Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
1 – Organization and Summary of Significant Accounting Policies
Business
Activities and Organization
We
are a clinical stage biopharmaceutical company focused on the development of drug products that are intended to improve the survival
and/or quality of life for patients who have a high unmet medical need condition or who have no alternative treatment. Our most
advanced product candidate, PCS499, is an oral tablet that is a deuterated analog of one of the major metabolites of pentoxifylline
(PTX or Trental®). We have completed the patient portion of the Phase 2A trial for PCS499 and are in the
process of closing the trial, and we plan to begin recruiting for a Phase 2B trial in the first quarter of 2021. We have also
begun the continued development of two newly acquired drugs, PCS12852 and PCS6422. We will continue to search for
additional products for our portfolio that meet our portfolio criteria.
PCS499
Our
lead product, PCS499, is an oral tablet that is a deuterated analog of one of the major metabolites of pentoxifylline (PTX or
Trental®). The advantage of PCS499 is that it potentially may work in many conditions because PCS499 and its metabolites
act on multiple pharmacological targets that are important in the treatment of these conditions. Based on its pharmacological
activity, we have identified unmet medical need conditions where the use of PCS499 may result in clinical efficacy. The lead indication
currently under development for PCS499 is Necrobiosis Lipoidica (NL). NL is a chronic, disfiguring condition affecting the skin
and the tissue under the skin typically on the lower extremities with no currently approved FDA treatments. NL presents more commonly
in women than in men and ulceration can occur in approximately 30% of NL patients which can lead to more severe complications,
such as deep tissue infections and osteonecrosis threatening life of the limb. Approximately 22,000 - 55,000 people in the United
States and more than 120,000 people outside the United States are affected with ulcerated NL.
The
degeneration of tissue occurring at the NL lesion site may be caused by a number of pathophysiological changes which has made
it extremely difficult to develop effective treatments for this condition. Because PCS499
and its metabolites affect a number of biological pathways, several of which could contribute to the pathophysiology associated
with NL, PCS499 may provide a novel treatment solution for NL, a condition for which there are currently no FDA-approved treatments.
On
June 18, 2018, the FDA granted orphan-drug designation for PCS499 for the treatment of NL. On September 28, 2018, the IND for
PCS499 in NL was made effective by the FDA, such that we could move forward with a Phase 2A trial multicenter, open-label prospective
trial designed to determine the safety and tolerability of PCS499 in patients with NL. The study initially had a six-month treatment
phase and a six-month optional extension phase. In December 2019, we informed patients and sites that the study would conclude
after the treatment phase and there would no longer be an extension phase. The first enrolled NL patient in this Phase 2A clinical
trial was dosed on January 29, 2019 and the study completed enrollment on August 23, 2019. The last patient visit took place in
February 2020. Due to COVID-19 related restrictions at certain sites, study closeout and database lock did not occur until
October 2020. We are currently finalizing the data results and clinical study report.
The
main objective of the trial was to evaluate the safety and tolerability of PCS499 in patients with NL and to use the collected
safety and efficacy data to design future clinical trials. Based on toxicology studies and healthy human volunteer studies, Processa
and the FDA agreed that a PCS499 dose of 1.8 grams/day would be the highest dose administered to NL patients in this Phase 2A
trial. As anticipated, the PCS499 dose of 1.8 grams/day, 50% greater than the maximum tolerated dose of PTX, appeared to be well
tolerated with no serious adverse events reported. All adverse events reported in the study were mild in severity. As expected,
gastrointestinal symptoms were the most noted adverse events and reported in four patients, all of which were mild in severity
and resolved within 1-2 weeks of starting dosing.
Two
of the twelve patients in the study presented with more severe ulcerated NL and had ulcers for more than two months prior to dosing.
At baseline, the reference ulcer in one of the two patients measured 3.5 cm2 and had completely closed by Month
2 of treatment. The second patient had a baseline reference ulcer of 1.2 cm2 which completely closed by Month
9 during the patient’s treatment extension period. In addition, while in the trial, both patients also developed small ulcers
at other sites, possibly related to contact trauma, and these ulcers resolved within one month. However, the other ten patients,
presenting with mild to moderate NL and no ulceration, had more limited improvement of the NL lesions during treatment. Historically,
less than 20% of all the patients with NL naturally progress to complete healing over many years after presenting with NL. Although
the natural healing of the more severe NL patients with ulcers has not been evaluated independently, medical experts who treat
NL patients believe that the natural progression of an open ulcerated wound to complete closure would be significantly less than
the 20% reported as the maximum percentage of patients who naturally heal over several years after NL presentation.
On
March 25, 2020, we met with the FDA and discussed the clinical program, as well as the nonclinical and clinical pharmacology plans
to ultimately support the submission of the PCS499 New Drug Application (NDA) in the U.S. for the treatment of ulcers in NL patients.
With input from the FDA, we will be designing the next trial as a randomized, placebo-controlled trial to evaluate the ability
of PCS499 to completely close ulcers in patients with NL. We initially planned to begin recruiting for the randomized, placebo-controlled
trial in the fourth quarter of 2020, but we now expect to begin recruiting patients in 2021 due to delays in fundraising efforts.
This PCS499 NL study will be a randomized, placebo-controlled Phase 2B study to better understand the potential response of
NL patients on drug and on placebo. After obtaining the results from this Phase 2B study, we expect to meet with FDA to discuss
our Phase 2B drug and placebo response findings while further discussing the next steps to obtain approval.
PCS12852
On
August 19, 2020, we entered into a License Agreement (“Yuhan License Agreement”) with Yuhan Corporation (“Yuhan”),
pursuant to which we acquired an exclusive license to develop, manufacture and commercialize PCS12852 (formerly known as YH12852)
globally, excluding South Korea.
We
accounted for the Yuhan License Agreement as an asset acquisition since it did not meet the definition of a business, and therefore
recorded the intangible asset at fair value, equal to the consideration paid of $2 million in the form of 500,000 shares of our
common stock (see Note 12). Because the intangible asset represents in-process research and development with no alternative
future use, we immediately expensed the fair value in the Statement of Operations. At September 30, 2020, only 250,000 shares
had been issued.
PCS12852
is a novel, potent and highly selective 5-hydroxytryptamine 4 (5-HT4) receptor agonist. Other 5-HT receptor agonists with less
5-HT4 selectivity have been shown to successfully treat gastrointestinal (GI) motility disorders such as chronic constipation,
constipation-predominant irritable bowel syndrome, functional dyspepsia and gastroparesis. Less selective 5-HT4 agonists, such
as cisapride, have been either removed from the market or not approved because of the cardiovascular side effects associated with
the drugs binding to other receptors, especially 5-HT receptors other than 5-HT4.
