6.

NET LOSS PER COMMON SHARE:

The Company computes 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 are computed by dividing net loss applicable to common stockholder by the weighted-average number ofYuhan 250,000 shares of common stock outstanding.

Outstanding options(based upon an $8.00 per share price). Per the Yuhan License Agreement and warrants underlying 1,954,475related Share Issuance Agreement, we will issue an additional 250,000 shares were not includedbased on the $4.00 per share price in the computationunderwritten public offering, which closed on October 6, 2020. As additional consideration, we will pay Yuhan development and regulatory milestone payments (a portion of diluted loss per share becausewhich are payable in shares of our common stock based on the exercisevolume weighted average trading price was greater thanduring the average market priceperiod prior to such achievement and a portion of which are payable in cash) upon the common sharesachievement of certain milestones, which primarily consist of dosing a patient in pivotal trials or having a drug indication approved by a regulatory authority in the United States or another country. The amount of future development and therefore, the effect would be anti-dilutive.

The calculation of the numerator and denominator for basic and diluted net loss per common shareregulatory milestone payments payable to Yuhan 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; and isbased on a director 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 4,725,721Yuhan affiliate purchasing 750,000 shares of common stock for $3,000,000 in our underwritten public offering. In addition, we must pay Yuhan one-time sales milestone payments based on the achievement during a calendar year of one or more thresholds for annual sales for products made and holds warrantspay royalties based on annual licensing sales. We are also required to purchase 1,278,186 common sharessplit any milestone payments received with Yuhan based on any sub-license agreement we may enter into.

We are required to use commercially reasonable efforts, at our sole cost and expense, in conjunction with a joint Processa-Yuhan Board to oversee such commercialization efforts, to research, develop and commercialize products in one or more countries, including meeting specific diligence milestones that consist of: (i) preparing a first draft of the product development plan within 90 days; (ii) requesting an FDA pre-IND meeting for a product within 6 months; (iii) dosing a first patient in a Phase 2A clinical trial with a product within 24 months; and (iv) dosing a first patient with a product in a Phase 2B clinical trial, Phase 3 clinical trial or other pivotal clinical trial with a product within 48 months. Either party may terminate the agreement in the aggregate.event of a material breach of the agreement that has not been cured following written notice and a 60-day opportunity to cure such breach (which is shortened to 15 days for a payment breach).

Note 13 – License Agreement with Elion Oncology, Inc.

On August 23, 2020, we entered into the Elion License Agreement with Elion, pursuant to which we acquired an exclusive license to develop, manufacture and commercialize PCS6422 globally.

The grant of license was conditioned on the closing of our underwritten public offering and successful up-listing to Nasdaq, which closed on October 6, 2020. Following the satisfaction of the conditions, we paid Elion $100,000 and will issue Elion 825,000 shares of our common stock, based on the $4.00 per share price in our underwritten public offering. Such shares will be subject to a lock-up, with 50% of such shares released from such lock up after six months and the remaining 25% tranches to be released following 9 months and 12 months, respectively.

As additional consideration, we will pay Elion development and regulatory milestone payments (a portion of March 31, 2017which are payable in shares of our common stock and a portion of which are payable in cash) upon the achievement of certain milestones, which include the first two annual anniversaries of the effective date of the agreement, FDA or other regulatory approval and dosing a patient. In addition, we must pay Elion one-time sales milestone payments based on the achievement during a calendar year of one or more thresholds for annual sales for products made and pay royalties based on annual licensing sales. We are also required to split any milestone payments received with Elion based on any sub-license agreement we may enter into.

We are required to use commercially reasonable efforts, at our sole cost and expense to research, develop and commercialize products in one or more countries, including meeting specific diligence milestones that consist of: (i) dosing a first patient in a Phase 1B clinical trial with a product within 12 months; and (ii) dosing a first patient with a product in a Phase 2 or 3 clinical trial within 48 months. Either party may terminate the agreement in the event of a material breach of the agreement that has not been cured following written notice and a 90-day opportunity to cure such breach (which is shortened to 15 days for a payment breach).

Note 14 – Related Party Transactions

CorLyst reimburses us for shared costs related to payroll, health care insurance and rent based on actual costs incurred, which are recognized as a reduction of our general and administrative operating expenses being reimbursed in our condensed consolidated statement of operations. We recorded $76,979 and $79,058 of reimbursements during the nine months ended September 30, 2020 and 2019, respectively. No amounts were due from CorLyst at September 30, 2020 and December 31, 20162019. In September 2020, CorLyst prepaid shared expenses to us for the Companyfourth quarter of 2020 through the second quarter of 2021. Similarly, in August 2019, CorLyst prepaid us for shared expenses for Q4 2019. At September 30, 2020, we recognized $110,796 in prepaid reimbursements as due to related parties in the accompanying condensed consolidated balance sheet.

At September 30, 2020, we had secured notes payableapproximately $7,600 due from certain employees for health insurance contributions. We did not have comparable a similar receivable at December 31, 2019.

Note 15 – Commitments and Contingencies

Purchase Obligations

We enter into contracts in the normal course of business with JMW Fund, LLC,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 San Gabriel Fund, LLCeffective date of the termination and any applicable cancellation fees. We had no purchase obligations at September 30, 2020.

