Processa Pharmaceuticals(PCSA) - 2019 Q2 - Quarterly Report

PART 1: FINANCIAL INFORMATION This section presents unaudited condensed consolidated financial statements and management's financial discussion and analysis ITEM 1: FINANCIAL STATEMENTS This section presents unaudited condensed consolidated financial statements and notes for periods ended June 30, 2019 and 2018 Condensed Consolidated Balance Sheets This statement provides a snapshot of the company's assets, liabilities, and equity at specific points in time | Metric | June 30, 2019 | December 31, 2018 | | :-------------------------- | :-------------- | :------------------ | | Cash and cash equivalents | $721,985 | $1,740,961 | | Total Current Assets | $989,907 | $2,020,376 | | Total Assets | $11,305,628 | $12,481,068 | | Total Current Liabilities | $783,436 | $645,704 | | Total Liabilities | $2,803,558 | $2,780,050 | | Total Stockholders' Equity | $8,502,070 | $9,701,018 | - Cash and cash equivalents decreased by approximately $1.02 million from December 31, 2018, to June 30, 2019[10] - Total assets decreased by approximately $1.18 million, while total liabilities saw a slight increase of about $23.5K[10] - Stockholders' equity decreased by approximately $1.2 million, primarily due to the accumulated deficit[10] Condensed Consolidated Statements of Operations This statement details the company's revenues, expenses, and net loss over specific reporting periods | Metric (Unaudited) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :---------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Research and development expenses | $726,904 | $1,077,643 | $1,211,655 | $1,865,921 | | General and administrative expenses | $410,072 | $350,581 | $807,837 | $853,918 | | Total operating expenses | $1,136,976 | $1,428,224 | $2,019,492 | $2,719,839 | | Operating Loss | $(1,136,976) | $(1,428,224) | $(2,019,492) | $(2,719,839) | | Net Loss | $(969,078) | $(1,206,074) | $(1,719,910) | $(2,302,870) | | Net Loss per Common Share | $(0.03) | $(0.03) | $(0.04) | $(0.06) | - Net loss for the three months ended June 30, 2019, decreased by $236,996 compared to the same period in 2018, primarily due to lower operating expenses and reduced interest expense[12] - For the six months ended June 30, 2019, net loss decreased by $582,960, driven by a significant reduction in research and development expenses and interest expense[12] Condensed Consolidated Statement of Changes in Stockholders' Equity This statement tracks changes in equity components, including common stock, additional paid-in capital, and accumulated deficit | Metric | Balance, January 1, 2019 | Stock-based compensation | Payments by investor for clinical trial costs | Net loss | Balance, June 30, 2019 | | :----------------------- | :----------------------- | :----------------------- | :-------------------------------------------- | :------- | :--------------------- | | Common Stock Amount | $3,867 | - | - | - | $3,867 | | Additional Paid-In Capital | $19,121,285 | $125,035 | - | - | $19,246,320 | | Subscription Receivable | $(1,800,000) | - | $395,927 | - | $(1,404,073) | | Accumulated Deficit | $(7,624,134) | - | - | $(1,719,910) | $(9,344,044) | | Total Stockholders' Equity | $9,701,018 | $125,035 | $395,927 | $(1,719,910) | $8,502,070 | - Total stockholders' equity decreased from $9.7 million at January 1, 2019, to $8.5 million at June 30, 2019, primarily due to a net loss of $1.7 million[15] - Stock-based compensation added $125,035 to additional paid-in capital during the six months ended June 30, 2019[15] - Payments made directly by an investor for clinical trial costs reduced the subscription receivable by $395,927[15] Condensed Consolidated Statements of Cash Flows This statement reports cash generated and used across operating, investing, and financing activities | Cash Flow Activity | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(1,018,976) | $(2,233,186) | | Net cash used in investing activities | $- | $(497,782) | | Net cash provided by financing activities | $- | $2,733,992 | | Net (Decrease)/Increase in Cash | $(1,018,976) | $3,024 | | Cash and Cash Equivalents – End of Period | $721,985 | $2,850,453 | - Net cash used in operating activities significantly decreased from $2.23 million in H1 2018 to $1.02 million in H1 2019, primarily due to reduced net loss and direct payments by an investor for clinical trial expenses[17][109] - No cash flows from investing or financing activities were reported for the six months ended June 30, 2019, compared to significant activities in the prior year period[17][111][112] - The company reported a net decrease in cash and cash equivalents of $1,018,976 for the six months ended June 30, 2019[17] Notes to Condensed Consolidated Financial Statements These notes provide additional information and explanations for financial statement figures and significant accounting policies - Processa Pharmaceuticals, Inc. is an emerging clinical stage biopharmaceutical company focused on developing drug products for high unmet medical needs, with PCS-499 for Necrobiosis Lipoidica (NL) as its lead product[23][24] - The company's financial statements are prepared under the going concern assumption, but substantial doubt exists about its ability to continue as a going concern due to recurring losses, negative cash flow, and the need for additional funding[30][35][36] - PCS-499 received orphan-drug designation from the FDA for NL on June 22, 2018, and the Phase 2a clinical trial for NL is fully enrolled as of August 2, 2019, with no serious adverse events reported at the highest dose[25][79] - The adoption of ASC 842, Leases, on January 1, 2019, resulted 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[46] - Subsequent