6.

NET LOSS PER COMMON SHARE:

The Company computesBasic net loss per share of common stock using the two-class method required for participating securities.  The Company’s participating securities include all series of its convertible preferred stock.  Undistributed earnings allocated to these participating securities are added to net loss in determining net loss applicable to common stockholders.  Basic and Diluted loss per share areis computed by dividing net loss applicable to common stockholder by the weighted-average numberweighted average common shares outstanding. Diluted net loss per share is computed by dividing net loss by the weighted average common shares outstanding without the impact of potential dilutive common shares outstanding because they would have an anti-dilutive impact on diluted net loss per share. The treasury-stock method is used to determine the dilutive effect of commonthe Company’s stock outstanding.

Outstanding options and warrants underlying 1,954,475grants, and the if-converted method is used to determine the dilutive effect of the Company’s Senior Convertible Notes.

The computation of net loss per share for the three and nine months ended September 30, 2018 and 2017 is shown below.

The outstanding options and warrants to purchase common stock and the shares issuable under the Senior Convertible Note were not included inexcluded from the computation of diluted lossnet income per share becauseas their effect would have been anti-dilutive for the exercise price was greater thanperiods presented below:

Note 8 – Related Party Transactions

A shareholder, CorLyst, LLC, reimburses the average market priceCompany for shared costs related to payroll, health care insurance and rent based on actual costs incurred and recognized as a reduction of the general and administrative operating expenses being reimbursed in the Company’s condensed consolidated statement of operations. The reimbursed amounts totaled $1,025 and $0 for the three months ended September 30, 2018 and 2017, respectively, and $28,505 and $49,089 for the nine months ended September 30, 2018 and 2017, respectively. Amounts due from CorLyst at September 30, 2018 and December 31, 2017 were $79,422 and $62,709, respectively. CorLyst also purchased 132,159 shares of our common shares and, therefore, the effect would be anti-dilutive.stock for $300,001 in a private placement transaction.

The calculationA Director of the numerator and denominator for basic and diluted net loss per common share is as follows:

7.

COMMITMENTS AND CONTINGENCIES:

Vendors and Debt - The Company has significant liabilities as of March 31, 2017 with limited cash flow generated by the sale of Company assets and revenue. The Company has $323,349 in accounts payable and accrued expenses from continuing operations. In addition, the Company has $2,115,461 in debt and accrued interest from continuing operations. The Company will work with their vendors and lenders to establish payment plans, explore extensions and conversion of debt.

8.

RELATED PARTY TRANSACTIONS:

Dividend and Interest activity

Justin Yorke is the manager of the JMW Fund, LLC, the San Gabriel Fund, LLC, and the Richland Fund, LLC;LLC, collectively known as the “Funds”. The Funds received 515,583 shares of our common stock and iswarrants to purchase 515,583 shares of our common stock upon the conversion of $1 million of Senior Convertible Notes held by the Funds purchased on October 4, 2017. At September 30, 2018, the Funds owned a directortotal of the Company.  Mr. McGrain, our Interim Chief executive officer and Interim Chief financial officer is also a member of the JMW Fund, LLC, the San Gabriel Fund, LLC, and the Richland Fund, LLC.  These funds own 4,725,7212,566,639 shares of common stock and holds warrants to purchase 1,278,186515,583 shares of common shares in the aggregate.stock.

Processa Pharmaceuticals, Inc.

AsNotes to Condensed Consolidated Financial Statements

(Unaudited)

Entities affiliated with our Chairman of March 31, 2017 and December 31, 2016 the Company had secured notes payable with JMW Fund, LLC, the San Gabriel Fund, LLC and the Richland Fund, LLC in the aggregate amount of $962,361.  An outstanding balance of $138,000 on the revolving line of credit as of March 31, 2017 and December 31, 2016.  Mr. Yorke, as the manager of these funds, earned interest from loans payable for the three months ended March 31, 2017 and 2016 of $46,796 and $49,739, respectively. Total accrued interest as of March 31, 2017 and 2016 was $379,362 and $189,577, respectively.

9.

SUPPLEMENTAL CASH FLOW INFORMATION:

10.

SUBSEQUENT EVENTS:

Debt offerings

The Company entered into Secured notes under the senior secured loan agreement in the aggregate amount of $75,000 on June 9, 2017; $15,000 on July 26, 2017 and $105,000 on August 7, 2017.

Other

On July 17, 2017, the Company issued a press release entitled “Heatwurx Announces Letter of Intent with Promet Therapeutics, LLC Relating to a Reverse Merger” in which the Company disclosed that it has entered into a non-binding letter of intent to engage in a reverse merger with Promet Therapeutics, LLC.

Board of Directors

On August 24, 2017, Mr. Justin Yorke and Mr. Christopher Bragg were appointed to the Board of Directors and Chief Executive Officer (CEO) received 103,117 shares of our common stock and warrants to purchase 103,117 shares of our common stock upon the conversion of $200,000 in Senior Convertible Notes purchased on October 4, 2017. Our CEO and entities affiliated with our CEO also purchased a total of 132,160 shares of common stock and warrants to purchase 132,160 shares of common stock in private placement transactions.