Note 16 – Impact of COVID-19

In December 2019, a novel strain of coronavirus, SARS-CoV-2, causing the Coronavirus Disease 2019, also known as COVID-19, was reported to have surfaced in Wuhan. Since then, the SARS-CoV-2 virus has spread to multiple countries worldwide, including the United States, where we have planned and have ongoing preclinical studies and clinical trials. On March 11, 2020, the World Health Organization declared the outbreak of the SARS-CoV-2 virus to be a global pandemic.

Our clinical development timelines and plans could be affected by the SARS-CoV-2 virus pandemic. Site initiation and patient enrollment could be delayed or suspended due to prioritization of hospital resources toward the SARS-CoV-2 virus pandemic. In addition, some patients may not be able to comply with clinical trial protocols and the Richland Fund, LLCability to conduct follow up visits with treated patients may be limited if quarantines impede patient movement or interrupt healthcare services. We cannot assure the SARS-CoV-2 virus will not have an adverse impact on our future planned clinical trials. Similarly, our ability to recruit and retain patients and principal investigators and site staff who, as healthcare providers, may have heightened exposure to SARS-CoV-2 virus pandemic could be adversely impacted.

If the SARS-CoV-2 virus pandemic continues to spread in the aggregate amountUnited States and elsewhere, we may experience disruptions, including those that could severely impact our business, preclinical studies, and planned clinical trials.

Note 17 – Subsequent Events

On October 6, 2020, we closed on our underwritten public offering of $962,361.  An outstanding balance4,800,000 shares of $138,000 oncommon stock for a public offering price of $4.00 per share. Net proceeds from the revolvingoffering were approximately $17.1 million. In addition to closing our underwritten public offering, the following additional transactions occurred subsequent to September 30, 2020:

The following pro forma table shows the number of issued and outstanding shares of our common stock as a result of the underwritten offering, which closed on October 6, 2020 as if the shares were all issued and outstanding as of 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.September 30, 2020:

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 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, our history of losses; our ability to achieve profitability; our ability to obtain adequate financing to fund our business operations in the future; the impact of the global pandemic caused by COVID-19, including its impact on our ability to obtain financing or complete clinical trials; 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, 2019, 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 a clinical stage biopharmaceutical company focused on the development of drug products that are intended to improve the survival and/or quality of life for patients who have a high unmet medical need condition or who have no alternative treatment. Our most advanced product candidate, PCS499, is an oral tablet that is a deuterated analog of one of the major metabolites of pentoxifylline (PTX or Trental^®). We have completed the patient portion of the Phase 2A trial for PCS499 and are in the process of closing the trial, and we plan to begin recruiting for a Phase 2B trial in the first quarter of 2021. We have also begun the continued development of two newly acquired drugs, PCS12852 and PCS6422. We will continue to search for additional products for our portfolio that meet our portfolio criteria.

Our Strategy

Our vision is to develop drugs with potentially high return on investment and lower risk of development failure. Our portfolio drugs are focused on treating patients who do not have adequate treatment options for their conditions and have some clinical evidence supporting the efficacy of the drug, whether it be evidence with the drug itself or a drug with similar pharmacological properties. Given the prior success of our development team, the regulatory science approach that we employ not only allows us to develop drugs focused on FDA approval, but also allows us to select drugs for our portfolio which may have a greater chance for approval in a population of patients who need treatment options. The key pillars of our strategy to achieve our vision include:

In order to add significant value to our in-licensed drugs within 2 to 4 years, the drugs must be in the clinical development stage and not in discovery stage, and during those 2 to 4 years we must be able to obtain clinical data to support the added value. The additional clinical data could range from a clinical proof-of-concept data to further demonstrate that the proposed pharmacology occurs clinically in the targeted patient population to a pivotal well-designed randomized controlled trial.

Our portfolio specifically includes drugs that (i) already have clinical proof-of-concept data demonstrating the desired pharmacological activity in humans or, minimally, clinical evidence in the form of case studies or clinical experience demonstrating the drug or a similar drug pharmacologically can successfully treat patients with the targeted indication, (ii) target indications for which the FDA believes that a single positive pivotal study demonstrating efficacy provides enough evidence that the clinical benefits of the drug and its approval outweighs the risks associated with the drug or the present standard of care (e.g., some orphan indications, many serious life-threatening conditions, some serious quality of life conditions), and/or (iii) target indications where the prevalence of the condition and the likelihood of patients enrolling in a study meet the desired time-frame to demonstrate that the drug can, at some level, treat or potentially treat patients with the condition.

To advance our mission, we have assembled an experienced and talented management and product development team. Our team is experienced in developing drug products through all principal regulatory tiers from IND enabling studies to NDA submission. Our combined scientific, development and regulatory experience has resulted in more than 30 drug approvals by the FDA, over 100 meetings with the FDA and involvement with more than 50 drug development programs, including drug products targeted to patients who have an unmet medical need. Although we believe that the skills and experience of our team in drug development and commercialization is an important indicator of our future success, the past successes of our team in developing and commercializing pharmaceutical products does not guarantee that they will successfully develop and commercialize drugs for us. In addition, the growth in revenues of companies at which our executive officers and directors served in was due to many factors and does not guarantee that they will successfully operate or manage us or that we will experience similar growth in revenues, even if they continue to serve as executive officers and/or directors.

