Processa Pharmaceuticals(PCSA) - 2020 Q3 - Quarterly Report

PART 1: FINANCIAL INFORMATION Financial Statements The company reported a net loss of $4.7 million for the nine months ended September 30, 2020, with total assets decreasing and liabilities increasing, while a subsequent $17.1 million public offering significantly improved liquidity Condensed Consolidated Balance Sheets Total assets decreased to $9.6 million by September 30, 2020, from $10.9 million at year-end 2019, while total liabilities increased to $4.1 million, leading to a decline in stockholders' equity Condensed Consolidated Balance Sheet Highlights (Unaudited) | Account | September 30, 2020 ($) | December 31, 2019 ($) | | :--- | :--- | :--- | | Total Current Assets | $375,888 | $1,007,141 | | Total Assets | $9,589,176 | $10,883,134 | | Total Current Liabilities | $2,657,872 | $1,191,564 | | Total Liabilities | $4,061,947 | $2,870,584 | | Total Stockholders' Equity | $5,527,229 | $8,012,550 | - Subsequent to the quarter end, on October 6, 2020, the company closed an underwritten public offering, raising net proceeds of approximately $17.1 million[10] Condensed Consolidated Statements of Operations The net loss for the nine months ended September 30, 2020, significantly increased to $4.68 million from $2.58 million in the prior year, primarily due to a $2.0 million expense for in-process R&D acquisition Statement of Operations Summary (Unaudited) | Metric | Nine Months Ended Sep 30, 2020 ($) | Nine Months Ended Sep 30, 2019 ($) | | :--- | :--- | :--- | | Research and development expenses | $1,461,416 | $1,804,169 | | Acquisition of in-process R&D | $2,000,000 | $0 | | General and administrative expenses | $1,282,239 | $1,219,329 | | Operating Loss | ($4,743,655) | ($3,023,498) | | Net Loss | ($4,679,035) | ($2,583,433) | | Net Loss per Share | ($0.84) | ($0.47) | Condensed Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity decreased from $8.01 million to $5.53 million by September 30, 2020, primarily due to the $4.68 million net loss, partially offset by $2.0 million in stock issued for a license and $0.36 million in stock-based compensation - For the nine months ended September 30, 2020, total stockholders' equity decreased by $2,485,321, from $8,012,550 to $5,527,229[15] - Key non-cash equity activities included issuing 250,000 shares valued at $2.0 million for the Yuhan license agreement and recognizing $357,039 in stock-based compensation[15][69] Condensed Consolidated Statements of Cash Flows Net cash used in operating activities decreased to $0.87 million for the nine months ended September 30, 2020, while financing activities provided $0.50 million, resulting in a $0.37 million overall decrease in cash and cash equivalents Cash Flow Summary (Unaudited) | Activity | Nine Months Ended Sep 30, 2020 ($) | Nine Months Ended Sep 30, 2019 ($) | | :--- | :--- | :--- | | Net cash used in operating activities | ($867,839) | ($2,136,659) | | Net cash provided by financing activities | $501,731 | $900,000 | | Net Decrease in Cash | ($366,108) | ($1,236,659) | | Cash and Cash Equivalents – End of Period | $325,428 | $504,302 | - A significant non-cash activity was the issuance of $2.0 million in common stock for the acquisition of in-process research and development related to the Yuhan License Agreement[18] Notes to Condensed Consolidated Financial Statements The notes detail the company's drug development focus, including lead candidate PCS499 and newly licensed assets, highlighting key financial events such as license acquisitions, a $700,000 line of credit draw, a $162,459 PPP loan, and a subsequent $17.1 million public offering expected to fund operations into Q4 2022 - The lead product, PCS499, has completed the patient portion of its Phase 2A trial for Necrobiosis Lipoidica (NL), and a Phase 2B trial is planned to begin in 2021[20][27] - In Q3 2020, the company acquired an exclusive license for PCS12852 from Yuhan Corporation for $2 million in stock, which was immediately expensed as in-process R&D[28][29] - Contingent license agreements for PCS6422 (from Elion) and PCS11T (from Aposense) were executed, with conditions met subsequent to the quarter-end following a successful public offering and Nasdaq up-listing on October 6, 2020[34][42][96][91] - On October 6, 2020, the company closed a public offering with net proceeds of approximately $17.1 million, which is expected to fund operations into the fourth quarter of 2022[50][82][106] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's clinical-stage focus and in-licensing strategy, noting a net loss increase to $4.7 million for the nine months ended September 30, 2020, primarily due to a $2.0 million R&D acquisition, with a subsequent $17.1 million public offering improving liquidity into Q4 2022 Overview and Strategy The company, a clinical-stage biopharmaceutical firm, focuses on in-licensing drugs with existing clinical evidence to de-risk development, with its portfolio including lead candidate PCS499 and newly acquired assets PCS12852 and PCS6422 - The company's strategy is to in-license clinical-stage drugs that have some existing clinical evidence, aiming to achieve significant clinical milestones within 2-4 years[111][112][118] - The Phase 2A trial for lead product PCS499 in Necrobiosis Lipoidica (NL) is complete, with a randomized, placebo-controlled Phase 2B trial planned to begin recruiting in 2021[110][122] - In Q3 2020, the