successor”) agrees, then some or all outstanding awards will be assumed or replaced with the same type of award with similar terms and conditions. If applicable, each award that is assumed must be appropriately adjusted, immediately after such change of control, to apply to the number and class of securities that would have been issuable to a participant upon the consummation of such change of control had the award been exercised, vested, or earned immediately prior to such change of control, and other appropriate adjustment to the terms and conditions of the award may be made.
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If a participant is terminated from employment without cause (as defined in the Omnibus Plan) or the participant resigns employment for good reason (as defined in the Omnibus Plan) within 24 months following the change of control, then upon such termination, all of the participant’s awards in effect on the date of such termination will vest in full or be deemed earned in full.
Term of Omnibus Plan. Unless earlier terminated by our Board of Directors, the Omnibus Plan will remain in effect until the date all shares reserved for issuance have been issued, except that no incentive stock options may be issued if the term of the Omnibus Plan extends beyond 10 years from the effective date without stockholder approval of transactions with related parties. Our unwritten policy with regardsuch extension.
Outstanding Equity Awards at Fiscal Year-End
The following table lists the outstanding equity awards held by each of our named executive officers as of December 31, 2019:
| Name | Number of Securities Underlying Unexercised Options (1) Exercisable | Number of Securities Underlying Unexercised Options (1) Unexercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options | Option Exercise Price ($) | Option Expiration Date | |||||||||||||||
| David Young (2) | - | 7,859 | - | 16.80 | 6/20/2024 | |||||||||||||||
| 1,733 | - | - | 16.80 | 6/20/2024 | ||||||||||||||||
| - | 1,733 | - | 16.80 | 6/20/2024 | ||||||||||||||||
| - | 5,198 | - | 16.80 | 6/20/2024 | ||||||||||||||||
| Patrick Lin (2) | - | 7,859 | - | 16.80 | 6/20/2024 | |||||||||||||||
| 1,733 | - | - | 16.80 | 6/20/2024 | ||||||||||||||||
| - | 1,733 | - | 16.80 | 6/20/2024 | ||||||||||||||||
| - | 5,198 | - | 16.80 | 6/20/2024 | ||||||||||||||||
| Sian Bigora (2) | - | 7,859 | - | 16.80 | 6/20/2024 | |||||||||||||||
| 1,733 | - | - | 16.80 | 6/20/2024 | ||||||||||||||||
| - | 1,733 | - | 16.80 | 6/20/2024 | ||||||||||||||||
| - | 5,198 | - | 16.80 | 6/20/2024 | ||||||||||||||||
| Wendy Guy (2) | - | 7,859 | - | 16.80 | 6/20/2024 | |||||||||||||||
| 1,733 | - | - | 16.80 | 6/20/2024 | ||||||||||||||||
| - | 1,733 | - | 16.80 | 6/20/2024 | ||||||||||||||||
| - | 5,198 | - | 16.80 | 6/20/2024 | ||||||||||||||||
| James Stanker (2) | - | 7,859 | - | 16.80 | 6/20/2024 | |||||||||||||||
| 1,733 | - | - | 16.80 | 6/20/2024 | ||||||||||||||||
| - | 1,733 | - | 16.80 | 6/20/2024 | ||||||||||||||||
| - | 5,198 | - | 16.80 | 6/20/2024 | ||||||||||||||||
| 14,125 | 31,075 | - | 19.88 | 8/31/2028 | ||||||||||||||||
| 2,571 | - | - | 19.88 | 8/31/2028 | ||||||||||||||||
| (1) | The standard vesting schedule for all stock option grants is vesting over three years. |
| (2) | Options for the purchase of 16,523 shares of our common stock were granted to each of Dr. David Young, Patrick Lin, Dr. Sian Bigora, Wendy Guy and James Stanker on June 20, 2019 contained either service or performance vesting conditions, have a contractual term of five years and an exercise price equal to the closing price of our common stock on the OTCQB on the date of grant of $16.80. Stock options for the purchase of 7,859 shares of common stock vest one-third on the first anniversary date of the grant, with the remaining options vesting ratably over the subsequent two years. Stock options for the purchase of 8,664 shares vest upon meeting the following performance criteria: (i) 1,733 shares vest when we in-license one new or additional drug; (ii) 1,733 shares vest when our current Phase 2A clinical trial for PCS499 is complete; and (iii) 5,198 shares vest when we up-list from the OTCQB to either the Nasdaq or NYSE markets. On August 29, 2019, we reached a license agreement with Akashi Therapeutics for PCS100 and as such, the performance condition related to the award for in-licensing one new or additional drug was met; accordingly stock options to purchase 1,733 shares have vested. |
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Effective February 10, 2020, each non-employee director receives an annual cash retainer of $20,000, payable quarterly. In addition, each new director will receive an initial stock option grant of approximately 5,000 shares of common stock and each non-employee director will receive an annual stock option grant to transactions with related persons is that all material transactionsa number of shares of common stock equal to $20,000 total value. All such awards are tomade under our Omnibus Plan. The annual stock option awards may be pro-rated in the first year of service depending on when the non-employee director joins the Board. This compensation program was reviewed by the entire Board of Directors in February 2020. Our directors have decided to waive any cash compensation and directors fees until we complete our up-list to Nasdaq.
During 2019, our non-employee directors did not receive any cash compensation for their service on the Board. On June 20, 2019, both Mr. Yorke and Mr. Thompson were granted options for the purchase of 2,068 shares of our common stock. The options granted contained either service or performance vesting conditions, have a contractual term of five years and an exercise price equal to the closing price of our common stock on the OTCQB on the date of grant of $16.80. Of these options, each received options for the purchase of 1,085 shares of common stock that vest one-third on the first anniversary date of the grant, with the remaining options vesting ratably over the subsequent two years. Stock options for the purchase of 983 shares vest upon meeting the following performance criteria: (i) 197 shares vest when we in-license one new or additional drug; (ii) 197 shares vest when our current Phase 2A clinical trial for PCS499 is complete; and (iii) 589 shares vest when we up-list from the OTCQB to either the Nasdaq or NYSE markets.
Our directors are reimbursed for any possible conflictsreasonable out-of-pocket expenses incurred in connection with service as a director.
| Name | Fees Earned or Paid in Cash ($) | Option Awards ($) (1)(2) | All Other Compensation ($) | Total ($) | ||||||||||||
| Justin Yorke | - | 20,423 | - | 20,423 | ||||||||||||
| Virgil Thompson | - | 20,423 | - | 20,423 | ||||||||||||
| (1) | The “Option Awards” column reflects the grant date fair value for all stock option awards granted under the Omnibus Plan during 2019. These amounts are determined in accordance with FASB Accounting Standards Codification 718 (ASC 718), without regard to any estimate of forfeiture for service vesting. Assumptions used in the calculation of the amounts are included in Note 10 to the Company’s consolidated audited financial statements for the year ended December 31, 2019 in Item 8 of this Annual Report on Form 10-K. |
| (2) | Options for the purchase of 2,068 shares of our common stock were granted to each of Justin Yorke and Virgil Thompson on June 20, 2019 contained either service or performance vesting conditions, have a contractual term of five years and an exercise price equal to the closing price of our common stock on the OTCQB on the date of grant of $16.80. Stock options for the purchase of 1,085 shares of common stock vest one-third on the first anniversary date of the grant, with the remaining options vesting ratably over the subsequent two years. Stock options for the purchase of 983 shares vest upon meeting the following performance criteria: (i) 197 shares vest when we in-license one new or additional drug; (ii) 197 shares vest when our current Phase 2A clinical trial for PCS499 is complete; and (iii) 589 shares vest when we up-list from the OTCQB to either the Nasdaq or NYSE markets. On August 29, 2019, we reached a license agreement with Akashi Therapeutics for PCS100 and as such, the performance condition related to the award for in-licensing one new or additional drug has been met, accordingly stock options to purchase 197 shares have vested. |
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TRANSACTIONS WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS
The audit committee has adopted written policies and procedures for the committee to review and approve, or ratify related party transactions. These transactions include:
| ● | transactions that must be disclosed in proxy statements under SEC rules, and |
| ● | transactions that potentially could cause a non-employee director to cease to qualify as an independent director under Nasdaq Stock Market listing requirements. |
Transactions that are deemed immaterial under applicable disclosure requirements are generally deemed pre-approved under these written policies and procedures, including transactions with an entity with which a director’s sole relationship is as a non-employee director and the total amount involved does not exceed 1% of interest. The Board is responsiblethe entity’s total annual revenues.
Criteria for review,committee approval or ratification of “related-person transactions” involvinga related party transaction, in addition to factors that the Company and related persons.committee otherwise deems appropriate under the circumstances, include:
| ● | whether terms of the transaction are no less favorable than terms generally available from an unaffiliated third party; and |
| ● | in the case of a non-employee director, whether the transaction would disqualify the director from (1) being independent under Nasdaq Stock Market listing requirements, or (2) from serving on the audit committee, compensation committee or nominating and governance committee under Nasdaq Stock Market and other regulatory requirements. |
With the exception of the transactions set forth below, the Company waswe were not a party to any transaction (in which the amount involved exceeded the lesser of $120,000 or 1%one percent of the average of our assets for the last two fiscal years) in which a director, executive officer, holder of more than five percent of our common stock, or any member of the immediate family of any such person has or will have a direct or indirect material interest and no such transactions are currently proposed.
Transactions with JMW Fund, LLC, San Gabriel Fund,CorLyst, LLC and Richland Fund,DKBK Enterprises, LLC
Mr. Yorke, a member of our Board of Directors, manages JMW Fund, LLC, San Gabriel Fund, LLC and Richland Fund, LLC, collectively known as the “Funds.” The Funds owned 2,025,792 shares of the Company at December 31, 2017. In addition, the Funds owned $1.0 million in senior convertible notes at December 31, 2017. The notes have now been converted into shares of common stock and warrants.
Transactions Following to the October 2017 Promet Transaction:
CorLyst, LLC
CorLyst LLC (“CorLyst”) was a related party to Promet Therapeutics, LLC (“Promet”) as one of the largest investors in Promet. As a result of the transaction with Heatwurx, all of Promet’s assets were purchased in exchange for equity in the companycompany. Promet has since distributed the shares to its stockholders and CorLyst is now considered a related party to Processa by association. CorLyst and Processaparty. We share certain administrative expenses with CorLyst (salaries, healthcare and office space). David Young, our Chief Executive OfficerCEO and Chairman of our Board of Directors, is also the Chief Executive OfficerCEO and Managing Member of CorLyst. David Young spends less than one hour per week on CorLyst activity, while averaging more than 40 hours per week on Processa activities. CorLyst beneficially owns 1,095,649 shares of our common stock.
On September 20, 2019, we entered into two separate LOC Agreements (“LOC Agreements”) with DKBK Enterprises, LLC (“DKBK”) and CorLyst, LLC (“CorLyst”, and, together with DKBK, collectively, “Lenders”), both related parties, which provide a revolving commitment of up to $700,000 each ($1.4 million total). Under the LOC Agreements, all funds borrowed bear interest at an annual rate of 8%. The promissory notes issued in connection with the LOC Agreements provide that the Lenders have the right to convert all or any portion of the principal and accrued and unpaid interest into our common stock on the same terms as our 2019 Senior Convertible Notes. Therefore, the Lenders may convert the outstanding debt under the LOC Agreements into our common stock at a conversion price equal to the lower of (i) $14.28 per share, (ii) a price per share equal to a 10% discount to the pre-money valuation of an equity sale of the Company’s common stock for cash, or (iii) at an adjusted price; all as more particularly described in the 2019 Senior Convertible Notes.
Our CEO is also the CEO and Managing Member of DKBK, which directly holds 16,166 shares of our common stock. In April and June 2020, we drew $500,000 under the LOC Agreement with DKBK. On July 21, 2020, we drew an additional $200,000, bringing the total amount drawn under the LOC Agreement with DKBK to $700,000.
DKBK has informed us that they will convert the $700,000 principal amount outstanding under the LOC Agreement with DKBK and related accrued interest simultaneously with the closing of this offering into 156,450 shares of common stock, based on interest accrued through June 30, 2020 and a conversion price of $4.50 per share, which, pursuant to the LOC Agreement, is a 10% discount on an assumed public offering price of $5.00 per share.
License Agreement with CoNCERT Pharmaceuticals, Inc.
On October 4, 2017, Promet entered into a license agreement with CoNCERT (“the CoNCERT Agreement”). On March 19, 2018, we, Promet, and CoNCERT entered into an Amended Option Licensing Agreement (“March Amendment”) that, among other things, assigned the CoNCERT Agreement from Promet to us and we exercised the exclusive commercial license option for the PCS499 compound from CoNCERT.
The CoNCERT Agreement provides us with an exclusive (including to CoNCERT) royalty-bearing license to CoNCERT’s patent rights and know-how to develop, manufacture, use, sub-license and commercialize compounds (PCS499 and each metabolite thereof) and pharmaceutical products with such compounds worldwide. We are required to pay CoNCERT royalties, on a product by product basis, on worldwide net sales, as more fully described in the Description of Business.
Participation in this Offering
Certain of our officers, directors and existing stockholders have indicated an interest in purchasing shares in this offering on the same terms as those offered to the public. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, fewer or no shares in this offering to any of these officers, directors or stockholders, or any of these officers, directors or stockholders may determine to purchase more, fewer or no shares in this offering. The underwriters will receive the same underwriting discounts and commissions on any shares purchased by these officers, directors and stockholders as they will on any other shares sold to the public in this offering.
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The following table sets forth certain information with respect to the beneficial ownership of our common stock at August 31, 2020 for:
| ● | Each of our directors; | |
| ● | Each of our named executive officers; | |
| ● | All of our current directors and executive officers as a group; and | |
| ● | Each person, or group of affiliated persons, who beneficially owned more than 5% of our common stock. |
The number of shares of our common stock beneficially owned by each entity, person, director or executive officer is determined in accordance with the rules of the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares over which the individual has sole or shared voting power or investment power as well as any shares that the individual has the right to acquire within 60 days of August 31, 2020, through the exercise of any stock option, warrants or other rights. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock held by that person.
The percentage of shares beneficially owned is computed on the basis of 5,515,447 shares of our common stock outstanding as of August 31, 2020. Shares of our common stock that a person has the right to acquire within 60 days of August 31, 2020, are deemed outstanding for purposes of computing the percentage ownership of the person holding such rights, but are not deemed outstanding for purposes of computing the percentage ownership of any other person, except with respect to the percentage ownership of all directors and executive officers as a group.
Certain of our officers, directors and existing stockholders have indicated an interest in purchasing shares in this offering on the same terms as those offered to the public. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, fewer or no shares in this offering to any of these officers, directors or stockholders, or any of these officers, directors or stockholders may determine to purchase more, fewer or no shares in this offering. The underwriters will receive the same underwriting discounts and commissions on any shares purchased by these officers, directors and stockholders as they will on any other shares sold to the public in this offering. The below ownership percentages do not reflect the potential purchase of any shares of common stock in this offering by these officers, directors or stockholders.
| Shares beneficially owned prior to this offering | Shares beneficially owned after this offering(13) | |||||||||||||||
| Shares | Percent | Shares | Percent | |||||||||||||
| Name and address of beneficial owner (1) | ||||||||||||||||
| Officers and Directors | ||||||||||||||||
| David Young (2), (9) | 1,348,557 | 24.2 | % | % | ||||||||||||
| Sian Bigora (3) | 500,677 | 9.1 | % | 521,925 | % | |||||||||||
| Patrick Lin (7) | 345,448 | 6.3 | % | 366,696 | % | |||||||||||
| Wendy Guy (4) | 318,402 | 5.8 | % | 339,650 | % | |||||||||||
| Virgil Thompson (8) | 88,108 | 1.6 | % | 91,376 | % | |||||||||||
| Justin Yorke (5) | 446,946 | 7.9 | % | 450,214 | % | |||||||||||
| Geraldine Pannu | - | * | 3,268 | * | ||||||||||||
| James Stanker (12) | 52,282 | * | 73,530 | * | ||||||||||||
| Total for all Officers and Directors | 3,100,420 | 55.7 | % | % | ||||||||||||
| More than 5% Stockholders: | ||||||||||||||||
| CorLyst, LLC (6), (9), (11) | 1,095,649 | 19.8 | % | 1,095,649 | % | |||||||||||
| Young-Plaisance Revoc. Trust (9), (10) | 482,030 | 8.7 | % | 482,030 | % | |||||||||||
| CoNCERT Pharmaceuticals, Inc. | 298,615 | 5.4 | % | 298,615 | % | |||||||||||
* represents less than 1%
| (1) | Unless otherwise indicated, the address for each beneficial owner listed is c/o Processa Pharmaceuticals, Inc., 7380 Coca Cola Drive, Suite 106, Hanover, Maryland 21076. |
| (2) | Consists of (i) 305,854 shares of common stock held directly by Dr. Young; (ii) 5,227 shares of common stock issuable pursuant to options held directly by Dr. Young exercisable within 60 days of August 31, 2020; (iii), 482,030 shares held by the Young-Plaisance Revoc. Trust; (iv) 161,672 shares held by three other family entities; (v) 390,627 shares held by CorLyst, LLC (“CorLyst”) (317,446 shares held on behalf of entities controlled by Dr. Young, 52,872 shares held on behalf of unrelated stockholders, and stock purchase warrants to purchase 20,309 shares); and (vi) 3,147 shares that Dr. Young will receive on the exercise of stock purchase warrants. Dr. Young is the Trustee of the Young-Plaisance Revoc. Trust and the Chief Executive Officer and Managing Member of CorLyst. Dr. Young disclaims beneficial ownership of a portion of CorLyst shares. |
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| (3) | Consists of (i) 368,747 shares of common stock held directly by Dr. Bigora; (ii) 126,973 shares held by CorLyst; and (iii) 5,227 shares of common stock issuable pursuant to options held directly by Dr. Bigora exercisable within 60 days of August 31, 2020. |
| (4) | Consists of (i) 154,452 shares of common stock held directly by Ms. Guy; (ii) 158,723 shares held by CorLyst; and (iii) 5,227 shares of common stock issuable pursuant to options held directly by Ms. Guy exercisable within 60 days of August 31, 2020. |
| (5) | Justin Yorke, a member of our Board of Directors, is a manager of the San Gabriel Fund, LLC, JMW Fund, LLC and the Richland Fund, LLC. The shares of common stock reported for Mr. Yorke include the shares held by these Funds and 73,657 shares that the funds will receive on the exercise of stock purchase warrants. Also included are 679 shares of common stock issuable pursuant to options held directly by Mr. Yorke exercisable within 60 days of August 31, 2020. |
| (6) | CorLyst is the beneficial holder of 1,095,649 shares. This beneficial ownership is allocated in the above table as follows: David Young related entities – 317,446, Sian Bigora – 126,973; Wendy Guy – 158,723; the Young-Plaisance Revoc. Trust – 419,326; other unrelated stockholders – 52,872; and stock purchase warrants to purchase 20,309 shares. |
| (7) | Consists of (i) 335,752 shares of common stock held directly by Mr. Lin; (ii) 5,227 shares of common stock issuable pursuant to options held directly by Mr. Lin exercisable within 60 days of August 31, 2020; and (iii) 4,469 shares that Mr. Lin will receive on the exercise of stock purchase warrants. |
| (8) | Consists of (i) 87,429 shares of common stock held directly by Mr. Thompson and (ii) 679 shares of common stock issuable pursuant to options held directly by Mr. Thompson exercisable within 60 days of August 31, 2020. |
| (9) | Although David Young confers with all other members or parties associated with CorLyst and the Young-Plaisance Revoc Trust, Dr. Young has voting and investment control of these entities. |
| (10) | Includes 30,465 shares of common stock that will be issued upon the exercise of stock purchase warrants. |
| (11) | Includes 20,309 shares of common stock that will be issued upon the exercise of stock purchase warrants. |
| (12) | Consists of (i) 20,000 shares of common stock held directly by Mr. Stanker and (ii) 32,282 shares of common stock issuable pursuant to options held directly by Mr. Stanker exercisable within 60 days of August 31, 2020. |
| (13) | The number of shares beneficially owned after this offering includes (i) shares of common stock beneficially owned by David Young as a result of the conversion of the LOC Agreement with DKBK and (ii) the vesting of 21,248 shares of restricted common stock which were granted to each of David Young, Sian Bigora, Patrick Lin, Wendy Guy and James Stanker; and 3,268 shares of restricted common stock granted to each of Virgil Thompson, Justin York and Geraldine Pannu on August 5, 2020 pursuant to our 2019 Omnibus Incentive Plan, which shares vest upon the completion of this offering. |
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The following description of our securities and provisions of our amended and restated certificate of incorporation and amended and restated bylaws is only a summary. You should also refer to the copies of our amended and restated certificate of incorporation and amended and restated bylaws which have been filed with the SEC.
We have the authority to issue an aggregate of 350,000,00030,000,000 shares of $0.0001 par value common stock and 10,000,0001,000,000 shares of $0.0001 par value preferred stock. As of July 24, 2018,August 31, 2020, there are 38,674,264were 5,514,447 shares of common stock outstanding and no shares of preferred stock outstanding.
Common Stock
Dividend Rights.Subject to the rights of holders of preferred stock of any series that may be issued and outstanding from time to time, holders of our common stock are entitled to receive such dividends and other distributions as may be declared by our boardBoard of directorsDirectors from time to time.
Voting Rights.Each outstanding share of our common stock is entitled to one vote on all matters submitted to a vote of stockholders generally. In the event we issue one or more series of preferred or other securities in the future such preferred stock or other securities may be given rights to vote, either together with the common stock or as a separate class on one or more types of matters. The holders of our common stock do not have cumulative voting rightsrights.
Liquidation Rights.In the event of any liquidation, dissolution or winding up of the Company, the holders of our common stock will be entitled, subject to any preferential or other rights of any then outstanding preferred stock, to receive all assets of the Company available for distribution to stockholders.
Preemptive Rights.As of the date hereof, the holders of our common stock have no preemptive rights in their capacities as such holders.
Board of Directors.Holders of common stock do not have cumulative voting rights with respect to the election of directors. At any meeting to elect directors by holders of our common stock, the presence, in person or by proxy, of the holders of a majority of the voting power of shares of our capital stock then outstanding will constitute a quorum for such election. Directors may be elected by a plurality of the votes of the shares present and entitled to vote on the election of directors, except for directors whom the holders of any then outstanding preferred stock have the right to elect, if any.
Preferred Stock
Our Board is authorized, subject to certain limitations prescribed by law, without further stockholder approval, to issue from time to time up to an aggregate of 10,000,0001,000,000 shares of preferred stock in one or more series and to fix or alter the designations, preferences, rights and any qualifications, limitations or restrictions of the shares of each such series thereof, including the dividend rights, dividend rates, conversion rights, voting rights and terms of redemption of shares constituting any series or designations of such seriesseries. The rights of holders of our common stock may be subject to, and adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change of control and may adversely affect the voting and other rights of holders of our common stock.
Warrants
As of the date of this prospectus, we have issuedoutstanding warrants to purchase shares of our common stock to various persons and entities, under which we could be obligated to issue up to 2,812,785533,959 shares of common stock, including:
| (a) | ||
| (b) | 201,781 shares of common stock issuable upon exercise of outstanding warrants allowing the holders to purchase shares of common stock at an exercise price of $17.16 per share expiring between May 25, 2021 and July 2, 2022; of which warrants for 11,347 shares of common stock contain cashless exercise provisions; and | |
In addition, there are 117,459 shares of common stock issuable upon exercise of warrants at an exercise price of $2.452 per share through June 29, 2021 that will be issued upon conversion of our 8.0% Senior Convertible Notes.
None of the Warrants may be exercised prior to November 15, 2018.
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Debt
The Company recognizes debt issuance costs incurred on the 8.0%8% Senior Convertible Notes as
During the fourth quarter of 2019, accredited investors purchased $805,000 of 8% Senior Convertible Notes (“2019 Senior Notes”) from us. For every $1,000 principal amount purchased, the note holders received 70 warrants to purchase shares of our common stock. As a reductionresult, we granted 56,350 warrants to purchase shares of our common stock at an exercise price of $19.04, which expire on December 19, 2023. The 2019 Senior Notes bear interest at 8% per year and if converted, the interest is payable in common stock. The 2019 Senior Notes mature on December 15, 2020.
The 2019 Senior Notes are convertible by the holder upon (i) completion of listing our common stock on either the Nasdaq Capital Market or the New York Stock Exchange or if we raise at least $14 million, prior to December 15, 2020, the maturity date of the carrying2019 Senior Notes, in one or more qualified financings. If the 2019 Senior Notes are not paid or converted prior to their maturity date, the principal and any accrued interest will be automatically or mandatorily converted into our common stock. The 2019 Senior Notes, plus any accrued interest is convertible into shares of our common stock at a conversion price equal to the lower of (i) $14.28 per share or (ii) a price per share equal to a 10% discount to the pre-money valuation of an equity sale of the Company’s common stock for cash as defined in the 2019 Senior Note agreement, occurring after the closing of the 2019 Senior Note financing. The noteholders have the option to convert their notes upon the closing of this offering. In the event that all of the principal and related accrued interest of the $805,000 2019 Senior Notes are converted upon the closing of this offering, we would issue 190,989 shares of common stock, based on interest accrued through June 30, 2020 and a conversion price of $4.50 per share, which, pursuant to the 2019 Senior Note Agreement, is a 10% discount on an assumed public offering price of $5.00 per share.
The 2019 Senior Notes provide the holders with (a) the option of receiving 110% of principal plus accrued interest in the event there is a change of control prior to conversion of the 2019 Senior Notes; (b) weighted-average anti-dilution protection in event of any sale of securities at a net consideration per share that is less than the applicable conversion price per share to the holder until we have raised an additional $14 million from the sale of certain securities; and (c) certain preemptive rights pro rata to their respective interests through December 31, 2021.
The 2019 Senior Notes contains negative covenants that do not permit us to incur additional indebtedness or liens on property or assets owned, repurchase common stock, pay dividends, or enter into any transaction with affiliates of ours that would require disclosure in a public filing with the Securities and Exchange Commission. Upon an event of default, the outstanding principal amount of the Senior Convertible Notes, onplus accrued but unpaid interest and other amounts owing in respect thereof through the facedate of acceleration, shall become immediately due and payable in cash at the consolidated balance sheet.holder’s election, if not cured within the cure period.
We incurred $4,280 in debt issuance costs related to the 2019 Senior Notes. The debt issuance costs are amortized to interest expense using the interest methodstraight line amortization over the term of the 2019 Senior Convertible Notes. We recognized debt issuance costs incurred as a reduction of the carrying amount of the 2019 Senior Notes on the face of the consolidated balance sheet.
Principal and interest under eachWe determined the sale of 2019 Senior Note is due on the earlier of (i) the mandatory and automatic conversion of the Senior NoteNotes, which are convertible into the next PIPE financing we undertake, provided the PIPE financing yields gross proceeds of at least $4 millioncommon stock at a conversion price per share equalrate of $14.28 triggered the full ratchet anti-dilution provision of the common stock we sold in 2018 Private Placement Transactions, as described in our December 31, 2019 audited consolidated financial statements included elsewhere in this prospectus. As a result, those stockholders were entitled to the lower of (a) $72 million pre-money valuation or (b) a 10% discount to the pre-money valuation (Qualified Financing) or (ii) the one-year anniversary of that Senior Note (Maturity Date). The Senior Notes bear interest at 8.0% per year and are payable in kind (in common stock). At the Maturity Date, the outstanding principal and accrued interest on the Senior Note will be automatically converted into28,971 shares of common stock in the fourth quarter of 2019, which were issued on June 18, 2020. We determined the value of these shares to be $506,993 based on a price per share of $17.50, which represents the closing price per share on October 18, 2019, the last day investors had to rescind their investment. We recorded the triggering of the Company equalfull ratchet anti-dilution provision as a deemed dividend payable at December 31, 2019 in our statement of changes in stockholders’ equity at par value due to the lesser of (i) $72 million pre-money valuation or (ii) any adjusted price resulting from the application of down round pricing during the anti-dilution period through December 31, 2018. In such event, the anti-dilution period, as defined, will be extendedfact that we have a retained deficit and are receiving no additional consideration for a further 12 months. The Senior Notes are secured by a security interest in the assets of the Company and contain negative covenants as defined in the note agreement.these shares.
AsRelated Party Lines of Credit
On September 20, 2019, we entered into two separate LOC Agreements, one with DKBK and another with CorLyst (“the Lenders”), which provide a revolving commitment of up to $700,000 each ($1.4 million total). Our CEO is also the CEO and Managing Member of both Lenders. DKBK beneficially owns 16,166 shares of our common stock, while CorLyst beneficially owns 1,095,649 shares of our common stock. Under the LOC Agreements, all funds borrowed will bear an 8% annual interest rate, which is prorated monthly from the date money has been borrowed to the date money has been paid back. We agreed to furnish certified financial statements to the Lenders upon demand so long as indebted under the LOC Agreements and the Note remains unpaid. The Lenders have the right to convert all or any portion of the debt and interest into shares in our common stock on the same terms as our 2019 Senior Convertible Notes. We drew funds in April, June and July of 2020 totaling $700,000 under the LOC Agreement with DKBK.
DKBK has informed us that they will convert the $700,000 principal amount and related accrued interest outstanding under the LOC Agreement simultaneously with the closing of this offering into 156,450 shares of common stock based on interest accrued through June 30, 2018, $230,0002020 and a conversion price of 8.0% Senior Convertible Notes are outstanding. Although$4.50 per share, which represents a 10% discount on the PIPE contingency hasassumed public offering price of $5.00 per share of our common stock.
Registration Rights
Following the offering, shares of our common stock will be subject to registration rights, as described below.
Aposense, Ltd. Pursuant to the License Agreement with Aposense, commencing 180 days after the effectiveness of this registration statement, upon Aposense’s request, we will file a registration statement within 30 days for the shares issued to Aposense in connection with the License Agreement and will use commercially reasonable efforts to cause such registration statement to become effective. The obligation to register the shares will cease when such shares (A) have been satisfiedsold or otherwise disposed of or (B) may be sold under Rule 144 without regard to volume restrictions.
Yuhan Corporation. Pursuant to the Yuhan License Agreement and the related Share Issuance Agreement, commencing 180 days after the completion of this offering, upon Yuhan’s written request, we will file a resale registration statement on Form S-3 (or such other available registration statement) for purposesthe shares issued to Yuhan in connection with such agreements (including the 250,000 shares of convertingcommon stock previously issued and any shares of common stock issued a result of the Senior Notes, $230,000achievement of any milestones) and will use commercially reasonable efforts to cause such Senior Notes remain outstanding untilregistration statement to become effective. The obligation to register the Alberta Securities Commission permitsshares will cease when such shares (A) have been sold or otherwise disposed of or (B) may be sold under Rule 144 without regard to volume restrictions.
Elion Oncology, Inc. Pursuant to the issuanceElion License Agreement, commencing 180 days after the agreement, upon Elion’s request, we will use commercially reasonable efforts to our Canadian holders.file a registration statement for the shares issued to Elion in connection with the Elion License Agreement and will use commercially reasonable efforts to cause such registration statement to become effective. The obligation to register the shares will cease when such shares (A) have been sold or otherwise disposed of or (B) may be sold under Rule 144 without regard to volume restrictions.
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Indemnification of Directors and Officers
Our amended and restated certificate of incorporation provides that, to the fullest extent permitted by the Delaware General Corporate Law (“DGCL”) as it may hereafter be amended, none of our directors will be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director. Under the DGCL as it now reads, such limitation of liability is not permitted:
| ● | for any breach of the director’s duty of loyalty to us or our stockholders; | |
| ● | for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; | |
| ● | for payments of unlawful dividends or unlawful stock purchases or redemptions under Section 174 of the DGCL; or | |
| ● | for any transaction from which the director derived an improper personal benefit. |
These provisions will have no effect on the availability of equitable remedies such as an injunction or rescission based on a director’s breach of his or her duty of care.
Our amended and restated certificate of incorporation and our amended and restated bylaws include provisions that require us to indemnify and advance expenses, to the fullest extent allowable under the DGCL as it now exists or may hereafter be amended, to our directors or officers for actions taken as a director or officer of us, or for serving at our request as a director or officer at another corporation or enterprise, as the case may be.
Section 145 of the DGCL provides that a corporation may indemnify directors and officers, as well as other employees and individuals, against expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement, that are incurred in connection with various actions, suits or proceedings, whether civil, criminal, administrative or investigative, other than an action by or in the right of the corporation, known as a derivative action, if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, if they had no reasonable cause to believe their conduct was unlawful. A similar standard is applicable in the case of derivative actions, except that indemnification only extends to expenses, including attorneys’ fees, incurred in connection with the defense or settlement of such actions, and the statute requires court approval before there can be any indemnification if the person seeking indemnification has been found liable to the corporation. The statute provides that it is not exclusive of other indemnification that may be granted by a corporation’s bylaws, disinterested director vote, stockholder vote, agreement or otherwise.
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Our amended and restated bylaws require us to indemnify any person who was or is a party or is threatened to be made a party to, or was otherwise involved in, a legal proceeding by reason of the fact that he or she is or was a director or officer of the Company or is or was serving at our request as a director or officer of another corporation or enterprise, as the case may be, to the fullest extent authorized by the DGCL as it now exists or may hereafter be amended, against all expense, liability and loss (including attorneys’ fees, judgments, fines, Employee Retirement Income Security Act excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such director or officer in connection with such service. The right to indemnification in our amended and restated bylaws includes the right to be paid by the Company the expenses incurred in defending any proceeding for which indemnification may be sought in advance of the final disposition of such proceeding, subject to certain limitations. We carry directors’ and officers’ insurance protecting us, any director, officer, employee or agent of ours or who was serving at the request of the Company as a director, officer, employee or agent of another corporation or enterprise, as the case may be, against any expense, liability or loss, whether or not we would have the power to indemnify the person under the DGCL.
The limitation of liability and indemnification and advancement provisions in our amended and restated certificate of incorporation and our amended and restated bylaws may discourage stockholders from bringing a lawsuit against our directors for breach of fiduciary duty. These provisions also may reduce the likelihood of derivative litigation against our directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. In addition, your investment in our common stock may be adversely affected to the extent we pay the costs of settlement and damage awards under these indemnification provisions.
Certain Anti-Takeover Effects
Provisions of Delaware Law.We are a Delaware corporation and Section 203 of the DGCL applies to us. It is an anti-takeover statute that is designed to protect stockholders against coercive, unfair or inadequate tender offers and other abusive tactics and to encourage any person contemplating a business combination with us to negotiate with our boardBoard of directorsDirectors for the fair and equitable treatment of all stockholders.
Under Section 203 of the DGCL, a Delaware corporation is not permitted to engage in a “business combination” with an “interested stockholder” for a period of three years following the date that the stockholder became an interested stockholder. As defined for this purpose, the term “business combination” includes a merger, consolidation, asset sale or other transaction resulting in a financial benefit to the interested stockholder. The term “interested stockholder” is defined to mean a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation’s outstanding voting stock. This prohibition does not apply if:
| ● | prior to the time that the stockholder became an interested stockholder, the | |
| ● | upon completion of the transaction resulting in the stockholder becoming an interested stockholder, the stockholder owns at least 85% of the outstanding voting stock of the corporation, excluding voting stock owned by directors who are also officers and by certain employee stock plans; or | |
| ● | at or subsequent to the time that the stockholder became an interested stockholder, the business combination is approved by the |
A Delaware corporation may elect not to be governed by these restrictions. We have not opted out of Section 203.
Advance Notice Procedures.Our bylaws establish an advance notice procedure for stockholder nominations of persons for election to our boardBoard of directorsDirectors and for any proposals to be presented by stockholders at an annual meeting. Stockholders at an annual meeting will only be able to consider nominations and other proposals specified in the notice of meeting or brought before the meeting by or at the direction of our boardBoard of directorsDirectors or by a stockholder who was a stockholder of record on the record date for the meeting, who is entitled to vote at the meeting and who has given our corporate secretary timely written notice, in proper form, of the stockholder’s intention to nominate a person for election as a director or to bring a proposal for action at the meeting.
SHARES ELIGIBLE FOR RESALEFUTURE SALE
There is currently no liquid tradingPrior to this offering, there has been a limited public market for our common stock and one may not develop in the future.stock. Future sales of substantial amounts of common stock including shares of common stock issued upon exercise of outstanding options and exercise of the warrants offered in this prospectus in the public market, or the anticipation of thoseperception that such sales may occur, could adversely affect the market prices prevailingprice of our common stock. Although we have been approved for trading on Nasdaq, we cannot assure you that there will be an active public market for our common stock.
All shares of common stock sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except for any shares of common stock purchased by our “affiliates,” as that term is defined in Rule 144 under the Securities Act or any shares subject to lock-up agreements. Shares purchased by our affiliates would be subject to the Rule 144 resale restrictions described below, other than the holding period requirement.
The remaining shares of common stock outstanding after this offering, excluding 167,551 shares issued prior to our acquisition of Promet in 2017, shares issued pursuant to our Omnibus Plan and any shares sold pursuant to our Selling Stockholders Registration Statement on Form S-1 (Registration No. 333-226428), are “restricted securities,” as that term is defined in Rule 144 under the Securities Act. These restricted securities are eligible for public sale only if they are registered under the Securities Act or if they qualify for an exemption from registration under Rule 144 or Rule 701 under the Securities Act, each of which is summarized below.
We may issue shares of common stock from time to time as consideration for future licensing transactions, investments or other corporate purposes and could impair our ability to raise capital through salesthe number of shares of common stock that we may issue may also be significant. We may also grant registration rights covering those shares of common stock issued in connection with any such transaction. See “Registration Rights” below.
Lock-Up Agreements
In connection with this offering, certain of our equity securities.stockholders and our directors and executive officers have agreed with the underwriters that, subject to certain customary exceptions, without the prior written consent of Craig-Hallum Capital Group LLC and Benchmark Company, LLC on behalf of the underwriters, they will not, for 90 days (the “Lock-Up Period”), (a) offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, make any short sale or otherwise transfer or dispose of, directly or indirectly, our common stock or any securities convertible into, exercisable or exchangeable for or that represent the right to receive our common stock; (b) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of such securities, whether any such transaction is to be settled by delivery of common stock or other securities, in cash or otherwise; (c) make any demand for or exercise any right with respect to the registration of any shares of our common stock or any security convertible into, exercisable or exchangeable for our common stock; or (d) publicly disclose the intention to do any of the foregoing. The underwriters may, in their sole discretion, permit any such transactions during the Lock-Up Period in whole or in part and at any time, with or without notice.
Upon the expiration of the Lock-Up Period, substantially all of the shares subject to such lock-up restrictions will become eligible for sale, subject to the limitations discussed above.
