United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 20212022

or

For the transition period from ____ to ____

Commission File Number 333-184948001-39531

Processa Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

7380 Coca Cola Drive, Suite 106,

Hanover, Maryland21076

(443)776-3133

Securities registered pursuant to Section 12(b) of the Exchange Act:

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), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] ☒ No [  ]☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] ☒ No [  ]☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “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] ☒

The number of outstanding shares of the registrant’s common stock as of April 30, 20212022 was 15,521,616.15,837,525.

PROCESSA PHARMACEUTICALS, INC.

TABLE OF CONTENTS

PART 1: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

Processa Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

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

Processa Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations

Three Months Ended March 31, 2021 and 2020(Unaudited)

(Unaudited)

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

Processa Pharmaceuticals, Inc.

Condensed Consolidated Statement of Changes in Stockholders’ Equity

Three Months Ended March 31, 20212022 and 20202021

(Unaudited)

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

Processa Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

Three Months Ended March 31, 2021 and 2020(Unaudited)

(Unaudited)

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

We are a clinical-stage biopharmaceutical company focused on the development of drug products that are intended to provide treatment for patients who have a high unmet medical need condition that effectsaffects survival or the patient’s quality of life and havefor which few or no treatment options.options currently exist. We currently have three drugsfive drugs: four in various stages of clinical development. Our most advanced product candidate, PCS499, is an oral tablet that is a deuterated analog ofdevelopment (PCS499, PCS12852, PCS3117 and PCS6422) and one of the major metabolites of pentoxifylline (PTX or Trental^®)in nonclinical development (PCS11T). We group our drugs into non-oncology (PCS499 and PCS12852) and oncology (PCS3117, PCS6422 and PCS11T). A summary of each drug is provided below:

Impact of COVID-19

The COVID-19 pandemic continues to create uncertainties in expected timelines by causing delays in clinical trials and disruptions in the supply chain for raw materials used in clinical trial work. We have completed a Phase 2A trial forexperienced delays in the enrollment of patients in our PCS499 and will begin recruiting patients for a Phase 2B trial in the second quarter of 2021. In addition, wedue to COVID-19. Potential patients have in-licensed PCS6422 (eniluracil)died from Elion OncologyCOVID-19 prior to screening and PCS12852 from Yuhan Corporation. PCS6422 will be orally administered with capecitabine in a Phase 1B dose-escalation study in patients with Advanced Refractory Gastrointestinal (GI) Tract Tumors, with recruitment beginning in the second quarter of 2021. PCS12852 has already been evaluated in clinical studies in South Korea. We are planning on submitting an IND application in the third quarter of 2021 based on guidance received from the FDA for PCS12852 in patients with gastroparesis. Our remaining drug asset whose active molecules have been showncontinue to be clinically efficacious require more toxicology datareluctant to travel to our testing sites for fear of contracting COVID-19. Delays in orderenrollment lengthen the time of studies and increase their costs, which 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 we are hopeful the infection rate of COVID-19 will continue to more efficiently developdecline, we cannot predict the drug clinically.

Impact offuture impact COVID-19

The extent of the impact of the COVID-19 pandemic will have on our business, operationscurrent and development timelines and plans remains uncertain, and will dependfuture clinical trials. For more information on certain developments, including the duration ofrisks associated with COVID-19, refer to Part I, Item 1A, “Risk Factors” included in our Annual Report on Form 10-K for the outbreak and its impact on our development activities, planned clinical trial enrollment, future trial sites, CROs, third-party manufacturers, and other third parties with whom we do business, as well as its impact on regulatory authorities and our key scientific and management personnel. Although we modified our operations and practices in 2020 due to the COVID-19 pandemic and to comply with federal, state and local requirements, our business, operations and development timelines were not materially adversely affected. However, the extent to which the COVID-19 pandemic may affect our business, operations and development timelines and plans in the future, including the resulting impact on our expenditures and capital needs, remains uncertain.year ended December 31, 2021.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions of the 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 by U.S. GAAP for complete financial statements. All material intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments necessary, which are of a normal and recurring nature, for the fair presentation of the Company’sour financial position and of the results of operations and cash flows for the periods presented. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020,2021, as filed with the SEC. The results of operations for the interim periods shown in this report are not necessarily indicative of the results that may be expected for any other interim period or for the full 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 $27.5 $40.1million atas of March 31, 2021.2022. During the three months ended March 31, 2021,2022, we generated a net loss of approximately $2.1 $3.2 million and we expect to continue to generate operating losses and negative cash flow from operations for the foreseeable future. However,Based on our current plans, we believe our current cash balance at March 31, 2021balances is adequate to fundfor at least the next twelve months without considering amounts available from the Purchase Agreement with Lincoln Park (see below and Note 3) or potential sales under our budgeted operations through 2023.ATM Offering (see below). 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 no0 revenue during the three months ended March 31, 20212022 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 we incur and pay these expenses.

On August 20, 2021, we entered into an equity distribution agreement (the “Sales Agreement”) with Oppenheimer & Co. Inc. under which we may issue and sell in a registered “at-the-market” offering shares of our 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 from the ATM Offering over time as a source for working capital and general corporate purposes. The shares under the ATM Offering will be sold and issued pursuant to our S-3 shelf registration statement (Registration No. 333-257588) filed on July 30, 2021.

On March 23, 2022, we entered into a Purchase Agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”) under which we have the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park is obligated to purchase up to $15,000,000 of our shares of common stock, par value $0.0001 per share, subject to the terms and conditions in the Purchase Agreement, during the term of the Purchase Agreement. See Note 3 for additional details concerning the Purchase Agreement.

Use of Estimates

In preparing our condensed consolidated financial statements and related disclosures in conformity with GAAP and pursuant to the rules and regulations of the SEC, we make estimates and judgments that affect the amounts reported in the condensed 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 relevant facts and circumstances. While we believe the estimates to be reasonable, actual results could differ materially from those estimates and could impact future results of operations and cash flows.

Intangible AssetsIncome Taxes

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 othersWe account for use in research and development activities and that have alternative future uses (in research and development projects or otherwise) are capitalizedincome taxes in accordance with ASC Topic 350,740, Intangibles – Goodwill and Other. Income Taxes.Those that have no alternative future uses (in research and development projects or otherwise) and therefore no separate economic value Deferred income taxes 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 ofrecorded for the expected usetax consequences of temporary differences between the asset by usbasis of assets and the legal, regulatory or contractual provisions that constrain the useful lifeliabilities for financial reporting purposes and future cash flowsamounts recognized for income tax purposes. As of the asset, including regulatory acceptanceMarch 31, 2022 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 revisionDecember 31, 2021, we recorded a valuation allowance equal to the remaining useful life is required. If the remaining useful life is changed, the remaining carryingfull recorded amount of the intangible asset will be amortized prospectively over the revised remaining useful life. If an income approach is usedour net deferred tax assets related 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 ordeferred start-up costs, federal orphan drug tax credit and certain 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 thatminor temporary differences since 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 maysuch benefits will not be recoverable. Recoverability of assetsrealized. The valuation allowance is reviewed quarterly and is maintained until sufficient positive evidence exists to be heldsupport its reversal.

Under ACS 740-270 Income Taxes – Interim Reporting, we are required to project our annual federal and used is measured by a comparison ofstate effective income tax rate and apply it to 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 the assets basedyear-to-date ordinary operating tax basis loss before income taxes. Based on the present valueprojection, we recognized the tax benefit from our projected ordinary tax loss, which was used to offset the deferred tax liabilities related to the intangible asset and resulted in the recognition 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 no impairment loss recorded during the three months ended March 31, 2021 or 2020.

Stock-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 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 recorded as general and administrative or research and development costsdeferred tax benefit shown in the condensed consolidated statements of operations based upon the underlying individual’s or consultant’s role.

Net Loss Per Share

Basic loss per share is computed by dividing our net loss available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted loss per share is computed by dividing our net loss available to common shareholders by the diluted weighted average number of shares of common stock during the period. 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 three months ended March 31, 2021 and 2020 excludes the impactremainder of potentially dilutive common shares related to outstanding stock options2021. No current income tax benefit or expense is expected for 2022 and warrants and, in 2020, the conversionforeseeable future since the deferred tax liability has been offset completely as of our 2019 Senior Notes since those shares would have an anti-dilutive effect on loss per share.

In December 2019, we determined the sale of the 2019 Senior Notes triggered the full ratchet anti-dilution provision of the common stock we sold in 2018 Private Placement Transactions. As a result, those shareholders were entitled to 28,971 shares of common stock in the fourth quarter of 2019. At March 31, 2020, we accounted for these shares as a common stock dividend payable as they were not issued until June 2020. For purposes of computing our basic and diluted EPS, we included the shares in our weighted number of common shares outstanding for the three months ended March 31, 2020.

Our diluted net loss per share for the three months ended March 31, 2021 and 2020 excluded 989,531 and 762,157we expect to generate taxable net operating losses.