Note 9 – Commitments and Contingencies

Purchase Obligations

The Company enters into contracts in the normal course of business with contract research organizations and subcontractors to further develop its products. The contracts are cancellable, with varying provisions regarding termination. If a contract with a specific vendor were to be terminated, the Company would only be obligated for products or services that it received as of the Company.effective date of the termination and any applicable cancellation fees. The Company had purchase obligations of approximately $41,000 and $896,000 at September 30, 2018 and December 31, 2017, respectively.

Due to the contingent nature of the amounts and timing of the payments, we have excluded our agreement with the CRO with whom we have contracted to conduct our Phase 2a NL clinical trial. We were contractually obligated for up to approximately $1.8 million of future services under the agreement, but our actual contractual obligations will vary depending on the progress and results of the clinical trial.

Cybersecurity Fraud

In January 2018, the Company incurred a loss of $144,200 due to fraud from a cybersecurity breach. As a result, we have implemented certain review and approval procedures internally and with our banks; our technology consultants have implemented system changes; and, we reported the fraud to our banks and the Federal Bureau of Investigation Cyber Crimes Unit. The Company does not have insurance coverage against the type of fraud that occurred, therefore, recovery of the loss is remote. While we are taking steps to prevent such an event from reoccurring, we cannot provide assurance that similar issues will not reoccur. The loss is included in general and administrative expenses in the consolidated statement of operations for the nine months ended September 30, 2018.

Note 10 - Subsequent Events

The Company has evaluated all subsequent events through the date of filing of this Quarterly Report on Form 10-Q with the SEC, to ensure that this filing includes appropriate disclosure of events both recognized in the financial statements as of September 30, 2018, and events which occurred subsequent to September 30, 2018, but which were not recognized in the financial statements. The Company has determined that there were no subsequent events which required recognition, adjustment to or disclosure in the financial statements.

ITEM 2.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The following discussion and analysis should

This Quarterly Report on Form 10-Q contains forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “hopes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “would,” “should,” “could,” “may” or other similar expressions in this report on Form 10-Q. These statements may be read in conjunction withfound under the section of this report on Form 10-Q captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and audited consolidated financial statements and related notes thereto included in our 2016 Annual Report on Form 10-K, and with the unaudited condensed consolidated financial statements and related notes thereto presented in this Quarterly Report on Form 10-Q.

Forward-Looking Statements

The statements containedOperations,” as well as in this report that are not historical facts are forward-lookingon Form 10-Q generally. In particular, these include statements that represent management’s beliefs and assumptions based on currently available information. Forward-looking statements include the information concerning our possiblerelating to future actions, prospective products, applications, customers, technologies, future performance or assumed future results of operations, business strategies, need for financing, competitive position, potential growth opportunities, potential operating performance improvements, ability to retainanticipated products, expenses, and recruit personnel, the effects of competition and the effects of future legislation or regulations. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “believes,” “intends,” “may,” “should,” “anticipates,” “expects,” “could,” “plans,” or comparable terminology or by discussions of strategy or trends. Although we believe that the expectations reflected in suchfinancial results. These forward-looking statements are reasonable, we cannot give any assurances that these expectations will provesubject to be correct. Such statements by their nature involvecertain risks and uncertainties that could significantly affect expected results, and actual future results could differ materially from those described in such forward-looking statements.

Factors that may cause actual results to differ materially from currentour historical experience and our present expectations or projections. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

·

risks associated with the asphalt repair industry, including competition, increases in wages, labor relations, energy and fuel costs, actual and threatened pandemics, actual and threatened terrorist attacks, and downturns in domestic and international economic and market conditions;

·

risks associated with the asphalt repair industry, including changes in laws or regulations, increases in taxes, rising insurance premiums, costs of compliance with environmental laws and other governmental regulations;

·

the availability and terms of financing and capital and the general volatility of securities markets;

·

changes in the competitive environment in the asphalt repair industry;

·

risks related to natural disasters;

·

litigation; and

·

other risk factors discussed in the 2016

	●	our limited operating history, limited cash and history of losses;
	●	our ability to achieve profitability;
	●	our ability to secure required FDA or other governmental approvals for our product candidates and the breadth of the indication sought;
	●	the impact of competitive or alternative products, technologies and pricing;
	●	whether we are successful in developing and commercializing our technology, including through licensing;
	●	the adequacy of protections afforded to us and/or our licensor by the anticipated patents that we own or license and the cost to us of maintaining, enforcing and defending those patents;
	●	our and our licensor’s ability to protect non-patented intellectual property rights;
	●	our exposure to and ability to defend third-party claims and challenges to our and our licensor’s anticipated patents and other intellectual property rights;
	●	our ability to obtain adequate financing to fund our business operations in the future;
	●	our ability to continue as a going concern; and
	●	other factors discussed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC (as amended) on April 17, 2018.

The forward-looking statements are based upon management’s beliefs and assumptions and are made as of the date of this report on Form 10-K, filed by10-Q. We undertake no obligation to publicly update or revise any forward-looking statements included in this report on Form 10-Q or to update the Company with the Securities and Exchange Commission.

Should one or more of these risks materialize (or the consequences of such a development worsen), or should the underlying assumptions prove incorrect,reasons why actual results could differ materially from those expected. We disclaim any intention or obligation to update publicly or revisecontained in such statements, whether as a result of new information, future events or otherwise.otherwise, except to the extent required by federal securities laws. Actual future results may vary materially as a result of various factors, including, without limitation, the risks disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC (as amended) on April 17, 2018. In light of these risks and uncertainties, we cannot assure you that the forward-looking statements contained in this report on Form 10-Q will in fact occur. You should not place undue reliance on these forward-looking statements.

