UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON,United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2021

or

For the transition period from ____ to ____

Commission File Number 333-184948001-39531

Heatwurx,Processa Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

530 S Lake Avenue #6157380 Coca Cola Drive, Suite 106,

Pasadena, CA 91101Hanover, Maryland21076

(Address443) 776-3133

Securities registered pursuant to Section 12(b) of principal executive offices and Zip Code)the Exchange Act:

(626) 364-5342

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports)  YES [  ]  NO [X]

Indicate by check mark whether the registrant, and (2) has been subject to such filing requirements for the past 90 days. YES [X]  NO [  ]Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [  ]  NO [X]Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or emerging growth company. See the definitionsdefinition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [  ]  NO [X]Yes ☐ No ☒

The registrant has 11,017,388number of outstanding shares of the registrant’s common stock outstanding as of September 28, 2017.November 2, 2021 was 15,715,996.

HEATWURX,PROCESSA PHARMACEUTICALS, INC.

FORM 10-Q

For the Quarter Ended March 31, 2017

TABLE OF CONTENTS

PART I.1: FINANCIAL INFORMATION

ITEM 1.1: FINANCIAL STATEMENTS

HEATWURX, INC.Processa Pharmaceuticals, Inc.

CONSOLIDATED BALANCE SHEETSCondensed Consolidated Balance Sheets

(Unaudited)

The accompanying notes are an integral part of these unauditedcondensed consolidated financial statements.

HEATWURX, INC.

CONSOLIDATED STATEMENTS OF OPERATIONSProcessa Pharmaceuticals, Inc.

(Unaudited)Condensed Consolidated Statements of Operations

(Unaudited)

The accompanying notes are an integral part of these unauditedcondensed consolidated financial statements.

HEATWURX, INC.

CONSOLIDATED STATEMENT OF CASH FLOWSProcessa Pharmaceuticals, Inc.

(Unaudited)Condensed Consolidated Statement of Changes in Stockholders’ Equity

(Unaudited)

The accompanying notes are an integral part of these unauditedcondensed consolidated financial statements.

HEATWURX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSProcessa Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2021 and 2020

1.(Unaudited)

PRINCIPAL BUSINESS ACTIVITIES:

The accompanying notes are an integral part of these condensed consolidated financial statements.

Processa Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1 – Organization and Summary of Significant Accounting Policies

Business Activities and Organization - Heatwurx, Inc. (“Heatwurx,”

We are a clinical-stage biopharmaceutical company focused on the “Company”)development of drug products that are intended to provide treatment for patients who have a high unmet medical need condition that effects survival or the patient’s quality of life and for which few or no treatment options currently exist. We currently have five drugs: four in various stages of clinical development (PCS499, PCS12852, PCS3117 and PCS6422) and one in nonclinical development (PCS11T). We group our drugs into non-oncology (PCS499 and PCS12852) and oncology (PCS3117, PCS6422 and PCS11T). A summary of each of our five drugs is an asphalt repair equipmentprovided below:

Impact of COVID-19

The COVID-19 pandemic has created uncertainties in the expected timelines for clinical stage biopharmaceutical companies such as ours, including possible delays in clinical trials and technology company.disruptions in the supply chain for raw materials used in clinical trial work. Such delays could materially impact our business in future periods. Furthermore, the spread of COVID-19, which has caused a broad impact globally, may materially affect us economically. While the economic impact brought by, and the duration of, COVID-19 is difficult to assess or predict, the COVID-19 pandemic and its resulting variants could result in further disruption of global financial markets, reducing our ability to access capital, which could negatively affect our liquidity. Policymakers around the globe have responded with fiscal policy actions to support the healthcare industries and economies as a whole. Whether this support continues is uncertain. Accordingly, the extent to which the COVID-19 global pandemic impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict. These developments include, but are not limited to, the duration and spread of the outbreak, its resulting variants, its severity, the actions to contain the virus or address its impact, U.S. and foreign government actions to respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume. For more information on the risks associated with COVID-19, refer to Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K.