Concentration of Credit Risk

Financial instruments that potentially dilutive common shares, respectively, relatedsubject us to outstanding stock options, warrants and unvested restricted stock and, in 2020, the conversionsignificant concentration of credit risk consist primarily of our Senior Notes since those shares would have had an anti-dilutive effectcash and cash equivalents. We utilize only well-established banks and financial institutions with high credit ratings. Balances on loss per share duringdeposit are insured by the periods then ended.Federal Deposit Insurance Corporation (FDIC) up to specified limits. Total cash held by our banks at March 31, 2022, exceeded FDIC limits.

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”). We have implemented all new accounting pronouncements that are in effect and that may impact our condensed consolidated financial statements. We have evaluated recently issued accounting pronouncements and determined that there is no material impact on our consolidated financial position or results of operations.

Note 2 – Property and Equipment

Property and equipment at March 31, 2021 and December 31, 2020 consisted of the following:

Note 32 – Intangible Assets

Intangible assets at March 31, 20212022 and December 31, 20202021 consisted of the following:

Summary of Intangible Assets

Gross intangible assets consist primarily of costs we capitalized when we acquired the license rights to PCS499 in 2018. These costs represented intangible assets to be used in research and development activities that management believes has future alternative uses.

Amortization expense was $198,832$197,124 and $198,832 for the three months ended March 31, 2022 and 2021, and 2020respectively, and is included within research and development expense in the accompanying condensed consolidated statements of operations. As of March 31, 2021,2022, our estimated amortization expense for the 2021 will be approximately $790,000year ended December 31, 2022 and approximately $788,000 per year for annual periods thereafter.thereafter until the asset is fully amortized is approximately $788,000.

Note 3 – Stockholders’ Equity

Preferred Stock

There were 0 issued or outstanding shares of preferred stock at either March 31, 2022 or December 31, 2021.

Common Stock

Increase in Our Authorized Number of Shares

On January 1, 2022, we amended our Certificate of Incorporation to increase the number of authorized shares of our common stock from 30,000,000 to 50,000,000. We believe 50,000,000 authorized shares of common stock better aligns our capital structure with our future needs.

ATM Offering

The capitalized costs forOn August 20, 2021, we entered into the license rights to PCS499 included the $8 million purchase price, $1,782 in transaction costs and $3,037,147 associatedSales Agreement with the initial recognition of an offsetting deferred tax liability relatedSales Agent under which we may issue and sell up to $30.0 million from time to time under 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 capitalizedATM Offering. We expect to use net proceeds from 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 4 – Income Taxes

We account for income taxes in accordance with ASC Topic 740, Income Taxes. Deferred income taxes are recorded for the expected tax consequences of temporary differences between the tax basis of assets and liabilities for financial reporting purposes and amounts recognized for income tax purposes. As of March 31, 2021 and December 31, 2020, we recorded a valuation allowance equal to the full recorded amount of our net deferred tax assets related to deferred start-up costs, 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.

A 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 license and Know-How for stockATM Offering over time as a tax-free exchange. As a result, under ASC 740-10-25-51 Income Taxes, Processa recorded a deferred tax liability of $3,037,147source for the acquired temporary difference between intangible assets (see Note 3) for the financial reporting basis of $11,038,929working capital and the tax basis of $1,782. The deferred tax liability will be reduced 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 project our annual federal and state effective income tax rate and apply it to the year-to-date ordinary operating tax basis loss before income taxes. Based on the projection, we expect to recognize the tax benefit from our projected ordinary tax loss, which can be used to offset the deferred tax liabilities related to the intangible assets and resulted in the recognition of a deferred tax benefit shown in the condensed consolidated statements of operations for three months ended March 31, 2021 and 2020. No current income tax expense is expected for the foreseeable future as we expect to generate taxable net operating losses.

Note 5 – Stock-based Compensation

general corporate purposes. We did not grantsell any stock options to employees or non-employeesshares during the three months ended March 31, 2021 or 2020. At2022.

Lincoln Park Capital Fund, LLC Purchase Agreement

On March 31, 2021,23, 2022, we had outstanding optionsentered into the Purchase Agreement with Lincoln Park, pursuant to which Lincoln Park has committed to purchase 152,806up to $15.0 million of shares (the “Purchase Shares”) of our common stock, of which options for the purchase of 115,750 shares of our common stock were vested. All the options outstanding have exercise prices higher than the closing market price at March 31, 2021.

At March 31, 2021, we also had 122,782 shares of unvested restricted stock that was granted in 2020 outstanding.

During the three months ended March 31, 2021, we issued 12,500 restricted stock units (RSUs) and 100,000 warrants to a consultant for services to be provided in 2021. We valued the RSUs based on the closing$0.0001 par value per share, price on the date of grant. The fair value of the warrants granted was estimated using the Black-Scholes option pricing model at the date of grant. We also agreed to grant 64,556 RSUs and 30,000 stock options to our employees and a consultant in accordance with our employment/consulting agreements. These RSUs and stock options are subject to shareholder approval; thus, they are not included in the number of potentially dilutive securities.

We recorded $308,298 and $98,663 of stock-based compensation expense for the three months ended March 31, 2021 and 2020, respectively.

Note 6 – Paycheck Protection Program Loan

In May 2020, we entered into a $162,459 Paycheck Protection Promissory Note (the “PPP Loan”) with the Bank of America. The PPP Loan was made under, and is subject to the terms and conditions in the Purchase Agreement. We issued 123,609 shares of common stock (valued at $450,000) to Lincoln Park as a commitment fee in connection with entering into the Purchase Agreement and agreed to reimburse Lincoln Park $25,000 for fees incurred in connection with the Purchase Agreement. Concurrently with entering into the Purchase Agreement, we also entered into a registration rights agreement with Lincoln Park (the “Registration Rights Agreement”), pursuant to which we agreed to take certain actions relating to the registration under the Securities Act of 1933, as amended, of the PPP which was establishedoffer and sale of the shares of common stock available for issuance under the CARES Act and is administered byPurchase Agreement.

Beginning on March 23, 2022, we have the U.S. Small Business Administration. The current termright to present Lincoln Park with a purchase notice (a “Regular Purchase Notice”), directing Lincoln Park to purchase up to 25,000 Purchase Shares (the “Regular Purchase Amount”) provided that the closing sale price of the loan is two years with a maturity date of May 5, 2022 and it contains a favorable fixed annual interest rate of 1.00%. Payments of principal and interestcommon stock 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 are 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, orpurchase date is not below 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 asthreshold price set forth in the PPP, including, but not limitedPurchase Agreement (a “Regular Purchase”). The Regular Purchase Amount may be increased to payroll costs, mortgage interest, rent or utility costs, andup to 75,000 shares if the closing sale price of our common stock on the maintenance of employeeapplicable purchase date equals or exceeds certain higher threshold prices set forth in the Purchase Agreement. We and compensation levels during a certain time period followingLincoln Park may mutually agree to increase the fundingRegular Purchase Amount with respect to any Regular Purchase under the Purchase Agreement, provided that Lincoln Park’s maximum committed purchase obligation under any single Regular Purchase shall not exceed $1,250,000. The above-referenced share amount limitations and closing sale price thresholds are subject to adjustment for any reorganization, recapitalization, non-cash dividend, stock split, reverse stock split or other similar transaction as provided in the Purchase Agreement. The purchase price per share for each Regular Purchase will be based on prevailing market prices of the PPP Loan. We usedcommon stock immediately preceding the entire proceedstime of sale as computed in accordance with the terms set forth in the Purchase Agreement. There are no upper limits on the price per share that Lincoln Park must pay for shares of common stock under the Purchase Agreement. Lincoln Park may not assign or transfer its rights and obligations under the Purchase Agreement.

The aggregate number of shares that we can issue to Lincoln Park under the Purchase Agreement may in no case exceed 3,142,430 shares (subject to proportional adjustments for stock splits, reverse stock splits and similar events as described above), which is equal to 19.99% of the outstanding shares of common stock immediately prior to the execution of the Purchase Agreement (the “Exchange Cap”), unless (i) stockholder approval is obtained to issue shares of common stock in excess of the Exchange Cap, in which case the Exchange Cap will no longer apply, or (ii) the average price of all sales of Purchase Shares to Lincoln Park under the Purchase Agreement equals or exceeds the lower of (i) the Nasdaq official closing price immediately preceding the execution of the Purchase Agreement or (ii) the arithmetic average of the five Nasdaq official closing prices for the common stock immediately preceding the execution of the Purchase Agreement, plus an incremental amount to take into account the issuance of the commitment shares to Lincoln Park under the Purchase Agreement, such that the transactions contemplated by the Purchase Agreement are exempt from the Exchange Cap limitation under applicable Nasdaq rules. In all instances, we may not sell shares of our PPP Loan for payroll costscommon stock to Lincoln Park under the Purchase Agreement if it would result in Lincoln Park beneficially owning more than 9.99% of the outstanding shares of common stock.