We
plan to meet with the FDA in early 2021 to further define the clinical development program required for the PCS12852 product and
discuss a Phase 2A proof of concept randomized, placebo-controlled study for PCS12852 in a gastrointestinal (GI) motility dysfunction
disorder (e.g., gastroparesis, post-operative ileus also called gastrointestinal dysfunction (POGD), opioid induced constipation,
chronic idiopathic constipation). The purpose of the Phase 2A trial would be to better define a dosage regimen of PCS128552 that
could be potentially efficacious and safe in a larger pivotal study. The patients with these types of conditions have an abnormal
pattern of GI motility in the absence of mechanical obstruction. For example, gastroparesis is characterized by postprandial
fullness (early satiety), nausea, vomiting and bloating. It is known to occur in more than 4 million people in the US, but many still do not have access to medications that work or can be tolerated by the patients. The only FDA-approved product
for gastroparesis is a dopamine D2 Antagonist metoclopramide (Gimoti®), which includes an FDA “Black Box” warning
for tardive dyskinesia (TD), a serious movement disorder that is often irreversible. Because of this adverse effect, the treatment
is limited to no more than 12 weeks. POGD is characterized by nausea, vomiting, abdominal distension and/or delated passage
of flatus or stool, following surgery (most commonly with abdominal surgery). It is the most common cause of prolonged length
of stay in hospital following GI surgery, leading to an increase in healthcare costs. The only FDA-approved drug to treat POGD
is a mu-opioid receptor antagonist alvimopan (Entereg®), which is only available through a restricted program for short-term
use due to the potential risk of myocardial infarction with long-term use.
Two
clinical studies have been previously conducted by Yuhan with PCS12852. In the first-in-human clinical trial (Protocol YH12852-101),
the initial safety and tolerability of PCS12852 were evaluated after single and multiple oral doses in healthy subjects. PCS12852
increased stool frequency with faster onset when compared to prucalopride, an FDA approved drug for the treatment of chronic idiopathic
constipation. Compared to the group receiving prucalopride, the PCS12852 dose groups showed higher stool frequency for 24 hours
following single dosing and had faster onset of spontaneous bowel movements (SBMs) with comparable or relatively higher Bristol
Stool Form Scale score (lower stool consistency) for 24 hours following first dosing. In addition, based on an increase of ≥
1 SBM/week from baseline during 7-day multiple dosing, the PCS12852 dose group had a higher percent of patients with an increase
than the prucalopride group. All doses of PCS12852 were safe and well tolerated and no serious adverse events (SAE) occurred during
the study. The most frequently reported adverse events (AEs) were headache, nausea and diarrhea which were temporal, manageable,
and reversible within 24 hours. There were no clinically significant changes in platelet aggregation or ECG parameters including
no sign of QTc prolongation in the study. The second study conducted was a Phase 1/2A clinical trial (Protocol YH12852-102) to
evaluate the safety, tolerability, pharmacokinetics and pharmacodynamics of PCS12852 immediate release (IR) formulation and delayed
release (DR) formulation after multiple oral dosing. PCS12852 was safe and well tolerated after single and multiple administrations.
The most frequent AEs for both the IR and DR formulations of PCS12852 were headache, nausea and diarrhea, but the incidences of
these AEs were comparable with those of the prucalopride 2 mg group. These AEs, which were transient and mostly mild in severity,
are also commonly observed with other 5-HT4 agonists. Both formulations of PCS12852 also showed pharmacologic activity as assessed
using various pharmacodynamic parameters for stool assessment. In this study, PCS12852 also showed an enhanced gastric emptying
rate in patients assessed by the Gastric Emptying Breath Test (GEBT). The change from baseline in gastric emptying rate increased
in both 0.1 mg and 0.05 mg PCS12852 groups and showed a statistically significant change from baseline in the 0.1 mg group.
Yuhan
had also conducted extensive toxicological studies for the product that demonstrated that the product is safe for use and can
be moved quickly into Phase 2 studies.
PCS6422
On
August 23, 2020, we entered into a License Agreement (“Elion License Agreement”) with Elion Oncology, Inc. (“Elion”),
pursuant to which we acquired an exclusive contingent license to develop, manufacture and commercialize PCS6422 globally. On October
6, 2020, in connection with the closing of our underwritten offering and listing on the Nasdaq Capital Market, the contingencies
related to this license were met.
We
have not accounted for the Elion License Agreement at September 30, 2020 since the contingency was not met until we closed our
underwritten public offering and up-listed our common stock to the Nasdaq stock market, which occurred on October 6, 2020. We
believe this license agreement represents an asset acquisition since it did not meet the definition of a business, and we plan
to record the intangible asset acquired at fair value equal to the consideration paid of $3.3 million in the form of 825,000 shares
of our common stock and $100,000 cash. Because the intangible assets represent in-process research and development with no alternative
future use, we will immediately expense the fair value in the fourth quarter in our statement
of operations.
Elion
acquired the eniluracil (PCS6422) product from Fennec Pharmaceuticals (formerly known as Adherex Technologies) in 2016. PCS6422
is an oral, potent, selective, and irreversible inhibitor of dihydropyrimidine dehydrogenase (DPD), the enzyme that rapidly metabolizes
5-FU, a common chemotherapy drug, to inactive metabolites, such as α-fluoro-β-alanine (F-Bal). F-Bal is thought to
cause the neurotoxicity and Hand–Foot Syndrome (HFS) associated with 5-FU, and greater formation of F-Bal appears to be
associated with a decrease in the antitumor activity of 5-FU. HFS can affect daily living activities, quality of life, and requires
dose interruptions/adjustments and even therapy discontinuation resulting in suboptimal tumor effects. We believe that the inhibition
of DPD by PCS6422 may significantly improve exposure to 5-FU and reduce 5-FU side effects related to F-Bal. One dose of PCS6422
irreversibly blocks DPD activity for up to two weeks until DPD levels recover via de novo synthesis of the DPD enzyme. Thus, we
believe inhibition of tumor DPD will result in higher 5-FU intra-tumoral concentration and potentially better tumor response along
with the decrease in F-Bal.
Fluoropyrimidines
(e.g., 5-FU) are still the cornerstone of treatment for many different types of cancers, either as monotherapy or in combination
with other chemotherapy agents by an estimated two million patients annually. Xeloda®, an oral pro-drug of 5-FU,
is approved as first-line therapy for metastatic colorectal and breast cancer. However, its use is limited by adverse effects
such as the development of HFS in up to 60% of patients.
Elion
evaluated the potential for the combination of PCS6422 with capecitabine (Xeloda®, and, together with PCS6422, known as ECAPE)
as a treatment of advanced gastrointestinal (GI) tumors. Nonclinical efficacy data indicated that in colorectal cancer models,
pretreatment with PCS6422 enhanced the antitumor activity of capecitabine. PCS6422 increased the antitumor potency of capecitabine
while not increasing the toxicity. The antitumor efficacy of the combination of PCS6422 and capecitabine was tested in several
xenograft animal models with human breast, pancreatic and colorectal cancer cells. These preclinical xenograft models demonstrate
that PCS6422 potentiates the antitumor activity of capecitabine and significantly reduces the dose of capecitabine required to
be efficacious.