Rule 144
AsRule 144, as currently in effect, generally provides that, as we have been subject to the public company reporting requirements of July 24, 2018, there were 38,674,264Section 13 or Section 15(d) of the Exchange Act for at least 90 days, a stockholder who is not deemed to have been one of our affiliates at any time during the preceding 90 days and who has beneficially owned the shares of our commoncapital stock issued and outstanding,proposed to be sold for at least six months is entitled to sell such our securities in reliance upon Rule 144 without complying with the volume limitation, manner of which 37,501,407 shares are deemed “restricted securities,” within the meaningsale or notice conditions of Rule 144. Absent registrationAs the Company was previously a “shell company,” as such term is defined in Rule 12b-2 of the Exchange Act, our stockholders, whether affiliates or non-affiliates, may never sell shares of our securities under Rule 144, unless current public information is available about us at the Securities Act,time of the sale of such shares is subject to shares.
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Rule 144 as promulgated under the Securities Act.
In general, under Rule 144, subject to the satisfaction of certain other conditions,also provides that a personstockholder who is deemed to behave been one of our affiliates at any time during the preceding 90 days and who has beneficially owned restricted shares of our common stocksecurities that are proposed to be sold for at least one yearsix months is permittedentitled to sell such securities in a brokerage transaction,reliance upon Rule 144 within any three-monththree month period beginning 90 days after the date of this prospectus a number of shares that does not exceed the greater of 1% of the total number of outstanding shares of the same class, or, if our common stock is quoted on a stock exchange, the average weekly trading volume during the four calendar weeks preceding the sale, if greater.following:
Rule 144 also permits a person who presently is not and who has not been an affiliate of ours for at least three months immediately preceding the sale and who has beneficially owned the shares of common stock for at least six months to sell such shares without restriction other than the requirement that there be current public information as set forth in Rule 144. If a non-affiliate has held the shares for more than one year, such person may make unlimited sales pursuant to Rule 144 without restriction.
As a former shell company, Rule 144 is not available to our stockholders until October 18, 2018.
The possibility that substantial amounts of our common stock may be sold As under Rule 144 into the public market may adversely affect prevailing market prices for the common stock and could impair our ability to raise capital in the future through the sale of equity securities. Please refer to “Risk Factors.”
Registration Rights
As part of the PIPE Transaction, we agreed to register the common stock issued in such transaction plus the common stock to be issued upon the exercise of the warrants issued in the PIPE Transaction. We agreed that we would file a registration statement for such shares and will use commercially reasonable efforts to ensure that the registration statement becomes effective as soon as practical. We further agreed to keep the registration statement effective until the due date of our next annual report on Form 10-K for the fiscal year ending December 31, 2018, which is expected to be April 1, 2019. Aside from the Selling Stockholders paying any and all costs, fees, discounts or commissions attributable to the sale of shares as well as fees and expenses of their counsel and other advisors, we are paying all fees and expenses related to the registration statement.
In connection with the issuance of our 8.0% Senior Convertible Notes, we agreed that holders of such notes would be included in any registration of equity securities by the Company for its own account or for the account of others.
As part of the private placement for our clinical trial funding, we agreed to register the common stock issued in such transaction plus the common stock to be issued upon the exercise of the warrants issued in the clinical trial funding placement. The terms of our commitment are generally the same as those we provided as part of the PIPE Transaction.
The following table presents information regarding the Selling Stockholders. The Selling Stockholders may sell up to 6,379,267 shares of common stock (including shares issuable upon exercise of the Warrants). The percentage of outstanding shares beneficially owned is based on 38,674,264 shares of common stock issued and outstanding as of July 24, 2018. Information with respect to beneficial ownership is based upon information provided to us by the Selling Stockholders. Except as may be otherwise described below, to the best of our knowledge, the named Selling Stockholders beneficially own and have sole voting and investment authority as to all of the shares set forth opposite their names. The Selling Stockholders who are known to us to be a registered broker-dealer or an affiliate of a registered broker-dealer are identified in the notes to the table below. Each of the Selling Stockholders has acquired its shares solely for investment and not with a view to or for resale or distribution of such securities.
| Selling Stockholders | # of Shares to | % of Outstanding Shares Owned Prior to the Offering(1) | # of Shares Registered and to be Sold in this Offering(2) (3) | Estimated # of Shares this | ||||||||||||
| PoC Capital, LLC | 803,166 | 2.08 | 1,606,332 | 0 | ||||||||||||
| Katz Family Trust | 220,265 | * | 440,530 | 0 | ||||||||||||
| Young-Plaisance Revocable Trust(4) | 2,887,019 | 7.46 | 426,500 | 2,673,769 | ||||||||||||
| JMW Fund, LLC(5) | 740,326 | 1.91 | 360,908 | 559,872 | ||||||||||||
| San Gabriel Fund, LLC(5) | 624,217 | 1.61 | 360,908 | 443,763 | ||||||||||||
| Richland Fund, LLC(5) | 548,729 | 1.42 | 309,350 | 394,054 | ||||||||||||
| CorLyst, LLC(12) | 2,493,403 | 6.45 | 264,318 | 2,361,244 | ||||||||||||
| Weintraub Capital Management | 127,672 | * | 255,344 | 0 | ||||||||||||
| Thomas Hudson | 110,133 | * | 220,266 | 0 | ||||||||||||
| Valley High Limited Partnership | 110,133 | * | 220,266 | 0 | ||||||||||||
| The Farwell Family 1998 Trust dtd 12/2/1998 | 110,000 | * | 220,000 | 0 | ||||||||||||
| Prestwick Associates LLC(6) | 0 | * | 145,049 | 0 | ||||||||||||
| The 2003 Bruce E. Whitten Trust(7) | 66,080 | * | 132,160 | 0 | ||||||||||||
| Eric and Laura Lamison Family Trust | 60,329 | * | 120,658 | 0 | ||||||||||||
| William F. Kruse | 51,069 | * | 102,138 | 0 | ||||||||||||
| Boustead Securities, LLC(6) | 0 | * | 66,098 | 0 | ||||||||||||
| Patrick Lin(8) | 2,365,597 | 6.12 | 62,558 | 2,334,327 | ||||||||||||
| Herman Lam | 292,369 | * | 61,284 | 261,727 | ||||||||||||
| Kong 1992 Family Trust | 287,507 | * | 51,560 | 132,832 | ||||||||||||
| JPG Investments, LLC | 32,643 | * | 51,070 | 7,108 | ||||||||||||
| Lee and Janet Keyte | 37,000 | * | 51,070 | 11,465 | ||||||||||||
| Michael Gonzalez | 25,535 | * | 51,070 | 0 | ||||||||||||
| Paul and Heidi Reed | 25,535 | * | 51,070 | 0 | ||||||||||||
| Underwood Family Partners | 27,573 | * | 51,070 | 0 | ||||||||||||
| David Young(9) | 7,852,477 | 20.30 | 44,054 | 7,830,450 | ||||||||||||
| Intracoastal Capital, LLC | 22,027 | * | 44,054 | 0 | ||||||||||||
| Les Walter | 22,027 | * | 44,054 | 0 | ||||||||||||
| Vijay K. and Reena E. Panikar | 22,027 | * | 44,054 | 0 | ||||||||||||
| Eric Cheng(10) | 22,026 | * | 44,052 | 0 | ||||||||||||
| Yan Chin(11) | 385,108 | 1.00 | 35,242 | 236,622 | ||||||||||||
| William Barham | 15,500 | * | 31,000 | 0 | ||||||||||||
| Chris Lahiji | 14,538 | * | 29,076 | 0 | ||||||||||||
| Jerry Yang | 13,216 | * | 26,432 | 0 | ||||||||||||
| Beverly Munselle Exemption Trust | 12,768 | * | 25,536 | 0 | ||||||||||||
| Phil Yu | 78,200 | * | 25,536 | 65,432 | ||||||||||||
| Weston Munselle | 12,768 | * | 25,536 | 0 | ||||||||||||
| Robert Lamoreaux | 12,000 | * | 24,000 | 0 | ||||||||||||
| Charles A. & Diane C. Peterson | 11,014 | * | 22,028 | 0 | ||||||||||||
| Conrad and Selenda Lai Family Trust | 11,014 | * | 22,028 | 0 | ||||||||||||
| Gordon Wang | 11,014 | * | 22,028 | 0 | ||||||||||||
| Raymond Kuo | 11,014 | * | 22,028 | 0 | ||||||||||||
| Richard Yarborough | 11,014 | * | 22,028 | 0 | ||||||||||||
| Robert Chen | 11,014 | * | 22,028 | 0 | ||||||||||||
| Sean McNeil | 11,014 | * | 22,028 | 0 | ||||||||||||
| Sharon Popp | 11,014 | * | 22,028 | 0 | ||||||||||||
| Tom Yu | 11,000 | * | 22,000 | 0 | ||||||||||||
| Carlo Casulo | 10,000 | * | 20,000 | 0 | ||||||||||||
| King Yung Hor | 4,500 | * | 9,000 | 0 | ||||||||||||
| James A. Ntambi | 4,406 | * | 8,812 | 0 | ||||||||||||
| Ritu Lal and Soujanya Bhumkar | 4,406 | * | 8,812 | 0 | ||||||||||||
| Kyle Miller | 2,554 | * | 5,108 | 0 | ||||||||||||
| Michael and Judith Welch | 2,554 | * | 5,108 | 0 | ||||||||||||
| 15,278,092 | 33.45 | 6,379,267 | 11,932,243 | |||||||||||||
| ● | |
Other than the relationships described in the table and footnotes, none of the Selling Stockholders had or have any material relationship with us or any of our affiliates within the past three years.
We may require the Selling Stockholders to suspend the sales of the securities offered by this prospectus upon the occurrence of any event that makes any statement in this prospectus or the related registration statement untrue in any material respect or that requires the changing of statements in these documents in order to make statements in those documents not misleading.
Each Selling Stockholder of the common stock and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on the OTCPink or any other stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. A Selling Stockholder may use any one or more of the following methods when selling shares:
| ● |
The Selling Stockholders maySales of our securities made in reliance upon Rule 144 by a stockholder who is deemed to have been one of our affiliates at any time during the preceding 90 days are also subject to the current public information, manner of sale and notice conditions of Rule 144.
Restrictions on the Use of Rule 144 by Shell Companies or Former Shell Companies
Rule 144 is not available for the resale of securities initially issued by shell companies (other than business combination related shell companies) or issuers that have been at any time previously a shell company. However, Rule 144 also includes an important exception to this prohibition if the following conditions are met:
| ● | the issuer of the securities that was formerly a shell company has ceased to be a shell company; | |
| ● | the issuer of the securities is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act; | |
| ● | the issuer of the securities has filed all Exchange Act reports and materials required to be filed, as applicable, during the preceding 12 months (or such shorter period that the issuer was required to file such reports and materials), other than Current Reports on Form 8-K; and | |
| ● | at least one year has elapsed from the time that the issuer filed current Form 10 type information with the SEC reflecting its status as an entity that is not a shell company. |
As a result, our stockholders are able to sell shares pursuant to Rule 144, provided that there is current public information available on us and there has been compliance with other applicable requirements of Rule 144.
Rule 701
Rule 701 generally allows a stockholder who purchased shares of our common stock pursuant to a written compensatory plan or contract and who is not deemed to have been one of our affiliates during the immediately preceding 90 days to sell these shares in reliance upon Rule 144, but without being required to comply with the public information, holding period, volume limitation, or notice provisions of Rule 144. Rule 701 also permits our affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144.
Registration Rights
Aposense, Ltd. Pursuant to the License Agreement with Aposense, commencing 180 days after the effectiveness of this registration statement, upon Aposense’s request, we will file a registration statement within 30 days for the shares issued to Aposense in connection with the License Agreement and will use commercially reasonable efforts to cause such registration statement to become effective. The obligation to register the shares will cease when such shares (A) have been sold or otherwise disposed of or (B) may be sold under Rule 144 without regard to volume restrictions.
Yuhan Corporation. Pursuant to the Yuhan License Agreement and the related Share Issuance Agreement, commencing 180 days after the completion of this offering, upon Yuhan’s written request, we will file a resale registration statement on Form S-3 (or such other available registration statement) for the shares issued to Yuhan in connection with such agreements (including the 250,000 shares of common stock previously issued and any shares of common stock issued a result of the achievement of any milestones) and will use commercially reasonable efforts to cause such registration statement to become effective. The obligation to register the shares will cease when such shares (A) have been sold or otherwise disposed of or (B) may be sold under Rule 144 without regard to volume restrictions.
Elion Oncology, Inc. Pursuant to the Elion License Agreement, commencing 180 days after the agreement, upon Elion’s request, we will use commercially reasonable efforts to file a registration statement for the shares issued to Elion in connection with the Elion License Agreement and will use commercially reasonable efforts to cause such registration statement to become effective. The obligation to register the shares will cease when such shares (A) have been sold or otherwise disposed of or (B) may be sold under Rule 144 without regard to volume restrictions.
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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO
NON-U.S. HOLDERS OF OUR COMMON STOCK
The following summary describes the material U.S. federal income tax consequences of the ownership and disposition of our common stock acquired in this offering by Non-U.S. Holders (as defined below). This discussion does not address all aspects of U.S. federal income taxes, does not discuss the potential application of the alternative minimum tax or the Medicare Contribution tax on net investment income, and does not deal with state or local taxes, U.S. federal gift, and estate tax laws, except to the limited extent provided below, or any non-U.S. tax consequences that may be relevant to Non-U.S. Holders in light of their particular circumstances.
Special rules different from those described below may apply to certain Non-U.S. Holders that are subject to special treatment under the Code, such as:
| ● | insurance companies, banks, and other financial institutions; | |
| ● | tax-exempt organizations (including private foundations) and tax-qualified retirement plans; | |
| ● | “qualified foreign pension funds” as defined in Section 897(l)(2) of the Code and entities of which all interests are held by qualified foreign pension funds; | |
| ● | persons subject to special tax accounting rules as a result of any item of gross income with respect to our common stock being taken into account in an applicable financial statement; | |
| ● | non-U.S. governments and international organizations; | |
| ● | broker-dealers and traders in securities; | |
| ● | U.S. expatriates and certain former citizens or long-term residents of the United States; | |
| ● | persons that own, or are deemed to own, more than five percent of our common stock; | |
| ● | “controlled foreign corporations,” “passive foreign investment companies,” and corporations that accumulate earnings to avoid U.S. federal income tax; | |
| ● | persons that hold our common stock as part of a “straddle,” “hedge,” “conversion transaction,” “synthetic security,” or integrated investment or other risk reduction strategy; | |
| ● | persons who do not hold our common stock as a capital asset within the meaning of Section 1221 of the Code (generally, for investment purposes); and | |
| ● | partnerships and other pass-through entities, and investors in such pass-through entities (regardless of their places of organization or formation). |
Such Non-U.S. Holders are urged to consult their own tax advisors to determine the U.S. federal, state, local, and other tax consequences, including applicable non-U.S. tax consequences, that may be relevant to them.
Furthermore, the discussion below is based upon the provisions of the Code, and Treasury regulations, rulings, and judicial decisions thereunder as of the date hereof, and such authorities may be repealed, revoked, or modified, possibly retroactively, and are subject to differing interpretations which could result in U.S. federal income tax consequences different from those discussed below. We have not requested a ruling from the Internal Revenue Service, or IRS, with respect to the statements made and the conclusions reached in the following summary, and there can be no assurance that the IRS will agree with such statements and conclusions or will not take a contrary position regarding the tax consequences described herein, or that any such contrary position would not be sustained by a court.
PERSONS CONSIDERING THE PURCHASE OF OUR COMMON STOCK PURSUANT TO THIS OFFERING SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF ACQUIRING, OWNING, AND DISPOSING OF OUR COMMON STOCK IN LIGHT OF THEIR PARTICULAR SITUATIONS AS WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION, INCLUDING ANY STATE, LOCAL, OR NON-U.S. TAX CONSEQUENCES OR ANY U.S. FEDERAL NON-INCOME TAX CONSEQUENCES, AND THE POSSIBLE APPLICATION OF TAX TREATIES.
For the purposes of this discussion, a “Non-U.S. Holder” is a beneficial owner of common stock that is not a U.S. Holder for U.S. federal income tax purposes. A “U.S. Holder” means a beneficial owner of our common stock that is, for U.S. federal income tax purposes, (1) an individual who is a citizen or resident of the United States; (2) a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes), created or organized in or under the laws of the United States, any state thereof, or the District of Columbia; (3) an estate the income of which is subject to U.S. federal income taxation regardless of its source; or (4) a trust if it (i) is subject to the primary supervision of a court within the United States and one or more U.S. persons (within the meaning of Section 7701(a)(30) of the Code) have the authority to control all substantial decisions of the trust or (ii) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
For purposes of this discussion, a Non-U.S. Holder does not include a partnership or other pass-through entity (including for this purpose any entity that is treated as a partnership or other pass-through entity for U.S. federal income tax purposes). If a partnership or other pass-through entity is a beneficial owner of our common stock, the tax treatment of a partner (or other owner) will generally depend upon the status of the partner (or other owner) and the activities of the entity. If you are a partner (or other owner) of a partnership or other pass-through entity that acquires our common stock, you are urged to consult your tax advisor regarding the tax consequences of acquiring, owning and disposing of our common stock.
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If you are an individual non-U.S. citizen, you may, in some cases, be deemed to be a resident alien (as opposed to a nonresident alien) by virtue of being present in the United States for at least 31 days in the calendar year and for an aggregate of at least 183 days during a three-year period ending in the current calendar year. Generally, for this purpose, all the days present in the current year, one-third of the days present in the immediately preceding year, and one-sixth of the days present in the second preceding year, are counted.
Resident aliens are generally subject to U.S. federal income tax as if they were U.S. citizens. Individuals who are uncertain of their status as resident or nonresident aliens for U.S. federal income tax purposes are urged to consult their own tax advisors regarding the U.S. federal income tax consequences of the ownership or disposition of our common stock.
Distributions
We do not expect to make any distributions on our common stock in the foreseeable future. If we do make distributions on our common stock, however, such distributions made to a Non-U.S. Holder of our common stock will constitute dividends for U.S. tax purposes to the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Distributions in excess of our current and accumulated earnings and profits will constitute a return of capital that is applied against and reduces, but not below zero, a Non-U.S. Holder’s adjusted tax basis in our common stock. Any remaining excess will be treated as gain recognized on the sale or exchange of our common stock as described below under “—Gain on Disposition of Our Common Stock.”
Any distribution on our common stock that is treated as a dividend paid to a Non-U.S. Holder that is not effectively connected with such beneficial owner’s conduct of a trade or business in the United States will generally be subject to withholding tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty between the United States and the Non-U.S. Holder’s country of residence. To obtain a reduced rate of withholding under a treaty, a Non-U.S. Holder generally will be required to provide the applicable withholding agent with a properly executed IRS Form W-8BEN, IRS Form W-8BEN-E, or other appropriate form, certifying the Non-U.S. Holder’s entitlement to benefits under that treaty. Such form must be provided prior to the payment of dividends and must be updated periodically. If a Non-U.S. Holder holds stock through a financial institution or other agent acting on the holder’s behalf, the holder will be required to provide appropriate documentation to such agent. The holder’s agent will then be required to provide certification to the applicable withholding agent, either directly or through other intermediaries. If you are eligible for a reduced rate of U.S. withholding tax under an income tax treaty, you should consult with your own tax advisor to determine if you are able to obtain a refund or credit of any excess amounts withheld by timely filing an appropriate claim for a refund with the IRS.
Except to the extent that we elect (or the paying agent or other intermediary through which a Non-U.S. Holder holds our common stock elects) otherwise, we (or the intermediary) must generally withhold on the entire distribution, in which case the Non-U.S. Holder would be entitled to a refund from the IRS for the withholding tax on the portion of the distribution that exceeded our current and accumulated earnings and profits.
We generally are not required to withhold tax on dividends paid to a Non-U.S. Holder that are effectively connected with the beneficial owner’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment that the beneficial owner maintains in the United States) if a properly executed IRS Form W-8ECI, stating that the dividends are so connected, is furnished to the applicable withholding agent. In general, such effectively connected dividends will be subject to U.S. federal income tax on a net income basis at the regular rates applicable to U.S. persons. A corporate Non-U.S. Holder receiving effectively connected dividends may also be subject to an additional “branch profits tax,” which is imposed, under certain circumstances, at a rate of 30% (or such lower rate as may be specified by an applicable treaty) on the corporate Non-U.S. Holder’s effectively connected earnings and profits, subject to certain adjustments.
See also the section below titled “—Foreign Accounts” for additional withholding rules that may apply to dividends paid to certain foreign financial institutions or non-financial foreign entities.
Gain on Disposition of Our Common Stock
Subject to the discussions below under the sections titled “—Backup Withholding and Information Reporting,” a Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax with respect to gain realized on a sale or other disposition of our common stock unless (1) the gain is effectively connected with a trade or business of such beneficial owner in the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment that the beneficial owner maintains in the United States), (2) the Non-U.S. Holder is a nonresident alien individual and is present in the United States for 183 or more days in the taxable year of the disposition and certain other conditions are met, or (3) we are or have been a “United States real property holding corporation” within the meaning of Code Section 897(c)(2) at any time within the shorter of the five-year period preceding such disposition or the holder’s holding period in the common stock.
If you are a Non-U.S. Holder described in (1) above, you will be required to pay tax on the net gain derived from the sale at the regular U.S. federal income tax rates applicable to U.S. persons. Corporate Non-U.S. Holders described in (1) above may also be subject to the additional branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. If you are an individual Non-U.S. Holder described in (2) above, you will be required to pay a flat 30% tax on the gain derived from the sale, which gain may be offset by U.S.-source capital losses (even though you are not considered a resident of the United States), provided you timely file a U.S. federal income tax return or returns with respect to such losses. With respect to (3) above, in general, we would be a United States real property holding corporation if United States real property interests (as defined in the Code and the Treasury Regulations) comprised (by fair market value) at least half of our assets. We believe that we are not, and do not anticipate becoming, a United States real property holding corporation. However, there can be no assurance that we will not become a United States real property holding corporation in the future. Even if we were treated as a United States real property holding corporation, gain realized by a Non-U.S. Holder on a disposition of our common stock would not be subject to U.S. federal income tax so long as (1) the Non-U.S. Holder owned, directly, indirectly, or constructively, no more than five percent of our common stock at all times within the shorter of (i) the five-year period preceding the disposition or (ii) such beneficial owner’s holding period and (2) our common stock is regularly traded on an established securities market. We believe that our common stock, once listed on NASDAQ, will qualify as regularly traded on an established securities market, but there can be no assurance that this will always be the case.
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U.S. Federal Estate Tax
The estates of nonresident alien individuals generally are subject to U.S. federal estate tax on property with a U.S. situs. Because we are a U.S. corporation, our common stock will be U.S.-situs property and, therefore, will be included in the taxable estate of a nonresident alien decedent, unless an applicable estate tax treaty between the United States and the decedent’s country of residence provides otherwise. The terms “resident” and “nonresident” are defined differently for U.S. federal estate tax purposes than for U.S. federal income tax purposes. Investors are urged to consult their own tax advisors regarding the U.S. federal estate tax consequences of the ownership or disposition of our common stock.
Backup Withholding and Information Reporting
Generally, we or certain financial middlemen must report information to the IRS with respect to any dividends we pay on our common stock, including the amount of any such dividends, the name and address of the recipient, and the amount, if any, of tax withheld. A similar report is sent to the holder to whom any such dividends are paid. Pursuant to tax treaties or certain other agreements, the IRS may make its reports available to tax authorities in the recipient’s country of residence.
Dividends paid by us (or our paying agents) to a Non-U.S. Holder may also be subject to U.S. backup withholding. U.S. backup withholding generally will not apply to a Non-U.S. Holder who provides a properly executed IRS Form W-8BEN or IRS Form W-8BEN-E, as applicable, or otherwise establishes an exemption, provided that the applicable withholding agent does not have actual knowledge or reason to know the holder is a U.S. person.
Under current U.S. federal income tax law, U.S. information reporting and backup withholding requirements generally will apply to the proceeds of a disposition of our common stock effected by or through a U.S. office of any broker, U.S. or non-U.S., unless the Non-U.S. Holder provides a properly executed IRS Form W-8BEN or IRS Form W-8BEN-E, as applicable, or otherwise meets documentary evidence requirements for establishing non-U.S. person status or otherwise establishes an exemption. Generally, U.S. information reporting and backup withholding requirements will not apply to a payment of disposition proceeds to a Non-U.S. Holder where the transaction is effected outside the United States through a non-U.S. office of a non-U.S. broker. Information reporting and backup withholding requirements may, however, apply to a payment of disposition proceeds if the broker has actual knowledge, or reason to know, that the holder is, in fact, a U.S. person. For information reporting purposes only, certain U.S.-related brokers may be treated in a manner similar to U.S. brokers.
Backup withholding is not an additional tax. If backup withholding is applied to you, you should consult with your own tax advisor to determine whether you have overpaid your U.S. federal income tax, and whether you are able to obtain a tax refund or credit of the overpaid amount.
Foreign Accounts
In addition, U.S. federal withholding taxes may apply under the Foreign Account Tax Compliance Act, or FATCA, on certain types of payments, including dividends on our common stock, made to non-U.S. financial institutions and certain other non-U.S. entities. Specifically, a 30% withholding tax may be imposed on dividends on our common stock paid to a “foreign financial institution” or a “non-financial foreign entity” (each as defined in the Code), unless (1) the foreign financial institution agrees to undertake certain diligence and reporting obligations, (2) the non-financial foreign entity either certifies it does not have any “substantial United States owners” (as defined in the Code) or furnishes identifying information regarding each substantial United States owner, or (3) the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from these rules. The 30% federal withholding tax described in this paragraph cannot be reduced under an income tax treaty with the United States. If the payee is a foreign financial institution and is subject to the diligence and reporting requirements in (1) above, it must enter into an agreement with the U.S. Department of the Treasury requiring, among other things, that it undertake to identify accounts held by certain “specified United States persons” or “United States-owned foreign entities” (each as defined in the Code), annually report certain information about such accounts, and withhold 30% on certain payments to non-compliant foreign financial institutions and certain other account holders. Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States governing FATCA may be subject to different rules. Under the applicable Treasury Regulations and administrative guidance, withholding under FATCA generally applies to payments of dividends on our common stock, and will apply to payments of gross proceeds from the sale or other disposition of such stock on or after January 1, 2019, except that under recently proposed regulations (the preamble to which specifies that taxpayers are permitted to rely on such proposed regulations pending finalization), no withholding will apply with respect to payments of gross proceeds.
Prospective investors should consult their tax advisors regarding the potential application of withholding under FATCA to their investment in our common stock.
EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF PURCHASING, HOLDING, AND DISPOSING OF OUR COMMON STOCK, INCLUDING THE CONSEQUENCES OF ANY PROPOSED CHANGE IN APPLICABLE LAW, AS WELL AS TAX CONSEQUENCES ARISING UNDER ANY STATE, LOCAL, NON-U.S. OR U.S. FEDERAL NON-INCOME TAX LAWS SUCH AS ESTATE AND GIFT TAX.
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Craig-Hallum Capital Group LLC and Benchmark Company, LLC are acting as representatives of each of the underwriters named below. Subject to the terms and conditions set forth in the underwriting agreement between us and the underwriters, each of the underwriters has agreed, severally and not jointly, to purchase from us the number of common stock set forth opposite its name below.
| Underwriter | Number of | |
| Shares | ||
| Craig-Hallum Capital Group LLC | ||
| Benchmark Company, LLC | ||
| National Securities Corporation | ||
| Total |
Subject to the terms and conditions set forth in the underwriting agreement, the underwriters have agreed, severally and not jointly, to purchase all of the shares sold under the underwriting agreement if any of these shares are purchased. If an underwriter defaults, the underwriting agreement provides that the purchase commitments of the non-defaulting underwriters may be increased, or the underwriting agreement may be terminated.
Certain of our officers, directors and existing stockholders have indicated an interest in purchasing shares in this offering on the same terms as those offered to the public. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, fewer or no shares in this offering to any of these officers, directors or stockholders, or any of these officers, directors or stockholders may determine to purchase more, fewer or no shares in this offering. The underwriters will receive the same underwriting discounts and commissions on any shares purchased by these officers, directors and stockholders as they will on any other shares sold to the public in this offering.
We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, if available, rather than under this prospectus.or to contribute to payments the underwriters may be required to make in respect of those liabilities.
Broker-dealers engaged by anyThe underwriters are offering the shares subject to their acceptance of the Selling Stockholders may arrange for other broker-dealerscommon stock from us and subject to participateprior sale. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in sales. Broker-dealers may receive commissionswhole or discounts from Selling Stockholders (or, if any broker-dealer acts as agent forin part.
Commissions and Discounts; Expenses
The underwriters have advised us that they propose initially to offer the purchaser of shares fromto the purchaser) in amounts to be negotiated, but, except aspublic at the public offering price set forth in a supplement toon the cover of this prospectus in the case of an agency transactionand to dealers at that price less a concession not in excess of $ per share. After the initial offering, the public offering price, concession or any other term of the offering may be changed.
The following table shows the public offering price, underwriting discounts and commissions and proceeds before expenses to us.
| Per Share | Total | |||||||
| Public offering price | ||||||||
| Underwriting discounts and commissions to be paid by us | ||||||||
| Proceeds, before expenses, to us | ||||||||
We estimate expenses payable by us in connection with this offering, other than the underwriting discounts and commissions referred to above, will be approximately $473,000, which includes certain expenses incurred by the underwriters in connection with this offering that will be reimbursed by us. We have agreed to reimburse the underwriters for certain expenses incurred by them in connection with this offering (including certain fees and expenses of counsel for the underwriters and fees and expenses related to filings with and review by FINRA) in an amount not to exceed $135,000, plus an additional $9,500 reimbursement of an underwriter’s previously incurred fees and expenses of counsel.
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No Sales of Similar Securities
In connection with this offering, we have agreed with the underwriters that, subject to certain customary exceptions, without the prior written consent of Craig-Hallum Capital Group LLC and Benchmark Company, LLC on behalf of the underwriters, we will not, for a period ending 90 days after the date of this prospectus (the Lock-Up Period) (a) offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for common stock or (b) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of our common stock, whether any such transaction is to be settled by delivery of common stock or such other securities, in cash or otherwise.
In connection with this offering, certain of our stockholders and our directors and executive officers have agreed with the underwriters that, subject to certain customary exceptions, without the prior written consent of Craig-Hallum Capital Group LLC and Benchmark Company, LLC on behalf of the underwriters, they will not, for the Lock-Up Period, (a) offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, make any short sale or otherwise transfer or dispose of, directly or indirectly, our common stock or any securities convertible into, exercisable or exchangeable for or that represent the right to receive our common stock; (b) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of such securities, whether any such transaction is to be settled by delivery of common stock or other securities, in cash or otherwise; (c) make any demand for or exercise any right with respect to the registration of any shares of our common stock or any security convertible into, exercisable or exchangeable for our common stock; or (d) publicly disclose the intention to do any of the foregoing. The underwriters may, in their sole discretion, permit any such transactions during the Lock-Up Period in whole or in part and at any time, with or without notice.
Electronic Offer, Sale and Distribution of Securities
A prospectus in electronic format may be made available on the websites maintained by one or more of the underwriters or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute prospectuses electronically. The underwriters may agree to allocate a number of shares to selling group members for sale to their online brokerage commissionaccount holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations. Other than the prospectus in compliance with FINRA NASD Rule 2440;electronic format, the information on these websites is not part of, nor incorporated by reference into, this prospectus or the registration statement of which this prospectus forms a part, has not been approved or endorsed by us or the underwriters in their capacity as underwriter, and should not be relied upon by investors.
Nasdaq Capital Market Listing
We have applied to list our common stock on Nasdaq under the symbol “PCSA” and our common stock has been approved for listing contingent on the completion of this offering.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the shares is completed, SEC rules may limit underwriters and selling group members from bidding for and purchasing our common stock. However, the representative may engage in transactions that stabilize the caseprice of a principal transaction a markupthe common stock, such as bids or markdown in compliance with NASD IM-2440.purchases to peg, fix or maintain that price.
In connection with the sale ofoffering, the common stock or interests therein, Selling Stockholdersunderwriters may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of thepurchase and sell our common stock in the courseopen market. These transactions may include short sales, purchases on the open market to cover positions created by short sales and stabilizing transactions. Short sales involve the sale by the underwriters of hedginga greater number of shares than they are required to purchase in the positions they assume. Selling Stockholdersoffering. The underwriters must close out any short position by purchasing shares in the open market. A short position is more likely to be created if the underwriters are concerned that there may also sell sharesbe downward pressure on the price of our common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of common stock made by the underwriters in the open market prior to the closing of the common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. Selling Stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).offering.
Similar to other purchase transactions, the underwriters’ purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. The underwriters may conduct these transactions on the Nasdaq Capital Market, in the over-the-counter market or otherwise.
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Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor any of the underwriters make any representation that the representative will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.
Passive Market Making
Any underwriters who are qualified market makers on the Nasdaq Capital Market may engage in passive market making transactions in the securities on the Nasdaq Capital Market in accordance with Rule 103 of Regulation M, during the business day prior to the pricing of the offering, before the commencement of offers or sales of the securities. Passive market makers must comply with applicable volume and price limitations and must be identified as passive market makers. In general, a passive market maker must display its bid at a price not in excess of the highest independent bid for such security; if all independent bids are lowered below the passive market maker’s bid, however, the passive market maker’s bid must then be lowered when certain purchase limits are exceeded. Passive market making may stabilize the market price of the securities at a level above that which might otherwise prevail in the open market and, if commenced, may be discontinued at any time.
Other Relationships
The underwriters and certain of their affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. Some of the underwriters and certain of their affiliates may in the future engage in investment banking and other commercial dealings in the ordinary course of business with us and our affiliates, for which they may in the future receive customary fees, commissions and expenses.
In addition, in the ordinary course of their business activities, the underwriters and their affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers.
Such investments and securities activities may involve securities and/or instruments of ours or our affiliates. The underwriters and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.
Selling StockholdersRestrictions
Notice to Prospective Investors in the European Economic Area
In relation to each Member State of the European Economic Area (a “Member State”), no shares have been offered or will be offered pursuant to the offering to the public in that Member State prior to the publication of a prospectus in relation to the shares which has been approved by the competent authority in that Member State or, where appropriate, approved in another Member State and notified to the competent authority in that Member State, all in accordance with the Prospectus Regulation, except that offers of shares may be made to the public in that Member State at any broker-dealerstime under the following exemptions under the Prospectus Regulation:
| A | to any legal entity which is a qualified investor as defined under the Prospectus Regulation; | |
| B. | to fewer than 150 natural or legal persons (other than qualified investors as defined under the Prospectus Regulation), subject to obtaining the prior consent of the underwriters; or | |
| C. | in any other circumstances falling within Article 1(4) of the Prospectus Regulation; |
provided that no such offer of shares shall require us or agents that are involved in sellingany underwriter to publish a prospectus pursuant to Article 3 of the Shares mayProspectus Regulation or supplement a prospectus pursuant to Article 23 of the Prospectus Regulation and each person who initially acquires any shares or to whom any offer is made will be deemed to have represented, acknowledged and agreed to and with us and each of the underwriters that it is a “qualified investor” within the meaning of Article 2(e) of the Prospectus Regulation.
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In the case of any shares being offered to a financial intermediary as that term is used in the Prospectus Regulation, each such financial intermediary will be “underwriters”deemed to have represented, acknowledged and agreed that the shares acquired by it in the offer have not been acquired on a non-discretionary basis on behalf of, nor have they been acquired with a view to their offer or resale to, persons in circumstances which may give rise to an offer of any shares to the public other than their offer or resale in a Member State to qualified investors as so defined or in circumstances in which the prior consent of the underwriters have been obtained to each such proposed offer or resale.
For the purposes of this provision, the expression an “offer to the public” in relation to shares in any Member State means the communication in any form and by any means of sufficient information on the terms of the offer and any shares to be offered so as to enable an investor to decide to purchase or subscribe for any shares, and the expression “Prospectus Regulation” means Regulation (EU) 2017/1129.
MiFID II Product Governance
Any person offering, selling or recommending the shares (a “distributor”) should take into consideration the manufacturers’ target market assessment; however, a distributor subject to MiFID II is responsible for undertaking its own target market assessment in respect of the shares (by either adopting or refining the manufacturers’ target market assessment) and determining appropriate distribution channels.
Notice to Prospective Investors in the United Kingdom
In addition, in the United Kingdom, this document is being distributed only to, and is directed only at, and any offer subsequently made may only be directed at, persons who are “qualified investors” (as defined in the Prospectus Regulation) who (i) have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the Order) and/or (ii) are high net worth companies (or persons to whom it may otherwise be lawfully communicated) falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as “relevant persons”) or otherwise in circumstances which have not resulted and will not result in an offer to the public of the shares in the United Kingdom within the meaning of the SecuritiesFinancial Services and Markets Act 2000.
Any person in connection with such sales. In such event, any commissions received by such broker-dealersthe United Kingdom that is not a relevant person should not act or agents and any profitrely on the resale ofinformation included in this document or use it as basis for taking any action. In the shares purchasedUnited Kingdom, any investment or investment activity that this document relates to may be made or taken exclusively by themrelevant persons.
Notice to Prospective Investors in Canada
The securities may be sold in Canada only to purchasers purchasing, or deemed to be underwriting commissionspurchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or discounts under the Securities Act. Each Selling Stockholder has informed us that it does not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute the common stock. Boustead is a registered broker-dealer and may be deemed to be an “underwriter” in connection with the sales of Shares.
We are required to pay certain fees and expenses incurred by Selling Stockholders incident to the registration of the shares. We have agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.
Because Selling Stockholders may be deemed to be “underwriters” within the meaningsubsection 73.3(1) of the Securities Act they will(Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the securities must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus delivery requirements of the Securities Act including Rule 172 thereunder. In addition, anyapplicable securities covered by this prospectus which qualify for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather than under this prospectus. There is no underwriter or coordinating broker-dealer acting in connection with the proposed sale of the shares by the Selling Stockholders.laws.
The Shares will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition,
Securities legislation in certain states,provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the Shares may not be sold unless they have been registeredremedies for rescission or qualified for sale indamages are exercised by the applicable state or an exemption frompurchaser within the registration or qualification requirement is available and is complied with.
Under applicable rules and regulations undertime limit prescribed by the Exchange Act, any person engaged in the distributionsecurities legislation of the Shares may not simultaneously engage in market making activities with respectpurchaser’s province or territory. The purchaser should refer to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the Selling Stockholders will be subject toany applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and salessecurities legislation of the Shares bypurchaser’s province or territory for particulars of these rights or consult with a legal advisor.
Pursuant to section 3A.3 of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the Selling Stockholders or any other person. We will make copiesunderwriter is not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this prospectus available to the Selling Stockholdersoffering.
Transfer Agent and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act).Registrar
The transfer agent and registrar for our common stock is Equiniti Trust Company.
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The validity of the shares of common stock offered hereby has beenby this prospectus will be passed upon for us by Foley & Lardner LLP, in Jacksonville, Florida. The underwriters have been represented in connection with this offering by Faegre Drinker Biddle & Reath LLP, Minneapolis, Minnesota.