We may terminate the Purchase Agreement at any time, at our sole discretion, without any cost or penalty, by giving one business day notice to Lincoln Park to terminate the Purchase Agreement. Lincoln Park has covenanted not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of the common stock.

There are no limitations on use of proceeds, financial or business covenants, restrictions on future financings (other than restrictions on our ability to enter into variable rate transactions described in the Purchase Agreement), rights of first refusal, participation rights, penalties or liquidated damages in the Purchase Agreement. We may deliver Purchase Notices under the Purchase Agreement, subject to market conditions, and applied for full forgiveness on January 18, 2021. On February 11, 2021, Bankin light of America submitted a decisionour capital needs from time to time and under the Small Business Administration thatlimitations contained in the full amount should be forgiven. However, no assurance is providedPurchase Agreement. Any proceeds that we willreceive under the Purchase Agreement are expected to be able to obtain fullused for working capital and general corporate purposes.

Repurchase of Shares from Aposense, Ltd.

On March 29, 2022, we purchased 100,000 shares of our common stock from Aposense Ltd. for $300,000 in a private transactionand are holding these shares as treasury stock until they are reissued or partial forgivenessretired at the discretion of the PPP Loan. Asour Board of March 31, 2021, $144,888 of the total $162,459 PPP-related debt is classified as a current liability on our consolidated balances sheet.Directors.

Note 7 – Stockholders’4 - Stock-based Compensation

On June 19, 2019, our stockholders approved, and we adopted the Processa Pharmaceuticals Inc. 2019 Omnibus Equity Incentive Plan (the “2019 Plan”). The 2019 Plan allows us, under the direction of our Board of Directors or a committee thereof, to make grants of stock options, restricted and unrestricted stock and other stock-based awards to employees, including our executive officers, consultants and directors. The 2019 Plan provides for the aggregate issuance of 3,000,000 shares of our common stock, with 1,729,664 shares available for future grants at March 31, 2022.

On January 11,Stock Compensation Expense

We recorded stock-based compensation expense for the three month ended March 31, 2022 and 2021 as follows:

Schedule of Stock-based Compensation Expense

During the three months ended March 31, 2022, we granted 12,500 RSUs and 100,000 warrants issued Restricted Stock Awards (“RSAs”) for 9,766 shares of our common stock to a consultant for services to be provided in 2022. These RSAs had a fair market value of $50,000 on the date of grant and were expensed as stock- based compensation during the three months ended March 31, 2022. We also granted 72,832 RSAs to our directors for their 2022 service during the three months ended March 31, 2022, which had a fair market value of $252,000 on the date of grant and will cliff vest on December 31, 2022. Additionally, we issued 17,572 RSAs to our directors in satisfaction of the $120,000 of directors’ fees we had accrued at December 31, 2021. We recorded $312,293 asdid not cancel any RSAs, nor were any RSAs forfeited during the three months ended March 31, 2022.

At March 31, 2022, we had unvested RSAs for 163,941 shares with a prepaidweighted average grant date fair value of $5.84. Unvested RSAs representing 138,941 shares that are expected to vest at various dates in 2022, 12,500 shares are expected to vest in 2023, and the remainder are expected to vest in 2024. As of March 31, 2022, the total unrecognized stock-based compensation expense forrelated to the portionoutstanding RSAs was approximately $537,000, which is expected to be recognized over a weighted average period of services1.0 year.

Restricted Stock Units

We grant Restricted Stock Units (“RSUs”) related to the consultant has yet to provide.

On February 24, 2021, we sold in a private placement 1,321,132 future issuance of 69,862 shares of our common stock pursuant to accreditedagreements with our Executive team and institutional investors certain other employees where a portion of their base compensation is paid in RSUs during the three months ended March 31, 2022. The value of an RSU award is based on the award’s measurement date. These RSUs are vested, but must meet distribution requirements before any shares of common stock are issued.

Activity with respect to our RSUs during the three months ended March 31, 2022 was as follows:

Schedule of Information About RSU Outstanding

As of March 31, 2022, unrecognized stock-based compensation expense of approximately $960,000 for gross proceedsRSUs is expected to be fully recognized over a weighted average period of $10.2 million. Net proceeds from1.8 years. The unrecognized expense excludes approximately $349,000 of expense related to certain RSUs with a performance milestone that is not probable of occurring at this time.

Holders of our vested RSUs have our promise to issue shares of our common stock upon the offeringearlier to occur of the distribution restrictions contained in their Restricted Stock Unit Award Agreement. The distribution restrictions are typically different (longer) than the vesting schedule, imposing an additional restriction on the holder. Unlike RSAs, while certain employees may hold fully vested RSUs, the individual does not hold any shares or have any rights of a shareholder until the distribution restrictions are met. Upon distribution to the employee, each RSU converts into one share of our common stock. The RSUs contain dividend equivalent rights.

On April 1, 2022 we awarded RSUs for 1,979,818 shares of our common stock, 879,819 of which are subject to shareholder approval. These RSUs vest on January 1, 2023 and are subject to distribution requirements before any shares of common stock are issued. The fair value of the RSUs that are not subject to shareholder approval totaled $3.3 million, which will be recognized during the last three quarters of 2022.

Warrants

NaNstock purchase warrants were $9.9 million. We issuedgranted, cancelled or forfeited during the three months ended March 31, 2022. At March 31, 2022, we had outstanding stock purchase warrants for the purchase of 79,268 303,725 shares with a weighted average exercise price of our common stock to our placement agent. These$10.66 and a weighted average remaining contractual life of 1.3 years. Stock purchase warrants are exercisable for cash at $9.30 per share and expire on February 24, 2023.

We have not had any salesthe purchase of our preferred stock since we291,225 shares were incorporated on March 29, 2011 and there were no issued or outstanding shares of preferred stockvested at March 31, 2021 or December2022 and the remaining outstanding stock purchase warrants are expected to vest in 2022.

As of March 31, 2020.2022, the total unrecognized expense related to our stock purchase warrants was approximately $35,000, which is expected to be fully recognized in 2022.

Note 85 – Net Loss per Share of Common Stock

Net Loss Per Share

Basic net loss per share is computed by dividing our net loss available to common shareholders by the weighted average number of shares of common shares outstanding.stock outstanding (which excludes unvested RSAs and includes vested RSUs) during the period. Diluted net loss per share is computed by dividing our net loss available to common shareholders by the diluted weighted average number of shares of common shares outstanding, whichstock (which includes the potentially dilutive effect of stock options, warrantsunvested RSAs, unvested RSUs and senior convertible notes.warrants) during the period. Since we experienced a net loss for both periods presented, anybasic and diluted net loss per share are the same. As such, diluted loss per share for the three months ended March 31, 2022 and 2021 excludes the impact of potentially dilutive common shares outstanding were excluded from the computation as shown below, as theysince those shares would have an anti-dilutive impacteffect on diluted net loss per share. The treasury-stock method is used to determine the dilutive effect of our stock options and warrants grants, and the if-converted method is used to determine the dilutive effect of the Senior Notes.

The computation of net loss per share for the three months ended March 31, 20212022 and 20202021 was as follows:

Schedule of Net Loss Per Share Basic and Diluted

As described in Note 1, in December 2019, we determined the sale of the 2019 Senior Notes triggered the full ratchet anti-dilution provision of the common stock we sold in 2018 Private Placement Transactions. As a result, those shareholders were entitled to 28,971 shares of common stock in the fourth quarter of 2019. At March 31, 2020, we accounted for these shares as a common stock dividend payable as they were not issued until June 2020. For purposes of computing our basic andOur diluted EPS, we included the shares in our weighted number of common shares outstandingnet loss per share for the three months ended March 31, 2020.

The following2022 and 2021 excluded 795,342 and 989,531 of potentially dilutive securities were excluded from the computation of dilutedcommon shares, respectively, related to outstanding stock options, warrants and unvested restricted stock since those shares would have had an anti-dilutive effect on net incomeloss per share as their effect would have been anti-dilutive forduring the periods presented.then ended.

Note 96 – Operating Leases

We lease our office space under an operating lease agreement. This lease does not have significant rent escalation, concessions, leasehold improvement incentives, or other build-out clauses. Further, the lease does not contain contingent rent provisions. We also lease office equipment under an operating lease. Our office space lease includes both lease (e.g., fixed payments including rent, taxes, and insurance costs) and non-lease components (e.g., common-area or other maintenance costs), which are accounted for as a single lease component as we have elected the practical expedient to group lease and non-lease components for all leases. We also lease office equipment under an operating lease. Our leases do not provide an implicit rate and, as such, we have used our incremental borrowing rate of 8% in determining the present value of the lease payments based on the information available at the lease commencement date.