OverviewThis Quarterly Report on Form 10-Q also contains estimates, projections and Basisother information concerning our industry, our business, and the markets for certain diseases, including data regarding the estimated size of Presentationthose markets. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market, and other data from reports, research surveys, studies, and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data, and similar sources.

Heatwurx, Inc. was incorporated under the laws of the State of Delaware on March 29, 2011 as Heatwurxaq,In this Form 10-Q, “we,” “us” and “our” refer to Processa Pharmaceuticals, Inc. and subsequently changed its name to Heatwurx, Inc. on April 15, 2011.subsidiary.

Overview

We are an asphalt preservationemerging 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 two indications (i.e., the use of a drug to treat a particular disease) and repair, equipment company. searching for additional products for our portfolio.

Part of our business strategy is:

Our innovative, and eco-friendly hot-in-place recycling process corrects surface distresses withinlead product, PCS-499, is an oral tablet that is an analog (i.e.,a compound having a structure similar to that of the top 3 inches of existing pavement by heating the surface materialapproved drug but differing from it in respect to a temperature between 325°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 on the basis of chronic occlusive arterial disease of the limbs. In the body PCS-499 is broken down to multiple metabolites with PCS-499 and 375° Fahrenheit with our electrically powered infrared heating equipment, mechanically looseningmany 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 heated material with our processor/tiller attachment that is optimized for producing a seamless repair, and mixing in additional recycled asphalt pavement and a binder (asphalt-cement), and then compacting repaired area with a vibrating roller or compactor. We consider our equipmentgreater exposure to these pharmacologically active molecules, PCS-499 appears to be eco-friendlywell tolerated, even at higher doses than the standard dosing of PTX. Based on our findings in the literature that PTX has some activity in a number of conditions, PCS-499 may potentially provide clinical benefit over other on-label or off-label products used for the various conditions. These conditions include NL and RIF in head and neck cancer patients. NL is a chronic, disfiguring condition for which most patients do not have any treatment options. It develops more commonly in women than in men on the lower extremities, and ulceration can occur in approximately 30% of NL patients, which may lead to more severe complications, such as the Heatwurx process reusesdeep tissue infections and rejuvenates distressed asphalt, uses recycled asphalt pavement for filler material, eliminates travel to and from asphalt batch plants, and extends theosteonecrosis that can threaten life of the roadway.  We believe our equipment, technologylimb. RIF or radiation-induced fibrosis can occur after radiation treatment in head and processes provide savings over other processesneck cancer. Some patients develop late radiation-induced fibrotic effects 90 days after initiation of radiation therapy and sometimes months or years later. RIF can significantly affect the quality of life of these patients causing symptoms such as dry mouth, oral mucositis, muscular atrophy, swallowing dysfunction, vascular damage, and neural damage.

Our team had a successful pre-IND (Investigating New Drug) meeting with the FDA on NL in October 2017, defining the next steps to move PCS-499 into Phase 2 studies and the path to eventual approval. Processa has also entered into an agreement with Integrium, LLC (“Integrium”), a CRO, to conduct the planned Phase 2 clinical study to further evaluate PCS-499 for the treatment of NL. Integrium is a full-service Clinical Proof of Concept firm based in Tustin, California, that can be more laborspecializes in a wide range of therapeutic areas including cardiovascular, metabolic disease and equipment intensive.

12

Our hot-in-place recycling process and equipment was selected bydermatology research. The budget agreed to with Integrium for the Technology Implementation Groupcompletion of the American AssociationPhase 2 Clinical study is approximately $1.6 to $1.8 million, and this clinical trial funding (of up to $1.8 million) has been committed to by PoC Capital. Enrollment in the study is planned to start in late 2018.

On June 22, 2018, the FDA granted orphan-drug designation to our leading clinical compound PCS-499 for treatment of State Highway Transportation Officials (“AASHTO TIG”)NL. On September 28, 2018, the FDA cleared our IND for PCS-499 in NL such that we can move forward with the Phase 2 study and enroll patients in the fourth quarter of 2018.

Going Concern and Management’s Plan

Our consolidated financial statements are prepared using U.S. GAAP and are based on the assumption that the Company will continue as an “additionally Selected Technology”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. These risks and other factors raised substantial doubt about our ability to continue as a going concern as of the date of the filing of our Annual Report on Form 10-K for the year 2012. We develop, manufactureended December 31, 2017 and intend to sell our unique and innovative and eco-friendly equipment to federal, state and local agencies as well as contractorsQuarterly Report on Form 10-Q for the repair and rehabilitation of damaged and deteriorated asphalt surfaces.nine months ended September 30, 2018.

During 2014, we acquired Dr. Pave, LLC a service company offering asphalt repair and restoration utilizing the Heatwurx asphalt repair technology and established a new entity Dr. Pave Worldwide LLC to house our franchise program providing franchisees with the exclusive Heatwurx equipment and processing.  We launched our franchise sales program throughout the U.S. in the third quarter of 2014; however, to date, no franchises have been sold.  The Company decided not to renew its franchise registrations throughout the U.S. do to the extensive costs.  In 2015, we offered license agreements, which grants a license of all Heatwurx equipment and supplies and the use of the Heatwurx intellectual property within a specified territory.  We have one licenseerelied exclusively on private placements with a small group of accredited investors to finance our business and operations. We do not have any credit facilities as a source of Marchfuture funds. We have not had any revenue since our inception on August 31, 2017.

