Processa Pharmaceuticals(PCSA) - 2019 Q1 - Quarterly Report

PART 1: FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis for the company ITEM 1: FINANCIAL STATEMENTS This section presents Processa Pharmaceuticals, Inc.'s unaudited condensed consolidated financial statements and notes for Q1 2019 and 2018 Condensed Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and equity at specific dates Condensed Consolidated Balance Sheets | Metric | March 31, 2019 | December 31, 2018 | | :-------------------------- | :------------- | :---------------- | | Cash and cash equivalents | $1,248,532 | $1,740,961 | | Total Current Assets | $1,542,897 | $2,020,376 | | Total Assets | $12,077,897 | $12,481,068 | | Total Current Liabilities | $724,724 | $645,704 | | Total Liabilities | $2,954,152 | $2,780,050 | | Total Stockholders' Equity | $9,123,745 | $9,701,018 | - Total assets decreased by approximately $400,000 to $12.1 million at March 31, 2019, from $12.5 million at December 31, 2018, primarily due to operating costs, partially offset by the recognition of right-of-use assets and tax effects[87] - Total liabilities increased by $304,401 to $950,105 at March 31, 2019, from $645,704 at December 31, 2018, mainly due to accrued expenses for PCS-499 development and Phase 2a clinical trial, and the recognition of operating lease liabilities[88] Condensed Consolidated Statements of Operations This section details the company's financial performance, including revenues, expenses, and net loss for the reporting periods Operating Expenses (Three Months Ended March 31) | Operating Expenses (Three Months Ended March 31) | 2019 | 2018 | | :----------------------------------------------- | :---------- | :---------- | | Research and development | $484,750 | $821,388 | | General and administrative | $397,766 | $470,228 | | Operating Loss | $(882,516) | $(1,291,616)| | Net Loss | $(750,832) | $(1,096,798)| | Net Loss Per Common Share - Basic and Diluted | $(0.02) | $(0.03) | - Net loss decreased by $345,966, from $(1,096,798) in Q1 2018 to $(750,832) in Q1 2019, primarily due to reduced research and development expenses and a lower interest expense[13][71] Condensed Consolidated Statement of Changes in Stockholders' Equity This section outlines changes in the company's equity, reflecting net loss, stock-based compensation, and investor contributions Stockholders' Equity Changes | Item | Balance at Jan 1, 2019 | Stock based compensation | Payments by investor for clinical trial costs | Net loss | Balance at Mar 31, 2019 | | :-------------------------------- | :--------------------- | :----------------------- | :-------------------------------------------- | :------- | :---------------------- | | Additional Paid-In Capital | $19,121,285 | $58,559 | - | - | $19,179,844 | | Stock Subscription Receivable | $(1,800,000) | - | $115,000 | - | $(1,685,000) | | Accumulated Deficit | $(7,624,134) | - | - | $(750,832)| $(8,374,966) | | Total Stockholders' Equity | $9,701,018 | $58,559 | $115,000 | $(750,832)| $9,123,745 | - Stockholders' equity decreased from $9,701,018 at January 1, 2019, to $9,123,745 at March 31, 2019, mainly due to the net loss of $750,832, partially offset by stock-based compensation and investor payments for clinical trial costs[16] Condensed Consolidated Statements of Cash Flows This section details the company's cash inflows and outflows from operating, investing, and financing activities Cash Flows (Three Months Ended March 31) | Cash Flows (Three Months Ended March 31) | 2019 | 2018 | | :--------------------------------------- | :---------- | :---------- | | Net cash used in operating activities | $(492,429) | $(1,069,008)| | Net cash used in investing activities | $0 | $(1,782) | | Net cash provided by financing activities| $0 | $0 | | Net Decrease in Cash | $(492,429) | $(1,070,790)| | Cash and Cash Equivalents – End of Period| $1,248,532 | $1,776,639 | - Net cash used in operating activities decreased significantly from $1,069,008 in Q1 2018 to $492,429 in Q1 2019, primarily due to a lower net loss and direct payments by an investor for clinical trial costs[96] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and additional information supporting the condensed consolidated financial statements Note 1 – Organization and Summary of Significant Accounting Policies This note describes the company's business, its lead product, going concern issues, and significant accounting policy adoptions - Processa Pharmaceuticals, Inc. is an emerging clinical stage biopharmaceutical company focused on developing drug products for high unmet medical needs, with PCS-499 as its lead product for Necrobiosis Lipoidica (NL)[23][24] - The company dosed its first NL patient in a Phase 2a clinical trial on January 29, 2019, and as of May 1, 2019, nine patients were enrolled, with eight receiving 1.8 gm of PCS-499 daily without dose-limiting side effects[24][70] - Substantial doubt exists about the company's ability to continue as a going concern due to recurring losses, negative cash flow, and the need to raise additional capital by the end of Q2 2019 to fund future operations beyond the current Phase 2a trial[29][31][33][34] - The company adopted ASC 842, Leases, on January 1, 2019, resulting in the recognition of a right-of-use asset of $293,198 and lease obligations of $303,161, without a material impact on the statement of operations[44][45] Note 2 – Intangible Assets This note details the company's intangible assets, including gross amounts, accumulated amortization, and net values Intangible Assets | Intangible Assets | March 31, 2019 | December 31, 2018 | | :------------------------ | :------------- | :---------------- | | Gross