Lease costs included in our condensed consolidated statements of operations totaled $24,030$24,390 and $24,207$24,030 for the three months ended March 31, 20212022 and 2020,2021, respectively. The weighted average remaining lease terms and discount rate for our operating leases were as follows at March 31, 2021:2022:

Schedule of Weighted Average Remaining Lease Terms and Discount Rate for Operating Leases

Maturities of ourAnnual lease liabilities for all operating leases were as follows as of March 31, 2021:2022:

Schedule of Maturities of Lease Liabilities for all Operating Leases

Note 107 – Related Party Transactions

A shareholder, CorLyst, LLC (“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. In September 2020, CorLyst prepaid shared expenses to us forWe recorded $31,262 and $30,751 of reimbursements during the fourth quarter of 2020 through the second quarter of 2021. Atthree months ended March 31, 2022 and December 31, 2021, we recognized $41,258 in prepaid reimbursements as due to related parties in the accompanying condensed consolidated balance sheet. No respectively. NaNamounts were due from CorLyst at March 31, 20212022 or 2021. Our CEO is also the CEO of CorLyst, and December 31, 2020.CorLyst is a shareholder.

Note 118 – Commitments and Contingencies

Purchase Obligations

We enter into contracts in the normal course of business with contract research organizations and subcontractors to further develop our products. The contracts are cancellable, with varying provisions regarding termination. If we terminated a cancellable contract with a specific vendor, we would only be obligated for products or services that we received as of the effective date of the termination and any applicable cancellation fees. We are contractually obligated to pay up to approximately $5.1$6.2 million of future services under the agreements with the CROs, but our actual contractual obligations will vary depending on the progress and results of the clinical trials.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation

Forward Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” that reflect, when made, the Company’s expectations or beliefs concerning future events that involve risks and uncertainties. Forward-looking statements frequently are identified by the words “believe,” “anticipate,” “expect,” “estimate,” “intend,” “project,” “will be,” “will continue,” “will likely result,” or other similar words and phrases. Similarly, statements herein that describe the Company’s objectives, plans or goals also are forward-looking statements. Actual results could differ materially from those projected, implied or anticipated by the Company’s forward-looking statements. Some of the factors that could cause actual results to differ include: our limited operating history, limited cash and history of losses; our ability to achieve profitability; our ability to obtain adequate financing to fund our business operations in the future; the impact of the global pandemic caused by the novel coronavirus, 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, 2020,2021, 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

Our mission is to develop drug products that improve the survival and/or quality of life for patients with high unmet medical need conditions for which few or no treatment options currently exist. We are a clinical-stage biopharmaceuticaldevelopment company, focused on the development of drug productsnot a discovery company, that are intendedseeks to provide treatmentidentify and develop drugs for patients who have a high unmet medical need condition that effects survival or the patient’s quality of life and have few or nobetter treatment options. We currentlyTo increase the probability of development success, our pipeline only includes drugs which have three drugs in various stages of clinical development. 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 a Phase 2A trial for PCS499 and will begin recruiting patients for a Phase 2B trialpreviously demonstrated some efficacy in the second quarter of 2021. In addition, we have in-licensed PCS6422 (eniluracil) from Elion Oncology and PCS12852 from Yuhan Corporation. PCS6422 will be orally administeredtargeted population or a drug with capecitabine in a Phase 1B dose-escalation study in patients with Advanced Refractory Gastrointestinal (GI) Tract Tumors, with recruitment beginning in the second quarter of 2021. PCS12852very similar pharmacological properties that has already been evaluated in clinical studies in South Korea. We are planning on submitting an IND application in the third quarter of 2021 based on guidance received from the FDA on the clinical development program for PCS12852 in patients with gastroparesis. Our remaining drug asset whose active molecules have been shown to be clinically efficacious require more toxicology dataeffective in order to more efficiently develop the drug clinically.population.

Our Strategyscreening criteria for identifying and selecting new candidates include:

Our strategy is to acquire or in-license development candidates that will not only treat a specific group of patients with unmet medical needs, but may also have the potential to chart a more efficient path to registration. In many instances, these clinical candidates have significant pre-clinical and clinical data that we canmay leverage to high value inflection points while de-risking the programs and adding in optionality to potential future indications. TheOur regulatory science approach developed by our team has developed seeksover decades of work with regulatory authorities attempts to leveragebalance the earlier data and identify the least risk path toward commercialization/registration of these drugs. We apply rigorous standards“benefit/risk” equation to identify drugs for our portfolio, namely:a regulatory path with higher clinical benefit and/or lower clinical risk with shorter timelines to deliver better treatment options to patients, physicians, and caregivers.

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 we must be able to obtain clinical data to support the added value during those 2 to 4 years. 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 specificallypipeline 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 providesmight provide 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-frametimeframe 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 managementsuccessful development team with a track record of drug approvals and product development team.successful exits. Our team is experienced in developing drug products through all principal regulatory tiers from IND enabling studies to NDA submission. The combined scientific, development and regulatory experience of our team members hashave 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 members in drug development and commercialization is an important indicator of our future success, the past successes of our team members in developing and commercializing pharmaceutical products doesdo not guarantee that they will successfully develop and commercialize drugs for us.in our current pipeline. In addition, the growth in revenues of companies atin 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 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.

Our Strategy

Our strategy is to obtain and develop drugs that will not only treat patients with unmet medical need conditions, but, with our regulatory science approach, also have the potential to be more efficiently developed with a greater probability of development success than what typically occurs in the biotech-pharma industry and a better return on investment given lower development costs, more efficient development and high commercial value. Given the prior successes of our regulatory science approach, we have selected drugs for our portfolio which may have a greater chance for approval in a population of patients who desperately need better treatment options. We have applied rigorous standards to identify drugs for our portfolio, namely:

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.

Recent Developments

On March 23, 2022, we entered into a purchase agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which Lincoln Park has committed to purchase up to $15.0 million of shares (the “Purchase Shares”) of our common stock, $0.0001 par value per share (“Common Stock”), subject to the terms and conditions in the Purchase Agreement. We issued 123,609 shares of common stock (valued at $450,000) to Lincoln Park as a commitment fee in connection with entering into the Purchase Agreement and agreed to reimburse Lincoln Park $25,000 for fees incurred in connection with the Purchase Agreement. Concurrently with entering into the Purchase Agreement, we also entered into a registration rights agreement with Lincoln Park (the “Registration Rights Agreement”), pursuant to which we agreed to take certain actions relating to the registration under the Securities Act of 1933, as amended, of the offer and sale of the shares of common stock available for issuance under the Purchase Agreement. See Note 3 to the Consolidated Financial Statements for additional details concerning the Purchase Agreement.

Impact of COVID-19

The COVID-19 pandemic has createdcontinues to create uncertainties in the expected timelines for clinical stage biopharmaceutical companies such as ours, including possibleby causing delays in clinical trials and disruptions in the supply chain for raw materials used in clinical trial work. SuchWe have experienced delays in the enrollment of patients in our PCS499 Phase 2B trial due to COVID-19. Potential patients have died from COVID-19 prior to screening and continue to be reluctant to travel to our testing sites for fear of contracting COVID-19. Delays in enrollment lengthen the time of studies and increase their costs, which 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 we are hopeful the potential economic impact brought by, and the durationinfection rate of COVID-19 may be difficultwill continue to assess ordecline, we cannot predict a widespread pandemic could result in significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affectimpact COVID-19 will have on our liquidity. Policymakers around the globe have responded with fiscal policy actions to support the healthcare industriescurrent and economies as a whole. The magnitude and overall effectiveness of these actions remain uncertain. Accordingly, the extent to which the COVID-19 global pandemic impactsfuture clinical trials. Continued delays could materially impact our business resultsin future periods and further extend our timelines.

Our Drug Pipeline

We currently have five drugs: four in various stages of operationsclinical development (PCS499, PCS12852, PCS3117, and financial condition will depend on future developments, which are highly uncertainPCS6422) and are difficult to predict. These developments include, but are not limited to, the durationone in nonclinical development (PCS11T). We group our drugs into non-oncology (PCS499 and spreadPCS12852) and oncology (PCS3117, PCS6422, and PCS11T). A summary of the outbreak, 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.each drug is provided below:

Our Drug Pipeline

PCS499

The table below of our clinical product pipeline summarizes each drug, organized by phase of development. It should be noted that we expect the Phase 2B PCS499 and Phase 1B PCS6422 studies to have their first patient enrolled in the second quarter of 2021. The PCS12852 Phase 2A study will likely have first patient enrolled at the end of 2021 or beginning of 2022, depending on the submission and approval of our IND application.

PCS499,

Our most advanced product candidate, PCS499, is an oral tablet that isof 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 targeted ulcerative Necrobiosis Lipoidica (NL)(uNL) as our lead indication for PCS499. NL is a chronic, disfiguring condition affecting the skin and 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 occurshas been reported to occur in approximatelyup to 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 makemakes it extremely difficult to develop effective treatments for this condition. Because PCS499 and its metabolites appear to affect most of the biological pathways that contribute to the pathophysiology associated with NL, PCS499 may provide a novel treatment solution for NL.

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 initiated and completed 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, database lock and final report were delayed and completed in December 2020.