We are no longer receiving financial support2015 and we do not believecurrently have any revenue under contract or any immediate sales prospects. As of September 30, 2018, we had an accumulated deficit of approximately $7.0 million incurred since inception. For the nine months ended September 30, 2018, we incurred a net loss from continuing operations of approximately $3.2 million and used approximately $3.2 million in net cash from operating activities. We expect our operating costs to be substantial as we incur costs related to the various clinical trials for our product candidates and that we will operate at a loss for the foreseeable future.

As further described below under Recent Developments, since December 31, 2017, we have received proceeds of approximately $3.2 million dollars from the sale of 1,402,442 shares of our common stock and warrants to purchase the same number of shares of common stock exercisable at $2.724 per share. We also entered into an agreement with an investor for a commitment to fund up to $1.8 million of clinical trial expenses in exchange for 792,952 shares of our common stock and warrants to purchase the same number of shares of common stock exercisable at $2.724 per share. We will use these committed funds for our Phase 2a clinical trial of PCS-499 in patients with NL. Payment under this commitment will be made directly to the contract research organization (CRO) based on their invoicing and not to us. Finally, on May 25, 2018, we converted approximately $2.35 million of our 8.0% Senior Notes into 1,206,245 shares of our common stock and 1,206,245 warrants to purchase common stock.

We are looking at ways to add a revenue stream to offset some of our expenses. We plan to begin fundraising efforts in the first half of 2019. In addition, we are seeking alternative options to add additional cash. However, no assurance can be given that we will be ablesuccessful in securing adequate funds that may be required. 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.

Uncertainty concerning our ability to continue as a going concern may hinder our ability to obtain future financing, from another source.  We do not believe weas well as adversely affect our collaborative drug development relationships. Continued operations and our ability to continue as a going concern are abledependent on our ability to achieve a level of revenues adequate to support our cost structure.  Do to the slow growthobtain additional funding in the service sectornear future and the high cost of the franchise registrations, we discontinued the operations of Dr. Pave, LLCthereafter, and Dr. Pave Worldwide LLC.  In addition, we significantly scaled back operations to maintain only a minimal level of operations necessary to support our licensee and look for potential merger candidates.  The Company sold the remaining equipment and inventory to the licensee during 2016.  Based upon the Company’s current financial position, the Company does not believe itno assurances can be given that such funding will be ableavailable at all or will be available in sufficient amounts or on reasonable terms. Without additional funds from debt or equity financing, sales of assets, sales or out-licenses of intellectual property or technologies, or other transactions yielding funds, we will rapidly exhaust our resources and will be unable to satisfycontinue operations. Absent additional funding, we believe that our cash and cash equivalents will not be sufficient to fund our operations for a period of one year or more after the mandatory principal payments.  The Company will work withdate that these consolidated financial statements are available to be issued based on the lenders to explore extension or conversion options.  There is no guarantee the lenders will accommodate our requests.  As of March 31, 2017; principal in thetiming and amount of $962,361 is outstandingour projected net loss from continuing operations and payable under the secured notes.  These notes are secured by all the assetscash to be used in operating activities during that period of the Company, including intellectual property rights.  We are in default on the notes, and astime.

As a result, the Company’s assets may be foreclosed upon.

The issues described above raise substantial doubt exists about the Company’s ability to continue as a going concern.  It isconcern within one year after the date that these consolidated financial statements are available to be issued. 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 the Company be unable to continue as a going concern based on the outcome of these uncertainties described above.

Recent Developments

Investigative New Drug Application and Orphan Drug Designation. On June 22, 2018, the FDA granted orphan-drug designation to our intention toleading clinical compound PCS-499 for treatment of NL. On September 28, 2018, the FDA cleared our IND for PCS-499 in NL such that we can move forward with the Phase 2 study and enroll patients in the fourth quarter of 2018.

CoNCERT License Agreement. On October 4, 2017, Promet entered into an option and license agreement (the “CoNCERT Agreement”) with CoNCERT Pharmaceuticals, Inc. (“CoNCERT”). On March 19, 2018, we, Promet, and CoNCERT entered into an agreement (the “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. Our agreement with CoNCERT, along with raising additional financing, was contemplated as a public entitypart of our reverse acquisition of Heatwurx. The March Amendment also amended the CoNCERT Agreement to provide: (i) for the immediate transfer and release of $8.0 million of our common stock that was held for the benefit of CoNCERT by Promet (2,090,301 shares) to seek potential merger candidates.  If the Company fails to merge or be acquired by another company,CoNCERT and (ii) that if we will be required to terminate all operations.

Section 107sublicense any of the JOBS Act provides that an “emerging growth company can take advantageintellectual property licensed to us by CoNCERT to a third party prior to the earlier of the extended transition period provideddate that we (a) raise gross proceeds of at least $8.0 million in Section 7(a)(2)(B)one or more equity offerings or (b) CoNCERT can sell the shares of common stock released to it by Promet without restriction under Rule 144(b)(1), then we must pay CoNCERT 15% of such revenue. All other terms of the CoNCERT Agreement remain unchanged. As a result, we recognized an intangible asset of approximately $11.0 million, additional paid-in capital of $8.0 million resulting from Promet releasing the earmarked shares to CoNCERT in satisfaction of our obligation to CoNCERT, along with a $3.0 million 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.