Our ability to generate meaningful revenue from any products depends on our ability to out-license the drugs in the U.S. and/or ex-U.S. before or after we obtain FDA NDA approval. Even if our products are authorized and approved by the FDA, it should be noted that the products must still meet the challenges of successful marketing, distribution and consumer acceptance.

Status of our clinical trial in Necrobiosis Lipoidica - Our lead product, PCS499, is an oral tablet that is a deuterated analog of one of the major metabolites of pentoxifylline (PTX or Trental^®). PCS499 is classified by FDA as a new molecular entity. PCS499 and its metabolites act on multiple pharmacological targets that are important in a variety of conditions. We have identified Necrobiosis Lipoidica (NL) as our lead indication for PCS499. 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 occurs more often in people with diabetes. Ulceration occurs in approximately 30% of NL patients, which can lead to more severe complications, such as deep tissue infections and osteonecrosis threatening the life of the limb. Approximately 22,000 - 55,000 people in the United States and more than 120,000 people outside the United States are affected with ulcerated NL.

The degeneration of tissue occurring at the NL lesion site may be caused by a number of pathophysiological changes, which has made it extremely difficult to develop effective treatments for this condition. Because PCS499 and its metabolites affect a number of biological pathways, several of which could contribute to the pathophysiology associated with NL, PCS499 may provide a novel treatment solution for NL, a condition for which there are currently no FDA-approved treatments.

On June 18, 2018, the FDA granted orphan-drug designation for PCS499 for the treatment of NL. On September 28, 2018, the IND for PCS499 in NL became effective, such that we could move forward with a Phase 2A multicenter, open-label prospective trial designed to determine the safety and tolerability of PCS499 in patients with NL. The study initially had a six-month treatment phase and a six-month optional extension phase. In December 2019, we informed patients and sites that the study would conclude after the treatment phase and there would no longer be an extension phase. The first enrolled NL patient in this Phase 2A clinical trial was dosed on January 29, 2019 and the study completed enrollment on August 23, 2019. The last patient visit took place in February 2020. Due to COVID-19 related restrictions at certain sites, study closeout and database lock did not occur until October 2020. We are finalizing the data results and clinical study report.

The main objective of the trial was to evaluate the safety and tolerability of PCS499 in patients with NL and to use the collected safety and efficacy data to design future clinical trials. Based on toxicology studies and healthy human volunteer studies, Processa and the FDA agreed that a PCS499 dose of 1.8 grams/day would be the highest dose administered to NL patients in this Phase 2A trial. As anticipated, the PCS499 dose of 1.8 grams/day, 50% greater than the maximum tolerated dose of PTX, appeared to be well tolerated with no serious adverse events reported. All adverse events reported in the study were mild in severity. As expected, gastrointestinal symptoms were the most noted adverse events and reported in four patients, all of which were mild in severity and resolved within 1-2 weeks of starting dosing.

Two of the twelve patients in the study presented with more severe ulcerated NL and had ulcers for more than two months prior to dosing. At baseline, the reference ulcer in one of the two patients measured 3.5 cm² and had completely closed by Month 2 of treatment. The second patient had a baseline reference ulcer of 1.2 cm² which completely closed by Month 9 during the patient’s treatment extension period. In addition, while in the trial, both patients also developed small ulcers at other sites, possibly related to contact trauma, and these ulcers resolved within one month. However, the other ten patients, presenting with mild to moderate NL and no ulceration, had more limited improvement of the NL lesions during treatment. Historically, less than 20% of all the patients with NL naturally progress to complete healing over many years after presenting with NL. Although the natural healing of the more severe NL patients with ulcers has not been evaluated independently, medical experts who treat NL patients believe that the natural progression of an open ulcerated wound to complete closure would be significantly less than the 20% reported as the maximum percentage of patients who naturally heal over several years after NL presentation.

On March 25, 2020, we met with the FDA and discussed the clinical program, as well as the nonclinical and clinical pharmacology plans to ultimately support the submission of the PCS499 New Drug Application (NDA) in the U.S. for the treatment of ulcers in NL patients. With input from the FDA, we will be designing the next trial as a randomized, placebo-controlled trial to evaluate the ability of PCS499 to completely close ulcers in patients with NL. We initially planned to begin recruiting for the randomized, placebo-controlled trial in the fourth quarter of 2020, but we now expect to begin recruiting patients in 2021 due to delays in fundraising efforts. This PCS499 NL study will be a randomized, placebo-controlled Phase 2B study to better understand the potential response of NL patients on drug and on placebo. After obtaining the results from this Phase 2B study, we expect to meet with FDA to discuss our Phase 2B drug and placebo response findings while further discussing the next steps to obtain approval.

New Licenses Entered into in Third Quarter

License Agreement with Yuhan Corporation. - On August 19, 2020, we entered into a License Agreement (the “Yuhan License Agreement”) with Yuhan, pursuant to which we acquired an exclusive license to develop, manufacture and commercialize PCS12852 globally, excluding South Korea.