The primary objective of the Phase 2A trial was to evaluate the safety and tolerability of PCS499 in patients with ulcerated and non-ulcerated NL and to use the safety and efficacy data to design future clinical trials. Based on toxicology studies and healthy human volunteer studies, Processawe 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 (SAEs) reported. All adverse events (AEs) reported in the study were mild in severity. As expected, gastrointestinal symptoms were the most frequent adverse eventsAEs and were reported in four patients, all of which resolved within 1-2 weeks of starting dosing.

Two of the twelve patients in the study presented with more severe ulcerated NLuNL 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. The other ten patients, presenting with mild to moderate non-ulcerated NL, and no ulceration, had more limited improvement of the NL lesions during treatment. Historically, 13 - 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 ulcerated NLuNL patients has not been evaluated independently, medical experts who treat NL patients suggest that the natural progression of an open ulcerated wound to complete closure wouldmay be significantly less than 13% over 1-2 years and probably close to 0% in patients with the larger ulcers.

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 have designed the next trial as a randomized, placebo-controlled Phase 2B study to evaluate the ability of PCS499 to completely close ulcers in patients with NLuNL and better understand the potential response of NLuNL patients on drug and on placebo. We currently have selected severalsix clinical trial sites in the United States and are evaluating additional sites to add to our study. We had four sites in Europe, but these sites were unable to recruit patients timely, largely due to COVID-19, so we decided to close them and concentrate our efforts on recruiting patients within the inclusion of additionalUnited States.

We began recruiting for the clinical trial sites, both within and outsidein the first half of the United States. We will begin recruiting for2021. On May 19, 2021, we dosed our first patient in the randomized, placebo-controlled trial in the second quarter of 2021 and are planning to complete an interim analysis of the data from this trial inby the first quarterend of 2022. After obtaining the results from this Phase 2B study, we expect to have an end of Phase 2 meeting with the FDA to agree on the design of the Phase 3 study, with the intent to define a Special Protocol Assessment for the Phase 3 study and to agree on the next steps to obtain approval.

PCS12852We have experienced delays in the enrollment of patients in the PCS499 Phase 2B trial due to COVID-19. Many potential patients also have co-morbidities, such as diabetes, and have been unwilling to travel to the testing sites for fear of contracting COVID-19. Potential patients in this trial have died from COVID-19 prior to screening. We have initiated a number of programs to hopefully increase the enrollment rate in this study, including paying for travel to study sites and informing physicians who might be treating these patients that a trial is occurring. 

PCS12852

On August 19, 2020, we in-licensed PCS12852 (formerly known as YH12852) from Yuhan Corporation (“Yuhan”), pursuant to which we acquired an exclusive license to develop, manufacture and commercialize PCS12852 globally, excluding South Korea.

PCS12852 is a novel, potent and highly selective 5-hydroxytryptamine 4 (5-HT4) receptor agonist. Other 5-HT receptor agonists with less 5-HT4 selectivity have been shown to successfully treat gastrointestinal (GI) motility disorders such as gastroparesis, chronic constipation, constipation-predominant irritable bowel syndrome and functional dyspepsia. Less selective 5-HT4 agonists, such as cisapride, have been either removed from the market or not approved because of the cardiovascular side effects associated with the drugs binding to other receptors, especially receptors other than 5-HT4.

We plan to submit an IND application in the third quarter of 2021 based on guidance received from the FDA on the clinical development program required for patients with gastroparesis. We plan to conduct a Phase 2A randomized, placebo-controlled study in patients with gastroparesis. The purpose of the Phase 2A trial is to evaluate the safety, efficacy and pharmacokinetics of two different dosing regimens for PCS12852. Data obtained from this study will be used to better design a future Phase 2/3 efficacy study. Since patients with gastroparesis have an abnormal pattern of upper GI motility in the absence of mechanical obstruction, the Phase 2A study will be designed to evaluate the change on gastric emptying in patients with gastroparesis on the two different dosing regimens of PCS12852 compared to placebo. The only FDA-approved drug to treat gastroparesis is metoclopramide, a dopamine D2 receptor antagonist that has serious side effects and can only be used as a short-term treatment. Other 5-HT4 drugs have been used clinically but the side effects, caused mainly by binding to other receptors, has resulted in these drugs not being a viable option to treat patients with gastroparesis. It should be noted that PCS12852 is a highly specific 5-HT4 agonist that has been shown in non-clinical studies to have a cardiovascular side effect only at concentrations greater than 1,000 times the maximum concentration seen in humans.

Two clinical studies, both of which have demonstrated the effectiveness of PCS12852 on GI motility, have been previously conducted by Yuhan with PCS12852. In a Phase 1 trial (Protocol YH12852-101), the initial safety and tolerability of PCS12852 were evaluated after single and multiple oral doses in healthy subjects. PCS12852 was shown to increase GI motility in this study, increasing stool frequency with faster onset when compared to prucalopride, a less specific 5-HT4 agonist FDA-approved drug for the treatment of chronic idiopathic constipation. Based on an increase of ≥1 spontaneous bowel movement (SBM)/week from baseline during 7-day multiple dosing, the PCS12852 dose group had a higher percentpercentage of patients with an increase than the prucalopride group. All doses of PCS12852 were safe and well tolerated and no SAEs occurred during the study. The most frequently reported AEs were headache, nausea and diarrhea which were temporal, manageable and reversible within 24 hours. There were no clinically significant changes in platelet aggregation and ECG parameters including a change in QTc prolongation in the study. In a Phase 1/2A clinical trial (Protocol YH12852-102), the safety, tolerability, gastric emptying rate and pharmacokinetics of multiple doses of a PCS12852 immediate release (IR) formulation and a delayed release (DR) formulation were evaluated. PCS12852 was safe and well tolerated after single and multiple administrations. The most frequent AEs for both the IR and DR formulations of PCS12852 were headache, nausea and diarrhea, but the incidences of these AEs were comparable with those of the 2mg prucalopride group. These AEs, which were transient and mostly mild in severity, are also commonly observed with other 5-HT4 agonists. Both formulations of PCS12852 also increased the gastric emptying rate and increased GI motility.

Yuhan had also conducted extensive toxicological studies for the product that demonstrated that the product is safe for use and can be moved into Phase 2 studies.

PCS6422We received guidance from the FDA in the first half of 2021 and in October 2021 we received notice of safe to proceed for PCS12852 evaluation in a Phase 2A randomized, placebo-controlled study in patients with gastroparesis. We enrolled our first patient on April 5, 2022, anticipate completing enrollment in the second half of 2022 with top-line results at the end of 2022, and should complete final analysis in the first half of 2023. The purpose of the Phase 2A trial is to evaluate the safety, efficacy, and pharmacokinetics of two different dosing regimens for PCS12852. Data obtained from this study will be used to better design a future Phase 2/3 efficacy study. Since patients with gastroparesis have an abnormal pattern of upper GI motility in the absence of mechanical obstruction, the Phase 2A study was designed to evaluate the change in gastric emptying in patients with gastroparesis from two different dosing regimens of PCS12852 compared to placebo. The only FDA-approved drug to treat gastroparesis is metoclopramide, a dopamine D2 receptor antagonist that has documented serious side effects which limit dosing to no more than 12 weeks. Other 5-HT4 drugs have been used clinically but the side effects, caused mainly by binding to other receptors, has resulted in these drugs not being a viable option to treat patients with gastroparesis. It should be noted that PCS12852 is a highly specific 5-HT4 agonist that has been shown in nonclinical studies to have a cardiovascular side effect only at concentrations greater than 1,000 times the maximum concentration seen in humans.

PCS3117

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 globally, excluding Republic of Singapore, China, Hong Kong, Macau, and Taiwan.

PCS3117 is a novel, investigational, oral small molecule nucleoside compound. PCS3117 is an analog of the endogenous nucleoside, cytidine, and an analog of the cancer drug gemcitabine. Once intracellularly activated (phosphorylated) by the enzyme UCK2, it is incorporated into the DNA or RNA of cells and inhibits both DNA and RNA synthesis, which induces apoptotic cell death of tumor cells. PCS3117 has received orphan drug designation from the FDA and the European Commission for the treatment of patients with pancreatic cancer.

Gemcitabine is usually used as second line therapy for metastatic pancreatic cancer and non-small cell lung cancer, as well as used as second line therapy for other types of cancer. The difference between PCS3117 and gemcitabine is how they are activated to cancer killing nucleotides. PCS3117 also has additional pharmacological pathways which will result in cancer cell apoptosis. Since 45% - 85% of pancreatic cancer and non-small cell lung cancer patients are inherently resistant or acquire resistance to gemcitabine, the differences between PCS3117 and gemcitabine could potentially provide a therapeutic alternative to patients who do not or will not respond to gemcitabine.