intangible assets | $11,059,429 | $11,059,429 | | Less: accumulated amortization | $(820,479) | $(621,647) | | Total intangible assets, net | $10,238,950 | $10,437,782 | - Amortization expense for intangible assets was $198,832 for the three months ended March 31, 2019, a significant increase from $25,435 in the same period of 2018, and is included in research and development expense[46] Note 3 – Income Taxes This note explains the income tax benefit recognized and the deferred tax liability related to acquired intangible assets - An income tax benefit of $130,299 was recognized for the three months ended March 31, 2019, stemming from the recording and amortization of a deferred tax liability of $3,037,147 related to the acquisition of CoNCERT's license and 'Know-How'[13][50][85] - The deferred tax liability was created due to a temporary difference between the financial reporting basis ($11,038,929) and the nominal tax basis ($1,782) of the acquired intangible assets[49][85] Note 4 - Stock-based Compensation This note details the stock-based compensation expense recorded for the reporting period - Stock-based compensation expense of $58,559 was recorded for the three months ended March 31, 2019, as general and administrative expense, with no expense recorded in the comparable 2018 period[51] Note 5 – Senior Convertible Notes This note discusses the outstanding senior convertible notes and their potential repayment obligations - The company has $230,000 in Senior Convertible Notes outstanding, which cannot be converted until the Alberta Securities Commission permits the issuance of common stock units to Canadian holders, otherwise, the principal and accrued interest (approx. $255,000) will need to be repaid[52][89] Note 6 – Net Loss per Share of Common Stock This note presents the calculation of basic and diluted net loss per share and discusses potentially dilutive securities Net Loss per Share (Three Months Ended March 31) | Metric (Three Months Ended March 31) | 2019 | 2018 | | :----------------------------------- | :------ | :------ | | Net loss | $(750,832)| $(1,096,798)| | Weighted-average common shares | 38,674,265| 35,272,626| | Basic and diluted net loss per share | $(0.02) | $(0.03) | Potentially Dilutive Securities (March 31) | Potentially Dilutive Securities (March 31) | 2019 | 2018 | | :----------------------------------------- | :-------- | :-------- | | Stock options and purchase warrants | 3,917,763 | - | | Senior convertible notes | 124,789 | 1,305,577 | - Potentially dilutive securities, including stock options, warrants, and senior convertible notes, were excluded from diluted net loss per share computation as their effect would have been anti-dilutive due to the net loss[42][53][55] Note 7 - Operating Leases This note details lease costs for office space and equipment, along with future lease liability maturities - Lease costs for office space and equipment totaled $24,563 for the three months ended March 31, 2019, down from $27,981 in the prior year[57] Lease Liabilities Maturities (as of March 31, 2019) | Lease Liabilities Maturities (as of March 31, 2019) | Amount ($) |\n| :------------------------------------------------ | :------ | | 2019 | $73,508 |\n| 2020 | $92,603 |\n| 2021 | $90,495 |\n| 2022 | $69,741 |\n| Total lease payments | $326,347|\n| Present value of lease liabilities | $283,885| Note 8 – Related Party Transactions This note discloses amounts due from related party CorLyst, LLC for shared operational costs - Amounts due from related party CorLyst, LLC, for shared payroll, healthcare, and rent costs increased to $47,165 at March 31, 2019, from $21,583 at December 31, 2018[58] Note 9 – Commitments and Contingencies This note outlines the company's purchase obligations related to contracts with research organizations and subcontractors - The company had purchase obligations of approximately $23,000 at March 31, 2019, related to contracts with contract research organizations and subcontractors[59] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION This section provides management's analysis of the company's financial condition, operational results, liquidity, and future outlook Forward Looking Statements This section highlights that the report contains forward-looking statements subject to various risks and uncertainties - The report contains forward-looking statements subject to risks and uncertainties, including limited operating history, funding ability, regulatory approvals, competition, intellectual property protection, and the ability to continue as a going concern[60] Overview This section provides a general description of the company's business, its focus, and historical financial performance - Processa Pharmaceuticals is an emerging pharmaceutical company focused on clinical development of drug products for unmet medical needs, with one product currently in development for multiple indications[62] - The company acquired Promet Therapeutics, LLC in October 2017, which was accounted for as a reverse acquisition, and has incurred operating losses since inception, with an accumulated deficit of $8.4 million as of March 31, 2019[63][64][65] Going Concern and Management's Plan This section addresses the company's going concern status and outlines management's strategies to secure future funding - Substantial doubt exists about the company's ability to continue as a going concern due to limited working capital, recurring losses, negative cash flow, and the absence of revenue or immediate sales prospects[66][67][69] - The company plans to raise additional funds in the first half of 2019 and is exploring alternative revenue