Elion
met with the FDA in 2019 and agreed upon the clinical development program required for the combination of PCS6422 and capecitabine
as first-line therapy for metastatic colorectal cancer when treatment with fluoropyrimidine therapy alone is preferred. Subsequently,
an IND has been granted safe to proceed by FDA on May 17, 2020, for the Phase 1B study. This Phase 1B study will evaluate the
safety and tolerability of several dose combinations of PCS6422 and capecitabine in advanced GI tumor patients and should be initiated
in the first half of 2021.
Other
DPD enzyme inhibitors (e.g. Gimeracil used in Teysuno® approved only outside the US) act as competitive reversible inhibitors.
These agents must be present when 5-FU or capecitabine are administered to inhibit 5-FU breakdown by DPD in order to improve the
efficacy and safety profiles of 5-FU. Given the reversible nature of their effect on DPD, over time 5-FU metabolism to F-Bal will
return, decreasing the amount of 5-FU in the cancer cells and decreasing the potential cytotoxicity on the cancer cells. There
is also evidence that administering DPD inhibitors directly with 5-FU may also decrease the antitumor effect of the 5-FU. Because
PCS6422 is an irreversible inactivator of DPD, it can be dosed the day before capecitabine administration and its effect on DPD
can last longer than the reversible DPD inhibitors and beyond the time 5-FU exists in the cancer cell. We believe this can optimize
the potential cytotoxic effect and minimize the metabolism of 5-FU.
Prior
to Elion’s involvement, two multicenter Phase 3 studies were conducted in patients with colorectal cancer (CRC) with PCS6422
administered in 10-fold excess to 5-FU. Unfortunately, we believe the dose of PCS6422 during these trials was not optimal, and
that PCS6422 was not administered early enough to irreversibly affect the DPD enzyme, thus the regimen tended to produce less
antitumor benefit than the control arm with the standard regimen of 5-FU/leucovorin (LV) without PCS6422. Later preclinical work
suggested that when PCS6422 was present at the same time as and in excess to 5-FU, it diminished the antitumor activity of 5-FU,
which we believe supports the proposal of exploring clinically dosing PCS6422 several hours before 5-FU to allow its clearance
before the administration of 5-FU.
PCS11T
On
May 24, 2020, we entered into an exclusive License Agreement with Aposense, Ltd., (“Aposense”), pursuant to which
we were granted a contingent license in Aposense’s patent rights and know-how to develop and commercialize their next generation
irinotecan cancer drug, PCS11T (formerly known as ATT-11T). The grant of license was conditioned on (i) our closing of
an equity financing and successful up-listing to Nasdaq which we completed on October 6, 2020 and (ii) Aposense obtaining the
approval of the Israel Innovation Authority for the consummation of the transactions contemplated by the agreement, which was
obtained on August 24, 2020.
We
have not accounted for the License Agreement with Aposense at September 30, 2020 since the contingency was not met until we closed
our underwritten public offering and up-listed our common stock to the Nasdaq stock market, which occurred on October 6, 2020.
We believe this license agreement represents an asset acquisition since it did not meet the definition of a business, and we plan
to record the intangible asset acquired at fair value equal to the consideration paid of $2.5 million in the form of 625,000 shares
of our common stock. Because the intangible assets represent in-process research and development with no alternative future use,
we will immediately expense the fair value in the fourth quarter in our statement
of operations.
PCS11T
is a novel lipophilic anti-cancer pro-drug that is being developed for the treatment of the same solid tumors as prescribed for
irinotecan. This pro-drug is a conjugate of a specific proprietary Aposense molecule connected to SN-38, the active metabolite
of irinotecan. The proprietary molecule in PCS11T has been designed to allow PCS11T to bind to cell membranes to form an inactive
pro-drug depot on the cell with SN-38 preferentially accumulating in the membrane of tumors cells and the tumor core. This unique
characteristic may make the therapeutic window of PCS11T wider than other irinotecan products such that the antitumor effect of
PCS11T could occur at a much lower dose with a milder adverse effect profile than irinotecan. Despite the widespread use of commercially
marketed irinotecan products in the treatment of metastatic colorectal cancer and other cancers resulting in peak annual sales
of approximately $1.1 billion, irinotecan has a narrow therapeutic window and includes an FDA “Black Box” warning
for both neutropenia and severe diarrhea. There is, therefore, a substantial unmet need to overcome the limitations of the current
commercially marketed irinotecan products, improving efficacy and reducing the severity of treatment emergent adverse events.
We believe the potential wider therapeutic window of PCS11T will likely lead to more patients responding with less side effects
when on PCS11T compared to other irinotecan products.
Pre-clinical
studies conducted to date showed that PCS11T demonstrated tumor eradication at much lower doses than irinotecan across various
tumor xenograft models. PCS11T does not affect acetyl choline esterase (AChE) activity in human and rat plasma in vitro, which
would suggest that PCS11T will show an improved safety profile, compared to irinotecan, which is known for its cholinergic-related
side effects.
We
are currently planning to manufacture the product at a GMP facility, conduct the toxicological studies required to file the IND
and initiate the Phase 1B study in oncology patients with solid tumors in 2022-2023.
PCS100
On
August 29, 2019, we entered into an exclusive license agreement with Akashi Therapeutics, Inc. (“Akashi”) to develop
and commercialize an anti-fibrotic, anti-inflammatory drug, PCS100 (formerly known as HT-100), which also promotes healthy muscle
fiber regeneration. In previous clinical trials in Duchenne Muscular Dystrophy (DMD), PCS100 showed promising improvement in the
muscle strength of non-ambulant pediatric patients. Although the FDA placed a full clinical hold on the DMD trial after a serious
adverse event in a pediatric patient, the FDA has partially removed the clinical hold and defined how PCS100 can resume clinical
trials in DMD. At the present time, we are evaluating the potential GMP manufacturing facilities and the potential indications
for PCS100.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions
of the Securities and Exchange Commission (“SEC”) on Form 10-Q and Article 8 of Regulation S-X.
Accordingly,
they do not include all the information and disclosures required by U.S. GAAP for complete financial statements. All material
intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements include all adjustments necessary, which are of a normal and recurring nature, for
the fair presentation of the Company’s financial position and of the results of operations and cash flows for the periods
presented. These condensed consolidated financial statements should be read in conjunction with the audited financial statements
and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC. The
results of operations for the interim periods shown in this report are not necessarily indicative of the results that may be expected
for any other interim period or for the full year.
