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, 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 shares 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 commonour stock outstanding.

Outstanding options and warrants underlying 1,954,475 sharesgrants, 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 six months ended June 30, 2019 and 2018 was as follows:

The following potentially dilutive securities were not included inexcluded from the computation of diluted lossnet income per share becauseas their effect would have been anti-dilutive for the periods presented.

Note 8 - Operating 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 statement of operations totaled $49,302 and $53,302 for the six months ended June 30, 2019 and 2018, respectively. The weighted average remaining lease terms and discount rate for our operating leases were as follows at June 30, 2019:

Maturities of our lease liabilities for all operating leases were as follows as of June 30, 2019:

Note 9 – Related Party Transactions

A shareholder, CorLyst, LLC, 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. Reimbursements from CorLyst totaled $52,464 and $0 for rent and other costs during the six months ended June 30, 2019 and 2018, respectively. Amounts due from CorLyst at June 30, 2019 and December 31, 2018 were $170 and $21,583, respectively.

Note 10 – 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 a purchase obligation of approximately $16,000 and $35,000 at June 30, 2019 and December 31, 2018, respectively.

Note 11 – Subsequent Events

Subsequent to June 30, 2019, we raised $435,000 from the sale of 8% Senior Convertible Notes and we expect more within the coming weeks. Principal and interest under each Senior Note is due on the earlier of (i) upon raising a cumulative amount of $14 million prior to December 15, 2020 which can occur over multiple financing transactions (i.e. Qualified Financing and/or Equity Stake transactions where net cash is obtained) or (ii) completion of the Company listing its common stock on either the Nasdaq Capital Market or the New York Stock Exchange or (iii) December 15, 2020 (“Maturity Date”). Holders of Senior Notes may elect to (i) convert all principal, together with accrued and unpaid interest under each Senior Note to Company common stock or (ii) be paid back all principal, together with accrued and unpaid interest under each Senior Note. The Company will grant investors stock purchase warrants on a 1:1 basisto the number of common stock shares issued, which will have an exercise price wasequal to the greater thanof (i) the average marketreported closing price of the common shares and, therefore,Common Stock on the effect would be anti-dilutive.

The calculationOTCQB Venture Market on the closing day of the numerator and denominator for basic and diluted net loss per common share is as follows:

Justin Yorke is the manageroffering or (ii) $2.72 (133% of the JMW Fund, LLC,purchase price).

Also, as described in Note 5, on July 2, 2019 we converted the San Gabriel Fund, LLC,principal and the Richland Fund, LLC; and is a directorrelated interest 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 4,725,721outstanding Senior Convertible Notes totaling $259,830 into 126,741 shares of common stock and holds warrants to126,741 stock purchase 1,278,186 common shares in the aggregate.warrants.

As of March 31, 2017 and December 31, 2016In August 2019, the Company had secured notes payable with JMW Fund, LLC,reduced the San Gabriel Fund, LLCnumber of authorized shares of its common stock from 350,000,000 shares to 100,000,000 shares 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 interestits preferred stock 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 Relating10,000,000 shares 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.1,000,000 shares.

Board of Directors

On August 24, 2017, Mr. Justin Yorke and Mr. Christopher Bragg were appointed to the Board of Directors of the Company.

ITEM

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSManagement’s Discussion and Analysis of Financial Condition and Results of Operation

Forward Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” that reflect, when made, the Company’s expectations or beliefs concerning future events that involve risks and uncertainties. Forward-looking statements frequently are identified by the words “believe,” “anticipate,” “expect,” “estimate,” “intend,” “project,” “will be,” “will continue,” “will likely result,” or other similar words and phrases. Similarly, statements herein that describe the Company’s objectives, plans or goals also are forward-looking statements. Actual results could differ materially from those projected, implied or anticipated by the Company’s forward-looking statements. Some of the factors that could cause actual results to differ include: our limited operating history, limited cash and history of losses; our ability to achieve profitability; our ability to obtain adequate financing to fund our business operations in the future; 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; and our ability to continue as a going concern. For a discussion of these and all other known risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as amended, which is available on the SEC’s website at www.sec.gov. All forward-looking statements are qualified in their entirety by this cautionary statement, and the Company undertakes no obligation to revise or update this Quarterly Report on Form 10-Q to reflect events or circumstances after the date hereof.

For purposes of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, references to the “Company,” “we,” “us” or “our” refer to the operations of Processa Pharmaceuticals, Inc. and its direct and indirect subsidiaries for the periods described herein.