OurThe consolidated financial statements of Processa Pharmaceuticals, Inc. as of December 31, 2019 and 2018, and for the fiscal years then ended December 31, 2017 and 2016, appearing herein, have been audited byincluded herein and in the registration statement in reliance on the report of BD & Company, Inc., an independent registered public accounting firm, as set forth in its report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of suchsaid firm as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONALMORE INFORMATION
We have filed with the SEC a registration statement on Form S-1, including exhibits and schedules, under the Securities Act that registers the shares of our common stock to be sold in this offering. This prospectus does not contain all the information contained in the registration statement and the exhibits and schedules filed as part of the registration statement. For further information with respect to us and our common stock, we refer you to the registration statement and the exhibits and schedules filed as part of the registration statement. Statements contained in this prospectus as to the contents of any contract or other document are not necessarily complete. If a contract or document has been filed as an exhibit to the registration statement, we refer you to the copies of the contract or document that has been filed. Each statement in this prospectus relating to a contract or document filed as an exhibit is qualified in all respects by the filed exhibit.
We file periodicannual, quarterly and current reports, proxy statements and other information with the SEC under the Exchange Act. You can read our SEC filings, including quarterly reports and annual reports which include our audited financial statements. Thisthe registration statement, including exhibits hereto, and all of our periodic reports may be inspected without charge at the Public Reference Room maintained by the SECSEC’s website at 100 F Street, NE, Washington, D.C. 20549. You may obtain copieswww.sec.gov.
Our website address is www.processapharmaceuticals.com. The information contained in, and that can be accessed through, our website is not incorporated into and shall not be deemed to be part of this registration statement, including the exhibits hereto, and all ofprospectus. We have included our periodic reports after payment of the fees prescribed by the SEC. For additional information regarding the operation of the Public Reference Room, you may call the SEC at 1-800-SEC-0330. The SEC also maintains a website which provides on-line access to reports and other information regarding registrants that file electronically with the SEC at: www.sec.gov. In addition, you may request a copy of any of our periodic reports filed with the SEC at no cost, by writing us at Processa Pharmaceuticals, Inc., 7380 Coca Cola Drive, Suite 106, Hanover, Maryland 21076.address in this prospectus solely as an inactive textual reference.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Audited consolidated financial statements as of and for the years ended December 31, 2019 and 2018: | ||
| Report of | F-2 | |
| Consolidated balance sheets | F-3 | |
| Consolidated statements of operations and comprehensive loss | F-4 | |
| Consolidated statements of changes in stockholders’ equity | F-5 | |
| Consolidated statements of cash flows | F-6 | |
| Notes to consolidated financial statements | F-8 |
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Processa Pharmaceuticals, Inc. (formerly Heatwurx, Inc.)
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Processa Pharmaceuticals, Inc. (formerly Heatwurx, Inc.) (the “Company”) as of December 31, 20172019 and 2016,2018, the related consolidated statements of operations, stockholders’ equity, and cash flows, for the years then ended, and the related notes (collectively referred to as the “financial“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 20172019 and 2016,2018, and the consolidated results of theirits operations and theirits cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Notes 1 andNote 2 to the financial statements, the Company has suffered recurring losses from operations and has stated that substantial doubt exists about the Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding these matters are described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Change in Reporting Entity
On October 4, 2017, as described in Note 3, the Company entered into a reverse acquisition with Promet Therapeutics, LLC which resulted in a change in the historical reporting entity from Heatwurx, Inc. to Promet Therapeutics, LLC. Subsequently, the Company changed its name to Processa Pharmaceuticals, Inc.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BD & Company, Inc. |
Owings Mills, MD
April 16, 2018March 6, 2020
We have served as the Company’s auditor since 2017.
Processa Pharmaceuticals, Inc.
| December 31, 2019 | December 31, 2018 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 691,536 | $ | 1,740,961 | ||||
| Due from related party | - | 21,583 | ||||||
| Prepaid expenses and other | 315,605 | 257,832 | ||||||
| Total Current Assets | 1,007,141 | 2,020,376 | ||||||
| Property And Equipment | ||||||||
| Software | 19,740 | 19,740 | ||||||
| Office equipment | 9,327 | 9,327 | ||||||
| Total Cost | 29,067 | 29,067 | ||||||
| Less: accumulated depreciation | 20,137 | 11,692 | ||||||
| Property and equipment, net | 8,930 | 17,375 | ||||||
| Other Assets | ||||||||
| Operating lease right-of-use assets, net of accumulated amortization | 219,074 | - | ||||||
| Intangible assets, net of accumulated amortization | 9,642,454 | 10,437,782 | ||||||
| Security deposit | 5,535 | 5,535 | ||||||
| Total Other Assets | 9,867,063 | 10,443,317 | ||||||
| Total Assets | $ | 10,883,134 | $ | 12,481,068 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities | ||||||||
| Senior convertible notes, net of debt issuance costs | $ | 802,503 | $ | 230,000 | ||||
| Current maturities of operating lease liability | 77,992 | - | ||||||
| Accrued interest | 21,902 | 20,343 | ||||||
| Accounts payable | 75,612 | 292,102 | ||||||
| Due to related parties | 316 | - | ||||||
| Accrued expenses | 213,239 | 103,259 | ||||||
| Total Current Liabilities | 1,191,564 | 645,704 | ||||||
| Non-current Liabilities | ||||||||
| Non-current operating lease liability | 147,390 | - | ||||||
| Net deferred tax liability | 1,531,630 | 2,134,346 | ||||||
| Total Liabilities | 2,870,584 | 2,780,050 | ||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ Equity | ||||||||
| Common stock, par value $0.0001, 100,000,000 and 350,000,000 shares authorized; 5,486,476 and 5,525,009 issued and outstanding at December 31, 2019 and 2018, respectively | 549 | 552 | ||||||
| Additional paid-in capital | 18,994,008 | 19,124,600 | ||||||
| Common stock deemed dividend payable: 28,971 shares at par value | 3 | - | ||||||
| Stock subscription receivable | - | (1,800,000 | ) | |||||
| Accumulated deficit | (10,982,010 | ) | (7,624,134 | ) | ||||
| Total Stockholders’ Equity | 8,012,550 | 9,701,018 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 10,883,134 | $ | 12,481,068 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
Processa Pharmaceuticals, Inc.
Consolidated Statements of Operations
Years Ended December 31, 20172019 and 20162018
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Operating Expenses | ||||||||
| Research and development expenses | $ | 2,320,573 | $ | 3,085,317 | ||||
| General and administrative expenses | 1,614,909 | 1,439,623 | ||||||
| Operating Loss | (3,935,482 | ) | (4,524,940 | ) | ||||
| Other Income (Expense) | ||||||||
| Interest expense | (36,658 | ) | (161,205 | ) | ||||
| Interest income | 11,548 | 18,297 | ||||||
| Net Operating Loss Before Income Tax Benefit | (3,960,592 | ) | (4,667,848 | ) | ||||
| Income Tax Benefit | 602,716 | 902,801 | ||||||
| Net Loss | $ | (3,357,876 | ) | $ | (3,765,047 | ) | ||
| Net Loss Per Common Stock - Basic and Diluted | $ | (0.70 | ) | $ | (0.71 | ) | ||
| Weighted Average Common Stock Used to Compute | ||||||||
| Net Loss Per Common Stock - Basic and Diluted | 5,525,635 | 5,332,141 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
Processa Pharmaceuticals, Inc.
Consolidated Statement of Changes in Stockholders’ Equity
| December 31, 2017 | December 31, 2016 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 2,847,429 | $ | 1,071,894 | ||||
| Certificates of deposit | - | 1,019,294 | ||||||
| Due from related party | 62,709 | - | ||||||
| Vendor deposit | - | 227,657 | ||||||
| Prepaid expenses | 41,446 | 18,147 | ||||||
| Total Current Assets | 2,951,584 | 2,336,992 | ||||||
| Property And Equipment | ||||||||
| Software | 19,740 | 15,330 | ||||||
| Equipment | 9,327 | 8,445 | ||||||
| Total Cost | 29,067 | 23,775 | ||||||
| Less: accumulated depreciation | 3,246 | 1,381 | ||||||
| Property and equipment, net | 25,821 | 22,394 | ||||||
| Other Assets | ||||||||
| Security deposit | 5,535 | 5,535 | ||||||
| Total Other Assets | 5,535 | 5,535 | ||||||
| Total Assets | $ | 2,982,940 | $ | 2,364,921 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities | ||||||||
| Senior convertible notes, net of debt issuance costs | $ | 2,448,570 | $ | - | ||||
| Accrued interest | 35,693 | - | ||||||
| Accounts payable | 50,686 | 14,593 | ||||||
| Due to related parties | 436 | 95 | ||||||
| Accrued expenses | 64,428 | 83,004 | ||||||
| Total Current Liabilities | 2,599,813 | 97,692 | ||||||
| Non-current Liabilities | ||||||||
| Accrued rent liability | 9,963 | - | ||||||
| Total Liabilities | 2,609,776 | 97,692 | ||||||
| COMMITMENTS AND CONTINGENCIES - SEE NOTE | ||||||||
| Stockholders’ Equity | ||||||||
| Common stock, par value $0.0001, 350,000,000 and 43,261,049 shares authorized; 35,272,626 and 31,745,242 issued and outstanding at December 31, 2017 and 2016, respectively | 3,527 | 3,175 | ||||||
| Preferred stock, par value $0.0001, 10,000,000 shares authorized; zero shares issued and outstanding | - | - | ||||||
| Additional paid-in capital | 4,228,723 | 4,266,825 | ||||||
| Accumulated deficit | (3,859,086 | ) | (2,002,771 | ) | ||||
| Total Stockholders’ Equity | 373,164 | 2,267,229 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 2,982,940 | $ | 2,364,921 | ||||
Years Ended December 31, 2019 and 2018
| Common Stock | Additional Paid-In | Subscription | Common Stock Dividend | Accumulated | ||||||||||||||||||||||||
| Shares | Amount | Capital | Receivable | Payable | Deficit | Total | ||||||||||||||||||||||
| Balance, January 1, 2018 | 5,039,033 | $ | 504 | $ | 4,231,746 | $ | - | $ | - | $ | (3,859,087 | ) | $ | 373,163 | ||||||||||||||
Recognize the fair value of exclusive license intangible asset acquired from CoNCERT in exchange for 298,615 common stock of Processa held by Promet | - | - | 8,000,000 | - | - | - | 8,000,000 | |||||||||||||||||||||
| Conversion of Senior convertible notes and accrued interest for common stock and stock purchase warrants, net of costs of $82,502 | 172,327 | 17 | 2,312,592 | - | - | - | 2,312,609 | |||||||||||||||||||||
| Issuance of common stock units for cash, net of costs of $308,830 | 200,369 | 20 | 2,874,667 | - | - | - | 2,874,687 | |||||||||||||||||||||
| Issuance of common stock units for a future research funding commitment, net of costs of $168,457 | 113,280 | 11 | 1,631,532 | (1,800,000 | ) | - | - | (168,457 | ) | |||||||||||||||||||
| Stock-based compensation | - | - | 74,063 | - | - | - | 74,063 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (3,765,047 | ) | (3,765,047 | ) | |||||||||||||||||||
| Balance, January 1, 2019 | 5,525,009 | 552 | 19,124,600 | (1,800,000 | ) | - | (7,624,134 | ) | 9,701,018 | |||||||||||||||||||
| Conversion of Senior convertible debt for common stock and stock purchase warrants | 18,107 | 2 | 258,928 | - | - | - | 258,930 | |||||||||||||||||||||
| Payments made by investor for clinical trial costs | - | - | - | 900,000 | - | - | 900,000 | |||||||||||||||||||||
| Pledged shares of common stock forfeited upon revised research funding commitment | (56,640 | ) | (5 | ) | (899,995 | ) | 900,000 | - | - | - | ||||||||||||||||||
| Stock-based compensation | - | - | 510,478 | - | - | - | 510,478 | |||||||||||||||||||||
| Deemed stock dividend due to full ratchet anti-dilution adjustment | - | - | (3) | - | 3 | - | - | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (3,357,876 | ) | (3,357,876 | ) | |||||||||||||||||||
| Balance, December 31, 2019 | 5,486,476 | $ | 549 | $ | 18,994,008 | $ | - | $ | 3 | $ | (10,982,010 | ) | $ | 8,012,550 | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Processa Pharmaceuticals, Inc.
Consolidated Statements of OperationsCash Flows
Years Ended December 31, 20172019 and 20162018
| December 31, 2017 | December 31, 2016 | |||||||
| Operating Expenses | $ | 1,802,433 | $ | 1,921,520 | ||||
| Operating Loss | (1,802,433 | ) | (1,921,520 | ) | ||||
| Other Income (Expense): | ||||||||
| Interest expense | (59,063 | ) | - | |||||
| Interest income | 5,181 | 4,454 | ||||||
| Other Income (Expense) | (53,882 | ) | 4,454 | |||||
| Net Loss | $ | (1,856,315 | ) | $ | (1,917,066 | ) | ||
| Net Loss Applicable to Common Shares - Basic and Diluted | $ | (0.06 | ) | $ | (0.07 | ) | ||
| Weighted Average Common Shares Used to Compute Net Loss Applicable to Common Shares - Basic and Diluted | 32,595,680 | 29,321,049 | ||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net Loss | $ | (3,357,876 | ) | $ | (3,765,047 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | 8,445 | 8,445 | ||||||
| Non-cash lease expense for right-of-use assets | 74,124 | - | ||||||
| Amortization of debt issuance costs | 1,783 | 67,069 | ||||||
| Amortization of intangible asset | 795,328 | 621,647 | ||||||
| Deferred income tax (benefit) expense | (602,716 | ) | (902,801 | ) | ||||
| Stock-based compensation | 510,478 | 74,063 | ||||||
| Net changes in operating assets and liabilities: | ||||||||
| Prepaid expenses and other | (57,773 | ) | (216,386 | ) | ||||
| Operating lease liability | (77,779 | ) | - | |||||
| Accrued interest | 30,489 | 94,122 | ||||||
| Accounts payable | (216,490 | ) | 241,416 | |||||
| Due from related parties | 21,899 | 40,690 | ||||||
| Accrued expenses | 119,943 | 28,868 | ||||||
| Net cash (used in) operating activities | (2,750,145 | ) | (3,707,914 | ) | ||||
| Cash Flows From Investing Activities | ||||||||
| Purchase of software license | - | (20,500 | ) | |||||
| Purchase of intangible asset | - | (1,782 | ) | |||||
| Net cash (used in) investing activities | - | (22,282 | ) | |||||
| Cash Flows From Financing Activities | ||||||||
| Net proceeds from issuance of stock | - | 2,874,687 | ||||||
| Proceeds from issuance of senior convertible notes | 805,000 | - | ||||||
| Proceeds received in satisfaction of stock subscription receivable | 900,000 | - | ||||||
| Transaction costs incurred on senior convertible notes | (4,280 | ) | (82,502 | ) | ||||
| Payment of placement agent and legal fees associated with clinical funding commitment | - | (168,457 | ) | |||||
| Net cash provided by financing activities | 1,700,720 | 2,623,728 | ||||||
| Net (Decrease)/Increase in Cash and Cash Equivalents | (1,049,425 | ) | (1,106,468 | ) | ||||
| Cash and Cash Equivalents - Beginning of Year | 1,740,961 | 2,847,429 | ||||||
| Cash and Cash Equivalents - End of Year | $ | 691,536 | $ | 1,740,961 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-6 |
Processa Pharmaceuticals, Inc.
Consolidated Statements of Changes in Stockholders’ Equity (Deficit)Cash Flows (continued)
Years Ended December 31, 20172019 and 20162018
| Common Stock | Additional Paid-In | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| Balance, January 1, 2016 | - | $ | - | $ | - | $ | (85,705 | ) | $ | (85,705 | ) | |||||||||
| Issuance of Common Stock, $0.0001 Par Value/Share | 31,745,242 | 3,175 | 4,266,825 | - | 4,270,000 | |||||||||||||||
| Promet Net Loss for the Year Ended December 31, 2016 | - | - | - | (1,917,066 | ) | (1,917,066 | ) | |||||||||||||
| Balance, December 31, 2016 | 31,745,242 | 3,175 | 4,266,825 | (2,002,771 | ) | 2,267,229 | ||||||||||||||
| Fair value of Heatwurx net liabilities obtained in reverse acquisition | 3,527,384 | 352 | (38,102 | ) | - | (37,750 | ) | |||||||||||||
| Net Loss for the Year Ended December 31, 2017 | - | - | - | (1,856,315 | ) | (1,856,315 | ) | |||||||||||||
| Balance, December 31, 2017 | 35,272,626 | $ | 3,527 | $ | 4,228,723 | $ | (3,859,086 | ) | $ | 373,164 | ||||||||||
| 2019 | 2018 | |||||||
| Supplemental Cash Flow Information: | ||||||||
| Cash paid for interest | $ | - | $ | - | ||||
| Cash paid for income taxes | - | - | ||||||
| Non-Cash Investing and Financing Activities: | ||||||||
| Right-of-use asset obtained in exchange for operating lease liability | $ | (293,198 | ) | $ | - | |||
| Reduction in deferred lease liability | (9,963 | ) | - | |||||
| Operating lease liability | 303,161 | - | ||||||
| Net | $ | - | $ | - | ||||
| Recognize the exclusive license intangible asset acquired from CoNCERT | $ | - | $ | (11,037,147 | ) | |||
| Recognize deferred tax liability for basis difference of Intangible asset | - | 3,037,147 | ||||||
| Recognize additional paid-in capital for consideration paid from the transfer of 298,615 common stock of Processa released by Promet to CoNCERT for Processa | - | 8,000,000 | ||||||
| Net | $ | - | $ | - | ||||
| Conversion of $230,000 and $2,350,000, respectively, of Senior Convertible Debt and related accrued interest of $28,930 and $114,333, respectively, into 18,107 and 172,327 shares, respectively, of common stock and warrants | $ | 258,930 | $ | 2,464,333 | ||||
| Common stock and stock purchase warrants (forfeited)/issued in connection with a clinical trial funding commitment | $ | (900,000 | ) | $ | 1,800,000 |
The accompanying notes are an integral part of these consolidated financial statements.
Processa Pharmaceuticals, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2017 and 2016
| December 31, 2017 | December 31, 2016 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net Loss | $ | (1,856,315 | ) | $ | (1,917,066 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | 1,865 | 1,381 | ||||||
| Amortization of debt issuance costs | 23,370 | - | ||||||
| Impairment of software costs | 15,330 | - | ||||||
| Net changes in operating assets and liabilities: | ||||||||
| Prepaid expenses | (23,299 | ) | (16,278 | ) | ||||
| Vendor deposit | 227,657 | (227,657 | ) | |||||
| Security deposit | - | (5,535 | ) | |||||
| Accrued interest | 35,693 | - | ||||||
| Accounts payable | 9,995 | 3,707 | ||||||
| Due to related parties | (62,368 | ) | (69,379 | ) | ||||
| Accrued rent liability | 13,284 | - | ||||||
| Accrued liabilities | (39,829 | ) | 75,790 | |||||
| Net cash used in operating activities | (1,654,617 | ) | (2,155,037 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Proceeds from (purchase of) certificates of deposit | 1,019,294 | (1,019,294 | ) | |||||
| Purchase of property and equipment | (20,622 | ) | (23,775 | ) | ||||
| Cash received in a reverse acquisition transaction | 6,280 | - | ||||||
| Net cash provided by (used in) investing activities | 1,004,952 | (1,043,069 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from issuance of common stock | - | 4,270,000 | ||||||
| Proceeds from issuance of senior convertible notes | 2,580,000 | - | ||||||
| Payment of debt issuance costs | (154,800 | ) | - | |||||
| Net cash provided by financing activities | 2,425,200 | 4,270,000 | ||||||
| NET INCREASE IN CASH | 1,775,535 | 1,071,894 | ||||||
| CASH AND CASH EQUIVALENTS - BEG. OF YEAR | 1,071,894 | - | ||||||
| CASH AND CASH EQUIVALENTS - END OF YEAR | $ | 2,847,429 | $ | 1,071,894 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
Processa Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
Note 1 – Organization and Description of the Business
NOTE 1 – NATURE OF BUSINESS
Company Overview
Promet Therapeutics, LLC (“Promet”), a Delaware limited liability company, was a private company founded on August 31, 2015 (inception). On October 2, 2017, Heatwurx, Inc. (“Heatwurx”), a nonoperating public shell corporation, entered into an Asset Purchase Agreement with Promet and Heatwurx’s wholly-owned subsidiary, Processa Therapeutics LLC (“Processa”), a Delaware limited liability company, and closed on this agreement effective October 4, 2017. Under this agreement, Heatwurx acquired all of the assets and assumed all the liabilities of Promet, in exchange for 222,217,112 shares of the common stock of Heatwurx, which, at the closing, constituted 90% of the Company’s issued and outstanding common stock on a fully diluted basis. Immediately following the closing, there were 246,907,902 shares of common stock issued and outstanding, of which the prior Heatwurx shareholders own 24,690,790 shares after giving effect to 13,673,402 shares issued for Heatwurx’s Series D Preferred stock and existing debt that converted into common stock prior to closing of the asset purchase transaction. At the closing, Heatwurx assigned to Processa all of the assets and operations of Promet that constitutes the operating business of Promet. Authorized capital stock consists of 350,000,000 shares of $0.0001 par value common stock and 10,000,000 shares of $0.0001 par value preferred stock.
The closing of the Asset Purchase Agreement on October 4, 2017 resulted in a change in control of Heatwurx by Promet (see Note 3). The Heatwurx executive management, officers and directors resigned and Promet executive management, officers and directors were appointed. Following the closing, Heatwurx changed its trading symbol from “HUWX” to “PCSA” on the OTC Pink exchange effective as of October 10, 2017. Heatwurx changed its name to Processa Pharmaceuticals, Inc. (the “Company”(“Processa” or “the Company”) and authorized a one-for-seven exchange, or reverse split, of its shares effective October 23, 2017. On December 8, 2017, the Company received approval from the Financial Industry Regulatory Authority to implement the one-for-seven reverse split in trading markets. As a result, the consolidated financial statements have been retrospectively adjusted to reflect shares outstanding after the one-for-seven reverse split. Following the asset purchase transaction, the Company abandoned Heatwurx’s prior business plan and is now only pursuing Promet’s proposed business with a focus on developing drugs to treat patients that have a high unmet medical need.
As a result of the above, these consolidated financial statements represent Promet as the accounting acquirer (legal acquiree) and Processa Pharmaceuticals, Inc. from October 4, 2017 forward as the accounting acquiree (legal acquirer) and the legal capital stock (number and type of equity interests issued) is that of Heatwurx, which subsequently changed its name to Processa Pharmaceuticals, Inc., the legal parent, in accordance with guidance on reverse acquisitions accounted for as a capital transaction instead of a business combination (See Note 2 – Basis of Presentation and Earnings Per Share and Note 3 – Reverse Acquisition).
All references to the “Company” and Processa Pharmaceuticals, Inc. refer to Heatwurx, Inc., Processa Therapeutics, LLC, and Promet Therapeutics, LLC, which was assigned at acquisition to Processa Therapeutics, LLC.
Description of Business
We are an emerging clinical stage biopharmaceutical company focused on the development of drug products that are intended to provide treatment for and improve the survival and/or quality of life of patients who have a high unmet medical need condition or who have no alternative treatment. Within this group of pharmaceutical products, we currently are developing one product for twomultiple indications (i.e., the use of a drug to treat a particular disease), will begin developing a newly acquired drug once adequate funding has been obtained, and are searching for additional products for our portfolio.
PCS499
Our operationslead product, PCS499, is an oral tablet that is a deuterated analog of the major metabolites of pentoxifylline (Trental®). The advantage of PCS499 is that it potentially may work in many conditions because it has multiple pharmacological targets it affects that are performedimportant in the statetreatment of Marylandthese conditions. Based on its pharmacological activity, we have identified multiple unmet medical need conditions where the use of PCS499 may result in clinical efficacy. The lead indication currently under development for PCS499 is Necrobiosis Lipoidica (NL). NL is a chronic, disfiguring condition affecting the skin and are stillthe tissue under the skin typically on the lower extremities with no currently approved FDA treatments. NL presents more commonly in women than in men and ulceration can occur in approximately 30% of NL patients. More severe complications can occur, such as deep tissue infections and osteonecrosis threatening life of the limb. Approximately 74,000 - 185,000 people in the organizationalUnited States and researchmore than 200,000 – 500,000 people outside the United States are affected by NL.
The degeneration of tissue occurring at the NL lesion site may be caused by a number of pathophysiological changes, which has made it extremely difficult to develop effective treatments for this condition. PCS499 may provide a solution since PCS499 and development phaseits metabolites affect a number of operations.biological pathways, several of which could contribute to the pathophysiology associated with NL.
On June 18, 2018, the FDA granted orphan-drug designation to PCS499 for the treatment of NL. On September 28, 2018, the IND for PCS499 in NL was made effective by the FDA, such that we could move forward with the Phase 2A safety and dose tolerability trial. We dosed our first NL patient in this Phase 2A clinical trial on January 29, 2019 and completed enrollment on August 23, 2019. The main objective of the trial is to evaluate the safety and tolerability of PCS499 in patients with NL and to use the collected safety and efficacy data to design future clinical trials. Based on toxicology studies and healthy human volunteer studies, Processa and the FDA agreed that a PCS499 dose of 1.8 grams/day would be the highest dose administered to NL patients in this Phase 2 trial. As a result, weanticipated, the PCS499 dose of 1.8 grams/day, 50% greater than the maximum tolerated dose of PTX, appeared to be well tolerated with no serious adverse events reported. To date, nine of the patients dosed at 1.8 grams/day have reported only mild adverse events related to the treatment, which occurred mostly in the first month of treatment and were quickly resolved. As expected, gastrointestinal or CNS adverse events were reported most often.
We have a limited operating history and only a preliminary business plan from which investors may evaluate our future prospects. We have not had any sources of revenue from inception through December 31, 2017 and have a history of operating losses from operations.
Processa Pharmaceuticals, Inc.
Notesmeeting scheduled with the FDA in March 2020 to Consolidated Financial Statements
As of December 31, 2017, the Company had an accumulated deficit of approximately $3.859 million incurred over approximately 28 months of its existence. Our current capital is insufficient to fully fund our total business plan andfurther discuss the development of our planned product candidates. Our ability to achieve revenue-generating operations and, ultimately, achieve profitability will depend on whether we can obtain additional capital when we need it, complete the development of our technology, receive regulatory approval of our planned product candidates and find strategic collaborators that can incorporate our planned product candidates into new or existing drugs which can be successfully commercialized. There can be no assurance that we will ever generate revenues or achieve profitability.PCS499, including a future clinical trial.
Recent DevelopmentsPCS100
On or about October 4, 2017, the Company received $1.25 million from the first tranche of Senior Convertible Notes that are expected to convert into securities of the Company that are placed in the next placement round at a price that will not be greater than 90% of the offering price in that placement (See Note 6). This first tranche was from current Heatwurx and Promet shareholders. On November 21, 2017, an additional tranche of $1,330,000 of Senior Convertible Notes was issued to third party accredited investors. We are in the process of raising additional funds by potentially selling additional Senior Convertible Notes, convertible loans or other securities. No assurance however can be given that the Company will be successful in doing so.
On October 4, 2017, the Company and CoNCERT Pharmaceuticals Inc. (“CoNCERT”)August 29, 2019, we entered into an exclusive option and license agreement for the CTP-499 compound. However, under the terms of this agreement, if the Company fails to meet the conditions set forth in the agreement, which include a requirement for us to have not less than $8 million in funding for the support of the drug as defined within the agreement, or if the Company elects not to exercise the option, then the product reverts back to ownership by CoNCERT. Since CPT-499 is currently our drug product lead candidate, should we lose our rights to CTP-499, our planned growth and business plan would be materially and adversely affected. On March 19, 2018, we modified the Option and License Agreement with CoNCERT effective January 2018 (see Notes 10 and 14), which enabled us to exercise our option to license the CoNCERT patent rights and know-howAkashi Therapeutics, Inc. (“Akashi”) to develop and commercialize compounds (CTP-499 and each metabolite thereof) and products, as definedan anti-fibrotic, anti-inflammatory drug, PCS100, which also promotes healthy muscle fiber regeneration. In previous clinical trials in Duchenne Muscular Dystrophy (DMD), PCS100 showed promising improvement in the agreement.muscle strength of non-ambulant pediatric patients. Although the FDA placed a clinical hold on the DMD trial after a serious adverse event in a pediatric patient, the FDA has removed the clinical hold and defined how PCS100 can resume clinical trials in DMD. Once we have obtained adequate funding, we plan to develop PCS100 in rare adult fibrotic related diseases such as focal segmental glomerulosclerosis, idiopathic pulmonary fibrosis or Scleroderma.
Status as an Emerging Growth Company
We are an “emerging growth company” as that term is defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (i.e., those that have not had a registration statement declared effective under the Securities Act of 1933, as amended (the “Securities Act”), or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are required to comply with such new or revised financial accounting standards.
The JOBS Act also provides that an emerging growth company can elect to opt out of the extended transition period provided by Section 102(b)(1) of the JOBS Act and comply with the requirements that apply to nonemerging growth companies, but any such election to opt out is irrevocable. We may still take advantage of all of the other provisions of the JOBS Act, which include, but are not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, the reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and the exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
Processa Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
NOTENote 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Earnings per Share
The accompanying consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”), and reflect all of our activities, including those of our wholly-owned subsidiary. All material intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. These adjustments consist of normal and recurring accruals, as well as non-recurring charges.
The acquisition of Promet by Heatwurx has been accounted for as a reverse acquisition in accordance with U.S. GAAP, Financial Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”) 805-40-45,Business Combinations - Reverse Acquisitions. Under this method of accounting, Heatwurx, a nonoperating public shell corporation with nominal net liabilities, acquired all the assets of Promet, a private operating entity, through issuance of 90 percent of the issued and outstanding common stock of Heatwurx immediately after the asset acquisition. As a result of the change in control, Promet comprises the ongoing operations and assets of the combined entity and Promet senior management comprises the senior management of the Company and Promet is considered the accounting acquirer. Heatwurx has been treated as the “acquired” company for financial reporting purposes. The transaction is considered to be a capital transaction in substance. Accordingly, for accounting purposes, it is assumed that Promet issued shares to Heatwurx at fair value for Heatwurx’s net liabilities to be assumed by Promet at closing of the reverse acquisition. The fair value of the net liabilities assumed from Heatwurx, net of the par value of the assumed shares issued to Heatwurx is recognized as a reduction of additional paid-in capital.
As a result of the above, the operations prior to the asset purchase transaction are those of Promet. The assets and liabilities of Promet are recognized and measured at the historical carrying amounts. The accumulated deficit and other equity balances of Promet have been carried forward and adjusted to reflect the legal shares and par value of Heatwurx with the difference allocated to additional paid-in capital. Additional paid-in capital is also reduced by the fair value over the historical cost of the net liabilities assumed from Heatwurx, since the transaction is accounted for as a capital transaction, not a business combination.
Earnings per share (“EPS”) is calculated using the equity structure of Processa Pharmaceuticals, Inc., including the equity interests issued to Promet in the asset acquisition transaction (see Note 3). Prior to the reverse acquisition, EPS is based on Promet’s net income and weighted average common shares outstanding that were received in the asset purchase transaction. Subsequent to the reverse acquisition, EPS is based on the actual number of common shares of Processa Pharmaceuticals, Inc. outstanding during that period.
The Company completed a reverse split or a one-for-seven exchange of its shares. As a result, the consolidated financial statements have been retrospectively adjusted to reflect the one-for-seven reverse split.
Processa Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
Segments
The Company operates in one segment. Management uses one measurement of profitability and does not segregate its business for internal reporting. During 2017 and 2016 all of the Company’s long-lived assets were located within the United States.
Going Concern and Management’s PlanPlans
The Company’sOur consolidated financial statements are prepared using U.S. GAAP and are based on the assumption that the Companywe will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company facesWe face certain risks and uncertainties that are present in many emerging growth companies regarding product development and commercialization, limited working capital, recurring losses and negative cash flow from operations, future profitability, ability to obtain future capital, protection of patents, technologies and property rights, competition, rapid technological change, navigating the domestic and major foreign markets’ regulatory and clinical environment, recruiting and retaining key personnel, dependence on third party manufacturing organizations, third party collaboration and licensing agreements, lack of sales and marketing activities and having no customers or pharmaceutical products to sell or distribute. These risks and other factors raiseraised substantial doubt about our ability to continue as a going concern.concern as of the date of the filing of this Annual Report on Form 10-K for the year ended December 31, 2019.
The Company hasWe have relied exclusively on private placements with a small group of accredited investors to finance itsour business and operations. We dohave not havehad any prospective arrangements or credit facilities as a source of future funds. The Company has had no revenue since our inception, on August 31, 2015. The Company doesand we do not currently have any revenue under contract nor does it haveor any immediate sales prospects. As of December 31, 2017, the Company2019, we had an accumulated deficit of approximately $3.859 million incurred since inception.$11.0 million. For the year ended December 31, 2017, the Company2019, we incurred a net loss from continuing operations of approximately $1.856$3.4 million and used approximately $1.655$2.8 million in net cash from operating activities from continuing operations. The Company had total cash and cash equivalents of approximately $2.847 million as of December 31, 2017. We have raised proceeds of $2.58 million from the Senior Convertible Notes issued through December 31, 2017.
No additional Senior Convertible Notes have been issued through the date this report was issued. On March 19, 2018, we modified the Option and License Agreement with CoNCERT Pharmaceuticals, Inc. effective January 2018 (see Notes 10 and 14), which enabled us to exercise our option to license the CoNCERT patent rights and know-how to develop and commercialize compounds (CTP-499 and each metabolite thereof) and products, as defined in the agreement. Although we have other drugs being positioned into our pipeline, the loss of our rights to CTP-499 would have materially and adversely affected our planned growth and business plan.activities. We expect our operating costs to be substantial as we incur costs related to the clinical trials for our product candidates and that we will operate at a loss for the foreseeable future.
We areOn September 20, 2019, we entered into two separate LOC Agreements (“LOC Agreements”) with DKBK Enterprises, LLC (“DKBK”) and CorLyst, LLC (“CorLyst”, and, together with DKBK, collectively, “Lenders”), both related parties, which provide a revolving commitment of up to $700,000 each ($1.4 million total). Under the LOC Agreements, all funds borrowed bear interest at an annual rate of 8%. The promissory notes issued in connection with the LOC Agreements provide that the Lenders have the right to convert all or any portion of the principal and accrued and unpaid interest into our common stock on the same terms as our 2019 Senior Convertible Notes. Therefore, the Lenders may convert the outstanding debt under the LOC Agreements into our common stock at a conversion price equal to the lower of (i) $14.28 per share, (ii) a price per share equal to a 10% discount to the pre-money valuation of an equity sale of the Company’s common stock for cash, or (iii) at an adjusted price; all as more particularly described in the process2019 Senior Convertible Notes. Our CEO is also the CEO and Managing Member of both Lenders. CorLyst beneficially owns 996,376 shares of Processa common stock, representing approximately 17.8% of the Company’s outstanding shares of voting capital stock. We have not drawn any amounts under these LOC agreements as of February 28, 2020.
In connection with the LOC Agreements, we amended the existing pledge agreement with PoC Capital on September 30, 2019 to reduce the committed funds from $1.8 million to $900,000, which has been paid in full as of December 31, 2019. As part of the original pledge agreement, we issued 113,280 shares of common stock and 113,280 warrants to purchase shares of common stock to PoC Capital but held 56,640 shares and 56,640 warrants as collateral until certain payment milestones were met. PoC Capital forfeited the pledged collateral in the amended agreement. The forfeited shares and warrants have been returned to us.
In December 2019, we closed our bridge financing and issued $805,000 of the 2019 Senior Notes to accredited investors (see Note 7). We have also delayed some of our cash outflows, primarily through the deferred payment of salaries ($122,175, which has been accrued and included in accrued expenses at December 31, 2019) until such time as we have raised sufficient funding.
Based on our current plan, we will need to raise additional capital to fund our future operations. While we believe our current resources are adequate to complete our current Phase 2A trial for NL, we do not currently have resources to conduct other future trials or develop PCS100 without raising additional funds by potentially selling additional Senior Convertible Notes, convertible loans or other securities. However, no assurance cancapital. As noted above, the timing and extent of our spending will depend on the costs associated with, and the results of our Phase 2A trial for NL. Our anticipated spending and our cash flow needs could change significantly as the trial progresses. There may be givencosts we incur during our trial that we willdo not currently anticipate in order to complete the trial, requiring us to need additional capital sooner than currently expected.
The additional funding may not be successful in raising adequate funds needed.available to us on acceptable terms, or at all. If we are unable to raise additional capitalobtain adequate financing when required or on acceptable terms,needed, we may have to significantly delay, scale backreduce the scope of, or discontinuesuspend our current or future clinical trials, or research and development programs. We may seek to raise any necessary additional capital through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing and distribution arrangements. To the developmentextent that we raise additional capital through marketing and distribution arrangements or commercialization of oneother collaborations, strategic alliances or more oflicensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates, restrictfuture revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we raise additional capital through public or private equity offerings, the ownership interest of our operationsexisting stockholders will be diluted, and the terms of these securities may include liquidation or obtain funds by entering into agreements on unattractive terms, which would likely have a material adverse effect onother preferences that adversely affect our business, stock price andstockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our relationships with third parties with whom we have business relationships, at least untilability to take specific actions, such as incurring additional funding is obtained.
Processa Pharmaceuticals, Inc.
Notes to Consolidated Financial Statementsdebt, making capital expenditures or declaring dividends.
Uncertainty concerning our ability to continue as a going concern may hinder our ability to obtain future financing, as well as adversely affect our collaborative drug development relationships.financing. Continued operations and our ability to continue as a going concern are dependent on our ability to obtain additional funding in the near future and thereafter, and no assurances can be given that such funding will be available at all, or will be available in a sufficient amountsamount, or on reasonable terms. Without additional funds from debt or equity financing, sales of assets, sales or out-licenses of intellectual property or technologies, or other transactions yieldingproviding funds, we will rapidly exhaust our resources and will be unable to continue operations. Absent additional funding, we believe that our cash and cash equivalents will not be sufficient to fund our operations for a period of one year or more after the date that these condensed consolidated financial statements are available to be issued based on the timing and amount of our projected net loss from continuing operations and cash to be used in operating activities during that period of time.
As a result, substantial doubt exists about the Company’sour ability to continue as a going concern within one year afteras of the date that these consolidated financial statements are available to be issued.of the filing of the Annual Report on Form 10-K for the year ended December 31, 2019. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be different should the Companywe be unable to continue as a going concern based on the outcome of these uncertainties described above.
UseNote 3 – Basis of EstimatesPresentation and Summary of Significant Accounting Policies
Basis of Presentation
The preparationaccompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”), and reflect all of our activities, including those of our wholly-owned subsidiary. All material intercompany accounts and transactions have been eliminated in consolidation.