Resistance to gemcitabine or PCS3117 is likely caused by:

PCS3117 has shown broad spectrum anti-tumor activity against over 100 different human cancer cell lines and efficacy in 17 different mouse xenograft models. In preclinical trials, PCS3117 retained its anti-tumor activity in human cancer cell lines made resistant to the anti-tumor effects of gemcitabine. In August 2012, the completion of an exploratory Phase 1 clinical trial of PCS3117 in cancer patients to investigate the oral bioavailability, safety and tolerability of the compound was reported. In that study, oral administration of a 50 mg dose of PCS3117 indicated an oral bioavailability of 56% and a plasma half-life (T_1/2) of 14 hours. In addition, PCS3117 appeared to be well tolerated in all subjects throughout the dose range evaluated.

Final results from a Phase 1B clinical trial of PCS3117 were presented in June 2016 showing evidence of single agent activity. Patients in the study had generally received four or more cancer therapies prior to enrollment. In this study, 12 patients experienced stable disease persisting for up to 276 days and three patients showed evidence of tumor burden reduction. A maximum tolerated dose of 700 mg was identified in the study. At the doses evaluated, PCS3117 appeared to be well tolerated with a predictable pharmacokinetic profile following oral administration.

In March 2016, a multi-center Phase 2A clinical trial of PCS3117 in patients with relapsed or refractory pancreatic cancer was initiated to further evaluate safety and efficacy. The study was designed as a two-stage study with 10 patients in stage 1 and an additional 40 patients in stage 2. According to pre-set criteria, if greater than 20% of the patients had an increase in progression free survival of more than four months, or an objective clinical response rate and reduction in tumor size, additional pancreatic cancer patients would be enrolled into stage 2. Secondary endpoints included time to disease progression, overall response rate and duration of response, as well as pharmacokinetic assessments and safety parameters. In January 2018, the final data from this trial showed evidence of tumor shrinkage in some patients with metastatic pancreatic cancer that was resistant to gemcitabine and who had failed on multiple prior treatments was presented. In this study, 31% of patients experienced progression free survival for two months or more and five patients, or 12%, had disease stabilization for greater than four months. Although the pre-set criteria of 20% of the patients having an increase in progression free survival for four months was not met, some of the gemcitabine refractory patients did respond to PCS3117. However, an evaluation of why patients were resistant to PCS3117 was not undertaken within the study.

In November 2017, a Phase 2A trial of PCS3117 in combination with ABRAXANE in patients newly diagnosed with metastatic pancreatic cancer was initiated. The multicenter, single-arm, open-label study was designed to evaluate PCS3117 in combination with ABRAXANE in first line metastatic pancreatic cancer patients. In February 2019, the target enrollment of 40 evaluable patients in this trial was reached. An overall response rate of 23% had been observed in 40 patients that had at least one scan on treatment. Preliminary and unaudited data indicated that the median progression free survival for patients in the study was approximately 5.6 months. The most commonly reported related adverse events were nausea, diarrhea, fatigue, alopecia, decreased appetite, rash, vomiting, and anemia. Again, an evaluation of the cause of treatment resistance to PCS3117 was not undertaken.

To identify patients who would be more likely respond to PCS3117 than gemcitabine, we will be refining existing assays and developing new assays of biological molecules (i.e., biomarkers) that could help to identify which patients are more likely to respond to or activate PCS3117 over gemcitabine.

PCS6422 (“Next Generation Capecitabine” when administered with Capecitabine)

On August 23, 2020, we in-licensed PCS6422 from Elion Oncology, Inc. (“Elion”), pursuant to which we acquired an exclusive license to develop, manufacture and commercialize PCS6422 globally.

Elion acquired eniluracil (PCS6422) from Fennec Pharmaceuticals (formerly known as Adherex Technologies) in 2016. PCS6422 is an oral, potent, selective, and irreversible inhibitor of dihydropyrimidine dehydrogenase (DPD), the enzyme that rapidly metabolizes a common chemotherapy drug known as 5-FU, into inactive metabolites, such as α-fluoro-β-alanine (F-Bal). F-Bal is a metabolite that has no anti-cancer activity but causes unwanted side effects, which notably leads to dose interruptions and significantly affectaffects a patient’s quality of life. F-Bal is thought to cause the neurotoxicity and Hand–Foot Syndrome (HFS) associated with 5-FU, and greater formation of F-Bal appears to be associated with a decrease in the antitumor activity of 5-FU. HFS can affect activities of daily living, quality of life, and requires dose interruptions/adjustments and even therapy discontinuation resulting in suboptimal tumor effects. We believe that the inhibition of DPD by PCS6422 will significantly reduce 5-FU side effects related to F-Bal. One dose of PCS6422 irreversibly blocksa decrease in F-Bal, although the timeframe and magnitude for DPD activity for upinhibition have been shown to two weeks until DPD levels recover viavary, ranging from 2-14 days depending on the de novo synthesis. Thus, we believeformation of DPD within a patient and the dosage regimen of PCS6422. With the inhibition of DPD, willthe level of the 5-FU anti-cancer metabolites could also be potentially higher within cancer and normal cells leading to an improved efficacy profile and/or increased side effects associated with these antimetabolites such as neutropenia. By combining capecitabine (an oral pro-drug form of 5-FU) with PCS6422, the change in 5-FU metabolism should result in an improved safety profile givenincrease in the decreasesystemic exposure of 5-FU based on the 5-FU Area Under the Plasma Concentration Curve (AUC) per mg of capecitabine dosed. This results in F-Balneeding less capecitabine to kill cancer cells and potentially higher 5-FU intra-tumoral anti-cancer metabolites that could improve efficacy.treat each patient, making the combination of PCS6422 and capecitabine (the “Next Generation Capecitabine”) more potent than current FDA approved capecitabine.

Fluoropyrimidines (e.g., 5-FU)5-FU, capecitabine) remain the cornerstone of treatment for many different types of cancers, either as monotherapy or in combination with other chemotherapy agents by an estimated two million patients annually. Xeloda^®, the brand name of capecitabane,capecitabine, is an oral pro-drug of 5-FU and approved as first-line therapy for metastatic colorectal and breast cancer. However, its use is limited by adverse effects such as the development of HFS in up to 60% of patients.

Elion evaluated the potential for the combination of PCS6422 with capecitabine as a treatment of advanced gastrointestinal (GI) tumors. Nonclinical efficacy data indicated that in colorectal cancer models, pretreatment with PCS6422 enhanced the antitumor activity of capecitabine. PCS6422 dramatically increased the antitumor potency of capecitabine without increasing the toxicity. The antitumor efficacy of the combination of PCS6422 and capecitabine was tested in several xenograft animal models with human breast, pancreatic and colorectal cancer cells. These preclinical xenograft models demonstrate that PCS6422 potentiates the antitumor activity of capecitabine and significantly reduces the dose of capecitabine required to be efficacious.

Elion met with the FDA in 2019 and agreed upon the clinical development program required for the combination of PCS6422 and capecitabine as first-line therapy for metastatic colorectal cancer when treatment with fluoropyrimidine therapy alone is preferred. On May 17, 2020, an IND for the Phase 1B study was granted safe to proceed by the FDA. This Phase 1B study will evaluate i) the safety and tolerability of escalating doses of capecitabine with a fixed dose of PCS6422 in advanced GI tumor patients, ii) the pharmacokinetics of PCS6422, capecitabine, 5-FU and selected metabolites, and iii) the activity of DPD over time after PCS6422 administration. We have selected several clinical trial sites in the United States for the study, which will begin patient recruitment in the second quarter of 2021.

Other DPD enzyme inhibitors (e.g., Gimeracil used in Teysuno® approved only outside the US) act as competitive reversible inhibitors. These agents must be present when 5-FU or capecitabine are administered to inhibit 5-FU breakdown by DPD in order to improve the efficacy and safety profiles of 5-FU. Given the reversible nature of their effect on DPD, over time 5-FU metabolism to F-Bal will return if the reversible inhibitor is not present, decreasing the amount of 5-FU in the cancer cells and decreasing the potential cytotoxicity on the cancer cells. There is also evidence that administering large amounts of DPD inhibitors directly with 5-FU may also decrease the antitumor effect of the 5-FU. Because PCS6422 is an irreversible inactivator of DPD, it can beis dosed the day before capecitabine administration and its effect on DPD can last longer than the reversible DPD inhibitors and beyond the time 5-FU exists in the cancer cell, even after PCS6422 has been completely eliminated out of the body. We believe this can optimize the potential cytotoxic effect of the 5-FU nucleotide metabolites and minimize the catabolism of 5-FU to F-Bal.

Prior to Elion’s involvement, two multicenter Phase 3 studies were conducted in patients with colorectal cancer with PCS6422 administered in 10-fold excess to 5-FU and administered with the 5-FU. Unfortunately, we believe the dose of PCS6422 during these trials was not optimal and that PCS6422 was not administered early enough to irreversibly affect the DPD enzyme, thus the regimen tended to produce less antitumor benefit than the control arm with the standard regimen of 5-FU/leucovorin (LV) without PCS6422. LaterIn addition, later preclinical work suggested that when PCS6422 was present in excess to 5-FU and at the same time, as and in excess to 5-FU, it diminished the antitumor activity of 5-FU, which we believe supports the proposalrationale of exploring clinically dosing PCS6422 such that the exposure at the time of 5-FU or capecitabine administration is as low as possible, yet continues to inhibit DPD activity to less than 10% of normal activity.