Liquidity
On October 6, 2020,
we closed an underwritten public offering of 4,800,000 shares of common stock for a public offering price of $4.00 per share.
Net proceeds from the offering were approximately $17.1 million. We believe these funds, along with our existing cash on that
day will provide us with sufficient capital to meet our anticipated operating and capital expenditure requirements into the fourth
quarter of 2022. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital
resources sooner than we currently expect. Our ultimate success depends on the outcome of our planned clinical trials and our
research and development activities, as disclosed above. We expect to incur additional losses in the future and we anticipate
the need to raise additional capital to fully implement our business plan if the cost of our planned clinical trials are greater
than we expect or they take longer than anticipated. We also expect to incur increased general and administrative expenses at
least through 2022 due in part to planned increased research and development activities as we conduct a Phase 2B trial for PCS499,
a Phase 1B trial for PCS6422, and a Phase 2A clinical trial for PCS12852. In addition, there may be costs we incur as we develop
these drug products that we do not currently anticipate requiring us to need additional capital sooner than currently expected.
Use
of Estimates
In
preparing our condensed consolidated financial statements and related disclosures in conformity with GAAP and pursuant to the
rules and regulations of the SEC, we make estimates and judgments that affect the amounts reported in the consolidated financial
statements and accompanying notes. Estimates are used for, but not limited to: stock-based compensation, determining the fair
value of acquired assets and assumed liabilities, intangible assets, and income taxes. These estimates and assumptions are continuously
evaluated and are based on management’s experience and knowledge of the relevant facts and circumstances. While we believe
the estimates to be reasonable, actual results could differ materially from those estimates and could impact future results of
operations and cash flows.
Intangible
Assets
Intangible
assets acquired individually or with a group of other assets from others (other than in a business combination) are recognized
at cost, including transaction costs, and allocated to the individual assets acquired based on relative fair values and no goodwill
is recognized. Cost is measured based on cash consideration paid. If consideration given is in the form of non-cash assets, liabilities
incurred, or equity interests issued, measurement of cost is based on either the fair value of the consideration given or the
fair value of the assets (or net assets) acquired, whichever is more clearly evident and more reliably measurable. Costs of internally
developing, maintaining or restoring intangible assets that are not specifically identifiable, have indeterminate lives or are
inherent in a continuing business are expensed as incurred.
Intangible
assets purchased from others for use in research and development activities and that have alternative future uses (in research
and development projects or otherwise) are capitalized in accordance with ASC Topic 350, Intangibles – Goodwill and Other.
Those that have no alternative future uses (in research and development projects or otherwise), and therefore no separate
economic value, are considered research and development costs and are expensed as incurred (see Notes 11, 12 and 13). Amortization
of intangibles used in research and development activities is a research and development cost.
Intangibles
with a finite useful life are amortized using the straight-line method unless the pattern in which the economic benefits of the
intangible assets are consumed or used up are reliably determinable. The useful life is the best estimate of the period over which
the asset is expected to contribute directly or indirectly to our future cash flows. The useful life is based on the duration
of the expected use of the asset by us and the legal, regulatory or contractual provisions that constrain the useful life and
future cash flows of the asset, including regulatory acceptance and approval, obsolescence, demand, competition and other economic
factors. We evaluate the remaining useful life of intangible assets each reporting period to determine whether any revision to
the remaining useful life is required. If the remaining useful life is changed, the remaining carrying amount of the intangible
asset will be amortized prospectively over the revised remaining useful life. If an income approach is used to measure the fair
value of an intangible asset, we consider the period of expected cash flows used to measure the fair value of the intangible asset,
adjusted as appropriate for company-specific factors discussed above, to determine the useful life for amortization purposes.
If
no regulatory, contractual, competitive, economic or other factors limit the useful life of the intangible to us, the useful life
is considered indefinite. Intangibles with an indefinite useful life are not amortized until its useful life is determined to
be no longer indefinite. If the useful life is determined to be finite, the intangible is tested for impairment and the carrying
amount is amortized over the remaining useful life in accordance with intangibles subject to amortization. Indefinite-lived intangibles
are tested for impairment annually and more frequently if events or circumstances indicate that it is more-likely-than-not that
the asset is impaired.
Impairment
of Long-Lived Assets and Intangibles Other Than Goodwill
We
account for the impairment of long-lived assets in accordance with ASC 360, Property, Plant and Equipment and ASC 350,
Intangibles – Goodwill and Other, which require that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to its expected future
undiscounted net cash flows generated by the asset. If such assets are considered to be impaired, the impairment to be recognized
is measured as the amount by which the carrying amounts of the assets exceed the fair value of the assets based on the present
value of the expected future cash flows associated with the use of the asset. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell. Based on management’s evaluation, there was no impairment loss
recorded during the nine months ended September 30, 2020.
Stock-based
Compensation
Stock-based
compensation expense is based on the grant-date fair value estimated in accordance with the provisions of ASC 718, Compensation-Stock
Compensation. We expense stock-based compensation to employees over the requisite service period based on the estimated grant-date
fair value of the awards. For awards that contain performance vesting conditions, we do not recognize compensation expense until
achieving the performance condition is probable. Stock-based awards with graded-vesting schedules are recognized on a straight-line
basis over the requisite service period for each separately vesting portion of the award. We estimate the fair value of stock
option grants using the Black-Scholes option pricing model, and the assumptions used in calculating the fair value of stock-based
awards represent management’s best estimates and involve inherent uncertainties and the application of management’s
judgment. Stock-based compensation costs are recorded as general and administrative or research and development costs in the statements
of operations based upon the underlying individual’s role.
Net
Loss Per Share
Basic
net loss per share is computed by dividing our net loss available to common stockholders by the weighted average number of shares
of common stock outstanding during the year. Diluted net loss per share is computed by dividing our net loss available to common
stockholders by the diluted weighted average number of shares of common stock during the period. Since we experienced a net loss
for all periods presented, basic and diluted net loss per share are the same. As such, diluted loss per share for the nine
months ended September 30, 2020 and 2019 excludes the impact of 1,146,112 and 662,443 potentially dilutive common stock, respectively,
related to outstanding stock options and warrants and the conversion of our 2017 and 2019 Senior Notes and line of credit agreement
since those shares would have an anti-dilutive effect on loss per share.
Recent
Accounting Pronouncements
From
time to time, the Financial Accounting Standards Board (“FASB”) or other standard setting bodies issue new accounting
pronouncements. Updates to the FASB Accounting Standards Codification are communicated through issuance of an Accounting Standards
Update (“ASU”). We have implemented all new accounting pronouncements that are in effect and that may impact our condensed
consolidated financial statements. We have evaluated recently issued accounting pronouncements and determined that there is
no material impact on our financial position or results of operations.
