Filed
Pursuant to Rule 424(b)(4)
Registration
No. 333-235511
4,800,000 Shares of Common
Stock
This is a firm commitment
public offering of 4,800,000 shares of our common stock at a public offering price of $4.00 per share.
Prior to this offering,
there has been a limited public market for our common stock on the OTCQB® Market, or OTCQB.
On September 28, 2020, the last reported sale price of our common stock as reported on the OTCQB was $10.98 per share. Our common
stock has been approved for listing on the Nasdaq Capital Market, or Nasdaq, under the symbol “PCSA” contingent on
the completion of this offering. Our common stock will commence trading on Nasdaq on October 2, 2020. There can be no assurance
that a trading market will develop for our shares of common stock on Nasdaq. The final offering price of $4.00 per share was determined between us and the underwriters at the time of
pricing.
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 this prospectus has been adjusted to give effect to the Reverse
Split.
Investing
in our common stock is highly speculative and involves a high degree of risk. See “Risk Factors” beginning on page
10.
|
|
Per
Share
|
|
|
Total
|
|
Public
offering price
|
|
$
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4.00
|
|
|
$
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19,200,000
|
|
Underwriting
discounts and commissions(1)
|
|
$
|
0.32
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|
|
$
|
1,536,000
|
|
Proceeds,
before expenses, to us
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|
$
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3.68
|
|
|
$
|
17,664,000
|
|
(1)
See “Underwriting” for a description of compensation payable to the underwriters.
Certain
of our officers, directors and existing stockholders have agreed to purchase an aggregate of 37,250 shares in this offering
on the same terms as those offered to the public. 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
determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Delivery
of the shares of common stock is expected to be made on or about October 6, 2020.
Joint
Bookrunning Managers
Craig-Hallum Capital
Group
|
The Benchmark Company
|
Co-Manager
National
Securities Corporation
Prospectus
dated October 1, 2020
TABLE
OF CONTENTS
You
should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone
to provide any information or to 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 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 any sale of shares
of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.
For
investors outside the United States: neither we nor the underwriters have done anything that would permit this offering or possession
or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any
jurisdiction where action for that purpose is required, other than in the 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.
Unless
otherwise indicated, information contained in this prospectus 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 reasonable. These data involve a number of assumptions and limitations which
are necessarily subject to a 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
prospectus includes trademarks, service marks and trade names owned by us or other companies. All trademarks, service marks and
trade names included in this 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 Glossary on the following page.
GLOSSARY
OF CERTAIN SCIENTIFIC TERMS
The
medical and scientific terms used in this prospectus have the following meanings:
“Active
metabolite” means a drug that is processed by the body
into an altered form which effects the body.
“Analog”
means a compound having a structure similar to that 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 on 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.
“Indication”
means 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.
PROSPECTUS
SUMMARY
This
summary highlights selected information contained elsewhere in this prospectus and does not contain all of the information that
you should consider in making an investment decision. Before investing in our common stock, you should carefully read this entire
prospectus, including our consolidated financial statements and the related notes thereto and the information set forth
under the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” sections of this prospectus.
Overview
Our
mission is to develop drug products that 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 condition
or who have no alternative treatment. Our most advanced product candidate, PCS499, is an oral tablet that is a 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)
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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;
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(ii)
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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
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(iii)
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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.
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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 oral tablet that is a deuterated analog of one of the major metabolites of pentoxifylline (PTX or
Trental®). PCS499 is classified by FDA as a new molecular entity. PCS499 and its metabolites act on multiple
pharmacological targets that are important in a variety of conditions. We have identified Necrobiosis Lipoidica
(NL) as our lead indication for PCS499. 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 occurs more often in people with diabetes. Ulceration occurs in approximately 30% of NL patients, which can lead
to more severe complications, such as deep tissue infections and osteonecrosis threatening the 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. Because PCS499 and its metabolites affect
a number of biological pathways, several of which could contribute to the pathophysiology 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 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.
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
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.
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.
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.
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 (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.
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 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
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 195,562 shares of common stock (based on interest
accrued through June 30, 2020) at a conversion price of $3.60 per share, which, pursuant to the LOC Agreement, is a 10%
discount on the public offering price of $4.00 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). Per the Yuhan License Agreement, we will issue an additional 250,000 shares to Yuhan based on the
public offering price of $4.00 per share.
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.
Risks
Associated with our Business and Related to this Offering
We
are 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 investment decision. These risks are discussed more fully in the “Risk Factors” section
of this prospectus. These risks include, but are not limited to the following:
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We have a history
of losses and we may never become profitable;
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We have limited
cash resources and will require additional financing;
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The ongoing COVID-19
pandemic may disrupt our operations and affect our ability to successfully conduct clinical studies and raise capital;
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We currently
do not have, and may never develop, any FDA-approved, licensed or commercialized products;
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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);
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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;
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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;
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We cannot ensure
protection of our licensed intellectual property rights;
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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;
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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 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;
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If you purchase
shares of common stock in this offering, you will suffer substantial and immediate dilution of your investment; and
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Our common stock
price is expected to be volatile.
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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.
The
Offering
Common Stock Offered by Us
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4,800,000
shares of common stock.
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Common Stock to be Outstanding After this Offering*
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10,315,447 shares of common
stock.
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Use of Proceeds
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We intend to use the net proceeds from this offering over the next 18-24 months to conduct clinical trials and for working capital and other general corporate purposes. See the section titled “Use of Proceeds” for more information.
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Risk Factors
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You should read the “Risk Factors” section of this prospectus beginning on page 10 and other information included in this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.
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Nasdaq Capital Market Symbol
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Our common stock has been approved for
listing on Nasdaq under the symbol “PCSA” contingent on the completion of this offering and it will
commence trading on Nasdaq on October 2, 2020.
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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
as of August 31, 2020 and excludes the following:
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121,557 shares of our common stock issuable upon the exercise of outstanding stock options issued under the Processa Pharmaceuticals, Inc. 2019 Omnibus Incentive Plan, referred to herein as the Omnibus Plan, having a weighted-average exercise price of $17.24 per share, of which 37,009 options have vested, having a weighted-average exercise price of $17.49 per share. An additional 34,652 options will vest upon the successful completion of this offering;
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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;
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54,083 shares of common stock reserved for issuance pursuant to future awards under the Omnibus Plan;
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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;
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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;
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238,740 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 interest accrued through June 30, 2020 and a conversion price of $3.60 per share,
which, pursuant to the 2019 Senior Note Agreement, is a 10% discount on the public offering price of $4.00 per
share.
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1,142,916 shares
of common stock to be issued to stockholders who purchased common stock units in our 2018 Private Placement Transactions,
based on the public offering price of $4.00 per share, as a result of full ratchet anti-dilution provisions;
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195,562 shares of
common stock issuable upon the conversion of the $700,000 principal amount outstanding under the LOC Agreement with
DKBK and related accrued interest expected to occur simultaneously with the closing of this offering, based on interest
accrued through June 30, 2020 and a conversion price of $3.60 per share, which, pursuant to the LOC Agreement,
is a 10% discount on the public offering price of $4.00 per share;
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625,000 shares of
common stock to satisfy the in-license obligation due to Aposense on closing of the offering and up-listing of our common
stock to a national exchange, based on the public offering price of $4.00 per share;
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500,000 shares of
common stock issued to Yuhan in connection with the Yuhan License Agreement, based on the public offering price
of $4.00 per share; and
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825,000 shares of
common stock to be issued to Elion in connection with the Elion License Agreement on closing of the offering and up-listing
of our common stock to a national exchange, based on the public offering price of $4.00 per share.
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*
Unless otherwise indicated, all information in this prospectus gives effect to the Reverse Split.
Certain
of our officers, directors and existing stockholders have agreed to purchase an aggregate of 37,250
shares in this offering on the same terms as those offered to the public. 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 tables 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 years ended December 31, 2019 and 2018
from our audited consolidated financial statements appearing elsewhere in this prospectus. The summary historical consolidated
financial data as of June 30, 2020 and for the six months ended June 30, 2020 and 2019 have been derived
from our unaudited condensed consolidated financial statements 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 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.
