S-1 1 forms-1.htm

 

As filed with the Securities and Exchange Commission on December 13, 2019

 

Registration No. 333-               

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Processa Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware   2834   45-1539785

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

7380 Coca Cola Drive, Suite 106

Hanover, Maryland 21076

(443) 776-3133

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

David Young, Pharm.D, Ph.D.

Chairman and Chief Executive Officer

Processa Pharmaceuticals, Inc.

7380 Coca Cola Drive, Suite 106

Hanover, Maryland 21076

(443) 776-3133

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

 

Michael B. Kirwan

John J. Wolfel, Jr.

Foley & Lardner LLP

One Independent Drive, Suite 1300

Jacksonville, Florida 32202

(904) 359-2000

 

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date of this registration statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. [  ]

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer [  ]   Accelerated filer [  ]  
             
  Non-accelerated filer [  ]   Smaller reporting company [X]  
             
        Emerging growth company [X]  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act. [X]

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to be Registered 

Proposed Maximum

Aggregate
Offering Price(2)

  

Amount of

Registration Fee

 
Common Stock, $0.0001 par value per share(1)  $15,000,000   $1,947 
Underwriters’ Warrants(3)        
Shares of Common Stock underlying Underwriters’ Warrants  $750,000   $97.35 
Total:  $15,750,000   $2,044.35 

 

(1) Includes shares that the underwriters have the option to purchase to cover over-allotments, if any.
   
(2) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. Pursuant to Rule 416 of the Securities Act of 1933, as amended, such number of shares of common stock registered hereby also shall include an indeterminate number of shares of common stock that may be issued in connection with stock splits, stock dividends, recapitalizations or similar events.
   
(3) Registers warrants to be granted to the underwriters, or their designees, for an amount equal to 4.0% of the number of the shares of common stock sold to the public, and assuming a per share exercise price equal to 125% of the price per share in this offering. See “Underwriting” on page 89 for information on underwriting arrangements. No registration fee required pursuant to Rule 457(g) under the Securities Act of 1933, as amended.

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

   
 

 

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS, SUBJECT TO COMPLETION, DATED DECEMBER 13, 2019

 

 

Shares of Common Stock

 

This is a firm commitment public offering of ● shares of our common stock. Prior to this offering, there has been a limited public market for our common stock. We currently expect the public offering price to be between $● and $● per share.

 

Our common stock is currently quoted on the OTCQB Marketplace under the symbol “PCSA.” On December , 2019, the last reported sale price for our common stock as reported on the OTCQB Marketplace was $ per share, after giving effect to the one for seven reverse stock split completed on December ●, 2019. We intend to apply to list our common stock on the Nasdaq Capital Market under the symbol “PCSA.” No assurance can be given that our application will be approved. If our application is not approved or we otherwise determine that we will not be able to secure the listing of our common stock on the Nasdaq, we will not complete this offering.

 

We are an “emerging growth company” as that term is defined in the Jumpstart Our Business Startups Act of 2012, and as such, have elected to take advantage of certain reduced public company reporting requirements.

 

Investing in our common stock is highly speculative and involves a high degree of risk. See “Risk Factors” beginning on page 8.

 

   Per Share   Total 
Public offering price  $          $      
Underwriting discounts and commissions(1)  $    $  
Proceeds, before expenses, to us  $    $  

 

  (1) Does not include warrants that are issuable by us to the underwriters for 4% of the shares of common stock sold in the offering at a price per share equal to 125% of the public offering price or certain out-of-pocket expenses of the underwriters that are reimbursable by us. See “Underwriting” beginning on page 89 of this prospectus for a description of the compensation payable to the underwriters.

 

We have granted the underwriters an option to purchase up to additional shares of our common stock. The underwriters can exercise this option at any time within ● days after the date of this prospectus.

 

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 ●, 2019.

 

Prospectus dated ●, 2019

 

 ii 
 

 

TABLE OF CONTENTS

 

  Page
Prospectus Summary 1
Risk Factors 8
Special Note Regarding Forward-Looking Statements 32
Use of Proceeds 34
Market for Common Equity and Dividend Policy 35
Capitalization 36
Dilution 37
Management’s Discussion and Analysis of Financial Condition and Results of Operations 39
Business 55
Management 73
Executive and Director Compensation 79
Principal Stockholders 82
Description of Capital Stock 84
Shares Eligible for Future Sale 87
Underwriting 89
Legal Matters 92
Experts 92
Where You Can Find More Information 92

 

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.

 

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.

 

 iii 
 

 

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.

 

“IPR&D” means In-Process Research and Development.

 

“Moiety” means an active or functional part of a molecule.

 

“NDA” means a New Drug Application submitted to the FDA. Under the Food, Drug, and Cosmetic Act of 1938, an NDA is submitted to the FDA enumerating the uses of the drug and providing evidence of its safety.

 

“NL” means Necrobiosis Lipoidica, a chronic, disfiguring condition.

 

“Osteonecrosis” means the death of bone cells due to decreased blood flow. It can lead to pain and collapse of areas of bone.

 

“RIF” means Radiation-Induced Fibrosis, a side effect of external beam radiation therapy for the treatment of cancer.

 

 iv 
 

 

 

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 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.

 

On December ●, 2019, we completed a one for seven reverse stock split of our common stock. Unless otherwise indicated, all share amounts (and corresponding exercise and conversion prices of derivative securities) in this prospectus have been retroactively adjusted to give effect to this reverse stock split (subject to rounding up fractional shares), except for the financial statements and notes thereto.

 

Description of Business

 

Processa Pharmaceuticals, Inc. 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.

 

Our lead product, PCS-499, is an oral tablet that is an analog (i.e., a compound having a structure similar to that of the 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) of an active metabolite of an already approved drug called pentoxifylline (PTX). PTX (Trental®) was approved by the FDA on August 30, 1984 for the treatment of patients with intermittent claudication on the basis of chronic occlusive arterial disease of the limbs. Trental is a registered trademark of Aventis Pharma Deutschland. In the body PCS-499 is broken down to multiple metabolites with PCS-499 and many of these metabolites being pharmacologically active. In animal and healthy human volunteer studies, higher exposure of certain active metabolites are seen after PCS-499 administration compared to PTX. Despite the greater exposure to these pharmacologically active molecules, PCS-499 appears to be well tolerated, even at higher doses than the standard dosing of PTX. Our lead indication currently under development for PCS-499 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.

 

PCS-499 had previously been investigated for a different indication, diabetic nephropathy in Phase 2 studies before we exercised an option to license PCS-499 from CoNCERT Pharmaceuticals, Inc. in March 2018. Based on the diverse pharmacological activity of PCS-499, we have defined a strategy to develop this product in indications where physicians and patients seek significant medical help. Due to the previous preclinical, Phase 1 and Phase 2 clinical work completed in support of PCS-499, we are able to move the product into Phase 2 studies for the new indications. In October 2017, we met with the FDA at a pre-IND (Investigational New Drug) meeting for the NL indication and defined the steps to move PCS-499 into Phase 2 studies and the path to eventual approval. On June 22, 2018, the FDA granted orphan-drug designation to PCS-499 for the treatment of NL. On September 28, 2018, the FDA cleared our IND for PCS-499 in NL such that we could move forward with the Phase 2a safety-dose tolerability trial. We dosed our first NL patient in this Phase 2a clinical trial on January 29, 2019. On August 23, 2019, our study was fully enrolled as the twelfth patient was dosed. The main objective of the trial is to evaluate the safety and tolerability of PCS-499 in patients with NL. We expect the safety and efficacy data collected to provide information for the design of future clinical trials. Based on toxicology studies and healthy human volunteer studies, Processa and the FDA agreed that a PCS-499 dose of 1.8 grams/day would be the highest dose administered to NL patients in this Phase 2 trial. As anticipated, the PCS-499 dose of 1.8 grams/day, 50% greater than the maximum tolerated dose of pentoxifylline, appears to be well tolerated with no serious adverse events reported. Twelve patients have been dosed with nine patients on treatment for at least four months, seven patients on treatment for at least six months, and two patients on treatment for at least nine months. Currently, nine patients remain in the study. To date, six patients dosed at 1.8 g/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 central nervous system (CNS) adverse events were reported most often.

 

Our findings as of December 4, 2019, based on our early efficacy data, showed that the two patients in the trial with more severe ulcerated NL (both ulcerated patients had ulcers for more than two months prior to dosing) had the ulcers fully closed after two and nine months after starting the trial, respectively. In addition, while in the trial, one of the ulcerated patients developed small ulcers at other sites as a result of contact trauma to the site and these ulcers resolved within one month. Ten patients presented with mild to moderate NL and no ulceration. These patients have shown a slight improvement but not as dramatic as the more serious ulcerated patients. Based on the literature and clinical experience, approximately 30% of the patients with NL are expected to have open ulcers with the ulceration naturally healing in less than 20% of these patients.

 

The degeneration of tissue occurring at the NL lesion site is caused by a number of pathophysiological changes, which has made it extremely difficult to develop effective treatments for this condition. PCS-499 may provide a solution since PCS-499 and its metabolites affect a number of biological pathways, several of which contribute to the pathophysiology associated with NL. We are continually evaluating the data we receive.

 

We plan to request a meeting with the FDA before the end of 2019 to further discuss the development of PCS-499, including the next clinical trial.

 

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 (HT-100) that also promotes healthy muscle fiber regeneration. In previous clinical trials in Duchenne Muscular Dystrophy (DMD), HT-100 showed promising improvement in the muscle strength of non-ambulant pediatric patients. Although the FDA in January 2016 placed a clinical hold on the DMD trial after a serious adverse event in a pediatric patient, the FDA in March 2017 terminated the clinical hold it had placed on the DMD trial and provided specific guidelines as to how clinical trials for HT-100 could resume in DMD. Once we have obtained adequate funding, we plan to develop HT-100 for the cure of rare adult fibrotic related diseases such as focal segmental glomerulosclerosis, idiopathic pulmonary fibrosis or Scleroderma.

 

 

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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 products approved for sale and have incurred, and expect we will continue to incur for the foreseeable future, significant losses and negative cash flows from operations. 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:

 

  We have incurred significant operating losses since our inception, and we expect to incur losses for the foreseeable future and may never achieve or maintain profitability;
     
  We are highly dependent on the success of our lead product candidate PCS-499 and if we are unable to successfully complete our clinical development program for PCS-499, our business will be materially harmed.
     
  There is no guarantee that PCS-499 or any other product candidates, if approved, will generate revenues.
     
  Drug development is a highly uncertain undertaking and involves a substantial degree of risk, and we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of such product candidate.
     
  Even if this offering is successful, we will need substantial additional funding. If we are unable to raise capital when needed, or on acceptable terms, we may be forced to delay, reduce and/or eliminate one or more of our research and development programs or future commercialization efforts.
     
  The price of our stock may be volatile, and you could lose all or part of your investment.
     
  We have limited experience in drug development and may not be able to successfully develop any drugs, which would cause us to cease operations.
     
  We may be unable to obtain or protect intellectual property rights relating to our products, and we may be liable for infringing upon the intellectual property rights of others, which could have a materially adverse effect on our business.
     
  We rely on, and expect to continue to rely on, third parties to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties, comply with regulatory requirements or meet expected deadlines, we may not be able to obtain marketing approval for or commercialize our product candidates, and our business could be substantially harmed.
     
  There can be no assurance that our securities will continue to be listed on Nasdaq following this offering or that there will be liquidity in the trading market for our securities;
     
  We have identified material weaknesses in our internal control over financial reporting and, if our remediation of the material weaknesses is not effective or if we identify additional material weaknesses in the future, we may not be able to accurately or timely report our financial results, or prevent fraud, and investor confidence in our company and the market price of our shares may be adversely affected.

 

 

 - 2 - 
 

 

 

Implications of Being an Emerging Growth Company

 

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of relief from certain reporting requirements and other burdens that are otherwise applicable generally to public companies. These provisions include:

 

  an exception from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”);
     
  reduced disclosure about our executive compensation arrangements in our periodic reports, proxy statements and registration statements; and
     
  exemptions from the requirements of holding non-binding advisory votes on executive compensation or golden parachute arrangements.

 

We may take advantage of these provisions for up to five years or such earlier time that we no longer qualify as an emerging growth company. We would cease to qualify as an emerging growth company if we have more than $1.07 billion in annual revenue, we are deemed to be a “large accelerated filer” under the rules of the SEC, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th or we issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some but not all of these reduced reporting burdens. For example, we may take advantage of the exemption from auditor attestation on the effectiveness of our internal control over financial reporting. To the extent that we take advantage of these reduced reporting burdens, the information that we provide stockholders may be different than you might obtain from other public companies in which you hold equity interests.

 

In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

Corporate Information

 

Our principal executive offices are located at 7380 Coca Cola Drive, Suite 106, Hanover, Maryland 21076. Our telephone number is (443) 776-3133. Our website is www.processapharmaceuticals.com. The information found on, or otherwise accessible through, our website is not incorporated into, and does not form a part of, this prospectus or any other report or document we file with or furnish to the U.S. Securities and Exchange Commission (the “SEC”). We have included our website address in this prospectus solely as an inactive textual reference. Investors should not rely on any such information in deciding whether to purchase our common stock.

 

 

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The Offering

 

Common Stock Offered by Us   ● shares of common stock (or ● shares if the underwriters exercise their option to purchase additional shares in full).
   
Common Stock to be Outstanding After this Offering*   ● shares (or ● shares if the underwriters exercise their option to purchase additional shares in full) and adjusted for the one for seven reverse stock split completed on December ●, 2019.
   
Use of Proceeds   We intend to use the net proceeds of this offering primarily to fund clinical trials of our lead product candidate PCS-499, to fund the development of HT-100 and/or other product candidates, to fund general research and development activities, working capital and other general corporate activities. See the section titled “Use of Proceeds” for more information.
   
Risk Factors   You should read the “Risk Factors” section of this prospectus beginning on page 8 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.
     
Proposed Nasdaq Capital Market Symbol   Our common stock is currently quoted on the OTCQB Marketplace under the symbol “PCSA.” We intend to apply to list our common stock on the Nasdaq Capital Market under the symbol “PCSA.” No assurance can be given that our application will be approved. If our application is not approved or we otherwise determine that we will not be able to secure the listing of our common stock on the Nasdaq, we will not complete this offering.

 

 

 - 4 - 
 

 

 

* The number of shares of our common stock to be outstanding after this offering, adjusted for the one for seven reverse stock split completed on December ●, 2019, is based on 5,486,362 shares of common stock outstanding as of December ●, 2019 and excludes the following:

 

  137,033 shares of our common stock issuable upon the exercise of outstanding stock options issued under the Processa Pharmaceuticals, Inc. 2019 Omnibus Incentive Plan, having a weighted-average exercise price of $17.19 per share, of which 12,950 options have vested, having a weighted-average exercise price of $16.80 per share;
     
  362,967 shares of common stock reserved for issuance pursuant to future awards under the Processa Pharmaceuticals, Inc. 2019 Omnibus Incentive 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 13,872 shares have vested with an exercise price of $19.88 per share;
     
  52,171 shares of common stock issuable upon the conversion of $745,000 principal amount of outstanding 8% Senior Convertible Notes, assuming a conversion price of $14.28 per share;
     
  477,579 shares of common stock issuable upon exercise of the outstanding stock purchase warrants, all of which are exercisable, having a weighted average exercise price of $18.27 per share; and
     
  ● shares of our common stock that may be issued upon exercise of the underwriters’ warrants at an exercise price of $●, which represents ●% of the shares of common stock being offered hereby and 125% of an assumed public offering price of $●.