Note
2 – Intangible Assets
Intangible
assets as of September 30, 2020 and December 31, 2019 consisted of the following:
|
|
September
30, 2020
|
|
|
December
31, 2019
|
|
Gross
intangible assets
|
|
$
|
11,059,429
|
|
|
$
|
11,059,429
|
|
Less:
accumulated amortization
|
|
|
(2,013,471
|
)
|
|
|
(1,416,975
|
)
|
Total
intangible assets, net
|
|
$
|
9,045,958
|
|
|
$
|
9,642,454
|
|
Amortization
expense was $198,832 for both three months ended September 30, 2020 and 2019, and $596,496 for both nine months ended September
30, 2020 and 2019. Amortization expense is included within research and development expense in the accompanying condensed consolidated
statements of operations. Our estimated annual amortization expense in future periods will be approximately $790,000 per year.
The
capitalized costs for the license rights to PCS499 included the $8 million purchase price, $1,782 in transaction costs and $3,037,147
associated with the initial recognition of an offsetting deferred tax liability related to the acquired temporary difference for
an asset purchased that is not a business combination and has a tax basis of $1,782 in accordance with ASC 740-10-25-51 Income
Taxes. In accordance with ASC Topic 730, Research and Development, we capitalized the costs of acquiring the exclusive
license rights to PCS499, as the exclusive license rights represent intangible assets to be used in research and development activities
that management believes has future alternative uses.
Note
3 – Income Taxes
We
account for income taxes in accordance with ASC Topic 740, Income Taxes. Deferred income taxes are recorded for the expected
tax consequences of temporary differences between the tax basis of assets and liabilities for financial reporting purposes and
amounts recognized for income tax purposes. As of September 30, 2020, and December 31, 2019, we recorded a valuation allowance
equal to the full recorded amount of our net deferred tax assets related to deferred start-up costs and other minor temporary
differences since it is more-likely-than-not that such benefits will not be realized. The valuation allowance is reviewed quarterly
and is maintained until sufficient positive evidence exists to support its reversal.
A
deferred tax liability was recorded on March 19, 2018 when we received CoNCERT’s license and “Know-How” in exchange
for Processa stock that had been issued in the Internal Revenue Code Section 351 Transaction. The Section 351 Transaction treats
the acquisition of the license and Know-How for stock as a tax-free exchange. As a result, under ASC 740-10-25-51 Income Taxes,
we recorded a deferred tax liability of $3,037,147 for the acquired temporary difference between intangible assets for the financial
reporting basis of $11,038,929 and the tax basis of $1,782. The deferred tax liability will be reduced for the effect of non-deductibility
of the amortization of the intangible asset and may be offset by the deferred tax assets resulting from net operating tax losses.
Under
ASC 740-270 Income Taxes – Interim Reporting, we are required to project our annual federal and state effective
income tax rate and apply it to the year to date ordinary operating tax basis loss before income taxes. Based on the projection,
we expect to recognize the tax benefit from our projected ordinary tax loss, which can be used to offset the deferred tax liabilities
related to the intangible assets and resulted in the recognition of a deferred tax benefit shown in the condensed consolidated
statements of operations for nine months ended September 30, 2020 and 2019. No current income tax expense is expected for the
foreseeable future as we expect to generate taxable net operating losses.
In
September 2020, we acquired PCS12852 from Yuhan Corporation for an initial purchase price of $2 million. We also acquired
PCS6422 from Elion Oncology, Inc. for an initial purchase price of $3.4 million and PCS11T from Aposense Ltd. for $2.5
million during the fourth quarter of 2020. Our total acquired research and development for 2020 is expected to be $7.9
million. The assets acquired were determined to represent in-process research and development with no alternative future use,
so we immediately expensed the full $7.9 million for book purposes and capitalized the amount for tax purposes, creating
deferred tax assets. We also established a full valuation allowance against these deferred tax assets.
Under ASC 350-30-35-17A,
a research and development asset acquired must be considered an indefinite-lived intangible asset until completion or abandonment
of the R&D efforts. Only at that time can one accurately determine the useful life of the research and development asset and
begin amortization. Due to their current indefinite lives, we did not offset the acquired in-process research and development
assets against our existing deferred tax liability from the CoNCERT transaction explained above. We will determine the useful
life of the R&D assets when the research and development efforts are complete.
Note
4 – Stock-based Compensation
On
August 5, 2020, we granted 324,360 restricted stock awards under the 2019 Omnibus Incentive Plan to our employees and directors,
of which restricted stock awards for 214,078 shares of common stock vested on October 6, 2020 when we successfully completed our
underwritten public offering, and the remaining 110,282 shares of common stock vest over two years.
During
the nine months ended September 30, 2019, we granted 129,919 stock options to employees and non-employees under the 2019 Omnibus
Incentive Plan. At September 30, 2020, we had outstanding options to purchase 169,329 shares of our common stock, of which options
for the purchase of 63,272 shares of our common stock were vested.
We
recorded stock-based compensation expense for the three and nine months ended September 30, 2020 and 2019 as follows:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Research and development
|
|
$
|
40,715
|
|
|
$
|
88,707
|
|
|
$
|
64,170
|
|
|
$
|
92,111
|
|
General and administrative
|
|
|
123,791
|
|
|
|
180,422
|
|
|
|
292,869
|
|
|
|
302,053
|
|
Total
|
|
$
|
164,507
|
|
|
$
|
269,129
|
|
|
$
|
357,039
|
|
|
$
|
394,164
|
|
Note
5 – 2019 Senior 8% Convertible Notes Payable
During
the fourth quarter of 2019, accredited investors purchased $805,000 of 8% Senior Convertible Notes (“2019 Senior Notes”)
from us. For every $1,000 principal amount purchased, the note holders received 70 warrants to purchase our common stock. As a
result, we granted 56,350 warrants to purchase our common stock at an exercise price of $19.04, which expire on December 19, 2023.
The 2019 Senior Notes bear interest at 8% per year and if converted, the interest is payable in kind (in common stock). The 2019
Senior Notes mature on December 15, 2020. At September 30, 2020 and December 31, 2019, we had $805,000 of 2019 Senior Notes outstanding.
As
a result of the underwritten public offering in October 2020, the 2019 Senior Notes are currently convertible by the holder. If
the 2019 Senior Notes are not paid or converted prior to their maturity date, the principal and any accrued interest will be automatically
or mandatorily converted into our common stock. The 2019 Senior Notes, plus any accrued interest, is convertible into shares of
our common stock at a conversion price equal to $3.60 per share.
The
2019 Senior Notes provide the holders with (a) the option of receiving 110% of principal plus accrued interest in the event there
is a change of control prior to conversion of the 2019 Senior Notes; (b) weighted-average anti-dilution protection in event of
any sale of securities at a net consideration per share that is less than the applicable conversion price per share to the holder
until we have raised an additional $14 million from the sale of certain securities; and (c) certain preemptive rights pro rata
to their respective interests through December 31, 2021.