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Six
Months Ended
June 30,
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Year
Ended December 31,
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2020
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2019
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2019
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2018
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Operating expenses
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|
|
|
|
|
|
|
|
|
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Research
and development
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$
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928,855
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$
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1,211,655
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$
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2,320,573
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$
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3,085,317
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General
and administrative
|
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859,255
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807,837
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1,614,909
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1,439,623
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|
|
|
|
|
|
|
|
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|
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|
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Operating loss
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(1,788,110
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)
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(2,019,492
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)
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(3,935,482
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)
|
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|
(4,524,940
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)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Other income (expense)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Interest
income
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|
846
|
|
|
|
9,383
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|
|
|
11,548
|
|
|
|
18,297
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|
Interest
expense
|
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|
(36,450
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)
|
|
|
(10,702
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)
|
|
|
(36,658
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)
|
|
|
(161,205
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss
before income tax benefit
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|
(1,823,714
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)
|
|
|
(2,020,811
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)
|
|
|
(3,960,592
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)
|
|
|
(4,667,848
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)
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Income
tax benefit
|
|
|
215,964
|
|
|
|
300,901
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|
|
|
602,716
|
|
|
|
902,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss and comprehensive loss
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|
$
|
(1,607,750
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)
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|
$
|
(1,719,910
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)
|
|
$
|
(3,357,876
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)
|
|
$
|
(3,765,047
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share attributable to common stockholders - basic and diluted
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$
|
(0.29
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)
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|
$
|
(0.31
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)
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$
|
(0.70
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)
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$
|
(0.71
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)
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Weighted
average common stock outstanding - basic and diluted
|
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|
5,515,447
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|
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5,525,009
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|
|
|
5,525,635
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|
|
|
5,332,141
|
|
|
|
As
of June 30, 2020
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Actual
|
|
|
Pro
Forma (1)
|
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Pro
Forma, As Adjusted (2)
|
|
Balance
Sheet Data:
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|
|
|
|
|
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Cash
and cash equivalents
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$
|
452,654
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|
|
$
|
552,654
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|
|
$
|
17,599,154
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|
Total
Assets
|
|
|
10,011,456
|
|
|
|
10,111,456
|
|
|
|
27,157,956
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|
Working
Capital (Deficit) (3)
|
|
|
(1,321,086
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)
|
|
|
(717,063
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)
|
|
|
16,329,437
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|
2019
Senior convertible debt (4)
|
|
|
859,102
|
|
|
|
859,102
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|
|
|
859,102
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|
Line
of Credit Payable
|
|
|
504,023
|
|
|
|
-
|
|
|
|
-
|
|
Total
Liabilities (5)
|
|
|
3,418,436
|
|
|
|
2,914,413
|
|
|
|
2,914,413
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|
Total
Stockholders’ Equity
|
|
|
6,593,020
|
|
|
|
7,197,043
|
|
|
|
24,243,543
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(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 the
public offering price of $4.00 per share: (i) the issuance of 1,142,916 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 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 195,562 shares of common stock (based on interest accrued through June 30, 2020); (iii) the
issuance of 625,000 shares of common stock to Aposense; (iv) the issuance of 500,000 shares of common stock
to Yuhan; and (v) the issuance of 825,000 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 8,803,925.
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(2)
|
Gives effect to
the Pro Forma Adjustments and the issuance of 4,800,000 shares of common stock in this offering and the receipt of
$17.0 million in net proceeds. The number of outstanding shares on a pro forma as adjusted basis would be 13,603,925.
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(3)
|
We define working capital as current assets less current liabilities.
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(4)
|
Includes accrued interest totaling $54,459 and a discount of $357.
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(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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RISK
FACTORS
Investing
in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below,
the section of this prospectus entitled “Management’s Discussion and Analysis of Financial Condition and Results of
Operation” and our consolidated financial statements and related notes, before investing in our common stock. The
risks and uncertainties described below are not the only ones 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.
Since
inception, we have incurred significant operating losses. Our net losses were $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 $12.6 million. To date, we have financed our operations with the proceeds raised from accredited investors in
private transactions. We have devoted substantially all of our financial resources and efforts to research and development. We
will incur additional losses as we continue our research and development activities, seek regulatory approvals for our product
candidates, engage in clinical 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 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.
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 private placement of equity securities and senior secured convertible
notes. 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. Our ability to obtain additional financing will be subject to many 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 revenue 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 accrued expenses at June 30, 2020) until
such time as we have raised sufficient 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, 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.
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 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.
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 cause 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 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.
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 submitting 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.
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.
Our
operations to date have been limited to financing and staffing, conducting research and developing our core technologies, identifying
and optimizing our lead product clinical 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 only conducted two clinical trials in any jurisdiction and have not had previous
experience commercializing product candidates through 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; that our development program and studies would be acceptable to the FDA or other regulatory 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.
Through
our IND, we are currently evaluating the safety tolerability of PCS499 in patients with NL. We have developed dosing based
on our past experience with the drug in a healthy human volunteer study, the experience of CoNCERT Pharmaceuticals 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 with 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 be any way to differentiate PCS499 from
PTX thus making development and commercialization of PCS499 in NL not worth pursuing.
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.
We
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, 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:
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demonstration
of clinical safety and efficacy;
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relative
convenience, dosing burden and ease of administration;
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the
prevalence and severity of any adverse effects;
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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;
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the
introduction of any new products that may in the future become available targeting indications for which our product candidates
may be approved;
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new
procedures or therapies that may reduce the incidences of any of the indications in which our product candidates may show
utility;
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pricing
and cost-effectiveness;
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the
inclusion or omission of our product candidates in treatment guidelines;
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the
effectiveness of our own or any future collaborators’ sales and marketing strategies;
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limitations
or warnings contained in approved labeling from regulatory authorities;
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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
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the
willingness of patients to pay out-of-pocket in the absence of third-party coverage or reimbursement or government pricing
approvals.
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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.
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.
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 to manufacture 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.
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.
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.
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. While 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 additional product candidates
in the indications for which we think they might qualify, if we elect to seek such applications.
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, 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 an 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 access to an 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, 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 may 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.
Legal,
regulatory and legislative changes with respect to reimbursement, 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.
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 providers, pharmaceutical companies or others selling or
otherwise coming into contact with our product 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 merit or eventual outcome,
product liability claims may result in:
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withdrawal
of clinical trial participants;
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termination
of clinical trial sites or entire trial programs;
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the
inability to commercialize our product candidates;
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decreased
demand for our product candidates;
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impairment
of our business reputations;
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product
recall or withdrawal from the market or labeling, marketing or promotional restrictions;
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substantial
costs of any related litigation or similar disputes;
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distractions
of management’s attention and other resources from our primary business;
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substantial
monetary awards to patients or other claimants against us that may not be covered by insurance; or
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loss
of revenue.
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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.
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 own 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
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:
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CoNCERT
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Yuhan
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Elion
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Aposense
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Akashi
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Total
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U.S. patents
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9
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|
4
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|
2
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3
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2
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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 will have a chance to achieve a viable product for licensing or commercialization. Our
business currently depends entirely on the successful development, regulatory approval, and licensing or commercialization of
our product candidates, which may never occur.
Enforcement
of our licensed patents or defense of any claims asserting 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.
We
cannot ensure protection of our licensed intellectual property rights.
Our
commercial success will depend, in part, on the ability of our licensors to obtain and maintain patent protection for our licensed
technologies, products and processes, successfully defend these licensed patents against third-party challenges and successfully
enforce 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 rights.
Accordingly, we cannot predict the breadth of claims that may be allowable or enforceable in our patents. The existing patents
and patent applications relating to our drug product candidates 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. We may not be able to adequately protect our rights, gain
or keep our competitive advantage, or provide 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.
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 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 or trade secret protection for our product candidates or our technologies, third parties
could use our 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-party patent
rights that may be relevant to our licensed 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.
A
number of companies, including several major pharmaceutical companies, have conducted, or are conducting, research within the
licensed 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. 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:
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manage
all our development efforts effectively, especially our clinical trials;
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integrate
additional management, administrative, scientific, operation and regulatory personnel;
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maintain
sufficient administrative, accounting and management information systems and controls; and
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hire
and train additional qualified personnel.
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We
may not be able to accomplish these tasks, and our failure to accomplish any of them could harm our financial results.
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.
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 include 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 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.
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.
Our
limited operating history may make it difficult to evaluate our business and our future viability.
We
are in the relatively early stages 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 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.
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.
We
are a “smaller reporting company,” and the reduced disclosure requirements applicable to us as such may make our common
stock less attractive to our stockholders and investors.
We
are a “smaller reporting company” under the federal securities laws and, as such, are subject to scaled disclosure
requirements afforded to such companies. For example, as a smaller reporting company, we are subject to reduced executive compensation
disclosure requirements. Our stockholders and investors may find our common stock less attractive as a result of our 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.
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 also 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 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 or our vendors experience significant data security breaches or
fail to detect and appropriately respond to significant data security breaches, we could be exposed to government enforcement
actions and private litigation.
Risks
Related to Ownership of Our Common Stock and This Offering
If
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 the 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 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” section of this prospectus for
a more detailed description of the dilution to investors participating in the offering.
You
may experience future dilution as a result of future equity offerings, license transactions or acquisitions.
In
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
our 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 common stock, the newly issued securities may 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 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.
The
offering 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:
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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;
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changes
in estimates or recommendations by securities analysts, if any, who cover our common stock;
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the
timing and results of our current and any future preclinical or clinical trials of our product candidates;
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the
entry into or termination of key agreements, including, among others, key collaboration and license agreements;
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the
results and timing of regulatory reviews relating to the approval of our product candidates;
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the
initiation of, material developments in, or conclusion of, litigation to enforce or defend any of our intellectual property
rights;
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failure
of any of our product candidates, if approved, to achieve commercial success;
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general
and industry-specific economic conditions that may affect our research and development expenditures;
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the
results of clinical trials conducted by others on products that would compete with our product candidates;
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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;
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developments
or disputes concerning patent applications, issued patents or other proprietary rights;
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future
sales of our common stock by us, our insiders or our other stockholders;
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a
negative outcome in any litigation or potential legal proceeding.
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additions
and departures of key personnel;
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negative
publicity or announcements regarding regulatory developments relating to our products;
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actual
or anticipated fluctuations in our financial condition and operating results, including our cash and cash equivalents balance,
operating expenses, cash burn rate or revenue levels;
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our
filing for protection under federal bankruptcy laws; or
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the
other factors described in this “Risk Factors” section.