We have reclassified certain immaterial prior year amounts to conform to our current year presentation. The reclassification of prior period amounts had no effect on previously reported net income, stockholders’ equity or cash flows.
On December 23, 2019, we effected a 1-for-7 reverse stock split, reducing the number of the Company’s common stock outstanding on that date from 38,404,530 shares to 5,486,476 shares. The number of authorized shares of common stock remained unchanged at 100,000,000 shares and the number of authorized shares of preferred stock remained unchanged at 1,000,000 shares. Additionally, the conversion price of our 2019 Senior Notes, the exercise price of all then outstanding options and warrants, and the number of shares reserved for future issuance pursuant to our equity compensation plans were all adjusted proportionately in connection with the reverse stock split. All share and per share amounts and conversion and exercise prices presented herein have been adjusted retroactively to reflect this change.
Use of Estimates
In preparing our consolidated financial statements and related disclosures in conformity with U.S. GAAP requiresand pursuant to the userules and regulations of the SEC, we make estimates and assumptions by managementjudgments that affect the amounts reported amounts of assets and liabilities and disclosures of contingent assets and liabilities atin the date of theconsolidated financial statements and accompanying notes. Estimates are used for, but not limited to stock-based compensation, determining the reported amountsfair value of revenuesacquired assets and expenses during the reporting period.assumed liabilities, intangible assets, and income taxes. These estimates and assumptions are continuously evaluated and are based on management’s experience and knowledge of the relevant facts and circumstances. While management believeswe believe the estimates to be reasonable, actual results could differ materially from those estimates and could impact future results of operations and cash flows.
Cash and Cash Equivalents
Cash and cash equivalents includesinclude cash on hand and money market funds. The Company considersWe consider all highly liquid investments with a maturity at the date of purchase of three months or less to be cash equivalents. Money market funds were $1,300,815 and $0 at December 31, 2017 and 2016, respectively.
Certificates of Deposit
The certificates of deposit were purchased through an investment company and were held at multiple banks. The maturities of the certificates of deposit are typically six months or less.
Fair Value Measurements and Disclosure
The Company applies ASC 820, “Fair Value Measurements and Disclosures,” which expands disclosures for assets and liabilities that are measured and reported at fair value on a recurring basis. Fair value is defined as an exit price, representing the amount that would be received upon the sale of an asset or payment to transfer a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:
Level 1 – Quoted market prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Processa Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
Level 2 – Quoted market prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable, either directly or indirectly. Fair value determined through the use of models or other valuation methodologies.
Level 3 – Significant unobservable inputs for assets or liabilities that cannot be corroborated by market data. Fair value is determined by the reporting entity’s own assumptions utilizing the best information available, and includes situations where there is little market activity for the asset or liability.
The asset’s or liability’s fair value measurement within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and the senior convertible notes approximate fair value because of the short-term maturity of these instruments, including the mandatory conversion of the senior convertible notes into the common stock of the Company upon the earlier of (i) meeting certain funding levels on the next Private Investment in Public Equity (“PIPE”) financing we undertake or (ii) the one-year anniversary of the issuance of the senior convertible note.
Due From/To Related Parties and Administrative Fees
Administrative fees are collected from a related party, Corlyst, LLC (“Corlyst”), for shared costs related to payroll, health care insurance and rent based on actual costs incurred and recognized as a reduction of the operating expense being reimbursed (see Note 4). Corlyst pays certain operating expenses on behalf of the Company and the Company reimburses Corlyst based on actual costs incurred and recognizes the appropriate expense. The amounts due from and due to Corlyst are billed monthly and are due on demand at the beginning of each month.
Property and DepreciationEquipment
Property is stated at cost, less accumulated depreciation. Depreciation is computed underCosts of renewals and improvements that extend the straight-line method over the estimated useful lives of the assets.assets are capitalized. Expenditures for maintenance and routine repairs are charged to expense as incurred; expenditures for improvements and major repairs that materially extend the useful lives of assets are capitalized.incurred. Depreciation expense for the years ended December 31, 2017 and 2016 was $1,865 and $1,381, respectively.
Following areis recognized on a straight-line basis over the estimated useful lives for the various classifications of assets:
Impairment of Long-lived Assets
The Company periodically reviews its long-lived assets to determine potential impairment by comparing the carrying value of the long-lived assets with the estimated future net undiscounted cash flows expected to result from the use of the assets, including cash flowswhich generally range from disposition, at least annually or more frequently if events or changes in circumstances indicate a potential impairment may exist. Should3 to 5 years. We amortize leasehold improvements over the sumshorter of the expected future net cash flows be less than the carrying value, the Company would recognize an impairment loss at that date. An impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value (estimated discounted future cash flows)estimated useful life of the long-lived assets. The Company performs its impairment analysis in October of each year. Based on management’s evaluation, $15,330 of carrying costs related to the software was impaired and an impairment loss recorded for the year ended December 31, 2017. No impairment of long-lived assets was recognized for the year ended December 31, 2016.
Processa Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
Debt Issuance Costs
The Company recognizes debt issuance costs incurred on the Senior Convertible Notes as a reduction of the carrying amount of the Senior Convertible Notes on the face of the consolidated balance sheet. The debt issuance costs are amortized to interest expense using the interest method overasset or the term of the Senior Convertible Notes. The amortization of the debt issuance costs was $23,370 for the year ended December 31, 2017 and zero for the year ended December 31, 2016.
Compensated Absences
For the years ended December 31, 2017 and 2016, the Company recorded a liability for paid time off earned by permanent employees but not taken, in accordance with human resource policies.
Advertising Costs
Advertising costs are recognized as expense in the year incurred. Total advertising and marketing expense for the years ended December 31, 2017 and 2016 was $135 and $3,850, respectively.
Research and development
Research and development costs are expensed as incurred and consist of direct and overhead-related expenses. Research and development costs totaled $926,117 and $1,536,996 for the years ended December 31, 2017 and 2016, respectively. Expenditures to acquire technologies, including licenses, which are utilized in research and development and that have no alternative future use are expensed when incurred. Technology the Company develops for use in its products is expensed as incurred until technological feasibility has been established after which it is capitalized and depreciated. No costs have been capitalized during the years ended December 31, 2017 and 2016.
Stock-Based Compensation
The Company accounts for the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award, determined on the date of grant. Significant assumptions utilized in determining the fair value of our stock options include the volatility rate, estimated term of the options, risk-free interest rate and forfeiture rate. The term of the options will be based on the contractual term of the options as determined by the Board of Directors when the 2011 Equity Incentive Plan is amendedrelated lease. Upon retirement or terminated and approved by the stockholders to the extent required by applicable laws and regulations. The expense is to be recognized over the period during which an employee is required to provide services in exchange for the award. The Company estimates forfeitures at the time of grant and makes revisions, if necessary, at each reporting period if actual forfeitures differ from those estimates. The Company has not estimated future unvested forfeitures since there were no option grants outstanding at December 31, 2017. Upon the issuance of 90% of Heatwurx’s common stock to Promet on October 4, 2017, there was a Change in Control event, as defined in the Amended and Restated Heatwurx, Inc. 2011 Equity Incentive Plan. As of September 30, 2017, prior to the Change in Control event, all 269,500 unexercised options and all 40,000-unexercised performance options outstanding at December 31, 2016 were cancelled.
Processa Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
Non-employee share-based compensation charges generally are immediately vested and have no future performance requirements by the non-employee and the total share-based compensation charge is recorded in the period of the measurement date.
Income Taxes
As a result of the asset purchase transaction (see Note 1 Company Overview above and Note 3), there was a change in control of the Company. Prior to the closing of the asset purchase transaction, Promet was treated as a partnership for federal income tax purposes and thus was not subject to income tax at the entity level. Therefore, no provision or liability for income taxes has been included in these financial statements through the date of the asset purchase on October, 4, 2017. In addition, Promet determined that it was not required to record a liability related to uncertain tax positions as a result of the requirements of ASC 740-10-25 Income Taxes.
The net deferred tax assets of Heatwurx were principally federal and state net operating loss carry forwards. The Heatwurx net deferred tax assets were fully reserved with a valuation allowance.
Subsequent to the closing of the asset purchase, Processa Pharmaceuticals, Inc. will file a consolidated federal income tax return in the United States, which includes eligible subsidiaries. In addition, we file income tax returns in state and local jurisdictions as applicable. The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
The provision for income taxes includes federal and state income taxes currently payable and deferred taxes resulting from temporary differences between the financial statement and tax basisdisposition of assets, the costs and liabilities atrelated accumulated depreciation are removed from the enacted tax rates. Changes in deferred income tax assets and liabilities are included as a component of income tax expense. The effect on deferred income tax assets and liabilities attributable to changes in enacted tax rates are charged or credited to income tax expense in the period of enactment. Valuation allowances are recorded to reduce deferred tax assets when it is more-likely-than-not that a tax benefit will not be realized. A full valuation allowance was recorded against the Company’s deferred tax assets at December 31, 2017. The Company had no deferred tax assets and no valuation allowance at December 31, 2016.
With respect to uncertain tax positions, the Company would recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. Estimated interest and penalties related to uncertain tax positions are included as a component of interest expense and general and administrative expense, respectively. The Company had no unrecognized tax benefits or uncertain tax positions at December 31, 2017 or 2016.
Net Income (Loss) per Share
The Company computes basic and diluted earnings per share amounts pursuant to ASC 260-10-45. Basic earnings per share is computed by dividing net income (loss) available to common shareholders, by the weighted average number of shares of common stock outstanding during the period, as retrospectively restated for the one-for-seven reverse stock split, excluding the effects of any potentially dilutive securities. Diluted earnings per share is computed by dividing net income (loss) available to common shareholders by the diluted weighted average number of shares of common stock during the period. The diluted weighted average number of common shares outstanding is the basic weighted number of shares adjusted for any potentially diluted debt or equity. The computation does not assume conversion, exercise or contingent exercise of securities since that would have an anti-dilutive effect on earnings (loss) during the years ended December 31, 2017 and 2016.
Processa Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
Equity
The asset purchase of Promet by Heatwurx is accounted for as a reverse acquisition. As a result, these consolidated financial statements represent Promet as the accounting acquirer (legal acquiree) and Heatwurx from October 4, 2017 forward as the accounting acquiree (legal acquirer). However, the legal capital stock (number and type of equity interests issued) is that of Heatwurx, which subsequently changed its name to Processa Pharmaceuticals, Inc., the legal parent, in accordance with guidance on reverse acquisitions accounted for as a capital transaction (See Note 2 – Basis of Presentation and Earnings per Share and Note 3 – Reverse Acquisition).
The accumulated deficit and other equity balances of Promet have been carried forward and adjusted to reflect the legal capital shares and par value of Heatwurx, including the shares issued to Promet in the reverse acquisition transactionaccounts with the difference allocated to additional paid-in capital. Additional paid-in capital is also reduced by the fair value/ historical cost of theresulting net liabilities assumed from Heatwurx since the transaction is accounted for as a capital transaction, not a business combination.
Subsequent events
The Company has evaluated subsequent events and transactions for potential recognitiongain or disclosure through April 16, 2018, the date the financial statements were issued, in accordance with ASC 855-10-50. Refer to Note 14 below for further information.
Recent Accounting Pronouncements
From time to time, the Financial Accounting Standards Board (“FASB”) or other standard setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification are communicated through issuance of an Accounting Standards Update (“ASU”). The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements. It has evaluated recently issued accounting pronouncements and determined that there was no material impact on its financial position or results of operations.
From May 2014 through December 2017, the FASB issued several ASUs related to ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. These ASUs are intended to provide greater insight into both revenue that has been recognized and revenue that is expected to be recognized in the future from existing contracts. The new guidance is effective for interim and annual periods beginning after December 15, 2017, although entities may adopt one year earlierloss, if they choose. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. The Company is currently in the pre-revenue stages of operations; therefore, we do not currently anticipate there would be any, change to timing or method of recognizing revenue. As such, we do not believe this new standard will have a material impact on our results of operations, financial condition or cash flows.
Processa Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
In February 2016 through December 2017, the FASB issued several ASUs related to ASU-2016-02, “Leases (Topic 842).” The guidance requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right of use asset representing its right to use the underlying asset for the lease term. For finance leases: the right-of-use asset and a lease liability will be initially measured at the present value of the lease payments, in the statement of financial position; interest on the lease liability will be recognized separately from amortization of the right-of-use asset in the statement of comprehensive income; and repayments of the principal portion of the lease liability will be classified within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows. For operating leases: the right-of-use asset and a lease liability will be initially measured at the present value of the lease payments, in the statement of financial position; a single lease cost will be recognized, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis; and all cash payments will be classified within operating activities in the statement of cash flows. Under Topic 842 the accounting applied by a lessor is largely unchanged from that applied under previous GAAP. The amendments in Topic 842 are effective for the Company beginning January 1, 2019. Management is currently evaluating the impact of adopting the new guidance on the Company’s financial statements.
NOTE 3 – REVERSE ACQUISITION
On October 4, 2017, Heatwurx acquired Promet’s net assets of $1,017,342 at historical cost in exchange for approximately 90 percent or 222,217,112 shares of common stock issued by the Company (or 31,745,242 shares post reverse split). Immediately following the transaction, total shares issued and outstanding were 246,907,902 (or 35,272,626 shares post reverse split), representing the total legal capital of the Company. The transaction has been accounted for as a reverse acquisition in accordance with ASC 805-40-45,Business Combinations - Reverse Acquisitions. As a result, Heatwurx is considered the acquired company. The consolidated financial statements are under the name of Processa Pharmaceuticals, Inc., the legal parent (accounting acquiree) but represent Promet, the legal subsidiary (accounting acquirer) with an adjustment, to retrospectively adjust Promet’s legal capital to reflect the legal capital (number and type of shares) of Processa Pharmaceuticals, Inc. and Heatwurx from October 4, 2017 forward as the accounting acquiree (legal acquirer).
Promet’s assets and liabilities are recognized and measured at their precombination carrying amounts. Heatwurx, which subsequently changed its name to Processa Pharmaceuticals, Inc., recognized and measured its assets and liabilities at October 4, 2017 in accordance with guidance applicable to business combinations. The net liabilities were all short term in nature and were recognized at their precombination carrying amounts. The accumulated deficit reflects Promet balances before the reverse acquisition. See Note 2 – Basis of Presentation and Earnings per Share and Note 2 – Equity for the recognition and measurement of common stock and additional paid-in capital.
Promet incurred acquisition-related transaction costs of $58,763, which are included in general and administrative expense, a component of operating expenses in the consolidated statements of operations. The operating results for Heatwurx are included in the accompanying consolidated financial statements from October 4, 2017 forward.
Heatwurx’s assets acquired and liabilities assumed (see below) and the par value of the common stock allocated to Heatwurx stockholders is recognized as a reduction of additional paid-in capital at the acquisition date.
Processa Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
| Net recognized values of Heatwurx identifiableassets and liabilities | ||||||||
| Cash | 6,280 | |||||||
| Accounts payable | (26,098 | ) | ||||||
| Accrued expenses | (17,932 | ) | ||||||
| Net liabilities assumed | $ | (37,750 | ) |
NOTE 4 – RELATED PARTY TRANSACTIONS
A shareholder, Corlyst, LLC, pays the Company for administrative services performed by the Company. These administrative fees are included as a reduction of the related general and administrative expenses in the Company’s statement of operations. These fees were charged beginning in October 2016 and totaled $111,799 and $32,327 for the years ended December 31, 2017 and 2016, respectively. The receivable balances due from Corlyst at December 31, 2017 and 2016 were $62,709 and $0, respectively.
During 2016 and 2017, Corlyst paid certain operating expenses on behalf of the Company and the Company reimbursed Corlyst based on actual costs incurred at later dates. The accounts payable amounts due to Corlyst at December 31, 2017 and 2016 were $336 and $95, respectively. In addition, there was $100 due to an officer included in due to related parties as of December 31, 2017.
A director of the Company is the manager of the JMW Fund, LLC, the San Gabriel Fund, LLC, and the Richland Fund, LLC, collectively known as the “Funds”. These Funds own 14,180,543 shares of common stock in the aggregate at December 31, 2017 or 2,025,792 shares of common stock restated for the reverse stock split. In addition, the Funds own $1 million in Senior Convertible Notes at December 31, 2017.
Entities affiliated with the Chairman of the Board of Directors, Chief Executive Officer and Interim Chief Financial Officer of the Company own $250,000 in Senior Convertible Notes at December 31, 2017.
Heatwurx had secured notes payable with the Funds in the aggregate amount of $1,289,361; on September 29, 2017, prior to the asset purchase closing, Heatwurx converted the principal and accrued interest of $412,716 into 8,510,386 shares of common stock or 1,215,813 shares of common stock restated for the reverse stock split. The Funds also had an aggregate principal balance of $138,000 and accrued interest of $50,887 on the Heatwurx revolving line of credit converted into 944,436 shares of common stock on September 29, 2017 or 134,924 shares of common stock restated for the reverse stock split.
NOTE 5– NOTES PAYABLE
On September 29, 2017, prior to the Asset Purchase closing, principal of all existing Heatwurx notes payable in the amount of $1,939,341 and related accrued interest in the amount of $613,114 were converted to 12,953,902 shares of common stock or 1,850,625 shares of common stock restated for the reverse stock split. As of December 31, 2017, there were no Heatwurx notes payable outstanding.
NOTE 6 – SENIOR CONVERTIBLE NOTES
As of October 4, 2017, certain entities affiliated with current shareholders (see Note 4) had purchased $1.25 million of our senior secured convertible notes (“Senior Notes”) in a bridge financing undertaken by us to support the Processa operations. On November 21, 2017, additional third party accredited investors contributed $1.33 million in financing proceeds. As of December 31, 2017, $2.58 million of Senior Notes were issued and outstanding.
Processa Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
Principal and interest under each Senior Note is due on the earlier of (i) the mandatory and automatic conversion of the Senior Note into the next Private Investment in Public Equity (“PIPE”) financing we undertake, provided the PIPE financing yields gross proceeds of at least $4 million at a conversion price per share equal to the lower of (a) $72 million pre-money valuation or (b) a 10% discount to the pre-money valuation (Qualified Financing) or (ii) the one-year anniversary of that Senior Note (Maturity Date). The Senior Notes bear interest at 8% per year, and are payable in kind (in common stock). At the Maturity Date, the outstanding principal and accrued interest on the Senior Note will be automatically converted into shares of common stock of the Company equal to the lesser of (i) $72 million pre-money valuation or (ii) any adjusted price resulting from the application of down round pricing during the anti-dilution period through December 31, 2018. In such event, the anti-dilution period, as defined, will be extended for a further 12 months. There can be no assurance that we will be successful in achieving the financing levels targeted under the Senior Convertible Notes or the PIPE financing.
Holders of Senior Notes (a) may elect to receive 110% of principal plus accrued interest in the event there is a change of control prior to conversion of the Senior Notes, (b) are entitled to full ratchet anti-dilution protection in event of any sale of securities at a net consideration per share that is less than the applicable conversion price per share to the holder, (c) are entitled to certain registration rights for the securities underlying the Senior Notes and (d) have been granted certain preemptive rights pro rata to their respective interests through December 31, 2018. The Senior Notes can be prepaid by the Company at any time following the date of issuance with seven days prior written notice to the note holder.
The Senior Notes are secured by a security interest in the assets of the Company and contain negative covenants that do not permit the Company to incur additional indebtedness or liens on property or assets owned, repurchase common stock, pay dividends, or enter into any transaction with affiliates of the Company that would require disclosure in a public filing with the Securities and Exchange Commission. Upon an event of default, the outstanding principal amount of the Senior Notes, plus accrued but unpaid interest and other amounts owing in respect thereof through the date of acceleration, shall become immediately due and payable in cash at the holder’s election, if not cured within the cure period.
The Company retained Boustead Securities Ltd. (“Boustead”), a registered broker-dealer, as its exclusive financial adviser and has agreed to pay Boustead (i) six percent (6%) of gross proceeds received by the Company and (ii) warrants to purchase securities in the amount of three percent (3%) of the equity issued or issuable in connection with the Senior Notes bridge financing. These warrants will be issued upon achieving certain financing levels under the next PIPE financing we undertake. No warrants are issuable, and none have been issued as of December 31, 2017. To the extent that the Company raises more than $8 million (the “Excess Investment”) then as to that portion of the Excess Investment that is attributable to funds provided by existing holders of Company equity or by shareholders of the Company, including their respective affiliated holders (the “Affiliated Excess Investment”), the Company shall pay Boustead a cash fee equal to two percent (2%) of the Excess Investment and six percent (6%) of the balance of the Excess Investment, if any. Boustead may allow a portion of its fees payable hereunder to be shared with another registered broker-dealer assisting in the private capital raise.
Senior Notes and the underlying common stock that the Senior Notes will convert into have not been registered under the United States Securities Act of 1933, as amended (the “Act”). The Senior Notes and the underlying common stock that the Senior Notes will convert into shall be issued solely to investors who are “accredited investors” within the meaning of Rule 501(a) of Regulation D promulgated under the Act. There is no public market for the Senior Notes and there is no public market for the securities of the Company (or shares of common stock of the Company issued to Promet at the closing of the Asset Purchase Agreement discussed in Note 1) upon conversion of the Senior Notes.
Processa Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
Debt and accrued interest at December 31, 2017 and interest expense for the year ended December 31, 2017 are as follows:
| Debt Balance | Accrued Interest | Interest Expense | ||||||||||
| Senior Convertible Notes | $ | 2,580,000 | $ | 35,693 | $ | 35,693 | ||||||
| Unamortized Debt Issuance Cost | (131,430 | ) | - | 23,370 | ||||||||
| Balance, December 31, 2017 | $ | 2,448,570 | $ | 35,693 | $ | 59,063 | ||||||
The Company incurred $154,800 in debt issuance costs on the Senior Notes with Boustead, which were offset against the debt balance. All debt issuance costs are being amortized over the term of the Senior Notes using the effective interest method. The face interest rate of the Senior Notes is 8 percent. The effective interest rate on the Senior Notes was 7.72 percent before debt issuance costs since no payments of interest are due until maturity and 13.96 percent including the debt issuance costs based on the repayment terms of the Senior Notes.
Future maturities of debt and accrued interest, contractual interest expense to be incurred and amortization of debt issuance costs as of December 31, 2017 are $2,580,000, $206,400, $170,707 and $131,430, respectively, for the year ended December 31, 2018.
NOTE 7 – INCOME TAXES
The Company files income tax returns in the U.S. federal jurisdiction and in the state of Maryland. There are currently no income tax examinations underway for these jurisdictions.
The Company provides deferred income taxes for differences between the tax reporting bases and the financial reporting bases of assets and liabilities at the enacted tax rates. The Company determined that it was not required to record a liability related to uncertain tax positions as a result of implementing the requirements of ASC 740-10-25 Income Taxes. Should the Company incur interest and penalties relating to tax uncertainties, such amounts would be classified as a component of interest expense and general and administrative expense, respectively. The liability related to uncertain tax positions is not expected to increase or decrease within the next twelve months.
As of December 31, 2017, the Company’s tax year for 2016, 2015 and 2014 are subject to examination by the Internal Revenue Service and the state taxing authorities of Maryland, Colorado, Utah, North Dakota and California.
As discussed in Note 2 – Income Taxes, the historical information presented in the financial statements is that of Promet. Prior to the closing of the asset purchase transaction on October 4, 2017, Promet was treated as a partnership for federal income tax purposes and thus the partners were taxed separately on their proportionate share of Promet’s income, deductions, losses and credits. Therefore, no provision or liability for income taxes has been included in these financial statements through the date of the asset purchase on October 4, 2017.
In addition, as a result of the asset purchase transaction, Promet was issued 90 percent of the total issued and outstanding common stock of Heatwurx, including the shares issued to Promet. The transaction resulted in an ownership change as defined by Internal Revenue Code Section 382. The net deferred tax assets of Heatwurx, prior to the asset purchase transaction, were principally federal and state net operating loss carry forwards.
Processa Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
The Company has no current federal or state tax provision recognized in the consolidated financial statements. Since the asset purchase transaction, the Company has incurred operating losses of approximately $606,400. The total deferred tax asset as of December 31, 2017 includes approximately $347,500 ($95,632 net of tax) of general and administrative expenses treated as deferred start-up expenditures for tax purposes and approximately $258,600 ($71,155 net of tax) of tax losses resulting in tax loss carryforwards. The Company has had no revenues and recognized cumulative loses since inception. Due to the uncertainty regarding future profitability and recognition of taxable income to utilize the amortization of deferred start-up expenditures and the tax loss carryforwards, a full valuation allowance against any potential deferred tax assets has been recognized for the year ended December 31, 2017 as discussed below.
As of December 31, 2017, the Company is evaluating its qualified research expenditures for application to federal and state research and development tax credits to offset potential future tax liabilities. The federal research and development tax credits have a 20-year carryforward period. The Maryland research and development tax credits have a 7-year carryforward period. There is no recognition of a deferred tax asset for research and development tax credits as of December 31, 2017.
The Company is subject to U.S. Federal and state income taxes. The provision (benefit) for income taxes for the tax years ended December 31, 2017 and 2016 are as follows:
| Years Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Current: | ||||||||
| Federal | $ | - | $ | - | ||||
| State | - | - | ||||||
| Total current | - | - | ||||||
| Deferred: | ||||||||
| Federal | (116,783 | ) | - | |||||
| State | (50,004 | ) | - | |||||
| Total deferred tax benefit | (166,787 | ) | - | |||||
| Valuation allowance | 166,787 | - | ||||||
| Net deferred tax benefit | - | - | ||||||
| Total tax provision (benefit) | $ | - | $ | - | ||||
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“TCJA”) was signed into law. Among its provisions, the TCJA reduces the statutory U.S. Corporate income tax rate from 34% to 21% effective January 1, 2018. The TCJA includes provisions that, in certain instances, impose U.S. income tax liabilities on future earnings of foreign subsidiaries and limit the deductibility of future interest expenses. The TCJA also provides for accelerated deductions of certain capital expenditures made after September 27, 2017 through bonus depreciation and an indefinite tax loss carryforward period for losses incurred after December 31, 2017. However, these tax loss carry forwards can only offset 80 percent of future taxable income. Losses incurred prior to January 1, 2018 continue to carry forward for twenty years. The application of the TCJA may change due to regulations subsequently issued by the U.S. Treasury Department.
Upon the enactment of the TCJA, we recorded a reduction in our deferred income tax assets of approximately $72,300 for the effect of the aforementioned change in the U.S. statutory income tax rate with an offsetting decrease in the valuation allowance established against the deferred tax assets. As a result, there was no change or recognition of an income tax provision or benefitreflected in the consolidated statement of operations for the year ended December 31, 2017.
Processa Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
In December 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin 118 (“SAB 118”) to provide clarification in implementing the TCJA when registrants do not have the necessary information available to complete the accounting for an element of the TCJA in the period of its enactment. SAB 118 provides for tax amounts to be classified as provisional and subject to remeasurement for up to one year from the enactment date for such elements when the accounting effect is not complete, but can be reasonably estimated. We consider our estimates of the tax effects of the TCJA on the components of our tax provision to be reasonable and no provisional estimates subject to remeasurement will be necessary to complete the accounting.operations.
Deferred Income Taxes - The Company does not recognize the deferred income tax asset at this time because the realization of the asset is not more-likely-than-not. As of December 31, 2017, the Company had deferred start-up expenditures and net operating losses for both federal and state income tax purposes of approximately $166,787 as described above. As of December 31, 2016 and through October 4, 2017, the Company had no net operating losses for federal and state income tax purposes since Promet’s partners were taxed separately on their proportionate share of Promet’s income, deductions, losses and credits.
The net operating losses are available for application against future taxable income for 20 years, expiring in 2037. The benefit associated with the amortization of the deferred start-up expenditures and the net operating loss carry forward will more-likely-than-not go unrealized unless future operations are successful. Since the success of future operations is indeterminable, the potential benefits resulting from these deferred tax assets have not been recorded in the financial statements.
| December 31, 2017 | December 31, 2016 | |||||||
| Deferred Tax Assets: | ||||||||
| Non-current | ||||||||
| Net operating loss carry forward - Federal | $ | 49,822 | $ | - | ||||
| Net operating loss carry forward - State | 21,333 | - | ||||||
| Start-up expenditures and amortization | 95,632 | - | ||||||
| Total non-current deferred tax assets | 166,787 | - | ||||||
| Valuation allowance for deferred tax assets | (166,787 | ) | - | |||||
| Total deferred tax assets | $ | - | $ | - | ||||
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, the projected future taxable income and tax planning strategies in making this assessment. Based on management’s analysis, a full reserve has been established against this asset. The change in the valuation allowance in 2017 and 2016 was $166,787 and $0, respectively.
Processa Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
A reconciliation of the Company’s effective income tax rate and statutory income tax rate at December 31, 2017 and 2016 is as follows:
| December 31, 2017 | December 31, 2016 | |||||||
| Federal statutory income tax rate | 34.00 | % | 0.00 | % | ||||
| State tax rate, net | 5.45 | % | 0.00 | % | ||||
| Permanent differences | -0.02 | % | 0.00 | % | ||||
| Impact of change in federal income tax rates | -11.92 | % | 0.00 | % | ||||
| Deferred tax asset valuation allowance | -27.51 | % | 0.00 | % | ||||
| Effective income tax rate | 0.00 | % | 0.00 | % | ||||
NOTE 8 –STOCKHOLDERS’ EQUITY
On December 8, 2017, we completed a one-for-seven reverse split in trading markets. As a result, the consolidated financial statements have been retrospectively adjusted to reflect shares outstanding after the one-for-seven reverse split.
Common Stock– As of December 31, 2017 and 2016, the Company had authorized 350,000,000 and 43,261,049 shares of common stock with a $0.0001 par value. At December 31, 2017 and 2016 there were 35,272,626 and 31,745,242 common shares issued and outstanding, respectively. Common shares attributable to Promet’s controlling interest were 31,745,242 at December 31, 2017 and 2016. Common shares attributable to the minority shareholders’ interest were 3,527,384 and zero at December 31, 2017 and 2016, respectively.
Preferred Stock - As of December 31, 2017, the Company has authorized 10,000,000 shares of Preferred Stock with a $0.0001 par value. No shares were issued and outstanding.
On September 29, 2017, prior to the asset purchase closing, Heatwurx converted 178,924 shares of Series D Preferred Stock and all accrued dividends in the amount of $118,658 into 719,500 shares of common stock or 102,789 shares of common stock restated for the reverse stock split.
Stock and Performance Options - The Amended and Restated Heatwurx, Inc. 2011 Equity Incentive Plan (the “Plan”) approved by the Heatwurx Board of Directors and stockholders in October 2012 has 1,800,000 shares of common stock or 257,143 shares of common stock after the reverse-split reserved for issuance under the Plan. The Plan is being reviewed by the new Promet appointed Board of Directors and may be amended or terminated. Amendments are subject to stockholder approval to the extent required by applicable laws and regulations. Unless terminated sooner, the Plan will automatically terminate on April 15, 2021. There are currently no outstanding option grants to officers, directors, employees and consultants under the Plan. If unexercised options expire or are terminated, the underlying shares will again become available for grants under the Plan.
During the year ended December 31, 2016, there were no options or performance options granted or exercised and 321,667 unexercised options with a weighted average exercise price of $1.69 were cancelled. At December 31, 2016, there were 269,500 unexercised options with a weighted average exercise price of $1.88 and a weighted average remaining life of 2.04 years and 40,000 unexercised performance options with a weighted average exercise price of $2.00. Upon the issuance of 90% of Heatwurx’s common stock to Promet on October 4, 2017, there was a Change in Control event, as defined in the Plan. As of September 30, 2017, prior to the Change in Control event, all 269,500 unexercised options and all 40,000-unexercised performance options outstanding at December 31, 2016 were cancelled. No stock-based compensation expense was recognized for the years ended December 31, 2017 and 2016.
Processa Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
Warrants- During the year ended December 31, 2016, there were no warrants granted, exercised or cancelled. At December 31, 2016, there were 2,000,304 warrants outstanding with a weighted average exercise price of $2.36 and a weighted average remaining life of 0.63 years. During the nine months ended September 30, 2017, 723,181 warrants with a weighted average exercise price of $2.99 were cancelled a result of non-exercise prior to their exercise date. At September 30, 2017, there were 1,277,123 warrants with a weighted average exercise price of $2.00 and a weighted average remaining life of 0.08 years that were cancelled in October 2017 as a result of non-exercise prior to their exercise date. As a result, there were no warrants issued, issuable or outstanding at December 31, 2017. See Note 6 for discussion of warrants.
NOTE 9 – NET LOSS PER COMMON SHARE
The Company computes loss per share of common stock using the two-class method required for participating securities. The Company’s participating securities include all series of its convertible preferred stock. Undistributed earnings allocated to these participating securities are added to net loss in determining net loss applicable to common stockholders. The Company has preferred stock authorized but no preferred stock issued and outstanding at December 31, 2017 and 2016.
The dilutive effect of convertible securities, including the preferred stock, if issued, and the Senior Convertible Notes, are reflected in diluted earnings per share using the if-converted method. As a result, (i) the preferred dividends applicable to the convertible preferred stock are deducted from income from continuing operations and net income in computing income available to common stockholders and, (ii) the interest expense and nondiscretionary adjustments on income that would have been calculated differently had the interest on the Senior Convertible Notes never been recognized, both net of income tax, are added back to the numerator. The convertible preferred stock and the Senior Convertible Notes assume the conversion to common stock at the beginning of the period or the date of issuance, if later, resulting in common shares being included in the denominator.
Other convertible securities that may be dilutive on their own but antidilutive when included with other potential common shares in computing diluted earnings per share include options and warrants since the treasury stock method applied to options and warrants has no effect on the numerator in the calculation. However, including potential common shares in the denominator (including convertible preferred stock and Senior Convertible Notes) of a diluted per share computation for continuing operations will always result in an antidilutive per share amount when the Company reports a loss from continuing operations or a loss from continuing operations available to common stockholders (after any preferred dividend deductions).
No potential common shares shall be included in the computation of any diluted per share amount when a loss from continuing operations or a loss from continuing operations available to common stockholders (after preferred dividend deduction) exists, even if the entity reports net income (as a result of discontinued operations) since it would be antidilutive. As a result, if there is a loss from continuing operations or a loss from continuing operations available to common stockholders, diluted earnings per share would be computed in the same manner as basic loss per share.
There were no outstanding options or warrants issued for the period from August 31, 2015 (inception) through December 31, 2017. See Notes 6 and 8 for further discussion of warrants related to the Senior Convertible Notes and the PIPE financing.
The Company has reported a loss from continuing operations and a loss from continuing operations available to common stockholders for all periods presented. As a result, there is no assumed conversion, exercise or contingent exercise of potential common shares included in the computation of the diluted per share amounts since it would have an antidilutive effect, therefore, basic and diluted loss per share are computed by dividing net loss applicable to common stockholders by the weighted-average number of shares of common stock outstanding.
Processa Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
The calculation of the numerator and denominator for basic and diluted net loss per common share is shown in the table below. The weighted-average shares of common stock used in calculating basic earnings per share for the 2017 calculation uses the number of shares issued to Promet in the asset purchase transaction from January 1, 2017 through the acquisition date of October 4, 2017 plus all the legal capital issued and outstanding of Heatwurx, including Promet’s shares, from the closing date through December 31, 2017. All shares were restated for the one-for-seven reverse split.
The 2016 calculation uses the common shares issued to Promet in the asset purchase transaction, restated for the one-for-seven reverse split and weighted for the issuance dates of Promet’s member interests.
| For the year ended | ||||||||
| December 31, 2017 | December 31, 2016 | |||||||
| Net loss from continuing operations | $ | (1,856,315 | ) | $ | (1,917,066 | ) | ||
| Less: Preferred stock dividends | - | - | ||||||
| Net loss from continuing operations applicable to common stockholders - basic | (1,856,315 | ) | (1,917,066 | ) | ||||
| Dilution adjustments (not computed since they are antidilutive): | ||||||||
| Preferred stock dividend | - | - | ||||||
| Interest on senior convertible notes, net of tax | - | - | ||||||
| Net loss from continuing operations applicable to common stockholders - diluted | $ | (1,856,315 | ) | $ | (1,917,066 | ) | ||
| Promet common shares issued and outstanding | 31,745,242 | 31,745,242 | ||||||
| Heatwurx common shares issued and outstanding | 3,527,384 | - | ||||||
| Total common shares issued and outstanding - basic | 35,272,626 | 31,745,242 | ||||||
| Potential common shares (not computed since they are antidilutive): | ||||||||
| Warrants | - | - | ||||||
| Conversion of preferred stock to common shares | - | - | ||||||
| Conversion of senior convertible notes to common shares | - | - | ||||||
| Total common shares issued and outstanding - diluted | 35,272,626 | 31,745,242 | ||||||
| Weighted average shares outstanding used in calculating net loss per common share - basic | 32,595,680 | 29,321,049 | ||||||
| Weighted average shares outstanding used in calculating net loss per common share - diluted | 32,595,680 | 29,321,049 | ||||||
| Net loss per share - basic | $ | (0.06 | ) | $ | (0.07 | ) | ||
| Net loss per share - diluted | $ | (0.06 | ) | $ | (0.07 | ) | ||
Processa Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Operating Lease Obligations
The Promet leases office space and equipment from third parties under non-cancelable operating leases. The office lease commenced on October 1, 2016 and expires September 30, 2019 with monthly rent at inception of $5,535 that escalates $1,107 annually on each October. Rent expense under the current office lease for the years ended December 31, 2017 and 2016 was $105,954 and $50,997, respectively. Rent expense for the year ended December 31, 2017 includes straight-line rent expense of $13,284 and $22,929 of common area maintenance and real estate tax reimbursements. At December 31, 2017, the accrued rent liability was $13,284, of which $3,321 was a current liability and $9,963 was a non-current liability.
The equipment lease commenced in June 2017 and expires in August 2020. Monthly rent of $586 over the 39-month lease term includes a monthly operating usage cost allowance of $125. Additional charges for excess usage, as defined in the agreement, are charged quarterly. The lessor charges monthly sales tax of 6 percent. Rent expense under the equipment lease for the years ended December 31, 2017 and 2016 was $6,626 and $5,362, respectively.
Future minimum rental payments under the leases as of December 31, 2017, are as follows:
| Office | Equipment | Total | ||||||||||
| 2018 | $ | 83,025 | $ | 7,036 | $ | 90,061 | ||||||
| 2019 | 69,741 | 7,036 | 76,777 | |||||||||
| 2020 | - | 4,691 | 4,691 | |||||||||
| Total future minimum lease payments | $ | 152,766 | $ | 18,762 | $ | 171,528 | ||||||
Option and License Agreement with CoNCERT Pharmaceuticals
On October 4, 2017, Promet entered into an option and license agreement with CoNCERT Pharmaceuticals, Inc. (“CoNCERT”). The agreement provides the Company with an option to license the CoNCERT patent rights and know-how to develop and commercialize compounds (CTP-499 and each metabolite thereof) and products, as defined in the agreement. The option period ends, and the agreement terminates nine months from the date of the agreement if not exercised. Promet has the right to exercise the option during the option period; provided Promet (i) has raised gross proceeds of at least $8 million in one or more equity or other financings after the date of the agreement, and (ii) has a post-money valuation, following its then most recent equity financing, of at least $40.5 million.