to June 30, 2019, the company raised $435,000 from the sale of 8% Senior Convertible Notes and converted $259,830 of existing Senior Convertible Notes into common stock and warrants[65][66] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management discusses financial condition, operating results, liquidity, capital resources, and the going concern status Overview This section introduces the company's drug development business and its financial history - Processa Pharmaceuticals is an emerging pharmaceutical company focused on developing drug products for high unmet medical needs, with one product (PCS-499) currently in development for multiple indications[69] - The company acquired Promet Therapeutics, LLC in October 2017, which was accounted for as a reverse acquisition, and has focused on acquiring rights to PCS-499, business planning, capital raising, and clinical trials since its formation in March 2011[70][71][72] - Processa has no approved drug candidates or revenue from drug sales and has incurred operating losses since inception, with an accumulated deficit of $9.3 million as of June 30, 2019[72] Going Concern and Management's Plan This section addresses the company's ability to continue operations, outlining financial challenges and funding strategies - The company's ability to continue as a going concern is in substantial doubt due to product development risks, limited working capital, recurring losses, negative cash flow, and the need for future capital[74][77] - Management is raising additional funds through private sales of 8% Senior Convertible Notes, having received $435,000 subsequent to June 30, 2019, and has delayed some cash outflows by deferring salaries[73] - For the six months ended June 30, 2019, the company incurred a net loss of $1.7 million and used $1.0 million in net cash from operating activities[75] - Failure to secure adequate additional capital could lead to significant delays, scaling back, or discontinuation of product development, adversely affecting the business[76] Status of our Phase 2a Clinical Trial in Necrobiosis Lipoidica This section updates on the progress and safety findings of the PCS-499 Phase 2a clinical trial for Necrobiosis Lipoidica - PCS-499, an oral tablet, is the lead product for Necrobiosis Lipoidica (NL), a chronic, disfiguring skin condition with no approved FDA treatments, affecting 74,000-185,000 people in the US[78] - PCS-499 received orphan-drug designation for NL in June 2018, and the IND for the Phase 2a safety-dose tolerability trial was cleared in September 2018[79] - The Phase 2a clinical trial for NL dosed its first patient on January 29, 2019, and is anticipated to be fully enrolled by late August 2019, with the highest dose (1.8 grams/day) appearing well tolerated with only mild adverse events[79] - Management plans to request a meeting with the FDA before the end of 2019 to discuss the next clinical trial for PCS-499[81] Results of Operations This section analyzes the company's financial performance, focusing on changes in operating expenses and net loss | Metric (Unaudited) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Change (3M) | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | Change (6M) | | :---------------------------------- | :------------------------------- | :------------------------------- | :---------- | :----------------------------- | :----------------------------- | :---------- | | Research and development expenses | $726,904 | $1,077,643 | $(350,739) | $1,211,655 | $1,865,921 | $(654,266) | | General and administrative expenses | $410,072 | $350,581 | $59,491 | $807,837 | $853,918 | $(46,081) | | Total operating expenses | $1,136,976 | $1,428,224 | $(291,248) | $2,019,492 | $2,719,839 | $(700,347) | | Net Loss | $969,078 | $1,206,074 | $(236,996) | $1,719,910 | $2,302,870 | $(582,960) | - Research and development expenses decreased by $350,739 for the three months and $654,266 for the six months ended June 30, 2019, primarily due to lower preclinical, clinical trial, and other costs compared to the prior year, which included a Phase 1 trial and new manufacturing site establishment[85][86][87] - General and administrative expenses increased by $59,491 for the three months ended June 30, 2019, due to increased payroll (including stock-based compensation) and tax expenses, partially offset by reduced professional fees[92] - For the six months ended June 30, 2019, general and administrative expenses decreased by $46,081, mainly due to the absence of a $144,000 cybersecurity fraud loss incurred in H1 2018 and reductions in professional fees, despite increases in payroll and administrative costs[93] - Interest expense significantly decreased due to the conversion of most Senior Convertible Notes in May 2018, with the remaining $230,000 converted subsequent to June 30, 2019[95] Financial Condition This section assesses the company's financial position, including cash, assets, liabilities, and equity - As of June 30, 2019, the company had $721,985 in cash and a remaining $1.4 million commitment from PoC Capital for its Phase 2a clinical trial[98] - Total assets decreased by approximately $1.2 million to $11.3 million at June 30, 2019, from $12.5 million at December 31, 2018, primarily due to operating costs offset by the recognition of right-of-use assets[99] - Total liabilities (excluding deferred income taxes) increased by $324,409 to $970,113, mainly due to accrued expenses and the recognition of operating lease liabilities[100] - The remaining $230,000 of Senior Convertible Notes outstanding at June 30, 2019, were converted into common stock and warrants on July 2, 2019[101] Liquidity and Capital Resources This section discusses the company's ability