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation - These

The accompanying unaudited interimcondensed consolidated financial statements and related notes are presentedhave been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and are expressed inwith the instructions of the U.S. dollars.  Securities and Exchange Commission (“SEC”) on Form 10-Q and Article 8 of Regulation S-X.

Accordingly, they do not include all the information and disclosures required in the annual financial statements by U.S. GAAP.GAAP for complete financial statements. All material intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments considered necessary to present fairly in all material respects the financial position as of March 31, 2017.

The Company’scondensed consolidated financial statements include Dr. Pave, LLCall adjustments necessary, which are of a normal and Dr. Pave Worldwide, LLC; both wholly-owned subsidiariesrecurring nature, for the fair presentation of the Company, which are represented inCompany’s financial position and of the Company’s discontinuedresults of operations (Note 3).  All intercompany balances and transactions have been eliminated incash flows for the periods presented. These condensed consolidated financial statements.

Interim Financial Statements - These financial statements should be read in conjunction with the audited financial statements and accompanying notes for the year ended December 31, 2016, and have been prepared on a consistent basis with the accounting policies described in Note 2 - Summary of Significant Accounting Policies of the Notes to Financial Statementsthereto included in our Annual Report on Form 10-K for the year ended December 31, 2016.  Our accounting policies did not change in2020, as filed with the first three monthsSEC. The results of 2017.  Operating resultsoperations for the three months ended March 31, 2017interim periods shown in this report are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2017full year.

Liquidity

We have incurred losses since inception, devoting substantially all of our efforts toward research and development, and have an accumulated deficit of approximately $33.6 million at September 30, 2021. During the nine months ended September 30, 2021, we generated a net loss of approximately $8.2 million and we expect to continue to generate operating losses and negative cash flow from operations for the foreseeable future. However, we believe our cash balance at September 30, 2021 is adequate to fund our budgeted operations into the middle of 2023. Our ability to execute our longer-term operating plans, including unplanned future clinical trials for our portfolio of drugs depend on our ability to obtain additional funding from the sale of equity and/or debt securities, a strategic transaction or other funding transactions. We plan to continue to actively pursue financing alternatives, but there can be no assurance that we will obtain the necessary funding in the future when necessary.

We had 0 revenue during the nine months ended September 30, 2021 and do not have any revenue under contract or any future period.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 we incur and pay these expenses.

Use of estimatesEstimates - The preparation of

In preparing our condensed consolidated financial statements and related disclosures in conformity with U.S. GAAP requires managementand pursuant to the rules and regulations of the SEC, we make estimates and assumptionsjudgments that affect the amounts reported amounts of assets and liabilities and disclosure of contingent assets and liabilities atin the date of thecondensed consolidated financial statements and accompanying notes. Estimates are used for, but not limited to preclinical and clinical trial expenses, stock-based compensation, intangible assets, future milestone payments and income taxes. These estimates and assumptions are continuously evaluated and are based on management’s experience and knowledge of the reported amounts of revenuesrelevant facts and expenses duringcircumstances. While we believe the reporting period.  Accordingly,estimates to be reasonable, actual results could differ materially from those estimates. Such estimates include management’s assessmentsand could impact future results of operations and cash flows.

Intangible Assets

Intangible assets acquired individually or with a group of other assets from others (other than in a business combination) are recognized at cost, including transaction costs, and allocated to the individual assets acquired based on relative fair values and no goodwill is recognized. Cost is measured based on cash consideration paid. If consideration given is in the form of non-cash assets, liabilities incurred, or equity interests issued, measurement of cost is based on either the fair value of the consideration given or the fair value of the assets (or net assets) acquired, whichever is more clearly evident and more reliably measurable. Costs of internally developing, maintaining or restoring intangible assets that are not specifically identifiable, have indeterminate lives or are inherent in a continuing business are expensed as incurred.

Intangible assets purchased from others for use in research and development activities and that have alternative future uses (in research and development projects or otherwise) are capitalized in accordance with ASC Topic 350, Intangibles – Goodwill and Other. Those that have no alternative future uses (in research and development projects or otherwise) and therefore no separate economic value are considered research and development costs and are expensed as incurred. Amortization of intangibles used in research and development activities is a research and development cost.