As consideration for the Yuhan License Agreement and related Share Issuance Agreement, we issued to Yuhan 250,000 shares of common stock (based upon an $8.00 per share price). Per the Yuhan License Agreement, we will issue an additional 250,000 shares based on the $4.00 per share price in the underwritten public offering, which closed on October 6, 2020. As additional consideration, we will pay Yuhan development and regulatory milestone payments (a portion of which are payable in shares of our common stock based on the volume weighted average trading price during the period prior to such achievement and a portion of which are payable in cash) upon the achievement of certain milestones, which primarily consist of dosing a patient in pivotal trials or having a drug indication approved by a regulatory authority in the United States or another country. The amount of future development and regulatory milestone payments payable to Yuhan is based in part on a Yuhan affiliate purchasing 750,000 shares of common stock for $3,000,000 in our underwritten public offering. In addition, we must pay Yuhan one-time sales milestone payments based on the achievement during a calendar year of one or more thresholds for annual sales for products made and pay royalties based on annual licensing sales. We are also required to split any milestone payments received with Yuhan based on any sub-license agreement we may enter into.

We are required to use commercially reasonable efforts, at our sole cost and expense, in conjunction with a joint Processa-Yuhan Board to oversee such commercialization efforts, to research, develop and commercialize products in one or more countries, including meeting specific diligence milestones that consist of: (i) preparing a first draft of the product development plan within 90 days; (ii) requesting an FDA pre-IND meeting for a product within 6 months; (iii) dosing a first patient in a Phase 2A clinical trial with a product within 24 months; and (iv) dosing a first patient with a product in a Phase 2B clinical trial, Phase 3 clinical trial or other pivotal clinical trial with a product within 48 months. Either party may terminate the agreement in the event of a material breach of the agreement that has not been cured following written notice and a 60-day opportunity to cure such breach (which is shortened to 15 days for a payment breach).

License Agreement with Elion Oncology, Inc. - On August 23, 2020, we entered into the Elion License Agreement with Elion, pursuant to which we acquired an exclusive license to develop, manufacture and commercialize PCS6422 globally.

The grant of license was conditioned on the closing of our underwritten public offering and successful up-listing to Nasdaq, which closed on October 6, 2020. Following the satisfaction of the conditions, we paid Elion $100,000 and will issue Elion 825,000 shares of our common stock, based on the $4.00 per share price in our underwritten public offering. Such shares will be subject to a lock-up, with 50% of such shares released from such lock up after six months and the remaining 25% tranches to be released following 9 months and 12 months, respectively.

As additional consideration, we will pay Elion development and regulatory milestone payments (a portion of which are payable in shares of our common stock and a portion of which are payable in cash) upon the achievement of certain milestones, which include the first two annual anniversaries of the effective date of the agreement, FDA or other regulatory approval and dosing a patient. In addition, we must pay Elion one-time sales milestone payments based on the achievement during a calendar year of one or more thresholds for annual sales for products made and pay royalties based on annual licensing sales. We are also required to split any milestone payments received with Elion based on any sub-license agreement we may enter into.

We are required to use commercially reasonable efforts, at our sole cost and expense to research, develop and commercialize products in one or more countries, including meeting specific diligence milestones that consist of: (i) dosing a first patient in a Phase 1B clinical trial with a product within 12 months; and (ii) dosing a first patient with a product in a Phase 2 or 3 clinical trial within 48 months. Either party may terminate the agreement in the event of a material breach of the agreement that has not been cured following written notice and a 90-day opportunity to cure such breach (which is shortened to 15 days for a payment breach).

Recent Developments

Underwritten Public Offering - On October 6, 2020, we closed on our underwritten public offering of 4,800,000 shares of common stock for a public offering price of $4.00 per share. Net proceeds from the offering were approximately $17.1 million.

Conversion of our Line of Credit with DKBK Enterprises, LLC. - On October 6, 2020, the Lender converted $700,000 due under the line of credit and accrued interest of $18,333 into 199,537 shares of common.

Results of Operations

Comparison of the three and nine months ended September 30, 2020 and 2019

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

Revenues.

We had no revenue during the three and nine months ended September 30, 2020 and 2019. 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 PCS499 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 September 30, 2020 and 2019, we incurred total research and development expenses of $532,587 and $584,979, respectively, for the continued development and testing of our lead product, PCS499. Research and development expenses were approximately $1.5 and $1.8 million for the nine months ended September 30, 2020 and 2019, respectively. Costs for the three and nine months ended September 30, 2020 and 2019 were as follows:

Overall, during the three months ended September 30, 2020, our research and development costs decreased by $52,392 as compared to the three months ended September 30, 2019. The decrease in research and development expenses was due to a decrease in research and development salaries and benefits of $88,858 for the three months ended September 30, 2020 when compared to the same period in 2019 related to the departure of two research and development team members in the first quarter of 2020. The decrease was offset by an increase in preclinical, clinical trial and other costs of $36,466, which was primarily due to an increase in professional fees.

During the nine months ended September 30, 2020, our research and development costs decreased by $342,753 as compared to the nine months ended September 30, 2019. The decrease in research and development expenses was due to a decrease in preclinical, clinical trial and other costs of $188,838 and in research and development salaries and benefits of $153,915 during the nine months ended September 30, 2020 when compared to the same period in 2019 for the same reasons as stated above.

We incurred $297,020 of costs related to our Phase 2A trial during the nine months ended September 30, 2020 and expect to spend an additional $188,000 as we close out the trial. We believe, based on our estimates, the total cost of our Phase 2A trial in NL will total approximately $1.5 million.