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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, 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.
After
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 corporate control.
Upon
the closing of this offering, our executive officers and directors, combined with our stockholders who owned more than 5% of our
outstanding common stock before this offering and their respective affiliates, will, in the aggregate, beneficially own shares
representing approximately 28.2% of our outstanding capital stock. As a result, if these stockholders were to choose to act together, they would be able to influence
our 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. These 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 stockholders may have an adverse effect on the price of our common stock. This concentration of ownership control
may adversely affect the market price of our common stock by:
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delaying,
deferring or preventing a change in control;
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entrenching
our management and the Board of Directors;
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impeding
a merger, consolidation, takeover or other business combination involving us that other stockholders may desire;
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and/or
discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.
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See
the “Principal Stockholders” section of this prospectus for more information regarding the ownership of our outstanding
common stock by our executive officers, directors, principal stockholders and their affiliates.
Sales
of substantial amounts of our common stock 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. Shares held by directors, executive
officers, and other affiliates will also be subject to volume limitations under Rule 144 under the Securities Act. See “Shares
Eligible for Future Sale.” Further, we have granted registration rights to 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 our value.
We
have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future 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. There is no guarantee that our valuation will appreciate in value or even maintain the valuation at which
our stockholders have purchased their shares.
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 1,000,000 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 the 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 operations, whether voluntary or involuntary, the proceeds and/or
assets 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,
upon such a liquidation, dissolution or 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:
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providing
that the number of members of our Board is limited to a range fixed by our bylaws;
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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
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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.
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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. In some cases, you can identify forward-looking statements
by 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 and projections about future events and trends that we believe may affect our financial condition,
results of operations, strategy, short- and long-term business operations and objectives, and financial needs. These forward-looking
statements are subject to a number of risks, uncertainties and assumptions, 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
those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking
events and circumstances discussed in this prospectus may not occur, and actual results could differ materially and adversely
from those anticipated 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, statements about:
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our
use of the net proceeds from this offering;
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our
liquidity and working capital requirements, including cash requirements over the next 12 months;
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our
ability to obtain funding for our operations;
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the
impact of the COVID-19 pandemic on our business, operations or ability to obtain funding;
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our
ability to obtain and maintain regulatory approval of PCS499 and/or our other product candidates;
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our
ability to contract with third-party suppliers, manufacturers and other service providers and their ability to perform adequately;
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the
potential market size, opportunity and growth potential for PCS499 and/or our other product candidates, if approved;
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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;
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the
initiation, timing, progress and results of our pre-clinical studies and clinical trials, and our research and development
programs;
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our
ability to retain the continued service of our key professionals and to identify, hire and retain additional qualified professionals;
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our
ability to advance product candidates into, and successfully complete, clinical trials;
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our
ability to recruit and enroll suitable patients in our clinical trials;
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the
timing or likelihood of the accomplishment of various scientific, clinical, regulatory filings and approvals and other product
development objectives;
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the
pricing and reimbursement of our product candidates, if approved;
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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;
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the
scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates
and technology;
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developments
relating to our competitors and our industry;
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the
accuracy of our estimates regarding expenses, capital requirements and needs for additional financing; and
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our
financial performance.
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You
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 reasonable as of the date of this 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 update publicly any forward-looking statements for any reason after the date of this prospectus
to conform these statements to new information, actual results or to changes in our expectations, except as required by law.
You
should read this prospectus and the documents 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 our actual future results, levels
of activity, performance, and events and circumstances may be materially different from what we expect.
USE
OF PROCEEDS
We estimate that we will
receive net proceeds of approximately $17.0 million from the sale of the shares of our common stock in this offering, based
on the public offering price of $4.00 per share and after deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable by us.
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.
MARKET
FOR COMMON EQUITY AND DIVIDEND POLICY
Market
Information
Our common
stock has been approved for listing on the Nasdaq Capital Market, or Nasdaq, under the symbol “PCSA”
contingent on the completion of this offering and it will commence trading on Nasdaq on October 2, 2020. Our common
stock was previously 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, or the Reverse Split. Unless otherwise
specified or the context otherwise indicates, the information contained in this prospectus has been adjusted to give effect
to the Reverse Split.
Holders
of our Common Stock
As
of August 31, 2020, we had 5,515,447 shares of common stock issued and outstanding and 204 holders of record of
our common stock.
Transfer
Agent
Our
transfer agent is Equiniti Trust Company, 3200 Cherry Creek Dr. South Suite 430 Denver, CO 80209; telephone (303) 282-4800.
Dividend
Policy
We
have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and future
earnings, if any, for use in the operation of our business and 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.
CAPITALIZATION
The
following table sets forth our cash and cash equivalents and capitalization as of June 30, 2020 as follows:
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on an actual basis.
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on a pro forma basis after giving effect
to the Pro Forma Adjustments based on the public offering price of $4.00 per share.
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on a pro forma basis, as adjusted to give
further effect to the issuance by us of 4,800,000 shares of our common stock in this offering.
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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
|
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|
Actual
|
|
|
Pro forma
|
|
|
Pro forma, as adjusted
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Cash and cash equivalents
|
|
$
|
452,654
|
|
|
$
|
552,654
|
|
|
$
|
17,599,154
|
|
2019 Senior Convertible Notes and accrued interest
|
|
|
859,102
|
|
|
|
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; 8,803,925 shares issued and outstanding, pro forma and 13,603,925 shares issued and
outstanding pro forma, as adjusted(1)
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|
|
552
|
|
|
|
882
|
|
|
|
1,362
|
|
Additional paid-in capital
|
|
|
19,182,228
|
|
|
|
27,685,921
|
|
|
|
44,731,941
|
|
Accumulated equity
|
|
|
(12,589,760
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)
|
|
|
(20,489,760
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)
|
|
|
(20,489,760
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)
|
|
|
|
|
|
|
|
|
|
|
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|
Total stockholders’ equity
|
|
|
6,593,020
|
|
|
|
7,197,043
|
|
|
|
24,243,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
7,956,145
|
|
|
$
|
8,056,145
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|
|
$
|
25,102,645
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(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:
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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;
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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;
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|
54,083 shares
of common stock reserved for issuance pursuant to future awards under the Omnibus Plan;
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|
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;
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|
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
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●
|
238,740
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 $3.60
per share, which, pursuant to the 2019 Senior Note Agreement, is a 10% discount on
the public offering price of $4.00 per share.
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DILUTION
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 per share
of our common stock immediately 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 our historical net tangible book value divided by 5,514,447, the
number of shares of common stock outstanding as of June 30, 2020. Our historical net tangible book value as 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 Pro Forma Adjustments based on the public offering price of
$4.00 per share and is calculated based on an aggregate of 8,803,925 shares of our common stock outstanding.
Our pro forma as adjusted
net tangible book value per share gives further effect to the issuance by us of 4,800,000 shares of our common stock in
this offering and receipt of the net proceeds therefrom, after deducting underwriting discounts and commissions and estimated
offering expenses payable by us, based on the public offering price of $4.00 per share, and is calculated based
on an aggregate of 13,603,925 shares of our common stock outstanding.
The
following table illustrates this per share dilution to investors participating in this offering:
Public offering price per
share
|
|
|
|
|
|
$
|
4.00
|
|
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
|
|
|
0.16
|
|
|
|
|
|
Pro forma net tangible book value as of June 30, 2020, before giving effect to the offering
|
|
|
(0.08
|
)
|
|
|
|
|
Increase in net tangible book value per share from new investors participating in this offering
|
|
|
1.28
|
|
|
|
|
|
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
|
|
|
|
|
|
|
2.80
|
|
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 4,800,000 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.
|
|
|
|
|
●
|
238,740
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 $3.60 per share,
which, pursuant to the 2019 Senior Note Agreement, is a 10% discount on the public
offering price of $4.00 per share.
|
To
the extent that any 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 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
You
should read the following discussion and analysis of our financial condition and results of operations together with our consolidated
financial statements and the related notes and other financial information included elsewhere in this prospectus. Some of the
information contained in this discussion and analysis contains forward-looking statements that involve risks and uncertainties.
You should review the section titled “Risk Factors” in this prospectus for a discussion of important factors that
could cause actual results to differ materially from the results described below.
Overview
We
are 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 highly 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 (PCS12852, PCS6422, PCS11T and PCS100)
once adequate funding has been obtained. We continue searching for additional products for our portfolio that meet our
criteria.
Our
drug portfolio approach is to 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 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.
Part
of our 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 clinical 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 assembled 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 FDA, over 100 meetings with the FDA and
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 skills and experience 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 us. In addition, the growth in revenues of companies
at which our executive officers and directors served in 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.
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, it should be noted that
the products must still meet the challenges of successful marketing, distribution and consumer acceptance.
Going
Concern and Management’s Plan
Our
consolidated financial statements are 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 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 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 recently entered into two line of credit agreements 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, and we do not currently have
any revenue under contract or any immediate sales prospects. For the six months ended June 30, 2020 and year ended December
31, 2019, we incurred a net loss from continuing operations of approximately $1.6 million and $3.4 million, respectively;
and used approximately $897,000 and $2.8 million in net cash from operating 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.
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 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.
In
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 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 have used the loan proceeds for payroll costs in accordance with the relevant
terms and conditions of the CARES Act.