PIPE Transactions. On May 15, 2018, and June 29, 2018, we entered into Subscription and Purchase Agreements with certain accredited investors and conducted closings pursuant to which we sold 1,402,442 shares of common stock at a purchase price of $2.27 per share. In addition, each investor received a warrant to purchase one share of common stock for each share of common stock purchased by such investor at an exercise price equal to $2.724, subject to adjustment thereunder.

We received total gross proceeds of approximately $3.2 million prior to deducting placement agent fees and estimated expenses payable by us. We currently intend to use the proceeds of the Private Placement to fund research and development of our lead product candidate, PCS-499, including clinical trial activities, and for general corporate purposes.

Our placement agent received $167,526 and Placement Agent Warrant to purchase up to 84,146 shares of common stock at an exercise price equal to $2.724.

Clinical Trial Funding. On May 25, 2018, we entered into an agreement with an accredited investor to whom we sold 792,952 shares of common stock at a purchase price of $2.27 per share for $1.8 million of gross proceeds. We will use these committed funds for our Phase 2a clinical trial of PCS-499 in patients with NL which is planned to begin in the fourth quarter of 2018. The investor will make payments not to us, but rather directly to the CRO conducting our Phase 2 Necrobiosis Lipoidica Trial based on their invoicing. The investor also received warrants to purchase one share of common stock for each share of common stock purchased at an exercise price equal to $2.724 per share.

Our placement agent received $108,000 and a warrant to purchase up to 47,578 shares of common stock at an exercise price equal to $2.724.

Note Conversion. On May 25, 2018, we converted approximately $2.35 million of our mandatory convertible 8.0% Senior Notes and accrued interest of $109,472 into 1,206,245 shares of common stock, at a price of $2.043 per share. The noteholders also received warrants to purchase one share of common stock for each share of common stock purchased at an exercise price equal to $2.452. Our placement agent received a warrant to purchase 72,375 shares of common stock at an exercise price of $2.452.

The shares of common stock for both PIPE Transactions and the clinical trial funding were sold in a private placement pursuant to exemptions from the registration requirements of the Securities Act afforded by Rule 506 of Regulation D promulgated thereunder.

The common stock, but not the warrants, issued in the PIPE Transactions, the clinical trial funding and the note conversion have, subject to certain customary exceptions, full ratchet anti-dilution protection. Until we have issued equity securities or securities convertible into equity securities for complying with newa total of an additional $20.0 million in cash or revised accounting standards.  In other words, an “emerging growth company” can delayassets, including the adoption of certain accounting standards until those standards would otherwise apply to private companies.  However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised standards onproceeds from the relevant dates on which adoption of such standards is required for non-emerging growth companies.  Section 107exercise of the JOBS Act provides that our decisionwarrants issued above, in the event we issue additional equity securities or securities convertible into equity securities at a purchase price less than $2.27 per share of common stock, the above purchase prices shall be adjusted and new shares of common stock issued as if the purchase price was such lower amount (or, if such additional securities are issued without consideration, to opt outa price equal to $0.01 per share).

Critical Accounting Policies and Use of the extended transition period for complying with new or revised accounting standards is irrevocable.Estimates

Results of operations

The following discussion and analysis of theour financial condition and results of operations shouldare based on our unaudited consolidated financial statements which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on other assumptions that we believe to be readreasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following accounting policies and estimates are most critical to aid in conjunctionunderstanding and evaluating our financial results reported in our consolidated financial statements.

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 to the Company following an ownership change as defined by Internal Revenue Code Section 382.

We account for income taxes in accordance with ASC 740Income 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 financial statementsprovisions 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 herewith.  This discussion shouldas 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 be construedhave the necessary information available to imply that results discussed herein will necessarily continue intocomplete the future, or that any conclusion reached herein will necessarily be indicativeaccounting for an element of actual operating resultsthe TCJA in the future.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.

ForWe file U.S. federal income and Maryland 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 three monthsyear ended MarchDecember 31, 2017, compared to the three months ended March 31, 2016

For the three months ended March 31, 2017, our net loss was approximately $76,000, compared to a net losswe incurred operating losses of approximately $134,000 including loss from discontinued operations of approximately $2,000$606,400. However, we recorded no income tax benefit for the same periodapproximately $347,500 ($95,632 net of 2016.  Further descriptiontax) of these losses is provided below.

13

Revenue

The Company did not recognize any revenue during the three months ended March 31, 2017 compared to $5,000 in revenue in the three months ended March 31, 2016.  Operations have been significantly reduced; the Company sold equipment to our licensee in the first quarter of 2016. The Company does not anticipate any revenue during 2017 from equipment sales.

Cost of goods sold

The Company had no cost of goods sold during the three months ended March 31, 2017 and 2016.