We anticipate our research and development costs to increase significantly in the future as we continue manufacturing drug products and conduct future clinical trials related to our current drug portfolio as we start clinical trials for PCS499, PCS6422 and PCS12852.

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. As noted above, we anticipate our research and development costs to increase in the future as we finalize our Phase 2A clinical trial activities and beginning designing and conducting a Phase 2B trial to evaluate the ability of PCS499 to completely close ulcers in patients with NL, begin a Phase 1B clinical trial for PCS6422 and a Phase 2A study for PCS12852. We expect to begin recruiting patients for these three clinical trials during the first half of 2021.

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 contract research organizations (CROs) that conduct and manage clinical trials on our behalf.

We estimate manufacturing 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.

Acquisition of In-Process Research and Development.

In connection with the Yuhan License Agreement, we recorded $2 million of acquired in-process research and development expense during the three and nine month periods ended September 30, 2020. We believe the in-process research and development assets acquired have no alternative future use. We did not acquire any in-process research and development assets in 2019.

General and Administrative Expenses.

Our general and administrative expenses for the three months ended September 30, 2020 increased by $3,930 to $422,958 from $419,028 for the three months ended September 30, 2019. We experienced an increase in professional fees for legal, accounting, advisory and consulting costs of approximately $24,524 and in administrative expenses such as taxes, insurance and office expenses of $21,828. The increase was offset by reductions in payroll and related costs of $42,679 (primarily due to a decrease in stock-based compensation of $56,631). Reimbursements from CorLyst, a related party, were $26,337 and $26,594 for rent and other costs during the nine months ended September 30, 2020 and 2019, respectively.

For the nine months ended September 30, 2020, general and administrative expenses increased by $62,910 to $1,282,239 from $1,219,329 for the nine months ended September 30, 2019. The majority of the increase was due to a $126,003 increase in taxes and licenses, primarily due to our Delaware franchise tax as a result of our 1-for-7 reverse stock split in December 2019. Delaware used the assumed par value method to compute their franchise tax. The reverse stock split increased the assumed par value per share which was assessed on the number of authorized shares to compute the franchise tax. On June 25, 2020, we amended our articles of incorporation to reduce the number of authorized shares in part to decrease our future Delaware franchise tax.

We also experienced an increase in insurance of $24,469 and in payroll and related costs of $1,291. These increases were offset by a decrease of $70,106 in professional fees for legal, accounting, advisory and consulting costs, and $20,826 in other administrative expenses such as office expenses, travel, and repairs and maintenance. Reimbursements from CorLyst of $76,979 for rent and other costs during the nine months ended September 30, 2020 were $2,079 less than the same period in 2019.

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

Other Income and Expense.

Interest expense was $186,209 and $2,271 for the three months ended September 30, 2020 and 2019, respectively, and $222,660 and $12,973 for the nine months ended September 30, 2020 and 2019, respectively, related to our $805,000 and $2.58 million of 8% Senior Notes sold in 2019 and 2017, respectively, and to the 2020 borrowings on the LOC Agreement with DKBK. Included in interest expense is the amortization of debt issuance costs totaling $157,129 and $0 for the nine months ended September 30, 2020 and 2019, respectively. As noted in Note 5 – 2019 Senior Notes, we did not recognize $197,403 in debt issuance costs related to the warrants issuable to the Note Holders until September 2020, and as such, did not amortize the debt issuance costs in previous periods.

Interest income was $12 and $1,503 for the three months ended September 30, 2020 and 2019, respectively, and $859 and $10,886 for the nine months ended September 30, 2020 and 2019, respectively. Interest income represents interest earned on money market funds.

Income Tax Benefit.

We recognized an income tax benefit of $70,457 and $141,251 for the three months ended September 30, 2020 and 2019, respectively, and $286,421 and $442,152 for the nine months ended September 30, 2020 and 2019, 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 the 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 740-10-25-51 Income 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 condensed consolidated statements of operations.

Liquidity and Capital Resources

At September 30, 2020, we had $325,428 in cash. Net cash used in our operating activities during the nine months ended September 30, 2020 totaled $867,839 compared to $2,136,659 for the nine months ended September 30, 2019. On October 6, 2020, we closed on our underwritten public offering of 4,800,000 shares of common stock for a public offering price of $4.00 per share. Net proceeds from the offering were approximately $17.1 million.

We had no revenue during the three and nine months ended September 30, 2020 and 2019, and do not have any revenue under contract or any immediate sales prospects. Our primary uses of cash are to fund our planned clinical trials, research and development expenditures and operating expenses. Cash used to fund operating expenses is impacted by the timing of when incur and pay these expenses.

On October 6, 2020, we closed an underwritten public offering of 4,800,000 shares of common stock for a public offering price of $4.00 per share. Net proceeds from the offering were approximately $17.1 million. We believe these funds, along with our existing cash on that day will provide us with sufficient capital to meet our anticipated operating and capital expenditure requirements into the fourth quarter of 2022. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Our ultimate success depends on the outcome of our planned clinical trials and our research and development activities, as disclosed above. We expect to incur additional losses in the future and we anticipate the need to raise additional capital to fully implement our business plan if the cost of our planned clinical trials are greater than we expect or they take longer than anticipated. We also expect to incur increased general and administrative expenses at least through 2022 due in part to planned increased research and development activities as we conduct a Phase 2B trial for PCS499, a Phase 1B trial for PCS6422, and a Phase 2A clinical trial for PCS12852. In addition, there may be costs we incur as we develop these drug products that we do not currently anticipate requiring us to need additional capital sooner than currently expected.