streams to offset expenses, but there is no assurance of securing adequate funds[68] Status of our Phase 2a Clinical Trial in Necrobiosis Lipoidica This section updates on the progress of the PCS-499 Phase 2a clinical trial for Necrobiosis Lipoidica, including patient enrollment - PCS-499 received orphan-drug designation for Necrobiosis Lipoidica (NL) in June 2018, and the FDA cleared its IND in September 2018 for a Phase 2a safety-dose tolerability trial[70] - The first NL patient was dosed on January 29, 2019, and as of May 1, 2019, nine patients were enrolled, with eight receiving 1.8 gm of PCS-499 daily without dose-limiting side effects[70] - The company anticipates enrolling all 12 planned patients by June 2019 and expects to request an FDA meeting before the end of 2019 to discuss further development, including the next clinical trial[70] Results of Operations This section analyzes the company's financial performance, detailing revenues, expenses, and other income/loss components Revenues This section states the company currently has no revenue or immediate sales prospects - The company currently has no revenue under contract or any immediate sales prospects[72] Research and Development Expenses This section details changes in research and development costs, including amortization and clinical trial expenses R&D Expenses (Three Months Ended March 31) | R&D Expenses (Three Months Ended March 31) | 2019 | 2018 | | :----------------------------------------- | :---------- | :---------- | | Amortization of intangible assets | $198,832 | $25,435 | | Research and development salaries and benefits | $158,855 | $165,512 | | Preclinical, clinical trial and other costs | $127,063 | $630,441 | | Total | $484,750 | $821,388 | - Total research and development costs decreased by $336,638 in Q1 2019 compared to Q1 2018, primarily due to a $503,378 reduction in preclinical, clinical trial, and other costs, despite an increase in amortization expense[75][76] - R&D costs are anticipated to increase in the future with ongoing Phase 2a clinical trial activities for NL, with an estimated $395,000 to be spent in the remainder of 2019 and $711,000 through 2021 to complete the current trial[77] General and Administrative Expenses This section analyzes the changes in general and administrative expenses, including payroll and professional fees - General and administrative expenses decreased by $72,462 to $397,766 in Q1 2019, primarily due to a cybersecurity fraud loss of approximately $144,000 in Q1 2018 that did not recur, and reductions in professional fees, rent, and maintenance[81] - This decrease was partially offset by an increase of approximately $98,000 in payroll and related costs, including $58,559 in stock-based compensation, as the company built its finance team[81] Interest Expense This section explains the significant decrease in interest expense due to the conversion of senior convertible notes - Interest expense significantly decreased from $87,740 in Q1 2018 to $4,600 in Q1 2019, mainly due to the conversion of $2.35 million of Senior Convertible Notes into common stock and warrants in May 2018[83] Interest Income This section reports the increase in interest income from money market funds and certificates of deposit - Interest income increased from $1,024 in Q1 2018 to $5,985 in Q1 2019, representing interest earned on money market funds and certificates of deposit[84] Income Tax Benefit This section details the income tax benefit recognized from the amortization of a deferred tax liability - An income tax benefit of $130,299 was recognized in Q1 2019, resulting from the recording and amortization of a deferred tax liability created by the acquisition of CoNCERT's license and 'Know-How'[85] Financial Condition This section summarizes the company's financial position, including cash, assets, liabilities, and funding commitments - As of March 31, 2019, the company had $1,248,532 in cash and a $1.7 million commitment from PoC Capital to fund its Phase 2a clinical trial for NL[86] - Total assets decreased by approximately $400,000 to $12.1 million, while total liabilities (excluding deferred income taxes) increased by $304,401 to $950,105, primarily due to accrued expenses and operating lease liabilities[87][88] - The company still has $230,000 in Senior Convertible Notes outstanding, which require repayment if the Alberta Securities Commission does not permit their conversion into common stock units[89] Liquidity and Capital Resources This section assesses the company's ability to meet short-term obligations and its plans for securing future funding - The company's cash and cash equivalents were $1.2 million at March 31, 2019, down from $1.7 million at December 31, 2018, with $1.7 million of a $1.8 million clinical trial funding commitment remaining unused[91] - Additional capital is needed before the end of Q2 2019 to fund future operations beyond the current Phase 2a trial, as current resources are deemed adequate only for the ongoing trial[93] - Future funding may be sought through equity offerings, debt financings, collaborations, or licensing arrangements, which could lead to dilution for existing stockholders or restrictive covenants[94] Cash Flows This section analyzes the company's cash movements across operating, investing, and financing activities Net cash used in operating activities This section details the decrease in cash used for operations, driven by lower net loss and direct investor payments - Net cash used in operating activities decreased from $1,069,008 in Q1 2018 to $492,429 in Q1 2019, driven by a lower net loss and direct payments by PoC Capital to the CRO[96] - Operating