 

Unless otherwise indicated, all share and per share information contained in this prospectus has been adjusted for the one for seven reverse stock split of our common stock completed on December ●, 2019. All share amounts (and corresponding exercise and conversion prices of derivative securities) in this prospectus have been retroactively adjusted to give effect to this reverse stock split (subject to rounding up fractional shares), except for the financial statements and notes thereto.

 

 

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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA

 

The following tables summarize our historical consolidated financial data for the periods and as of the dates indicated. The summary consolidated financial data as of December 31, 2018 and 2017 and for each of the years in the two-year period ended December 31, 2018 have been derived from our audited consolidated financial statements included herein. The summary unaudited condensed consolidated financial data as of September 30, 2019 and the nine-month period ended September 30, 2019 and 2018 has been derived from our unaudited condensed consolidated financial statements included herein The unaudited interim financial statements have been prepared on the same basis as our annual audited financial statements and, in the opinion of management, reflect all adjustments, which include only normal, recurring adjustments that are necessary to state fairly the unaudited interim financial statements. Our historical results are not necessarily indicative of results that may be expected in the future, and the results for the nine months ended September 30, 2019 are not necessarily indicative of results to be expected for the full year or any other period.

 

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.

 

   Year Ended December 31,   Nine Months Ended September 30, 
   2018   2017   2019   2018 
Statements of Operations and Comprehensive Loss Data: 
Operating expenses:                    
Research and development  $3,085,317   $964,164   $1,804,169   $2,477,481 
General and administrative   1,439,623    838,269    1,219,329    1,305,511 
                     
Loss from operations   (4,524,940)   (1,802,433)   (3,023,498)   (3,782,992)
                     
Other income (expense):                    
Interest income   18,297    5,181    10,886    10,163 
Interest expense   (161,205)   (59,063)   (12,973)   (154,377)
                     
Net Operating Loss Before Income Tax Benefit   (4,667,848)   (1,856,315)   (3,025,585)   (3,927,206)
Income Tax Benefit   902,801    -    442,152    771,332 
                     
Net loss and comprehensive loss  $(3,765,047)  $(1,856,315)  $(2,583,433)  $(3,155,874)
                     
Net loss per share attributable to common stockholders - basic and diluted, adjusted for the one for seven reverse stock split.  $(0.71)  $(0.40)  $(0.47)  $(0.60)
                     
Weighted average common shares outstanding - basic and diluted, adjusted for the one for seven reverse stock split.   5,332,038    4,656,526    5,530,864    5,267,046 

 

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   As of
December 31, 2018
   As of
December 31, 2017
 
   Actual   Actual 
Balance Sheet Data:          
Cash and cash equivalents  $1,740,961   $2,847,429 
Total Assets   12,481,068    2,982,940 
Working Capital(3)   1,374,672    351,771 
Total Liabilities   2,780,050    2,609,776 
Total Stockholders’ Equity   9,701,018    2,982,940 

 

   As of September 30, 2019 - Unaudited 
   Actual   Pro Forma (1)(2) 
Balance Sheet Data:          
Cash and cash equivalents  $504,302   $ 
Total Assets   10,821,293     
Working Capital(3)   433,564     
Total Liabilities   2,150,614     
Total Stockholders’ Equity   8,670,679     

 

(1) Reflects the issuance and sale of shares of common stock in this offering at the assumed public offering price of $ ● per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
   
(2) Each $1.00 increase (decrease) in the assumed public offering price of $● per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents, working capital, total assets, and total stockholders’ equity by approximately $● million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares offered by us at the assumed public offering price after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders’ equity by approximately $● million. The pro forma information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of our public offering determined at pricing.
   
(3) We define working capital as current assets less current liabilities.

 

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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 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.

 

Promet Therapeutics, LLC, whose assets were acquired by Processa, had an accumulated deficit of $3.3 million incurred since its inception on August 31, 2015 through the date of acquisition on October 4, 2017. Subsequent to the date of acquisition, the accumulated deficit increased to $10.2 million at September 30, 2019. We will incur additional losses as we continue our research and development activities, seek regulatory approvals for our product candidates and engage in clinical trials. 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.

 

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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 recently entered into two line of credit agreements providing a revolving commitment of an aggregate of up to $1.4 million but have not drawn any amounts as of the date hereof. On November 30, 2019 we closed our bridge financing and issued $745,000 of 8% Senior Convertible Notes (“8% Senior Notes”) to accredited investors. 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 ($48,840, which has been accrued and included in accrued expenses during the three and nine months ended September 30, 2019) 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 financing, if obtained, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, could increase our expenses and require that our assets secure such debt. Moreover, any debt we incur must be repaid regardless of our operating results. If we choose to pursue additional indications and/or geographies for our product candidates, in-license additional development assets, or otherwise expand more rapidly than we presently anticipate, we may also need to raise additional capital sooner than expected.

 

As a result, 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, 2018. 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.

 

Raising additional capital may cause dilution to our existing shareholders, 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. We do not currently have any committed external source of funds. 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.

 

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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.

 

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.

 

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We are not permitted to market our product candidates as prescription pharmaceutical products in the United States until we receive approval of an NDA from the FDA, or in any foreign countries until we receive the requisite approval from such countries. In the United States, the FDA generally requires the completion of clinical trials of each drug to establish its safety and efficacy and extensive pharmaceutical development to ensure its quality before an NDA is approved. Regulatory authorities in other jurisdictions impose similar requirements. Of the large number of drugs in development, only a small percentage result in the submission of an NDA to the FDA and even fewer are eventually approved for commercialization. If our development efforts for our product candidates, including regulatory approval, are not successful for their planned indications, or if adequate demand for our product candidates is not generated, our business will be materially adversely affected.

 

We cannot guarantee that regulators will agree with our assessment of the results of the clinical trials we intend to conduct in the future or that such trials will be successful. The FDA, European Medicines Agency (“EMA”) and other regulators have substantial discretion in the approval process and may refuse to accept any application or may decide that our data is insufficient for approval and require additional clinical trials, or pre-clinical or other studies. In addition, varying interpretations of the data obtained from pre-clinical and clinical testing could delay, limit or prevent regulatory approval of our product candidates.

 

We have 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 PCS-499 in Necrobiosis Lipoidica (NL), improving the manufacturing of PCS-499 final product, receiving FDA IND clearance on one indication, conducting one healthy human volunteer trial and presently conducting a Phase 2 PCS-499 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.

 

In order to obtain marketing approval for any of our product candidates, we must demonstrate the safety and efficacy of the product candidate for the relevant clinical indication or indications through preclinical studies and clinical trials as well as additional supporting data. If our product candidates are associated with undesirable side effects in preclinical studies or clinical trials or have characteristics that are unexpected, we may need to interrupt, delay or abandon their development or limit development to more narrow uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective.

 

Through our IND, we are conducting a Phase 2 safety tolerability evaluation of PCS-499 in patients with NL. We and the FDA have assumed that the drug will be tolerated and safe at 900 mg b.i.d. (twice daily) or 600 mg t.i.d. (thrice daily) 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 drug dosed at the 1,800 mg per day (900 mg b.i.d. or 600 mg t.i.d.) will be safe and tolerated in patients with NL. 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 PCS-499. If this occurs, there may not be any way to differentiate PCS-499 from PTX thus making development and commercialization of PCS-499 in NL not worth pursuing.

 

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Preclinical studies of our product candidates have been completed, but we do not know the predictive value of these studies for our targeted population of patients, and we cannot guarantee that any positive results in preclinical studies will translate successfully to our targeted population of patients. It is not uncommon to observe results in human clinical trials that are unexpected based on preclinical testing, and many product candidates fail in clinical trials despite promising preclinical results. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval for their products. Human patients in clinical trials may suffer significant adverse events or other side effects not observed in our preclinical studies, including, but not limited to, immunogenic responses, organ toxicities such as liver, heart or kidney or other tolerability issues or possibly even death. The observed potency and kinetics of our planned product candidates in preclinical studies may not be observed in human clinical trials. If clinical trials of our planned product candidates fail to demonstrate efficacy to the satisfaction of regulatory authorities or do not otherwise produce positive results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our planned product candidates which may result in complete loss of expenditures which we devote to those products.

 

If significant adverse events or other side effects are observed in any of our future clinical trials, 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:

 

  demonstration of clinical safety and efficacy;
     
  relative convenience, dosing burden and ease of administration;
     
  the prevalence and severity of any adverse effects;
     
  the willingness of physicians to prescribe our product candidates, and the target patient population to try new therapies;

 

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  efficacy of our product candidates compared to competing products;
     
  the introduction of any new products that may in the future become available targeting indications for which our product candidates may be approved;
     
  new procedures or therapies that may reduce the incidences of any of the indications in which our product candidates may show utility;
     
  pricing and cost-effectiveness;
     
  the inclusion or omission of our product candidates in applicable therapeutic and vaccine guidelines;
     
  the effectiveness of our own or any future collaborators’ sales and marketing strategies;
     
  limitations or warnings contained in approved labeling from regulatory authorities;
     
  our ability to obtain and maintain sufficient third-party coverage or reimbursement from government health care programs, including Medicare and Medicaid, private health insurers and other third-party payors or to receive the necessary pricing approvals from government bodies regulating the pricing and usage of therapeutics; and
     
  the willingness of patients to pay out-of-pocket in the absence of third-party coverage or reimbursement or government pricing approvals.

 

If any of our product candidates are approved, but do not achieve an adequate level of acceptance by physicians, health care payors, and patients, we may not generate sufficient revenue and we may not be able to achieve or sustain profitability. Our efforts to educate the medical community and third-party payors on the benefits of our product candidates may require significant resources and may never be successful.

 

In addition, even if we obtain regulatory approvals, the timing or scope of any approvals may prohibit or reduce our ability to commercialize our product candidates successfully. For example, if the approval process takes too long, we may miss market opportunities and give other companies the ability to develop competing products or establish market dominance. Any regulatory approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render our product candidates not commercially viable. For example, regulatory authorities may approve any of our product candidates for fewer or more limited indications than we request, may not approve the price we intend to charge for any of our product candidates, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve any of our product candidates with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that indication.

 

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.

 

To date, we are using PCS-499 originally manufactured for CoNCERT Pharmaceuticals. Since PCS-499 is a deuterated molecule requiring special facilities and chemicals for manufacturing, the manufacturing costs for PCS-499 could result in the cost of goods being too high for the commercial price to be obtainable or too high to even manufacture the amount of drug needed to run the clinical studies prior to approval.

 

We do not currently have, nor do we plan to acquire, the capability or infrastructure to manufacture the active pharmaceutical ingredient, or API, in our product candidates for use in our clinical trials or for commercial product. In addition, we do not have the capability to formulate any of our product candidates into a finished drug product for commercial distribution. As a result, we will be obligated to rely on contract manufacturers, if and when any of our product candidates are approved for commercialization. We have not entered into an agreement with any contract manufacturers for commercial supply and may not be able to engage a contract manufacturer for commercial supply of any of our product candidates on favorable terms to us, or at all.

 

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The facilities used by our contract manufacturers to manufacture our product candidates must be approved by the FDA or comparable foreign regulatory authorities pursuant to inspections that will be conducted after we submit an NDA or biologics license application to the FDA or their equivalents to other relevant regulatory authorities. We will not control the manufacturing process of, and will be completely dependent on, our contract manufacturing partners for compliance with cGMPs 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.

 

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Even if we obtain marketing approval for any of our product candidates, we will be subject to ongoing obligations and continued regulatory review, which may result in significant additional expense.

 

Even if we obtain regulatory approval for any of our product candidates for an indication, the FDA or foreign equivalent may still impose significant restrictions on their indicated uses or marketing or the conditions of approval or impose ongoing requirements for potentially costly and time-consuming post-approval studies, including Phase 4 clinical trials, and post-market surveillance to monitor safety and efficacy. Our product candidates will also be subject to ongoing regulatory requirements governing the manufacturing, labeling, packaging, storage, distribution, safety surveillance, advertising, promotion, recordkeeping and reporting of adverse events and other post-market information. These requirements include registration with the FDA, as well as continued compliance with 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.

 

The FDA has the authority to require a risk evaluation and mitigation strategy, or REMS, as part of an NDA or after approval, which may impose further requirements or restrictions on the distribution, use or marketing of an approved drug, such as limiting prescribing to certain physicians or medical centers that have undergone specialized training, limiting treatment to patients who meet certain safe-use criteria or requiring patient testing, monitoring and/or enrollment in a registry. Any of these requirements or restrictions on approval or marketing could restrict the commercial promotion, distribution, prescription or dispensing of our product candidates. Moreover, product approvals may be withdrawn for non-compliance with regulatory standards or if problems occur following the initial marketing of the product. Any of the foregoing scenarios could materially harm the commercial success of our product candidates.

 

With respect to sales and marketing activities by us or any future partner, advertising and promotional materials must comply with FDA rules in addition to other applicable federal, state and local laws in the United States and similar legal requirements in other countries. In the United States, the distribution of product samples to physicians must comply with the requirements of the U.S. Prescription Drug Marketing Act. Application holders must obtain FDA approval for product and manufacturing changes, depending on the nature of the change. We may also be subject, directly or indirectly through our customers and partners, to various fraud and abuse laws, including, without limitation, the U.S. Anti-Kickback Statute, U.S. False Claims Act, and similar state laws, which impact, among other things, our proposed sales, marketing, and scientific/educational grant programs. If we participate in the U.S. Medicaid Drug Rebate Program, the Federal Supply Schedule of the U.S. Department of Veterans Affairs, or other government drug programs, we will be subject to complex laws and regulations regarding reporting and payment obligations. All of these activities are also potentially subject to U.S. federal and state consumer protection and unfair competition laws. Similar requirements exist in many of these areas in other countries.

 

In addition, if any of our product candidates are approved for a particular indication, our product labeling, advertising and promotion would be subject to regulatory requirements and continuing regulatory review. The FDA strictly regulates the promotional claims that may be made about prescription products. In particular, a product may not be promoted for uses that are not approved by the FDA as reflected in the product’s approved labeling. If we receive marketing approval for our product candidates, physicians may nevertheless legally prescribe our products to their patients in a manner that is inconsistent with the approved label. If we are found to have promoted such off-label uses, we may become subject to significant liability and government fines. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant sanctions. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent decrees of permanent injunctions under which specified promotional conduct is changed or curtailed.

 

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If we or a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, problems with the facility where the product is manufactured, or we or our manufacturers fail to comply with applicable regulatory requirements, we may be subject to various administrative or judicial sanctions, such as issuance of warning letters, withdrawal of the product from the market, injunctions or the imposition of civil or criminal penalties or monetary fines, suspension of any ongoing new clinical trials or suspension or withdrawal of regulatory approval.