Upon exercise of the option, Promet will have an exclusive, royalty-bearing right and license, including a right to sublicense, under CoNCERT intellectual property and joint intellectual property, to develop, manufacture, use and commercialize, including filing for, obtaining and maintaining regulatory approval for, products in all medical fields on a global basis. Promet shall control and be solely responsible for the commercialization of products in all medical fields on a global basis, including all costs and expenses. On March 19, 2018, we modified the Option and License Agreement with CoNCERT effective March 2018 (see Note 14), which enabled us to exercise our option to license the CoNCERT patent rights and know-how to develop and commercialize compounds (CTP-499 and each metabolite thereof) and products, as defined in the agreement.
Processa Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
In addition, Promet will have the right and license, including a right to sublicense, under CoNCERT intellectual property and joint intellectual property, to develop compounds and products in all medical fields on a global basis. Promet shall control and be solely responsible for the development of and regulatory activities with respect to compounds and products in all medical fields on a global basis, including all costs and expenses.
Promet shall use commercially reasonable efforts to develop and obtain regulatory approval for one product in the U.S. and at least one other major market and subject to obtaining regulatory approval in the applicable major market, commercialize one product in the U.S. and at least one other major market. Failure to comply with the diligence obligation under the license agreement may result in the termination of the license agreement by CoNCERT in accordance with the relevant terms of the agreement.
In partial consideration for the rights granted to Promet , if the option is exercised, pursuant to the terms of a customary stock purchase agreement on mutually acceptable terms based on shares issued that enabled Promet to exercise the option under the license agreement discussed above, Promet shall issue to CoNCERT, for no additional consideration, shares representing the lesser of (a) the number of shares determined by dividing $8 million by the price per share paid by other investors in the financing round that enabled Promet to exercise the option under the license agreement discussed above or (b) the number of shares rounded down to the nearest whole share equal to 19.9 percent of the issued and outstanding shares of Promet immediately following the issuance of shares to CoNCERT. Following the execution of the stock purchase agreement, CoNCERT shall also be entitled to the same right to participate in future financing rounds of Promet (and subject to the same exceptions) as applicable to any investor in the financing round that enabled Promet to exercise the option under the license agreement.
Promet will incur royalty obligations to CoNCERT on a country-by-country and product-by-product basis that commence on the date of this agreement and expire on a country-by-country and product-by-product basis on the later of (i) expiration or invalidation of the last valid claim covering such product in such country or (ii) the tenth anniversary of the date of the first commercial sale to a non-sublicensee third party of such product in such country. Promet shall pay to CoNCERT royalties, on a product-by-product basis, on worldwide net sales of products during each year as follows: (a) four percent (4%) of sales less than or equal to $100 million; (b) five percent (5%) of sales greater than $100 million and less than or equal to $500 million; (c) six percent (6%) of sales greater than $500 million and less than or equal to $1 billion; and, (d) for that portion greater than $1 billion, (i) with respect to net sales made by Promet or any of its affiliates, ten percent (10%) of net sales, and (ii) with respect to net sales made by any sub-licensee, the greater of (1) 6% of such net sales or (2) 50% of all payments received by Promet or any of its affiliates with respect to such net sales. Royalties are subject to adjustment as provided in the terms of the agreement.
CoNCERT shall have one Board observer to attend all Board meetings of the Company in a nonvoting observer capacity subject to the Company’s right to exclude the CoNCERT observer for confidentiality and other reasons as defined in the agreement. CoNCERT’s Board Observer right will expire when CoNCERT’s ownership interest in Promet decreases below ten percent of the outstanding voting stock of Promet.
The term of the agreement commences on the date of the agreement and shall continue in full force and effect until the expiration of the last royalty term. On a country-by-country and product-by-product basis, upon the expiration of the royalty term in such country with respect to such product, Promet shall have a fully paid-up, perpetual, irrevocable license under the CoNCERT intellectual property and CoNCERT’s interest in the joint intellectual property with respect to such product in such country.
Processa Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
Purchase Obligations
The Company enters into contracts in the normal course of business with contract research organizations and subcontractors to further develop its products. The contracts are cancellable, with varying provisions regarding termination. If a contract with a specific vendor were to be terminated, the Company would only be obligated for products or services that it received as of the effective date of the termination and any applicable cancellation fees. The Company had purchase obligations of $895,740 and $0 at December 31, 2017 and 2016, respectively.
NOTE 11 – CONCENTRATION OF CREDIT RISK
The Company maintains its operating cash in two commercial banks. Balances on deposit are insured by the Federal Deposit Insurance Corporation (FDIC) up to specified limits. Total cash held by one bank was $2,900,393 and the second bank held a cash balance of $2,184 at December 31, 2017.
NOTE 12 – SUPPLEMENTAL CASH FLOW INFORMATION
| December 31, 2017 | December 31, 2016 | |||||||
| Supplemental cash flow information | ||||||||
| Cash paid for interest | $ | - | $ | - | ||||
| Cash paid for income taxes | $ | - | $ | - | ||||
| Noncash financing and investing activities | ||||||||
| Assumption of liabilities related to reverse acquisition | ||||||||
| Accounts payable | $ | 26,098 | $ | - | ||||
| Accrued expenses | 17,932 | - | ||||||
| Issuance of common stock related to reverse acquisition recognized in: | ||||||||
| Common stock | 352 | - | ||||||
| Additional paid-in capital | (38,102 | ) | - | |||||
| Total | (37,750 | ) | - | |||||
| Cash received related to net liabilities assumed in a reverse acquisition transaction | $ | 6,280 | $ | - | ||||
Processa Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
NOTE 13 – QUARTERLY DATA
A summary of revenues, operating expenses, other income and net loss attributable to common stockholders for each of the last two years follows (this information is unaudited):
| 1st | 2nd | 3rd | 4th | |||||||||||||||||
| Quarter | Quarter | Quarter | Quarter | Annual | ||||||||||||||||
| 2017 | ||||||||||||||||||||
| Revenues | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
| Operating expenses | (233,940 | ) | (280,335 | ) | (712,852 | ) | (575,306 | ) | (1,802,433 | ) | ||||||||||
| Interest expense | - | - | - | (59,063 | ) | (59,063 | ) | |||||||||||||
| Other income | 1,498 | 1,889 | 1,285 | 509 | 5,181 | |||||||||||||||
| Net loss attributable to common stockholders | $ | (232,442 | ) | $ | (278,446 | ) | $ | (711,567 | ) | $ | (633,860 | ) | $ | (1,856,315 | ) | |||||
| Weighted-average common shares - basic and diluted | 31,745,242 | 31,745,242 | 31,745,242 | 35,119,261 | 32,595,680 | |||||||||||||||
| Net loss per common share - basic and diluted | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.06 | ) | |||||
| 2016 | ||||||||||||||||||||
| Revenues | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
| Operating expenses | (280,956 | ) | (575,281 | ) | (829,064 | ) | (236,219 | ) | (1,921,520 | ) | ||||||||||
| Interest expense | - | - | - | - | - | |||||||||||||||
| Other income | 7 | 869 | 1,698 | 1,880 | 4,454 | |||||||||||||||
| Net loss attributable to common stockholders | $ | (280,949 | ) | $ | (574,412 | ) | $ | (827,366 | ) | $ | (234,339 | ) | $ | (1,917,066 | ) | |||||
| Weighted-average common shares - basic and diluted | 26,870,217 | 26,870,217 | 31,745,242 | 31,745,242 | 29,321,049 | |||||||||||||||
| Net loss per common share - basic and diluted | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.03 | ) | $ | (0.01 | ) | $ | (0.07 | ) | |||||
NOTE 14 – SUBSEQUENT EVENTS
Amendment of Option and License Agreement between Promet Therapeutics, LLC and CoNCERT Pharmaceuticals, Inc.
Promet Therapeutics, LLC (“Promet”) and CoNCERT Pharmaceuticals Inc. (“CoNCERT”) entered into an exclusive option and license agreement for the CTP-499 compound (the “Agreement”) in October 2017 (see Note 10). On March 19, 2018, Promet and CoNCERT amended the Agreement and Promet exercised the exclusive option for the CTP-499 compound and assigned the Agreement to Processa. The option was exercised in March 2018 in exchange for CoNCERT receiving (i) $8 million of common stock of Processa that was owned by Promet or approximately 2,090,300 shares representing 6.58% of Promet’s common stock holding or 5.93% of total Processa common stock issued and outstanding, and (ii) 15% of any sublicense revenue earned by Processa for a period equivalent to the royalty term (as defined in the Agreement) until (a) Processa raises $8 million of gross proceed; after the $8M is raised CoNCERT receives 0% sublicense revenue and (b) CoNCERT can sell its shares of Processa common stock without restrictions pursuant to the terms of the amended Agreement. All other terms of the Agreement remain unchanged.
Cybersecurity Fraud
In January 2018, we incurred a loss of $144,200 due to fraud from a cybersecurity breach. As a result, we have implemented certain review and approval procedures internally and with our banks; our technology consultants have implemented system changes; and, we reported the fraud to our banks and to a national law enforcement agency. We do not have insurance coverage against the type of fraud that occurred, therefore, recovery of the loss is remote. While we are taking steps to prevent such an event from reoccurring, we cannot provide assurance that similar issues will not reoccur. Failure of our control systems to prevent or detect and correct errors or fraud could have a material and adverse effect on our financial condition.
The following are the consolidated financial statements of the Company as of March 31, 2018 (Unaudited) and December 31, 2017 (Audited) and for the three months ended March 31, 2018 and 2017 (Unaudited).
Processa Pharmaceuticals, Inc.
| (Unaudited) | (Audited) | |||||||
| March 31, 2018 | December 31, 2017 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 1,776,639 | $ | 2,847,429 | ||||
| Due from related party | 26,684 | 62,709 | ||||||
| Prepaid expenses | 40,189 | 41,446 | ||||||
| Total Current Assets | 1,843,512 | 2,951,584 | ||||||
| Property And Equipment | ||||||||
| Software | 19,740 | 19,740 | ||||||
| Equipment | 9,327 | 9,327 | ||||||
| Total Cost | 29,067 | 29,067 | ||||||
| Less: accumulated depreciation | 5,358 | 3,246 | ||||||
| Property and equipment, net | 23,709 | 25,821 | ||||||
| Other Assets | ||||||||
| Security deposit | 5,535 | 5,535 | ||||||
| Intangible asset, net of accumulated amortization | 11,013,494 | - | ||||||
| Total Other Assets | 11,019,029 | 5,535 | ||||||
| Total Assets | $ | 12,886,250 | $ | 2,982,940 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities | ||||||||
| Senior convertible notes, net of debt issuance costs | $ | 2,484,710 | $ | 2,448,570 | ||||
| Accrued interest | 87,293 | 35,693 | ||||||
| Accounts payable | 104,880 | 50,686 | ||||||
| Due to related parties | 436 | 436 | ||||||
| Accrued expenses | 170,310 | 64,428 | ||||||
| Total Current Liabilities | 2,847,629 | 2,599,813 | ||||||
| Non-current Liabilities | ||||||||
| Accrued rent liability | 6,642 | 9,963 | ||||||
| Deferred tax liability | 2,755,613 | - | ||||||
| Total Liabilities | 5,609,884 | 2,609,776 | ||||||
| COMMITMENTS AND CONTINGENCIES - SEE NOTE | ||||||||
| Stockholders’ Equity | ||||||||
| Common stock, par value $0.0001, 350,000,000 shares authorized; 35,272,626 issued and outstanding at March 31, 2018 and December 31, 2017 | 3,527 | 3,527 | ||||||
| Preferred stock, par value $0.0001, 10,000,000 shares authorized; zero shares issued and outstanding | - | - | ||||||
| Additional paid-in capital | 12,228,723 | 4,228,723 | ||||||
| Accumulated deficit | (4,955,884 | ) | (3,859,086 | ) | ||||
| Total Stockholders’ Equity | 7,276,366 | 373,164 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 12,886,250 | $ | 2,982,940 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Processa Pharmaceuticals, Inc.
Consolidated Statements of Operations
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| Operating Expenses | ||||||||
| Research and development costs | $ | 807,661 | $ | 139,922 | ||||
| General and administrative expenses | 483,955 | 94,018 | ||||||
| Total operating expenses | 1,291,616 | 233,940 | ||||||
| Operating Loss | (1,291,616 | ) | (233,940 | ) | ||||
| Other Income (Expense) | ||||||||
| Interest expense | (87,740 | ) | - | |||||
| Interest income | 1,024 | 1,498 | ||||||
| Total other income (expense) | (86,716 | ) | 1,498 | |||||
| Net Operating Loss Before Income Tax Benefit | (1,378,332 | ) | (232,442 | ) | ||||
| Income Tax Benefit | 281,534 | - | ||||||
| Net Loss | $ | (1,096,798 | ) | $ | (232,442 | ) | ||
| Net Loss per Common Share - Basic and Diluted | $ | (0.03 | ) | $ | (0.01 | ) | ||
| Weighted Average Common Shares Used to Compute Net Loss Applicable to Common Shares - Basic and Diluted | 35,272,626 | 31,745,242 | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Processa Pharmaceuticals, Inc.
Consolidated Statement of Changes in Stockholders’ Equity
(Unaudited)
| Common Stock | Preferred Stock | Additional Paid-In | Accumulated | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| Balance, December 31, 2017 | 35,272,626 | $ | 3,527 | - | $ | - | $ | 4,228,723 | $ | (3,859,086 | ) | $ | 373,164 | |||||||||||||||
| Recognize the fair value of exclusive license intangible asset acquired from CoNCERT in exchange for 2,090,301 common shares of Processa owned by Promet | - | - | - | - | 8,000,000 | - | 8,000,000 | |||||||||||||||||||||
| Net Loss for the Three Months Ended March 31, 2018 | - | - | - | - | - | (1,096,798 | ) | (1,096,798 | ) | |||||||||||||||||||
| Balance, March 31, 2018 | 35,272,626 | $ | 3,527 | - | $ | - | $ | 12,228,723 | $ | (4,955,884 | ) | $ | 7,276,366 | |||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Processa Pharmaceuticals, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net Loss | $ | (1,096,798 | ) | $ | (232,442 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | 2,112 | - | ||||||
| Amortization of intangible asset | 25,435 | - | ||||||
| Deferred income tax (benefit) expense | (281,534 | ) | - | |||||
| Amortization of debt issuance costs | 36,140 | - | ||||||
| Net changes in operating assets and liabilities: | ||||||||
| Prepaid expenses | 1,257 | 18,147 | ||||||
| Vendor deposit | - | 227,657 | ||||||
| Accrued interest | 51,600 | - | ||||||
| Accounts payable | 54,194 | 4,397 | ||||||
| Due from related parties | 36,025 | (95 | ) | |||||
| Accrued rent liability | - | 6,642 | ||||||
| Accrued liabilities | 102,561 | (83,004 | ) | |||||
| Net cash used in operating activities | (1,069,008 | ) | (58,698 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of property and equipment | - | (882 | ) | |||||
| Acquisition of intangible asset | (1,782 | ) | - | |||||
| Net cash used in investing activities | (1,782 | ) | (882 | ) | ||||
| NET DECREASE IN CASH AND CASH EQUIVALENTS | (1,070,790 | ) | (59,580 | ) | ||||
| CASH AND CASH EQUIVALENTS | ||||||||
| BEGINNING OF PERIOD | 2,847,429 | 1,071,894 | ||||||
| END OF PERIOD | $ | 1,776,639 | $ | 1,012,314 | ||||
| NON-CASH FINANCING AND INVESTING ACTIVITIES | ||||||||
| Recognize exclusive license intangible asset acquired from CoNCERT | $ | (11,037,147 | ) | $ | - | |||
| Recognize deferred tax liability for basis difference for intangible asset | 3,037,147 | |||||||
| Recognize additional paid-in capital for consideration paid from the transfer of 2,090,301 common shares of Processa owned by Promet to CoNCERT | 8,000,000 | - | ||||||
| Cash paid for intangible asset acquired from CoNCERT | $ | - | $ | - | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Processa Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - Organization and Summary of Significant Accounting Policies
Business Activities and Organization
Company Overview
Processa Pharmaceuticals, Inc. (the “Company” and formerly known as “Heatwurx” ) and its wholly-owned subsidiary, Processa Therapeutics LLC (“Processa”), a Delaware limited liability company, acquired all the net assets of a private company, including the rights to the CoNCERT Agreement mentioned below, Promet Therapeutics, LLC (“Promet”), a Delaware limited liability company on October 4, 2017 in exchange for 31,745,242 shares (post reverse split) of the common stock of the Company which, at the closing, constituted approximately 90% of the Company’s issued and outstanding common stock on a fully diluted basis. Immediately following the closing, there were 35,272,626 shares (post reverse split) of common stock issued and outstanding. At the closing, Processa was assigned all of the assets and operations of Promet that constituted the operating business of Promet and Promet, which continues as an active company, received the Processa shares mentioned above and agreed to provide the Processa shares needed if the option in the CoNCERT Agreement (see below) was exercised. Upon closing on October 4, 2017, there was a change in control of the Company to Promet. The Company abandoned its prior business plan and adopted Promet’s business plan focused on developing drugs to treat patients that have a high unmet medical need. Subsequent to closing and effective October 10, 2017, the Company changed its trading symbol to “PCSA” on the OTC Pink Marketplace (“OTCQB”). The Company effected a one-for-seven reverse split of its shares in December 2017. As a result, the 2017 consolidated financial statements have been retrospectively adjusted to reflect shares outstanding after the one-for-seven reverse split.
The net asset acquisition transaction was accounted for as a reverse acquisition. Prior to the acquisition, Heatwurx (subsequently renamed Processa Pharmaceuticals, Inc.) had nominal net liabilities and operations. It was considered a non-operating public shell corporation. Therefore, Promet was considered the accounting acquirer (and legal wholly-owned subsidiary of Heatwurx, now called Processa Pharmaceuticals, Inc.) and Heatwurx was considered the accounting acquiree (and legal acquirer). As a result, the consolidated financial statements of the Company reflect the financial condition, results of operations and cash flows of Promet for all periods presented prior to October 4, 2017 and Processa for the periods subsequent to October 4, 2017. The legal capital stock (number and type of equity interests issued) is that of Processa Pharmaceuticals, Inc., the legal parent, in accordance with guidance on reverse acquisitions accounted for as a capital transaction instead of a business combination (See Note 2 – Basis of Presentation and Earnings Per Share and Note 3 – Reverse Acquisition in Item 8 of the Company’s annual Report on Form 10-K filed with the SEC on April 17, 2018).).
All references to the “Company” and Processa Pharmaceuticals, Inc. refer to Heatwurx, Inc., Processa Therapeutics, LLC, and the net assets acquired from Promet Therapeutics, LLC, which were assigned at acquisition to Processa Therapeutics, LLC and Promet’s operations prior to October 4, 2017.
On March 19, 2018, Promet, Processa and CoNCERT Pharmaceuticals Inc. (“CoNCERT”) amended the Option and License Agreement (the “Agreement”) executed in October 2017. The Agreement was assigned to Processa and Processa exercised the exclusive option for the CTP-499 compound. The option was exercised in exchange for CoNCERT receiving (i) $8 million of common stock of Company that was owned by Promet (or 2,090,301 shares representing 6.58% of Promet’s common stock holding or 5.93% of total the Company’s common stock issued and outstanding), and (ii) 15% of any sublicense revenue earned by the Company for a period equivalent to the royalty term (as defined in the Agreement) until the earliest of (a) Processa raising $8 million of gross proceeds; and (b) CoNCERT can sell its shares of Processa common stock without restrictions pursuant to the terms of the amended Agreement. All other terms of the Agreement remain unchanged. As a result, the Company recognized an intangible asset and additional paid-in capital in the amount of $8 million resulting from Promet satisfying Processa’s liability to CoNCERT. There was no change in the total shares issued and outstanding, however, Promet’s controlling interest in Processa was reduced from 90% to 84%.
Processa Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Description of Business
Processa is an emerging pharmaceutical company focused on the clinical development of drug products that are intended to improve the survival and/or quality of life for patients who have a high unmet medical need or who have no alternative treatment. Within this group of pharmaceutical products, we currently are developing one product for two indications (i.e., the use of a drug to treat a particular disease) and searching for additional products for our portfolio.
Processa’s lead product, PCS-499 (previously known as CTP-499), is an oral tablet that is an analog of an active metabolite of an already approved FDA drug. The advantage of PCS-499 is that it potentially may work in many conditions because it has multiple pharmacological targets that it affects that are important in the treatment of these conditions. Based on its pharmacological activity, Processa has identified other unmet medical need conditions where the use of PCS-499 may result in clinical efficacy. These include Necrobiosis Lipoidica (NL) and Radiation-Induced Fibrosis (RIF) in head and neck cancer patients. Processa has met with the FDA on the NL condition and has developed a strategy for moving the program for NL forward starting with a Phase 2 clinical trial in NL patients in late 2018. Processa will meet with the FDA to further define the program for use of PCS-499 for the RIF condition in the next few months.
Processa is looking to acquire additional drug candidates to help patients who have an unmet medical need. Processa has evaluated over 50 potential assets for acquisition and are continuing to evaluate new assets to acquire.
Our operations are performed in the state of Maryland and are still in the organizational and research and development phase of operations. As a result, we have a limited operating history and only a preliminary business plan from which investors may evaluate our future prospects. We have not had any sources of revenue from inception (August 31, 2015) through March 31, 2018 and have a history of operating losses from operations. Our ability to generate meaningful revenue from any products in the United States depends on obtaining FDA authorization. Even if our products are authorized and approved by the FDA, we must still meet the challenges of successful marketing, distribution and consumer acceptance.
As of March 31, 2018, the Company had an accumulated deficit of approximately $5.0 million incurred since inception and expects to incur substantial operating losses for the foreseeable future. Our current capital is insufficient to fully fund our total business plan and the development of our planned product candidates for a period of one-year from the date these consolidated financial statements are available to be issued. Our ability to achieve revenue-generating operations and, ultimately, achieve profitability will depend on whether we can obtain additional capital when we need it, complete the development of our technology, receive regulatory approval of our planned product candidates and any stand along development planned product candidates into new or existing drugs which can be successfully commercialized. There can be no assurance that we will ever generate revenues or achieve profitability. These risks and other factors could have a material adverse effect on the Company and raise substantial doubt about our ability to continue as a going concern.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions of the Securities and Exchange Commission (“SEC”) on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for complete financial statements. All material intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary, which are of a normal and recurring nature, for the fair presentation of the Company’s financial position and of the results of operations and cash flows for the periods presented. These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on April 17, 2018. The results of operations for the interim period shown in this report are not necessarily indicative of the results that may be expected for any other interim period or for the full year.
Processa Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
As a result of the modification of the Option and License Agreement with CoNCERT and the acquisition of an exclusive license intangible asset used in research and development activities described above, the Company adopted a new intangible asset policy and disclosure (See Note 1 – Intangible Assets and Note 2) and recognized a deferred tax liability for the acquired temporary difference between the financial reporting basis and the tax basis of the intangible asset (See Note 5).
Going Concern and Management’s Plan
The Company’s consolidated financial statements are prepared using U.S. GAAP and are based on the assumption that the Company will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company faces certain risks and uncertainties that are present in many emerging growth companies regarding product development and commercialization, limited working capital, recurring losses and negative cash flow from operations, future profitability, ability to obtain future capital, protection of patents, technologies and property rights, competition, rapid technological change, navigating the domestic and major foreign markets’ regulatory and clinical environment, recruiting and retaining key personnel, dependence on third party manufacturing organizations, third party collaboration and licensing agreements, lack of sales and marketing activities and no customers or pharmaceutical products to sell or distribute. These risks and other factors raise substantial doubt about our ability to continue as a going concern.
The Company has relied exclusively on private placements with a small group of accredited investors to finance its business and operations. We do not have any prospective arrangements or credit facilities as a source of future funds. The Company has had no revenue since inception on August 31, 2015. The Company does not currently have any revenue under contract nor does it have any immediate sales prospects. As of March 31, 2018, the Company had an accumulated deficit of approximately $5.0 million incurred since inception. For the three months ended March 31, 2018, the Company incurred a net loss from continuing operations of approximately $1.1 million and used approximately $1.1 million in net cash from operating activities from continuing operations. The Company had total cash and cash equivalents of approximately $1.8 million as of March 31, 2018.
No additional sources of capital have been obtained or committed through the date these consolidated financial statements were available to be issued. We expect our operating costs to be substantial as we incur costs related to the clinical trials for our product candidates and that we will operate at a loss for the foreseeable future.
We are in the process of raising additional funds by potentially selling additional Senior Convertible Notes, convertible loans or other securities. However, no assurance can be given that we will be successful in raising adequate funds needed. If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates, restrict our operations or obtain funds by entering into agreements on unattractive terms, which would likely have a material adverse effect on our business, stock price and our relationships with third parties with whom we have business relationships, at least until additional funding is obtained.
Uncertainty concerning our ability to continue as a going concern may hinder our ability to obtain future financing, as well as adversely affect our collaborative drug development relationships. Continued operations and our ability to continue as a going concern are dependent on our ability to obtain additional funding in the near future and thereafter, and no assurances can be given that such funding will be available at all or will be available in sufficient amounts or on reasonable terms. Without additional funds from debt or equity financing, sales of assets, sales or out-licenses of intellectual property or technologies, or other transactions yielding funds, we will rapidly exhaust our resources and will be unable to continue operations. Absent additional funding, we believe that our cash and cash equivalents will not be sufficient to fund our operations for a period of one year or more after the date that these consolidated financial statements are available to be issued based on the timing and amount of our projected net loss from continuing operations and cash to be used in operating activities during that period of time.
As a result, substantial doubt exists about the Company’s ability to continue as a going concern within one year after the date that these consolidated financial statements are available to be issued. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be different should the Company be unable to continue as a going concern based on the outcome of these uncertainties described above.
Processa Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Use of Estimates
The preparation of the accompanying unaudited consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts (including assets, liabilities, revenues and expenses) and related disclosures, including contingent assets and liabilities. Estimates have been prepared on the basis of the most current and best available information. However, actual results could differ materially from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand and money market funds. The Company considers all highly liquid investments with a maturity at the date of purchase of three months or less to be cash equivalents. Money market funds were $961,193 and $1,300,815 at March 31, 2018 and December 31, 2017, respectively.
Intangible Assets
Intangible assets acquired individually or with a group of other assets from others (other than in a business combination) are recognized at cost, including transaction costs, and allocated to the individual assets acquired based on relative fair values and no goodwill is recognized. Cost is measured based on cash consideration paid. If consideration given is in the form of non-cash assets, liabilities incurred, or equity interests issued, measurement of cost is based on either the fair value of the consideration given or the fair value of the assets (or net assets) acquired, whichever is more clearly evident and more reliably measurable. Costs of internally developing, maintaining or restoring intangible assets that are not specifically identifiable, have indeterminate lives or are inherent in a continuing business are expensed as incurred.
Intangible assets purchased from others for use in research and development activities and that have alternative future uses (in research and development projects or otherwise) are capitalized in accordance with ASC Topic 350, Intangibles – Goodwill and Other and thoseOther. Those that have no alternative future uses (in research and development projects or otherwise) and therefore no separate economic value are considered research and development costs and are expensed as incurred. Amortization of intangibles used in research and development activities is a research and development cost.
Intangibles with a finite useful life are amortized and those with an indefinite useful lifeusing the straight-line method unless the pattern in which the economic benefits of the intangible assets are not amortized.consumed or used up are reliably determinable. The useful life is the best estimate of the period over which the asset is expected to contribute directly or indirectly to theour future cash flows of the Company.flows. The useful life is based on the duration of the expected use of the asset by the Companyus and the legal, regulatory or contractual provisions that constrain the useful life and future cash flows of the asset, including regulatory acceptance and approval, obsolescence, demand, competition and other economic factors. If an income approach is used to measure the fair value of an intangible asset, the Company considers the period of expected cash flows used to measure the fair value of the intangible asset, adjusted as appropriate for Company-specific factors discussed above, to determine the useful life for amortization purposes. If no regulatory, contractual, competitive, economic or other factors limit the useful life of the intangible to the Company, the useful life is considered indefinite.
Intangibles with a finite useful life are amortized on the straight-line method unless the pattern in which the economic benefits of the intangible asset are consumed or used up are reliably determinable. The Company evaluatesWe evaluate the remaining useful life of intangible assets each reporting period to determine whether any revision to the remaining useful life is required. If the remaining useful life is changed, the remaining carrying amount of the intangible asset will be amortized prospectively over the revised remaining useful life. If an income approach is used to measure the fair value of an intangible asset, we consider the period of expected cash flows used to measure the fair value of the intangible asset, adjusted as appropriate for company-specific factors discussed above, to determine the useful life for amortization purposes.
If no regulatory, contractual, competitive, economic or other factors limit the useful life of the intangible to us, the useful life is considered indefinite. Intangibles with an indefinite useful life are not amortized until its useful life is determined to be no longer indefinite. If the useful life is determined to be finite, the intangible is tested for impairment and the carrying amount is amortized over the remaining useful life in accordance with intangibles subject to amortization. Indefinite-lived intangibles are tested for impairment annually and more frequently if events or circumstances indicate that it is more-likely-than-not that the asset is impaired.
Processa Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Impairment of Long-Lived Assets and Intangibles Other Than Goodwill
The Company accountsWe account for the impairment of long-lived assets in accordance with ASC 360, Property, Plant and Equipment and ASC 350, Intangibles – Goodwill and Other, which requiresrequire that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to its expected future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amounts of the assets exceed the fair value of the assets based on the present value of the expected future cash flows associated with the use of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Based on management’s evaluation, there was no impairment loss recorded forduring the three monthsyears ended MarchDecember 31, 20182019 and 2017, respectively.2018.
Fair Value Measurements and Disclosure
The Company appliesWe apply ASC 820, “FairFair Value Measurements and Disclosures”, which expands disclosures for assets and liabilities that are measured and reported at fair value on a recurring basis. Fair value is defined as an exit price, representing the amount that would be received upon the sale of an asset or payment to transfer a liability in an orderly transaction between market participants.
Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:
Level 1 – Quoted market prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 – Quoted market prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable, either directly or indirectly. Fair value determined through the use of models or other valuation methodologies.
Level 3 – Significant unobservable inputs for assets or liabilities that cannot be corroborated by market data. Fair value is determined by the reporting entity’s own assumptions utilizing the best information available and includes situations where there is little market activity for the asset or liability.
The asset’s or liability’s fair value measurement within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement. The Company’sOur policy is to recognize transfers between levels of the fair value hierarchy in the period the event or change in circumstances that caused the transfer. There were no transfers into or out of Level 1, 2, or 3 during the periods presented.
Net Income (Loss) per ShareStock-based Compensation
The Company computes basicStock-based compensation expense is based on the grant-date fair value estimated in accordance with the provisions of ASC 718, Compensation-Stock Compensation. We expense stock-based compensation to employees over the requisite service period based on the estimated grant-date fair value of the awards. For awards that contain performance vesting conditions, we do not recognize compensation expense until achieving the performance condition is probable. Stock-based awards with graded-vesting schedules are recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award. We estimate the fair value of stock option grants using the Black-Scholes option pricing model, and diluted earnings per share amounts pursuant to ASC 260-10-45. the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. Stock-based compensation costs are recorded as general and administrative or research and development costs in the consolidated statements of operations based upon the underlying individual’s role.
Net Loss Per Share
Basic earningsloss per share is computed by dividing our net income (loss)loss available to common shareholders,stockholders by the weighted average number of shares of common stock outstanding during the period, excluding the effects of any potentially dilutive securities.period. Diluted earningsloss per share is computed by dividing our net income (loss)loss available to common shareholdersstockholders by the diluted weighted average number of shares of common stock during the period. TheSince we experienced a net loss for all periods presented, basic and diluted weighted average numbernet loss per share are the same. As such, diluted loss per share for the years ended December 31, 2019 and 2018 excludes the impact of potentially dilutive common sharesstock related to outstanding isstock options and warrants and the basic weighted numberconversion of shares adjusted for any potentially diluted debt or equityour 2017 and options. The diluted computation does not assume conversion, exercise or contingent exercise of securities2019 Senior Notes since thatthose shares would have an anti-dilutive effect on earnings (loss)loss per share.
As more fully described in Note 11, we have determined the sale of the 2019 Senior Notes in late 2019 triggered the full ratchet anti-dilution provision of the common stock we sold in 2018 Private Placement Transactions. For purposes of computing our basic and diluted EPS, we increased our net loss available for common stockholders by the fair value of the additional shares to be issued since they did not affect all our common stockholders equally and there are no contingencies related to the issuance of these shares. We also included the related shares which will be issued in 2020 in our weighted number of shares of common stock outstanding.
Our diluted net loss per share for the years ended December 31, 2019 and 2018 excluded 715,452, and 588,586 of potentially dilutive common stock, respectively, related to the conversion of our Senior Notes and outstanding stock options and warrants since those shares would have had an anti-dilutive effect on loss per share during the three months ended March 31, 2018 and 2017.years then ended.
Subsequent EventsSegments
We operate in one segment. Management uses one measurement of profitability and does not segregate its business for internal reporting. All our assets are located within the United States.
Fair Value of Financial Instruments
The Companycarrying amounts of cash and cash equivalents, accounts receivable, accounts payable and the senior convertible notes approximate fair value because of the short-term maturity of these instruments, including the mandatory conversion of the Senior Notes into our common stock upon meeting certain conditions.
Debt Issuance Costs
We recognized the debt issuance costs incurred related to our 2017 and 2019 Senior Notes as a reduction of the carrying amount of the 2017 and 2019 Senior Notes on the face of the consolidated balance sheet. The debt issuance costs are amortized to interest expense using the straight-line method over the term of the 2019 Senior Notes and the interest method over the term of the 2017 Senior Notes.
Research and development
Research and development costs are expensed as incurred and consisted of direct and overhead-related expenses. Research and development costs totaled $2,320,573 and $3,085,317 for the years ended December 31, 2019 and 2018, respectively. Expenditures to acquire technologies, including licenses, which are utilized in research and development and that have no alternative future use are expensed when incurred. Technology we develop for use in our products is expensed as incurred until technological feasibility has evaluated subsequent eventsbeen established after which it is capitalized and transactionsdepreciated. No research and development costs were capitalized during the years ended December 31, 2019 and 2018.
Income Taxes
As a result of our reverse acquisition merger, there was an ownership change as defined by Internal Revenue Code Section 382. Prior to the closing of the transaction, Promet was treated as a partnership for potential recognitionfederal income tax purposes and thus was not subject to income taxes at the entity level, and no provision or disclosure through May18, 2018,liability for income taxes has been included in the date theconsolidated financial statements through October 4, 2017. In addition, Promet determined that it was not required to record a liability related to uncertain tax positions as a result of the requirements of ASC 740-10-25 Income Taxes. The net deferred tax assets of Heatwurx were available to be issued,principally federal and state net operating loss carry forwards, which are significantly limited following an ownership change as defined by Internal Revenue Code Section 382.
We account for uncertain tax positions in accordance with the provisions of ASC 855-10-50. Refer740. When uncertain tax positions exist, we recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. Estimated interest and penalties related to Note 9 belowuncertain tax positions are included as a component of interest expense and general and administrative expense, respectively. We had no unrecognized tax benefits or uncertain tax positions for further information.any periods presented.
Processa Pharmaceuticals, Inc.
NotesOn December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“TCJA”) was signed into law. In December 2017, the SEC issued Staff Accounting Bulletin 118 (“SAB 118”) to Consolidated Financial Statementsprovide clarification in implementing the TCJA when registrants do not have the necessary information available to complete the accounting for an element of the TCJA in the period of its enactment. SAB 118 provides for tax amounts to be classified as provisional and subject to remeasurement for up to one year from the enactment date for such elements when the accounting effect is not complete but can be reasonably estimated. We considered our estimates of the tax effects of the TCJA on the components of our tax provision to be reasonable and no provisional estimates subject to remeasurement were necessary to complete the accounting.
(Unaudited)
We file U.S. federal income and California and Maryland state tax returns. There are currently no income tax examinations underway for these jurisdictions. However, tax years from and including 2016 remain open for examination by federal and state income tax authorities.
Recent Accounting Pronouncements
From time to time, the Financial Accounting Standards Board (“FASB”) or other standard setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification are communicated through issuance of an Accounting Standards Update (“ASU”). The Company hasWe have implemented all new accounting pronouncements that are in effect and that may impact itsour consolidated financial statements. It hasWe have evaluated recently issued accounting pronouncements and determined that there wasis no material impact on itsour financial position or results of operations.
From May 2014 through March 31, 2018,Recently adopted accounting pronouncements
In July 2017, the FASB issued several ASUs relatedAccounting Standards Update 2017-11 (ASU 2017-11), which allows companies to exclude a down round feature when determining whether a financial instrument is considered indexed to the entity’s own stock. As a result, financial instruments with round down features are no longer classified as liabilities and embedded conversion options with down round features are no longer bifurcated. For equity-classified freestanding financial instruments, such as warrants, an entity will treat the value of the effect of the round down, when triggered, as a dividend and a reduction of income available to common stockholders in computing basic earnings per share. The guidance in ASU 2014-09, “Revenue from Contracts with Customers (Topic 606). The new guidance2017-11 is effective for interim and annual periodsfiscal year beginning after December 15, 2017, although2018, and interim periods within those fiscal years. We early adopted ASU 2017-11 effective January 1, 2018 without a material impact on our consolidated financial statements.
On January 1, 2019, we adopted Accounting Standards Codification (ASC) 842, Leases. ASC 842 was issued to increase transparency and comparability among entities may adopt one year earlier if they choose.by recognizing right-of-use assets and lease liabilities on the balance sheet and disclosing key information about our lease agreements. We elected practical expedients upon transition that allows us to not reassess the lease classification of our leases, whether initial direct costs qualify for capitalization for our leases or whether any expired contracts are or contain leases. Additionally, we elected the optional transition method that allows for a cumulative effect adjustment in the period of adoption and we did not restate prior periods. The two permitted transition methods underadoption of the new standard areguidance on leasing resulted in the full retrospective method, in which caserecognition of a right-of-use asset of $293,198 and lease obligations of $303,161. The difference between the standard would be applied to each prior reporting period presentedright-of-use asset and the cumulative effect of applying the standard would be recognizedlease obligations is due to deferred rent liability related to our facility operating lease at the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. December 31, 2018.
The Company is currently in the pre-revenue stages of operations; therefore, we do not currently anticipate there would be any change to timing or method of recognizing revenue. As such, the adoption of this standardthe new guidance did not have a material impact on our resultsthe consolidated statement of operations, financial condition or cash flows.operations. For further details regarding the adoption of this standard, see Note 12, “Operating Leases.”