Prior to our underwritten public offering in October 2020, our business and operations were funded primarily through the private placement of equity securities and senior secured convertible notes. We have taken the following actions to address our liquidity:

If we need to raise additional capital to fund our operations in the future, 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 one or more of our preclinical studies 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 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 nine months ended September 30, 2020 and 2019:

Net cash used in operating activities

We used net cash in our operating activities of $867,839 and $2,136,659 during the nine months ended September 30, 2020 and 2019, respectively. The decrease in cash used in operating activities during the first nine months of 2020 compared to the comparable period in 2019 was related to a decreased amount of direct cash costs incurred, such as salaries and clinical trial costs. Additionally, prepaid expenses decreased by approximately $273,000, $172,000 of which related to costs for our Phase 2A clinical trial.

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 nine months ended September 30, 2020 or 2019.

Net cash provided by financing activities

Net cash provided by financing activities during the nine months ended September 30, 2020 of $501,731 was from borrowings totaling $700,000 under our LOC Agreement with DKBK and $162,459 we received from the Bank of America pursuant to a promissory note under the Paycheck Protection Program, less transaction costs of $360,728 related to our underwritten public offering. During the nine months ended September 30, 2019, net cash provided by financing activities of $900,000 were funds received from our clinical trial funding investor in partial satisfaction of his stock subscription receivable that he paid directly to our CRO.

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, 2019.

Off Balance Sheet Arrangements

At September 30, 2020, 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 presented in this Quarterly Report on Form 10-Q.

Forward-Looking Statements

The statements contained in this report that are not historical facts are forward-looking statements that represent management’s beliefs and assumptions based on currently available information. Forward-looking statements include the information concerning our possible or assumed future results of operations, business strategies, need for financing, competitive position, potential growth opportunities, potential operating performance improvements, ability to retain 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. Althoughso we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give any assurances thatconsider these expectations will prove to be correct. Such statements by their nature involve risks and uncertainties that could significantly affect expected results, and actual futureour critical accounting policies. Actual results could differ materially from those describedthe estimates we use in such forward-looking statements.

Factors that may cause actual results to differ materially from current expectations include, butapplying our critical accounting policies. We are not limited to:currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.

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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;

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risks associated with the asphalt repair industry, includingThere have been no changes in laws or regulations, increases in taxes, rising insurance premiums, costs of compliance with environmental laws and other governmental regulations;

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

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changes in the competitive environment in the asphalt repair industry;

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risks related to natural disasters;

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litigation; and

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other risk factors discussed in the 2016our critical accounting policies from our most recent Annual Report on Form 10-K, filed by the Company with the Securities and Exchange Commission.10-K.

Should one or more of these risks materialize (or the consequences of such a development worsen), or should the underlying assumptions prove incorrect, actual results could differ materially from those expected. We disclaim any intention or obligation to update publicly or revise such statements whether as a result of new information, future events or otherwise.Recently Issued Accounting Pronouncements

Overview and Basis of Presentation

Heatwurx, Inc. was incorporated under the laws of the State of Delaware on March 29, 2011 as Heatwurxaq, Inc. and subsequently changed its name to Heatwurx, Inc. on April 15, 2011.

We are an asphalt preservation and repair, equipment company. Our innovative, and eco-friendly hot-in-place recycling process corrects surface distresses within the top 3 inches of existing pavement by heating the surface material to a temperature between 325° and 375° Fahrenheit with our electrically powered infrared heating equipment, mechanically loosening 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 equipment to be eco-friendly as the Heatwurx process reuses and rejuvenates distressed asphalt, uses recycled asphalt pavement for filler material, eliminates travel to and from asphalt batch plants, and extends the life of the roadway.  We believe our equipment, technology and processes provide savings over other processes that can be more labor and equipment intensive.

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Our hot-in-place recycling process and equipment was selected by the Technology Implementation Group of the American Association of State Highway Transportation Officials (“AASHTO TIG”) as an “additionally Selected Technology” for the year 2012. We develop, manufacture and intend to sell our unique and innovative and eco-friendly equipment to federal, state and local agencies as well as contractors for the repair and rehabilitation of damaged and deteriorated asphalt surfaces.

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 licensee as of March 31, 2017.

We are no longer receiving financial support and we do not believe we will be able to obtain financing from another source.  We do not believe we are able to achieve a level of revenues adequate to support our cost structure.  Do to the slow growth in the service sector and the high cost of the franchise registrations, we discontinued the operations of Dr. Pave, LLC 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 it will be able to satisfy the mandatory principal payments.  The Company will work with 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 the amount of $962,361 is outstanding and payable under the secured notes.  These notes are secured by all the assets of the Company, including intellectual property rights.  We are in default on the notes, and as a result the Company’s assets may be foreclosed upon.

The issues described above raise substantial doubt about the Company’s ability to continue as a going concern.  It is our 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.