 

The occurrence of any event or penalty described above may inhibit our ability to commercialize our product candidates and generate revenue. Adverse regulatory action, whether pre- or post-approval, can also potentially lead to product liability claims and increase our product liability exposure.

 

Obtaining and maintaining regulatory approval of our product candidates in one jurisdiction does not mean that we will be successful in obtaining regulatory approval of our product candidates in other jurisdictions.

 

Obtaining and maintaining regulatory approval of our product candidates in one jurisdiction does not guarantee that we will be able to obtain or maintain regulatory approval in any other jurisdiction, but a failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the regulatory approval process in others. For example, even if the FDA grants marketing approval of a product candidate, comparable regulatory authorities in foreign jurisdictions must also approve the manufacturing, marketing and promotion of the product candidate in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from those in the United States, including additional preclinical studies or clinical trials, as clinical studies conducted in one jurisdiction may not be accepted by regulatory authorities in other jurisdictions. In many jurisdictions outside the United States, a product candidate must be approved for reimbursement before it can be approved for sale in that jurisdiction. In some cases, the price that we intend to charge for our products is also subject to approval.

 

Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for us and could delay or prevent the introduction of our products in certain countries. If we fail to comply with the regulatory requirements in international markets and/or to receive applicable marketing approvals, our target market will be reduced and our ability to realize the full market potential of our product candidates will be harmed.

 

Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our product candidates and affect the prices we may obtain.

 

In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval for our product candidates, restrict or regulate post-approval activities and affect our ability to profitably sell our product candidates. Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We do not know whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product labeling and post-marketing testing and other requirements.

 

We could face competition from other biotechnology and pharmaceutical companies, and our operating results would suffer if we fail to innovate and compete effectively.

 

Our products are used for indications where we believe that there is an unmet medical need. If existing or newly approved drug products, whether approved by the FDA for the indication or not, are able to successfully treat the same patients, it may be more difficult to perform clinical studies, to develop our product and/or to commercialize our product, adversely affecting our business. Since the biopharmaceutical industry is characterized by intense competition and rapid innovation, our competitors may be able to develop other compounds or drugs that are able to achieve similar or better results than our product candidates. Our competitors may include major multinational pharmaceutical companies, established biotechnology companies, specialty pharmaceutical companies, and universities and other research institutions. Many of our competitors have substantially greater financial, technical and other resources, such as a larger research and development staff and experienced marketing and manufacturing organizations, established relationships with CROs and other collaborators, as well as established sales forces. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. Mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in our competitors. Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Our competitors, either alone or with collaborative partners, may succeed in developing, acquiring or licensing on an exclusive basis drug or biologic products that are more effective, safer, more easily commercialized or less costly than our product candidates, or may develop proprietary technologies or secure patent protection and, in turn, exclude us from technologies that we may need for the development of our technologies and potential products.

 

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Even if we obtain regulatory approval of any of our product candidates, we may not be the first to market and that may negatively affect the price or demand for our product candidates. Additionally, we may not be able to implement our business plan if the acceptance of our product candidates is inhibited by price competition or the reluctance of physicians to switch from existing methods of treatment to our product candidates, or if physicians switch to other new drug or biologic products or choose to reserve our product candidates for use in limited circumstances. Furthermore, for drugs that receive orphan drug designation at the FDA, a competitor could obtain orphan product approval from the FDA with respect to such competitor’s drug product. If such competitor drug product is determined to be the same product as one of our product candidates, we may be prevented from obtaining approval from the FDA for such product candidate for the same indication for seven years, except in limited circumstances, and we may be subject to similar restrictions under non-U.S. regulations.

 

We expect to rely on third parties to conduct clinical trials for our product candidates. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize any of our product candidates and our business would be substantially harmed.

 

We expect to enter into agreements with third-party CROs to conduct and manage our clinical programs including contracting with clinical sites to perform our clinical studies. We plan to rely heavily on these parties for execution of clinical studies for our product candidates and will control only certain aspects of their activities. Nevertheless, we will be responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards, and our reliance on CROs and clinical sites will not relieve us of our regulatory responsibilities. We and our CROs will be required to comply with cGCPs, which are regulations and guidelines enforced by the FDA, the Competent Authorities of the Member States of the European Economic Area and comparable foreign regulatory authorities for any products in clinical development. The FDA and its foreign equivalents enforce these cGCP regulations through periodic inspections of trial sponsors, principal investigators and trial sites. If we or our CROs fail to comply with applicable cGCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, upon inspection, the FDA or other regulatory authorities will determine that any of our clinical trials comply with cGCPs. In addition, our clinical trials must be conducted with products produced under cGMP regulations and will require a large number of test subjects. Our failure or the failure of our CROs or clinical sites to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process and could also subject us to enforcement action up to and including civil and criminal penalties.

 

Although we intend to design the clinical trials for our product candidates in consultation with CROs, we expect that the CROs will manage all of the clinical trials conducted at contracted clinical sites. As a result, many important aspects of our drug development programs would be outside of our direct control. In addition, the CROs and clinical sites may not perform all of their obligations under arrangements with us or in compliance with regulatory requirements. If the CROs or clinical sites do not perform clinical trials in a satisfactory manner, breach their obligations to us or fail to comply with regulatory requirements, the development and commercialization of any of our product candidates for the subject indication may be delayed or our development program materially and irreversibly harmed. We cannot control the amount and timing of resources these CROs and clinical sites will devote to our program or any of our product candidates. If we are unable to rely on clinical data collected by our CROs, we could be required to repeat, extend the duration of, or increase the size of our clinical trials, which could significantly delay commercialization and require significantly greater expenditures.

 

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If any of our relationships with these third-party CROs or clinical sites terminate, we may not be able to enter into arrangements with alternative CROs or clinical sites. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, any such clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates. As a result, our financial results and the commercial prospects for any of our product candidates would be harmed, our costs could increase and our ability to generate revenue could be delayed.

 

Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.

 

Clinical testing of drug product candidates is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. The results of pre-clinical studies and early clinical trials may not be predictive of the results of later-stage clinical trials. We cannot assure you that the FDA or comparable foreign regulatory authorities will view the results as we do or that any future trials of any of our product candidates will achieve positive results. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through pre-clinical studies and initial clinical trials. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials. Any future clinical trial results for our product candidates may not be successful.

 

In addition, a number of factors could contribute to a lack of favorable safety and efficacy results for any of our product candidates. For example, such trials could result in increased variability due to varying site characteristics, such as local standards of care, differences in evaluation period and surgical technique, and due to varying patient characteristics including demographic factors and health status.

 

Even though we may apply for orphan drug designation for a product candidate, we may not be able to obtain orphan drug marketing exclusivity.

 

There is no guarantee that the FDA, EMA or their foreign equivalents will grant any future application for orphan drug designation for any of our product candidates, which would make us ineligible for the additional exclusivity and other benefits of orphan drug designation.

 

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 PCS-499 for the treatment of NL on June 22, 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.

 

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Although we may pursue expedited regulatory approval pathways for a product candidate, it may not qualify for expedited development or, if it does qualify for expedited development, it may not actually lead to a faster development, 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. Increasingly, third-party payors attempt to contain health care costs in ways that are likely to impact our development of products including:

 

failing to approve or challenging the prices charged for health care products;
   
introducing reimportation schemes from lower priced jurisdictions;
   
limiting both coverage and the amount of reimbursement for new therapeutic products;
   
denying or limiting coverage for products that are approved by the regulatory agencies but are considered to be experimental or investigational by third-party payors; and
   
refusing to provide coverage when an approved product is used in a way that has not received regulatory marketing approval.

 

We may face product liability exposure, and if successful claims are brought against us, we may incur substantial liability if our insurance coverage for those claims is inadequate.

 

We face an inherent risk of product liability as a result of the clinical testing of our product candidates and will face an even greater risk if we commercialize any products. This risk exists even if a product is approved for commercial sale by the FDA and manufactured in facilities licensed and regulated by the FDA or an applicable foreign regulatory authority. Our products and product candidates are designed to affect important bodily functions and processes. Any side effects, manufacturing defects, misuse or abuse associated with our product candidates could result in injury to a patient or even death. We cannot offer any assurance that we will not face product liability suits in the future, or that our insurance coverage will be sufficient to cover our liability under any such cases.

 

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In addition, a liability claim may be brought against us even if our product candidates merely appear to have caused an injury. Product liability claims may be brought against us by consumers, health care 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:

 

  withdrawal of clinical trial participants;
     
  termination of clinical trial sites or entire trial programs;
     
  the inability to commercialize our product candidates;
     
  decreased demand for our product candidates;
     
  impairment of our business reputations;
     
  product recall or withdrawal from the market or labeling, marketing or promotional restrictions;
     
  substantial costs of any related litigation or similar disputes;
     
  distractions of management’s attention and other resources from our primary business;
     
  substantial monetary awards to patients or other claimants against us that may not be covered by insurance; or
     
  loss of revenue.

 

We have obtained product liability insurance coverage for our clinical trials. However, large judgments have been awarded in class action or individual lawsuits based on drugs that had unanticipated side effects and our insurance coverage may not be sufficient to cover all of our product liability related expenses or losses and may not cover us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost, in sufficient amounts or upon adequate terms to protect us against losses due to product liability. We will need to increase our product liability coverage if any of our product candidates receive regulatory approval, which will be costly, and we may be unable to obtain this increased product liability insurance on commercially reasonable terms, or at all. A successful product liability claim or series of claims brought against us could cause our stock price to decline and, if judgments exceed our insurance coverage, could decrease our cash and could harm our business, financial condition, operating results and prospects.

 

If any of our product candidates are approved for marketing and we are found to have improperly promoted off-label uses, or if physicians misuse our products or use our products off-label, we may become subject to prohibitions on the sale or marketing of our products, product liability claims and significant fines, penalties and sanctions, and our brand and reputation could be harmed.

 

The FDA and other regulatory agencies strictly regulate the marketing and promotional claims that are made about drug products. In particular, a product may not be promoted for uses or indications that are not approved by the FDA or such other regulatory agencies as reflected in the product’s approved labeling and comparative safety or efficacy claims cannot be made without direct comparative clinical data. If we are found to have promoted off-label uses of any of our product candidates, we may become subject to significant liability, which would materially harm our business. Both federal and state governments have levied large civil and criminal fines against companies for alleged improper promotion and have enjoined several companies from engaging in off-label promotion. If we become the target of such an investigation or prosecution based on our marketing and promotional practices, we could face similar sanctions, which would materially harm our business. In addition, management’s attention could be diverted from our business operations, significant legal expenses could be incurred, and our brand and reputation could be damaged.

 

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The FDA has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed. If we are deemed by the FDA to have engaged in the promotion of our products for off-label use, we could be subject to FDA regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our business activities constitute promotion of an off-label use, which could result in significant penalties, including criminal, civil or administrative penalties, damages fines, disgorgement, exclusion from participation in government healthcare programs and the curtailment or restructuring of our operations.

 

We cannot, however, prevent a physician from using our product candidates outside of those indications for use when in the physician’s independent professional medical judgment he or she deems appropriate. Physicians may also misuse our product candidates or use improper techniques, potentially leading to adverse results, side effects or injury, which may lead to product liability claims. If our product candidates are misused or used with improper technique, we may become subject to costly litigation by physicians or their patients. Furthermore, the use of our product candidates for indications other than those cleared by the FDA may not effectively treat such conditions, which could harm our reputation among physicians and patients.

 

We may choose not to continue developing or commercializing any of our product candidates at any time during development or after approval, which would reduce or eliminate our potential return on investment for those product candidates.

 

At any time, we may decide to discontinue the development of any of our product candidates or not to continue commercializing one or more of our approved product candidates for a variety of reasons, including changes in our internal product, technology or indication focus, the appearance of new technologies that make our product obsolete, competition from a competing product or changes in or failure to comply with applicable regulatory requirements. If we terminate a program in which we have invested significant resources, we will not receive any return on our investment and we will have missed the opportunity to have allocated those resources to potentially more productive uses.

 

Risks Relating to Our Intellectual Property Rights

 

We depend on rights to certain pharmaceutical compounds that are or will be licensed to us. We do not control 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 own 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 patents licensed from CoNCERT Pharmaceuticals for PCS-499 and related compounds. The portfolio includes approximately 29 allowed or issued patents (of which 9 are in the United States), which are directed to claims for composition of matter, methods of use, and certain chemical processes. Of these, 3 allowed or issued patents in the U.S. and Europe, as well as 2 in each of Australia, Canada, China, Japan and Mexico and 1 in each of Taiwan, Hong Kong, Russia, South Korea, the Philippines, South Africa, and Brazil cover the composition of matter of PCS-499. The allowed or issued U.S. and European patents are expected to expire between 2029 and 2031, excluding any extension or adjustment of patent term that may be available.

 

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In addition, we do not own any intellectual property rights, including any patents that underlie our drug candidates. These drugs are in-licensed from other biotech or pharmaceutical companies and our rights to develop and commercialize the product candidates we license are subject to the validity of the owner’s intellectual property rights. All of our product candidates are either in the early stages of clinical development or late stages of preclinical development and we have only recently initiated a clinical trial and 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 our drug candidates. 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.

 

Our rights to develop and commercialize the product candidates we license are subject to the validity of the owner’s intellectual property rights. Enforcement of our licensed patents or defense or any claims asserting the invalidity of these patents is often subject to the control or cooperation of our licensors. Legal action could be initiated against the owners of the intellectual property that we license and an adverse outcome in such legal action could harm our business because it might prevent such companies or institutions from continuing to license intellectual property that we may need to operate our business. In addition, such licensors may resolve such litigation in a way that benefits them but adversely affects our ability to develop and commercialize our product candidates.

 

In addition, our rights to practice the inventions claimed in the licensed patents and patent applications are subject to our licensors abiding by the terms of those licenses and not terminating them. Our licenses may be terminated by the licensor if we are in material breach of certain terms or conditions of the license agreement or in certain other circumstances. Our license agreements with CoNCERT Pharmaceuticals 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. Our rights under the licenses are subject to our continued compliance with the terms of the license, including the payment of royalties due under the license. Termination of these licenses could prevent us from marketing some or all of our products. Because of the complexity of our products and the patents we have licensed, determining the scope of the license and related royalty obligations can be difficult and can lead to disputes between us and the licensor. An unfavorable resolution of such a dispute could lead to an increase in the royalties payable pursuant to the license. If a licensor believed we were not paying the royalties due under the license or were otherwise not in compliance with the terms of the license, the licensor might attempt to revoke the license. If such an attempt were successful, we might be barred from producing and selling some or all of our products.

 

It is difficult and costly to protect our intellectual property rights, and we cannot ensure the protection of these rights.

 

Our commercial success will depend, in part, on obtaining and maintaining patent protection for our technologies, products and processes, successfully defending these patents against third-party challenges and successfully enforcing 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 intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowable or enforceable in our patents. The existing patent and patent applications relating to our product candidates and related technologies may be challenged, invalidated or circumvented by third parties and might not protect us against competitors with similar products or technologies.

 

The degree of future protection for our proprietary rights is uncertain, because legal means afford only limited protection and may not adequately protect our rights, permit us to gain or keep our competitive advantage, or provide us with any competitive advantage at all. For example, others have filed, and in the future are likely to file, patent applications covering products and technologies that are similar, identical or competitive to any of our product candidates, or important to our business. We cannot be certain that any patent application owned by a third party will not have priority over patent applications filed by us, or that we will not be involved in interference, opposition or invalidity proceedings before United States or foreign patent offices.