to meet short-term obligations and strategies for securing ongoing funding - The company funds its operations primarily through private placements of equity and senior secured convertible notes[103] - As of June 30, 2019, cash and cash equivalents were $721,985, down from $1.7 million at December 31, 2018[104] - A Clinical Trial Funding commitment of $1.8 million, with $1.4 million unused as of June 30, 2019, is expected to fund the current Phase 2a clinical trial[104] - Substantial doubt exists about the company's ability to continue as a going concern without additional capital, which may be sought through equity offerings, debt financings, or strategic collaborations[104][107] Cash Flows This section analyzes cash sources and uses from operating, investing, and financing activities | Cash Flow Activity | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(1,018,976) | $(2,233,186) | | Net cash used in investing activities | $- | $(497,782) | | Net cash provided by financing activities | $- | $2,733,992 | | Net increase in cash and cash equivalents | $(1,018,976) | $3,024 | - Net cash used in operating activities decreased by over $1.2 million in H1 2019 compared to H1 2018, primarily due to a lower net loss and direct payments by PoC Capital for clinical trial expenses[109] - No cash flows from investing or financing activities occurred in H1 2019, contrasting with H1 2018 which saw cash used for CDs and intangible asset acquisition, and cash provided by financing activities[111][112] - The company anticipates continued negative cash flows from operating activities due to ongoing R&D and G&A costs, as it does not currently sell pharmaceutical products[110] 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[113] Off Balance Sheet Arrangements This section states that the company had no off-balance sheet arrangements as of the reporting date - As of June 30, 2019, the company did not have any off-balance sheet arrangements[114] Critical Accounting Policies and Use of Estimates This section confirms critical accounting policies remain consistent with the most recent annual report - The company's critical accounting policies, as described in its most recent Annual Report on Form 10-K, remain unchanged[116][117] Recently Issued Accounting Pronouncements This section discusses the adoption of new accounting standards, specifically ASC 842 on Leases, and its impact - The company adopted ASC 842, Leases, on January 1, 2019, recognizing right-of-use assets and lease liabilities on the balance sheet[46][118] Emerging Growth Company This section clarifies the company's emerging growth status and its election regarding accounting standard compliance - The company is an 'emerging growth company' under the JOBS Act 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[119] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This item is not applicable to the company as a smaller reporting company - Item 3 is not applicable to the company as a smaller reporting company and has been omitted[120] ITEM 4. CONTROLS AND PROCEDURES Disclosure controls were ineffective as of June 30, 2019, due to unrectified material weaknesses in internal control - Disclosure controls and procedures were evaluated and concluded to be not effective as of June 30, 2019[121] - Material weaknesses identified in the 2018 Annual Report on Form 10-K, including entity level controls, inadequate segregation of duties, and insufficient documentation of policies and procedures, continue to be present[122] - No changes in internal control over financial reporting occurred during the quarter ended June 30, 2019, and remediation actions are ongoing[123] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, unregistered sales of equity, defaults, and exhibits ITEM 1. LEGAL PROCEEDINGS The company is not currently involved in any material legal proceedings - The company is currently not a party to any material legal proceedings[125] ITEM 1A. RISK FACTORS There have been no material changes to the risk factors previously disclosed in the company's 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 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018[126] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section details the conversion of Senior Convertible Notes into common stock and warrants, with no public offerings or share repurchases - On July 2, 2019, $259,000 of principal and accrued interest from Senior Convertible Notes were converted into 126,741 shares of common stock and 126,741 stock purchase warrants, following the release of a cease trade order by the Alberta Securities Commission[127] - The shares and warrants were issued under exemptions provided in Section 4(a)(2) of the Securities Act of 1933 and Regulation S[127] - The company did not have any proceeds from public offerings of common stock or repurchase any shares during the six months ended June 30, 2019[128][129] ITEM 3. DEFAULTS UPON SENIOR SECURITIES The company reported no defaults upon senior securities - There were no defaults upon senior securities[130] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to the company - Mine Safety Disclosures are not applicable to the company[131] ITEM 5. OTHER INFORMATION No other information is reported in this section - No other information is reported[132] ITEM 6. EXHIBITS This section lists exhibits filed with the Form 10-Q, including corporate documents, officer certifications, and XBRL files | SEC Ref. No. | Title of Document | | :----------- | :------------------------------------------------------------------- | | 3 | Fourth Amended and Restated Certificate of Incorporation of Processa Pharmaceuticals, Inc. | | 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 |