Overview

We are an emerging pharmaceutical company focused on the clinical development of drug products that are intended to improve the survival and/or quality of life for patients who have a high unmet medical need. Within this group of pharmaceutical products, we currently are developing one product for multiple indications (i.e., the use of a drug to treat a particular disease) and are searching for additional products for our portfolio.

On October 4, 2017, we acquired all the net assets of Promet Therapeutics, LLC (“Promet”), a private Delaware limited liability company, including the rights to the CoNCERT Agreement in exchange for 31,745,242 shares of our common stock. Immediately following the transaction, the former equity holders of Promet owned approximately 84% and held approximately 6% of the shares for the benefit of CoNCERT in relation to the CoNCERT contribution of the license to Processa as part of the Section 351 transaction, and our stockholders immediately prior to the transaction owned approximately 10% of our common stock. We traded on the OTC Pink Marketplace until December 8, 2018 when we listed our common stock on the OTCQB.

We accounted for the net asset acquisition transaction as a “reverse acquisition” merger under the acquisition method for GAAP, where Promet was considered the accounting acquirer; and for tax purposes, as a tax-free contribution under Internal Revenue Code Section 351. Accordingly, Promet’s historical results of operations replaced our historical results of operations for all periods prior to the merger. Unless otherwise stated, all comparisons in this Management’s Discussion and Analysis to periods prior to the merger are to the results of Promet for such period on a stand-alone basis. Prior to the acquisition, we had nominal net liabilities and operations. It was considered a non-operating public shell corporation.

We have a limited operating history as we were formed on March 29, 2011. Since that date, our operations have focused on acquiring the rights to PCS-499, organizing and staffing our company, business planning, raising capital, establishing our intellectual property portfolio and conducting clinical trials. We do not have any drug candidates approved for sale and have not yet generated any revenue from drug sales. We have funded our operations through the private sale of equity and equity-linked securities to accredited investors. Since inception, we have incurred operating losses. As of June 30, 2019, we had an accumulated deficit of $9.3 million. We expect to continue to incur significant expenses and operating losses for the foreseeable future. We anticipate that our expenses will continue to increase in connection with our ongoing activities, as we:

Going Concern and Management’s Plan

We are currently in the process of raising additional funds through the private sale of 8% Senior Convertible Notes (“8% Senior Notes”) to accredited investors. Subsequent to June 30, 2019, we have received $435,000 from the sale of 8% Senior Notes to both new and existing investors and expect more in the coming weeks before we close the financing. We have also delayed some of our cash outflows, primarily through the deferral of salaries until such time as we have raised sufficient funding.

Our condensed consolidated financial statements are prepared using U.S. GAAP and are based on the assumption that we will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. We face certain risks and uncertainties that are present in many emerging growth companies regarding product development and commercialization, limited working capital, recurring losses and negative cash flow from operations, future profitability, ability to obtain future capital, protection of patents, technologies and property rights, competition, rapid technological change, navigating the domestic and major foreign markets’ regulatory and clinical environment, recruiting and retaining key personnel, dependence on third party manufacturing organizations, third party collaboration and licensing agreements, lack of sales and marketing activities and no customers or pharmaceutical products to sell or distribute. 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 this quarterly report on Form 10-Q.

We have relied 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 future funds. We have not had any revenue since our inception and we do not currently have any revenue under contract or any immediate sales prospects. For the six months ended June 30, 2019, we incurred a net loss from continuing operations of $1.7 million and used $1.0 million in net cash from operating activities. We expect our operating costs to be substantial as we incur costs related to the clinical trials for our product candidates and that we will operate at a loss for the foreseeable future.

We are looking at ways to add an additional revenue stream to offset some of our expenses. We may also need to raise additional funds depending on the outcome of the additional 8% Senior Notes funding. However, no assurance can be given that we will be successful in securing adequate funds that may be required. If we are unable to raise additional capital on acceptable terms, or at all, 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.

As a result, substantial doubt existed about our ability to continue as a going concern as of the date of the filing of this quarterly report on Form 10-Q for the quarter ended June 30, 2019. The accompanying condensed 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.