Note 4 – Acquisition
In February 2016 through March 31, 2018,On October 4, 2017, in exchange for 90 percent or 4,535,121 shares of our common stock, we acquired the FASBnet assets of Promet, totaling $1,017,342, in a transaction that was accounted for as a reverse acquisition in accordance with ASC 805-40-45, Business Combinations - Reverse Acquisitions. We completed this transaction to provide improved access to the capital markets in order to obtain the resources necessary to continue the development of PCS499 and build a clinical development drug company. Immediately following the transaction, we had 5,039,033 shares of common stock issued several ASUs relatedand outstanding, which represented our total legal capital. Promet owned approximately 84% of our common stock, and as part of the Section 351 transaction, held approximately 6% for the benefit of CoNCERT until the CoNCERT transaction had been concluded, whereupon CoNCERT took title to ASU-2016-02, “Leases (Topic 842).” The guidance requires thattheir shares. Together, Promet’s pre-transaction owners and CoNCERT held a lessee recognize90% economic and voting interest in the statementcombined company immediately following completion of the transaction and as such, Promet was considered the acquirer for accounting purposes. Subsequent to the Merger, we changed our name from “Heatwurx, Inc.” to “Processa Pharmaceuticals, Inc.” and our ticker symbol was changed from “HWRX” to “PCSA.”
The transaction was considered a capital transaction in substance. Accordingly, for accounting purposes, it was assumed that Promet issued shares to Heatwurx at fair value, net of the assets and liabilities assumed from Heatwurx as shown below, which were recognized as a reduction of additional paid-in-capital at closing of the reverse merger. The net recognized value of Heatwurx identifiable assets and liabilities included the following:
| Cash | $ | 6,280 | ||
| Accounts payable | (26,098 | ) | ||
| Accrued expenses | (17,932 | ) | ||
| Net liabilities assumed | $ | (37,750 | ) |
Our consolidated financial statements present the financial position (with a liabilityretrospective adjustment to make lease payments (the lease liability)Promet’s legal capital to reflect our pre-merger capital structure) and a rightoperations of use asset representing its rightPromet prior to useOctober 4, 2017, and of the underlying asset for the lease term. For operating leases: the right-of-use assetcombined company from October 4, 2017 forward. The assets and a lease liability will be initiallyliabilities of Promet are recognized and measured at their historical carrying amounts. The accumulated deficit and other equity balances of Promet have been carried forward and adjusted to reflect our legal shares and par value with the present valuedifference allocated to additional paid-in capital.
Promet incurred acquisition-related transaction costs of the lease payments,$58,763, which are included in general and administrative expense, a component of operating expenses in the statementconsolidated statements of financial position; a single lease cost will be recognized,operations.
Earnings per share (“EPS”) is calculated so thatusing our equity structure, including the cost of the lease is allocated over the lease term on a generally straight-line basis; and all cash payments will be classified within operating activitiesequity interests issued to Promet in the statement of cash flows. The amendmentsasset acquisition transaction. Prior to the reverse acquisition, EPS was based on Promet’s net income and weighted average common stock outstanding that were received in Topic 842 are effective for the Company beginning January 1, 2019. The Company’s office lease expires September 30, 2019. Managementasset purchase transaction. Subsequent to the reverse acquisition, EPS is currently evaluating the impact of adopting the new guidancebased on the Company’s consolidated financial statements.weighted actual number of common stock outstanding during that period (see Note 11).
Note 2 –5 - Intangible AssetAssets
Intangible assets consistat December 31, 2019 consisted of the capitalized costs of $20,500 for a purchased software license and $11,038,929 including transaction costs of $1,782, associated with theour exercise of the option to acquire the exclusive license from CoNCERT related to patent rights and know-how to develop and commercialize compounds and products for CTP-499 (also known as the Company’s lead product PCS-499)PCS499 and each metabolite thereof and the related income tax effects. The capitalized costs for the license rights to PCS499 include $8 million purchase price, $1,782 in transaction costs and $3,037,147 associated with the initial recognition of an offsetting deferred tax liability related to the acquired temporary difference for an asset purchased that is not a business combination and has a tax basis of $1,782 in accordance with ASC 740-10-25-51Income Taxes. In accordance with ASC Topic 730,Research and Development, the Companywe capitalized the costs of acquiring the exclusive license rights to CTP-499PCS499 as the exclusive license rights represent intangible assets to be used in research and development activities that have future alternative uses.
The negotiationAcquisition of the modification to the Agreement was finalized in mid-February 2018 and the legal documents were executed and the option was exercised onCoNCERT License
On March 19, 2018, Promet, Processa and CoNCERT amended the CoNCERT Agreement executed in October 2017. The Amendment assigned the CONCERT Agreement to us and we exercised the exclusive option for the PCS499 compound in exchange for CoNCERT receiving, (i)in part, $8 million of our common stock that was held by Promet (298,615 shares at $26.79 per share) and for the benefit of Processa thatin satisfaction of the obligation due for the exclusive license for PCS499 acquired by us. There was owned by Promet (or 2,090,301no change in the total shares representing 6.58% of Promet’s common stock holding or 5.93% of total Processa common stock issued and outstanding),outstanding of 5,039,033. Promet contributed the payment of the obligation due for the exclusive license to us without consideration paid to them. As a result of the transaction, we recognized an exclusive license intangible asset with a fair value of $8 million and an offsetting increase in additional paid-in capital resulting from the exchange.
The CoNCERT Agreement provides us with an exclusive (including to CoNCERT) royalty-bearing license to CoNCERT’s patent rights and know-how to develop, manufacture, use, sub-license and commercialize compounds (PCS499 and each metabolite thereof) and pharmaceutical products with such compounds worldwide. We are required to pay CoNCERT royalties, on a product by product basis, on worldwide net sales, as follows:
● 4% of the net sales of the portion less than or equal to $100 million;
● 5% of the net sales of the portion greater than $100 million and less than or equal to $500 million;
● 6% of the net sales of the portion greater than $500 million and less than or equal to $1.0 billion; and
● 10% of the net sales of the portion greater than $1 billion if such sales are made by us or our affiliates.
With respect to net sales made by us or any of our affiliates, we will pay 10% of net sales and with respect to sales by our sublicensees, we will pay the greater of (i) 6% or (ii) 50% of all payment received by us with respect to such sublicensee. We will also pay 15% of any sublicense revenue earned by Processaus for a period equivalent to the royalty term (as defined in the CoNCERT Agreement) until the earliest to occur of (a) Processaour raising $8 million of gross proceeds;proceeds and (b) CoNCERT canbeing able to sell its shares of Processaour common stock without restrictions pursuant to the terms of the amended Agreement. All other terms of the CONCERT Agreement remained unchanged. The license agreement was assigned to and deemed to have been exercised by the Company. As a result of the transaction, the Company recognized an intangible asset for the fair value of the common stock consideration paid of $8 million with an offsetting amount in additional paid-in capital resulting from Promet satisfying Processa’s liability to CoNCERT.
Processa Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
The CompanyWe estimated the fair value of the common stock issued based on the market approach and CoNCERT’s requirement to receive shares valued at $8 million. The market approach was based on the final negotiated number of shares of stock determined on a volume weighted average price of Processaour common stock quoted on the OTCQB (principal market) over a 45 day period preceding the mid-February 2018 finalized negotiation of the modification to the option and license agreement with CoNCERT, an unrelated third party, for the exclusive license rights to CTP-499. However, Processa has less than 300 shareholders, the volume of shares trading for Processa’s common stock is not significant and the OTCQB is not a national exchange, therefore the volume weighted average price quotes for the Processa stock are from markets that are not active and therefore are Level 2 inputs.PCS499. The total cost recognized for the exclusive license acquired represents the allocated fair value related to the stock transferred to CoNCERT plus the recognition of the deferred tax liability related to the acquired temporary difference and the transaction costs incurred to complete the transaction as discussed above.
IntangibleOur intangible assets consist of the following:following at December 31, 2019:
| License Rights | Software | December 31, | ||||||||||||||||||
| to PCS499 | License | 2019 | ||||||||||||||||||
| March 31, 2018 | March 31, 2017 | |||||||||||||||||||
| Gross intangible assets | $ | 11,038,929 | $ | 20,500 | $ | 11,059,429 | ||||||||||||||
| Exclusive license rights to CTP-499 | $ | 11,038,929 | $ | - | ||||||||||||||||
| Less: Accumulated amortization | (25,435 | ) | - | |||||||||||||||||
| Less: accumulated amortization | (1,405,301 | ) | (11,674 | ) | (1,416,975 | ) | ||||||||||||||
| Total intangible assets, net | $ | 11,013,494 | $ | - | $ | 9,633,628 | $ | 8,826 | $ | 9,642,454 | ||||||||||
Our intangible assets consist of the following at December 31, 2018:
| License Rights | Software | December 31, | ||||||||||
| to PCS499 | License | 2018 | ||||||||||
| Gross intangible assets | $ | 11,038,929 | $ | 20,500 | $ | 11,059,429 | ||||||
| Less: accumulated amortization | (616,807 | ) | (4,840 | ) | (621,647 | ) | ||||||
| Total intangible assets, net | $ | 10,422,122 | $ | 15,660 | $ | 10,437,782 | ||||||
Amortization expense was $25,435$795,328 and $0$621,647 for the three monthsyears ended MarchDecember 31, 2019 and 2018 and 2017, respectively. The weighted average amortization period for the intangible asset is 14 years based on the average remaining patent lives for CTP-499 and the estimated royalty period for a fully paid-up license under the terms of the license agreement. Amortization expense is included within research and development expense in the accompanying consolidated statements of operations. As of MarchDecember 31, 2018, the2019, estimated future amortization expense each year for the next five yearsyear will be approximately $795,000 and approximately $788,000 per year for annual periods thereafter until fully amortized amounts to $788,495 per year.thereafter.
Note 36 – Senior Convertible NotesLicense Agreement for PCS100
On August 29, 2019, we entered into an exclusive license agreement with Akashi to develop and commercialize an anti-fibrotic, anti-inflammatory drug, PCS100, which also promotes healthy muscle fiber regeneration. In previous clinical trials in Duchenne Muscular Dystrophy (DMD), PCS100 showed promising improvement in the muscle strength of non-ambulant pediatric patients. Although the FDA placed a clinical hold on the DMD trial after a serious adverse event in a pediatric patient, the FDA has removed the clinical hold and defined how PCS100 can resume clinical trials in DMD. Once we have obtained adequate funding, we plan to develop PCS100 in rare adult fibrotic related diseases such as focal segmental glomerulosclerosis, idiopathic pulmonary fibrosis or Scleroderma.
The Akashi Agreement provides us with a worldwide license to research, develop, make and commercialize products comprising or containing PCS100. As partial consideration for the license, we paid $10,000 to Akashi upon full execution of October 4, 2017,the license agreement. This upfront payment was expensed as a research and development cost. As additional consideration, we will pay Akashi development and regulatory milestone payments (up to $3.0 million per milestone) upon the achievement of certain entities affiliatedmilestones, which primarily consist of having a drug indication approved by a regulatory authority in the United States or another country. In addition, we must pay Akashi one-time sales milestone payments based on the achievement during a calendar year of one or more thresholds for annual sales for products made and pay royalties based on annual licensing sales. Due to the early stage of PCS100, it is not possible to determine if any of the development or sales milestones will be achieved and no amounts have been accrued related to these contingent payments. We are also required to split any milestone payments we receive with current shareholders had purchased $1.25Akashi based on any sub-license agreement we may enter into.
We are required to use commercially reasonable efforts, at our sole cost and expense, to research, develop and commercialize products in one or more countries, including meeting specific diligence milestones that consist of (i) requesting a meeting with the FDA for a first indication within 18 months of the date of the agreement, (ii) submitting an IND for a drug indication on or before June 30, 2022 and (iii) initiating a Phase 1 or 2 trial for a drug indication on or before December 30, 2022. Either party may terminate the agreement in the event of a material breach of the license agreement that has not been cured following written notice and a 60-day opportunity to cure such breach (which is shortened to 15 days for a payment breach).
Note 7 – Notes Payable
Line of Credit Agreements
On September 20, 2019, we entered into two separate LOC Agreements (“LOC Agreements”) with DKBK Enterprises, LLC (“DKBK”) and CorLyst, LLC (“CorLyst”, and, together with DKBK, collectively, “Lenders”), both related parties, which provide a revolving commitment of up to $700,000 each ($1.4 million total). Under the LOC Agreements, all funds borrowed bear interest at an annual rate of 8%. The promissory notes issued in connection with the LOC Agreements provide that the Lenders have the right to convert all or any portion of the principal and accrued and unpaid interest into our common stock on the same terms as are our 2019 Senior Convertible Notes. Therefore, the Lenders may convert the outstanding debt under the LOC Agreements into our common stock at a conversion price equal to the lower of (i) $14.28 per share, (ii) a price per share equal to a 10% discount to the pre-money valuation of an equity sale of the Company’s common stock for cash, or (iii) at an adjusted price; all as more particularly described in the 2019 Senior Convertible Notes. Our Chief Executive Officer (CEO) is also the CEO and Managing Member of both Lenders. CorLyst beneficially owns 996,376 shares of Processa common stock, representing approximately 17.8% of the Company’s outstanding shares of voting capital stock at December 31, 2019.
We have not drawn any amounts under these LOC Agreements as of February 28, 2020.
Senior Convertible Notes
The balance of our senior secured convertible notesSenior Convertible Notes at December 31, 2019 and 2018 was as follows:
| 2019 | 2018 | |||||||
| 2019 Senior Notes | $ | 805,000 | $ | - | ||||
| 2017 Senior Notes | - | 230,000 | ||||||
| Less: Unamortized debt issuance costs | (2,497 | ) | - | |||||
| Balance | 802,503 | 230,000 | ||||||
| Current portion | (802,503 | ) | (230,000 | ) | ||||
| Long term portion | $ | - | $ | - | ||||
Interest expense totaled $36,658 and $161,205 for the years ended December 31, 2019 and 2018, respectively. Included in interest expense is the amortization of the related debt issuance costs of $1,783, and $67,069 for the years ended December 31, 2019 and 2018, respectively. The Senior Notes and related accrued interest are classified as current liabilities in our consolidated balance sheets.
2019 Senior Notes
During the fourth quarter of 2019, accredited investors purchased $805,000 of 8% Senior Convertible Notes (“2019 Senior Notes”) infrom us. For every $1,000 principal amount purchased, the note holders received 70 warrants to purchase our common stock. As a bridge financing undertaken by usresult, we granted 56,350 warrants to support the Processa operations. On November 21, 2017, additional third party accredited investors contributed $1.33 million in financing proceeds. Aspurchase our common stock at an exercise price of March 31, 2018, $2.58 million of Senior Notes were issued and outstanding.
Principal and interest under each Senior Note is due$19.04, which expire on the earlier of (i) the mandatory and automatic conversion of the Senior Note into the next Private Investment in Public Equity (“PIPE”) financing we undertake, provided the PIPE financing yields minimum gross proceeds and a pre-money valuation as defined in the financing agreement or (ii) the one-year anniversary of that Senior Note (Maturity Date).December 19, 2023. The 2019 Senior Notes bear interest at 8% per year and areif converted, the interest is payable in kind (in common stock). AtThe 2019 Senior Notes mature on December 15, 2020.
The 2019 Senior Notes are convertible by the Maturity Date,holder upon (i) completion of listing our common stock on either the outstandingNasdaq Capital Market or the New York Stock Exchange or if we raise at least $14 million, prior to December 15, 2020, the maturity date of the 2019 Senior Notes, in one or more qualified financings. If the 2019 Senior Notes are not paid or converted prior to their maturity date, the principal and any accrued interest on the Senior Note will be automatically or mandatorily converted into our common stock. The 2019 Senior Notes, plus any accrued interest is convertible into shares of our common stock of the Companyat a conversion price equal to the lesserlower of (i) $14.28 per share or (ii) a price per share equal to a 10% discount to the pre-money valuation or (ii) any adjusted price resulting fromof an equity sale of the application of down round pricing during the anti-dilution period through December 31, 2018Company’s common stock for cash, as defined in the financing agreement. There can be no assurance that we will be successful in achieving2019 Senior Note agreement, occurring after the financing levels targeted underclosing of the 2019 Senior Convertible Notes or the PIPENote financing.
Holders ofThe 2019 Senior Notes provide the holders with (a) may elect to receivethe option of receiving 110% of principal plus accrued interest in the event there is a change of control prior to conversion of the 2019 Senior Notes,Notes; (b) are entitled to full ratchetweighted-average anti-dilution protection in event of any sale of securities at a net conversionconsideration per share that is less than the applicable conversion price per share to the holder (c) are entitled tountil we have raised an additional $14 million from the sale of certain registration rights for the securities underlying the Senior Notessecurities; and (d) have been granted(c) certain preemptive rights pro rata to their respective interests through December 31, 2018. The Senior Notes can be prepaid by the Company at any time following the date of issuance with seven days prior written notice to the note holder.
Processa Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
(Unaudited)2021.
The 2019 Senior Notes are secured by a security interest in the assets of the Company and containcontains negative covenants that do not permit the Companyus to incur additional indebtedness or liens on property or assets owned, repurchase common stock, pay dividends, or enter into any transaction with affiliates of the Companyours that would require disclosure in a public filing with the Securities and Exchange Commission. Upon an event of default, the outstanding principal amount of the Senior Notes, plus accrued but unpaid interest and other amounts owing in respect thereof through the date of acceleration, shall become immediately due and payable in cash at the holder’s election, if not cured within the cure period.
We incurred $4,280 in debt issuance costs related to the 2019 Senior Notes. The Company retained Boustead Securities Ltd.debt issuance costs are amortized to interest expense using straight line amortization over the term of the 2019 Senior Notes.
2017 Senior Notes
In October and November of 2017, certain entities affiliated with current stockholders and other accredited investors purchased $2.58 million of our 8% Senior Convertible Notes (“Boustead”2017 Senior Notes”), in a registered broker-dealer, as its exclusive financial adviserbridge financing undertaken by us to support our operations. The 2017 Senior Notes bore interest at 8% per year.
On May 25, 2018, pursuant to the mandatory and has agreedautomatic conversion provisions of the Senior Notes, we converted $2,350,000 of the $2,580,000 outstanding Senior Notes, along with accrued interest of $114,333 into 172,327 shares of our common stock (at a conversion price of $14.30 per share) and issued to pay Boustead (i) six percent (6%) of gross proceeds received by the Company and (ii)debt holders warrants to purchase securities in the amounta total of 172,327 shares of common stock, exercisable for three percent (3%)years at an exercise price of the equity issued or issuable in connection$17.16. We also incurred costs totaling $82,502 related to our contractual obligations to file a resale registration statement related to this transaction with the Senior Notes bridge financing. These warrants will be issued upon achieving certain financing levels under the next PIPE financing we undertake. No additional funds have been raised since the November 21, 2017 financing proceeds. As a result, no warrants are issuable, and none have been issued as of March 31, 2018.SEC.
The Company2017 Senior Notes totaling $230,000 held by Canadian investors remained outstanding at December 31, 2018. Although qualifying for automatic and mandatory conversion, they could not be converted until the Alberta Securities Commission released us from a cease trade order (which predated our merger with Heatwurx) and permitted us to issue common stock units (consisting of shares of our common stock and stock purchase warrants) to these Canadian investors. In June 2019, the Alberta Securities Commission released the cease trade order and assessed us a $10,000 fine, which was expensed. On July 2, 2019, we converted the remaining principal and related accrued interest of $28,930 into 18,107 shares of common stock and issued warrants to purchase 18,107 shares of common stock. We evaluated the warrants issued in this transaction and determined they should be classified as equity.
We incurred $154,800 in debt issuance costs on the 2017 Senior Notes in connection with Boustead,a payment to the placement agent, which werewas reported as a reduction of the carrying amount of the 2017 Senior Convertible Notes on the face of the consolidated balance sheets. The debt issuance costs arewere amortized to interest expense using the effective interest rate method over the term of the Senior Convertible Notes. The effective interest rate on the 2017 Senior Notes was 7.72%before debt issuance costs, since no payments of interest are due until maturity and 13.96%including the debt issuance costs based on the repayment terms of the 2017 Senior Notes.
Debt and accrued interest at March 31, 2018 and interest expense for the three months ended March 31, 2018 are as follows:
| Unamortized | ||||||||||||||||||||
| Senior | Debt | Senior | ||||||||||||||||||
| Convertible | Issuance | Convertible | Accrued | Interest | ||||||||||||||||
| Notes | Costs | Notes, Net | Interest | Expense | ||||||||||||||||
| Balance, December 31, 2017 | $ | 2,580,000 | $ | (131,430 | ) | $ | 2,448,570 | $ | 35,693 | $ | 59,063 | |||||||||
| Accrued interest | - | - | - | 51,600 | 51,600 | |||||||||||||||
| Amortize debt issuance costs | - | 36,140 | 36,140 | - | 36,140 | |||||||||||||||
| Balance, March 31, 2018 | 2,580,000 | (95,290 | ) | 2,484,710 | 87,293 | $ | 87,740 | |||||||||||||
| Current portion | (2,580,000 | ) | 95,290 | (2,484,710 | ) | (87,293 | ) | |||||||||||||
| Long-term portion | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Note 48 – Stockholders’ Equity
In August 2019, we amended our certificate of incorporation, reducing the authorized number of shares of our preferred stock from 10,000,000 to 1,000,000 and our common stock from 350,000,000 to 100,000,000.
We have not had any sales of our preferred stock since we were incorporated on March 29, 2011 and there were no issued or outstanding shares of preferred stock at December 31, 2019 or 2018.
2019 Private Placement Transactions
During 2019 we amended our Pledge Agreement with PoC Capital to reduce the committed funds from $1.8 million to $900,000, which has been paid in full as of December 31, 2019. As part of the original Pledge Agreement, we issued 113,280 shares of common stock and 113,280 warrants to purchase shares of common stock to PoC Capital but held 56,640 shares and 56,640 warrants as collateral until certain payment milestones were met. PoC Capital forfeited the pledged collateral in the amended agreement (see below). The forfeited shares and warrants have been returned to us.
2018 Private Placement Transactions
Between May 15, 2018 and June 29, 2018, we sold an aggregate of 200,369 units in a private placement transaction at a purchase price equal to $15.89 per unit for gross proceeds of approximately $3.2 million. Each unit consisted of one share of our common stock and a warrant to purchase one share of our common stock for $19.07, subject to adjustment thereunder for a period of three years. We paid $167,526 to our placement agent and issued placement agent warrants to purchase up to 12,021 shares of common stock, with a three-year term, at an exercise price equal to $19.07. We also incurred costs totaling $141,304 related to this transaction and our contractual obligation to file a resale registration statement related to the PIPE transaction with the SEC. The issuance costs were charged against additional paid in capital.
On March 19,May 25, 2018, Promet, Processawe entered into an Agreement with PoC Capital, LLC (“PoC”), where PoC agreed to finance $1,800,000 in study costs associated with certain clinical studies, including our Phase 2A study to evaluate the safety, tolerability, efficacy and CoNCERT amended the Agreement executedpharmacodynamics of PCS499 in October 2017. The Agreement was assigned to Processa and Processa exercised the exclusive option for the CTP-499 compound (see Note 1 – Company Overview and Note 2 – Intangible Asset)patients with Necrosis Lipoidica in exchange for CoNCERT receiving, in part, $8 million113,280 shares of our common stock and a warrant for the purchase of 113,280 shares of common stock with an exercise price of $19.07, expiring on July 29, 2021. We paid $108,000 to our placement agent and issued our placement agent warrants to purchase 6,797 shares of common stock, with a three-year term, at an exercise price equal to $19.07. We also incurred costs totaling $60,457 related to this transaction and our contractual obligation to file a resale registration statement related to this transaction with the SEC. The issuance costs were charged against additional paid in capital.
As part of this transaction, we also entered into a Pledge Agreement with PoC, under which we received a security interest for 56,640 common stock units, or half the shares and warrants we issued to PoC, to hold as collateral. The Pledge Agreement with PoC Capital was amended on September 30, 2019 to reduce the committed funds from $1.8 million to $900,000, which has been paid in full as of December 31, 2019. As part of the Company that was owned directly by Promet (or 2,090,301Pledge Agreement amendment, PoC Capital forfeited the pledged collateral in the amended agreement. The forfeited shares and warrants have been returned to us.
We initially recorded the full amount of the commitment, $1.8 million, as a subscription receivable and reduced the subscription receivable in the period PoC made payments to our CRO or to us. We evaluated the warrants issued in the 2018 Private Placement Transactions and determined they should be classified as equity.
The common stock, but not the warrants, issued for the 2018 Private Placement Transactions and the conversion of the 2017 Senior Notes have, subject to certain customary exceptions, full ratchet anti-dilution protection. Until we have issued equity securities or securities convertible into equity securities for a total of an additional $20 million in cash or assets, including the proceeds from the exercise of the warrants issued above, in the event we issue additional equity securities or securities convertible into equity securities at $3.83a purchase price less than $15.89 per share representing 6.58% of Promet’s common stock, holding or 5.93%the above purchase prices shall be adjusted and new shares of total the Company’s common stock issued and outstanding) in satisfactionas if the purchase price was such lower amount (or, if such additional securities are issued without consideration, to a price equal to $0.01 per share).
We have determined the sale of 2019 Senior Notes, which are convertible into common stock at a conversion rate of $14.28 triggered the full ratchet anti-dilution provision of the obligation due for the exclusive license for CTP-499 acquired by Processa. There was no changecommon stock we sold in the total shares issued and outstanding of 35,272,626, however, Promet’s controlling interest was reduced from 90% to 84%. Promet contributed the payment of the obligation due for the exclusive license to the Company without consideration paid to them.2018 Private Placement Transactions described above. As a result, those stockholders were entitled to 28,971 shares of common stock in the fourth quarter of 2019. We will issue 28,971 shares of common stock to those stockholders in 2020. We determined the value of these shares to be $506,993 based on a price per share of $17.50, which represents the closing price per share on October 18, 2019, the last day investors had to rescind their investment. We recorded the triggering of the transaction, the Company recognized an exclusive license intangible asset withfull ratchet anti-dilution provision as a fair valuedeemed dividend payable at December 31, 2019 in our statement of $8 million and an offsetting increase in additional paid-in capital resulting from Promet satisfying Processa’s liability to CoNCERT.
There were no changes in or issuances of preferred stock, stock options or warrants from December 31, 2017.
Processa Pharmaceuticals, Inc.
Notesstockholders’ equity at par value due to Consolidated Financial Statements
(Unaudited)the fact that we have a retained deficit and are receiving no additional consideration for these shares.
Note 59 – Income Taxes
The Company accountsWe account for income taxes in accordance with ASC Topic 740,Income Taxes. Deferred income taxes are recorded for the expected tax consequences of temporary differences between the tax basis of assets and liabilities for financial reporting purposes and amounts recognized for income tax purposes. The Company recordsWe recorded a valuation allowance to reduceduring the Company’s deferred tax assets to the amount of future tax benefit that is more likely than not to be realized.
As required under ASC 740-270,Interim Financial Reporting, the Company has estimated its annual effective tax rate for the full fiscal year and applied that rate to its year-to-date consolidated pre-tax ordinary loss before income taxes in determining its benefit for income taxes. The Company recorded a benefit for income taxes of approximately $282,000 and $0 for the three-month periodyears ended March 31, 2018 and 2017, respectively.
As of March 31, 2018, and December 31, 2017, the Company maintained a valuation allowance2019 and 2018 equal to the full recorded amount of the Company’sour net deferred tax assets related to intangibledeferred start-up costs, federal orphan drug tax credit and other minor temporary differences since it is more likely than notmore-likely-than-not that such benefits will not be realized. The valuation allowance is reviewed quarterly and is maintained until sufficient positive evidence exists to support its reversal.
A deferred tax liability was recorded on March 19, 2018 when CoNCERT sold itsProcessa received CoNCERT’s license and “Know-How” toin exchange for Processa for stock that had been issued in an Internal Revenue Code Section 351 transaction on March 19, 2018 (see Note 1 – Company Overview and Note 2 – Intangible Asset). ATransaction. The Section 351 transactionTransaction treats the acquisition of the license and Know-How for stock as a tax-free exchange. As a result, under ASC 740-10-25-51Income Taxes, Processa recorded a deferred tax liability of $3,037,147 for the acquired temporary difference between intangible assets for the financial reporting basis of approximately $11,038,929 and the tax basis of approximately $1,782. The deferred tax liability will be reduced for the effect of non-deductibility of the amortization of the intangible asset and may be offset by the deferred tax assets resulting from net operating tax losses.
During the years ended December 31, 2019 and 2018, we incurred net operating losses of $3,960,592 and $4,667,848, respectively. We did not record any income tax benefit for the $1,205,811 ($331,809 tax effected) and $1,356,840 ($373,368 tax effected) of general and administrative expenses treated as deferred start-up expenditures for tax purposes for the years ended December 31, 2019 and 2018, respectively. We did not record any income tax benefit for the $283,189 of federal orphan drug tax credits for the year ended December 31, 2019. Additionally, we did not record any income tax benefit in 2017 for the $259,049 ($71,284 tax effected) of tax losses incurred in 2017 which resulted in tax loss carryforwards. The benefit was recognized in 2018 in the calculation of the valuation allowance. The 2017 net operating loss carry forwards are available for application against future taxable income for 20 years expiring in 2037. Tax losses incurred after December 31, 2017 have an indefinite carry forward period. However, the tax loss incurred after December 31, 2017 and carried forward can only offset 80 percent of future taxable income in any one year, with any excess losses being carried forward indefinitely. We have recorded the benefit of our 2019 and 2018 taxable net operating losses. Thus,losses in our consolidated financial statements as a partial releasereduction in the deferred tax liability created by the future financial statement amortization of valuation allowance occurred in Q1the intangible asset from the acquired CoNCERT license and “Know-How.” The benefit associated with the net operating loss carry forward will more-likely-than-not go unrealized unless future operations are successful except for their offset against the deferred tax liability created by the acquired CoNCERT license and “Know-How.”
For the years ended December 31, 2019 and 2018, we recorded a federal income tax benefit of $602,716 and $902,801, respectively, as it relates toa result of offsetting our deferred tax liability by the NOL. There remains a valuation allowance ondeferred tax assets resulting from our net operating losses and the income tax effect of the intangible start-up costs. Under ACS 740-270Income Taxes – Interim Reporting,asset amortization for financial statement purposes.
Our provision (benefit) for income taxes for the Company is required to project itsyears ended December 31, 2019 and 2018 federal and statewas as follows:
| Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Current: | ||||||||
| Federal | $ | - | $ | - | ||||
| State | - | - | ||||||
| Total deferred tax benefit | - | - | ||||||
| Deferred: | ||||||||
| Federal | (1,037,267 | ) | (940,510 | ) | ||||
| State | (234,033 | ) | (292,047 | ) | ||||
| Total deferred tax benefit | (1,271,300 | ) | (1,232,557 | ) | ||||
| Valuation allowance | 668,584 | 329,756 | ||||||
| Net deferred tax benefit | (602,716 | ) | (902,801 | ) | ||||
| Total tax provision (benefit) | $ | (602,716 | ) | $ | (902,801 | ) | ||
A reconciliation of our effective income tax rate and apply itstatutory income tax rate for the years ended December 31, 2019 and 2018 is as follows:
| Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Federal statutory income tax rate | 21.00 | % | 21.00 | % | ||||
| State tax rate, net | 3.60 | % | 4.58 | % | ||||
| Permanent differences | (1.96 | )% | (0.90 | )% | ||||
| Federal orphan drug tax credit | 7.15 | % | - | % | ||||
| Deferred tax asset valuation allowance | (14.57 | )% | (5.33 | )% | ||||
| Effective income tax rate | 15.22 | % | 19.35 | % | ||||
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“TCJA”) was signed into law. Among its provisions, the TCJA reduces the statutory U.S. Corporate income tax rate from 34% to 21% effective January 1, 2018. The TCJA includes provisions that, in certain instances, impose U.S. income tax liabilities on future earnings of foreign subsidiaries and limit the Marchdeductibility of future interest expenses. The TCJA also provides for accelerated deductions of certain capital expenditures made after September 27, 2017 through bonus depreciation and an indefinite tax loss carryforward period for losses incurred after December 31, 2017. However, these tax-loss carry forwards can only offset 80 percent of future taxable income in any one year, with respect to any excess continuing to be carried forward indefinitely. Losses incurred prior to January 1, 2018 operating loss before income taxes. Based oncontinue to carry forward for twenty years. The application of the projection,TCJA may change due to regulations subsequently issued by the Company expects to recognizeU.S. Treasury Department.
We applied the tax benefit fromguidance in SAB 118 when accounting for the 2017enactment-date effects of the TCJA in 2018 and throughout 2019. At December 31, 2019 and 2018, we had available federal net operating loss carryovercarryforwards of approximately $4.1 million and $2.7 million, respectively. The federal net operating loss generated in 2019 and 2018 of $1.4 million and $2.4 million, respectively, will carry forward indefinitely and be available to offset up to 80% of future taxable income each year. Net operating losses generated prior to 2018 will expire 2037. We are evaluating our qualified research expenditures for the federal orphan drug credit and the projected 2018 taxable loss, which resulted in the recognition offederal and state credit for increasing research activities to offset potential future tax liabilities. The federal research and development tax credits have a 20-year carryforward period. We have not recognized any deferred tax benefit shown inassets related to research and development tax credits as of December 31, 2019 or 2018. We also have available state net operating loss carryforwards of approximately $4.1 million and $2.7 million as of December 31, 2019 and 2018, respectively, which expire 2037. All federal and state net operating loss and credit carryforwards listed above are reflected after the consolidated statements of operationsreduction for 2018.amounts effectively eliminated under Section 382.
As discussed in Note 2 – Income Taxes inWe do not recognize other deferred income tax assets at this time because the consolidated financial statements included in Item 8realization of the 2017 Form 10-K filed with the SEC on April 17,assets is not more-likely-than-not that they will be realized. As of December 31, 2019 and 2018, the historical information presented in the consolidated financial statements prior to October 4, 2017 is that of Promet in accordance with Accounting Standards Codification (“ASC”) 805-40-45,Business Combinations – Reverse Acquisitions. Prior to the closing of the asset purchase transaction on October 4, 2017, Promet was treated as a partnershipwe had deferred start-up expenditures and other deductible expenses for both federal and state income tax purposes of $6,977,317 and thus was$4,369,700, respectively. The benefit associated with the amortization of the deferred start-up expenditures and other deductible expenses will more-likely-than-not go unrealized unless future operations are successful. Since the success of future operations is indeterminable, the potential benefits resulting from these deferred tax assets have not subject to income tax at the entity level. Therefore, no provision or liability for income taxes has been includedrecorded in theseour consolidated financial statements through the date of the asset purchase on October 4, 2017.statements.
The Company expects to be in an overall taxable loss position for 2018. However, the Company expects to recognize asignificant components of our deferred tax benefitassets and liabilities for Federal and state income taxes consisted of the following:
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Deferred tax assets: | ||||||||
| Non-current: | ||||||||
| Net operating loss carry forward – Federal | $ | 854,196 | $ | 559,817 | ||||
| Net operating loss carry forward – State | 265,106 | 173,743 | ||||||
| Deferred rent | - | 2,742 | ||||||
| Stock option expense | 72,504 | 20,380 | ||||||
| Depreciation | 8,753 | 4,549 | ||||||
| Federal orphan drug credits | 283,189 | - | ||||||
| Start-up expenditures and amortization | 800,681 | 468,872 | ||||||
| Total non-current deferred tax assets | 2,284,429 | 1,230,103 | ||||||
| Valuation allowance for deferred tax assets | (1,165,126 | ) | (496,542 | ) | ||||
| Total deferred tax assets | 1,119,303 | 733,561 | ||||||
| Deferred Tax Liabilities: | ||||||||
| Non-current: | ||||||||
| Intangible asset | (2,650,933 | ) | (2,867,907 | ) | ||||
| Total non-current deferred tax liabilities | (2,650,933 | ) | (2,867,907 | ) | ||||
| Total deferred tax asset (liability) | $ | (1,531,630 | ) | $ | (2,134,346 | ) | ||
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, the projected future taxable income and tax planning strategies in making this assessment. Based on management’s analysis, a reserve has been established against the deferred tax assets related to deferred start-up expenditures and other deductible expenses. The change in the valuation allowance in 2019 and 2018 was $668,584 and $329,755, respectively.
Our total deferred tax asset as of December 31, 2019 and 2018 include $2,909,715 ($800,681 tax effected) and $1,703,904 ($468,872 tax effected) of general and administrative expenses treated as deferred start-up expenditures for tax purposes, respectively, $4,067,602 ($1,119,302 tax effected) and $2,665,796 ($733,560 tax effected) of tax losses resulting in tax loss carryforwards as of the same periods and $283,189 of federal orphan drug tax credits as of December 31, 2019. We have had no revenues and recognized cumulative loses since inception. Due to the extentuncertainty regarding future profitability and recognition of taxable income to utilize the 2017 net operating loss carryoveramortization of deferred start-up expenditures, federal orphan drug tax credits and the 2018 net operating losses can be used totax loss carryforwards, except for its offset against the deferred tax liability created by our acquisition of the CoNCERT license, a valuation allowance against any potential deferred tax assets has been recognized for the years ended December 31, 2019 and 2018.
We recognize potential liabilities for uncertain tax positions using a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the intangible asset. No currenttax benefit as the largest amount that is more than 50% likely of being realized upon settlement. We have not recorded any uncertain tax positions.
We are subject to taxation in the United States and state jurisdictions where applicable. There are currently no income tax expense is expectedexaminations underway for the foreseeable future as the Company expects to generate taxable net operating losses.these jurisdictions. However, tax years from and including 2016 remain open for examination by federal and state income tax authorities.
Note 610 - Stock-based Compensation
On June 19, 2019, our stockholders approved and we adopted the Processa Pharmaceuticals Inc. 2019 Omnibus Equity Incentive Plan (the “Omnibus Plan”) and we terminated our prior equity incentive compensation plan, the Heatwurx, Inc. 2011 Amended and Restated Equity Plan (the “2011 Plan”). The Omnibus Plan allows us, under the direction of our Board of Directors or a committee thereof, to make grants of stock options, restricted and unrestricted stock and other stock-based awards to employees, including our executive officers, consultants and directors. An aggregate of 500,000 shares of our common stock, adjusted for the one for seven reverse stock split completed on December 23, 2019, were initially available for issuance under the Omnibus Plan. Shares available under the Omnibus Plan may be authorized but unissued shares, shares purchased on the open market or treasury shares.
On June 20, 2019, our Board of Directors granted stock options for the purchase of 129,919 shares of our common stock to employees. The stock options awarded contained either service or performance vesting conditions, as described below, have a contractual term of five years and an exercise price equal to the closing price of our common stock on the OTCQB on the date of grant of $16.80. We granted 54,915 stock options to employees and non-employees during the year ended December 31, 2018.
