Processa Pharmaceuticals Inc

Condensed Consolidated Balance Sheets

Condensed Consolidated Statements of Operations

Condensed Consolidated Statement of Changes in Stockholders’ Equity

Condensed Consolidated Statements of Cash Flows

Notes to Condensed Consolidated Financial Statements

Note 1 –Organization and Summary of Significant Accounting Policies

Organization

We are a clinical-stage biopharmaceutical company focused on incorporating our Regulatory Science Approach into the development of our Next Generation Chemotherapy (NGC) drugs to improve the safety and efficacy of cancer treatment. Our NGC drugs are modifications of existing FDA-approved oncology drugs resulting in an alteration of the metabolism and/or distribution while maintaining the well-known and established existing mechanisms of killing the cancer cells. By modifying the NGC drugs in this manner, we believe our three NGC treatments will provide improved safety-efficacy profiles when compared to their currently marketed counterparts.

On January 22, 2024, we filed a Certificate of Amendment to our Certificate of Incorporation, as amended with the Secretary of State of Delaware that effected a 1-for-20 reverse stock split of our common stock, par value $0.0001 per share (the “Reverse Stock Split”). Pursuant to the Certificate of Amendment, our issued common stock decreased from 24,706,474 shares to 1,291,000 shares and our outstanding common stock decreased from 24,606,474 to 1,286,000. The Reverse Stock Split did not affect our authorized common stock of 100,000,000 shares or our common stock par value. All shares of common stock, including common stock underlying warrants, stock options, restricted stock awards and restricted stock units, as well as exercise prices and per share information in these condensed consolidated financial statements give retroactive effect to the Reverse Stock Split.

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 our 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, 2023, 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

Our condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the ordinary course of business. We have incurred losses since inception, are currently devoting substantially all of our efforts toward research and development of our NGC drug product candidates, including conducting clinical trials and providing general and administrative support for these operations, and have an accumulated deficit of $78.1 million at March 31, 2024. During the three months ended March 31, 2024, we generated a net loss of $2.7 million and used $2.0 million in net cash for operating activities from continuing operations. To date, none of our drug candidates have been approved for sale, and therefore we have not generated any product revenue and do not expect positive cash flow from operations in the foreseeable future.

We have financed our operations primarily through public equity issuances, including an offering we closed on January 30, 2024 where we sold 476,000 shares of our common stock, pre-funded warrants to purchase up to 1,079,555 shares of our common stock, and warrants for the purchase of up to 1,555,555 shares of our common stock for net proceeds of $6.3 million, after deducting placement agent fees and offering-related expenses. Simultaneously with the closing of the sale, the pre-funded warrants were exercised in exchange for 1,079,555 shares of our common stock. We will continue to be dependent upon equity and/or debt financing until we are able to generate positive cash flows from its operations.

At March 31, 2024, we had cash and cash equivalents totaling $8.9 million which, based on our current business plans, we believe these funds will satisfy our capital needs into early 2025, includingthe beginningofour Phase 2 trial of NGC-Cap in breast cancer. Our ability to execute our longer-term operating plans, including future preclinical studies and 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 raise additional funds in the future through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing and distribution arrangements, but will only do so if the terms are acceptable to us. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scope of, or suspend our current or planned future clinical trial plans, or research and development programs. This may also cause us to not meet obligations contained in certain of our license agreements and put these assets at risk. To the extent that we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt or making capital expenditures. There can be no assurance that future funding will be available when needed.

Absent additional funding, we believe that our cash and cash equivalents will not be sufficient to fund our operations for a period of one year or more after the date that these condensed consolidated financial statements are available to be issued based on the timing and amount of our projected net loss from continuing operations and cash to be used in operating activities during that period of time. As a result, substantial doubt exists about our ability to continue as a going concern within one year after the date that these condensed consolidated financial statements are available to be issued. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be different should we be unable to continue as a going concern based on the outcome of these uncertainties described above.

Use of Estimates

In preparing our condensed consolidated financial statements and related disclosures in conformity with U.S. 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.

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 basis of assets and liabilities for financial reporting purposes and amounts recognized for income tax purposes. At March 31, 2024 and December 31, 2023, we recorded a valuation allowance equal to the full recorded amount of our net deferred tax assets 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.

Under ACS 740-270Income 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, no current income tax benefit or expense is expected for 2024 and the foreseeable future since we expect to generate taxable net operating losses.

Concentration of Credit Risk

Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of our cash and cash equivalents. We utilize only well-established banks and financial institutions with high credit ratings. Balances on deposit are insured by the Federal Deposit Insurance Corporation (FDIC) up to specified limits. Total cash held by our banks at March 31, 2024, 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 condensed consolidated financial position or results of operations.

Note 2 –Stockholders’ Equity

Preferred Stock

There wereno issued or outstanding shares of preferred stock at either March 31, 2024 or December 31, 2023.

Common Stock

During the three months ended March 31, 2024, we issued the following shares of common stock.