Status of our Phase 2a Clinical Trial in Necrobiosis Lipoidica

Our lead product, PCS-499 is an oral tablet that is a deuterated analog of one of the major metabolites of pentoxifylline (Trental^®). The advantage of PCS-499 is that it potentially may work in many conditions because it has multiple pharmacological targets it affects that are important in the treatment of these conditions. Based on its pharmacological activity, we have identified multiple unmet medical need conditions where the use of PCS-499 may result in clinical efficacy. The lead indication currently under development for PCS-499 is Necrobiosis Lipoidica (NL). NL is a chronic, disfiguring condition affecting the skin and the tissue under the skin typically on the lower extremities with no currently approved FDA treatments. NL presents more commonly in women than in men and ulceration can occur in approximately 30% of NL patients. More severe complications can occur, such as deep tissue infections and osteonecrosis threatening life of the limb. Approximately 74,000 - 185,000 people in the United States and more than 200,000 – 500,000 people outside the United States are affected by NL.

On June 22, 2018, the FDA granted orphan-drug designation to PCS-499 for the treatment of NL. On September 28, 2018, the FDA cleared our IND for PCS-499 in NL such that we could move forward with the Phase 2a safety-dose tolerability trial. We dosed our first NL patient in this Phase 2a clinical trial on January 29, 2019. On August 2, 2019, our twelfth patient was screened and qualified for our study. We anticipate dosing in late August, at which point our study will be fully enrolled. The main objective of the trial is to evaluate the safety and tolerability of PCS-499 in patients with NL. We expect the safety and efficacy data collected to provide information for the design of future clinical trials. Based on toxicology studies and healthy human volunteer studies, Processa and the FDA agreed that a PCS-499 dose of 1.8 grams/day would be the highest dose administered to NL patients in this Phase 2 trial. As anticipated, the PCS-499 dose of 1.8 grams/day, 50% greater than the maximum tolerated dose of pentoxifylline, appears to be well tolerated with no serious adverse events reported. Currently, eleven patients have been dosed with seven patients being on treatment for at least 3 months and three patients on treatment for 5 months. To date, six patients dosed at 1.8 g/day have reported only mild adverse events related to the treatment, which occurred mostly in the first month of treatment and were quickly resolved. As expected, gastrointestinal or central nervous system (CNS) adverse events were reported most often.

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

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

Results of Operations

Comparison of the three and six months ended June 30, 2019 and 2018

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

Revenues.

We had no revenue during the three and six months ended June 30, 2019 and 2018. We do not currently have any revenue under contract or any immediate sales prospects.

Research and Development Expenses.

Our research and development costs are expensed as incurred. Research and development expenses include (i) licensing of compounds for product testing and development, (ii) program and testing related expenses, (iii) amortization of the exclusive license intangible asset used in research and development activities, and (iv) internal research and development staff related payroll, taxes and employee benefits, external consulting and professional fees related to the product testing and our development activities. Non-refundable advance payments for goods and services to be used in future research and development activities are recorded as prepaid expenses and expensed when the research and development activities are performed.

During the three months ended June 30, 2019 and 2018, we incurred total research and development expenses of $726,904 and $1.1 million, respectively, for the continued development and testing of our lead product, PCS-499. Research and development expenses were approximately $1.2 million and $1.9 million for the six months ended June 30, 2019 and 2018, respectively. Costs for the three and six months ended June 30, 2019 and 2018 were as follows:

Overall, during the three months ended June 30, 2019, our research and development costs decreased by $350,739 as compared to the three months ended June 30, 2018. As a result of exercising the CoNCERT license and option agreement for PCS-499 in March 2018, and the purchase of a software license, we recognized $198,832 and $197,124 of amortization expense during the three months ended June 30, 2019 and 2018, respectively. The increase in amortization expense of approximately $1,700 was from the software license, which began recognition in the third quarter of 2018. Our research and development salaries and benefits decreased by approximately $12,000 for the three months ended June 30, 2019 when compared to the same period in 2018 related to one of our research and development team members having a reduced level of involvement. The majority of the reduction related to lower research and development expenses for preclinical, clinical trial and other costs of $340,717 during the three months ended June 30, 2019 when compared to the same period in 2018. During the three months ended June 30, 2019, our focus was on enrolling patients in our trial, along with other trial costs, including providing doses of PCS-499 to participants in our Phase 2a clinical trial in NL. In contrast, during the same period in 2018, we experienced significantly higher costs related to a Phase 1 trial for PCS-499 and costs related to having to establishing a new site to contract manufacture the tablets of PCS-499 needed for our clinical trial since the original CoNCERT tablet manufacturing site could no longer be used.