Intangibles with a finite useful life are amortized using the straight-line method unless the pattern in which the economic benefits of the intangible assets are consumed or used up are reliably determinable. The useful life is the best estimate of the period over which the asset is expected to contribute directly or indirectly to our future cash flows. The useful life is based on the duration of the expected use of the asset by us and the legal, regulatory or contractual provisions that constrain the useful life and future cash flows of the asset, including regulatory acceptance and approval, obsolescence, demand, competition and other economic factors. We evaluate the remaining useful life of intangible assets each reporting period to determine whether any revision to the remaining useful life is required. If the remaining useful life is changed, the remaining carrying amount of the intangible asset will be amortized prospectively over the revised remaining useful life. If an income approach is used to measure the fair value of an intangible asset, we consider the period of expected cash flows used to measure the fair value of the intangible asset, adjusted as appropriate for company-specific factors discussed above, to determine the useful life for amortization purposes.

If no regulatory, contractual, competitive, economic or other factors limit the useful life of the intangible to us, the useful life is considered indefinite. Intangibles with an indefinite useful life are not amortized until its useful life is determined to be no longer indefinite. If the useful life is determined to be finite, the intangible is tested for impairment and the carrying amount is amortized over the remaining useful life in accordance with intangibles subject to amortization. Indefinite-lived intangibles are tested for impairment annually and more frequently if events or circumstances indicate that it is more-likely-than-not that the asset is impaired.

Impairment of Long-Lived Assets and Intangibles Other Than Goodwill

We account for the impairment of long-lived assets in accordance with ASC 360, Property, Plant and Equipment and ASC 350, Intangibles – Goodwill and Other, which require that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to its expected future undiscounted net cash flows generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amounts of the assets exceed the fair value of certain assets.the assets based on the present value of the expected future cash flows associated with the use of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Based on management’s evaluation, there was 0 impairment loss recorded during the nine months ended September 30, 2021 or 2020.

Going ConcernStock-based Compensation

Stock-based compensation expense is based on the grant-date fair value estimated in accordance with the provisions of ASC 718, Compensation-Stock Compensation. We expense stock-based compensation over the requisite service period based on the estimated grant-date fair value of the awards. Stock-based awards with graded-vesting schedules are recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award. We value restricted stock awards (RSAs) and Management’s Plan - The Company’s financial statementsrestricted stock units (RSUs) based on the closing share price on the date of grant. We estimate the fair value of stock option and warrant grants using the Black-Scholes option pricing model, and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. Stock-based compensation costs are prepared using U.S. GAAPrecorded as general and are subject to a going concern, which contemplates the realization of assetsadministrative or research and liquidation of liabilitiesdevelopment costs in the normal coursecondensed consolidated statements of business.  The Company faces certain risks and uncertainties that are present in many emerging companies regarding product development, future profitability, ability to obtain future capital, protection of patents and property rights, competition, rapid technological change, government regulations, recruiting and retaining key personnel, and third party manufacturing organizations.operations based upon the underlying individual’s or consultant’s role.

The Company has previously relied exclusively on private placements with a small group of investors to finance its business and operations.  The Company has had little revenue since inception.  ForStock-based compensation during the threenine months ended March 31, 2017, the Company incurred a net loss from continuing operations of approximately $75,627 and used approximately $1,598 in net cash from operating activities from continuing operations.  The Company had total cash on hand of approximately $1,639 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. The Company does not currently have any revenue under contract nor does it have any immediate sales prospects.  The Company has significantly reduced employees and overhead. The decision to cease operations of Dr. Pave, LLC and Dr. Pave Worldwide, LLC was made on December 31, 2015. These business components are captured within discontinued operations as of March 31, 2017 (Note 3). The Company has significantly scaled back operations to maintain only a minimal level of operations necessary to support our licensee, warehouse the equipment held for the licensee and look for potential merger candidates.  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.