The
2019 Senior Notes contains negative covenants that do not permit us to incur additional indebtedness or liens on property or assets
owned, repurchase common stock, pay dividends, or enter into any transaction with affiliates of ours that would require disclosure
in a public filing with the Securities and Exchange Commission. Upon an event of default, the outstanding principal amount of
the Senior Notes, plus accrued but unpaid interest and other amounts owing in respect thereof through the date of acceleration,
shall become immediately due and payable in cash at the holder’s election, if not cured within the cure period.
We
incurred $201,683 in debt issuance costs related to the 2019 Senior Notes – $4,280 in professional fees and $197,403 related
to the warrants’ calculated fair value. At the time the Senior Notes were issued, management believed the warrants were
to be issued to the holders only if the notes were converted into shares of common stock. However, on September 4, 2020, we discovered
the warrants should have been issued at the same time as the notes were issued and have subsequently been issued. We calculated
the impact using the Black-Scholes valuation model and determined $197,403 should have been allocated to the warrants in
December 2019. As such, we recorded $42,771 in unamortized debt issuance costs and $154,632 in interest expense related
to the warrants for the nine months ended September 30, 2020. We amortized $154,989 and $157,129 in debt issuance costs
for the three and nine months ended September 30, 2020. The debt issuance costs are amortized to interest expense using straight
line amortization over the term of the 2019 Senior Notes. We did not have a similar expense during the same periods in 2019.
Note
6 – Related Party Line of Credit Agreements
On
September 20, 2019, we entered into two separate LOC Agreements (“LOC Agreements”) with DKBK Enterprises, LLC (“DKBK”)
and CorLyst, LLC (“CorLyst”, and, together with DKBK, collectively, “Lenders”), both related parties,
which provide a revolving commitment of up to $700,000 each ($1.4 million total). Under the LOC Agreements, all funds borrowed
bear interest at an annual rate of 8%. The promissory notes issued in connection with the LOC Agreements provide that the Lenders
have the right to convert all or any portion of the principal and accrued and unpaid interest into our common stock on the same
terms as our 2019 Senior Convertible Notes.
Our
Chief Executive Officer (CEO) is also the CEO and Managing Member of both lenders. As of September 30, 2020, DKBK directly held
16,166 shares of our common stock and CorLyst beneficially owned 1,095,649 shares of our common stock. In April and June 2020,
we drew $500,000 under the LOC Agreement with DKBK. On July 21, 2020, we drew an additional $200,000, bringing the total amount
drawn under the LOC Agreement with DKBK to $700,000.
On
October 6, 2020, in connection with the closing of our underwritten public offering, DKBK converted the $700,000 principal amount
and related interest outstanding under the LOC Agreement into 199,537 shares of our common stock at a conversion price of $3.60
per share, which, pursuant to the LOC Agreement, is a 10% discount on the underwritten public offering price.
Note
7 – Paycheck Protection Program Loan
In
May 2020, we entered into a $162,459 Paycheck Protection Promissory Note (the “PPP Loan”) with the Bank of America.
The PPP Loan was made under, and is subject to the terms and conditions of, the PPP which was established under the CARES Act
and is administered by the U.S. Small Business Administration. The current terms of the loan is two years with a maturity date
of May 5, 2022 and it contains a favorable fixed annual interest rate of 1.00%. Payments of principal and interest on the PPP
Loan is deferred for the first six months of the term of the PPP Loan until November 5, 2020. Principal and interest are payable
monthly and may be prepaid by us at any time prior to maturity with no prepayment penalties. Under the terms of the CARES Act,
recipients can apply for and receive forgiveness for all, or a portion of the loan granted under the PPP. Such forgiveness will
be determined, subject to limitations, based on the use of loan proceeds for certain permissible purposes as set forth in the
PPP, including, but not limited to, payroll costs, mortgage interest, rent or utility costs (collectively, “Qualifying Expenses”),
and on the maintenance of employee and compensation levels during a certain time period following the funding of the PPP Loan.
We have used the proceeds of our PPP Loan for payroll costs. However, no assurance is provided that we will be able to obtain
forgiveness of the PPP Loan in whole or in part. As of September 30, 2020, $90,329 of the total $162,459 PPP-related debt is classified
as a current liability on our condensed consolidated balances sheets.
Note
8 – Stockholders’ Equity
On
September 30, 2019, our Pledge Agreement with PoC Capital was amended to reduce the committed funds under this Agreement from
$1.8 million to $900,000, which was paid in full as of December 31, 2019. As part of the Pledge Agreement amendment, PoC Capital
forfeited the pledged collateral (56,640 shares of our common stock and warrants to purchase 56,640 shares of our common stock)
in the amended agreement. The forfeited shares of our common stock and stock purchase warrants have been returned to us.
We
determined the sale of the 2019 Senior Notes in late 2019 which are convertible into common stock at a conversion rate of $14.28
per share, triggered the full ratchet anti-dilution provision of common stock we sold in our 2018 Private Placement Transactions.
As a result, those stockholders were entitled to 28,971 shares of common stock in the fourth quarter of 2019, which we issued
on June 18, 2020. We accounted for these shares at December 31, 2019 as a deemed dividend payable at their par value.
On
June 25, 2020, we amended our Certificate of Incorporation reducing the number of authorized shares of our common stock from 100,000,000
to 30,000,000. We believe 100,000,000 authorized shares of common stock was disproportionately large in relation to the Company’s
outstanding common stock and our anticipated future needs, and the reduction will reduce our future Delaware franchise tax.
On
October 6, 2020, we closed an underwritten public offering of 4,800,000 shares of common stock for a public offering price of
$4.00 per share. Net proceeds from this offering were approximately $17.1 million. As a result of this offering,
we also issued an additional 3,270,095 shares as described in Note 17 – Subsequent Events.
There
were no issued or outstanding shares of preferred stock at September 30, 2020 or December 31, 2019.
Note
9 – Net Loss per Share of Common Stock
Basic
net loss per share is computed by dividing net loss by the weighted average common stock outstanding. Diluted net loss per share
is computed by dividing net loss by the weighted average common stock outstanding, which includes potentially dilutive effect
of stock options, warrants and senior convertible notes. Since we experienced a loss for both periods presented, including any
dilutive common stock outstanding would have an anti-dilutive impact on diluted net loss per share, and as shown below were excluded
from the computation. The treasury-stock method is used to determine the dilutive effect of our stock options and warrants grants,
and the if-converted method is used to determine the dilutive effect of the Senior Notes.