 

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In the future, we may rely on know-how and trade secrets to protect technology, especially in cases when we believe patent protection is not appropriate or obtainable. However, know-how and trade secrets are difficult to protect. While we intend to require employees, academic collaborators, consultants and other contractors to enter into confidentiality agreements, we may not be able to adequately protect our trade secrets or other proprietary or licensed information. Typically, research collaborators and scientific advisors have rights to publish data and information in which we may also have rights. If we cannot maintain the confidentiality of our proprietary technology and other confidential information, our ability to receive patent protection and our ability to protect valuable information owned by us may be imperiled. Enforcing a claim that a third-party entity illegally obtained and is using any of our 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 proprietary information, 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 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 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 proprietary 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 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 product candidates from being marketed. Any patent-related legal action against us claiming damages and seeking to enjoin commercial activities relating to any of our product candidates or our processes could subject us to potential liability for damages and require us to obtain a license and pay royalties to continue to manufacture or market any of our product candidates or any future product candidates. We cannot predict whether we would prevail in any such actions or that any license required under any of these patents would be made available on commercially acceptable terms, if at all. In addition, we cannot be sure that we could redesign our product candidates or any future product candidates or processes to avoid infringement, if necessary. Accordingly, an adverse determination in a judicial or administrative proceeding, or the failure to obtain necessary licenses, could prevent us from developing and commercializing any of our product candidates or a future product candidate, which could harm our business, financial condition and operating results.

 

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A number of companies, including several major pharmaceutical companies, have conducted, or are conducting, research within the therapeutic 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:

 

manage all our development efforts effectively, especially our clinical trials;
   
integrate additional management, administrative, scientific, operation and regulatory personnel;
   
maintain sufficient administrative, accounting and management information systems and controls; and
   
hire and train additional qualified personnel.

 

We may not be able to accomplish these tasks, and our failure to accomplish any of them could harm our financial results.

 

If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our product candidates.

 

We face a potential risk of product liability as a result of the clinical testing of our product candidates and will face an even greater risk if we commercialize any of our product candidates or any other future product. For example, we may be sued if any product we develop, including any of our product candidates, or any materials that we use in our products allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. In the U.S., claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:

 

  decreased demand for any of our product candidates or any future products that we may develop;
     
  injury to our reputation;
     
  withdrawal of clinical trial participants;
     
  substantial costs to defend the related litigation;
     
  a diversion of management’s time and our resources;

 

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  substantial monetary awards to trial participants or patients;
     
  product recalls, withdrawals or labeling, marketing or promotional restrictions;
     
  the inability to commercialize some or all of our product candidates; and
     
  a decline in the value of our stock.

 

Our inability to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of products we develop. We have obtained product liability insurance covering our clinical trials. However, such insurance is expensive, difficult to obtain and may not be available in the future on acceptable terms, or at all. Although we will maintain such insurance, any claim that may be brought against us could result in a court judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. Our insurance policies also have various exclusions, and we may be subject to a product liability claim for which we have no coverage. We may have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts.

 

Our limited operating history may make it difficult to evaluate our business and our future viability.

 

We are in the relatively early stage of operations and development and have only a limited operating history as the existing entity on which to base an evaluation of our business and prospects. Even if we successfully obtain additional funding, we are subject to the risks associated with early stage companies with a limited operating history, including: the need for additional financings; the uncertainty of research and development efforts resulting in successful commercial products, as well as the marketing and customer acceptance of such products; unexpected issues with the FDA, other federal or state regulatory authorities or ex-US regulatory authorities; regulatory setbacks and delays; competition from larger organizations; reliance on the proprietary technology of others; dependence on key personnel; uncertain patent protection; fluctuations in expenses; and dependence on corporate partners and collaborators. Any failure to successfully address these risks and uncertainties could seriously harm our business and prospects. We may not succeed given the technological, marketing, strategic and competitive challenges we will face. The likelihood of our success must be considered in light of the expenses, difficulties, complications, problems and delays frequently encountered in connection with the growth of a new business, the continuing development of new drug technology, and the competitive and regulatory environment in which we operate or may choose to operate in the future.

 

If we suffer negative publicity concerning the safety of our products in development, our sales may be harmed and we may be forced to withdraw such products.

 

If concerns should arise about the safety of any of our products that are being developed or marketed, regardless of whether or not such concerns have a basis in generally accepted science or peer-reviewed scientific research, such concerns could adversely affect the further development or market for these products. Similarly, negative publicity could result in an increased number of product liability claims, whether or not these claims are supported by applicable law or covered by insurance.

 

If we lose key management personnel, or if we fail to recruit additional highly skilled personnel, our ability to identify and develop new or next generation product candidates will be impaired, could result in loss of markets or market share and could make us less competitive.

 

We are highly dependent upon the principal members of our small management team and staff, including David Young, Pharm.D., Ph.D, our Chief Executive Officer, and Sian Bigora, Pharm.D., our Chief Development Officer. The employment of Drs. Young and Bigora may be terminated at any time by either us or Dr. Young or Dr. Bigora. The loss of any current or future team member could impair our ability to design, identify, and develop new intellectual property and product candidates and new scientific or product ideas. Additionally, if we lose the services of any of these persons, we would likely be forced to expend significant time and money in the pursuit of replacements, which may result in a delay in the development of our product candidates and the implementation of our business plan and plan of operations and diversion of our management’s attention. We can give no assurance that we could find satisfactory replacements for our current and future key scientific and management employees on terms that would not be unduly expensive or burdensome to us.

 

 - 25 - 
 

 

To induce valuable personnel to remain at our Company, in addition to salary and cash incentives, we expect that we will provide stock options, restricted stock units or other equity securities that vest over time from our 2019 Omnibus Incentive Plan or a subsequent plan. 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 have identified material weaknesses in our internal control over financial reporting related to our control environment. 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. We expanded our finance team, hiring a Director of Finance and Accounting in July 2018 and a CFO in September 2018. We are developing remediation steps to 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 an emerging growth 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 plan to implement a number of measures to address the material weaknesses we have identified, including hiring additional accounting personnel or consultants with appropriate expertise as necessary. We intend to complete the implementation of our remediation plan during late 2019 and/or early 2020. However, we cannot assure you that we will be successful in remediating the material weaknesses we identified or that our internal control over financial reporting, as modified, will enable us to identify or avoid material weaknesses in the future.

 

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We cannot assure you that management will be successful in identifying and retaining appropriate personnel; that newly engaged staff or outside consultants will be successful in identifying material weaknesses in the future; or that appropriate personnel will be identified and retained prior to these deficiencies resulting in material and adverse effects on our business.

 

Any failure to remediate the material weaknesses we identified or develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to remediate the material weaknesses we identified or implement and maintain effective internal control over financial reporting could also adversely affect the results of management reports and independent registered public accounting firm audits of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures, and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the market price of our common stock.

 

We 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.

 

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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. Based on an assumed public offering price of $● per share, you will experience immediate dilution of $● per share, representing the difference between our pro forma as adjusted net tangible book value per share as of September 30, 2019, after giving effect to this offering. In addition, investors purchasing common stock in this offering will contribute ● % of the total amount invested by stockholders since inception but will only own ● % of the shares of common stock outstanding, assuming no exercise of the underwriters’ option to acquire additional common stock in this offering and assuming we issue the number of shares of common stock as set forth on the cover page of this prospectus. To the extent these outstanding securities are ultimately exercised, investors purchasing common stock in this offering will sustain further dilution. See the “Dilution” section of this prospectus for a more detailed description of the dilution to investors participating in the offering.

 

Future capital raises may dilute our existing stockholders’ ownership and/or have other adverse effects on our operations.

 

If we raise additional capital by issuing equity securities, our existing stockholders’ percentage ownership will be reduced, and these stockholders may experience substantial dilution. We may also issue equity securities that provide for rights, preferences and privileges senior to those of our common stock. If we raise additional funds by issuing debt securities, these debt securities would have rights senior to those of our common stock and the terms of the debt securities issued could impose significant restrictions on our operations, including liens on our assets. If we raise additional funds through collaborations and licensing arrangements, we may be required to relinquish some rights to our technologies or candidate products, or to grant licenses on terms that are not favorable to us.

 

Our common stock price is expected to be volatile.

 

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:

 

  relatively low trading volume, which can result in significant volatility in the market price of our common stock based on a relatively smaller number of trades and dollar amount of transactions;
     
  changes in estimates or recommendations by securities analysts, if any, who cover our common stock;
     
  the timing and results of our current and any future preclinical or clinical trials of our product candidates;
     
  the entry into or termination of key agreements, including, among others, key collaboration and license agreements;
     
  the results and timing of regulatory reviews relating to the approval of our product candidates;
     
  the initiation of, material developments in, or conclusion of, litigation to enforce or defend any of our intellectual property rights;
     
  failure of any of our product candidates, if approved, to achieve commercial success;
     
  general and industry-specific economic conditions that may affect our research and development expenditures;
     
  the results of clinical trials conducted by others on products that would compete with our product candidates;
     
  issues in manufacturing our product candidates or any approved products;

 

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  the introduction of technological innovations or new commercial products by our competitors;
     
  developments or disputes concerning patent applications, issued patents or other proprietary rights;
     
  future sales of our common stock by us, our insiders or our other stockholders;
     
  a negative outcome in any litigation or potential legal proceeding.
     
  additions and departures of key personnel;
     
  negative publicity or announcements regarding regulatory developments relating to our products;
     
  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;
     
  our filing for protection under federal bankruptcy laws; or
     
  the other factors described in this “Risk Factors” section.

 

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. 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.

 

There is not now, and there may never be, an active, liquid and orderly trading market for our common stock, which may make it difficult for you to sell your shares of our common stock.

 

There is not now, nor has there been since our inception, any significant volume of trading activity in our common stock or an active market for shares of our common stock, and the warrants are a class of securities for which there is no existing market. An active trading market for our securities may never develop or be sustained after this offering. As a result, investors must bear the economic risk of holding our common stock for an indefinite period of time. Although our common stock is quoted on the OTCQB Marketplace, or OTCQB, over-the-counter quotation system, trading of our common stock on such system has only recently commenced and continues to be extremely limited and sporadic and at very low volumes. Although we expect to apply for listing on Nasdaq, an active trading market for our securities may never develop or be sustained. If an active market for our securities does not develop, it may be difficult for you to sell the securities you purchase in this offering without depressing the market price for such securities or at all. Further, an unestablished trading market for our securities may also impair our ability to raise capital by selling additional equity in the future, and may impair our ability to enter into strategic partnerships or acquire companies or products by using shares of our common stock as consideration.

 

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After this offering, our executive officers, directors and principal stockholders and their affiliates, if they choose to act together, will continue to 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 •% of our outstanding capital stock, assuming no exercise of the underwriters’ option to acquire additional common stock in this offering and assuming we issue the number of shares of common stock as set forth on the cover page of this prospectus. 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:

 

  delaying, deferring or preventing a change in control;
     
  entrenching our management and the board of directors;
     
  impeding a merger, consolidation, takeover or other business combination involving us that other stockholders may desire;
     
  and/or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.

 

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 under Rule 144 in the public markets could cause the market price of our common stock to decline.

 

Substantial amounts of our common stock may be sold under Rule 144 into the public market which may adversely affect prevailing market prices for the common stock and could impair our ability to raise capital in the future through the sale of equity securities. Rule 144 permits a person who presently is not and who has not been an affiliate of ours for at least three months immediately preceding the sale and who has beneficially owned the shares of common stock for at least six months to sell such shares without restriction other than the requirement that there be current public information as set forth in Rule 144. Shares held by directors, executive officers, and other affiliates will also be subject to volume limitations under Rule 144 under the Securities Act.

 

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.

 

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We may issue preferred stock which may have greater rights than our common stock.

 

Our Fourth Amended and Restated Certificate of Incorporation allow our Board of Directors to issue up to 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 then 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.

 

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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.” 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:

 

  our use of the net proceeds from this offering;
     
  our liquidity and working capital requirements, including cash requirements over the next 12 months;
     
  our ability to obtain funding for our operations;
     
  our ability to obtain and maintain regulatory approval of PCS-499 and/or our other product candidates;
     
  our ability to successfully commercialize and market PCS-499 and/or our other product candidates, if approved;
     
  our ability to contract with third-party suppliers, manufacturers and other service providers and their ability to perform adequately;
     
  the potential market size, opportunity and growth potential for PCS-499 and/or our other product candidates, if approved;
     
  our ability to build our own sales and marketing capabilities, or seek collaborative partners, to commercialize PCS-499 and/or our other product candidates, if approved;
     
  the initiation, timing, progress and results of our pre-clinical studies and clinical trials, and our research and development programs;
     
  our ability to retain the continued service of our key professionals and to identify, hire and retain additional qualified professionals;
     
  our ability to advance product candidates into, and successfully complete, clinical trials;
     
  our ability to recruit and enroll suitable patients in our clinical trials; the timing or likelihood of the accomplishment of various scientific, clinical, regulatory filings and approvals and other product development objectives;
     
  the pricing and reimbursement of our product candidates, if approved;
     
  the degree of market acceptance of PCS-499 and/or our other product candidates by physicians, patients, third-party payors and others in the medical community;
     
  the rate and degree of market acceptance of our product candidates, if approved;

 

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  the implementation of our business model, strategic plans for our business, product candidates and technology;
     
  the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates and technology;
     
  developments relating to our competitors and our industry;
     
  the accuracy of our estimates regarding expenses, capital requirements and needs for additional financing; and
     
  our financial performance.

 

These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the “Risk Factors” section 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.

 

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 Securities and Exchange Commission, or 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.

 

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USE OF PROCEEDS

 

We estimate that we will receive net proceeds of approximately $● million from the sale of the shares of our common stock in this offering, or approximately $● million, if the underwriters exercise their option to purchase additional shares of common stock in full, based on an assumed public offering price of $ ● per share, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

Each $1.00 increase (decrease) in the assumed public offering price of $● per share, would increase (decrease) the net proceeds to us from this offering, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, by approximately $ ● million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of shares we are offering. An increase (decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) the net proceeds to us from this offering, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, by approximately $● million, assuming no change in the assumed initial public offering price.

 

We intend to use the net proceeds from this offering as follows:

 

  approximately $● million to advance the development PCS-499 and to conduct clinical trials for PCS-499 in additional indications;
     
  approximately $● million to continue the development of HT-100 and/or other product candidates;
     
  the balance for working capital and other general corporate purposes.

 

We believe opportunities may exist from time to time 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.

 

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 2021. With our existing cash and cash equivalents and the net proceeds of this offering, we expect to be able to complete our Phase 2a trial and begin development of HT-100. We have based these estimates on assumptions that may prove to be incorrect, and 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.