Substantial
doubt existed about our ability to continue as a going concern
as of the date of our 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 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.
It
is our current expectation, assuming the receipt of the net proceeds from this offering and 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.
Components
of 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.
Revenues
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
research and development costs are expensed as incurred. Research and development expenses include (i) amortization of the 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.
Comparison
of the three and six months ended June 30, 2020 and 2019
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.
We
had no revenue during the three and six months ended June 30, 2020 and 2019. We do not currently have any revenue under contract
or any immediate sales prospects.
Research
and Development Expenses.
Our
research and development costs are expensed as incurred. Research and development expenses include (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 are recorded as
prepaid expenses and expensed when the 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 June 30, 2020 when compared
to the same period in 2019 related to the departure of two research and development team members in the first quarter of 2020.
During
the six months ended June 30, 2020, our research and development costs decreased by $282,800 as compared to the six months
ended June 30, 2019. The decrease in research and development expenses was due to a decrease in preclinical, clinical trial and
other costs of $217,803 and in research and development salaries and benefits of $64,997 during the six months ended June 30,
2020 when compared to the same period in 2019 for the same reasons as stated above.
We
anticipate our research and development costs to increase significantly in the future as we continue pre-clinical studies and
conduct future clinical trials related to 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 expect 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 $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.
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.
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.
Our
general and administrative expenses for the three months ended June 30, 2020 decreased by $35,194 to $374,878
from $410,072 for the three months ended June 30, 2019. We experienced reductions in professional fees for legal,
accounting, advisory and consulting costs of approximately $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 costs of approximately $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 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 licenses, primarily due
to our Delaware franchise tax as a result of our 1-for-7 reverse stock split in December 2019. Delaware used the assumed par value
method to compute their franchise tax. The reverse stock split increased the assumed par value per share which was assessed on
the number 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 part to decrease our future Delaware franchise tax.
We
also experienced increases of approximately $44,000 in payroll and related costs (due to an increase in stock-based compensation
of approximately $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
$95,000, as well as reductions of approximately $20,000 in office expenses, travel, continuing education, utilities and repairs
and maintenance. Reimbursements from CorLyst of $50,642 for rent and other costs during the six months ended June 30, 2020 were
$1,800 less than the same period in 2019.
We
expect the general and administrative expenses to increase in the future as we add staff to support our growing research
and development activities and the administration required to operate as a public company.
Interest
Expense and Interest Income.
Interest
expense was $19,280 and $6,102 for the three months ended 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 to the 2020 borrowings on the LOC Agreement with DKBK. Included in interest
expense is the amortization of debt issuance costs totaling $2,140 and $0 for the six months ended June 30,
2020 and 2019, respectively.
Interest
income was $18 and $3,398 for the three months ended June 30, 2020 and 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
|
)
|
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.
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.
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
At
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 decreased by approximately $872,000 to $10 million at June 30, 2020 compared to $10.9 million at December 31, 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 due to increases in accrued expenses related to accrued salary
liability, accrued interest related to the 2019 Senior Notes and other borrowings, funds drawn under the LOC Agreement with DKBK
and the promissory note we entered into with the Bank of America under the Paycheck Protection Program.
In
connection with exercising the option agreement with CoNCERT, we recognized a $3,037,147 deferred income tax liability since the
intangible assets purchased had only a nominal tax basis. Our deferred tax liability has been and is expected to be reduced each
period by the effect of the combination of the tax non-deductibility of the amortization of the intangible asset and an amount
up to the income tax effect of our net loss.
Liquidity
and Capital Resources
To
date, we have funded our business and operations primarily through the private placement of equity securities and senior secured
convertible notes. At June 30, 2020, we had $452,654 in cash compared to $691,536 at December 31, 2019. We
have taken the following actions to address our 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.
|
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:
|
●
|
the
timing and extent of spending on our research and development efforts, including with respect to PCS499 and our other product
candidates;
|
|
|
|
|
●
|
the
scope, rate of progress, results and cost of our clinical trials, preclinical testing and other related activities;
|
|
|
|
|
●
|
the
time and costs involved in obtaining regulatory and marketing approvals in multiple jurisdictions for our product candidates
that successfully complete clinical trials;
|
|
|
|
|
●
|
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.
|
Based 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, interest income earned on invested cash balances or a combination of one or more of these sources.
Cash
Flows
The
following table sets forth our sources and uses of cash and cash equivalents for the six months ended June 30, 2020
and 2019:
|
|
Six
months ended
|
|
|
|
June
30,
|
|
|
|
2020
|
|
|
2019
|
|
Net cash (used in) provided by:
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
(897,029
|
)
|
|
$
|
(1,414,903
|
)
|
Investing activities
|
|
|
-
|
|
|
|
-
|
|
Financing
activities
|
|
|
658,147
|
|
|
|
395,927
|
|
Net decrease
in cash
|
|
$
|
(238,882
|
)
|
|
$
|
(1,018,976
|
)
|
Net
cash used in operating activities
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. Additionally, prepaid expenses decreased by approximately $218,000, $145,000 of which related
to costs for our Phase 2A clinical trial.
Since
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
We
had no cash sources or uses for investing activities during the six months ended June 30, 2020 or 2019.
Net
cash (used in) provided by financing activities
Net
cash provided by financing activities during the six months ended June 30, 2020 of $658,147 was from borrowings totaling $500,000
under our LOC Agreement with DKBK and $162,459 we received from the Bank of America pursuant to a promissory note under the Paycheck
Protection Program, less transaction costs of $4,312 related to our anticipated 2020 offering. During the six months ended
June 30, 2019, net cash provided by financing activities of $395,927 were funds received from our clinical
trial funding investor in partial satisfaction of his stock subscription receivable that he paid directly to our CRO.
We
expect that we will continue to seek additional capital through a combination of private and public equity 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
Sheet Arrangements
We
do not have any off-balance sheet arrangements as defined
by Item 303(a)(4) of Regulation S-K.
Critical
Accounting Policies and Use of Estimates
Our
management’s discussion and analysis of our financial condition and results of operations are based on our consolidated
financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements
requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure
of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to
accrued expenses and stock-based compensation. We base our estimates on historical experience, known trends and events, and various
other factors that are 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.
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. The net deferred tax assets of Heatwurx were 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 income taxes in accordance with ASC 740 Income 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-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-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 2016 remain open for examination by federal and state income tax
authorities.
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
(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-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.”
Recently
Issued Accounting Pronouncements
See
Note 3 of our consolidated financial statements for new accounting pronouncements or changes to the recent accounting pronouncements
during the year ended December 31, 2019.
Quantitative
and Qualitative Disclosures about Market Risk
We
are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate risks and inflation
risks. Periodically, we maintain deposits in accredited financial institutions in excess of federally insured limits. We deposit
our cash in financial institutions 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 material effect on our results of operations during the periods presented.
BUSINESS
DESCRIPTION
OF BUSINESS
Overview
Our
mission is to develop drug products that 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 highly unmet medical need condition or who have no
alternative treatment. Our most advanced product candidate, PCS499, is an oral tablet that is a 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)
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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;
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(ii)
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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
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(iii)
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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.
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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 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.
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®). PCS499 is classified by FDA as a new molecular entity. PCS499 and its metabolites act on multiple
pharmacological targets that are important in a variety of conditions. We have identified Necrobiosis Lipoidica
(NL) as our lead indication for PCS499. 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 occurs more often in people with diabetes. Ulceration occurs in approximately 30% of NL patients, which can lead
to more severe complications, such as deep tissue infections and osteonecrosis threatening the 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. Because PCS499 and its metabolites affect
a number of biological pathways, several of which could contribute to the pathophysiology 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 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.
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
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.
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.
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.
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 (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.
Manufacturing
and Clinical Supplies
We
do not own or operate, and currently have no plans to establish, any manufacturing facilities. We currently rely, and expect to
continue to rely, on third party contract manufacturing organizations, or CMOs, for the supply of current good manufacturing practice-grade,
or cGMP-grade, clinical trial materials and commercial quantities of our product candidates and products, if approved. We require
all of our CMOs to conduct manufacturing activities in compliance with cGMP. We have assembled a team of experienced employees
and consultants to provide the necessary technical, quality and regulatory oversight of our CMOs.
We
anticipate that these CMOs will have the capacity 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 future.
We believe that our standardized manufacturing process can be transferred to a number of other CMOs for the production of clinical
and commercial supplies of our product candidates in the ordinary course of business.
Competition
Many
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 able to enter the market.
Intellectual
Property
Our
success will depend in large part on our ability and that of our licensors to:
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obtain and maintain
international and domestic patent and other legal protections for the proprietary technology, inventions and improvements
we consider important to our business;
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prosecute and defend
our future patents, once obtained;
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preserve confidentiality
of our own and our licensed methods, processes and know-how; and
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operate without
infringing the patents and proprietary rights of other parties.
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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 compositions
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:
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CoNCERT
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Yuhan
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Elion
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Aposense
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Akashi
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Total
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U.S.
patents
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9
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4
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2
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3
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2
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20
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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.
License
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 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 as 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:
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4%
of the net sales of the portion less than or equal to $100 million;
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5%
of the net sales of the portion greater than $100 million and less than or equal to $500 million;
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6%
of the net sales of the portion greater than $500 million and less than or equal to $1.0 billion;
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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.