activities are expected to continue generating negative cash flows due to ongoing R&D efforts and G&A costs, which are anticipated to increase[97] Net cash used in investing activities This section reports no significant cash flows from investing activities in the current period - There were no cash sources or uses for investing activities during the three months ended March 31, 2019, compared to $1,782 used in Q1 2018 for intangible asset transaction costs[98] Net cash provided by (used in) financing activities This section indicates no financing activities occurred during the current or prior reporting periods - No financing activities occurred during the three months ended March 31, 2019 or 2018[99] Contractual Obligations and Commitments This section confirms no significant changes to the company's contractual obligations since the last annual report - There have been no significant changes to the contractual obligations reported in the Annual Report on Form 10-K for the fiscal year ended December 31, 2018[100] Off Balance Sheet Arrangements This section states that the company did not have any off-balance sheet arrangements as of the reporting date - As of March 31, 2019, the company did not have any off-balance sheet arrangements[101] Critical Accounting Policies and Use of Estimates This section confirms no changes to the company's critical accounting policies since its most recent annual report - There have been no changes in the company's critical accounting policies from its most recent Annual Report on Form 10-K[104] Recently Issued Accounting Pronouncements This section refers to Note 1 for details on recently adopted accounting standards - Refer to Note 1 in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements for details on recently adopted accounting standards[105] Emerging Growth Company This section clarifies the company's status as an emerging growth company and its election regarding accounting standards - The company is an 'emerging growth company' but has irrevocably elected not to use the extended transition period for complying with new or revised financial accounting standards, thus adhering to the same standards as other public companies[106] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This item is not applicable to the company as it qualifies as a smaller reporting company - Item 3 is not applicable to the company as it is a smaller reporting company[107] ITEM 4. CONTROLS AND PROCEDURES This section addresses the effectiveness of disclosure controls, internal control over financial reporting, and ongoing remediation efforts Disclosure Controls and Procedures This section addresses the effectiveness of the company's disclosure controls and identified material weaknesses - Management concluded that the company's disclosure controls and procedures were not effective as of March 31, 2019, due to material weaknesses identified in the 2018 Annual Report on Form 10-K[108][109] - Material weaknesses include certain entity-level controls, inadequate segregation of duties, and insufficient documentation of policies and procedures for transaction processing, accounting, and financial reporting[109] Changes in Internal Control over Financial Reporting This section reports no material changes in internal control over financial reporting during the quarter - There have been no material changes in internal control over financial reporting during Q1 2019, and the company is continuing remediation actions to rectify control deficiencies[110] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, and other miscellaneous disclosures ITEM 1. LEGAL PROCEEDINGS The company is not currently a party to any material legal proceedings - The company is not currently a party to any material legal proceedings[112] ITEM 1A. RISK FACTORS There are no material changes to the company's risk factors as described in its Annual Report on Form 10-K for the fiscal year ended December 31, 2018 - There are no material changes to the company's risk factors as described in Item 1A of the Annual Report on Form 10-K for the fiscal year ended December 31, 2018[113] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The company did not have any unregistered sales of equity securities, use of proceeds from public offerings, or issuer purchases of equity securities during the three months ended March 31, 2019 - The company did not have any sales of unregistered securities during the three months ended March 31, 2019[114] - There was no use of proceeds from a public offering of common stock[115] - The company did not repurchase any shares of its common stock during the three months ended March 31, 2019[116] ITEM 3. DEFAULTS UPON SENIOR SECURITIES There were no defaults upon senior securities during the reporting period - There were no defaults upon senior securities[117] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to the company - Mine Safety Disclosures are not applicable to the company[118] ITEM 5. OTHER INFORMATION There is no other information to report under this item - No other information is reported under this item[119] ITEM 6. EXHIBITS This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications by the Principal Executive Officer and Principal Financial Officer, and XBRL files Exhibits Filed | SEC Ref. No. | Title of Document | | :----------- | :----------------------------------------------------------- | | 31.1* | Rule 153-14(a) Certification by Principal Executive Officer | | 31.2* | Rule 153-14(a) Certification by Principal Financial Officer | | 32.1*++ | Section 1350 Certification of Principal Executive Officer and Principal Financial Officer | | 99.1 | XBRL Files |