6

Based upon the Company’s current financial position and inability to obtain additional financing, the Company was not able to satisfy the mandatory principal payments in 2016 under the $2,000,000 senior secured debt.  The Company will continue to work with the lenders to explore extension or conversion options, but there is no guarantee the lenders will agree to modify the repayment termsSeptember 30, 2021 consisted of the notes under conditions that will allowfollowing:

Stock Based Compensation Awards

At September 30, 2021, $107,193 of stock-based compensation related to consultants for services is included in our prepaid expense and is being amortized over the Company to continue to repay the notes, if at all. As these notescontract period of one year as services are secured by all the assets of the Company, including intellectual property rights, the Company is in default in regard to interest payments on the notes, and the lenders may call the notes and foreclose on the Company’s assets.

The issues described above raise substantial doubt about the Company’s ability to continue as a going concern.  The Company has been solely reliant on raising debt and capital in order to maintain its operations.  Previously the Company was able to raise debt and equity financing through the assistance of a small number of investors who have been substantial participants in its debt and equity offerings since the Company’s formation.  These investors have chosen not to further assist the Company with its capital raising initiatives and, at this time, the Company is not able to obtain any alternative forms of financing and the Company will not be able to continue to satisfy its current or long term obligations.  The Company needs to merge with or be acquired by another company.  If a candidate is not identified, the Company will be forced to cease operations all together.

The accompanying 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.

Cash and cash equivalents - The Company considers all highly liquid investments with an original maturity of three months or less when purchasedexpected to be cash equivalents.provided.

Net income (loss) per shareLoss Per Share - The Company computes basic and diluted earnings per share amounts pursuant to ASC 260-10-45.

Basic earningsnet loss per share is computed by dividing net income (loss) available to common shareholders,loss by the weighted average number ofcommon shares of common stock outstanding during the period, excluding the effects of any potentially dilutive securities.and vested RSUs. Diluted earningsnet loss per share is computed by dividing net income (loss) available to common shareholdersloss by the diluted weighted average number of shares of common stock during the period.  The diluted weighted average number of common shares outstanding. Since we experienced a net loss for both periods presented, basic and diluted net loss per share are the same. As such, diluted loss per share for the nine months ended September 30, 2021 and 2020 excludes the impact of potentially dilutive common shares related to outstanding isstock options, unvested restricted stock awards (RSAs), unvested restricted stock units (RSUs) and purchase warrants and, in 2020, the basic weighted numberconversion of shares adjusted asour 2019 Senior Notes and related party line of the first day of the year for any potentially diluted debt or equity.  The computation does not assume conversion, exercise or contingent exercise of securitiescredit (LOC) since thatthose shares would have an anti-dilutive effect on earningsloss per share.

Our diluted net loss per share for the nine months ended September 30, 2021 and 2020 excluded 844,394 and 1,257,109, respectively, of potentially dilutive common shares, respectively, related to outstanding stock options, unvested RSAs, unvested RSUs and purchase warrants and, in 2020, the conversion of our Senior Notes and related party LOC since those shares would have had an anti-dilutive effect on loss per share during the three months ended March 31, 2017 and 2016, respectively.periods then ended.

Subsequent events - The Company follows the guidance in ASC 855-10-50 for the disclosure of subsequent events. The Company will evaluate subsequent events through the date when the financial statements were issued.

Recent Accounting Pronouncements -

From time to time, the Financial Accounting Standards Board (“FASB”) or other standard setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification are communicated through issuance of an Accounting Standards Update (“ASU”). Unless otherwise discussed, we believeWe have implemented all new accounting pronouncements that theare in effect and that may impact ofour condensed consolidated financial statements. We have evaluated recently issued guidance will not be material to our consolidated financial statements upon adoption.

In October 2016, the FASB issued ASU 2016-16, Accounting for Income Taxes - Intra-Entity Asset Transfers of Assets other than Inventory (“ASU 2016-16”), which would require the recognition of the tax expense from the sale of an asset other than inventory when the transfer occurs, rather than when the assetaccounting pronouncements and determined that there is sold to a third party or otherwise recovered through use. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments in this update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Early adoption is permitted.  We are considering the impact the adoption of ASU 2016-16 may have on our results of operations, financial condition, and cash flows.

7

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which standardizes cash flow statement classification of certain transactions, including cash payments for debt prepayment or extinguishment, proceeds from insurance claim settlements, and distributions received from equity method investments. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  The amendments in this update should be applied using a retrospective transition method to each period presented. If impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. Early adoption is permitted.  We are considering the impact the adoption of ASU 2016-15 may have on our presentation of cash flows.