Stock options representing the purchase of 65,148 shares of common stock (of the 129,919 stock options granted on June 20, 2019) contained service vesting conditions. The service condition related solely to employees rendering service over a three-year period. These awards vest one-third on the first anniversary of the grant date, and then vest ratably over the remaining twenty-four months, 1/36th of the original award each month.
Stock options representing the purchase of 64,771 shares of common stock (of the 129,919 stock options granted on June 20, 2019) vest upon meeting the following performance criteria: (i) 12,958 shares vest when we in-license one new or additional drug; (ii) 12,958 shares vest when our current Phase 2A clinical trial for PCS499 is complete; and (iii) 38,855 shares vest when we up-list from the OTCQB to either the Nasdaq or NYSE markets. We are recognizing compensation cost for the awards related to completion of our current clinical trial and for in-licensing a new drug. The clinical trial is progressing as planned with no significant adverse events, is fully enrolled, and fully funded. Management does not foresee any reasons why this study will not be completed as planned and believes it is probable that this performance condition will be met in mid-2020. On August 29, 2019, we reached a license agreement with Akashi Therapeutics for PCS100 and as such, the performance condition related to the award for in-licensing one new or additional drug has been met. As for the last award with performance conditions related to up-listing on Nasdaq or NYSE markets, management has determined that until we complete the performance related condition, it is not probable to conclude the performance condition will be achieved. As such, no stock-based compensation expense is being recorded for those awards.
We recorded $510,478 and $74,063 of stock-based compensation expense for the years ended December 31, 2019 and 2018, respectively. The allocation of stock-based compensation expense between research and development and general and administrative expense was as follows:
| Year ended | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Research and Development | $ | 113,239 | $ | - | ||||
| General and Administrative | 397,239 | 74,063 | ||||||
| Total | $ | 510,478 | $ | 74,063 | ||||
During the year ended December 31, 2018, there was one grant for the purchase of 7,143 shares of our common stock outstanding under the 2011 Plan. We also granted non-qualified stock options outside of the Plan for a total of 47,772 shares of common stock. An option for the purchase of 45,200 shares of common stock vests over a four-year term and an option for the purchase of 2,572 shares of common stock vests over one-year term. Stock option granted in 2018 all have a maximum contractual term of ten years. Vesting is subject to the holder’s continuous service with us.
The fair value of each stock option grants was estimated using the Black-Scholes option-pricing model at the date of grant. We lack company-specific historical and implied volatility information and therefore, determined our expected stock volatility based on the historical volatility of a publicly traded set of peer companies and expect to continue to do so until such time as it has adequate historical data regarding the volatility of our own traded stock price. Due to the lack of historical exercise history, the expected term of our stock options was determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The risk-free interest rate was determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that we have never paid cash dividends and do not expect to pay any cash dividends in the foreseeable future.
The fair value of our option awards granted during the year ended December 31, 2019 and 2018 was estimated using the following assumptions:
| 2019 | 2018 | |||||||
| Average risk-free rate of interest | 1.85 | % | 3.09 | % | ||||
| Expected term (years) | 3.75 to 5.00 | 5.00 to 6.25 | ||||||
| Expected stock price volatility | 81.77 | % | 85.31 | % | ||||
| Dividend yield | 0 | % | 0 | % | ||||
The following table summarizes our stock option activity for the years ended December 31, 2019 and 2018:
| Total options Outstanding | Weighted average exercise price | Weighted average remaining contractual life (in years) | ||||||||||
| Outstanding as of January 1, 2018 | - | - | - | |||||||||
| Options granted | 54,915 | 20.45 | 9.8 | |||||||||
| Exercised | - | - | - | |||||||||
| Forfeited | - | - | - | |||||||||
| Outstanding as of December 31, 2018 | 54,915 | $ | 20.45 | 9.8 | ||||||||
| Options granted | 129,919 | 16.80 | 4.5 | |||||||||
| Exercised | - | - | - | |||||||||
| Forfeited | (7,872 | ) | 16.80 | 4.5 | ||||||||
| Outstanding as of December 31, 2019 | 176,962 | 17.93 | 5.8 | |||||||||
| Exercisable (vested) at December 31, 2019 | 29,655 | 18.53 | 6.9 | |||||||||
The weighted average grant date fair value per share of options granted during the year ended December 31, 2019 and 2018 was between $9.88 and $15.10. No forfeiture rate was applied to these stock options.
No tax benefits were attributed to the stock-based compensation expense because a valuation allowance was maintained for all net deferred tax assets.
As of December 31, 2019, there was $1,450,684 of total unrecognized compensation expense, related to the unvested stock options which are expected to be recognized over a weighted average period of 5.82 years.
Note 11 – Net Loss per Share of Common Stock
The Company has preferred stock authorized but no preferred stock issued and outstanding at March 31, 2018 and 2017. There were no outstanding options or warrants issued at March 31, 2018 and 2017.
The Company has reported a loss from continuing operations and a loss from continuing operations available to common stockholders for all periods presented. As a result, there is no assumed conversion, exercise or contingent exercise of potential common shares included in the computation of the diluted per share amounts since it would have an antidilutive effect, therefore, basic and dilutedBasic net loss per share areis computed by dividing net loss applicableby the weighted average common stock outstanding. Diluted net loss per share is computed by dividing net loss by the weighted average common stock outstanding without the impact of potential dilutive common stock outstanding because they would have an anti-dilutive impact on diluted net loss per share. The treasury-stock method is used to determine the dilutive effect of our stock options and warrants grants, and the if-converted method is used to determine the dilutive effect of the 2017 and 2019 Senior Notes.
The computation of net loss per share for the year ended December 31, 2019 and 2018 was as follows:
| 2019 | 2018 | |||||||
| Basic and diluted net loss per share: | ||||||||
| Net loss | $ | (3,357,876 | ) | $ | (3,765,047 | ) | ||
| Deemed dividend related to the triggering of the full ratchet anti-dilution provision at fair value | (506,993 | ) | - | |||||
| Net loss available to common stockholders | (3,864,869 | ) | (3,765,047 | ) | ||||
| Weighted-average number of common stock-basic and diluted | 5,525,635 | 5,332,141 | ||||||
| Basic and diluted net loss per share | $ | (0.70 | ) | $ | (0.71 | ) | ||
We have determined the sale of the 2019 Senior Notes in late 2019, which are convertible into common stock at a conversion rate of $14.28 per share triggered the full ratchet anti-dilution provision of the common stock we sold in 2018 Private Placement Transactions (see Note 8). As a result, those stockholders were entitled to 28,971 shares of common stock in the fourth quarter of 2019. We will issue 28,971 shares of common stock to these stockholders in 2020. We determined the value of these shares at $506,993 based on a price per share of $17.50 which represents the closing price per share on October 18, 2019, the last day investors had to rescind their investment. For purposes of computing our basic and diluted EPS, we increased our net loss available for common stockholders by the weighted-averagefair value of the additional shares to be issued since they did not affect all our common stockholders equally and there are no contingencies related to the issuance of these shares. We also included these shares in our weighted number of shares of common stock outstanding.
Processa Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
The weighted-average shares of common stock used in calculating basic and diluted loss per share for Triggering the 2018 calculation uses the total shares issued and outstanding of 35,272,626. There has been no change in total shares issued and outstanding since December 31, 2017. The weighted-average shares of common stock used in calculating basic and diluted loss per share for the 2017 calculation uses the 31,745,242 shares issued to Promet in the asset purchase transaction for the period from January 1, 2017 through the acquisition date of October 4, 2017 in accordance with ASC 805-40-45,Business Combinations – Reverse Acquisitions. All shares were restated for the one-for-seven reverse split.
The calculation of the numerator and denominator forfull ratchet anti-dilution provision increased our basic and diluted net loss per common share is shown in the following table.by $0.09 per share, from $(0.61) to $(0.70).
| For the three months ended | ||||||||
| March 31, | ||||||||
| 2018 | 2017 | |||||||
| Net loss from continuing operations applicable to common stockholders - basic and diluted | $ | (1,096,798 | ) | $ | (232,442 | ) | ||
| Total common shares issued and outstanding | 35,272,626 | 31,745,242 | ||||||
| Weighted average shares outstanding used in calculating net loss per common share - basic and diluted | 35,272,626 | 31,745,242 | ||||||
| Net loss per common share - basic and diluted | $ | (0.03 | ) | $ | (0.01 | ) | ||
The outstanding options and warrants to purchase common stock and the shares issuable under the 2017 and 2019 Senior Notes were excluded from the computation of diluted net income per share as their effect would have been anti-dilutive for the periods are presented below:
| 2019 | 2018 | |||||||
| Stock options and purchase warrants | 654,569 | 571,055 | ||||||
| Senior convertible notes | 60,883 | 17,531 | ||||||
Note 712 - Operating Leases
We lease our office space under an operating lease agreement. This lease does not have significant rent escalation, concessions, leasehold improvement incentives, or other build-out clauses. Further, the lease does not contain contingent rent provisions. We also lease office equipment under an operating lease. Our office space lease includes both lease (e.g., fixed payments including rent, taxes, and insurance costs) and non-lease components (e.g., common-area or other maintenance costs), which are accounted for as a single lease component as we have elected the practical expedient to group lease and non-lease components for all leases. Our leases do not provide an implicit rate and, as such, we have used our incremental borrowing rate of 8% in determining the present value of the lease payments based on the information available at the lease commencement date.
Lease costs included in our consolidated statement of operations totaled $98,020 and $88,237 for the years ended December 31, 2019 and 2018, respectively. The weighted average remaining lease terms and discount rate for our operating leases were as follows at December 31, 2019:
| Weighted average remaining lease term (years) for our facility and equipment leases | 2.7 | |||
| Weighted average discount rate for our facility and equipment leases | 8 | % |
Maturities of our lease liabilities for all operating leases were as follows as of December 31, 2019:
| 2020 | $ | 92,603 | ||
| 2021 | 90,495 | |||
| 2022 | 69,741 | |||
| Total lease payments | 252,839 | |||
| Less: Interest | (27,457 | ) | ||
| Present value of lease liabilities | 225,382 | |||
| Less: current maturities | (77,992 | ) | ||
| Non-current lease liability | $ | 147,390 |
Note 13 – Related Party Transactions
A shareholder, Corlyst,stockholder, CorLyst, LLC, reimburses the Companyus for shared costs related to payroll, health care insurance and rent based on actual costs incurred, andwhich are recognized as a reduction of theour general and administrative operating expenses being reimbursed in the Company’sour consolidated statements of operations. The reimbursed amountsReimbursable expenses from CorLyst totaled $26,684$103,047 and $29,430$107,402 for rent and other costs during the three monthsyears ended MarchDecember 31, 2019 and 2018, and 2017, respectively. The receivable balancesAmounts due from Corlystrelated parties at March 31, 2018 and December 31, 20172019 and 2018 were $26,684$0 and $62,709,$21,583, respectively.
During 2016As described further in Note 7, we also entered into two separate Line of Credit Agreements with CorLyst, LLC and 2017, Corlyst paid certain operating expenses on behalf of the Company and the Company reimbursed Corlyst based on actual costs incurred at later dates. The accounts payable amounts due to Corlyst at March 31, 2018 and December 31, 2017 were $336 and $336, respectively. In addition, there was $100 due to an officer included in due toDKBK Enterprises, LLC, both related parties, as of March 31, 2018 and December 31, 2017.
A director of the Company is the manager of the JMW Fund, LLC, the San Gabriel Fund, LLC, and the Richland Fund, LLC, collectively known as the “Funds”. In addition, the Funds own $1 million in Senior Convertible Notes at March 31, 2018 and December 31, 2017.
Entities affiliated with the Chairman of the Board of Directors, Chief Executive Officer and Interim Chief Financial Officer of the Company own $250,000 in Senior Convertible Notes at March 31, 2018 and December 31, 2017.on September 20, 2019.
Note 814 – Commitments and Contingencies
Purchase Obligations
The Company entersWe enter into contracts in the normal course of business with contract research organizations and subcontractors to further develop itsour products. The contracts are cancellable, with varying provisions regarding termination. If a contract with a specific vendor were to be terminated, the Companywe would only be obligated for products or services that itwe received as of the effective date of the termination and any applicable cancellation fees. The CompanyWe had a purchase obligationsobligation of approximately $1,006,000$0 and $896,000$35,000 at March 31, 2018 and December 31, 2017,2019 and 2018, respectively.
Due to the contingent nature of the amounts and timing of the payments, we have excluded our agreement with the CRO with whom we have contracted to conduct our Phase 2A clinical trial for NL. We were contractually obligated for up to approximately $487,000 of future services under the agreement, but our actual contractual obligations will vary depending on the progress and results of the clinical trial.
Note 15 – Concentration of Credit Risk
We maintain cash accounts in two commercial banks. Balances on deposit are insured by the Federal Deposit Insurance Corporation (FDIC) up to specified limits. Total cash held by one bank was $691,536 at December 31, 2019, which exceed FDIC limits.
Processa Pharmaceuticals, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
| June 30, 2020 | December 31, 2019 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 452,654 | $ | 691,536 | ||||
| Due from related party | 26,497 | - | ||||||
| Prepaid expenses and other | 97,682 | 315,605 | ||||||
| Total Current Assets | 576,833 | 1,007,141 | ||||||
| Property and Equipment | ||||||||
| Property and equipment, net | 4,707 | 8,930 | ||||||
| Other Assets | ||||||||
| Operating lease right-of-use assets, net of accumulated amortization | 179,591 | 219,074 | ||||||
| Intangible assets, net of accumulated amortization | 9,244,790 | 9,642,454 | ||||||
| Security deposit | 5,535 | 5,535 | ||||||
| Total Other Assets | 9,429,916 | 9,867,063 | ||||||
| Total Assets | $ | 10,011,456 | $ | 10,883,134 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities | ||||||||
| Senior convertible notes, net of debt issuance costs | $ | 804,643 | $ | 802,503 | ||||
| Line of credit payable – related party | 500,000 | - | ||||||
| Note payable – Paycheck Protection Program, current portion | 72,203 | - | ||||||
| Current maturities of operating lease liability | 71,967 | 77,992 | ||||||
| Accrued interest | 58,483 | 21,902 | ||||||
| Accounts payable | 73,371 | 75,612 | ||||||
| Due to related parties | - | 316 | ||||||
| Accrued expenses | 317,252 | 213,239 | ||||||
| Total Current Liabilities | 1,897,919 | 1,191,564 | ||||||
| Non-current Liabilities | ||||||||
| Note payable – Paycheck Protection Program | 90,256 | - | ||||||
| Non-current operating lease liability | 114,595 | 147,390 | ||||||
| Net deferred tax liability | 1,315,666 | 1,531,630 | ||||||
| Total Liabilities | 3,418,436 | 2,870,584 | ||||||
| Commitments and Contingencies | - | - | ||||||
| Stockholders’ Equity | ||||||||
| Common stock, par value $0.0001, 30,000,000 and 100,000,000 shares authorized; 5,514,447 and 5,486,476 issued and outstanding at June 30, 2020 and December 31, 2019 | 552 | 549 | ||||||
| Additional paid-in capital | 19,182,228 | 18,994,008 | ||||||
| Common stock deemed dividend payable: 28,971 shares at par value | - | 3 | ||||||
| Accumulated deficit | (12,589,760 | ) | (10,982,010 | ) | ||||
| Total Stockholders’ Equity | 6,593,020 | 8,012,550 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 10,011,456 | $ | 10,883,134 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Processa Pharmaceuticals, Inc.
Condensed Consolidated Statements of Operations
Three and Six Months Ended June 30, 2020 and 2019
(Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Operating Expenses | ||||||||||||||||
| Research and development expenses | $ | 427,109 | $ | 726,904 | $ | 928,855 | $ | 1,211,655 | ||||||||
| General and administrative expenses | 374,878 | 410,072 | 859,255 | 807,837 | ||||||||||||
| Total operating expenses | 801,987 | 1,136,976 | 1,788,110 | 2,019,492 | ||||||||||||
| Operating Loss | (801,987 | ) | (1,136,976 | ) | (1,788,110 | ) | (2,019,492 | ) | ||||||||
| Other Income (Expense) | ||||||||||||||||
| Interest expense | (19,280 | ) | (6,102 | ) | (36,450 | ) | (10,702 | ) | ||||||||
| Interest income | 18 | 3,398 | 846 | 9,383 | ||||||||||||
| Total other income (expense) | (19,262 | ) | (2,704 | ) | (35,604 | ) | (1,319 | ) | ||||||||
| Net Operating Loss Before Income Tax Benefit | (821,249 | ) | (1,139,680 | ) | (1,823,714 | ) | (2,020,811 | ) | ||||||||
| Income Tax Benefit | 87,835 | 170,602 | 215,964 | 300,901 | ||||||||||||
| Net Loss | $ | (733,414 | ) | $ | (969,078 | ) | $ | (1,607,750 | ) | $ | (1,719,910 | ) | ||||
| Net Loss per Common Stock - Basic and Diluted | $ | (0.13 | ) | $ | (0.18 | ) | $ | (0.29 | ) | $ | (0.31 | ) | ||||
| Weighted Average Common Stock Used to Compute Net Loss Applicable to Common Stock - Basic and Diluted | 5,515,447 | 5,525,009 | 5,515,447 | 5,525,009 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Processa Pharmaceuticals, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
Six Months Ended June 30, 2020 and 2019
(Unaudited)
| Six Months Ended June 30, 2019 | ||||||||||||||||||||||||
| Additional | Common Stock | |||||||||||||||||||||||
| Common Stock | Paid-In | Dividend | Accumulated | |||||||||||||||||||||
| Shares | Amount | Capital | Payable | Deficit | Total | |||||||||||||||||||
| Balance at January 1, 2020 | 5,486,476 | $ | 549 | $ | 18,994,008 | $ | 3 | $ | (10,982,010 | ) | $ | 8,012,550 | ||||||||||||
| Stock-based compensation | - | - | 98,663 | - | - | 98,663 | ||||||||||||||||||
| Transaction costs related to anticipated 2020 offering | - | - | (2,806 | ) | - | - | (2,806 | ) | ||||||||||||||||
| Net loss | - | - | - | - | (874,336 | ) | (874,336 | ) | ||||||||||||||||
| Balance, March 31, 2020 | 5,486,476 | 549 | 19,089,865 | 3 | (11,856,346 | ) | 7,234,071 | |||||||||||||||||
| Stock-based compensation | - | - | 93,869 | - | - | 93,869 | ||||||||||||||||||
| Stock dividend distributed due to full-ratchet anti-dilution adjustment | 28,971 | 3 | - | (3 | ) | - | - | |||||||||||||||||
| Transaction costs related to anticipated 2020 offering | - | - | (1,506 | ) | - | - | (1,506 | ) | ||||||||||||||||
| Net loss | - | - | - | - | (733,414 | ) | (733,414 | ) | ||||||||||||||||
| Balance, June 30, 2020 | 5,515,447 | $ | 552 | $ | 19,182,228 | $ | - | $ | (12,589,760 | ) | $ | 6,593,020 | ||||||||||||
| Six Months Ended June 30, 2019 | ||||||||||||||||||||||||
| Additional | ||||||||||||||||||||||||
| Common Stock | Paid-In | Subscription | Accumulated | |||||||||||||||||||||
| Shares | Amount | Capital | Receivable | Deficit | Total | |||||||||||||||||||
| Balance, January 1, 2019 | 5,525,009 | $ | 552 | $ | 19,124,600 | $ | (1,800,000 | ) | $ | (7,624,134 | ) | $ | 9,701,018 | |||||||||||
| Stock-based compensation | - | - | 58,559 | - | - | 58,559 | ||||||||||||||||||
| Payments made directly by investor for clinical trial costs | - | - | - | 115,000 | - | 115,000 | ||||||||||||||||||
| Net loss | - | - | - | - | (750,832 | ) | (750,832 | ) | ||||||||||||||||
| Balance, March 31, 2019 | 5,525,009 | 552 | 19,183,159 | (1,685,000 | ) | (8,374,966 | ) | 9,123,745 | ||||||||||||||||
| Stock-based compensation | - | - | 66,476 | - | - | 66,476 | ||||||||||||||||||
| Payments made directly by investor for clinical trial costs | - | - | - | 280,927 | - | 280,927 | ||||||||||||||||||
| Net loss | - | - | - | - | (969,078 | ) | (969,078 | ) | ||||||||||||||||
| Balance, June 30, 2019 | 5,525,009 | $ | 552 | $ | 19,249,635 | $ | (1,404,073 | ) | $ | (9,344,044 | ) | $ | 8,502,070 | |||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Processa Pharmaceuticals, Inc.
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2020 and 2019
(Unaudited)
| 2020 | 2019 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net loss | $ | (1,607,750 | ) | $ | (1,719,910 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | 4,223 | 4,223 | ||||||
| Non-cash lease expense for right-of-use assets | 39,483 | 36,282 | ||||||
| Amortization of debt issuance costs | 2,140 | - | ||||||
| Amortization of intangible asset | 397,664 | 397,664 | ||||||
| Deferred income tax benefit | (215,964 | ) | (300,901 | ) | ||||
| Stock-based compensation | 192,532 | 125,035 | ||||||
| Net changes in operating assets and liabilities: | ||||||||
| Prepaid expenses and other | 217,923 | (10,090 | ) | |||||
| Operating lease liability | (38,820 | ) | (38,940 | ) | ||||
| Accrued interest | 36,581 | 8,587 | ||||||
| Accounts payable | (2,241 | ) | (148,751 | ) | ||||
| Due (from) to related parties | (26,813 | ) | 22,919 | |||||
| Accrued expenses | 104,013 | 208,979 | ||||||
| Net cash used in operating activities | (897,029 | ) | (1,414,903 | ) | ||||
| Cash Flows From Financing Activities | ||||||||
| Proceeds received in satisfaction of stock subscription receivable | - | 395,927 | ||||||
| Borrowings on line of credit payable from related party | 500,000 | - | ||||||
| Proceeds received from our Paycheck Protection Program note payable | 162,459 | - | ||||||
| Transaction costs related to anticipated 2020 offering | (4,312 | ) | - | |||||
| Net cash (used in) provided by financing activities | 658,147 | 395,927 | ||||||
| Net Decrease in Cash | (238,882 | ) | (1,018,976 | ) | ||||
| Cash and Cash Equivalents – Beginning of Period | 691,536 | 1,740,961 | ||||||
| Cash and Cash Equivalents – End of Period | $ | 452,654 | $ | 721,985 | ||||
| Non-Cash Investing and Financing Activities | ||||||||
| Right-of-use asset obtained in exchange for operating lease liability | $ | - | $ | (293,198 | ) | |||
| Reduction in deferred lease liability | - | (9,963 | ) | |||||
| Operating lease liability | - | 303,161 | ||||||
| Net | $ | - | $ | - | ||||
| Issuance of 28,971 shares of common stock due to triggering, in December 2019, the full ratchet anti-dilution provision of common stock sold in our 2018 Private Placement Transactions | $ | 3 | $ | - | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Processa Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 – Organization and Summary of Significant Accounting Policies
Cybersecurity FraudBusiness Activities and Organization
Processa is a clinical stage biopharmaceutical company focused on the development of drug products that are intended to improve the survival and/or quality of life for patients who have a high unmet medical need condition. Within this group of pharmaceutical products, we currently are developing one product for multiple indications (i.e., the use of a drug to treat a particular disease) and will begin developing our newly acquired drugs (PCS11T and PCS100) once adequate funding has been obtained. We continue searching for additional products for our portfolio that meet our criteria.
PCS499
Our lead product, PCS499, is an oral tablet that is a deuterated analog of one of the major metabolites of pentoxifylline (PTX or Trental®). The advantage of PCS499 is that it potentially may work in many conditions because PCS499 and its metabolites act on multiple pharmacological targets that are important in the treatment of these conditions. Based on its pharmacological activity, we have identified unmet medical need conditions where the use of PCS499 may result in clinical efficacy. The lead indication currently under development for PCS499 is Necrobiosis Lipoidica (NL). NL is a chronic, disfiguring condition affecting the skin and the tissue under the skin typically on the lower extremities with no currently approved FDA treatments. NL presents more commonly in women than in men and ulceration can occur in approximately 30% of NL patients which can lead to more severe complications, such as deep tissue infections and osteonecrosis threatening life of the limb. Approximately 22,000 - 55,000 people in the United States and more than 120,000 people outside the United States are affected with ulcerated NL.
The degeneration of tissue occurring at the NL lesion site may be caused by a number of pathophysiological changes which has made it extremely difficult to develop effective treatments for this condition. PCS499 may provide a solution since PCS499 and its metabolites affect a number of the biological pathways which could contribute to the pathophysiology associated with NL.
On June 18, 2018, the FDA granted orphan-drug designation for PCS499 for the treatment of NL. On September 28, 2018, the IND for PCS499 in NL was made effective by the FDA, such that we could move forward with a Phase 2A trial multicenter, open-label prospective trial designed to determine the safety and tolerability of PCS499 in patients with NL. The first enrolled NL patient in this Phase 2A clinical trial was dosed on January 29, 2019 and the study completed enrollment on August 23, 2019. The main objective of the trial was to evaluate the safety and tolerability of PCS499 in patients with NL and to use the collected safety and efficacy data to design future clinical trials. Based on toxicology studies and healthy human volunteer studies, Processa and the FDA agreed that a PCS499 dose of 1.8 grams/day would be the highest dose administered to NL patients in this Phase 2A trial. As anticipated, the PCS499 dose of 1.8 grams/day, 50% greater than the maximum tolerated dose of PTX, appeared to be well tolerated with no serious adverse events reported. All adverse events reported in the study were mild in severity. As expected, gastrointestinal symptoms were the most noted adverse events and reported in four patients, all of which were mild in severity and resolved within 1-2 weeks of starting dosing.
Two patients presenting with more severe ulcerated NL had ulcers for more than two months prior to dosing. At baseline, the reference ulcer in one of the two patients measured 3.5 cm2 and had completely closed by Month 2 of treatment. The second patient had a baseline reference ulcer of 1.2 cm2 which completely closed by Month 9. In addition, while in the trial both patients also developed small ulcers at other sites, possibly related to contact trauma, and these ulcers resolved within one month. The other ten patients presenting with mild to moderate NL and no ulceration had some improvement of the NL lesions but not as dramatic as the more serious ulcerated patients. Historically, less than 20% of all the patients with NL naturally progress to complete healing over many years after presenting with NL. Although the natural healing of the more severe NL patients with ulcers has not been evaluated independently, medical experts who treat NL patients believe that the natural progression of an open ulcerated wound to complete closure would be significantly less than the 20% reported as the maximum percentage of patients who naturally heal over several years after NL presentation. Although our study enrolled only two ulcerated patients, the existing ulcers and trauma ulcers in both patients completely closed supporting that the diverse pharmacology of PCS499 and its metabolites (similar to PTX) positively effects the open ulcers in NL. In addition, those patients without ulcers in our clinical trial also saw positive changes in their NL lesion, although to a much lesser extent than the closing of the more serious ulcers. We have completed the patient portion of our Phase 2A trial of PCS499 in NL, with the last patient completing the trial during the first quarter of 2020. We are in the process of closing the trial, but the close out of our two sites has been delayed as a result of COVID-19.
On March 25, 2020, we met with the FDA and discussed the clinical program, as well as the nonclinical and clinical pharmacology plans to support the submission of the PCS499 New Drug Application (NDA) in the U.S. for the treatment of ulcers in NL patients. With input from the FDA we will be designing the next trial as a randomized, placebo-controlled trial to evaluate the ability of PCS499 to completely close ulcers in patients with NL. We initially planned to begin recruiting for the randomized, placebo-controlled trial in the fourth quarter 2020, but we now expect to begin recruiting patients in 20201 due to the ongoing COVID-19 pandemic. This PCS499 NL study will be a randomized, placebo-controlled Phase 2B study to better understand the potential response of NL patients on drug and on placebo. After obtaining the results from this Phase 2B study, we expect to meet with FDA to discuss our Phase 2B drug and placebo response findings while further discussing the next steps to obtain approval.
PCS11T
On May 24, 2020, we entered into a condition precedent License Agreement (the “Aposense Agreement”) with Aposense, Ltd., (“Aposense”), pursuant to which we were granted a contingent license in Aposense’s patent rights and know-how to develop and commercialize their next generation irinotecan cancer drug, PCS11T (formerly known as ATT-11T). Granting of the license is conditioned on the following being satisfied within 9 months of May 24, 2020 (or the Aposense Agreement shall terminate): (i) our closing of an equity financing and successful up-listing to Nasdaq and (ii) Aposense obtaining the approval of the Israel Innovation Authority for the consummation of the transactions contemplated by the Aposense Agreement.
PCS11T is a novel lipophilic anti-cancer pro-drug that is being developed for the treatment of the same solid tumors as prescribed for irinotecan. This pro-drug is a conjugate of a specific proprietary Aposense molecule connected to SN-38, the active metabolite of irinotecan. The proprietary molecule in PCS11T has been designed to allow PCS11T to bind to cell membranes to form an inactive pro-drug depot on the cell with SN-38 preferentially accumulating in the membrane of tumors cells and the tumor core. This unique characteristic is expected to make the therapeutic window of PCS11T wider than all other irinotecan products such that the antitumor effect of PCS11T will occur at a much lower dose with a milder adverse effect profile than irinotecan. Irinotecan serves as a water-soluble pro-drug of SN-38, with SN-38 being significantly more potent as a topoisomerase I inhibitor than irinotecan. Despite the widespread use of commercially marketed irinotecan products in the treatment of metastatic colorectal cancer and other cancers resulting in peak annual sales of approximately $1.1 billion, irinotecan has a narrow therapeutic window and includes an FDA “Black Box” warning for both neutropenia and severe diarrhea. Its adverse effects include diarrhea, neutropenia, leucopenia, lymphocytopenia, and anemia, which are major impediments to optimal dosing for efficacy since the dose must often be reduced with repeated treatment cycles. There is, therefore, a substantial unmet need to overcome the limitations of the current commercially marketed irinotecan products, improving efficacy and reducing the severity of treatment emergent adverse events. The potential wider therapeutic window of PCS11T will likely lead to more patients responding with less side effects when on PCS11T compared to other irinotecan products.
Pre-clinical studies conducted to date showed that that PCS11T has an efficacy advantage over Irinotecan as demonstrated by tumor eradication at much lower doses than irinotecan across various tumor xenograft models. PCS11T produced a marked, dose-related sustained tumor growth inhibition (TGI) in all the evaluated models. TGI in these models was significantly improved in comparison to irinotecan. Tumor regression was also observed in several models. PCS11T does not affect acetyl choline esterase (AChE) activity in human and rat plasma in vitro, which would suggest that PCS11T will show an improved safety profile, unlike irinotecan which is known for its cholinergic related side-effects.
Prior to the License Agreement, Aposense had met with the FDA at a Pre-IND meeting. At that meeting, agreement was reached related to the necessary manufacturing and toxicological study requirements for filing the IND and the subsequent design of the Phase 1B study for PCS11T in the treatment of solid tumors. Depending upon our available funds, we are currently planning to manufacture the product at a GMP facility, conduct the required toxicological studies required to file the IND and initiate the Phase 1B study in oncology patients with solid tumors in late 2021.
PCS100
On August 29, 2019, we entered into an exclusive license agreement with Akashi Therapeutics, Inc. (“Akashi”) to develop and commercialize an anti-fibrotic, anti-inflammatory drug, PCS100, which also promotes healthy muscle fiber regeneration. In previous clinical trials in Duchenne Muscular Dystrophy (DMD), PCS100 showed promising improvement in the muscle strength of non-ambulant pediatric patients. Although the FDA placed a clinical hold on the DMD trial after a serious adverse event in a pediatric patient, the FDA has removed the drug off clinical hold and defined how PCS100 can resume clinical trials in DMD. Once we have obtained adequate funding, we plan to develop PCS100 in rare adult fibrotic related diseases such as focal segmental glomerulosclerosis, idiopathic pulmonary fibrosis or Scleroderma. At the present time we are evaluating the potential GMP manufacturing facilities and the potential indications for PCS100.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions of the Securities and Exchange Commission (“SEC”) on Form 10-Q and Article 8 of Regulation S-X.
Accordingly, they do not include all the information and disclosures required by U.S. GAAP for complete financial statements. All material intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments necessary, which are of a normal and recurring nature, for the fair presentation of the Company’s financial position and of the results of operations and cash flows for the periods presented. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC. The results of operations for the interim periods shown in this report are not necessarily indicative of the results that may be expected for any other interim period or for the full year.
Going Concern and Management’s Plans
Our condensed consolidated financial statements have been prepared using U.S. GAAP and are based on the assumption that we will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. We face certain risks and uncertainties that are present in many emerging pharmaceutical company regarding product development and commercialization, limited working capital, recurring losses and negative cash flow from operations, future profitability, ability to obtain future capital, protection of patents, technologies and property rights, competition, rapid technological change, navigating the domestic and major foreign markets’ regulatory and clinical environment, recruiting and retaining key personnel, dependence on third party manufacturing organizations, third party collaboration and licensing agreements, lack of sales and marketing activities. We currently have no customers or pharmaceutical products to sell or distribute. These risks and other factors raise substantial doubt about our ability to continue as a going concern.
We have relied primarily on private placements with a small group of accredited investors to finance our business and operations. As described in more detail below, we entered into two line of credit agreements last year with related parties providing a revolving commitment of an aggregate of up to $1.4 million. We have not had any revenue since our inception. We are looking at ways to add a revenue stream to offset some of our expenses but do not currently have any revenue under contract or any immediate sales prospects. At June 30, 2020, we had an accumulated deficit of $12.6 million, and during the six months ended June 30, 2020, we incurred a net loss of $1,607,750 and used $897,029 in net cash from operating activities from continuing operations. At June 30, 2020, we had cash and cash equivalents totaling $452,654.
On September 20, 2019, we entered into two separate Line of Credit Agreements (“LOC Agreements”) to borrow up to $700,000 with current stockholders and related parties: DKBK Enterprises, LLC (“DKBK”) and CorLyst, LLC (“CorLyst”) ($1.4 million total). Under the LOC Agreements, all funds borrowed bear an 8% annual interest rate. The lenders have the right to convert all or any portion of the debt and interest into shares of our common stock. Our Chief Executive Officer (CEO) is also the CEO and Managing Member of both lenders. DKBK directly holds 16,166 shares of our common stock, less than 1% of our outstanding common stock, and CorLyst beneficially owns 1,095,649 shares, representing 19.8% of our outstanding common stock. In April and June 2020, we drew $500,000 under the LOC Agreement with DKBK. On July 21, 2020, we drew an additional $200,000, bringing the total amount drawn under the LOC Agreement with DKBK to $700,000.
In December 2019, we closed our bridge financing and issued $805,000 of 2019 Senior Notes to accredited investors. In order to preserve cash, in August 2019 we began delaying some cash outflows, primarily through the deferred payment of certain salaries ($210,800 has been included in accrued expenses at June 30, 2020) until such time as we have raised sufficient funding.
In May 2020, we entered into a promissory note in favor of the Bank of America under the Small Business Administration Paycheck Protection Program of the Coronavirus Aid, Relief and Economic Security Act of 2020 (the “CARES Act”) for a $162,459 loan (“the PPP Loan”). We plan to use the loan proceeds for payroll costs, rent and utilities in accordance with the relevant terms and conditions of the CARES Act.
We have begun the process of raising capital in an underwritten public offering, however, we have faced delays due to the global pandemic caused by the novel coronavirus, COVID-19. Based on our current plan, we will need to raise additional capital to fund our future operations. While we believe our current resources are adequate to complete the closeout of our current Phase 2A trial for NL, we do not currently have resources to conduct other future trials, such as the Phase 2B clinical trial approved by the FDA, or to develop our other drug candidates without raising additional capital. We believe that our existing cash and LOC Agreements will enable us to fund our operating expenses and capital expenditure requirements through the end of 2020.
Additional funding may not be available to us on acceptable terms, or at all. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scope of, or suspend our current or future clinical trial plans, or research and development programs. We may seek to raise any necessary additional capital through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing and distribution arrangements. To the extent that we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.
Uncertainty concerning our ability to continue as a going concern may hinder our ability to obtain future financing. Continued operations and our ability to continue as a going concern are dependent on our ability to obtain additional funding in the future and thereafter, and no assurances can be given that such funding will be available at all, in a sufficient amount, or on reasonable terms. Without additional funds from debt or equity financing, sales of assets, sales or out-licenses of intellectual property or technologies, or other transactions providing funds, we will rapidly exhaust our resources and be unable to continue operations. Absent additional funding, we believe that our cash and cash equivalents will not be sufficient to fund our operations for a period of one year or more after the date that these condensed consolidated financial statements are available to be issued based on the timing and amount of our projected net loss from continuing operations and cash to be used in operating activities during that period of time.
As a result, substantial doubt exists about our ability to continue as a going concern within one year after the date that these condensed consolidated financial statements are available to be issued. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be different should we be unable to continue as a going concern based on the outcome of these uncertainties described above.
Use of Estimates
In Januarypreparing our condensed consolidated financial statements and related disclosures in conformity with GAAP and pursuant to the rules and regulations of the SEC, we make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates are used for, but not limited to: stock-based compensation, determining the fair value of acquired assets and assumed liabilities, intangible assets, and income taxes. These estimates and assumptions are continuously evaluated and are based on management’s experience and knowledge of the relevant facts and circumstances. While we believe the estimates to be reasonable, actual results could differ materially from those estimates and could impact future results of operations and cash flows.
Intangible Assets
Intangible assets acquired individually or with a group of other assets from others (other than in a business combination) are recognized at cost, including transaction costs, and allocated to the individual assets acquired based on relative fair values and no goodwill is recognized. Cost is measured based on cash consideration paid. If consideration given is in the form of non-cash assets, liabilities incurred, or equity interests issued, measurement of cost is based on either the fair value of the consideration given or the fair value of the assets (or net assets) acquired, whichever is more clearly evident and more reliably measurable. Costs of internally developing, maintaining or restoring intangible assets that are not specifically identifiable, have indeterminate lives or are inherent in a continuing business are expensed as incurred.
Intangible assets purchased from others for use in research and development activities and that have alternative future uses (in research and development projects or otherwise) are capitalized in accordance with ASC Topic 350, Intangibles – Goodwill and Other. Those that have no alternative future uses (in research and development projects or otherwise) and therefore no separate economic value are considered research and development costs and are expensed as incurred. Amortization of intangibles used in research and development activities is a research and development cost.
Intangibles with a finite useful life are amortized using the straight-line method unless the pattern in which the economic benefits of the intangible assets are consumed or used up are reliably determinable. The useful life is the best estimate of the period over which the asset is expected to contribute directly or indirectly to our future cash flows. The useful life is based on the duration of the expected use of the asset by us and the legal, regulatory or contractual provisions that constrain the useful life and future cash flows of the asset, including regulatory acceptance and approval, obsolescence, demand, competition and other economic factors. We evaluate the remaining useful life of intangible assets each reporting period to determine whether any revision to the remaining useful life is required. If the remaining useful life is changed, the remaining carrying amount of the intangible asset will be amortized prospectively over the revised remaining useful life. If an income approach is used to measure the fair value of an intangible asset, we consider the period of expected cash flows used to measure the fair value of the intangible asset, adjusted as appropriate for company-specific factors discussed above, to determine the useful life for amortization purposes.