Section 107 of the JOBS Act provides that an “emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards.  In other words, an “emerging growth company” can delay 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 on the relevant dates on which adoption of such standards is required for non-emerging growth companies.  Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

Results of operations

The following discussion of the financial condition and results of operations should be read in conjunction with the financial statements included herewith.  This discussion should not be construed to imply that results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future.

For the three months ended March 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 loss of approximately $134,000 including loss from discontinued operations of approximately $2,000 for the same period of 2016.  Further description of these losses is provided below.

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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 decreased to approximately $14,000 for the three months ended March 31, 2017 from approximately $81,000 for the three months ended March 31, 2016. The decrease in selling, general and administrative expenses is principally due to the significant reduction 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.

Research and Development

The Company had approximately $100 in research and development costs during the three months ended March 31, 2017; and no research and development costs during the three months ended March 31, 2016.  The Company is only utilizing legal representation to maintain the existing patents.

Liquidity and capital resources

Overview

We have incurred operating losses, accumulated deficit and negative cash flows from operations since inception.  As of March 31, 2017, we 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 little revenue since inception.  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 to maintain only a minimal level of operations necessary to support our licensee and look for potential merger candidates.  For the year three months ended March 31, 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.

Investing Activities

There were no investing activities during the three months ended March 31, 2017 compared to proceeds of $27,000 from the sale of assets held for sale during the three months ended March 31, 2017.

Financing Activities

There were no investing activities during the three months ended March 31, 2017 compared to cash provided by financing activities of $15,000 in the three months ended March 31, 2016.  This decrease in cash provided by financing activities was due to the Company no longer receiving financial support for the business and operations from their small group of investors.  The Company entered into a Senior secured loan agreement on February 16, 2015, extended on March 23, 2016, 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, we do not believe it 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 explore additional extension 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 raise substantial doubt about our ability to continue as a going concern. We have been solely reliant on raising capital or borrowing funds in order to maintain our operations.  We were able to raise debt and equity financing through the assistance of a small number of our investors who have been substantial participants in its debt and equity offerings since our formation.  These investors have chosen not to assist us with our capital raising initiatives.  At this time we are not able to obtain any alternative forms of financing and we will not be able to continue to satisfy our current or long term obligations.  We desire to merge or be acquired by another company.  If a candidate is not identified we will cease operations all together.

Recent accounting pronouncements

There were no newevaluated recently issued accounting pronouncements issued during the three months ended March 31, 2017and determined that had a material impact or are anticipated to have athere is no material impact on our financial position cash flows or operating results.results of operations.

ITEMItem 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative and Qualitative Disclosures About Market Risk

AsItem 3 is not applicable to us as a smaller reporting company we have elected not to provide the disclosure required by this item.and has been omitted.

ITEMItem 4. CONTROLS AND PROCEDURESControls and Procedures

Evaluation of disclosure controlsDisclosure Controls and proceduresProcedures

Our management, with the participation of our Chief Executive Officer who also serves as our(“CEO”) and Chief Financial Officer has concluded, based on evaluation,(“CFO”), evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report,Report. Based upon that evaluation, the CEO and CFO concluded that our disclosure controls and procedures (as defined in Rule 15d-15(e) underas of the Exchange Act) are (1)end of the period covered by this Report were not effective to ensure that material information required to be disclosed by us in reports filed or submitted by us under the Exchange Act is recorded, processed, summarized, and reported within the time periods specifiedproviding reasonable assurance in the rules and formsreliability of our report as of the Securities and Exchange Commission due toend of the material weakness noted below, and (2) lacking design to ensure that material information required to be disclosedperiod covered by us in such reports is accumulated, organized and communicated tothis report.

In our management, including our principal executive officer and principal financial officer, as appropriated, to allow timely decisions regarding required disclosure.

Material Weakness and Related Remediation Initiatives

Our management concluded that as of March 31, 2017,2019 Annual Report on Form 10-K, we identified the following material weaknesses existed: 1. Due to the Company’s budget constraints, the Company’s accounting department does not maintain the number of accounting personnel (either in-house or external) necessary to ensure more complete and effective financial reporting controls.  Through the efforts of management, external consultants, and our Director, we have developed a specific action plan to remediate the material weaknesses.  Due to the significant reduction in operations, the Company was unable to remediate the material weakness during 2017.

We have fewer than 300 record holders and, thus, our reporting obligations were automatically suspended.  As a voluntary filer, we may choose to cease filing Exchange Act reports at any time.

Changes in internal control over financial reporting

There has been no change in our internal control over financial reporting, as definedwhich are common in Rules 13a-15(f)many small companies with limited staff including: (i) certain entity level controls; (ii) inadequate segregation of duties throughout the Exchange Act,entire year; and (iii) insufficient documentation of certain policies and procedures for transaction processing, accounting and financial reporting with respect to the requirements and application of both GAAP and SEC guidelines, their related controls and the operation thereof. These material weaknesses continue to be present at September 30, 2020.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during our most recent fiscal quarter ended March 31, 2017,September 30, 2020, that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting. We are continuing to take remediation actions to rectify our control deficiencies (including material weaknesses) through the adoption and implementation of written policies and procedures for transaction processing, accounting and financial reporting, as well as strengthening our supervisory review processes.

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are currently not a party to any material legal proceedings.