 

Although we currently anticipate that we will use the net proceeds from this offering as described above, there may be circumstances where a reallocation of funds is necessary. Due to the uncertainties inherent in the product development process, it is difficult to estimate with certainty the exact amounts of the net proceeds from this offering that may be used for the above purposes. The amounts and timing of our actual expenditures will depend upon numerous factors, including our sales and marketing and commercialization efforts, demand for our products, if approved, our operating costs and the other factors described under the “Risk Factors” section of this prospectus. Accordingly, our management will have flexibility in applying the net proceeds from this offering. In addition, we might decide to postpone or not pursue clinical trials or pre-clinical activities if the net proceeds from this offering and the other sources of cash are less than expected. An investor will not have the opportunity to evaluate the economic, financial or other information on which we base our decisions on how to use the proceeds.

 

Pending their use as described above, we plan to invest the net proceeds in short-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or guaranteed obligations of the U.S. government.

 

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MARKET FOR COMMON EQUITY AND DIVIDEND POLICY

 

Market Information

 

Our common stock is currently traded on the OTCQB tier of the over-the-counter market under the symbol PCSA. Upon the closing of this offering our shares of common stock will be listed for trading on the Nasdaq Market.

 

Holders of our Common Stock

 

As of December 10, 2019, we had 5,486,362 shares of common stock issued and outstanding (adjusted for the one for seven reverse stock split completed on December ●, 2019) and 195 holders of record of our common stock.

 

Transfer Agent

 

Corporate Stock Transfer, Inc., Denver, Colorado, is the transfer agent for our common stock.

 

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.

 

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CAPITALIZATION

 

The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2019 as follows:

 

  on an actual basis;
     
  on pro forma bases to reflect the issuance of $745,000 of principal amount of 8% Senior Convertible Notes to accredited investors on November 30, 2019 for aggregate net proceeds of $745,000;
     
  on a pro forma as adjusted basis to give further effect to the sale by us of ● shares of our common stock in this offering, at an assumed public offering price of $● per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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” sections.

 

   Actual   Pro forma   Pro forma, as adjusted 
Cash and cash equivalents  $504,302   $1,249,302   $(1)
8% Senior Convertible Notes   -    745,000     
                
Preferred stock, $0.0001 par value: 1,000,000 shares authorized, no shares issued or outstanding   -    -                 - 
Common stock $0.0001 par value: 100,000,000 shares authorized, 5,486,362 shares issued and outstanding, actual; 5,486,362 shares issued and outstanding, pro forma; and ● shares issued and outstanding pro forma,
as adjusted (2)
   549         
Additional paid-in capital(2)   18,877,697         
Accumulated equity   (10,207,567)        
                
Total stockholders’ equity   (8,670,679)        
                
Total capitalization  $10,821,293   $     

 

(1) The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing. A $1.00 increase (decrease) in the assumed public offering price of $● per share would increase (decrease) the amount of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization on a pro forma as adjusted basis by approximately $● million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1,000,000 shares offered by us would increase (decrease) cash and cash equivalents, total stockholders’ equity (deficit) and total capitalization on a pro forma as adjusted basis by approximately $● million, assuming the assumed public offering price of $● per share, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
   
(2) The number of shares of our common stock outstanding as of September 30, 2019 has been adjusted for the one for seven reverse stock split completed on December ●, 2019 and excludes, as of September 30, 2019, the following, which has also been adjusted for the one for seven reverse stock split:

 

  137,033 shares of our common stock issuable upon the exercise of outstanding stock options issued under the Processa Pharmaceuticals, Inc. 2019 Omnibus Incentive Plan, having a weighted-average exercise price of $17.19 per share, of which 12,950 options have vested, having a weighted-average exercise price of $16.80 per share;
     
  362,967 shares of common stock reserved for issuance pursuant to future awards under the Processa Pharmaceuticals, Inc. 2019 Omnibus Incentive 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 13,872 shares have vested with an exercise price of $19.88 per share;
     
  52,171 shares of common stock issuable upon the conversion of $745,000 in principal amount of outstanding 8% Senior Convertible Notes, assuming a conversion price of $14.28 per share, and;
     
  477,579 shares of common stock issuable upon exercise of the outstanding stock purchase warrants, all of which are exercisable, having a weighted average exercise price of $18.27 per share.

 

 - 36 - 
 

 

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. Our historical net tangible book value per share is our historical net tangible book value divided by the number of shares of common stock outstanding as of September 30, 2019 (adjusted for the one for seven reverse stock split completed on December ●, 2019). Our historical net tangible book value as of September 30, 2019, was $521,587, or $0.10 per share of common stock.

 

Our pro forma net tangible book value as of September 30, 2019 gives effect to the conversion of all the 8% Senior Convertible Notes into an aggregate of ● shares of our common stock. Pro forma net tangible book value per share represents pro forma net tangible book value divided by the total number of shares outstanding at September 30, 2019, after giving effect to the conversion of all the 8% Senior Convertible Notes into an aggregate of ● shares of our common stock on completion of this offering.

 

Our as adjusted net tangible book value is our net tangible book value after giving further effect to the sale of ● shares of our common stock in this offering at an assumed public offering price of $● per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

The following table illustrates this per share dilution to investors participating in this offering:

 

Assumed public offering price per share $
     
Historical net tangible book value per share as of September 30, 2019 $ 0.10
     
Pro forma change in net tangible book value per share as of September 30, 2019 $
     
Pro forma net tangible book value per share as of September 30, 2019 $
     
Increase in net tangible book value per share from new investors participating in this offering $
     
Pro forma As adjusted net tangible book value per share after this offering $
     
Dilution in net tangible book value per share to new investors participating in this offering $

 

The information discussed above is illustrative only, and the dilution information following this offering will be adjusted based on the actual public offering price and other terms of this offering determined at pricing. A $1.00 increase (decrease) in the assumed public offering price of $● per share would increase (decrease) the net tangible book value by $● per share and the dilution to investors participating in this offering by $● per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.

 

We may also increase or decrease the number of shares we are offering. An increase of 1,000,000 shares offered by us would increase the net tangible book value by $● per share and decrease the dilution to investors participating in this offering by $● per share, assuming the assumed public offering price of $● per share, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us. Similarly, a decrease of 1,000,000 shares offered by us would decrease the net tangible book value by $● per share and increase the dilution to investors participating in this offering by $● per share, assuming the assumed public offering price of $● per share, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.

 

 - 37 - 
 

 

If the underwriters exercise their option to purchase additional shares of common stock in full, the net tangible book value as of September 30, 2019, will increase to $●, or $ ● per share, representing an increase to existing stockholders of $● per share, and there will be an immediate dilution of $● per share to investors participating in this offering.

 

The following table summarizes as of September 30, 2019, on the net tangible book value basis as described above, the differences between the number of shares of common stock purchased from us, the total consideration and the average price per share paid by existing stockholders and by investors participating in this offering, before deducting the estimated underwriting discounts and commissions and estimated offering expenses, at an assumed initial public offering price of $● per share.

 

   Shares Purchased   Total Consideration   Average
Price/
 
   Number   Percent   Amount   Percent   Share 
Existing stockholders         ●         ●%  $         ●%  $ 
Investors participating in this offering       %  $         %  $      ● 
Total       %  $    %  $ 

 

Each $1.00 increase (decrease) in the assumed public offering price of $● per share would increase (decrease) the total consideration paid by investors participating in this offering by $●, and increase (decrease) the percentage of total consideration paid by investors participating in this offering by approximately ●%, assuming that the number of shares offered by us, as listed on the cover page of this prospectus, remains the same. Similarly, each increase (decrease) of 1,000,000 shares in the number of shares of common stock offered by us would increase (decrease) the total consideration paid by investors participating in this offering by $● and increase (decrease) the percentage of total consideration paid by investors participating in this offering by approximately ●% assuming that the assumed public offering price of $● per share price remains the same.

 

The table above assumes no exercise of the underwriters’ option to purchase additional shares of common stock in this offering. If the underwriters’ option to purchase additional shares is exercised in full, the number of shares of our common stock held by existing stockholders would be reduced to ●% of the total number of shares of our common stock outstanding after this offering, and the number of shares of our common stock held by investors participating in the offering would be increased to ●% of the total number of shares of our common stock outstanding after this offering.

 

The number of shares of common stock to be outstanding after this offering has been adjusted for the one for seven reverse stock split completed on December ●, 2019, is based on an aggregate of 5,468,362 shares of common stock outstanding as of September 30, 2019 and excludes the following:

 

  137,033 shares of our common stock issuable upon the exercise of outstanding stock options issued under the Processa Pharmaceuticals, Inc. 2019 Omnibus Incentive Plan, having a weighted-average exercise price of $17.19 per share, of which 12,950 options have vested, having a weighted-average exercise price of $16.80 per share;
     
  362,967 shares of common stock reserved for issuance pursuant to future awards under the Processa Pharmaceuticals, Inc. 2019 Omnibus Incentive 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 13,872 shares have vested with an exercise price of $19.88 per share;
     
  52,171 shares of common stock issuable upon the conversion of $745,000 of outstanding 8% Senior Convertible Notes, assuming a conversion price of $14.28 per share, and;
     
  477,579 shares of common stock issuable upon exercise of the outstanding stock purchase warrants, all of which are exercisable, having a weighted average exercise price of $18.27 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.

 

 - 38 - 
 

 

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.

 

We completed a one for seven reverse stock split of our common stock on December ●, 2019. Unless otherwise indicated, all share amounts (and corresponding exercise and conversion prices of derivative securities) in this prospectus have been retroactively adjusted to give effect to this reverse stock split (subject to rounding up fractional shares), except for the financial statements and notes thereto.

 

Overview

 

We are an emerging pharmaceutical company focused on the clinical development of drug products that are intended to improve the survival and/or quality of life for patients who have a high unmet medical need. 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 is obtained, and are searching for additional products for our portfolio.

 

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 4,535,035 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 Section 351 transaction, and our stockholders immediately prior to the transaction owned approximately 10% of our common stock. On ●, Promet distributed 4,236,420 shares of the common stock it held to its partners. We traded on the OTC Pink Marketplace until December 8, 2018 when we listed our common stock on the OTCQB.

 

We accounted for the net asset acquisition transaction as a “reverse acquisition” merger under the acquisition method for U.S. 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. Unless otherwise stated, all comparisons in this Management’s Discussion and Analysis to periods prior to the merger are to the results of Promet for such period on a stand-alone basis. Prior to the acquisition, we had nominal net liabilities and operations. It was considered a non-operating public shell corporation.

 

We have a limited operating history as we were formed on March 29, 2011. Since that date, our operations have focused on acquiring the rights to PCS-499, organizing and staffing our company, business planning, raising capital, establishing our intellectual property portfolio and conducting clinical trials. We do not have any drug candidates approved for sale and have not yet generated any revenue from drug sales. We have funded our operations through the private sale of equity and equity-linked securities to accredited investors. Since inception, we have incurred operating losses. As of September 30, 2019, we had an accumulated deficit of $10.2 million. We expect to continue to incur significant expenses and operating losses for the foreseeable future. We anticipate that our expenses will continue to increase in connection with our ongoing activities, as we:

 

  continue to invest in the development of PCS-499 for the treatment of NL;
     
  manufacture our drug candidate;
     
  begin developing HT-100;
     
  hire additional research and development and general and administrative personnel;
     
  maintain, expand and protect our intellectual property portfolio;
     
  evaluate opportunities for the development of additional drug candidates; and
     
  incur additional costs associated with operating as a public company.

 

 - 39 - 
 

 

Going Concern and Management’s Plan

 

Our condensed 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 that are present in many emerging growth companies regarding product development and commercialization, limited working capital, recurring losses and negative cash flow from operations, future profitability, ability to obtain future capital, protection of patents, technologies and property rights, competition, rapid technological change, navigating the domestic and major foreign markets’ regulatory and clinical environment, recruiting and retaining key personnel, dependence on third party manufacturing organizations, third party collaboration and licensing agreements, lack of sales and marketing activities and no customers or pharmaceutical products to sell or distribute. Without consideration of the closing of our $745,000 8% Senior Notes bridge financing and the successful close of this offering, these risks and other factors raise substantial doubt about our ability to continue as a going concern.

 

We have relied exclusively 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 providing a revolving commitment of an aggregate of up to $1.4 million but have not drawn any amounts as of the date of this report. 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 nine months ended September 30, 2019, we incurred a net loss from continuing operations of $2.6 million and used $1.2 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. At September 30, 2019, we had cash and cash equivalents totaling $504,302.

 

On September 20, 2019, we entered into two separate Line of Credit Agreements (“LOC Agreements”) with DKBK Enterprises, LLC (“DKBK”) and current shareholder CorLyst, LLC (“CorLyst”), both related parties (“Lenders”), 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 Processa common shares. Our Chief Executive Officer (CEO) is also the Chief Executive Officer and Managing Member of both Lenders. CorLyst beneficially owns 401,401 shares of Processa common stock, representing approximately 7.2% of the Company’s outstanding shares of voting capital stock. We have not drawn any amounts under these LOC agreements.

 

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 now been paid in full. As part of the original pledge agreement, we issued 113,279 shares of common stock and 113,279 warrants to purchase shares of common stock to PoC Capital but held 56,639 shares and warrants to purchase 56,639 shares as collateral until certain payment milestones were met. PoC Capital forfeited the pledged collateral in the amended agreement and the shares have been reissued to Processa and will be retired.

 

On November 30, 2019 we closed our bridge financing and issued $745,000 of 8% Senior Convertible Notes (“8% Senior Notes”) to accredited investors. In order to preserve cash, we have also delayed some of our cash outflows, primarily through the deferred payment of salaries ($48,840 which has been accrued and included in accrued expenses during the three and nine months ended September 30, 2019) until such time as we have raised sufficient funding.

 

We believe that the net proceeds from this offering, together with our existing cash, will enable us to fund our operating expenses and capital expenditure requirements through 2021. With our existing cash and the net proceeds of this offering, we expect to be able to complete our Phase 2a trial and begin development of HT-100. We have based these estimates on assumptions that may prove to be incorrect, and we could use our available capital resources sooner than we currently expect.

 

 - 40 - 
 

 

Status of our Phase 2a Clinical Trial in Necrobiosis Lipoidica

 

Our lead product, PCS-499 is an oral tablet that is a deuterated analog of one of the major metabolites of pentoxifylline (Trental®). The advantage of PCS-499 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 PCS-499 may result in clinical efficacy. The lead indication currently under development for PCS-499 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.

 

On June 22, 2018, the FDA granted orphan-drug designation to PCS-499 for the treatment of NL. On September 28, 2018, the FDA cleared our IND for PCS-499 in NL such that we could move forward with the Phase 2a safety-dose tolerability trial. We dosed our first NL patient in this Phase 2a clinical trial on January 29, 2019. On August 23, 2019, our study was fully enrolled as the twelfth patient was dosed. The main objective of the trial is to evaluate the safety and tolerability of PCS-499 in patients with NL. We expect the safety and efficacy data collected to provide information for the design of future clinical trials. Based on toxicology studies and healthy human volunteer studies, Processa and the FDA agreed that a PCS-499 dose of 1.8 grams/day would be the highest dose administered to NL patients in this Phase 2 trial. As anticipated, the PCS-499 dose of 1.8 grams/day, 50% greater than the maximum tolerated dose of pentoxifylline, appears to be well tolerated with no serious adverse events reported. Twelve patients have been dosed with nine patients on treatment for at least four months, seven patients on treatment for at least six months, and two patients on treatment for at least nine months. Currently, nine patients remain in the study. To date, six patients dosed at 1.8 g/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 central nervous system (CNS) adverse events were reported most often.