If no regulatory, contractual, competitive, economic or other factors limit the useful life of the intangible to us, the useful life is considered indefinite. Intangibles with an indefinite useful life are not amortized until its useful life is determined to be no longer indefinite. If the useful life is determined to be finite, the intangible is tested for impairment and the carrying amount is amortized over the remaining useful life in accordance with intangibles subject to amortization. Indefinite-lived intangibles are tested for impairment annually and more frequently if events or circumstances indicate that it is more-likely-than-not that the asset is impaired.
| F-35 |
Impairment of Long-Lived Assets and Intangibles Other Than Goodwill
We account for the impairment of long-lived assets in accordance with ASC 360, Property, Plant and Equipment and ASC 350, Intangibles – Goodwill and Other, which require that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to its expected future undiscounted net cash flows generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amounts of the assets exceed the fair value of the assets based on the present value of the expected future cash flows associated with the use of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Based on management’s evaluation, there was no impairment loss recorded during the six months ended June 30, 2020.
Stock-based Compensation
Stock-based compensation expense is based on the grant-date fair value estimated in accordance with the provisions of ASC 718, Compensation-Stock Compensation. We expense stock-based compensation to employees over the requisite service period based on the estimated grant-date fair value of the awards. For awards that contain performance vesting conditions, we do not recognize compensation expense until achieving the performance condition is probable. Stock-based awards with graded-vesting schedules are recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award. We estimate the fair value of stock option grants using the Black-Scholes option pricing model, and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. Stock-based compensation costs are recorded as general and administrative or research and development costs in the statements of operations based upon the underlying individual’s role.
Net Loss Per Share
Basic loss per share is computed by dividing our net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the year. Diluted loss per share is computed by dividing our net loss available to common stockholders by the diluted weighted average number of shares of common stock during the period. Since we experienced a net loss for both periods presented, basic and diluted net loss per share are the same. As such, diluted loss per share for the six months ended June 30, 2020 and 2019 excludes the impact of 740,899 and 719,083 potentially dilutive common stock, respectively, related to outstanding stock options and warrants and the conversion of our 2017 and 2019 Senior Notes since those shares would have an anti-dilutive effect on loss per share.
Recent Accounting Pronouncements
From time to time, the Financial Accounting Standards Board (“FASB”) or other standard setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification are communicated through issuance of an Accounting Standards Update (“ASU”). We have implemented all new accounting pronouncements that are in effect and that may impact our consolidated financial statements. We have evaluated recently issued accounting pronouncements and determined that there is no material impact on our financial position or results of operations.
Note 2 – Intangible Assets
Intangible assets at June 30, 2020 and December 31, 2019 consisted of the following:
| June 30, 2020 | December 31, 2019 | |||||||
| Gross intangible assets | $ | 11,059,429 | $ | 11,059,429 | ||||
| Less: accumulated amortization | (1,814,639 | ) | (1,416,975 | ) | ||||
| Total intangible assets, net | $ | 9,244,790 | $ | 9,642,454 | ||||
Amortization expense was $397,664 for the six months ended June 30, 2020 and 2019 and is included within research and development expense in the accompanying condensed consolidated statements of operations. Our estimated amortization expense for the next year will be approximately $795,000 per year and for annual periods thereafter approximately $788,000 per year.
The capitalized costs for the license rights to PCS499 included the $8 million purchase price, $1,782 in transaction costs and $3,037,147 associated with the initial recognition of an offsetting deferred tax liability related to the acquired temporary difference for an asset purchased that is not a business combination and has a tax basis of $1,782 in accordance with ASC 740-10-25-51 Income Taxes. In accordance with ASC Topic 730, Research and Development, we capitalized the costs of acquiring the exclusive license rights to PCS499, as the exclusive license rights represent intangible assets to be used in research and development activities that management believes has future alternative uses.
Note 3 – Income Taxes
We account for income taxes in accordance with ASC Topic 740, Income Taxes. Deferred income taxes are recorded for the expected tax consequences of temporary differences between the tax basis of assets and liabilities for financial reporting purposes and amounts recognized for income tax purposes. As of June 30, 2020, and December 31, 2019, we recorded a valuation allowance equal to the full recorded amount of our net deferred tax assets related to deferred start-up costs and other minor temporary differences since it is more-likely-than-not that such benefits will not be realized. The valuation allowance is reviewed quarterly and is maintained until sufficient positive evidence exists to support its reversal.
A deferred tax liability was recorded on March 19, 2018 when we received CoNCERT’s license and “Know-How” in exchange for Processa stock that had been issued in the Company incurredInternal Revenue Code Section 351 Transaction. The Section 351 Transaction treats the acquisition of the license and Know-How for stock as a tax-free exchange. As a result, under ASC 740-10-25-51 Income Taxes, we recorded a deferred tax liability of $3,037,147 for the acquired temporary difference between intangible assets (see Note 2) for the financial reporting basis of $11,038,929 and the tax basis of $1,782. The deferred tax liability will be reduced for the effect of non-deductibility of the amortization of the intangible asset and may be offset by the deferred tax assets resulting from net operating tax losses.
Under ACS 740-270 Income Taxes – Interim Reporting, we are required to project our annual federal and state effective income tax rate and apply it to the year to date ordinary operating tax basis loss before income taxes. Based on the projection, we expect to recognize the tax benefit from our projected ordinary tax loss, which can be used to offset the deferred tax liabilities related to the intangible assets and resulted in the recognition of $144,200 duea deferred tax benefit shown in the condensed consolidated statements of operations for six months ended June 30, 2020 and 2019. No current income tax expense is expected for the foreseeable future as we expect to fraudgenerate taxable net operating losses.
Note 4 – Stock-based Compensation
We did not grant any stock options to our employees or non-employees during the six months ended June 30, 2020. During the six months ended June 30, 2019, we granted 129,919 stock options to employees and non-employees under the 2019 Omnibus Incentive Plan. At June 30, 2020, we had outstanding options to purchase 169,329 shares of our common stock of which options for the purchase of 56,853 shares of our common stock were vested. We recorded $192,532 and $125,035 of stock-based compensation expense for the six months ended June 30, 2020 and 2019, respectively.
| F-37 |
Note 5 – 2019 Senior 8% Convertible Notes Payable
During the fourth quarter of 2019, accredited investors purchased $805,000 of 8% Senior Convertible Notes (“2019 Senior Notes”) from a cybersecurity breach.us. For every $1,000 principal amount purchased, the note holders received 70 warrants to purchase our common stock. As a result, we granted 56,350 warrants to purchase our common stock at an exercise price of $19.04, which expire on December 19, 2023. The 2019 Senior Notes bear interest at 8% per year and if converted, the interest is payable in kind (in common stock). The 2019 Senior Notes mature on December 15, 2020. At June 30, 2020 and December 31, 2019, we had $805,000 of 2019 Senior Notes outstanding.
The 2019 Senior Notes are convertible by the holder upon (i) completion of listing our common stock on either the Nasdaq Capital Market or the New York Stock Exchange or if we raise at least $14 million, prior to December 15, 2020, the maturity date of the 2019 Senior Notes, in one or more qualified financings. If the 2019 Senior Notes are not paid or converted prior to their maturity date, the principal and any accrued interest will be automatically or mandatorily converted into our common stock. The 2019 Senior Notes, plus any accrued interest, is convertible into shares of our common stock at a conversion price equal to the lower of (i) $14.28 per share or (ii) a price per share equal to a 10% discount to the pre-money valuation of an equity sale of the Company’s common stock for cash, as defined in the 2019 Senior Note agreement, occurring after the closing of the 2019 Senior Note financing.
The 2019 Senior Notes provide the holders with (a) the option of receiving 110% of principal plus accrued interest in the event there is a change of control prior to conversion of the 2019 Senior Notes; (b) weighted-average anti-dilution protection in event of any sale of securities at a net consideration per share that is less than the applicable conversion price per share to the holder until we have implementedraised an additional $14 million from the sale of certain reviewsecurities; and approval procedures internally(c) certain preemptive rights pro rata to their respective interests through December 31, 2021.
The 2019 Senior Notes contains negative covenants that do not permit us to incur additional indebtedness or liens on property or assets owned, repurchase common stock, pay dividends, or enter into any transaction with affiliates of ours that would require disclosure in a public filing with the Securities and Exchange Commission. Upon an event of default, the outstanding principal amount of the Senior Notes, plus accrued but unpaid interest and other amounts owing in respect thereof through the date of acceleration, shall become immediately due and payable in cash at the holder’s election, if not cured within the cure period.
We incurred $4,280 in debt issuance costs related to the 2019 Senior Notes. The debt issuance costs are amortized to interest expense using straight line amortization over the term of the 2019 Senior Notes.
Note 6 – Related Party Line of Credit Agreements
On September 20, 2019, we entered into two separate LOC Agreements (“LOC Agreements”) with DKBK Enterprises, LLC (“DKBK”) and CorLyst, LLC (“CorLyst”, and, together with DKBK, collectively, “Lenders”), both related parties, which provide a revolving commitment of up to $700,000 each ($1.4 million total). Under the LOC Agreements, all funds borrowed bear interest at an annual rate of 8%. The promissory notes issued in connection with the LOC Agreements provide that the Lenders have the right to convert all or any portion of the principal and accrued and unpaid interest into our banks;common stock on the same terms as our technology consultants2019 Senior Convertible Notes. Therefore, the Lenders may convert the outstanding debt under the LOC Agreements into our common stock at a conversion price equal to the lower of (i) $14.28 per share, (ii) a price per share equal to a 10% discount to the pre-money valuation of an equity sale of the Company’s common stock for cash, or (iii) at an adjusted price; all as more particularly described in the 2019 Senior Convertible Notes.
Our Chief Executive Officer (CEO) is also the CEO and Managing Member of both lenders. DKBK directly holds 16,166 shares of our common stock, representing less than 1% of our outstanding common stock, and CorLyst beneficially owns 1,095,649 shares of our common stock, representing 19.8% of our outstanding common stock at June 30, 2020. In April and June 2020, we drew $500,000 under the LOC Agreement with DKBK. On July 21, 2020, we drew an additional $200,000, bringing the total amount drawn under the LOC Agreement with DKBK to $700,000.
Note 7 – Paycheck Protection Program Loan
In May 2020, we entered into a $162,459 Paycheck Protection Promissory Note (the “PPP Loan”) with the Bank of America. The PPP Loan was made under, and is subject to the terms and conditions of, the PPP which was established under the CARES Act and is administered by the U.S. Small Business Administration. The current terms of the loan is two years with a maturity date of May 5, 2022 and it contains a favorable fixed annual interest rate of 1.00%. Payments of principal and interest on the PPP Loan is deferred for the first six months of the term of the PPP Loan until November 5, 2020. Principal and interest are payable monthly and may be prepaid by us at any time prior to maturity with no prepayment penalties. Under the terms of the CARES Act, recipients can apply for and receive forgiveness for all, or a portion of the loan granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for certain permissible purposes as set forth in the PPP, including, but not limited to, payroll costs, mortgage interest, rent or utility costs (collectively, “Qualifying Expenses”), and on the maintenance of employee and compensation levels during a certain time period following the funding of the PPP Loan. We have implemented system changes;used the proceeds of our PPP Loan for payroll costs. However, no assurance is provided that we will be able to obtain forgiveness of the PPP Loan in whole or in part. As of June 30, 2020, $72,203 of the total $162,459 PPP-related debt is classified as a current liability on our condensed consolidated balances sheets.
Note 8 – Stockholders’ Equity
On September 30, 2019, our Pledge Agreement with PoC Capital was amended to reduce the committed funds under this Agreement from $1.8 million to $900,000, which was paid in full as of December 31, 2019. As part of the Pledge Agreement amendment, PoC Capital forfeited the pledged collateral (56,640 shares of our common stock and warrants to purchase 56,640 shares of our common stock) in the amended agreement. The forfeited shares of our common stock and stock purchase warrants have been returned to us.
We determined the sale of the 2019 Senior Notes in late 2019 which are convertible into common stock at a conversion rate of $14.28 per share, triggered the full ratchet anti-dilution provision of common stock we reportedsold in our 2018 Private Placement Transactions. As a result, those stockholders were entitled to 28,971 shares of common stock in the fraudfourth quarter of 2019, which we issued on June 18, 2020. We accounted for these shares at December 31, 2019 as a deemed dividend payable at their par value.
On June 25, 2020, we amended our Certificate of Incorporation reducing the number of authorized shares of our common stock from 100,000,000 to 30,000,000. We believe 100,000,000 authorized shares of common stock was disproportionately large in relation to the Company’s outstanding common stock and our banksanticipated future needs, and the Federal Bureau of Investigation Cyber Crimes Unit. The Company doesreduction will reduce our future Delaware franchise tax.
We have not have insurance coverage against the type of fraud that occurred, therefore, recovery of the loss is remote. While we are taking steps to prevent such an event from reoccurring, we cannot provide assurance that similar issues will not reoccur. Failurehad any sales of our control systems to preventpreferred stock since we were incorporated on March 29, 2011 and there were no issued or detect and correct errorsoutstanding shares of preferred stock at June 30, 2020 or fraud could have a material and adverse effect on our financial condition. The loss is included in general and administrative expenses in the consolidated statement of operations for the three months ended MarchDecember 31, 2018.2019.
Note 9 – Subsequent EventsNet Loss per Share of Common Stock
Basic net loss per share is computed by dividing net loss by the weighted average common stock outstanding. Diluted net loss per share is computed by dividing net loss by the weighted average common stock outstanding, which includes potentially dilutive effect of stock options, warrants and senior convertible notes. Since we experienced a loss for both periods presented, including any dilutive common stock outstanding would have an anti-dilutive impact on diluted net loss per share, and as shown below were excluded from the computation. The treasury-stock method is used to determine the dilutive effect of our stock options and warrants grants, and the if-converted method is used to determine the dilutive effect of the Senior Notes.
The computation of net loss per share for the six months ended June 30, 2020 and 2019 was as follows:
Six months ended June 30, | ||||||||
| 2020 | 2019 | |||||||
| Basic and diluted net loss per share: | ||||||||
| Net loss | $ | (1,607,750 | ) | $ | (1,719,910 | ) | ||
| Weighted average number of common stock-basic and diluted | 5,515,447 | 5,524,895 | ||||||
| Basic and diluted net loss per share | $ | (0.29 | ) | $ | (0.31 | ) | ||
The following potentially dilutive securities were excluded from the computation of diluted net income per share as their effect would have been anti-dilutive for the periods presented.
| 2020 | 2019 | |||||||
| Stock options and purchase warrants | 646,938 | 700,976 | ||||||
| Senior convertible notes and LOC, plus related accrued interest | 93,961 | 18,107 | ||||||
740,899 | 719,083 | |||||||
Note 10 – Leases
We lease our office space under an operating lease agreement. This lease does not have significant rent escalation, concessions, leasehold improvement incentives, or other build-out clauses. Further, the lease does not contain contingent rent provisions. We also lease office equipment under an operating lease. Our office space lease includes both lease (e.g., fixed payments including rent, taxes, and insurance costs) and non-lease components (e.g., common-area or other maintenance costs), which are accounted for as a single lease component as we have elected the practical expedient to group lease and non-lease components for all leases. Our leases do not provide an implicit rate and, as such, we have used our incremental borrowing rate of 8% in determining the present value of the lease payments based on the information available at the lease commencement date.
Lease costs included in our condensed consolidated statement of operations totaled $23,995 and $24,729 for the three months ended June 30, 2020 and 2019, respectively, and $48,201 and $49,302 for the six months ended June 30, 2020 and 2019, respectively. The weighted average remaining lease terms and discount rate for our operating leases were as follows at June 30, 2020:
| Weighted average remaining lease term (years) for our facility and equipment leases | 2.23 | |||
| Weighted average discount rate for our facility and equipment leases | 8.00 | % |
Maturities of our lease liabilities for all operating leases were as follows as of June 30, 2020:
| 2020 | $ | 45,869 | ||
| 2021 | 90,495 | |||
| 2022 | 69,741 | |||
| Total lease payments | 206,105 | |||
| Less: Interest | (19,543 | ) | ||
| Present value of lease liabilities | 186,562 | |||
| Less: current maturities | (71,967 | ) | ||
| Non-current lease liability | $ | 114,595 |
Note 11 – License Agreement with Aposense, Ltd.
On May 15, 2018 Processa Pharmaceuticals (the “Company”) entered into Subscription and Purchase Agreements (the “Purchase Agreements”24, 2020 we executed a condition precedent License Agreement (“Aposense Agreement”) with certain accredited investorsAposense under which they will provide us with an exclusive worldwide license (excluding China) to research, develop and conductedcommercialize products comprising or containing PCS11T. The grant of license is conditioned on the following being satisfied within 9 months of May 24, 2020 (or the Aposense Agreement shall terminate): (i) our closing of an equity financing and successful up-listing to Nasdaq and (ii) Aposense obtaining the approval of the Israel Innovation Authority for the consummation of the transactions contemplated by the Aposense Agreement. Within five business days of satisfying the conditions, we must issue Aposense a closing pursuant to which the Company sold 1,112,656number of shares of common stock determined by dividing $2.5 million by the Company’s Common Stock, par value $0.001price per share (the “Common Stock”), atpaid by such investors in equity financing. Such shares will be subject to a purchase pricelock-up, with 40% of $2.27such shares released from such lock up after six months and the remaining two 30% tranches to be released upon completion of the next two subsequent quarters. As additional consideration, we will pay Aposense development and regulatory milestone payments (up to $3.0 million per share.milestone) upon the achievement of certain milestones, which primarily consist of having a drug indication approved by a regulatory authority in the United States or another country. In addition, each investor receivedwe must pay Aposense one-time sales milestone payments based on the achievement during a warrantcalendar year of one or more thresholds for annual sales for products made and pay royalties based on annual licensing sales. We are also required to purchasesplit any milestone payments we receive with Aposense based on any sub-license agreement we may enter into.
We are required to use commercially reasonable efforts, at our sole cost and expense, to research, develop and commercialize products in one shareor more countries, including meeting specific diligence milestones that consist of Common Stock(i) submitting an IND for each Common Stock purchased by such investor at an exercise price equal to $2.724, subject to adjustment thereunder. The closing isa drug indication within 30 months following the initial closing (the “Initial Closing”)satisfaction of the Company’s previously announced private placement (the “Private Placement”)license conditions above; (ii) dosing of upa first patient with a product within 42 months following the satisfaction of the license conditions above; (iii) dosing of a first patient with a product in a pivotal clinical trial within 72 months following the satisfaction of the license conditions above and (iv) an NDA submission within 120 months following the satisfaction of the license conditions above. Either party may terminate the Aposense Agreement in the event of a material breach of the license agreement that has not been cured following written notice and a 90-day opportunity to $8 million of Common Stock (the Maximum Offering Amount”)cure such breach (which is shortened to 15 days for a payment breach).
The Company received total gross proceeds of approximately $2.5 million from the Initial Closing, prior to deducting placement agent fees and estimated expenses payable by the Company associated with the Initial Closing. The Company currently intends to use the proceeds of the Private Placement to fund research and development of its lead product candidate, PCS-499, including clinical trial activities, and for general corporate purposes. Pursuant to the Purchase Agreements, the Company may periodically conduct additional closings until the earlier of June 29, 2018 or the Company has sold the Maximum Offering Amount.Note 12 – Related Party Transactions
The SecuritiesCorLyst reimburses us for shared costs related to payroll, health care insurance and rent based on actual costs incurred, which are recognized as a reduction of our general and administrative operating expenses being reimbursed in our condensed consolidated statement of operations. We recorded $25,928 and $52,464 of reimbursements during the six months ended June 30, 2020 and 2019, respectively. Amounts due from CorLyst at June 30, 2020 and December 31, 2019 were sold in a private placement pursuant to exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), afforded by Rule 506 of Regulation D promulgated thereunder.$24,713 and $0, respectively.
Boustead Securities acted as placement agent The placement agent receivedAt June 30, 2020, we also had approximately $128,056 in connection with the Initial Closing$1,700 due from certain employees for health insurance contributions. We did not have comparable a similar receivable at December 31, 2019.
Note 13 – Commitments and a Placement Agent Warrant to purchase up to 33,380 shares of Common Stock at an exercise price equal to $2.724.Contingencies
Anti-Dilution ProtectionPurchase Obligations
We enter into contracts in the normal course of business with contract research organizations and subcontractors to further develop our products. The contracts are cancellable, with varying provisions regarding termination. If a contract with a specific vendor were to be terminated, we would only be obligated for products or services that we received as of the effective date of the termination and any applicable cancellation fees. We had no purchase obligations at June 30, 2020.
| F-41 |
Processa Pharmaceuticals, Inc.
3,200,000 Shares of Common Stock
PRELIMINARY PROSPECTUS
Joint Bookrunning Managers
Craig-Hallum Capital Group The Benchmark Company
The Common Stock, but not the Warrants, will have full ratchet anti-dilution protection rather than weighted-average anti-dilution protection. Except as provided, until the Company has issued equity securities or securities convertible into equity securities for a total of an additional $20.0 million in cash or assets, including the proceeds from the exercise of the Warrants issued in the Offering, in the event the Company issues additional equity securities or securities convertible into equity securities at a purchase price less than $2.27 per share of Common Stock, the Purchase Price shall be adjusted and new shares of Common Stock issued as if the Purchase Price was such lower amount (or, if such additional securities are issued without consideration, to a price equal to $0.01 per share).
The following issuances shall not trigger anti-dilution adjustment: (i) shares of Common Stock issued in the Private Placement and securities issuable upon exercise of the Warrants; (ii) securities issued upon the conversion of any outstanding debenture, warrant, option, or other convertible security; (iii) Common Stock issuable upon a stock split, stock dividend, or any subdivision of shares of Common Stock, provided that such securities have not been amended since the date of the Agreement to increase the number of such securities or to decrease the exercise price, exchange price or conversation price of such securities (other than in connection with stock splits or combinations) or to extend the term of such securities; (iv) shares of Common Stock (or options to purchase such shares of Common Stock) issued or issuable to employees or directors of, or consultants to, the Company pursuant to any plan approved by the Company’s Board of Directors and (v) securities issued pursuant to acquisitions or strategic transactions approved by a majority of the disinterested directors of the Company, provided that such issuance shall only be to a person (or to the equity holders of a person) which is, itself or through its subsidiaries, believed by the Company to be an operating company or an owner of an asset in a business synergistic with the business of the Company.
Co-Manager
PROCESSA PHARMACEUTICALS, INC.
6,379,267 SHARES OF COMMON STOCK
PROSPECTUSNational Securities Corporation
, 20182020
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEMItem 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTIONOther Expenses of Issuance and Distribution.
Our estimatedThe following table sets forth all costs and expenses, other than underwriting discounts and commissions, paid or payable by the Registrant in connection with the issuance and distributionsale of the securitiescommon stock being registered are:registered. All amounts shown are estimates except for the SEC registration fee and the FINRA filing fee:
| SEC filing fee | $ | 2,097 | ||||||
| Amount | ||||||||
| SEC registration fee | $ | 2,077 | ||||||
| FINRA filing fee | 10,000 | |||||||
| Initial Nasdaq Global Market listing fee | 25,000 | |||||||
| Blue sky qualification fees and expenses | 10,000 | |||||||
| Printing and engraving expenses | 50,000 | |||||||
| Legal fees and expenses | 300,000 | |||||||
| Accounting fees and expenses | $ | 75,000 | 50,000 | |||||
| Legal fees and expenses | $ | 125,000 | ||||||
| Miscellaneous | $ | 75,000 | ||||||
| Transfer agent and registrar fees and expenses | 10,000 | |||||||
| Miscellaneous expenses | 15,923 | |||||||
| Total | $ | 277,097 | $ | 473,000 | ||||
| II-1 |
ITEMItem 14. INDEMNIFICATION OF OFFICERS AND DIRECTORSIndemnification of Directors and Officers.
Processa Pharmaceuticals, Inc. is incorporated under the laws of the State of Delaware.
Section 102(b)(7) of the General Corporation Law of the State of Delaware, or the “DGCL,” permits a Delaware corporation to include a provision in its certificate of incorporation eliminating or limiting the personal liability of directors to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. This provision, however, may not eliminate or limit a director’s liability (1) for breach of the director’s duty of loyalty to the corporation or its stockholders, (2) for acts or omissions not in good faith or involving intentional misconduct or a knowing violation of law, (3) under Section 174 of the DGCL, or (4) for any transaction from which the director derived an improper personal benefit. The amended and restated certificate of incorporation of Processa contains such a provision.
Section 145(a) of the DGCL provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation), by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person’s conduct was unlawful.
Section 145(b) of the DGCL provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper.
Section 145(c) of the DGCL provides that to the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of Section 145 of the DGCL, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection therewith.
Section 145(e) of the DGCL permits a Delaware corporation to advance litigation expenses, including attorneys’ fees, incurred by present and former directors and officers prior to the final disposition of the relevant proceedings. The advancement of expenses to a present director or officer is conditioned upon receipt of an undertaking by or on behalf of such director or officer to repay the advancement if it is ultimately determined that such director or officer is not entitled to be indemnified by the corporation. Advancement to former officers and directors may be conditioned upon such terms and conditions, if any, as the corporation may deem appropriate.
Section 145(g) of the DGCL specifically allows a Delaware corporation to purchase liability insurance on behalf of its directors and officers and to insure against potential liability of such directors and officers regardless of whether the corporation would have the power to indemnify such directors and officers under Section 145 of the DGCL.
The amended and restated certificate of incorporation and the amended and restated bylaws of Processa authorize the corporation to indemnify its directors and officers to the fullest extent permitted by law.
The foregoing summaries are necessarily subject to the complete text of the DGCL and Processa’s amended and restated certificate of incorporation and amended and restated bylaws.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On September 29, 2017, prior to the consummation of the Asset Purchase Agreement, Heatwurx converted 178,924 shares of Series D Preferred Stock and all accrued dividends in the amount of $118,658 into 719,500 shares of Common Stock or 102,789 shares of Common Stock restated for the reverse stock split.
On October 4, 2017 and November 21, 2017, accredited investors purchased $1.25 million and $1.33 million of our senior secured convertible notes in a bridge financing undertaken by us to support our operations. The Notes were issued in reliance on the exemptions from registration under Regulation D and Securities Act Section 4(a)(2).
On October 4, 2017, in connection with the Asset Purchase Agreement dated October 2, 2017, among the Company, Promet Therapeutics LLC (“Promet”) and Processa Therapeutics LLC, the Company’s wholly owned subsidiary (“Asset Purchase Agreement”), we issued 222,217,000 shares of the Company’s Common Stock to Promet in exchange for all the assets of Promet. The issuance of our shares was made in reliance on the exemption provided by Section 4(a)(2) of the Securities Act for the offer and sale of securities not involving a public offering, and Regulation D promulgated under the Securities Act.
On May 15, 2018 and June 29, 2018, the Company entered into subscription and purchase agreements with certain accredited investors and conducted a closing pursuant to which the Company sold 1,101,643 shares of common stock and 300,798 shares of common stock at a purchase price of $2.27 per share. In addition, each investor received a warrant to purchase one share of common stock for each share of common stock purchased by such investor at an exercise price equal to $2.724, subject to adjustment thereunder. The Company received total gross proceeds of approximately $3.1 million from the closings, prior to deducting placement agent fees and estimated expenses payable by the Company associated with the closing. The common stock was sold in a private placement pursuant to exemptions from the registration requirements of the Securities Act, afforded by Rule 506 of Regulation D promulgated thereunder. Boustead acted as placement agent. The placement agent received approximately $167,256 in connection with the closing and a warrant to purchase up to 84,146 shares of common stock at an exercise price equal to $2.724. We intend to use the proceeds to fund research and development of our lead product candidate, PCS-499, including clinical trial activities, and for general corporate purposes.
On May 25, 2018, we entered into an agreement with an accredited investor to whom we sold 792,952 shares of common stock at a purchase price of $2.27 per share for $1.80 million of gross proceeds. The $1.80 million private placement will be applied to funding the Phase 2 Necrobiosis Lipoidica Trial which will begin in the fourth quarter of 2018. The investor will make payments not to us, but rather directly to the CRO conducting our Phase 2 Necrobiosis Lipoidica Trial based on their invoicing. The investor also received warrants to purchase one share of common stock for each share of common stock purchased at an exercise price equal to $2.724. Boustead Securities, placement agent, received as fees approximately $108,000 and a warrant to purchase up to 47,578 shares of common stock at an exercise price equal to $2.724. The Securities were sold in a private placement pursuant to exemptions from the registration requirements of the Securities Act afforded by Rule 506 of Regulation D promulgated thereunder.
In addition, on May 25, 2018, we converted approximately $2.35 million of our mandatory convertible 8% Senior Notes and accrued interest of $100,000, into 1,206,245 shares of common stock, at a price of $2.043 per share. The noteholders also received warrants to purchase one share of common stock for each share of common stock purchased at an exercise price equal to $2.452. Boustead Securities, placement agent, received as fees approximately $144,955 and a warrant to purchase up to 79,423 shares of common stock at an exercise price equal to $2.724.
| II-2 |
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULESItem 15. Recent Sales of Unregistered Securities.
In the three years preceding the filing of this registration statement, we have issued the following securities that were not registered under the Securities Act:
| ● | On September 29, 2017, prior to the consummation of the Asset Purchase Agreement, Heatwurx converted 178,924 shares of Series D Preferred Stock and all accrued dividends in the amount of $118,658 into 102,786 shares of Common Stock. |
| ● | On October 4, 2017 and November 21, 2017, accredited investors purchased $1.25 million and $1.33 million of our senior secured convertible notes in a bridge financing undertaken by us to support our operations. The Notes were issued in reliance on the exemptions from registration under Regulation D and Securities Act Section 4(a)(2). |
| ● | On October 4, 2017, in connection with the Asset Purchase Agreement dated October 2, 2017, among the Company, Promet Therapeutics LLC (“Promet”) and Processa Therapeutics LLC, the Company’s wholly owned subsidiary (“Asset Purchase Agreement”), we issued 4,535,035 shares of the Company’s Common Stock to Promet in exchange for all the assets of Promet. On December 30, 2019, Promet distributed these shares to the beneficial holders. The issuance of our shares was made in reliance on the exemption provided by Section 4(a)(2) of the Securities Act for the offer and sale of securities not involving a public offering, and Regulation D promulgated under the Securities Act. |
| ● | On May 15, 2018 and June 29, 2018, the Company entered into subscription and purchase agreements with certain accredited investors and conducted a closing pursuant to which the Company sold 157,392 shares of common stock and 42,977 shares of common stock at a purchase price of $15.89 per share. In addition, each investor received a warrant to purchase one share of common stock for each share of common stock purchased by such investor at an exercise price equal to $19.07, subject to adjustment thereunder. The Company received total gross proceeds of approximately $3.2 million from the closings, prior to deducting placement agent fees and estimated expenses payable by the Company associated with the closing. The common stock was sold in a private placement pursuant to exemptions from the registration requirements of the Securities Act, afforded by Rule 506 of Regulation D promulgated thereunder. Boustead acted as placement agent. The placement agent received approximately $168,000 in connection with the closing and a warrant to purchase up to 12,022 shares of common stock at an exercise price equal to $19.07. We have used the proceeds to fund research and development of our lead product candidate, PCS499, including clinical trial activities, and for general corporate purposes. |
| ● | On May 25, 2018, we entered into an agreement with an accredited investor to whom we sold 113,280 shares of common stock at a purchase price of $15.89 per share for $1.80 million of gross proceeds. The investor also received warrants to purchase one share of common stock for each share of common stock purchased at an exercise price equal to $19.07. The investor pledged 56,640 shares and warrants to purchase 56,640 shares to us to secure the investor’s funding obligation. The $1.80 million private placement was applied to funding the Phase 2A Necrobiosis Lipoidica Trial, which began in the fourth quarter of 2018. The investor made payments totaling $689,168 directly to the CRO conducting our Phase 2A Necrobiosis Lipoidica Trial based on their invoicing. The investor also repaid us $210,832 for clinical trial expenses we previously paid to our CRO. On September 30, 2019, we amended the existing pledge agreement to reduce the committed funds from $1.8 million to $900,000, which has now been paid in full. The investor forfeited the pledged collateral in the amended agreement and the shares have been reissued to Processa and will be retired. Boustead Securities, placement agent, received as fees approximately $108,000 and a warrant to purchase up to 6,797 shares of common stock at an exercise price equal to $19.07. The Securities were sold in a private placement pursuant to exemptions from the registration requirements of the Securities Act afforded by Rule 506 of Regulation D promulgated thereunder. |
| II-3 |
| ● | In addition, on May 25, 2018 and July 2, 2019, we converted approximately $2.5 million of our mandatory convertible 8% Senior Notes and accrued interest of $143,263 into 190,427 shares of common stock, at a price of $14.30 per share. The noteholders also received warrants to purchase one share of common stock for each share of common stock purchased at an exercise price equal to $17.16. Boustead Securities, our placement agent, received as fees $154,800 and a warrant to purchase up to 11,347 shares of common stock at an exercise price equal to $17.16. |
| ● | In December 2019, we sold $805,000 principal amount of 8.0% Senior Convertible Notes and 56,350 warrants to purchase shares of our common stock to accredited investors. |
| ● | In June 2020, in connection with the sale of the 8% Senior Convertible Notes sold in December 2019, we issued 28,971 shares of our common stock as a result of triggering the full ratchet anti-dilution provision of common stock sold in our 2018 Private Placement Transactions. |
| ● | In September 2020, we issued 250,000 shares of common stock to Yuhan Corporation, an accredited investor, in connection with a license agreement, based on $8.00 per share. The number of shares is subject to adjustment based on the offering price in this offering, but not less than 181,818 shares. |
| ● | Upon the closing of this offering, we will issue $2.5 million of shares of common stock (based on the offering price in this offering) to Aposense, Ltd., an accredited investor, in connection with a license agreement. |
| ● | Upon the closing of this offering, we will issue a minimum of 500,000 shares of common stock to Elion Oncology, Inc., an accredited investor, in connection with a license agreement. The number of shares will be adjusted based on the offering price in this offering. |
All sales of securities described above were exempt from the registration requirements of the Securities Act in reliance on Section 4(a)(2) of the Securities Act, Rule 701 promulgated under the Securities Act or Regulation D promulgated under the Securities Act, relating to transactions by an issuer not involving a public offering. All of the foregoing securities are deemed restricted securities for purposes of the Securities Act.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
The exhibits to the registration statement are listed in the Exhibit Index to this registration statementattached hereto and are incorporated by reference herein.
(b)Financial Statement SchedulesSchedules.
Schedules not listed have beenAll other schedules are omitted because they are not required, are not applicable, or the information required to be set forth therein is not applicable, not material or is shownincluded in the financial statements or the related notes to financial statements thereto.
ITEMItem 17. UNDERTAKINGSUndertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities Act;
(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and
(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initialbona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability under the Securities Act to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, or the Securities Act, may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.
SIGNATURES(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;
Pursuant to(2) That, for the requirementspurpose of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Hanover, State of Maryland, on July 27, 2018.
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below does hereby constitute and appoint David Young and Wendy Guy, with full power of substitution, such person’s true and lawful attorneys-in-fact and agents for such person, with full power and authority to dodetermining any and all acts and things and to execute any and all instruments which said attorneys and agents, and any one of them, determine may be necessary or advisable or required to enable said corporation to comply withliability under the Securities Act of 1933, as amended,each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any rules or regulations or requirements of the Securities and Exchange Commission in connection with this Registration Statement. Without limitingsecurities being registered which remain unsold at the generalitytermination of the foregoing power and authority,offering.
(4) That, for the powers granted includepurpose of determining liability under the power and authoritySecurities Act of 1933 to signany purchaser:
(i) Each prospectus filed by the namesregistrant pursuant to Rule 424(b)(3) shall be deemed to be part of the undersigned officersregistration statement as of the date the filed prospectus was deemed part of and directorsincluded in the capacities indicated belowregistration statement; and
(ii) Each prospectus required to this Registration Statement,be filed pursuant to any and all amendments, both pre-effective and post-effective, and supplements to this Registration Statement, and to any and all instrumentsRule 424(b)(2), (b)(5), or documents filed(b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or in conjunction with this Registration Statement or amendments or supplements thereof, and each(x) for the purpose of providing the undersigned hereby ratifies and confirms that all said attorneys and agents, or any one of them, shall do or cause to be doneinformation required by virtue hereof. This Power of Attorney may be signed in several counterparts.
Pursuant to the requirementssection 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date.
(5) That, for the purpose of determining liability of the registrant under the Securities Act to any purchaser in the initial distribution of the securities: the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, has been signed belowregardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the following personsundersigned registrant;
(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the capacities and onoffering made by the dates indicated.undersigned registrant to the purchaser.
(6) Provide to the underwriter at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.
(7) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(8) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
EXHIBIT INDEX
In reviewing the agreements included as exhibits to this registration statement, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about us, our subsidiaries or other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
| ● | should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; | |
| ● | have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement; | |
| ● | may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and | |
| ● | were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments. |
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. We acknowledge that, notwithstanding the inclusion of the foregoing cautionary statements, we are responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this registration statement not misleading. Additional information about us may be found elsewhere in the prospectus included in this registration statement.
| + | Indicates a management contract or compensatory plan or arrangement. |
| * | Previously filed. |
| ** | Furnished herewith. XBRL (eXtensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act is deemed not filed for purposes of Section 18 of the Exchange Act and otherwise is not subject to liability under these sections. |
| II-6 |
Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Amendment No. 3 to Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in Hanover, Maryland, on the 30th day of September, 2020.
| Processa Pharmaceuticals, Inc. | |
| /s/ David Young, Pharm.D, Ph.D. | |
| David Young, Pharm. D, Ph.D. | |
| Chairman and Chief Executive Officer |
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ David Young, Pharm.D, Ph.D. | Chairman and Chief | September 30, 2020 | ||
| David Young, Pharm.D, Ph.D. | Executive Officer (principal executive officer) | |||
| /s/ James Stanker | Chief Financial Officer | September 30, 2020 | ||
| James Stanker | (principal accounting officer and principal financial officer) | |||
| /s/ Patrick Lin* | Director | September 30, 2020 | ||
| Patrick Lin | ||||
| /s/ Justin Yorke* | Director | September 30, 2020 | ||
| Justin Yorke | ||||
| /s/ Virgil Thompson* | Director | September 30, 2020 | ||
| Virgil Thompson | ||||
| /s/ Geraldine Pannu | Director | September 30, 2020 | ||
| Geraldine Pannu |
*By:
| /s/ David Young, Pharm.D, Ph.D. | |
| David Young, Pharm.D, Ph.D., Attorney-in-Fact |
| II-7 |