From May 2014 through December 2016, the FASB issued several ASUs related to Revenue from Contracts with Customers.  These ASUs are intended to provide greater insight into both revenue that has been recognized and revenue that is expected to be recognized in the future from existing contracts.  The new guidance is effective for interim and annual periods beginning after December 15, 2017, although entities may adopt one year earlier if they choose.  The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application.  We do not believe this new standard will have ano material impact on our financial position or results of operations, financial conditionoperations.

Note 2 – License Agreement with Ocuphire Pharma, Inc.

On June 16, 2021, we executed a License Agreement with Ocuphire Pharma, Inc. (“Ocuphire Agreement”) under which we received a license to research, develop and commercialize PCS3117 (formerly RX-3117) globally, excluding the Republic of Singapore, China, Hong Kong, Macau and Taiwan.

As consideration for the Ocuphire Agreement, we issued 44,689 shares of our common stock to Ocuphire, a cash payment of $200,000 and assumed $66,583 in certain liabilities. Additional consideration includes future development and regulatory milestones payments to Ocuphire upon our achievement of certain defined clinical milestones, such as dosing a patient in pivotal trials and receiving marketing authorization by a regulatory authority in the United States or cash flows.another country. In addition, we are required to pay Ocuphire one-time sales milestone payments based on the achievement during a calendar year of the highest annual Net Sales for products made and pay royalties based on annual Net Sales, as defined in the Ocuphire Agreement.

3.

DISCONTINUED OPERATIONS:

InWe are required to use commercially reasonable efforts, at our sole cost and expense to oversee such commercialization efforts, to streamline operationsresearch, develop and expensescommercialize products in one or more countries, including meeting specific diligence milestones that consist of: (i) first patient administered drug in a Clinical Trial of a Product prior to June 16, 2024; and (ii) first patient administered drug in a Pivotal Clinical Trial of a Product or first patient administered drug in a Clinical Trial for a Second Indication of a Product prior to June 16, 2026. Either party may terminate the Company elected to discontinue the Dr. Pave and Dr. Pave Worldwide entities during 2015.  The financial results of these events are represented in discontinued operations includedagreement in the March 31, 2017 and 2016 financial statements.

The operating resultsevent of a material breach of the discontinued operationsagreement that has not been cured following written notice and a 120-day opportunity to cure such breach.

Note 3 – Property and Equipment

Property and equipment at September 30, 2021 and December 31, 2020 consisted of Dr. Pavethe following: 

Schedule of Property and Dr. Pave WorldwideEquipment

Note 4 – Intangible Assets

Intangible assets at September 30, 2021 and December 31, 2020 consisted of the following: 

Summary of Intangible Assets

Amortization expense was $195,700 and $198,832 for the three months ended March 31, 2017September 30, 2021 and 20162020, and $593,365 and $596,496 for the nine months ended September 30, 2021 and 2020 and is included within research and development expense in the accompanying condensed consolidated statements of operations. As of September 30, 2021, our estimated amortization expense for the 2021 will be approximately $790,000 and approximately $788,000 per year for annual periods thereafter.

The capitalized costs for the license rights to PCS499 included the $8 million purchase price, $1,782 in transaction costs and $3,037,147 associated with the initial recognition of an offsetting deferred tax liability related to the acquired temporary difference for an asset purchased that is not a business combination and has a tax basis of $1,782 in accordance with ASC 740-10-25-51 Income Taxes. In accordance with ASC Topic 730, Research and Development, we capitalized the costs of acquiring the exclusive license rights to PCS499, as the exclusive license rights represent intangible assets to be used in research and development activities that management believes has future alternative uses.