 

Our findings as of December 4, 2019, based on our early efficacy data, showed that the two patients in the trial with more severe ulcerated NL (both ulcerated patients had ulcers for more than two months prior to dosing) had the ulcers fully closed after two and nine months after starting the trial, respectively. In addition, while in the trial, one of the ulcerated patients developed small ulcers at other sites as a result of contact trauma to the site and these ulcers resolved within one month. Ten patients presented with mild to moderate NL and no ulceration. These patients have shown a slight improvement but not as dramatic as the more serious ulcerated patients. Based on the literature and clinical experience, approximately 30% of the patients with NL are expected to have open ulcers with the ulceration naturally healing in less than 20% of these patients.

 

The degeneration of tissue occurring at the NL lesion site is caused by a number of pathophysiological changes, which has made it extremely difficult to develop effective treatments for this condition. PCS-499 may provide a solution since PCS-499 and its metabolites affect a number of biological pathways, several of which contribute to the pathophysiology associated with NL. We are continually evaluating the data we receive.

 

We plan to request a meeting with the FDA before the end of 2019 to further discuss the development of PCS-499, including the next clinical trial.

 

License Agreement for HT-100

 

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, HT-100. As partial consideration for the licenses, 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 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 made and pay royalties based on annual licensed sales. We are also required to split any milestone payments we receive with Akashi based on any sub-license agreement we may enter into.

 

In previous clinical trials in Duchenne Muscular Dystrophy (DMD), HT-100 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, FDA has removed the drug off clinical hold and defined how HT-100 can resume clinical trials in DMD. Once we have obtained adequate funding, we plan to develop HT-100 in rare adult fibrotic related diseases such as focal segmental glomerulosclerosis, idiopathic pulmonary fibrosis or Scleroderma.

 

 - 41 - 
 

 

Results of Operations

 

Comparison of the Three and Nine Months Ended September 30, 2019 and 2018

 

The following table summarizes our operations loss during the periods indicated:

 

   Three Months Ended       Nine Months Ended     
   September 30,       September 30,     
   2019   2018   Change   2019   2018   Change 
Operating Expenses                              
Research and development expenses  $584,979   $611,612   $(26,633)  $1,804,169   $2,477,481   $(673,312)
General and administrative expenses   419,028    451,359    (32,331)   1,219,329    1,305,511    (86,182)
Total operating expenses   1,004,007    1,062,971    (58,964)   3,023,498    3,782,992    (759,494)
Other Income (Expense)                              
Interest Expense   (2,271)   (8,323)   6,052    (12,973)   (154,377)   141,404 
Interest Income   1,503    6,457    (4,954)   10,886    10,163    723 
Total other income (expense)   (768)   (1,866)   1,098    (2,087)   (144,214)   142,127 
Net Operating Loss Before Income Tax Benefit   1,004,775    1,064,837    (60,062)   3,025,585    3,927,206    (901,621)
Income Tax Benefit   (141,251)   (212,015)   70,764    (442,152)   (771,332)   329,180 
Net Loss  $863,524   $852,822   $10,702   $2,583,433   $3,155,874   $(572,441)

 

Revenues.

 

We had no revenue during the three and nine months ended September 30, 2019 and 2018. 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) amortization of the exclusive license intangible asset 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.

 

During the three months ended September 30, 2019 and 2018, we incurred total research and development expenses of approximately $585,000 and $612,000 respectively, for the continued development and testing of our lead product, PCS-499. Research and development expenses were approximately $1.8 million and $2.5 million for the nine months ended September 30, 2019 and 2018, respectively. Costs for the three and nine months ended September 30, 2019 and 2018 were as follows:

 

   Three months ended
September 30,
   Nine months ended
September 30,
 
   2019   2018   2019   2018 
Amortization of intangible assets  $198,832   $200,256   $596,496   $422,814 
Research and development salaries and benefits   245,053    156,098    564,935    494,274 
Preclinical, clinical trial and other costs   141,094    255,258    642,738    1,560,393 
Total  $584,979   $611,612   $1,804,169   $2,477,481 

 

 - 42 - 
 

 

Overall, during the three months ended September 30, 2019, our research and development costs decreased by $26,633 when compared to the three months ended September 30, 2018. As a result of exercising the CoNCERT license and option agreement for PCS-499 in March 2018, and the purchase of a software license, we recognized $198,832 and $200,256 of amortization expense during the three months ended September 30, 2019 and 2018, respectively. The decrease in amortization expense of approximately $1,400 was from the software license purchased in the second quarter of 2018, which began recognition in the third quarter of 2018. Our research and development salaries, stock-based compensation and benefits increased by approximately $89,000 for the three months ended September 30, 2019 when compared to the same period in 2018 due to the stock-based compensation expense. Much of the reduction related to lower research and development expenses for preclinical, clinical trial and other costs of $117,000 during the three months ended September 30, 2019 when compared to the same period in 2018. During the three months ended September 30, 2019, our focus was on enrolling patients in our trial, along with other trial costs, including providing doses of PCS-499 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 PCS-499 and costs related to having to establishing a new site to contract manufacture the tablets of PCS-499 needed for our clinical trial since the original CoNCERT tablet manufacturing site could no longer be used.

 

During the nine months ended September 30, 2019, our research and development costs decreased by $673,312 as compared to the nine months ended September 30, 2018. The decrease is due to a reduction of approximately $918,000 in preclinical, clinical trial, and other costs. The decrease was offset by an increase of approximately $71,000 in salaries, benefits, and other related payroll costs and an increase of approximately $174,000 in amortization expense for the software license and CoNCERT license agreement when comparing the nine months ended September 30, 2019 to the same period in 2018.

 

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 nine months ended September 30, 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 condensed consolidated balance sheet at September 30, 2019. 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 now been paid in full. As part of the original pledge agreement, we issued 113,279 shares of common stock and warrants to purchase 113,279 shares of common stock to PoC Capital but held 56,639 shares and warrants to purchase 56,639 shares as collateral until certain payment milestones were met. PoC Capital forfeited the pledged collateral in the amended agreement and the shares have been reissued to Processa and will be retired.

 

We incurred $435,544 in costs related to our Phase 2a trial during the nine months ended September 30, 2019 and expect to spend approximately an additional $113,400 during the remainder of 2019 and approximately $711,000 thereafter through 2021 to complete our current trial. We believe, based on our estimates, the cost of our current Phase 2a trial to be approximately $1.5 to 1.6 million. PoC Capital paid for $900,000 of the clinical trial costs, and we will cover the remaining $600,000 to $700,000 with funds received from the sale of our 8% 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 continue our Phase 2a clinical trial activities for NL in 2019 and into 2020.

 

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.

 

 - 43 - 
 

 

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 September 30, 2019 decreased by $32,331 to $419,028 from $451,359 for the three months ended September 30, 2018. The decrease related mostly to a reduction in professional fees of approximately $198,000 and in office and travel expenses of approximately $8,000. The decrease was offset by increased payroll and related costs of approximately $143,000 (including stock-based compensation of $180,422) as we built our finance team and hired our Chief Financial Officer 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 $25,000 in other administrative costs such as insurance, rent and repairs and maintenance expenses. Our tax expense also increased by approximately $6,000 due to our 2018 and estimated 2019 Delaware franchise taxes. Franchise tax in Delaware is calculated using the number of shares of Common Stock and Preferred Stock that the Company is authorized to issue. We were authorized to issue 350,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock, which is disproportionately large in relation to our outstanding shares. This resulted in a high tax bill for 2018 and requires us to pay quarterly estimated taxes for 2019. We have amended our Certificate of Incorporation to reduce our authority to issue 100,000,000 shares of Common Stock and 1,000,000 shares of Preferred Stock, thereby reducing our future Delaware franchise tax.

 

For the nine months ended September 30, 2019, general and administrative expenses decreased by $86,182 to $1,219,329 from $1,305,511 for the nine months ended September 30, 2018. The decrease related to a cybersecurity fraud loss of approximately $144,000, for which we did not have insurance coverage, which occurred during the nine months ended September 30, 2018. We also saw reductions in professional fees for legal, accounting, advisory and consulting costs of approximately $400,000. The overall decrease in our general and administrative expenses during the nine months ended September 30, 2019 was also offset by increases of approximately $352,000 in payroll and related costs (including stock-based compensation of $302,053) and approximately $106,000 in administrative costs such as insurance, rent, office, taxes and travel expenses.

 

Reimbursable expenses from CorLyst of $26,594 and $79,058 for rent and other costs during the three and nine months ended September 30, 2019 were comparable for the same periods in 2018.

 

We expect the general and administrative expenses to continue to increase as we add staff to support our growing research and development activities and the administration required to operate as a public company.

 

Interest Expense.

 

Interest expense was $2,271 and $8,323 for the three months ended September 30, 2019 and 2018, respectively, and $12,973 and $154,377 for the nine months ended September 30, 2019 and 2018, respectively, related to our $2.58 million of Senior Convertible Notes sold in 2017. In May 2018, $2.35 million of these Senior Convertible Notes were converted into shares of our common stock and stock purchase warrants. On July 2, 2019, the remaining $230,000 was converted into shares of common stock and stock purchase warrants. Included in interest expense is the amortization of debt issuance costs totaling $0 and $3,709 for the three months ended September 30, 2019 and 2018, respectively, and $0 and $64,841 for the nine months ended September 30, 2019 and 2018, respectively.

 

Interest Income.

 

Interest income was $1,503 and $6,457 for the three months ended September 30, 2019 and 2018, respectively, and $10,886 and $10,163 for the nine months ended September 30, 2019 and 2018, respectively. Interest income represents interest earned on money market funds and certificates of deposit.

 

 - 44 - 
 

 

Income Tax Benefit.

 

An income tax benefit of $141,251 and $212,015 was recognized for the three months ended September 30, 2019 and 2018, respectively, and $442,152 and $771,332 for the nine months ended September 30, 2019 and 2018, respectively. When we acquired CoNCERT’s license and “Know-How” in exchange for Processa Stock, we created a deferred tax liability. Each year, the deferred tax liability is decreased by 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. Our taxable net operating loss for 2019 is expected to be $1.3 million less than that of 2018 as we focus on the Phase 2a clinical trial study and decrease administrative costs such as professional fees. As a result, the income tax benefit recognized in the three and nine months ended September 30, 2019 is $70,764 and $329,180 less than the comparable periods in 2018, respectively.

 

Comparison of the year ended December 31, 2018 and 2017

 

The following table summarizes our operations and net loss during the periods indicated:

 

   Years Ended December 31, 
   2018   2017 
Operating expenses:          
Research and development  $3,085,317   $964,164 
General and administrative   1,439,623    838,269 
           
Loss from operations   (4,524,940)   (1,802,433)
Other income (expense):          
Interest expense, net   (142,908)   (53,882)
           
Net loss before income tax benefit   (4,677,848)   (1,856,315)
Income tax benefit   902,801     
           
Net loss  $(3,765,047)  $(1,856,315)

 

Revenues.

 

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 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 years ended December 31, 2018 and 2017, we incurred total research and development expenses of $3,085,317 and $964,164, respectively, for the continued development and testing of our lead product, PCS-499. A majority of costs incurred in 2017 and all the costs incurred in 2018 relate to the development of PCS-499.

 

On March 19, 2018, we exercised the License and Option Agreement with CoNCERT for PCS-499 that we entered into on October 4, 2017.

 

 - 45 - 
 

 

Costs for the years ended December 31, 2018 and 2017 were as follows.

 

   Year Ended December 31, 
   2018   2017 
Amortization of intangible assets  $621,647   $- 
Research and development salaries and benefits   650,702    520,734 
Preclinical, clinical and other costs   1,812,968    443,430 
           
Total  $3,085,317   $964,164 

 

During the year ended December 31, 2018, our research and development costs increased by $2,121,153 to $3,085,317 from $964,164 for year ended December 31, 2017.

 

As we noted above, we have had significant events related to our continued development of PCS-499, including:

 

  in March 2018, exercising the CoNCERT license and option agreement for PCS-499;
     
  in June 2018, the FDA granting us orphan-drug designation to our leading clinical compound PCS-499 for the treatment in NL;
     
  in August 2018, completing a healthy human volunteer study demonstrating that PCS-499 was well tolerated and had the potential to be more beneficial in NL than existing drugs used off-label;
     
  in December 2018, began recruiting and screening patients for our 12-patient Phase 2 study “A Study to Evaluate the Safety and Tolerability of PCS-499 for the Treatment of Necrobiosis Lipoidica”;
     
  in January 2019, we began dosing our patients with PCS-499; and
     
  in August 2019, our clinical trial was fully enrolled as we dosed our final patient with PCS-499.

 

As a result of exercising the CoNCERT license and option agreement for PCS-499 in March 2018, and the purchase of a software license, we recognized $621,647 of amortization expense during the year ended December 31, 2018. We had no similar expense in 2017. During 2018, we completed a Phase 1 study to evaluate the safety and pharmacokinetics of single and optional multiple dosing regimens of modified release (“MR”) formulations of PCS-499 compared to Trental® (pentoxifylline) administered to healthy subjects. We also incurred costs to establish a new site to contract manufacture the tablets of PCS-499 needed for our clinical trial since the original CoNCERT tablet manufacturing site could no longer be used. Our research and development salaries and benefits increased by $129,968 for the year ended December 31, 2018 when compared to the same period in 2017 related to an increase in full-time equivalent staff and related staff costs. We recognized higher research and development expenses for preclinical, clinical trial and other costs of $1,369,538 during the year ended December 31, 2018 when compared to the same period in 2017 due to the completion of our Phase 1 pharmacokinetics study described above, the scaling up of the manufacture of clinical trial material we will need for the Phase 2a clinical trial for NL, beginning our Phase 2a clinical study in fourth quarter of 2018, and for other research and development costs that we incurred.

 

During the early part of 2017, we were finalizing a contract we had with Drexel University that officially terminated in June 2017. We incurred nominal costs in 2017 in connection with the contract we had with Drexel University. Most of the research and development costs incurred in 2017 related to PCS-499.

 

We anticipate our research and development costs to increase in the future as we continue our Phase 2a clinical trial activities for NL in 2019 and 2020. We incurred $519,531 during the year ended December 31, 2018 and $435,544 during the nine months ended September 30, 2019 in costs related to our Phase 2a trial. We expect to spend approximately an additional $113,400 during the remainder of 2019 and approximately $711,000 through 2021 to complete our current trial. We anticipate the cost of our current Phase 2a trial to be approximately $1.5 to $1.6 million. PoC Capital paid $900,000 of the clinical trial costs, and we will cover the remaining $600,000 to $700,000 with funds received from the sale of our 8% 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.