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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 million of gross proceeds and (b) CoNCERT being able to sell its shares of
our common stock without restrictions pursuant to the terms of the amended Agreement. All other terms of the CoNCERT Agreement
remained unchanged.
We
will incur royalty obligations to CoNCERT on 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 fully paid-up, perpetual, irrevocable license to such intellectual property with respect to such product in such country. In
the event 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 assignment 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.
License
Agreement with Yuhan Corporation
On
August 19, 2020, we entered into a License 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). Per the Yuhan License Agreement, we will issue an additional 250,000 shares based on the public offering
price of $4.00 per share in this offering. 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 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
825,000 shares of our common stock, based on the public offering price of $4.00 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
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) 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 a payment breach).
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 know-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.
Within
five business days of satisfying the conditions, we must issue Aposense 625,000 shares of common stock determined by dividing
$2.5 million by the public offering price of $4.00 per share. 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
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) submitting an IND for a drug indication
within 30 months following the satisfaction of the license conditions above; (ii) dosing of a 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 been cured following written notice and a 90-day opportunity to cure such
breach (which is shortened to 15 days for a payment breach).
License
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
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 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 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. We are also required to split any milestone payments
we receive with Akashi 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).
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.
U.S.
Government Regulation
In
the United States, the FDA regulates drugs 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 requires the expenditure 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 government contracts, restitution, disgorgement or civil or criminal
penalties.
The
process required by the FDA before a drug may be marketed in the United States generally involves the following:
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completion
of pre-clinical laboratory tests, animal studies and formulation studies in compliance with the FDA’s good laboratory
practice, or GLP, regulations;
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submission
to the FDA of an IND application, which must become effective before human clinical trials may begin;
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approval
by an independent IRB, at each clinical site before each trial may be initiated;
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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 proposed drug product for each indication;
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submission
to the FDA of an NDA;
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satisfactory
completion of an FDA advisory committee review, if applicable;
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satisfactory
completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assess compliance
with cGMP requirements and to assure that the facilities, methods and controls are adequate to preserve the drug’s identity,
strength, quality and purity;
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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
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compliance
with any post-approval requirements, including the potential requirement to implement a Risk Evaluation and Mitigation Strategy
(REMS) or to conduct a post-approval study.
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Pre-clinical
studies
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 studies to evaluate toxicity in animals, to assess the potential for adverse events and in some cases
to establish a rationale for therapeutic use. The conduct of pre-clinical studies is subject to federal regulations and requirements,
including GLP regulations for safety/toxicology studies. An IND sponsor must submit the results of the pre-clinical studies, together
with manufacturing information, analytical data, any 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 investigational product to humans and must become effective before
human clinical trials may begin. Some long-term pre-clinical testing, such as animal tests of reproductive adverse events and
carcinogenicity, may continue after the IND is submitted. An IND automatically becomes effective 30 days after receipt by the
FDA, unless before that time, the FDA raises concerns or questions related to one or more proposed clinical trials and places
the trial on clinical hold. In such a case, the 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 to commence.
Clinical
trials
The
clinical stage of development involves the administration of the investigational product to healthy volunteers or patients under
the supervision of qualified 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 IRB for each institution at which the clinical trial will
be 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 also 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 ongoing clinical trials and completed clinical trial results to public registries. Information about most clinical
trials must be submitted within specific timeframes for publication on the www.clinicaltrials.gov website. Information related
to the product, patient population, phase of investigation, study sites and investigators and other aspects of the clinical 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.
Human
clinical trials are typically conducted in three sequential phases, which may overlap or be combined:
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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.
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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.
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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.
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Post-approval
trials, sometimes referred to as Phase 4 clinical trials, may be conducted after initial marketing approval. These trials are
used 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 may mandate the performance of Phase 4 clinical trials as a condition of approval
of a biologics license application, or BLA.
Progress
reports detailing the results of the clinical trials must be submitted at least annually to the FDA and more frequently if serious
adverse events occur. The FDA or the sponsor may suspend or terminate a clinical trial at any time, or the FDA may impose other
sanctions on various grounds, including a finding that the research 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.
In
addition, under the Pediatric Research Equity Act of 2003, as amended and reauthorized, certain NDAs or supplements to an NDA
must contain data that are adequate to assess the safety and effectiveness 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 conditions 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.
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, based on the request of a sponsor, that a product is intended
to treat a serious or life-threatening disease or condition and 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 determines that the schedule
is acceptable, and 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
addition, 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.
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 defined 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 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 may explore some of these opportunities for our product candidates as appropriate.
Post-approval
requirements
Drugs
manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing 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 product. 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 product’s safety and effectiveness
after commercialization.
In
addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to
register their establishments with the FDA and state agencies, and are subject to periodic unannounced inspections by the FDA
and these state agencies for compliance with cGMP requirements. Changes to the manufacturing process are strictly regulated and
often require prior FDA approval before being implemented. FDA regulations also require investigation and correction 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 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 withdraw 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 previously 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 restrictions under a REMS program. Other potential
consequences include, among other things:
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on the marketing or manufacturing of the product;
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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;
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fines,
warning letters or holds on post-approval clinical trials;
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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
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injunctions
or the imposition of civil or criminal penalties.
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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 to have improperly
promoted off-label uses may be subject to 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, including
Centers for Medicare and Medicaid Services (CMS), other divisions of the Department of Health and Human 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 state 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:
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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;
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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;
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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;
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federal
consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially
harm consumers;
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the
FDCA, which prohibits, among other things, the adulteration or misbranding of drugs, biologics and medical devices;
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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
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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.
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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 state consumer protection and unfair competition laws.
The
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 any 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, 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, seizure of products, total or partial suspension
of production, denial or withdrawal of product approvals or refusal to allow a firm to enter into supply contracts, including
government contracts.
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 patent 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 a 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 the 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.
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:
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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.
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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).
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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 products 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.
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.
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 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, Business Combinations
– Reverse Acquisitions, where Promet was considered the accounting acquirer. Accordingly, Promet’s historical
results of operations replaced our historical results of operations for all periods prior to the transaction. Prior to the acquisition,
we had nominal net liabilities and operations. It was considered a non-operating public shell corporation.
Business
Segments
We
manage our business as one segment which includes all activities related to the discovery, development, and commercialization
of drug products for the treatment of serious medical conditions. For financial information related to our one segment, see our
Consolidated Financial Statements and related notes.
Employees
As
of June 30, 2020, we had 11 employees (full and part time). None of our employees is subject to a collective bargaining agreement
or represented by a trade or labor union and we believe our relationships with our employees are good.
Facilities
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 adequate for our current needs and that suitable additional substitute space would be available if needed.
Legal
Proceedings
From
time to time, we may become involved in litigation 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 can have an adverse impact
on us because of defense and settlement costs, diversion of management resources and other factors.
MANAGEMENT
Executive
Officers and Directors
The
following table provides information regarding our executive officers and directors as of June 30, 2020:
Name
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Age
|
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Position
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Executive Officers:
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David Young, Pharm.D, Ph.D.
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67
|
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Chairman of the Board of Directors and Chief
Executive Officer
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Patrick Lin
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54
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Chief Business and Strategy Officer and Director
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Sian Bigora, Pharm.D.
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59
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Chief Development Officer
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James Stanker
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62
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Chief Financial Officer
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Wendy Guy
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55
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Chief Administrative Officer
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Non-Employee Directors:
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Justin Yorke
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53
|
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Director
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Virgil Thompson
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80
|
|
Director
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Geraldine Pannu
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51
|
|
Director
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Executive
Officers
David
Young, Pharm.D., Ph.D. - Dr. Young has served as our Chairman and Chief Executive Officer since October 4, 2017 and
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. He served as our interim CFO from October 4, 2017 to September
1, 2018. From 2006 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 modernized 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. 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 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-funded Clinical Pharmacology contract, was responsible for the analytical and pharmacokinetic
evaluation of all oral products manufactured in the UMAB-FDA contract which led to the Scale-up and Post-Approval Changes (SUPAC)
and in-vitro in-vivo correlation (IVIVC) FDA Guidance, taught FDA reviewers as part of the UMAB-FDA contract for five years,
has served on National 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.
Patrick
Lin - Mr. Lin has served as our Chief Business & Strategy Officer since October 4, 2017 and 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 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 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 served on the Board of Directors
and as 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 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, 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.
Non-Employee
Directors
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 in
August 2017. For more than the past 10 years, 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 since October 2017 and previously served on the Board of Directors
at Promet Therapeutics, LLC. He served as a Director of Mallinckrodt Pharmaceuticals (formerly Questcor Pharmaceuticals), and
Director of GenZ Corporation, both companies he 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. Mr. Thompson also served as Chairman
of the Board of Aradigm Corporation, as well as of Questcor Pharmaceuticals, Inc. until Questcor was acquired by Mallinckrodt
in August 2014. Mr. Thompson served as the Chief Executive Officer and as a Director of Angstrom Pharmaceuticals, Inc. from 2002
until 2007. From 2000 until 2002, Mr. Thompson was 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 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.
Geraldine
Liu Pannu - Ms. Pannu has served as a Director since February 13, 2020. Ms. Pannu has over 25 years of experience in investment
and financial 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 land acquisition, entitlement and vertical development of multifamily,
student and senior housing in the San 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 management 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 Business Administration degree from the
Chinese University of Hong Kong and an 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 because of her extensive investment experience.