Selling, general and administrative

Selling, general and administrative expenses decreasedtreated as deferred start-up expenditures for tax purposes and approximately $258,600 ($71,155 net of tax) of tax losses resulting in tax loss carryforwards. The 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. 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.” Since the success of future operations is indeterminable, the potential benefits resulting from these net operating losses have not been recorded in the condensed consolidated financial statements except for a benefit from the reduction in the deferred tax liability created by amortization of the intangible from the acquired Know-How. As of December 31, 2016 and through October 4, 2017, the Company had no net operating losses for federal and state income tax purposes since Promet’s members were taxed separately on their proportionate share of Promet’s income, deductions, losses and credits.

Clinical Trial Accruals / Research and Development. As part of the process of preparing our consolidated financial statements, we are required to approximately $14,000estimate 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.

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.

Our clinical trial accruals are based on estimates of patient enrollment and related costs at clinical investigator sites as well as estimates for the three months ended March 31, 2017services 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 approximately $81,000estimates. We make estimates of accrued expenses as of each balance sheet date based on the fact 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.

We expense research and development costs as they are incurred.

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 three months ended March 31, 2016. The decreaselicense rights to PCS-499 include $1,782 in selling, generaltransaction costs and administrative expenses is principally due$3,037,147 associated with the initial recognition of an offsetting deferred tax liability related to the significant reductionacquired temporary difference for an asset purchased that is not a business combination and has a nominal tax basis in operating activities which include a decrease in employee expenses of approximately $51,000; a decrease in travel and office expenses of approximately $8,000 which includes commercial insurance, rent and other expenses; and a decrease in legal and investor relations expenses of $8,000.

accordance with ASC 740-10-25-51Income Taxes. In accordance with ASC Topic 730,Research and Development

The Company had approximately $100, 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.

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 term of the options will be based on the contractual term of the options as determined by the Board of Directors pursuant to our equity incentive plan. 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. All stock-based compensation costs during the three months ended March 31, 2017;are recorded in general and noadministrative or research and development costs in the statements of operations based upon the underlying individual’s role.

Results of Operations

Comparison of the three and nine months ended September 30, 2018 and 2017

The following table summarizes our net loss during the three months ended March 31, 2016.  The Company is only utilizing legal representation to maintain the existing patents.periods indicated:

Liquidity and capital resources

OverviewRevenues.

We have incurred operating losses, accumulated deficit and negative cash flows from operations since inception.  As of March 31, 2017, wenot had an accumulated deficit of approximately $15,341,000 from operating activities.  The Company had total cash on hand of approximately $1,600 as of March 31, 2017. The Company is not able to obtain additional financing adequate to fulfill its commercialization activities, nor achieve a level of revenues adequate to support the Company’s cost structure.  

Operating Activities

During the three months ended March 31, 2017, the Company used $1,598 in cash for continuing operations compared to cash used of $43,900 for continuing operations and $6,469 for discontinued operations during the three months ended March 31, 2016. This decrease in cash used for operating activities was due to the significant reduction in employees and overhead expenses.  The Company has had littleany revenue since inception.our inception in August 2015. The Company does not currently have any revenue under contract, nor does it have any immediate sales prospects. The Company has significantly scaled back operations

Research and Development Expenses.

Our research and development costs are expensed as incurred. Research and development expenses primarily consist of (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 maintain only a minimal levelthe product testing and development activities of operations necessarythe Company. Non-refundable advance payments for goods and services to supportbe 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 and nine months of 2018, we incurred expenses totaling $611,612 and $2,477,481 for the continued development and testing of our licenseelead product, PCS-499. These amounts represent an increase over amounts we incurred during comparable periods in 2017. During 2017, we incurred research and lookdevelopment costs of $457,632 and $772,533 for potential merger candidates.  For the year three monthsand nine month ended September 30, 2017. A majority of the costs incurred in 2017 and all the costs incurred in 2018 relate to the development of PCS-499.

On March 31,19, 2018, we exercised the License and Option Agreement with CoNCERT for PCS-499 we entered into on October 4, 2017.

Costs for the three-month periods ended September 30, 2018 and 2017 the Company incurred a net loss from continuing operations of approximately $76,000. The operations of Dr. Pave, LLC and Dr. Pave Worldwide, LLC were discontinued in 2015 and have not activity in the current period. These business components are included in discontinued operations as of March 31, 2017. It is the Company’s intention to move forward as a public entity and to seek potential merger candidates.  If the Company fails to merge or be acquired by another company, we will be required to terminate all operations.follows.

Investing Activities

There were no investing activitiesAs shown above, during the three months ended September 30, 2018 we increased our overall research and development expenses by $153,980. As a result of exercising the CoNCERT license and option agreement for PCS-499 in March 31, 2017 compared to proceeds2018, and purchase of $27,000 from the salea software license we recognized $200,256 of assets held for saleamortization expense during the three months ended March 31,September 30, 2018. We had no similar expense in 2017.

Financing Activities

There were no investing activities As we continue development of PCS-499, our research and development salaries and benefits increased by $18,122 for the three months ended September 30, 2018 when compared to the same period in 2017 due to an increase in full-time equivalent staff and related costs. We recognized lower research and development expenses for preclinical, clinical trial and other costs of $64,398 during the three months ended March 31, 2017September 30, 2018 when compared to cash provided by financing activities of $15,000the same period in 2017. During the three months ended March 31, 2016.  ThisSeptember 30, 2017, we entered into an agreement with a contract research organization (CRO) for formulation development to determine the optimal composition and dosage of PCS-499 for manufacturing and delivery. During the three months ended September 30, 2018, we concluded a Phase 1 study to test the formulation, described below in detail. We anticipate our research and development costs to increase in the future as we begin our Phase 2a clinical trial activities for NL in the fourth quarter of 2018.