During the six months ended June 30, 2019, our research and development costs decreased by $654,266 as compared to the six months ended June 30, 2018. The decrease is due to a reduction of approximately $811,000 in preclinical, clinical trial, and other costs and a reduction of approximately $19,000 in salaries, benefits, and other related payroll costs when comparing the six months ended June 30, 2019 to the same period in 2018. The decrease was offset by an increase of approximately $175,000 in amortization expense for the software license and CoNCERT license agreement.

We incurred $333,157 of costs related to our Phase 2a trial during the six months ended June 30, 2019 and expect to spend approximately an additional $230,000 during the remainder of 2019 and approximately $711,000 through 2021 to complete our current trial. We believe, based on our estimates, the cost of our current Phase 2a trial to be approximately $1.6 to $1.8 million and anticipate our Clinical Trial Funding commitment of $1.8 million executed in June 2018 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. We anticipate our research and development costs to increase in the future as we continue our Phase 2a clinical trial activities for NL in 2019.

During the year ended December 31, 2018, we made payments to our CRO related to our Phase 2a trial of approximately $239,000. We have accounted for these payments as either a prepaid expense or a research and development expense depending on whether the related service has been provided. During the six months ended June 30, 2019, PoC Capital made payments directly to our CRO totaling $395,927 for amounts being currently invoiced, thereby reducing the subscription receivable to $1,404,073. Subsequent to June 30, 2019, PoC Capital has made additional payments totaling $193,299 directly to our CRO. We expect PoC Capital to repay us, as well as continue to make payments to our CRO for outstanding and future invoices related to our Phase 2a trial. We will continue to reduce the subscription receivable in the period the investor makes payment to our CRO or us.

Our clinical trial accruals are based on estimates of patient enrollment and related costs at clinical investigator sites, as well as estimates for the services received and efforts expended pursuant to contracts with multiple research institutions and CROs that conduct and manage clinical trials on our behalf.

We estimate preclinical and clinical trial expenses based on the services performed, pursuant to contracts with research institutions and clinical research organizations that conduct and manage preclinical studies and clinical trials on our behalf. In accruing service fees, we estimate the time-period over which services will be performed and the level of patient enrollment and activity expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we will adjust the accrual accordingly. Payments made to third parties under these arrangements in advance of the receipt of the related series are recorded as prepaid expenses until the services are rendered.

General and Administrative Expenses.

Our general and administrative expenses for the three months ended June 30, 2019 increased by $59,491 to $410,072 from $350,581 for the three months ended June 30, 2018. The increase related mostly to increased payroll and related costs of approximately $110,000 (including stock-based compensation of $63,072) as we built our finance team and hired our Chief Financial Officer (CFO) and Director of Finance and Accounting in the second half of 2018 to support our growth and public company reporting and compliance requirements. We also experienced increases of approximately $22,000 in other administrative costs such as insurance, office, and travel expenses. Our tax expense increased by approximately $66,000 due to our 2018 and estimated 2019 Delaware franchise taxes. Franchise tax in Delaware is calculated using the number of shares of Common Stock and Preferred Stock that the Company is authorized to issue. Currently, we are authorized to issue 350,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock, which is disproportionately large in relation to our outstanding shares (38,674,265 at June 30, 2019). This resulted in a high tax bill for 2018 and requires us to pay quarterly estimated taxes for 2019. We filed a definitive information statement Schedule 14c to decrease the number of authorized shares in July 2019 and submitted our Certificate of Amendment with the State of Delaware – Division of Corporations on August 8, 2019, following the required 20-day period for the action to become effective. These increases were offset by decreases of approximately $10,000 in training, repairs and maintenance, and telephone/internet expenses, as well as reductions of $129,000 in professional fees for legal, accounting, advisory and consulting costs as we establish in-house capabilities.

For the six months ended June 30, 2019, general and administrative expenses decreased by $46,081 to $807,837 from $853,918 for the six months ended June 30, 2018. The decrease related to a cybersecurity fraud loss of approximately $144,000, for which we did not have insurance coverage, during the six months ended June 30, 2018. We also saw reductions in professional fees for legal, accounting, advisory and consulting costs of approximately $201,000, as well as reductions of approximately $18,000 in rent, repairs and maintenance and continuing education. The overall decrease in our general and administrative expenses during the six months ended June 30, 2019 was also offset by increases of approximately $209,000 in payroll and related costs (including stock-based compensation of $121,631) and approximately $108,000 in administrative costs such as insurance, office expenses, continuing education, and travel.