Note 5 – Income Taxes

We account for income taxes in accordance with ASC Topic 740, Income Taxes. Deferred income taxes are summarized below:

There were norecorded for the expected tax consequences of temporary differences between the tax basis of assets orand liabilities from discontinued operations asfor financial reporting purposes and amounts recognized for income tax purposes. As of March 31, 2017September 30, 2021 and December 31, 2016.2020, we recorded a valuation allowance equal to the full recorded amount of our net deferred tax assets related to deferred start-up costs, purchased in-process research and development expenditures, federal orphan drug tax credit and certain other minor temporary differences since it is more-likely-than-not that such benefits will not be realized. The valuation allowance is reviewed quarterly and is maintained until sufficient positive evidence exists to support its reversal.

4.

NOTES PAYABLE:

Notes consistedA deferred tax liability was recorded on March 19, 2018 when Processa received CoNCERT’s license and “Know-How” in exchange for Processa stock that had been issued in the Internal Revenue Code Section 351 Transaction. The Section 351 Transaction treats the acquisition of the followinglicense and 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 March 31, 2017.

Based upon$3,037,147 for the Company’sacquired temporary difference between intangible assets (see Note 4) for the financial position,reporting basis of $11,038,929 and the Company does not believe ittax basis of $1,782. The deferred tax liability will be ablereduced for the effect of non-deductibility of the amortization of the intangible asset and may be offset by the deferred tax assets resulting from net operating tax losses.

Under ACS 740-270 Income Taxes – Interim Reporting, we are required to satisfyproject our annual federal and state effective income tax rate and apply it to the mandatory principal payments in 2017.  The Company will work with the lenders to explore extension or conversion options.  There is no guarantee the lenders will accommodate our requests.  The Company is in default in regard to interest paymentsyear-to-date ordinary operating tax basis loss before income taxes. Based on the notes,projection, we expect to recognize the Company’stax benefit from our projected ordinary tax loss, which can be used to offset the deferred tax liabilities related to the intangible assets may be foreclosed upon.and resulted in the recognition of a deferred tax benefit shown in the condensed consolidated statements of operations for three and nine months ended September 30, 2021 and 2020. No current income tax expense is expected for the foreseeable future as we expect to generate taxable net operating losses.

5.Note 6 – Stock-based Compensation

STOCKHOLDERS’ EQUITY:

Stock Options

The Company recognized noWe recorded $2,257,863 and $357,039 of stock-based compensation expense for the nine months ended September 30, 2021 and 2020, respectively. During the nine months ended September 30, 2021, we awarded the following equity instruments:

Equity Instruments Awarded

We valued the RSAs and RSUs based on the closing share price on the date of grant. The fair values of the stock options and warrants granted were estimated using the Black-Scholes option pricing model at the date of grant. The RSUs, stock options and warrants issued to consultants were for services to be provided in 2021 and 2022. Of the awards granted to consultants, 12,500 RSUs and 100,000 warrants vested upon grant but represent services that will be provided in 2021. As such, at September 30, 2021, we recognized $107,193 related to these awards as a prepaid expense for the portion of services the consultant has yet to provide.

On August 5, 2020, we issued 324,360 RSAs under the 2019 Omnibus Incentive Plan to our employees and directors, of which 214,078 shares of common stock vested on October 6, 2020 when we successfully completed our underwritten public offering and up-listed to the Nasdaq Capital Market and 55,142 shares of common stock vested on August 5, 2021. The remaining 53,610 shares of common stock vest on August 5, 2022, the second year anniversary of the grant date. Between the fourth quarter of 2020 and September 30, 2021, 29,847 shares have been forfeited to pay for federal, state and local income taxes or upon employment termination.

On July 1, 2021, we granted 198,930 RSUs under the 2019 Omnibus Incentive Plan to our employees. Of the RSUs awarded, 79,572 RSUs contain a service condition that requires continued employment over a two-year period. Half (or 39,786) of the RSUs vest on July 1, 2022 and the remaining half vest on July 1, 2023. 119,358 RSUs vest upon meeting the following performance criteria: (i) 39,786 RSUs vest upon the completion of the interim analysis of Cohorts 1 and 2 for our PCS6422 Phase 1B clinical trial; (ii) 39,786 RSUs vest upon the completion of the interim analysis of our PCS499 Phase 2B clinical trial; and (iii) 39,786 RSUs vest upon the next capital raise(s) totaling a cumulative amount of at least $30 million.