 

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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 year ended December 31, 2018 increased by $601,354 to $1,439,623 from $838,269 for the year ended December 31, 2017. The increase related primarily to professional fees for legal, accounting, advisory and consulting costs of approximately $223,000 related to our operations and compliance and other costs of operating as a public company. During 2018, we experienced increased payroll, and related costs of approximately $199,000 as we build our finance team, including hiring a Chief Financial Officer and a Director of Finance and Accounting to support our growth and public company reporting and compliance requirements. Included in this amount is stock-based compensation of $74,063. During 2018, we also incurred a cybersecurity fraud loss of approximately $144,000 for which we did not have insurance coverage. The remaining increase in our general and administrative expense was due to additional administrative costs such as insurance, office expenses, continuing education, and travel. Reimbursements from CorLyst of $107,402 for rent and other costs during the year ended December 31, 2018 were approximately $4,000 less than reimbursements for the same period in 2017.

 

We expect the general and administrative expenses to continue to increase as we add staff to support our growing research and development activities and the administration required to operate as a public company.

 

Interest Expense.

 

Interest expense was $161,205 and $59,063 for the years ended December 31, 2018 and 2017, respectively related to our $2.58 million of 8% Senior Notes sold in 2017. In March 2018, $2.35 million of these Senior Convertible Notes were converted into shares of our common stock and stock purchase warrants. Included in interest expense is the amortization of debt issuance costs totaling $67,069 and $23,370 for the years ended December 31, 2018 and 2017, respectively.

 

Interest Income.

 

Interest income was $18,297 and $5,181 for the years ended December 31, 2018 and 2017, respectively. Interest income represents interest earned on money market funds and certificates of deposit.

 

Income Tax Benefit.

 

An income tax benefit of $902,801 was recognized for the year ended December 31, 2018 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. The deferred tax liability may be offset by the deferred tax assets resulting from 2017 and 2018 net operating losses. This offset results in the recognition of a deferred tax benefit shown in the consolidated statements of operations for 2018. There was no income tax benefit in 2017 since the tax benefit of the net loss was offset by a full valuation allowance.

 

 - 47 - 
 

 

Prior to the asset purchase transaction on October 4, 2017, Promet was treated as a partnership for federal income tax purposes and thus was not subject to income taxes at the entity level. Therefore, no provision/benefit or liability for income taxes was included in the consolidated financial statements through October 4, 2017.

 

Financial Condition

 

At September 30, 2019, we had $504,302 in cash. Net cash used in our operating activities during the nine months ended September 30, 2019 totaled $1,236,659 compared to $3,243,938 for the nine months ended September 30, 2018.

 

Our total assets decreased by approximately $1.7 million to $10.8 million at September 30, 2019 compared to $12.5 million at December 31, 2018. This decrease is a result of the operating costs we have incurred during the nine months ended September 30, 2019, net of operating costs funded through the stock subscription receivable, offset by the recording of right of use assets in conjunction with the adoption of ASC 842.

 

At September 30, 2019, our total liabilities, not including the impact of deferred income taxes, decreased by $187,284 to $458,420 when compared to $645,704 at December 31, 2018. This decrease is due primarily to the conversion of Senior Convertible Notes and changes in accounts payable, offset by the recognition of operating lease liabilities in accordance with the adoption of ASC 842 and prepaid reimbursements.

 

We had $0 and $230,000 of Senior Convertible Notes outstanding at September 30, 2019 and 2018, respectively. The Senior Convertible Notes outstanding at September 30, 2018 were held by Canadian investors that, although qualifying for automatic and mandatory conversion, 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. On July 2, 2019, we converted the principal and related accrued interest of approximately $259,000 into 18,106 shares of common stock and 18,106 stock purchase warrants.

 

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 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. On November 30, 2019, we closed our bridge financing and issued $745,000 of 8% Senior Convertible Notes (“8% Senior Notes”) to accredited investors. In order to preserve cash, we have also delayed some of our cash outflows, primarily through the deferred payment of salaries ($48,840 which has been accrued and included in accrued expenses during the three and nine months ended September 30, 2019) until such time as we have raised sufficient funding.

 

At September 30, 2019, we had $504,302 in cash and cash equivalents compared to $1.7 million at December 31, 2018. During the nine months ended September 30, 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 condensed consolidated balance sheet at September 30, 2019.

 

On September 20, 2019, we entered into two separate LOC Agreements” with DKBK and current shareholder CorLyst, 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 will bear an 8% annual interest rate. We have not drawn any amounts under these LOC Agreements.

 

 - 48 - 
 

 

In connection with the LOC Agreements, we amended the existing pledge agreement with PoC Capital on September 30, 2019 to reduce the amount committed from $1.8 million to $900,000, which has now been paid in full. As part of the original pledge agreement, we issued 113,279 shares of common stock and warrants to purchase 113,279 shares of common stock to PoC Capital but held 56,639 shares and warrants to purchase 56,639 shares as collateral until certain payment milestones were met. PoC Capital forfeited the pledged collateral in the amended agreement. We anticipate the total cost to fund our current Phase 2a clinical trial of PCS-499 for patients with NL to be between $1.5 to $1.6 million. We will fund the remaining $600,000 to $700,000 with funds received from the sale of our 8% Senior Notes and our LOC Agreements, as necessary.

 

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 PCS-499 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.

 

We believe that the net proceeds from this offering, together with our existing cash, will enable us to fund our operating expenses and capital expenditure requirements through 2021. With our existing cash and depending on the amount of the net proceeds from this offering, we expect to be able to complete our Phase 2a trial and begin development of HT-100 and/or other product candidates. We have based these estimates on assumptions that may prove to be incorrect, and we could use our available capital resources sooner than we currently expect.

 

Cash Flows

 

The following table sets forth our sources and uses of cash and cash equivalents for the nine months ended September 30, 2019 and 2018:

 

   Nine months ended 
   September 30, 
   2019   2018 
Net cash provided by (used in):          
Operating activities  $(1,236,659)  $(3,243,938)
Investing activities   -    (22,282)
Financing activities   -    2,843,014 
Net increase in cash and cash equivalents  $(1,236,659)  $(423,206)

 

Net cash used in operating activities

 

We used net cash in our operating activities of $1,236,659 and $3,243,938 during the nine months ended September 30, 2019 and 2018, respectively. The decrease in cash used in operating activities in 2019 compared to the comparable period in 2018 was related to a decreased amount of direct cash costs incurred. Our net loss for the nine months ended September 30, 2019 was $572,441 less than the comparable period in 2018. This was due primarily to our focus on PCS-499 leading to an overall reduction in our research and development expenses. The cash used in operating activities for the nine months ended September 30, 2019 was further reduced as 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. We also incurred amortization expense of $596,496 (versus $422,814 for the comparable period in 2018) and $394,164 of stock-based compensation (versus $50,528 for the comparable period in 2018) during the nine months ended September 30, 2019. During the nine months ended September 30, 2018, we incurred a one-time cybersecurity fraud loss of $144,200 in January 2018, which was recognized in general and administrative expenses.

 

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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 nine months ended September 30, 2019. Net cash used during the nine months ended September 30, 2018 was $22,282 for transaction costs related to the exercise of the option agreement with CoNCERT and for the purchase of a software license.

 

Net cash provided by financing activities

 

We had no cash sources or uses for financing activities during the nine months ended September 30, 2019. Net cash provided from financing activities was approximately $2.8 million for the nine months ended September 30, 2018.

 

Funding Requirements

 

We believe that the net proceeds from this offering, together with our existing cash, will enable us to fund our operating expenses and capital expenditure requirements through 2021. With our existing cash and the net proceeds of this offering, we expect to be able to complete our Phase 2a trial and begin development of HT-100 We have based these estimates on assumptions that may prove to be incorrect, and we could use our available capital resources sooner than we currently expect. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could deplete our capital resources sooner than we expect.

 

Our future capital requirements will depend on many factors, including:

 

  the cost of future trials for PCS-499 and the cost of manufacturing;
     
  the initiation, progress, timing, costs and results of drug discovery, pre-clinical studies and clinical trials of HT-100 any other future product candidates;
     
  the number and characteristics of product candidates that we pursue;
     
  the outcome, timing and costs of seeking regulatory approvals;
     
  the costs associated with hiring additional personnel and consultants as our pre-clinical and clinical activities increase;
     
  the emergence of competing therapies and other adverse market developments;
     
  the costs involved in preparing, filing, prosecuting, maintaining, expanding, defending and enforcing patent claims, including litigation costs and the outcome of such litigation;
     
  the extent to which we in-license or acquire other products and technologies; and
     
  the costs of operating as a public company.

 

 - 50 - 
 

 

Until such time, if ever, as we can generate substantial product revenues to support our capital requirements, we expect to finance our cash needs through a combination of public or private equity offerings, debt financings, collaborations and licensing arrangements or other capital sources. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders.

 

Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, or other similar arrangements with third parties, we may need to relinquish valuable rights to our product candidates, future revenue streams, research programs or may have to grant licenses on terms that may not be favorable to us and/or may reduce the value of our common stock. If we are unable to raise additional funds through equity or debt financings as and when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market our product candidates.

 

Identifying potential product candidates and conducting pre-clinical studies and clinical trials is a time-consuming, expensive and uncertain process that takes many years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of product candidates that we do not expect to be commercially available for the next couple of years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all.

 

Contractual Obligations and Commitments

 

The following table summarizes our contractual obligations at September 30, 2019:

 

   Payments Due by Period 
   Total   Less than
1 Year
   1-3
Years
   3-5
Years
   More than
5 Years
 
   (in thousands) 
Operating lease obligations  $276,234   $93,582   $182,652   $           -   $       - 
                          
Total  $276,234   $93,582   $182,652   $-   $- 

 

We enter into contracts in the normal course of business with CROs, clinical supply manufacturers and vendors for pre-clinical studies, research supplies and other services and products for operating purposes. These contracts generally provide for termination after a notice period, and, therefore, are cancelable contracts and not included in the table above.

 

We have also entered into license and collaboration agreements with third parties, which are in the normal course of business. We have not included future payments under these agreements in the table of contractual obligations above since obligations under these agreements are contingent upon future events such as our achievement of specified development, regulatory, and commercial milestones, or royalties on net product sales

 

Off Balance Sheet Arrangements

 

During the periods presented we did not have, nor do we currently have, any off-balance sheet arrangements as defined under SEC rules.

 

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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.

 

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.

 

While our significant accounting policies are described in more detail in Note 2 to our December 31, 2018 audited consolidated financial statements included elsewhere in this prospectus, we believe the following accounting policies are the most critical to the judgments and estimates used in the preparation of our 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 PCS-499 and each metabolite thereof and the related income tax effects. The capitalized costs for the license rights to PCS-499 include $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 PCS-499 as the exclusive license rights represent intangible assets to be used in research and development activities that have future alternative uses. We had no recorded intangible assets as of December 31, 2017.

 

We used a market approach to estimate the fair value of the common stock issued to CoNCERT in this transaction. Our estimate was based on the final negotiated number of shares of stock issued and the volume weighted average price of our common stock quoted on the OTC Pink Marketplace over a 45-day period preceding the mid-February 2018 finalized negotiation of the modification to the option and license agreement with CoNCERT. We believe the fair values used to record intangible assets acquired in this transaction are based upon reasonable estimates and assumptions given the facts and circumstances as of the related valuation dates.

 

We determined our intangible assets to have finite useful lives and review them for impairment when facts or circumstances suggest that the carrying value of these assets may not be recoverable.

 

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Clinical Trial Accruals / Research and Development

 

As part of the process of preparing our consolidated financial statements, we are required to estimate expenses resulting from our obligations under contracts with vendors, CROs and consultants and under clinical site agreements related to conducting our clinical trials. The financial terms of these contracts vary and may result in payment flows that do not match the period over which materials or services are provided under such contracts.

 

Our clinical trial accruals are based on estimates of patient enrollment and related costs at clinical investigator sites as well as estimates for the services received and efforts expended pursuant to contracts with multiple research institutions and CROs that conduct and manage clinical trials on our behalf. During a clinical trial, we will adjust the clinical expense recognition if actual results differ from estimates. We make estimates of accrued expenses as of each balance sheet date based on the facts and circumstances known at that time. Our clinical trial accruals are partially dependent on the accurate reporting by the CRO and other third-party vendors. Although we do not expect estimates to differ materially from actual amounts, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that may be too high or too low for any reporting period.

 

Payments made to third parties under these arrangements in advance of the receipt of the related services are recorded as prepaid expenses until the services are rendered. We expense research and development costs as they are incurred.

 

Stock-Based Compensation

 

We account for the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award, determined on the date of grant. Significant assumptions utilized in determining the fair value of our stock options include the volatility rate, estimated term of the options, risk-free interest rate and forfeiture rate. The expense is to be recognized over the period during which an employee is required to provide services in exchange for the award. We estimate forfeitures at the time of grant and make revisions, if necessary, at each reporting period if actual forfeitures differ from those estimates.

 

Non-employee share-based compensation awards generally are immediately vested and have no future performance requirements by the non-employee and the total share-based compensation charge is recorded in the period of the measurement date.

 

We 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 Notes 4 and 9 to our September 30, 2019 and December 31, 2018 consolidated financial statements, respectively, included elsewhere in this prospectus 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, 2018 and 2017 and for the nine months ended September 30, 2019 and 2018.

 

All stock-based compensation costs are recorded in general and administrative or research and development costs in the 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.

 

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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 Maryland, California, and Colorado state tax returns. There are currently no income tax examinations underway for these jurisdictions. However, tax years from and including 2014 remain open for examination by federal and state income tax authorities.

 

During the years ended December 31, 2018 and 2017, we incurred net operating losses of $4,667,848 and $606,113, respectively. We did not record any income tax benefit for the $1,356,840 ($373,368 tax effected) and $347,530 ($95,504 tax effected) of general and administrative expenses treated as deferred start-up expenditures for tax purposes for the years ended December 31, 2018 and 2017, respectively. Additionally, we did not record any income tax benefit for the $258,583 ($71,283 tax effected) of tax losses incurred in 2017 which resulted in tax loss carryforwards. 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 2018 and 2017 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

 

A description of recently issued and adopted accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 1 to the unaudited condensed consolidated financial statements included elsewhere in this prospectus.

 

Emerging Growth Company

 

We are an “emerging growth company” as that term is defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (i.e., those that have not had a registration statement declared effective under the Securities Act, or do not have a class of securities registered under the Exchange Act) are required to comply with such new or revised financial accounting standards. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. We may still take advantage of all of the other provisions of the JOBS Act, which include, but are not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, the reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and the exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

 

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BUSINESS

 

DESCRIPTION OF BUSINESS

 

Overview

 

Processa is an emerging 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), will begin developing a newly acquired drug once adequate funding has been obtained and searching for additional products for our portfolio.

 

The Processa drug portfolio approach 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.

 

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 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 at some level that the drug can treat or potentially can treat patients with the condition.

 

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To advance its mission, Processa has assembled an experienced and talented management and product development team. The Processa team is experienced in developing drug products through all principal regulatory tiers from IND enabling studies to NDA submission. The Company’s combined scientific, development and regulatory experience has resulted in more than 30 drug approvals by the FDA, over 100 meetings with FDA and involvement with more than 50 drug development programs, including drug products targeted to patients who have an unmet medical need. 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.