Elion met with the FDA in 2019 and agreed upon the clinical development program required for the combination of PCS6422 and capecitabine as first-line therapy for metastatic colorectal cancer when treatment with fluoropyrimidine therapy alone is preferred. On May 17, 2020, an IND for the Phase 1B study was granted safe to proceed by the FDA. This Phase 1B study was designed to evaluate: i) the safety and tolerability of PCS6422 and several doses of capecitabine in advanced GI tumor patients; ii) the pharmacokinetics of PCS6422, capecitabine, 5-FU and selected metabolites; iii) the activity of DPD over time after PCS6422 administration; and iv) the maximum tolerated dose in up to 30 patients over multiple cycles. We began patient recruitment in the study during the second half of 2021 and enrolled our first patient on August 2, 2021.

The interim analysis of Cohorts 1 and 2 was conducted in the fourth quarter of 2021. DLTs, drug related adverse events of greater than Grade 1 and hand-foot syndrome were not observed in these patients. Also, this Next Generation Capecitabine effectively inhibited DPD enzyme activity 24-48 hours beforeafter PCS6422 administration with <10% of 5-FU metabolized to allow its complete clearance beforeF-Bal as compared to ~80% with the FDA approved capecitabine. Additionally, 5-FU potency based on the 5-FU AUC systemic exposure per mg of capecitabine dosed was 50 times greater with Next Generation Capecitabine. The interim analysis showed, however, that the improved metabolic profile and increased potency was not sustained at Day 7 after the single dose administration of 5-FU.PCS6422 on day 1. In February 2022, we submitted a modified Phase 1B trial protocol to the FDA to not only determine the MTD of capecitabine, but also to further evaluate the timeline of DPD inhibition and de novo formation as a function of PCS6422 dosing, as well as the potential for using individualized/personalized treatment of patients with Next Generation Capecitabine.

PCS11TWe anticipate that this additional data will allow us to select PCS6422 dosage regimens that will maintain DPD inhibition throughout capecitabine dosing and allow more of the drug to be metabolized to active tumor killing metabolites instead of metabolites that only cause side effects for each patient treated with this Next Generation Capecitabine. After interacting with the FDA and making protocol modifications, we restarted the Phase 1B study in April 2022 and expect to complete enrollment while defining the Next Generation Capecitabine regimens by the end of 2022. We expect that our overall timeline has not changed with a Phase 2B or 3 trial starting in 2023-2024 and NDA submission in 2027-2028.

PCS11T

On May 24, 2020, we in-licensed PCS11T (formerly known as ATT-11T) from Aposense, Ltd. (“Aposense”), pursuant to which we were granted Aposense’s patent rights and Know-How to develop and commercialize their next generation irinotecan cancer drug, PCS11T.

PCS11T is a novel lipophilic anti-cancer pro-drug that is being developed for the treatment of the same solid tumors as prescribed for irinotecan. This pro-drug is a conjugate of a specific proprietary Aposense molecule connected to SN-38, the active metabolite of irinotecan. The proprietary molecule in PCS11T has been designed to allow PCS11T to bind to cell membranes to form an inactive pro-drug depot on the cell with SN-38 preferentially accumulating in the membrane of tumors cells and the tumor core. This unique characteristic may make the therapeutic window of PCS11T wider than other irinotecan products such that the antitumor effect of PCS11T could occur at a much lower dose with a milder adverse effect profile than irinotecan. Despite the widespread use of commercially marketed irinotecan products in the treatment of metastatic colorectal cancer and other cancers resulting in peak annual sales of approximately $1.1 billion, irinotecan has a narrow therapeutic window and includes an FDA “Black Box” warning for both neutropenia and severe diarrhea. There is, therefore, a substantial unmet need to overcome the limitations of the current commercially marketed irinotecan products, improving efficacy and reducing the severity of treatment emergent AEs. We believe the potential wider therapeutic window of PCS11T will likely lead to more patients responding with less side effects when on PCS11T compared to other irinotecan products.

Pre-clinical studies conducted to date showed that PCS11T demonstrated tumor eradication at much lower doses than irinotecan across various tumor xenograft models. PCS11T does not affect acetyl cholineacetylcholine esterase (AChE) activity in human and rat plasma in vitro, which would suggest that PCS11T will show an improved safety profile, compared to irinotecan, which is known for its cholinergic-related side effects.

We are currently planningevaluating the manufacturing process and sites for drug substance and drug product. In addition, we are defining the potential paths to manufactureapproval, which include defining the product attargeted patient population and type of cancer. We hope to submit an IND in the first half of 2024, followed by a GMP facility, conduct the required toxicological studies required to file the IND and initiate the Phase 1B studytrial in oncology patients with solid tumors in 2022.tumors.

Results of Operations

Comparison of the three months ended March 31, 20212022 and 20202021

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

Revenues.

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, (ii) program and (iv) internal research and development stafftesting related payroll, taxes and employee benefits,expenses including external consulting and professional fees related to the product testing and our development activities.activities, and (iii) internal research and development staff related salaries and other payroll costs including stock-based compensation, payroll taxes and employee benefits. 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 March 31, 2021,2022, our research and development expenses increased by $974,389$567,824 to $2,043,984 from $1,476,160 from $501,771 when compared tofor the same period in 2020.three months ended March 31, 2021. Costs for the three months ended March 31, 20212022 and 20202021 were as follows:

The increase in research and development expenses was primarily due to an increase of $861,305$296,298 in preclinical, clinical trial and other costs during the three months ended March 31, 20212022 when compared to the same period in 2020.2021. This increase was attributable to expenses we incurred as we commencedin our Phase 2Bthree active clinical trial for PCS499, Phase 1B clinical trial for PCS6422 and for pre-IND costs for PCS12852.trials. Expenses include costs we paid contract research organizations, for regulatory filing and maintenance fees, drug product testing and stability, consulting, and other clinical fees. During the same period in 2020,2021, we were completing the patient portion ofbeginning our Phase 2A2B clinical trial for PCS499 and incurring regulatory filing and consulting feesPhase 1B clinical trial for PCS6422, as we preparedwell as conducting pre-IND tasks for our meeting with the FDA.PCS12852. During the three months ended March 31, 2022, when compared to the same period in 2021, we also had increases in payroll and related costs of $113,084 from increased employee$136,201 and an increase in stock-based compensation of $137,033 as a result of expanding our development team and increasing salary rates hiring additional personnel and stock-based compensation, when compared tocompensation. These increases were offset by a decrease of $1,708 in amortization expense, as the same periodcapitalized software was fully amortized in 2020.2021.

We anticipate our research and development costs to increase significantly in the future as we startcontinue our clinical trials, for PCS499, PCS6422 and PCS12852, including the cost of having drug product manufactured, and the continued evaluation ofcontinue evaluating the remaining drugdrugs in our portfolio.

The funding necessary to bring a drug candidate to market is subject to numerous uncertainties. Once a drug candidate is identified, the further development of that drug candidate may 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. Some 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 conduct the Phase 2B trial to evaluate the ability of PCS499 to completely close ulcers in patients with NL, and begin arestart our Phase 1B clinical trial for PCS6422. We expect to begin recruiting patientsPCS6422 and conduct our Phase 2 trial for these two clinical trials during the second quarter of 2021.PCS12852 in gastroparesis.

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

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

General and Administrative Expenses.

Our general and administrative expenses for the three months ended March 31, 20212022 increased by $232,794$467,583 to $717,147$1,184,730 from $484,353$717,147 for the three months ended March 31, 2020.2021. The majority of the increase was due to an increase in employee stock-based compensation of $199,956 for$282,250 and in payroll and other related costs of $21,707. We also experienced increases in insurance, office, tax, and other expenses of $77,590, as well as increases in professional fees of $89,696, mostly paid to investor relation firms, legal counsel, consultants and our auditors. We also experienced increased payroll and related costs of $139,491, as well as an increase in our insurance, office and other miscellaneous expenses of $38,827. These increases were offset by reductions in office, travel, continuing education, depreciation and depreciationother miscellaneous expenses of $22,872 and a decrease in our Delaware franchise taxes of $116,604.$3,149. Reimbursements from CorLyst totaled $30,751$31,262 for rent and other costs during the three months ended March 31, 2021, approximately $6,0002022, $511 more than reimbursements for the same period in 2020.2021.

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

Interest Expense and Interest Income

Interest expense was $362$0 and $17,170$362 for the three months ended March 31, 20212022 and 2020,2021, respectively. The interest expense in 2021 was related to our Paycheck Protection Program loan while interest expensewhich was forgiven in 20202021.