The
computation of net loss per share for the nine months ended September 30, 2020 and 2019 was as follows:
|
|
Nine months ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,679,035
|
)
|
|
$
|
(2,583,433
|
)
|
Weighted average number of common stock-basic and diluted
|
|
|
5,542,026
|
|
|
|
5,531,097
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.84
|
)
|
|
$
|
(0.47
|
)
|
The
following potentially dilutive securities were excluded from the computation of diluted net income per share as their effect would
have been anti-dilutive for the periods presented.
|
|
2020
|
|
|
2019
|
|
Stock options and purchase warrants
|
|
|
703,288
|
|
|
|
662,443
|
|
Shares of common stock that would be issued on the conversion of our 2019 Senior Notes and LOC Agreement with DKBK, plus related accrued interest
|
|
|
442,824
|
|
|
|
-
|
|
|
|
|
1,146,112
|
|
|
|
662,443
|
|
Note
10 – Leases
We
lease our office space under an operating lease agreement. This lease does not have significant rent escalation, concessions,
leasehold improvement incentives, or other build-out clauses. Further, the lease does not contain contingent rent provisions.
We also lease office equipment under an operating lease. Our office space lease includes both lease (e.g., fixed payments including
rent, taxes, and insurance costs) and non-lease components (e.g., common-area or other maintenance costs), which are accounted
for as a single lease component as we have elected the practical expedient to group lease and non-lease components for all leases.
Our leases do not provide an implicit rate and, as such, we have used our incremental borrowing rate of 8% in determining the
present value of the lease payments based on the information available at the lease commencement date.
Lease
costs included in our condensed consolidated statement of operations totaled $24,029 and $24,319 for the three months ended September
30, 2020 and 2019, respectively, and $72,230 and $73,621 for the nine months ended September 30, 2020 and 2019, respectively.
The weighted average remaining lease terms and discount rate for our operating leases were as follows at September 30, 2020:
Weighted average remaining lease term (years) for our facility and equipment leases
|
|
|
2
|
|
Weighted average discount rate for our facility and equipment leases
|
|
|
8.00
|
%
|
Maturities
of our lease liabilities for all operating leases were as follows as of September 30, 2020:
2020
|
|
$
|
22,416
|
|
2021
|
|
|
90,495
|
|
2022
|
|
|
69,741
|
|
Total lease payments
|
|
|
182,652
|
|
Less: Interest
|
|
|
(16,151
|
)
|
Present value of lease liabilities
|
|
|
166,501
|
|
Less: current maturities
|
|
|
(79,765
|
)
|
Non-current lease liability
|
|
$
|
86,736
|
|
Note
11 – License Agreement with Aposense, Ltd.
On
May 24, 2020, we executed a condition precedent License Agreement (“Aposense Agreement”) with Aposense under which
they will provide us with an exclusive worldwide license (excluding China) to research, develop and commercialize products comprising
or containing PCS11T. The grant of license is conditioned on the following being satisfied within 9 months of May 24, 2020 (or
the Aposense Agreement shall terminate): (i) our closing of an equity financing and successful up-listing to Nasdaq and (ii) Aposense
obtaining the approval of the Israel Innovation Authority for the consummation of the transactions contemplated by the Aposense
Agreement. On October 6, 2020, we satisfied the conditions and are currently working with Aposense to issue 625,000 shares of
our common stock, which was determined by dividing $2.5 million by the $4.00 per share price in our underwritten public offering.
Such shares will be subject to a lock-up, with 40% of such shares released from such lock up after six months and the remaining
two 30% tranches to be released upon completion of the next two subsequent quarters. As additional consideration, we will pay
Aposense development and regulatory milestone payments (up to $3.0 million per milestone) upon the achievement of certain milestones,
which primarily consist of having a drug indication approved by a regulatory authority in the United States or another country.
In addition, we must pay Aposense one-time sales milestone payments based on the achievement during a calendar year of one or
more thresholds for annual sales for products made and pay royalties based on annual licensing sales. We are also required to
split any milestone payments we receive with Aposense based on any sub-license agreement we may enter into.
We
are required to use commercially reasonable efforts, at our sole cost and expense, to research, develop and commercialize products
in one or more countries, including meeting specific diligence milestones that consist of (i) submitting an IND for a drug indication
within 30 months following the satisfaction of the license conditions above; (ii) dosing of a first patient with a product within
42 months following the satisfaction of the license conditions above; (iii) dosing of a first patient with a product in a pivotal
clinical trial within 72 months following the satisfaction of the license conditions above and (iv) an NDA submission within 120
months following the satisfaction of the license conditions above. Either party may terminate the Aposense Agreement in the event
of a material breach of the license agreement that has not been cured following written notice and a 90-day opportunity to cure
such breach (which is shortened to 15 days for a payment breach).
Note
12 – License Agreement with Yuhan Corporation
On
August 19, 2020, we entered into a License Agreement (the “Yuhan License Agreement”) with Yuhan, pursuant to which
we acquired an exclusive license to develop, manufacture and commercialize PCS12852 globally, excluding South Korea.
As
consideration for the Yuhan License Agreement, we issued to Yuhan 250,000 shares of common stock (based upon an $8.00 per share
price). Per the Yuhan License Agreement and related Share Issuance Agreement, we will issue an additional 250,000 shares
based on the $4.00 per share price in the underwritten public offering, which closed on October 6, 2020. As additional consideration,
we will pay Yuhan development and regulatory milestone payments (a portion of which are payable in shares of our common stock
based on the volume weighted average trading price during the period prior to such achievement and a portion of which are payable
in cash) upon the achievement of certain milestones, which primarily consist of dosing a patient in pivotal trials or having a
drug indication approved by a regulatory authority in the United States or another country. The amount of future development
and regulatory milestone payments payable to Yuhan is based on a Yuhan affiliate purchasing 750,000 shares of common stock for
$3,000,000 in our underwritten public offering. In addition, we must pay Yuhan one-time sales milestone payments based on
the achievement during a calendar year of one or more thresholds for annual sales for products made and pay royalties based on
annual licensing sales. We are also required to split any milestone payments received with Yuhan based on any sub-license agreement
we may enter into.
We
are required to use commercially reasonable efforts, at our sole cost and expense, in conjunction with a joint Processa-Yuhan
Board to oversee such commercialization efforts, to research, develop and commercialize products in one or more countries, including
meeting specific diligence milestones that consist of: (i) preparing a first draft of the product development plan within 90 days;
(ii) requesting an FDA pre-IND meeting for a product within 6 months; (iii) dosing a first patient in a Phase 2A clinical trial
with a product within 24 months; and (iv) dosing a first patient with a product in a Phase 2B clinical trial, Phase 3 clinical
trial or other pivotal clinical trial with a product within 48 months. Either party may terminate the agreement in the event of
a material breach of the agreement that has not been cured following written notice and a 60-day opportunity to cure such breach
(which is shortened to 15 days for a payment breach).
Note
13 – License Agreement with Elion Oncology, Inc.