Costs for the nine-month periods ended September 30, 2018 and 2017 were as follows.

During the nine months ended September 30, 2018 our research and development costs increased by $1,704,948 to $2,477,481 from $772,533 for nine months ended September 30, 2017. As noted above, following the exercise of the option and license agreement with CoNCERT, we started recognizing amortization expense; $422,814 was recognized during the nine months ended September 30, 2018. We had no similar expense in 2017. During the nine months ended September 30, 2018, we completed a Phase 1 study to evaluate the safety and pharmacokinetics of single and optional multiple dosing regimens of modified release formulations of PCS-499 compared to Trental® (pentoxifylline) administered to healthy subjects. We also incurred costs to establish a new site to 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 $103,899 for the nine months ended September 30, 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 $1,178,235 during the nine months ended September 30, 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 clinical trial material we will need for our Phase 2a clinical trial for NL and other research and development costs that we incurred. The majority of costs going forward into the remainder of 2018 and 2019 will be costs related to our Phase 2a clinical trial for NL. We will also incur additional costs when we need to scale up as we currently do not have enough clinical trial material to complete our Phase 2a clinical trial.

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.

We anticipate our research and development costs to increase in the future as we begin Phase 2a clinical trial activities for NL in the fourth quarter of 2018. We anticipate the cost for the Phase 2a trial we are beginning to be approximately $1.6 to $1.8 million. We believe the Clinical Trial Funding commitment of $1.8 million dollars will be sufficient to fund the costs of this trial. 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.

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.

General and administrative expenses for the three months ended September 30, 2018 increased $196,140 to $451,359 from $255,219 for the three months ended September 30, 2017. The increase related to payroll and related costs of approximately $103,000 were incurred in connection with building our finance team, including hiring a chief financial officer and a Director of Finance and Accounting. Included in this amount is stock-based compensation expense of $50,528. We also experienced an increase of approximately $96,000 in professional fees related to public company compliance costs and the filing of a Selling Shareholder Form S-1 and related amendments. There was an overall decrease of $2,900 in cash provided by financing activitiesother general and administrative expenses due to recategorization of expenses. Reimbursements from CorLyst of $26,947 for rent and other costs during the three months ended September 30, 2018 were similar to reimbursements for the same period in 2017.

General and administrative expenses for the nine months ended September 30, 2018 increased $850,919 to $1,305,511 from $454,592 for the nine months ended September 30, 2017. The increase related primarily to professional fees for legal, accounting, advisory and consulting costs of approximately $508,000 related to Company operations and compliance and other costs of operating as a public company. During the second and third quarters of 2018 we experienced increased payroll, and related costs of approximately $158,000 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 $50,528. We also incurred a cybersecurity fraud loss of approximately $144,000 for which we do 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 $80,447 for rent and other costs during the nine months ended September 30, 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 $8,323 and $154,377 for the three and nine months ended September 30, 2018, respectively. We had no interest expense during the corresponding periods in 2017. For the three months ended September 30, 2018, interest expense consisted of interest of $4,600 and the amortization of debt issuance costs of $3,723. For the nine months ended September 30, 2018, interest expense consisted of interest of $89,536 and the amortization of debt issuance costs of approximately $64,841. We incurred interest expense related to our issuance of $2.58 million of 8% Senior Notes issued on October 4, 2017 ($1,250,000) and November 21, 2017 ($1,330,000). See Recent Developments above regarding the conversion of $2,350,000 of these Senior Convertible Notes into shares of our common stock and warrants.

Interest Income.

Interest income was $6,457 and $1,284 for the three months ended September 30, 2018 and 2017, respectively. Interest income was $10,163 and $4,672 for the nine months ended September 30, 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 approximately $212,000 and $0 was recognized for the three months ended September 2018 and 2017, respectively. An income tax benefit of approximately $771,000 and $0 was recognized for the nine months ended September 30, 2018 and 2017, respectively. A deferred tax liability was recorded when Processa received 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. A Section 351 transaction treats the acquisition of the Know-How for stock as a tax-free exchange. As a result, under ASC 740-10-25-51Income Taxes, Processa recorded a deferred tax liability of approximately $3,037,000 for the acquired temporary difference between the financial reporting basis of approximately $11,039,000 and the tax basis of approximately $2,000. The deferred tax liability may be offset by the deferred tax assets resulting from 2017 and 2018 net operating losses. Under ACS 740-270Income Taxes – Interim Reporting, the Company is required to project its 2018 federal and state effective income tax rate and apply it to the September 30, 2018 operating loss before income taxes. Based on the projection, the Company expects to recognize a tax benefit from the 2017 net operating loss carryover and the projected 2018 loss that offset the deferred tax liability from the acquired Know-How. This offset results in the recognition of a deferred tax benefit shown in the consolidated statements of operations for 2018.

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 longer receivingprovision/benefit or liability for income taxes was included in the consolidated financial supportstatements through October 4, 2017.