During the three months ended March 31, 2023, we issued 421,611 shares of our common stock through several fundraising efforts described below:

Note 3 -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 300,000 shares of our common stock. At March 31, 2024, we have 35,508 shares available for future grants.

Stock Compensation Expense

We recorded stock-based compensation expense for the three month ended March 31, 2024 and 2023 as follows:

Stock Options

No stock options to purchase shares of common stock were forfeited or expired during the three months ended March 31, 2024. At March 31, 2024, we had outstanding and exercisable options for the purchase of 6,992 shares with a weighted average exercise price of $364.72 and a weighted average remaining contractual life of 1.9 years. At March 31, 2024, we did not have any unrecognized stock-based compensation expense related to our granted stock options.

Restricted Stock Awards

During the three months ended March 31, 2024, wevested 1,250 Restricted Stock Awards (“RSAs”) with a weighted average grant-date fair value of $9.26 per share. We hadno RSAs outstanding at March 31, 2024.

Restricted Stock Units

Activity with respect to our Restricted Stock Units (“RSUs”) during the three months ended March 31, 2024 was as follows:

On January 1, 2024, we granted RSUs for the future issuance of no more than 39,202 shares of our common stock, contingent upon receiving shareholder approval to increase the number of shares available under our 2019 Omnibus Incentive Plan (“Incentive Plan”) at our annual shareholder meeting in June 2024. The number of shares to be issued under the RSUs will be based on the greater of: (i) $30.00 per share or (ii) the closing price per share on the day we receive shareholder approval to increase the number of shares available under the Incentive Plan.

At March 31, 2024, unrecognized stock-based compensation expense of $723,000 for RSUs (which excludes the above grant on January 1, 2024) is expected to be fully recognized over a weighted average period of 1.4 years. The unrecognized expense excludes $420,000 of expense related to certain grants of RSUs with performance milestones that are not probable of occurring at this time.

Holders of our vested RSUs will be issued shares of our common stock upon meeting the distribution restrictions contained in their Restricted Stock Unit Award Agreement. The distribution restrictions are 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.

Warrants

During the three months ended March 31, 2024, other than warrants to purchase 1,617,777 shares of common stock as part of our public offering (see Note 2), we did not grant any warrants to purchase shares of our common stock and warrants to purchase 5,000 shares of common stock expired. We also repurchased a warrant issued to a consultant in 2023 for the purchase of 15,000 shares of our common stock in exchange for a payment of $10,000.

At March 31, 2024, we had outstanding stock purchase warrants for the purchase of 1,778,284 shares with a weighted average exercise price of $6.17 and a weighted average remaining contractual life of 4.5 years. All the outstanding stock purchase warrants are exercisable at March 31, 2024. We did not have any unrecognized stock-based compensation expense related to our granted stock purchase warrants at March 31, 2024.

Note 4 –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 stock outstanding (which excludes unvested RSAs and includes vested RSUs) 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 (which includes the potentially dilutive effect of stock options, unvested RSAs, unvested RSUs and warrants) 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, 2024 and 2023 excludes the impact of potentially dilutive common shares since those shares would have an anti-dilutive effect on net loss per share.

The computation of net loss per share for the three months ended March 31, 2024 and 2023 was as follows:

Our diluted net loss per share for the three months ended March 31, 2024 and 2023 excluded 1,866,753 and 236,496 of potentially dilutive common shares, respectively, related to outstanding stock options, warrants and unvested restricted stock since those shares would have had an anti-dilutive effect on net loss per share during the periods then ended.

Note 5 –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. 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 a financing 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 $22,461 for each of the three month periods ending March 31, 2024 and 2023. The weighted average remaining lease terms and discount rate for our operating leases were as follows at March 31, 2024:

Annual lease liabilities for the operating lease were as follows at March 31, 2024:

Annual lease liabilities for the financing lease were as follows at March 31, 2024:

Note 6 –Related Party Transactions

CorLyst, LLC (“CorLyst”) reimburses us for shared costs related to payroll, health insurance and rent based on actual costs incurred, which are recognized as a reduction of our general and administrative operating expenses being reimbursed in our condensed consolidated statement of operations. We recorded $23,000 and $30,000 of reimbursements during the three months ended March 31, 2024 and March 31, 2023, respectively. At March 31, 2024, $22,295 were due from CorLyst andno amounts were due at March 31, 2023. Our President, Research and Development is the CEO of CorLyst, and CorLyst is a shareholder.

Note 7 –Commitments and Contingencies

Purchase Obligations

We enter into contracts in the normal course of business with contract research organizations (CROs) and subcontractors to further develop our products. The contracts are cancelable, with varying provisions regarding termination. If we terminated a cancelable contract with a specific vendor, we would only be obligated for products or services that we received at the effective date of the termination and any applicable cancellation fees. At March 31, 2024, we are contractually obligated to pay up to $984,000 of future services under the agreements with the CROs. Our actual contractual obligations will also vary depending on the progress and results of the remaining clinical trials.