Reimbursements from CorLyst of $26,500 and $52,464 for rent and other costs during the three and six months ended June 30, 2019 were comparable for the same periods in 2018.

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

Interest Expense.

Interest expense was $6,102 and $58,314 for the three months ended June 30, 2019 and 2018, respectively, and $10,702 and $146,054 for the six months ended June 30, 2019 and 2018, respectively, related to our $2.58 million of Senior Convertible Notes sold in 2017. In May 2018, $2.35 million of these Senior Convertible Notes were converted into shares of our common stock and stock purchase warrants. Subsequent to June 30, 2019, the remaining $230,000 was converted into shares of common stock and stock purchase warrants. Included in interest expense is the amortization of debt issuance costs totaling $0 and $24,992 for the three months ended June 30, 2019 and 2018, respectively, and $0 and $61,132 for the six months ended June 30, 2019 and 2018, respectively.

Interest Income.

Interest income was $3,398 and $2,681 for the three months ended June 30, 2019 and 2018, respectively, and $9,383 and $3,706 for the six months ended June 30, 2019 and 2018, respectively. Interest income represents interest earned on money market funds and certificates of deposit.

Income Tax Benefit.

An income tax benefit of $170,602 and $277,783 was recognized for the three months ended June 30, 2019 and 2018, respectively, and $300,901 and $559,317 for the six months ended June 30, 2019 and 2018, respectively, as a result of our recording and amortizing the deferred tax liability created in connection with our acquisition of CoNCERT’s license and “Know-How” in exchange for Processa stock that had been issued in an Internal Revenue Code Section 351 transaction on March 19, 2018. The Section 351 transaction treated the acquisition of the Know-How for stock as a tax-free exchange. As a result, under ASC 740-10-25-51Income Taxes, Processa recorded a deferred tax liability of $3,037,147 for the acquired temporary difference between the financial reporting basis of $11,038,929 and the tax basis of $1,782. The deferred tax liability will be reduced for the effect of the non-deductibility of the amortization of the intangible asset and may be offset by the deferred tax assets resulting from net operating tax losses. This offset results in the recognition of a deferred tax benefit shown in the consolidated statements of operations.

Financial Condition

At June 30, 2019, we had $721,985 in cash and $1.4 million remaining in our commitment from PoC Capital to fund our Phase 2a clinical trial for NL. Net cash used in our operating activities during the six months ended June 30, 2019 totaled $1,018,976 compared to $2,233,186 for the six months ended June 30, 2018.

Our total assets decreased by approximately $1.2 million to $11.3 million at June 30, 2019 compared to $12.5 million at December 31, 2018. This decrease is a result of the operating costs we have incurred during the six months ended June 30, 2019, net of operating costs funded through the stock subscription receivable, offset by the recording of right of use assets in conjunction with the adoption of ASC 842.

At June 30, 2019, our total liabilities, not including the impact of deferred income taxes, increased $324,409 to $970,113 when compared to $645,704 at December 31, 2018. This increase is due primarily to changes in accrued expenses as we continue the development of PCS-499 and conduct our Phase 2a clinical trial, as well as the recognition of operating lease liabilities in accordance with the adoption of ASC 842.

At June 30, 2019, we had $230,000 of Senior Convertible Notes outstanding held by Canadian investors that, although qualifying for automatic and mandatory conversion, could not be converted until the Alberta Securities Commission released us from a cease trade order, which predated our merger with HeatWurx, and permitted us to issue common stock units (consisting of shares of our common stock and stock purchase warrants) to these Canadian investors. In June 2019, the Alberta Securities Commission released the cease trade order and assessed us a $10,000 fine. On July 2, 2019, we converted the principal and related accrued interest of approximately $259,000 into 126,741 shares of common stock and 126,741 stock purchase warrants.

In connection with exercising the option agreement with CoNCERT, we recognized a $3,037,147 deferred income tax liability since the intangible assets purchased had only a nominal tax basis. Our deferred tax liability has been and is expected to be reduced each period by an amount up to the income tax effect of our net loss.

Liquidity and Capital Resources

To date, we have funded our business and operations primarily through the private placement of equity securities and senior secured convertible notes. We are currently in the process of raising additional funds through the private sale of 8% Senior Convertible Notes (“8% Senior Notes”) to accredited investors. Subsequent to June 30, 2019, we have received $435,000 from the sale of 8% Senior Notes to both new and existing investors and expect more in the coming weeks before we close the financing. We have also delayed some of our cash outflows, primarily through the deferral of salaries until such time as we have raised sufficient funding.