On
August 23, 2020, we entered into the Elion License Agreement with Elion, pursuant to which we acquired an exclusive license to
develop, manufacture and commercialize PCS6422 globally.
The
grant of license was conditioned on the closing of our underwritten public offering and successful up-listing to Nasdaq, which
closed on October 6, 2020. Following the satisfaction of the conditions, we paid Elion $100,000 and will issue Elion 825,000 shares
of our common stock, based on the $4.00 per share price in our underwritten public offering. Such shares will be subject to a
lock-up, with 50% of such shares released from such lock up after six months and the remaining 25% tranches to be released following
9 months and 12 months, respectively.
As
additional consideration, we will pay Elion development and regulatory milestone payments (a portion of which are payable in shares
of our common stock and a portion of which are payable in cash) upon the achievement of certain milestones, which include the first two annual anniversaries of the effective date of the agreement, FDA or other regulatory
approval and dosing a patient. In addition, we must pay Elion one-time sales milestone payments based on the achievement during
a calendar year of one or more thresholds for annual sales for products made and pay royalties based on annual licensing sales.
We are also required to split any milestone payments received with Elion based on any sub-license agreement we may enter into.
We
are required to use commercially reasonable efforts, at our sole cost and expense to research, develop and commercialize products
in one or more countries, including meeting specific diligence milestones that consist of: (i) dosing a first patient in a Phase
1B clinical trial with a product within 12 months; and (ii) dosing a first patient with a product in a Phase 2 or 3 clinical trial
within 48 months. Either party may terminate the agreement in the event of a material breach of the agreement that has not been
cured following written notice and a 90-day opportunity to cure such breach (which is shortened to 15 days for a payment breach).
Note
14 – Related Party Transactions
CorLyst
reimburses us for shared costs related to payroll, health care insurance and rent based on actual costs incurred, which are recognized
as a reduction of our general and administrative operating expenses being reimbursed in our condensed consolidated statement of
operations. We recorded $76,979 and $79,058 of reimbursements during the nine months ended September 30, 2020 and 2019, respectively.
No amounts were due from CorLyst at September 30, 2020 and December 31, 2019. In September 2020, CorLyst prepaid shared expenses
to us for the fourth quarter of 2020 through the second quarter of 2021. Similarly, in August 2019, CorLyst prepaid us for shared
expenses for Q4 2019. At September 30, 2020, we recognized $110,796 in prepaid reimbursements as due to related parties in the
accompanying condensed consolidated balance sheet.
At
September 30, 2020, we had approximately $7,600 due from certain employees for health insurance contributions. We did not have
comparable a similar receivable at December 31, 2019.
Note
15 – Commitments and Contingencies
Purchase
Obligations
We
enter into contracts in the normal course of business with contract research organizations and subcontractors to further develop
our products. The contracts are cancellable, with varying provisions regarding termination. If a contract with a specific vendor
were to be terminated, we would only be obligated for products or services that we received as of the effective date of the termination
and any applicable cancellation fees. We had no purchase obligations at September 30, 2020.
Note
16 – Impact of COVID-19
In
December 2019, a novel strain of coronavirus, SARS-CoV-2, causing the Coronavirus Disease 2019, also known as COVID-19, was reported
to have surfaced in Wuhan. Since then, the SARS-CoV-2 virus has spread to multiple countries worldwide, including the United States,
where we have planned and have ongoing preclinical studies and clinical trials. On March 11, 2020, the World Health Organization
declared the outbreak of the SARS-CoV-2 virus to be a global pandemic.
Our
clinical development timelines and plans could be affected by the SARS-CoV-2 virus pandemic. Site initiation and patient enrollment
could be delayed or suspended due to prioritization of hospital resources toward the SARS-CoV-2 virus pandemic. In addition, some
patients may not be able to comply with clinical trial protocols and the ability to conduct follow up visits with treated patients
may be limited if quarantines impede patient movement or interrupt healthcare services. We cannot assure the SARS-CoV-2 virus
will not have an adverse impact on our future planned clinical trials. Similarly, our ability to recruit and retain patients and
principal investigators and site staff who, as healthcare providers, may have heightened exposure to SARS-CoV-2 virus pandemic
could be adversely impacted.
If
the SARS-CoV-2 virus pandemic continues to spread in the United States
and elsewhere, we may experience disruptions, including those that could severely impact our business, preclinical studies, and
planned clinical trials.
Note
17 – Subsequent Events
On
October 6, 2020, we closed on our underwritten public offering of 4,800,000 shares of common stock for a public offering price
of $4.00 per share. Net proceeds from the offering were approximately $17.1 million. In addition to closing our underwritten
public offering, the following additional transactions occurred subsequent to September 30, 2020:
|
●
|
As
a result of closing our public offering, we triggered the full ratchet anti-dilution provision of shares sold in PIPE transactions
in 2018, and as a result we will issue 1,156,480 shares of common stock to those stockholders. The full ratchet anti-dilution
provisions expired following closing of the offering.
|
|
●
|
DKBK,
our line of credit lender, converted $700,000 principal amount outstanding and related accrued interest into 199,537 shares
of common stock on October 6, 2020.
|
|
●
|
The
conditions for finalizing our agreements with Aposense and Elion were met upon the close of our public offering and up-list
to the Nasdaq Capital Market. We made a payment of $100,000 to Elion and issued 625,000 and 825,000 shares of common stock
to Aposense and Elion, respectively, pursuant to the agreements.
|
|
●
|
We
issued an additional 250,000 number of shares of common stock to Yuhan pursuant to the agreement we entered into with them.
|
|
●
|
Restricted
stock awards for 214,078 shares of our common stock vested on the completion of our public offering and up-list to the Nasdaq
Capital Market on October 6, 2020.
|
The
following pro forma table shows the number of issued and outstanding shares of our common stock as a result of the underwritten
offering, which closed on October 6, 2020 as if the shares were all issued and outstanding as of September 30, 2020:
|
|
September 30, 2020
|
|
Actual shares issued and outstanding
|
|
|
5,765,566
|
|
Shares sold in the underwritten common stock offering which closed on October 6, 2020
|
|
|
4,800,000
|
|
Conversion of the $700,000 LOC with DKBK and related accrued interest on October 6, 2020
|
|
|
199,537
|
|
Shares to be issued as a result of triggering the anti-dilution provision of previously
issued shares of common stock
|
|
|
1,156,480
|
|
Shares to be issued to Yuhan Corporation, Elion Oncology, Inc. and Aposense Ltd. in connection
with the respective license agreements.
|
|
|
1,700,000
|
|
Restricted stock awards that vested on the completion of our underwritten offering and up-list to the Nasdaq Capital Market on October 6, 2020
|
|
|
214,078
|
|
Pro forma shares issued and outstanding
|
|
|
13,835,661
|
|