 

Processa Portfolio: PCS-499

 

Processa’s lead product, PCS-499, is an oral tablet that is an analog (i.e., a compound having a structure similar to that of the approved drug, but differing from it in respect to a certain component of the molecule) of an active metabolite of an already approved drug called pentoxifylline (PTX). PTX (Trental®) was approved by the FDA on August 30,1984 for the treatment of patients with intermittent claudication. In the body PCS-499 is broken down to multiple metabolites with PCS-499 and many of these metabolites being pharmacologically active. In animal and healthy human volunteer studies, higher exposure of certain active metabolites are seen after PCS-499 administration compared to PTX. Despite the greater exposure to these pharmacologically active molecules, PCS-499 is tolerated at higher doses than the maximum recommended FDA dose of PTX based on animal toxicology studies as well healthy human volunteer trials.

 

Based on the pharmacological activity of PCS-499 and the off-label use of PTX, we have identified multiple unmet medical need conditions where the use of PCS-499 may result in clinical efficacy. The lead indication currently under development for PCS-499 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 is caused by a number of pathophysiological changes which has made it extremely difficult to develop effective treatments for this condition. PCS-499 may provide a solution since PCS-499 and its metabolites affect a number of the biological pathways which contribute to the pathophysiology associated with NL.

 

On June 22, 2018, the FDA granted orphan-drug designation to PCS-499 for the treatment of NL. On September 28, 2018, the FDA cleared our IND for PCS-499 in NL such that we could move forward with the Phase 2a safety-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 PCS-499 in patients with NL, and expect to use the collected safety and efficacy data to design of future clinical trials. Based on toxicology studies and healthy human volunteer studies, Processa and the FDA agreed that a PCS-499 dose of 1.8 grams/day would be the highest dose administered to NL patients in this Phase 2 trial. As anticipated, the PCS-499 dose of 1.8 grams/day, 50% greater than the maximum tolerated dose of PTX, appears to be well tolerated with no serious adverse events reported. To date, six of the patients dosed at 1.8 g/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.

 

Our findings as of December 4, 2019, based on our early efficacy data, showed that the two patients in the trial with more severe ulcerated NL (both ulcerated patients had ulcers for more than two months prior to dosing) had the ulcers fully closed after two and nine months after starting the trial, respectively. In addition, while in the trial, one of the ulcerated patients developed small ulcers at other sites as a result of contact trauma to the site and these ulcers resolved within one month. Ten patients presented with mild to moderate NL and no ulceration. These patients have shown a slight improvement but not as dramatic as the more serious ulcerated patients. Based on the literature and clinical experience, approximately 30% of the patients with NL are expected to have open ulcers with the ulceration naturally healing in less than 20% of these patients.

 

One patient after 3 months of treatment and after altering her hypertension medication had a transient prolonged QTc interval 4 days after adding a beta blocker to her hypertension regimen. Her PCS-499 regimen was decreased to 1.2 grams/day even though her QTc prolongation was only transient. The safety and tolerability of a dose 50% greater than the maximum tolerated dose of PTX is in part what Processa plans to demonstrate in this trial.

 

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In our evaluation of the efficacy, after 9 months of treatment we have seen significant changes in the two patients with more severe NL, one patient having a single ulcer and the second having multiple ulcers. In both patients, all of these ulcers have completely closed. Historically, less than 20% of the patients with ulcers have a natural progression to complete closure and it is even less likely when multiple ulcers exist. In those patients without ulcers, we have only seen a slight change in the NL lesion.

 

Given the positive side effect profile of PCS-499 and the efficacy seen in the severe NL patients, Processa will be requesting a meeting with the FDA before the end of 2019 to discuss the design of a pivotal adaptive design trial as a Special Protocol Assessment (SPA). A SPA is an advanced declaration from the FDA that a Phase III trial’s design, clinical endpoints, and statistical analyses are acceptable for FDA approval if the agreed upon approval endpoints are met within the study.

 

The FDA cleared the IND for PCS-499 in NL such that we are able to move directly into a Phase 2 trial based on the pre-clinical and clinical trials when the compound was developed by CoNCERT Pharmaceuticals for a different indication (i.e. diabetic nephropathy) and a Processa Phase 1 single dose - multiple dose study. When we licensed PCS-499 from CoNCERT in March 2018, all the previous preclinical, Phase 1 and Phase 2 clinical data was also acquired. Based on the development program and pre-IND meeting with FDA, Processa was able to show sufficient pharmacological, toxicological, pharmacokinetic and safety data to support the Phase 2 program in NL without having to repeat pre-clinical and Phase 1 work that had been previously conducted and submitted for the PCS-499 by CoNCERT. Pharmacologically, PCS-499 is believed to have a complex mechanism of action including anti-inflammatory, immunomodulatory, hemorheological and antifibrotic effects. PCS-499 may benefit NL patients based on its enhanced inhibition of cytokines (TNF-α, IFN-γ) that induce inflammation and granuloma formation as well as its effect on red blood cell deformability and promotion of platelet deaggregation, which can improve microcirculatory flow. From a safety perspective, six clinical trials with PCS-499 including four studies in healthy volunteers and two studies in patients with chronic kidney disease have been completed. Since PCS-499, is an analog (i.e., a compound having a structure similar to that of the 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) of an active metabolite of an already approved drug called PTX, we were able to define a development and regulatory strategy for PCS-499 based on the previous PCS-499 data and our findings in the literature that PTX has some pharmacological effects and clinical evidence that could be relevant to the treatment of NL.

 

The development program to date, including the studies performed by Processa and CoNCERT, has included five Phase 1 studies, which were conducted to support the clinical pharmacology program for PCS-499, one Phase 2 study in patients with chronic kidney disease (CKD) with Type 2 diabetes, and one Phase 2 study in NL patients. Of the five Phase 1 studies, four were conducted by CoNCERT (CP505.1001, CP.505.1002, CP505.1003 and CP505.1004) and one by Processa (PCS499.1005). Also, four of the Phase 1 studies were conducted in healthy volunteers and one Phase 1 study was performed in patients with chronic kidney disease (CKD). Each of the Phase 1 studies was conducted to assess the safety, tolerability and pharmacokinetics (PK) of PCS499 oral tablets. No serious adverse events related to PCS-499 have been experienced during the conduct of these studies.

 

Two Phase 1 studies to note are CP505.1004 and PCS499.1005. CP505.1004 was designed to assess the effect of food on the bioavailability and tolerability of single 600 mg doses of PCS-499 in 14 healthy volunteers. Based on the results of this study, the product appears to be better tolerated when administered with food. PCS499.1005 conducted by Processa, was a Phase 1 study to evaluate the safety and PK of single and optional multiple dosing regimens of MR formulations of PCS-499 compared to Trental® (pentoxifylline) administered to healthy subjects under fed conditions. Part 1 was a single-dose administration of three MR formulations of PCS-499 and Trental® to 12 healthy volunteers. Part 2 of the study was an open-label, 3-period crossover comparison in 6 healthy volunteers administered at two different dosage regimens of PCS-499 (900 mg twice daily or 600 mg three times a day) and Trental® after multiple dosing over 4 days. Administration of PCS-499 produced higher concentrations/exposures of the parent and primary metabolite (PCS-499 and D-PTX) on a per mg basis as compared to the concentrations/exposures of the parent and primary metabolite (PTX and PTX-M1) following PTX administration with no increase in frequency or severity of adverse events. From this study, a new MR formulation was chosen based on the PK results and both dosage regimens of PCS-499 were shown to be well tolerated.

 

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In addition to the Phase 1 studies, CoNCERT had previously conducted a Phase 2 study (CP505.2001) which was a randomized, double-blind, placebo-controlled multicenter study designed to assess the safety and efficacy of treatment with PCS-499 600 mg tablets orally, twice daily, in CKD patients with Type 2 diabetes receiving concomitant angiotensin-converting enzyme inhibitor (ACEi) and/or angiotensin II receptor blocker (ARB) therapy. This study included a 48-week double-blind, randomized, placebo-controlled period to evaluate the safety and efficacy of 600 mg PCS-499 twice daily in which 177 patients were enrolled. Of the patients that completed the double-blind period of the study, 102 patients chose to enroll in a 48-week open-label period (in which all patients received PCS-499). The primary endpoint of this Phase 2 study was the change after 24 weeks in urinary albumin to creatinine ratio (UACR), a marker of kidney tissue damage. The UACR outcomes at 24 weeks of treatment resulted in no significant differences between the PCS-499 and placebo groups. However, at 48 weeks, UACR in patients receiving PCS-499 increased 24 mg/g from baseline compared to 223 mg/g increase in patients receiving placebo (p = 0.097). While not statistically significant, the longer-term treatment duration suggests a favorable trend in UACR for patients receiving PCS-499 as compared to placebo. At 48 weeks, a measurable impact on serum creatinine, a key secondary endpoint, was also observed. The mean serum creatinine level in patients receiving PCS-499 increased by 0.13 mg/dL compared to an increase of 0.21 mg/dL in patients receiving placebo through the 48 weeks of treatment (p = 0.057), reflecting 38% lower levels in the PCS-499 treatment group. Furthermore, 10.3% of patients receiving placebo experienced a 50% or greater increase in serum creatinine levels after 48 weeks compared with 1.5% of patients receiving PCS-499 (p = 0.026). In this Phase 2 study, the overall incidence of serious adverse events was consistent with what might be expected, given the target population studied and the underlying medical histories and characteristics of the patients. Of the patients enrolled in the double-blind phase of the study, a total of 33 patients experienced at least one serious adverse event (SAE) with no meaningful differences between treatment groups [18 (20.2%) of the PCS-499 patients and 15 (17.0%) of the placebo patients]. Cardiac disorders were the most frequently reported SAEs, with 4 (4.5%) PCS-499 and 7 (8.0%) placebo patients experiencing at least one event in this system organ class. Infections and infestations [6 (6.7%) PCS-499 patients and 4 (4.5%) placebo patients] and vascular disorders [4 (4.5%) PCS-499 patients and 6 (6.8%) placebo patients] were the system organ classes with the next highest incidence of SAEs. Twelve (11.8%) of the 102 patients that entered the open-label treatment phase experienced at least one SAE during the open-label treatment phase, of which, infections and infestations [5 (4.9%) patients], cardiac disorders [3 (2.9%) patients], and renal and urinary disorders [3 (2.9%) patients], were the most frequently reported SAEs by system organ class. All SAEs that occurred during the study (in both the double-blind and open-label periods) were judged to be not related to PCS-499. The most common adverse events associated with PCS-499 were gastrointestinal effects such as nausea, diarrhea and vomiting.

 

Processa is also evaluating other unmet medical need conditions for PCS-499 such as primary glomerulonephritis and other conditions which would benefit from the diverse pharmacological properties associated with PCS-499 and its active metabolites. Although our evaluation to date has identified numerous conditions which are likely to benefit from the use of PCS-499, we are presently evaluating which indications meet our portfolio requirement of high potential return on investment and lower risk of development failure.

 

Processa Portfolio: HT-100

 

Processa recently entered into a license agreement for an anti-fibrotic, anti-inflammatory drug which affects collagen expression and the TGF-β pathway. HT-100 was previously developed for Duchenne Muscular Dystrophy (DMD) in pediatric patients but an incomplete toxicology package and a mismanaged DMD pediatric trial resulted in a serious adverse event, placing the drug temporarily on clinical hold. Since efficacy was observed in some DMD pediatric patients and FDA has removed the clinical hold, Processa plans to better define the therapeutic window and develop HT-100 in an adult unmet medical need condition (e.g., idiopathic pulmonary fibrosis, primary glomerulonephritis) and then move back to the pediatric focused indications at a later time.

 

Processa Portfolio: Additional Drugs

 

The Processa team is also looking to acquire additional drug candidates that fit our drug portfolio criteria.

 

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Manufacturing

 

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 believe that we have or will have sufficient quantities of drug substance and drug product to supply our current Phase 2a trial of PCS0499 for patients with NL.

 

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 the success of PCS-499, if approved, are likely to include its efficacy, safety, convenience and price. There are currently no FDA-approved drugs for the treatment of patients with NL.

 

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 to:

 

  obtain and maintain international and domestic patent and other legal protections for the proprietary technology, inventions and improvements we consider important to our business;
     
  prosecute and defend our patents, once obtained;
     
  preserve our trade secrets; and
     
  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 composition of matter, medical uses, processes for preparation and formulations. Our current patent portfolio consists of patents licensed from CoNCERT Pharmaceuticals for PCS-499 and related compounds. The portfolio includes approximately 29 allowed or issued patents (of which 9 are in the United States), which are directed to claims for composition of matter, methods of use, and certain chemical processes. Of these, 3 allowed or issued patents in the U.S. and Europe, as well as 2 in each of Australia, Canada, China, Japan and Mexico and 1 in each of Taiwan, Hong Kong, Russia, South Korea, the Philippines, South Africa, and Brazil cover the composition of matter of PCS-499. The allowed or issued U.S. and European patents are expected to expire between 2029 and 2031, excluding any extension or adjustment of patent term that may be available.

 

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 Agreement with CoNCERT Pharmaceuticals, Inc.

 

On October 4, 2017, Promet entered into the CoNCERT Agreement with CoNCERT. 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 PCS-499 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 (PCS-499 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 outlined in the Agreement.

 

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.

 

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License Agreement with Akashi Therapeutics, Inc.

 

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 (HT-100) that also promotes healthy muscle fiber regeneration. In previous clinical trials in Duchenne Muscular Dystrophy (DMD), HT-100 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, FDA has removed the drug off clinical hold and defined how HT-100 can resume clinical trials in DMD. Once we have obtained adequate funding, we plan to develop HT-100 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 HT-100. As partial consideration for the licenses, we paid $10,000 to Akashi upon full execution of the 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 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:

 

  completion of pre-clinical laboratory tests, animal studies and formulation studies in compliance with the FDA’s good laboratory practice, or GLP, regulations;
     
  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;
     
  performance of adequate and well-controlled human clinical trials in accordance with GCP requirements to establish the safety and efficacy of the proposed drug product for each indication;
     
  submission to the FDA of an NDA;
     
  satisfactory completion of an FDA advisory committee review, if applicable;
     
  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;
     
  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 Compliance with any post-approval requirements, including the potential requirement to implement a REMS or to conduct a post-approval study.

 

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.

 

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Human clinical trials are typically conducted in three sequential phases, which may overlap or be combined:

 

  Phase 1 clinical trials generally involve a small number of healthy volunteers or disease-affected patients who are initially exposed to a single dose and then multiple doses of the product candidate. The primary purpose of these clinical trials is to assess the metabolism, pharmacologic action, side effect tolerability and safety of the drug.
     
  Phase 2 clinical trials involve studies in disease-affected patients to determine the dose required to produce the desired benefits. At the same time, safety and further pharmacokinetic and pharmacodynamic information is collected, possible adverse effects and safety risks are identified and a preliminary evaluation of efficacy is conducted.
     
  Phase 3 clinical trials generally involve a larger number of patients at multiple sites and are designed to provide the data necessary to demonstrate the effectiveness of the product for its intended use, its safety in use and to establish the overall benefit/risk relationship of the product and provide an adequate basis for product approval. These trials may include comparisons with placebo and/or other comparator treatments. The duration of treatment is often extended to mimic the actual use of a product during marketing.

 

Post-approval trials, sometimes referred to as Phase 4 clinical trials, may be conducted after initial marketing approval. These trials are 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.

 

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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