At September 30, 2021, we had the following awards outstanding related to stock-based compensation:

Stock-based Compensation Awards Outstanding

The weighted average exercise price of stock options and warrants outstanding at September 30, 2021 was $17.06 and $10.66, respectively. At September 30, 2021, we had warrants for the purchase of 303,725shares of our common stock outstanding which expire at various dates through February 16, 2023. Warrants for the purchase of 153,725 shares of our common stock were issued in connection with PIPE transactions and other fundraising efforts we had over the last three years.

Note 7 – Paycheck Protection Program Loan

In May 2020, we entered into a $162,459 Paycheck Protection Promissory Note (the “PPP Loan”) with Bank of America. The PPP Loan was made under, and is subject to the terms and conditions of, the PPP which was established under the CARES Act and is administered by the U.S. Small Business Administration. The term of the loan was two years with a maturity date of May 5, 2022, and it contained a favorable fixed annual interest rate of 1.00%. Payments of principal and interest on the PPP Loan were deferred for the first six months of the term of the PPP Loan until November 5, 2020. Principal and interest were payable monthly and may be prepaid by us at any time prior to maturity with no prepayment penalties. Under the terms of the CARES Act, recipients can apply for and receive forgiveness for all, or a portion, of the loan granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for certain permissible purposes as set forth in the PPP, including, but not limited to, payroll costs, mortgage interest, rent or utility costs, and on the maintenance of employee and compensation levels during a certain time period following the funding of the PPP Loan. We used the entire proceeds of our PPP Loan for payroll costs and applied for full forgiveness on January 18, 2021. In August 2021, we received notice of loan forgiveness from the Small Business Administration, which we recorded in the three months ended March 31, 2017June 30, 2021.

Note 8 – Stockholders’ Equity

During the nine months ended September 30, 2021, we granted 17,800 shares of our common stock and $5,062issued a combination of warrants and stock options for the purchase of 180,000 shares of common stock to consultants in accordance with consulting agreements for services that will be provided in 2021 and 2022. The total value of these issuances was $797,216. We are amortizing this amount over the related contract lives and at September 30, 2021, we included $107,193 as a prepaid expense, representing the portion of services yet to be provided. We also granted 37,500 RSAs to an employee in accordance with their employment agreement.  

On February 24, 2021, we sold in a private placement 1,321,132 shares of our common stock to accredited and institutional investors for gross proceeds of $10.2 million. Net proceeds from the offering were $9.9 million. In connection with the placement, we issued warrants for the purchase of 79,268 shares of our common stock to our placement agent. These warrants are exercisable for cash at $9.30 per share and expire on February 24, 2023.

On June 16, 2021, we issued 44,689 shares of our common stock to Ocuphire Pharma, Inc. pursuant to the Ocuphire Agreement (see Note 2).

In August 2020, we issued 324,360 RSAs. Of these, 6,043 shares were forfeited during the threenine months ended March 31, 2016.September 30, 2021 to pay for federal, state and local income taxes or upon employment termination. No similar forfeiture occurred during the nine months ended September 30, 2020.

AsOn August 20, 2021, we entered into an equity distribution agreement (the “Sales Agreement”) with Oppenheimer & Co. Inc. (the “Sales Agent”) under which we may issue and sell in a registered “at-the-market” offering shares of March 31, 2017 there wasour common stock having an aggregate offering price of up to $30.0 million from time to time through or to our Sales Agent (the “ATM Offering”). We expect to use net proceeds, if any, from the ATM Offering over time as a source for working capital and general corporate purposes. We are not obligated to make any sales of our common stock under the Sales Agreement and no unrecognized compensation expense relatedassurance can be given that we will sell any shares under the Sales Agreement, or, if we do, as to the issuanceprice or amount of shares that we will sell, or the dates on which any such sales will take place. We will pay the Sales Agent an aggregate of up to 3.0% of the stock options.  As of March 31, 2016 there was $1,629 of unrecognized compensation expense related to the issuancegross proceeds of the stock options.

Performance Stock Options

There were no performance stock options granted during the three months ended March 31, 2017 and 2016.

Warrants

There were no warrants issued during the three months ended March 31, 2017.

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