company acquired exclusive licenses for PCS12852 from Yuhan Corporation and PCS6422 from Elion Oncology, Inc. to expand its pipeline[123][126] Results of Operations For the nine months ended September 30, 2020, R&D expenses decreased to $1.5 million but were offset by a new $2.0 million in-process R&D acquisition, leading to a widened net loss of $4.7 million from $2.6 million in the prior year Comparison of Operating Results (Nine Months Ended Sep 30) | Expense Category | 2020 ($) | 2019 ($) | Change ($) | | :--- | :--- | :--- | :--- | | Research and development | $1,461,416 | $1,804,169 | ($342,573) | | Acquisition of in-process R&D | $2,000,000 | $0 | $2,000,000 | | General and administrative | $1,282,239 | $1,219,329 | $62,910 | | Net Loss | ($4,679,035) | ($2,583,433) | ($2,095,602) | - The decrease in R&D expenses was due to lower costs for salaries and benefits ($153,915 decrease) and preclinical/clinical trials ($188,838 decrease)[137] - A $2.0 million expense was recorded for the acquisition of in-process research and development in connection with the Yuhan License Agreement[143] Liquidity and Capital Resources The company's liquidity significantly improved with a $17.1 million public offering on October 6, 2020, expected to fund operations into Q4 2022, following prior funding from a $700,000 related-party line of credit and a $162,459 PPP loan - On October 6, 2020, the company closed an underwritten public offering with net proceeds of approximately $17.1 million[153][155] - Management believes the post-offering funds are sufficient to meet capital requirements into the fourth quarter of 2022[155] - Prior to the offering, operations were funded by a $700,000 line of credit from a related party (DKBK), a $162,459 PPP loan, and deferral of certain employee salaries[156] Cash Flow Summary (Nine Months Ended Sep 30) | Activity | 2020 ($) | 2019 ($) | | :--- | :--- | :--- | | Net cash used in operating activities | ($867,839) | ($2,136,659) | | Net cash provided by financing activities | $501,731 | $900,000 | Critical Accounting Policies and Use of Estimates The company confirms no changes to its critical accounting policies from its most recent Form 10-K, which require significant management estimates and judgments for areas like stock-based compensation and acquired assets - There have been no changes in the company's critical accounting policies from its most recent Annual Report on Form 10-K[168] - The preparation of financial statements requires management to make estimates and judgments that affect reported amounts of assets, liabilities, revenues, and expenses[166] Quantitative and Qualitative Disclosures About Market Risk This section is not applicable as the company qualifies as a smaller reporting company - As a smaller reporting company, Processa Pharmaceuticals is not required to provide this information[170] Controls and Procedures Management concluded that disclosure controls and procedures were not effective as of September 30, 2020, due to ongoing material weaknesses like inadequate segregation of duties, with remediation efforts underway - Management concluded that disclosure controls and procedures were not effective as of September 30, 2020[171] - Ongoing material weaknesses include inadequate segregation of duties and insufficient documentation of policies and procedures for financial reporting[172] - The company is continuing to take remediation actions to rectify these control deficiencies[174] PART II. OTHER INFORMATION Legal Proceedings The company is not currently a party to any material legal proceedings - The company is not currently a party to any material legal proceedings[176] Risk Factors The company highlights significant risks, including potential disruptions from the COVID-19 pandemic, the uncertain forgiveness of its $162,459 PPP loan, and the risk of in-license agreement termination due to unmet milestones - The COVID-19 pandemic poses a significant risk of disrupting operations, clinical studies, and access to capital[178] - The company received a $162,459 PPP loan in May 2020, which is subject to review and may not be fully forgiven[179] - In-license agreements are subject to termination if the company breaches material terms, including failure to meet due diligence milestones for product development[182] Unregistered Sales of Equity Securities and Use of Proceeds In September 2020, the company issued 250,000 shares of common stock to Yuhan Corporation as part of a license agreement, exempt from registration under Section 4(a)(2) of the Securities Act - In September 2020, the company issued 250,000 shares of common stock to Yuhan Corporation in connection with a license agreement, exempt from registration under Section 4(a)(2) of the Securities Act[183] Defaults Upon Senior Securities The company reports no defaults upon its senior securities during the period - None reported[186] Mine Safety Disclosures This item is not applicable to the company - Not applicable[187] Other Information The company reports no other information for the period - None reported[188] Exhibits The report lists all exhibits filed with the Form 10-Q, including key license agreements with Yuhan Corporation and Elion Oncology, Inc., and Sarbanes-Oxley certifications - Filed exhibits include license agreements with Yuhan Corporation and Elion Oncology, Inc., as well as required officer certifications under Sarbanes-Oxley Sections 302 and 906[189]