Board
Composition
We
currently 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 no formal policy regarding Board diversity. Our Board of Directors’ priority in selecting
Board members is identification of persons who will further the interests of our stockholders through his or her established
record of professional accomplishment, the ability to contribute positively to the collaborative culture among Board members,
knowledge of our business, understanding of 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.
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 each of Justin Yorke,
Virgil Thompson and Geraldine Pannu is an “independent director” as defined under Rule 5605(a)(2) of the Nasdaq 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 SEC and the Nasdaq Marketplace Rules, as applicable. In making such determinations, our Board of Directors
considered the relationships that each such non-employee director has with our company and all other facts and circumstances our
Board of Directors deemed relevant in determining independence, including the beneficial ownership of our capital
stock by each non-employee director. There are no family relationships among any of our directors or executive officers.
Committees
of the Board of Directors
Each
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 direction
of our Board of Directors when necessary to address specific issues.
Audit
Committee
Our
audit committee is comprised of Justin Yorke, Virgil Thompson and Geraldine Pannu with Justin Yorke serving as chairman of the
committee. Our Board of Directors has determined that each member of the audit 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 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 audit
committee’s responsibilities include:
|
●
|
selecting
a firm to serve as the independent registered public accounting firm to audit our financial statements;
|
|
|
|
|
●
|
ensuring
the independence of the independent registered public accounting firm;
|
|
|
|
|
●
|
discussing
the scope and results of the audit with the independent registered public accounting firm, and reviewing, with management
and that firm, our interim and year-end operating results;
|
|
|
|
|
●
|
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
|
|
|
|
|
●
|
approving
or, as permitted, pre-approving all audit and non-audit services to be performed by the independent registered public accounting
firm.
|
Compensation
Committee
Our
compensation committee is comprised of Justin Yorke, Virgil Thompson and Geraldine 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 Exchange
Act, and an outside director, as defined pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”).
Our Board of Directors has determined that each member of the compensation committee is “independent”
as defined in the 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:
|
●
|
reviewing and approving,
or recommending that our Board of Directors approve, the compensation of our executive officers;
|
|
|
|
|
●
|
reviewing and recommending
to our Board of Directors the compensation of our directors;
|
|
|
|
|
●
|
reviewing and recommending
to our Board of Directors the terms of any compensatory agreements with our executive officers;
|
|
|
|
|
●
|
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 overall
compensation policies and practices.
|
Nominating
and Governance Committee
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 has determined that each member of the nominating and corporate
governance committee is “independent” as defined in the applicable 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 Directors is currently chaired by David Young, Pharm.D, Ph.D., who also serves as our Chief Executive Officer.
Our Board of Directors does not have a policy regarding the separation of the roles of Chief Executive Officer and
Chairman of the Board of Directors, as our Board of Directors believes it is in our best interest
to make that determination based on our position and direction 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.
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 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
None
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 code, or any waivers of its requirements, on our website or in a Current Report on
Form 8-K.
EXECUTIVE
AND DIRECTOR COMPENSATION
Summary
Compensation Table
The
following table and footnotes show information regarding the total compensation paid or accrued during the years ended December
31, 2019 and 2018 to our Chairman and Chief Executive Officer and executive officers (our “named executive officers”).
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)
|
Mr. Stanker started
with the Company September 1, 2018.
|
|
|
(2)
|
Reflects the aggregate
grant date fair value of equity awards to each named executive officer, calculated in accordance with FASB ASC Topic 718.
Refer to “Note 10 – Stock-Based Compensation” in our December 31, 2019 audited consolidated financial statements
included elsewhere in this prospectus for a discussion of the assumptions used in calculating the award amount.
|
|
|
(3)
|
Reflects consulting
fees paid prior to Mr. Stanker joining the Company as CFO.
|
Employment
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 base 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.
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 one 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.
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 such 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.
|
DIRECTOR
COMPENSATION
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 a number of shares of common stock equal to $20,000 total value. All such awards
are made 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 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 $16.80. Of these options, each received options for the purchase
of 1,085 shares of common stock that vest one-third on the first anniversary date of the grant, with the remaining options vesting
ratably over the subsequent two years. Stock options for the purchase of 983 shares vest upon meeting the following performance
criteria: (i) 197 shares vest when we in-license one new or additional drug; (ii) 197 shares vest when our current Phase 2A clinical
trial for PCS499 is complete; and (iii) 589 shares vest when we up-list from the OTCQB to either the Nasdaq or NYSE markets.
Our
directors are reimbursed for any reasonable out-of-pocket expenses incurred in connection with service as a director.
Name
|
|
Fees
Earned or
Paid
in Cash ($)
|
|
|
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.
|
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 the entity’s total annual revenues.
Criteria
for committee approval or ratification of a related party transaction, in addition to factors that the 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, we were not a party to any transaction (in which the amount involved
exceeded the lesser of $120,000 or 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.
CorLyst,
LLC and DKBK Enterprises, LLC
CorLyst
was a related party to 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 company. Promet has since distributed the shares to its stockholders
and CorLyst is now considered a related party. We share certain administrative expenses with CorLyst (salaries,
healthcare and office space). David Young, our CEO and Chairman of our Board of Directors, is also the CEO 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 195,562 shares of common stock, based on interest accrued
through June 30, 2020 and a conversion price of $3.60 per share, which, pursuant to the LOC Agreement, is a 10% discount
on the public offering price of $4.00 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 agreed to purchase an aggregate of 37,250
shares in this offering on the same terms as those offered to the public. 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.
PRINCIPAL
STOCKHOLDERS
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 and, with respect to shares beneficially owned after this offering, gives effect to the Pro Forma Adjustments.
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 agreed to purchase an aggregate of 37,250 shares in this offering on the
same terms as those offered to the public. 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 purchase of 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)(14)
|
|
|
|
Shares
|
|
|
Percent
|
|
|
Shares
|
|
|
Percent
|
|
Name
and address of beneficial owner (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officers
and Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Young (2), (9)
|
|
|
1,348,557
|
|
|
|
24.2
|
%
|
|
|
1,692,581
|
|
|
|
12.1
|
%
|
Sian
Bigora (3)
|
|
|
500,677
|
|
|
|
9.1
|
%
|
|
|
532,852
|
|
|
|
3.9
|
%
|
Patrick
Lin (7)
|
|
|
345,448
|
|
|
|
6.3
|
%
|
|
|
383,381
|
|
|
|
2.8
|
%
|
Wendy
Guy (4)
|
|
|
318,402
|
|
|
|
5.8
|
%
|
|
|
352,010
|
|
|
|
2.6
|
%
|
Virgil
Thompson (8)
|
|
|
88,108
|
|
|
|
1.6
|
%
|
|
|
91,965
|
|
|
|
*
|
|
Justin
Yorke (5)
|
|
|
446,946
|
|
|
|
7.9
|
%
|
|
|
640,103
|
|
|
|
4.6
|
%
|
Geraldine
Pannu
|
|
|
-
|
|
|
|
*
|
|
|
|
3,268
|
|
|
|
*
|
|
James
Stanker (12)
|
|
|
52,282
|
|
|
|
*
|
|
|
|
78,728
|
|
|
|
*
|
|
Total
for all Officers and Directors
|
|
|
3,100,420
|
|
|
|
55.7
|
%
|
|
|
3,774,888
|
|
|
|
26.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More
than 5% Stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CorLyst,
LLC (6), (9), (11)
|
|
|
1,095,649
|
|
|
|
19.8
|
%
|
|
|
1,144,171
|
|
|
|
8.4
|
%
|
Young-Plaisance
Revoc. Trust (9), (10)
|
|
|
482,030
|
|
|
|
8.7
|
%
|
|
|
579,248
|
|
|
|
4.2
|
%
|
CoNCERT
Pharmaceuticals, Inc.
|
|
|
298,615
|
|
|
|
5.4
|
%
|
|
|
298,615
|
|
|
|
2.2
|
%
|
*
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.
|
(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) 195,562 shares of common stock beneficially owned by David Young as a result
of the conversion of the LOC Agreement with DKBK; (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 Yorke and Geraldine Pannu on August 5, 2020 pursuant to our 2019 Omnibus
Incentive Plan, which shares vest upon the completion of this offering; and (iii) the vesting of 5,198 shares of common
stock issuable pursuant to options held directly by each of David Young, Sian Bigora, Patrick Lin, Wendy Guy and James Stanker;
and 589 shares of common stock issuable pursuant to options held directly by each of Virgil Thompson and Justin Yorke.
|
(14)
|
335,694
(of the total 1,142,916) shares of common stock to be issued to those who purchased common
stock units in our 2018 Private Placement Transactions, based on the public offering
price of $4.00 per share, as a result of full ratchet anti-dilution provisions, allocated
in the above table as follows:
|
|
●
|
CorLyst: 48,522 (further allocated as follows: David Young related
entities – 14,324, Sian Bigora – 5,729; Wendy Guy – 7,162; the Young-Plaisance
Revoc. Trust – 18,921; and other unrelated stockholders – 2,386 (included under
David Young as the managing partner));
|
|
●
|
David Young: 8,088;
|
|
●
|
Young-Plaisance Trust: 78,297;
|
|
●
|
Patrick Lin: 11,487; and
|
|
●
|
Funds managed by Justin Yorke: 189,300.
|
DESCRIPTION
OF OUR SECURITIES
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 30,000,000 shares of $0.0001 par value common stock and 1,000,000 shares of $0.0001
par value preferred stock. As of August 31, 2020, there were 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
Board of Directors 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 rights.