Interest income was related to our $805,000 8% Senior Notes sold in 2019. Included in interest expense is the amortization of debt issuance costs totaling $1,070$1,583 and $4,940 for the three months ended March 31, 2020.

Interest income was $4,9402022 and $829 for the three months ended March 31, 2021, and 2020, respectively. Interest income represents interest earned on money market funds.

Income Tax Benefit.

AnWe did not recognize any income tax benefit offor the three months ended March 31, 2022 compared to the $89,248 wasincome tax benefit we recognized for the three months ended March 31, 2021 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 behas been reduced for the effect of the non-deductibility of the amortization of the intangible asset and may behas been offset by the deferred tax assets resulting from net operating tax losses. This offset resultsresulted in the recognition of a deferred tax benefit shown in the consolidated statements of operations.operations in 2021 and prior periods.

Cash Flows

The following table sets forth our sources and uses of cash and cash equivalents for the three months ended March 31, 20212022 and 2020:2021:

Net cash used in operating activities

We used net cash in our operating activities of $2,243,529$1,802,926 and $546,453$2,243,529 during the three months ended March 31, 20212022 and 2020,2021, respectively. The increase in cash used in operating activities during the first quarter of 20212022 compared to the comparable period in 20202021 was primarily related to costs we incurred related to commencing our Phase 2Bthree clinical study for PCS499, Phase 1B clinical study for PCS6422, pre-clinical costs for PCS12852, andtrials, increased professional fees and increased salaries. As part of beginning these clinical trials, weWe have prepaid a portion of certain trial related costs, causing our prepaid expenses to increase by $557,137$216,807 during the three months ended March 31, 2021.2022. Our net loss for the three months ended March 31, 20212022 of $2,099,481$3.2 million was $1,225,145$1.1 million greater than the comparable period in 2020.2021.

As we start the patient enrollment phase ofcontinue our three clinical trials for PCS499 and PCS6422, prepare to submit an IND for PCS12852, and continue to evaluate the other drugs in our portfolio, we anticipate our research and development efforts and on-goingongoing general and administrative costs will continue to generate negative cash flows from operating activities for the foreseeable future andfuture. We expect these amounts are expected to increase in the future.

Net cash (used in) provided by financing activities

NetWe used net cash provided byin financing activities during the three months ended March 31, 2022 of $300,000 to purchase 100,000 shares of our common stock from a licensee. During the three months ended March 31, 2021, we closed a private offering raising net proceeds of $9,875,550 was received$9,875,550.

Liquidity

At March 31, 2022 we had $14.4 million in cash and cash equivalents.

On March 23, 2022, we entered into the Purchase Agreement with Lincoln Park under which we have the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park is obligated to purchase up to $15,000,000 of our shares of common stock, par value $0.0001 per share, subject to the terms and conditions in the private placement transaction completedPurchase Agreement, during the term of the Purchase Agreement as more fully described in Note 3 to the Consolidated Financial Statements. In addition, on February 24,August 20, 2021, we entered into the Sales Agreement with the Sales Agent under which we may issue and sell up to $30.0 million from time to time under the ATM Offering. We expect to use net proceeds from the ATM Offering over time as a source for working capital and general corporate purposes. During year ended December 31, 2021, we sold 21,597 shares of cash transaction costsour common stock under the ATM Offering at an average price of $363,223.approximately $8.33 per share for aggregate gross proceeds of approximately $179,831 prior to deducting sales commissions. We used net cash in our financing activities of $2,806 related to our underwritten public offeringdid not sell any shares during the three months ended March 31, 2020.2022.

Liquidity

On February 24, 2021, we closed a private placement for the sale of 1,321,132 shares of our common stock at a purchase price of $7.75 per share to accredited and institutional investors for gross proceeds of $10.2 million. Net proceeds from the offering were $9.9 million. We also completed an underwritten public offering in late 2020 where we raised net proceeds from the offering of approximately $17.1 million. As a result of these offerings, at March 31, 2021 we had $23,048,245 in cash.

We have incurred losses and net cash used in our operating activities during the three months ended March 31, 2021,2022, which we expect to continue for the foreseeable future. We do not currently ornor have since our inception had any sales. We have incurred losses since our inception, devoting substantially all of our efforts toward research and development, and have an accumulated deficit of approximately $27.5$40.1 million at March 31, 2021.2022. During the three months ended March 31, 2021,2022, we generated a net loss of approximately $2.1 million. However,$3.2 million, of which $1.0 million are non-cash expenses. Based on our current plans, we believe our current cash balance at March 31, 2021 is adequate to fundfor at least the next twelve months without considering amounts available from the Purchase Agreement with Lincoln Park or potential sales under our budgeted operations through 2023.ATM Offering. 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.

Our estimate of future cash needs is based on assumptions that may prove to be wrong, and we could utilize our available cash 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 thewill 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 in the future due in partfuture. We also plan to planned increased researchdevelop a biomarker assay for PCS3117 and development activities as we conduct a Phase 2B trialobtain IND enabling data for PCS499, a Phase 1B trial for PCS6422, and a Phase 2A clinical trial for PCS12852.PCS11T. 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.

Our future capital requirements will depend on many factors, including:

Until such time as we can generate substantial product revenues to support our capital requirements, if ever, we expect to finance our cash needs through a combination of public or private equity offerings, debt financings, collaborations and licensing arrangements or other capital sources. We currently have an effective S-3 shelf registration statement on file with the SEC, which provides us flexibility and optionality to raise capital, including pursuant to the ATM Offering and the Purchase Agreement with Lincoln Park, but there can be no assurance that capital will continue to be available to us on acceptable terms or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders.

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, 2020.2021.

Off Balance Sheet Arrangements

At March 31, 2021,2022, we did not have any off-balance sheet arrangements.

Critical Accounting Policies and Use of Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our Unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance 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 of our most recent Annual Report on Form 10-K have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Actual results could differ from the estimates we use in applying our critical accounting policies. We are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.

There have been no changes in our critical accounting policies from our most recent Annual Report on Form 10-K.

Recently Issued Accounting Pronouncements

We have evaluated recently issued accounting pronouncements and determined that there is no material impact on our financial position or results of operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 3 is not applicable to us as a smaller reporting company and has been omitted.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

OurAs of March 31, 2022, management, with the participation of ourthe Chief Executive Officer (“CEO”) and Chief Financial Officer, (“CFO”), evaluatedconducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on the evaluation of its disclosure controls and procedures, the end of the period covered by this Report. Based upon that evaluation, the CEOChief Executive Officer and CFOChief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Report were not effective in providingMarch 31, 2022to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the reliability of our report as of the end of the period covered by this report.

In our 2020 Annual Report on Form 10-K, we identified the following material weaknesses in our internal control over financial reporting, which are common in many small companies with limited staff including: (i) certain entity level controls;SEC’s rules and forms and (ii) inadequate segregation of duties throughout the entire year;accumulated 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 March 31, 2021.

Changes in Internal Control over Financial Reporting

During our quarter ended March 31, 2021, we implemented changescommunicated to our cash disbursements in ordermanagement, as appropriate, to strengthen our internal controls. Changes include a central accounts payable email address for invoice intake and processing, and an electronic invoice approval process. We also added additional approval requirements for wire transfers over certain amounts. We believe these additions have materially improved 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.

allow timely decisions regarding required disclosure. In designing and evaluating theour 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 controlstheir objectives, and procedures must reflect the fact that there are resource constraints, and that management is required to applynecessarily applies its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes to our risk factors as described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020.2021.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) Recent Sale of Unregistered Securities

On February 24, 2021,March 23, 2022, we closed a private placement forentered into the salePurchase Agreement with Lincoln Park, pursuant to which Lincoln Park has committed to purchase up to $15.0 million of 1,321,132 shares (the “Purchase Shares”) of our common stock, at a purchase price of $7.75$0.0001 par value per share, subject to accreditedthe terms and institutional investors for gross proceedsconditions in the Purchase Agreement. We issued 123,609 shares of $10.2 million. Net proceedscommon stock (valued at $450,000) to Lincoln Park as a commitment fee in connection with entering into the Purchase Agreement. The commitment fee shares were issued in a transaction exempt from registration in reliance on Section 4(a)(2) of the offering were $9.9 million. Following closingSecurities Act, Rule 701 promulgated under the offering, we filedSecurities Act of 1933, as amended, or Regulation D promulgated under the Securities Act of 1933, as amended, relating to transactions by an issuer not involving a Form S-3 for the selling shareholders of these shares, which was declared effective by the U.S. Securities and Exchange Commission on April 12, 2021.public offering.

(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 duringDuring the three months ended March 31, 2021.2022, we purchased 100,000 shares of our common stock from Aposense Ltd. for $300,000 in a private transaction and are holding these shares as treasury stock until they are reissued or retired at the discretion of our Board of Directors.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

* Filed herewith.

++ This certification is being furnished solely to accompany this Quarterly Report pursuant to 18 U.S.C. Section 1350 and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.