At June 30, 2019, we had $721,985 in cash and cash equivalents compared to $1.7 million at December 31, 2018. We also received a Clinical Trial Funding commitment of $1.8 million to fund clinical trial expenses, of which $1.4 million has not been used as of June 30, 2019. We believe the clinical trial committed funds will be sufficient to fund our current Phase 2a clinical trial of PCS-499 in patients with NL. We do not have any credit facilities as a source of future funds, and there can be no assurance that we will be able to raise sufficient additional capital on acceptable terms, or at all. As a result, substantial doubt exists about our ability to continue as a going concern within one year after the date that this Form 10-Q is filed with the SEC.

Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, and the extent to which we may enter into additional agreements with third parties to participate in their development and commercialization, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials. Our future capital requirements will depend on many factors, including:

Based on our current plan, our available resources (including the remaining Clinical Trial Funding Commitment of $1.4 million from PoC Capital) and the outcome of the additional 8% Senior Notes funding, we may need to raise additional capital before the end of the year in order to fund our future operations. While we believe our current resources, through our Clinical Trial Funding Commitment, are adequate to complete our 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 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 in order to complete our current trial, requiring us to need additional capital sooner than currently expected.

Additional funding 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 our current or future clinical trials, or research and development programs. We may 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 offerings, the ownership interest of our existing 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 our sources and uses of cash and cash equivalents for the six months ended June 30, 2019 and 2018:

Net cash used in operating activities

We used net cash in our operating activities of $1,018,976 and $2,233,186 during the six months ended June 30, 2019 and 2018, respectively. The decrease in cash used in operating activities in 2019 compared to the comparable period in 2018 was related to a decreased amount of direct cash costs incurred. Our net loss for the six months ended June 30, 2019 was $582,960 less than the comparable period in 2018. This was due primarily to our focus on PCS-499 leading to an overall reduction in our research and development expenses. The cash used in operating activities for the six months ended June 30, 2019 was further reduced as PoC Capital directly paid $395,927 to our CRO related to our Phase 2a clinical trial. We also incurred amortization expense of $397,664 (versus $222,559 for the comparable period in 2018) and $125,035 of stock-based compensation during the six months ended June 30, 2019. During the six months ended June 30, 2018, we incurred a one-time cybersecurity fraud loss of $144,200 in January 2018, which was recognized in general and administrative expenses.

Since we are in the process of developing our products, we anticipate our research and development efforts and on-going general and administrative costs will continue to generate negative cash flows from operating activities for the foreseeable future and that these amounts will increase in the future. We do not currently sell or distribute pharmaceutical products or have any sales or marketing capabilities.

Net cash used in investing activities

We had no cash sources or uses for investing activities during the six months ended June 30, 2019. Net cash used during the six months ended June 30, 2018 was $497,782 related to the purchase of certificates of deposit (CDs) and transaction costs incurred to acquire the exclusive license of PCS-499 in 2018.

Net cash provided by financing activities

We had no cash sources or uses for financing activities during the six months ended June 30, 2019. Net cash provided from financing activities was approximately $2.7 million for the six months ended 2018. We expect that we will continue to seek additional capital through a combination of private and public equity offerings, debt financings, and strategic collaborations to fund future operations. However, no assurance can be given that we will be successful in raising adequate funds needed. Absent additional financing, substantial doubt exists about our ability to continue as a going concern, as noted under “Going Concern” above.

Contractual Obligations and Commitments

There have been no significant changes to the contractual obligations reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Off Balance Sheet Arrangements

At June 30, 2019, we did not have any off-balance sheet arrangements.

Critical Accounting Policies and Use of Estimates

Our discussion and analysis should be readof our financial condition and results of operations are based upon our Unaudited Condensed Consolidated Financial Statements, which have been prepared in conjunctionaccordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities.

We believe that the estimates, assumptions and judgments involved in the accounting policies described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and audited consolidated financial statements and related notes thereto included inof our 2016most recent Annual Report on Form 10-K and withhave the unaudited condensed consolidatedgreatest potential impact on our financial statements, and related notes thereto presentedso we consider these to be our critical accounting policies. Actual results could differ from the estimates we use in this Quarterlyapplying our critical accounting policies. We are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.