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 1,000,000 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 series. 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 outstanding warrants to purchase shares of our common stock to various persons and entities,
under which we could be obligated to issue up to 533,959 shares of common stock, including:
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(a)
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275,828 shares of
common stock issuable upon exercise of outstanding warrants allowing the holders to purchase shares of common stock at an
exercise price of $19.07 per share through June 29, 2021; of which warrants for 18,819 shares of common stock contain cashless
exercise provisions;
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(b)
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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
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(c)
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56,350 shares
of common stock issuable upon exercise of outstanding warrants allowing the holders to purchase shares of common stock at
an exercise price of $19.04 per share through December 19, 2023.
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Debt
8%
Senior Convertible Notes
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 result, 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 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 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 238,740
shares of common stock, based on interest accrued through June 30, 2020 and a conversion price of $3.60 per
share, which, pursuant to the 2019 Senior Note Agreement, is a 10% discount on the public offering price of $4.00
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 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. 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.
We
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 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 28,971 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 full 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 fact that we have a retained deficit and are receiving no additional consideration for these shares.
Related
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 195,562 shares of common stock based on interest accrued through June 30, 2020
and a conversion price of $3.60 per share, which represents a 10% discount on the public offering price
of $4.00 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 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
initial 250,000 shares of common stock 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.
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:
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for
any breach of the director’s duty of loyalty to us or our stockholders;
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for
acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law;
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for
payments of unlawful dividends or unlawful stock purchases or redemptions under Section 174 of the DGCL; or
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for
any transaction from which the director derived an improper personal benefit.
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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.
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 Board of Directors 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:
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prior to the time
that the stockholder became an interested stockholder, the Board of Directors of the corporation approved either
the business combination or the transaction resulting in the stockholder becoming an interested stockholder;
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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
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at or subsequent
to the time that the stockholder became an interested stockholder, the business combination is approved by the Board
and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock that the interested stockholder does not own.
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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 Board of Directors 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 Board of Directors 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 FUTURE SALE
Prior
to this offering, there has been a limited public market for our common stock. Future sales of substantial amounts of common stock
in the public market, or the perception that such sales may occur, could adversely affect the market price 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 the 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 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
Rule
144, as currently in effect, generally provides that, as we have been subject to the public company reporting requirements of
Section 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 capital stock 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 sale or notice conditions of Rule 144. As 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 time of the sale of such shares.
Rule
144 also provides that a stockholder who is deemed to have been one of our affiliates at any time during the preceding 90 days
and who has beneficially owned our securities that are proposed to be sold for at least six months is entitled to sell such securities
in reliance upon Rule 144 within any three month period beginning 90 days after the date of this prospectus a number of shares
that does not exceed the greater of the following:
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1%
of the number of shares of our capital stock then outstanding, which will equal 136,040 shares immediately after the
completion of this offering; or
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the
average weekly trading volume of our Common Stock during the four calendar weeks preceding the filing of a notice on Form
144 with respect to such sale.
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Sales
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:
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the
issuer of the securities that was formerly a shell company has ceased to be a shell company;
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the
issuer of the securities is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act;
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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
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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.
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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
initial 250,000 shares of common stock 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.
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:
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insurance
companies, banks, and other financial institutions;
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tax-exempt
organizations (including private foundations) and tax-qualified retirement plans;
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“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;
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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;
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non-U.S.
governments and international organizations;
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broker-dealers
and traders in securities;
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U.S.
expatriates and certain former citizens or long-term residents of the United States;
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persons
that own, or are deemed to own, more than five percent of our common stock;
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“controlled
foreign corporations,” “passive foreign investment companies,” and corporations that accumulate earnings
to avoid U.S. federal income tax;
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persons
that hold our common stock as part of a “straddle,” “hedge,” “conversion transaction,”
“synthetic security,” or integrated investment or other risk reduction strategy;
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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
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partnerships
and other pass-through entities, and investors in such pass-through entities (regardless of their places of organization or
formation).
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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.
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.
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.
UNDERWRITING
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
|
|
2,400,000
|
Benchmark Company, LLC
|
|
1,680,000
|
National Securities Corporation
|
|
720,000
|
Total
|
|
4,800,000
|
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 agreed to purchase an aggregate of 37,250
shares in this offering on the same terms as those offered to the public. 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, or to contribute
to payments the underwriters may be required to make in respect of those liabilities.
The
underwriters are offering the shares subject to their acceptance of the common stock from us and subject to prior sale. The underwriters
reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.
Commissions
and Discounts; Expenses
The
underwriters have advised us that they propose initially to offer the shares to the public at the public offering price set
forth on the cover of this prospectus and to dealers at that price less a concession of $0.192 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
|
|
$
|
4.00
|
|
|
$
|
19,200,000
|
|
Underwriting
discounts and commissions to be paid by us
|
|
$
|
0.32
|
|
|
$
|
1,536,000
|
|
Proceeds,
before expenses, to us
|
|
$
|
3.68
|
|
|
$
|
17,664,000
|
|
We
estimate expenses payable by us in connection with this offering, other than the underwriting discounts and commissions referred
to above, will be approximately $618,000, 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.
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 account 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 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
Our common
stock has been approved for listing on Nasdaq under the symbol “PCSA” contingent on the completion of this
offering and it will commence trading on Nasdaq on October 2, 2020.
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 price of the common stock, such as
bids or purchases to peg, fix or maintain that price.
In connection with the offering, the underwriters may purchase and
sell our common stock in the open 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 a greater number of shares
than they are required to purchase in the offering. 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 be 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 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.
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
Restrictions
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 time 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 any underwriter to publish a prospectus pursuant to Article 3 of the Prospectus
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.
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 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 Financial Services and Markets Act 2000.
Any
person in the United Kingdom that is not a relevant person should not act or rely on the information included in this document
or use it as basis for taking any action. In the United Kingdom, any investment or investment activity that this document relates
to may be made or taken exclusively by relevant persons.
Notice
to Prospective Investors in Canada
The
securities may be sold in Canada only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors,
as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (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
requirements of applicable securities laws.
Securities
legislation in certain 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 remedies for rescission or damages
are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province
or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’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 underwriter is not required to comply with
the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.
Transfer
Agent and Registrar
The
transfer agent and registrar for our common stock is Equiniti Trust Company.
LEGAL
MATTERS
The
validity of the shares of common stock offered by this prospectus will be passed upon for us by Foley & Lardner LLP,
Jacksonville, Florida. The underwriters have been represented in connection with this offering by Faegre Drinker
Biddle & Reath LLP, Minneapolis, Minnesota.
EXPERTS
The
consolidated financial statements of Processa Pharmaceuticals, Inc. as of December 31, 2019 and 2018, and for the years then ended
have been included herein and in the registration statement in reliance on the report of BD & Company, an independent registered
public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.
WHERE
YOU CAN FIND MORE 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 annual, quarterly and current reports, proxy statements and other information with the SEC under the Exchange Act. You can
read our SEC filings, including the registration statement, at the SEC’s website at www.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 prospectus. We have included our website address in this prospectus
solely as an inactive textual reference.
INDEX
TO FINANCIAL STATEMENTS
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of
Processa
Pharmaceuticals, Inc.
Opinion
on the Consolidated Financial Statements
We
have audited the accompanying consolidated balance sheets of Processa Pharmaceuticals, Inc. (the “Company”) as of
December 31, 2019 and 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 “consolidated financial statements”).
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2019 and 2018, and the results of its operations and its 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 Note 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.
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
March
6, 2020
We
have served as the Company’s auditor since 2017.
Processa
Pharmaceuticals, Inc.
Consolidated
Balance Sheets
|
|
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, 2019 and 2018
|
|
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
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 Cash Flows
Years
Ended December 31, 2019 and 2018
|
|
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.
Processa
Pharmaceuticals, Inc.
Consolidated
Statements of Cash Flows (continued)
Years
Ended December 31, 2019 and 2018
|
|
|
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.
Notes
to Consolidated Financial Statements
Note
1 – Organization and Description of the Business
Processa
Pharmaceuticals, Inc. (“Processa” or “the Company”) is 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 multiple 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
lead 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 important in the treatment of these 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 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. 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 United States and more 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 its
metabolites affect a number of 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 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. 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 meeting scheduled with the FDA in March 2020 to further discuss the development of PCS499, including a future clinical
trial.
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 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.
Note
2 – Going Concern and Management’s Plans
Our
consolidated financial statements are 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 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 raised substantial doubt about our ability to continue as a going
concern as of the date of the filing of this Annual Report on Form 10-K for the year ended December 31, 2019.
We
have relied on private placements with a small group of accredited investors to finance our business and operations. We have not
had any revenue since our inception, and we do not currently have any revenue under contract or any immediate sales prospects.
As of December 31, 2019, we had an accumulated deficit of approximately $11.0 million. For the year ended December 31, 2019, we
incurred a net loss from continuing operations of approximately $3.4 million and used approximately $2.8 million in net cash from
operating 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.