Financial Condition

Our total assets increased by approximately $10.5 million to $13.5 million at September 30, 2018 compared to $3.0 million at December 31, 2017. Our assets increased by $11 million when we exercised our 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 in exchange for $8 million of our common stock (2,090,301 shares), and the related income tax effects resulting from the temporary difference between the book and tax basis of the intangible asset and transaction costs. The intangible asset is used in research and development activities and management believes it has alternative future uses (in research and development projects or otherwise). As a result, the acquisition cost of approximately $11 million was capitalized and is being amortized over the intangible asset’s useful life in accordance with Topic 350, Intangibles –Goodwill and Other. In May and June of 2018, we sold 1,402,442 common stock units for approximately $3.2 million and are using these proceeds to fund our operating activities. Lastly, we made prepayments totaling $220,000 to our contract research organization (CRO) related to our Phase 2a clinical trial for NL.

At September 30, 2018, our total liabilities increased $348,000 to $3.0 million when compared our total liabilities of $2.6 million at December 31, 2017. In May 2018, $2,350,000 of senior convertible notes were converted into 1,206,245 shares of our common stock. This left $230,000 of senior convertible notes outstanding at September 30, 2018. These notes are held by Canadian investors and will be converted into 119,195 shares of our common stock once certain Canadian regulatory matter (mainly reporting) have been resolved. We anticipate this will occur in early 2019. In connection with the exercise of 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. We also experienced an increase in our accounts payable and accrued expenses related to the continued development of PCS-499, costs related to beginning our Phase 2 clinical trial and other operating costs.

As noted above, many of the transactions had a direct impact on our stockholders’ equity, including:

Liquidity and Capital Resources

To date, we have funded our business and operations from their small groupprimarily through the private placement of investors.  The Company entered intoequity securities and senior secured convertible notes. At September 30, 2018, we had $2.4 million in cash and cash equivalents compared to $2.8 million at December 31, 2017. We also have a Senior secured loan agreement on February 16, 2015, extended on March 23, 2016,Clinical Trial Funding commitment of $1.8 million to fund clinical trial expenses. We will use the clinical trial committed funds for our Phase 2a clinical trial of PCS-499 in patients with JMW Fund, Richland Fund, and San Gabriel Fund (collectively, the “lenders”) whereby the lenders agreed to loan to the Company up to an aggregate of $2,000,000.  The interest rate on the notes is 12% per annum and monthly interest payments are due the first day each month beginning March 1, 2015.  The notes mature six months from the date of issuance.  If any interest payment remains unpaid in excess of 90 days, and the lender has not declared the entire principal and unpaid accrued interest due and payable, the interest rate on that amount only will be increased to 18% per annum, until the past due interest amount is paid in full.  The notes and any future notes under the loan agreement are secured by all the assets of the Company, including intellectual property rights. Upon the occurrence of an event of default the lenders have the right to foreclose on the assets of the Company.

Based upon the Company’s current financial position and inability to obtain additional financing, weNL. We do not believe ithave any credit facilities as a source of future funds, and there can be no assurance that we will be able to satisfy the mandatory principal payments under the $2,000,000 senior secured debt.  We will continue to work with the lenders to exploreraise sufficient additional extensioncapital on acceptable terms, or conversion options as needed.  These notes are secured by all the assets of the Company, including intellectual property rights.  We are in default on the notes, our assets may be foreclosed upon.

Cash Requirements

The issues described above raiseat all. As a result, substantial doubt exists about ourthe Company’s ability to continue as a going concern.concern within one year after the date that this Form 10-Q is available to be issued.

As described under Recent Developments, in May and June of 2018 we received proceeds of approximately $3.2 million dollars from the sale of 1,402,442 shares of our common stock and warrants to purchase a similar number of shares of common stock exercisable at $2.724 per share. On May 25, 2018, we also entered into an agreement with an investor (PoC Capital) for a commitment to fund up to $1.8 million of clinical trial expenses in exchange for 792,952 shares of our common stock and warrants to purchase a similar number of shares of common stock exercisable at $2.27 per share. This investor will typically make payments not to us, but rather directly to the CRO conducting our Phase 2a trial based on the CRO’s invoicing. We have been solely reliantmade payments of approximately $239,000 to the CRO which we expect this investor to repay us for in the fourth quarter. Finally, on raisingMay 25, 2018 we converted approximately $2.35 million of our 8% convertible debt into 1,206,245 shares of our common stock.

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 or borrowing fundsoutlays and operating expenditures associated with our current and anticipated clinical trials. Our future capital requirements will depend on many factors, including:

Based on our current plan and our available resources (including the Clinical Trial Funding commitment of $1.8 million from PoC Capital), we will need to raise additional capital before the end of the second quarter of 2019 in order to maintainfund our future operations. While we believe our current resources are adequate to complete our upcoming Phase 2a trial, we do not currently have resources to conduct other future trials without raising additional capital. As noted above, the timing and extent of our spending will depend on the cost associated with, and the results of our upcoming Phase 2a trial. Our anticipated spending and our cash flow needs could change significantly as the trial progresses. There may be costs we incur during our trial that we do not currently anticipate requiring us to need additional capital sooner than currently expected.

When additional funding is required, it may not be available to us on acceptable terms, or at all. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scope of or suspend one or more of our clinical trials, or research and development programs. We were ablemay seek to raise any necessary additional capital through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing and distribution arrangements. To the extent that we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we do raise additional capital through public or private equity financing throughofferings, the assistance of a small numberownership interest of our investors whoexisting stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

Cash Flows

The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below.

Net cash used in operating activities