Business Context and Reporting Period
Processa Pharmaceuticals, Inc. filed this Form 10-K for the fiscal year ended December 31, 2020. It is a clinical-stage biopharmaceutical company with no commercial products or revenue, focused on licensing and developing therapies for conditions with high unmet medical need. Its principal programs were PCS499, PCS6422 and PCS12852; PCS11T and PCS100 were earlier-stage assets.
Financial Performance and Liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $3.17 million | $2.32 million |
| Acquired in-process R&D expense | $8.70 million | $0 |
| General and administrative expense | $3.26 million | $1.61 million |
| Operating loss | $15.14 million | $3.94 million |
| Net loss | $14.41 million | $3.36 million |
| Net cash used in operating activities | $3.14 million | $2.75 million |
Margins are not meaningful because the company reported no revenue. The 2020 net loss per share was $2.54, versus $0.70 in 2019; the calculation included the value of shares issued under a full-ratchet anti-dilution provision, making net loss available to common shareholders $19.04 million in 2020.
At year-end, cash and cash equivalents were $15.42 million, current assets $16.20 million, current liabilities $1.22 million, total liabilities $2.27 million and stockholders’ equity $22.94 million. Accumulated deficit was $25.40 million. The 8% senior convertible notes and related accrued interest converted into common shares in December 2020. Remaining borrowings included a $162,459 PPP loan, whose forgiveness was pending; operating lease liabilities totaled $165,663. Management estimated cash, together with February 2021 financing proceeds, would fund budgeted operations through 2023, but said additional capital would be needed for longer-term plans.
Material Changes and Business Developments
- Net loss increased substantially, primarily reflecting $8.70 million of acquired in-process R&D from three 2020 licenses, higher G&A and increased R&D costs. R&D included $795,328 of annual PCS499 intangible-asset amortization.
- Cash rose from $0.69 million to $15.42 million, primarily following an October 2020 public offering that generated approximately $17.1 million net. A February 2021 private placement subsequently generated $9.9 million net.
- PCS499 completed a Phase 2A study. In 12 patients, the company reported no serious adverse events and mild reported adverse events; two ulcerated patients’ ulcers closed, but the small, uncontrolled study does not establish efficacy. A randomized, placebo-controlled Phase 2 study was planned to begin recruiting in the first half of 2021.
- PCS6422 was licensed for development with capecitabine; a Phase 1B study in advanced GI tumors was planned to begin recruiting in the first half of 2021. PCS12852 was licensed globally except South Korea; the company planned further FDA discussions and a Phase 2A gastroparesis study, subject to regulatory guidance.
- PCS11T remained preclinical, with manufacturing and toxicology work planned ahead of a targeted 2022 Phase 1B start. PCS100’s development remained under evaluation; the filing says the company had not submitted the planned FDA meeting request.
Outlook, Risks and Unusual Items
Management expected operating losses and negative operating cash flow to continue, with R&D costs rising as planned trials advance. The company had no immediate sales prospects and may require further financing; equity issuance could dilute shareholders, while debt or partnerships could impose restrictions or require rights concessions. Clinical outcomes, regulatory decisions, patient enrollment, manufacturing and CRO performance, and the effects of COVID-19 could delay programs or increase costs. The filing notes COVID-related delays to PCS499 trial closeout, although it says the pandemic did not materially adversely affect 2020 operations.
Other notable items include $2.73 million of stock-based compensation, a $1.00 million income tax benefit tied principally to deferred taxes associated with the PCS499 license, and a $162,459 PPP loan for which full forgiveness had been requested but was not assured. CRO and subcontractor agreements represented up to approximately $6.1 million of potential future services, subject to trial progress and contract terms. One bank held $15.27 million of year-end cash, above FDIC insurance limits.
Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2020 because of material weaknesses involving the control environment, segregation of duties and documentation. Remediation was underway, with completion targeted during 2021; success was not assured. The independent auditor issued an unqualified opinion on the financial statements but did not audit internal control effectiveness.
Important Facts for Investors to Verify
- Progress, enrollment, timing and results of the PCS499, PCS6422 and PCS12852 trials, including whether stated milestones were achieved.
- Cash burn, actual clinical-program costs and whether the projected funding runway through 2023 remains valid; assess future financing needs and potential dilution.
- Resolution of the PPP loan forgiveness application and the company’s liquidity exposure, including cash concentration above FDIC limits.
- Whether internal-control weaknesses were remediated and controls operated effectively for a sufficient period.
- License obligations, milestone and royalty terms, diligence deadlines, and PCS100’s development status, including any decisions affecting continued investment.