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 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 capital. 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 costs we incur during our trial that we do 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 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 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
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 as of the date 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 we be unable to continue as a going concern based on the outcome
of these uncertainties described above.
Note
3 – Basis of Presentation and Summary of Significant Accounting Policies
Basis
of Presentation
The
accompanying 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 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.
Cash
and Cash Equivalents
Cash
and cash equivalents include cash on hand and money market funds. We consider all highly liquid investments with a maturity at
the date of purchase of three months or less to be cash equivalents.
Property
and Equipment
Property
is stated at cost, less accumulated depreciation. Costs of renewals and improvements that extend the useful lives of the assets
are capitalized. Expenditures for maintenance and routine repairs are charged to expense as incurred. Depreciation is recognized
on a straight-line basis over the estimated useful lives of the assets, which generally range from 3 to 5 years. We amortize leasehold
improvements over the shorter of the estimated useful life of the asset or the term of the related lease. Upon retirement or disposition
of assets, the costs and related accumulated depreciation are removed from the accounts with the resulting net gain or loss, if
any, reflected in the consolidated statement of operations.
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.
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 years ended December 31, 2019 and 2018.
Fair
Value Measurements and Disclosure
We
apply 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.
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. Our 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.
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 consolidated
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 period. 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 all periods presented, basic and diluted net 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 stock 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.
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 years then ended.
Segments
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
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 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 been
established after which it is capitalized and depreciated. 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 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. The net deferred tax assets of Heatwurx were
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 740. 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 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 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.
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”). 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.
Recently
adopted accounting pronouncements
In
July 2017, the FASB issued Accounting 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 2017-11 is effective for fiscal year beginning after December 15, 2018,
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 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 adoption of the new guidance on leasing resulted in the recognition
of a right-of-use asset of $293,198 and lease obligations of $303,161. The difference between the right-of-use asset and the lease
obligations is due to deferred rent liability related to our facility operating lease at December 31, 2018.
The
adoption of the new guidance did not have a material impact on the consolidated statement of operations. For further details regarding
the adoption of this standard, see Note 12, “Operating Leases.”
Note
4 – Acquisition
On
October 4, 2017, in exchange for 90 percent or 4,535,121 shares of our common stock, we acquired the net 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 and 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 their shares. Together, Promet’s
pre-transaction owners and CoNCERT held a 90% economic and voting interest in the combined 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 retrospective adjustment to Promet’s legal capital
to reflect our pre-merger capital structure) and operations of Promet prior to October 4, 2017, and of the combined company from
October 4, 2017 forward. The assets and liabilities 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 difference allocated to 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.
Earnings
per share (“EPS”) is calculated using our equity structure, including the equity interests issued to Promet in the
asset 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 the asset purchase transaction. Subsequent to the reverse acquisition, EPS is based
on the weighted actual number of common stock outstanding during that period (see Note 11).
Note
5 - Intangible Assets
Intangible
assets at December 31, 2019 consisted of the capitalized costs of $20,500 for a purchased software license and $11,038,929 associated
with our 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 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 740-10-25-51 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.
Acquisition
of the CoNCERT 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, 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 in
satisfaction of the obligation due for the exclusive license for PCS499 acquired by us. There was no change in the total shares
issued and 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 us for a period equivalent to the royalty term (as defined in the CoNCERT Agreement)
until the earliest of (a) our raising $8 million of gross proceeds and (b) CoNCERT being able to sell its shares of our common
stock without restrictions pursuant to the terms of the amended Agreement. All other terms of the CONCERT Agreement remained unchanged.
We
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 our common stock 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 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.
Our
intangible assets consist of the following at December 31, 2019:
|
|
License
Rights
|
|
|
Software
|
|
|
December
31,
|
|
|
|
to
PCS499
|
|
|
License
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
Gross
intangible assets
|
|
$
|
11,038,929
|
|
|
$
|
20,500
|
|
|
$
|
11,059,429
|
|
Less:
accumulated amortization
|
|
|
(1,405,301
|
)
|
|
|
(11,674
|
)
|
|
|
(1,416,975
|
)
|
Total
intangible assets, net
|
|
$
|
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 $795,328 and $621,647 for the years ended December 31, 2019 and 2018 and is included within research and development
expense in the accompanying consolidated statements of operations. As of December 31, 2019, estimated amortization expense for
the next year will be approximately $795,000 and approximately $788,000 per year for annual periods thereafter.
Note
6 – License 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 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 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
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 Akashi 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 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”)
from 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.
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 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 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.
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 (“2017 Senior Notes”) in a bridge 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 automatic 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 the debt holders warrants to purchase a total of 172,327 shares of common stock, exercisable
for three years at an exercise price of $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 SEC.
2017
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 a payment to the placement agent, which was
reported as a reduction of the carrying amount of the 2017 Senior Notes on the face of the consolidated balance sheets. The debt
issuance costs were 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.
Note
8 – 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
May 25, 2018, we 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 pharmacodynamics of PCS499 in patients with Necrosis Lipoidica in exchange for 113,280 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 Pledge 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 a purchase price less than $15.89 per share of common stock, the above purchase prices 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).
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 common stock we sold in 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 full 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 fact that we have a retained
deficit and are receiving no additional consideration for these shares.
Note
9 – 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. We recorded a valuation allowance during the years ended December 31, 2019 and 2018
equal to the full recorded amount of our net deferred tax assets related to deferred start-up costs, federal orphan drug tax credit
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 Processa received CoNCERT’s license and “Know-How”
in exchange for Processa stock that had been issued in an Internal 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, Processa recorded a deferred tax liability of $3,037,147 for the acquired temporary difference between intangible assets
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.
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 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 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
a result of offsetting our deferred tax liability by the deferred tax assets resulting from our net operating losses and the income
tax effect of the intangible asset amortization for financial statement purposes.
Our
provision (benefit) for income taxes for the years ended December 31, 2019 and 2018 was 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 statutory 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 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 in any one year, with respect to any
excess continuing to be carried forward indefinitely. 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.
We
applied the guidance in SAB 118 when accounting for the enactment-date effects of the TCJA in 2018 and throughout 2019. At December
31, 2019 and 2018, we had available federal net operating loss carryforwards 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 federal 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 assets 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 reduction for amounts effectively eliminated under Section 382.
We
do not recognize other deferred income tax assets at this time because the realization of the assets is not more-likely-than-not
that they will be realized. As of December 31, 2019 and 2018, we had deferred start-up expenditures and other deductible expenses
for both federal and state income tax purposes of $6,977,317 and $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 been recorded in our consolidated financial statements.
The
significant components of our deferred tax assets 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 uncertainty regarding future profitability and recognition of taxable income to utilize
the amortization of deferred start-up expenditures, federal orphan drug tax credits and the tax 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 tax 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 examinations
underway for these jurisdictions. However, tax years from and including 2016 remain open for examination by federal and state
income tax authorities.
Note
10 - 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
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 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 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 these shares in our weighted
number of shares of common stock outstanding. Triggering the full ratchet anti-dilution provision increased our basic and
diluted net loss per share by $0.09 per share, from $(0.61) to $(0.70).
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
12 - 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
stockholder, CorLyst, LLC, 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 in our consolidated statements
of operations. Reimbursable expenses from CorLyst totaled $103,047 and $107,402 for rent and other costs during the years ended
December 31, 2019 and 2018, respectively. Amounts due from related parties at December 31, 2019 and 2018 were $0 and $21,583,
respectively.
As
described further in Note 7, we also entered into two separate Line of Credit Agreements with CorLyst, LLC and DKBK Enterprises,
LLC, both related parties, on September 20, 2019.
Note
14 – Commitments and Contingencies
Purchase
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 a purchase obligation of approximately $0 and $35,000 at December 31, 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
Business
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
preparing 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.
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 Internal 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 a 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 generate 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.
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 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 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 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 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 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 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 sold in our 2018 Private Placement Transactions.
As a result, those stockholders were entitled to 28,971 shares of common stock in the fourth 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 anticipated future needs, and the reduction will reduce our future Delaware franchise tax.
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 June 30, 2020 or December 31, 2019.
Note
9 – Net 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 24, 2020 we executed a condition precedent License Agreement (“Aposense Agreement”) with Aposense under which
they will provide 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 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 number of shares of common stock determined
by dividing $2.5 million by the price per share paid by such investors in equity financing. 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 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 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
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) submitting an IND for a drug indication
within 30 months following the satisfaction of the license conditions above; (ii) dosing of a 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 cure
such breach (which is shortened to 15 days for a payment breach).
Note
12 – Related Party Transactions
CorLyst
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 $24,713 and $0, respectively.
At
June 30, 2020, we also had approximately $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 Contingencies
Purchase
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.
Processa
Pharmaceuticals, Inc.
4,800,000
Shares of Common Stock
PROSPECTUS
Joint
Bookrunning Managers
Craig-Hallum
Capital Group The Benchmark Company
Co-Manager
National
Securities Corporation
October
1, 2020
Grafico Azioni Processa Pharmaceuticals (NASDAQ:PCSA)
Storico
Da Giu 2024 a Lug 2024
Grafico Azioni Processa Pharmaceuticals (NASDAQ:PCSA)
Storico
Da Lug 2023 a Lug 2024