ITEMItem 1A. RISK FACTORSRisk Factors

SeeThe following additional risk factor related to COVID-19 should be read in conjunction with the risk factors set forth under “Item 1A -1A. Risk Factors” in our 2019 Form 10-K. Except as described herein, there have been no material changes with respect to the risk factors disclosed in our 2019 Form 10-K10-K.

The ongoing COVID-19 pandemic may disrupt our operations and affect our ability to successfully conduct clinical studies and raise capital.

In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, and created significant volatility and disruption in the financial and capital markets. We are unable to accurately predict the full impact that the ongoing COVID-19 pandemic will have on our results from operations, financial condition, and scientific and clinical activities due to numerous factors that are not within our control, including the duration and severity of the outbreak, stay-at-home orders, business closures, travel restrictions, supply chain disruptions and employee illness or quarantines, which could result in disruptions to our operations and adversely impact our results from operations and financial condition. In addition, the COVID-19 pandemic has resulted in ongoing volatility in the financial and capital markets. If our access to capital is restricted or associated borrowing costs increase as fileda result of developments in financial markets relating to the COVID-19 pandemic, our operations and financial condition could be adversely impacted. In addition, we have experienced delays in completing the closeout of our Phase 2A clinical trial for PCS499 and any future delays would delay our drug development process.

We have incurred indebtedness under the CARES Act, which will be subject to review, may not be forgivable in whole or in part and may eventually have to be repaid.

We received funds under the Paycheck Protection Program in May 2020 in the amount of $162,459, serviced by the Bank of America. The application for these funds requires us to, in good faith, certify that the current economic uncertainty made the loan request necessary to support our ongoing operations. This certification further requires us to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on us having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria.

Under the terms of the CARES Act and the corresponding promissory note, the use of the proceeds of the loan is restricted to payroll costs (as defined in the CARES Act), covered rent, covered utility payments and certain other expenditures that, while permitted, would not result in forgiveness of a corresponding portion of the loan. Following recent amendments to the Paycheck Protection Program, after an eight- or twenty-four-week period starting with the Securitiesdisbursement of the loan proceeds, we may apply for forgiveness of some or all of the loan, with the amount which may be forgiven equal to the sum of eligible payroll costs, mortgage interest (not applicable to us), covered rent, and Exchange Commission on September 25, 2017.covered utility payments, in each case incurred by us during the eight- or twenty-four-week period following the date of first disbursement. Certain reductions in our payroll costs or full-time equivalent employees (when compared against the applicable measurement period) may reduce the amount of the Loan eligible for forgiveness. The Payroll Protection Program has been amended twice with the latest series of amendments significantly altering the timeline associated with the Payroll Protection Program spending and loan forgiveness. While we believe we have acted in good faith and has complied with all requirements of the Payroll Protection Program, if Treasury or SBA determined that our loan application was not made in good faith or that the we did not otherwise meet the eligibility requirements of the Payroll Protection Program, we may not receive forgiveness of the loan (in whole or in part) and we could be required to return the loan or a portion thereof. Further, there is no guarantee that we will receive forgiveness for any amount and forgiveness will be subject to review by our bank of information and documentation that we submit, as required by SBA and the lender.

Our licenses are subject to termination by the licensor in certain circumstances.

Our rights to practice the inventions claimed in the licensed patents and patent applications are subject to our licensors abiding by the terms of those licenses and not terminating them. Our licenses may be terminated by the licensor if we are in material breach of certain terms or conditions of the license agreement or in certain other circumstances. Our license agreements each include provisions that allow the licensor to terminate the license if (i) we breach any payment obligation or other material provision under the agreement and fail to cure the breach within a fixed time following written notice of termination, (ii) we or any of our affiliates, licensees or sublicensees directly or indirectly challenge the validity, enforceability, or extension of any of the licensed patents, or (iii) we declare bankruptcy or dissolve. The majority of license agreements require us to satisfy due diligence milestones that relate to the development of new products containing the licensed drug or the agreement may be terminated by such counterparty. Our rights under these licenses are subject to our continued compliance with the terms of the license, including the milestone and royalty payments due under the license. Termination of any of these licenses could prevent us from marketing some or all of our products. Because of the complexity of our products and the patents we have licensed, determining the scope of the license and related royalty obligations can be difficult and can lead to disputes between us and the licensor. An unfavorable resolution of such a dispute could lead to an increase in the royalties payable pursuant to the license. If a licensor believed we were not paying the royalties due under the license or were otherwise not in compliance with the terms of the license, the licensor might attempt to revoke the license. If such an attempt were successful, we might be barred from producing and selling some or all of our products.

ITEMItem 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSUnregistered Sales of Equity Securities and Use of Proceeds

None(a) Recent Sale of Unregistered Securities

In September 2020, we issued 250,000 shares of common stock to Yuhan Corporation, an accredited investor, in connection with a license agreement. The sale of shares was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), in reliance on Section 4(a)(2) of the Securities Act. See Note 12 for additional information about the license agreement with Yuhan Corporation. There were no other sales of unregistered securities during the three months ended September 30, 2020.

(b) Use of Proceeds from Public Offering of Common Stock

None.

(c) Issuer Purchases of Equity Securities

We did not repurchase any shares of our common stock during the three months ended September 30, 2020.