United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 20202021

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 [  ]Yes ☒ 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES [X] NO [  ]Yes ☒ 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 an emerging growth company. See the definitionsdefinition 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 ☒

YES [  ] NO [X]

The registrant has 5,515,447number of outstanding shares of the registrant’s common stock outstanding as of July 31, 2020.August 2, 2021 was 15,604,605.

Securities registered pursuant to Section 12(b) of the Exchange Act: None.

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 and Six Months Ended June 30, 2020 and 2019(Unaudited)

(Unaudited)

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

Processa Pharmaceuticals, Inc.

Condensed Consolidated StatementsStatement of Changes in Stockholders’ Equity

Six Months Ended June 30, 2020 and 2019(Unaudited)

(Unaudited)

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

Processa Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

Six Months Ended June 30, 20202021 and 20192020

(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

Processa isWe are a clinical stageclinical-stage biopharmaceutical company focused on the development of drug products that are intended to improve the survival and/or quality of lifeprovide treatment for patients who have a high unmet medical need condition. Within thiscondition that effects survival or the patient’s quality of life and for which few or no treatment options currently exist. We currently have five drugs: four in various stages of clinical development (PCS499, PCS12852, PCS3117, and PCS6422) and one in nonclinical development (PCS11T). We group our drugs into non-oncology (PCS499 and PCS12852) and oncology (PCS3117, PCS6422 and PCS11T). A summary of pharmaceutical products, we currently are developing one product for multiple indications (i.e.,each of our five drugs is provided below:

Impact of COVID-19

The extent of the useimpact of a drug to treat a particular disease)the COVID-19 pandemic on our business, operations and development timelines and plans remains uncertain, and will begin developing our newly acquired drugs (PCS11T and PCS100) once adequate funding has been obtained. We continue searching for additional products for our portfolio that meet our criteria.

PCS499

Our lead product, PCS499, is an oral tablet that is a deuterated analog of onedepend on certain developments, including the duration of the major metabolites of pentoxifylline (PTX or Trental^®). The advantage of PCS499 is that it potentially may work in many conditions because PCS499outbreak and its metabolites actimpact on multiple pharmacological targets that are importantour development activities, planned clinical trial enrollment, future trial sites, contract research organizations (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 treatment of these conditions. Basedfuture, including the resulting impact on its pharmacological activity, we have identified unmet medical need conditions whereour expenditures and capital needs, remains uncertain. In addition, a recession or market correction resulting from the use of PCS499 may result in clinical efficacy. The lead indication currently under development for PCS499 is Necrobiosis Lipoidica (NL). NL is a chronic, disfiguring condition affecting the skin and the 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 ulceration can occur in approximately 30% of NL patients which can lead to more severe complications, such as deep tissue infections and osteonecrosis threatening lifespread of the limb. Approximately 22,000 - 55,000 people incoronavirus could materially affect the United States and more than 120,000 people outside the United States are affected with ulcerated NL.value of our common stock.

The degeneration of tissue occurring at the NL lesion site is caused by a number of pathophysiological changes which has made it extremely difficult to develop effective treatments for this condition. PCS499 may provide a solution since PCS499 and its metabolites affect a number of the biological pathways which contribute to the pathophysiology associated with NL.

On June 22, 2018, the FDA granted orphan-drug designation for PCS499 for the treatment of NL. On September 28, 2018, the FDA cleared our IND for PCS499 in NL such that we could move forward with a Phase 2A trial multicenter, open-label prospective trial designed to determine the safety and tolerability of PCS499 in patients with NL. 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 main objective of the trial was to evaluate the safety and tolerability of PCS499 in patients with NL and to use the collected safety and efficacy data to design future clinical trials. Based on toxicology studies and healthy human volunteer studies, Processa 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 reported.

Two patients presenting with more severe ulcerated NL 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. In addition, while in the trial both patients also developed small ulcers at other sites as a result of contact trauma to the site and these ulcers resolved within one month. The other ten patients presenting with mild to moderate NL and no ulceration had some improvement of the NL lesions but not as dramatic as the more serious ulcerated patients. Historically, less than 20% of all the patients with NL naturally progress to complete healing over the first one to two years after presenting with NL. Although the natural healing of the more severe NL patients with ulcers has not been evaluated independently, medical experts who treat NL patients believe that the natural progression of an open ulcerated wound to complete closure would be significantly less than the 20% reported as the maximum percentage of patients who naturally heal over the 12-24 months after NL presentation with the likelihood and time of healing possibly being dependent on the size of the ulcer. Although our study enrolled only two ulcerated patients, the existing ulcers and trauma ulcers in both patients completely closed supporting that the diverse pharmacology of PCS499 and its metabolites (similar to PTX) positively effects the open ulcers in NL. In addition, those patients without ulcers in our clinical trial also saw positive changes in their NL lesion, although to a much lesser extent than the closing of the more serious ulcers.

We have completed the patient portion of our Phase 2A trial of PCS499 in NL, with the last patient completing the trial during the first quarter of 2020. We are in the process of closing the trial, but the close out of our two sites has been delayed as a result of COVID-19.

On March 25, 2020, we met with the FDA and discussed the clinical program, as well as the nonclinical and clinical pharmacology plans to 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 will be designing the next trial as a randomized, placebo controlled trial to evaluate the ability of PCS499 to completely close ulcers in patients with NL, along with an open labelled safety trial that will serve as an extension study for those in the randomized, placebo controlled trial. We initially planned to begin recruiting for the randomized, placebo-controlled trial in the fourth quarter 2020 but with the COVID-19 pandemic, we expect to begin recruiting patients in early 2021. The decision to conduct the study as a Phase 3 study with further input from the FDA via a Special Protocol Assessment, or to perform a smaller Phase 2B study, is still to be determined based on financial considerations, current pandemic concerns and other priorities within our portfolio. A Phase 2B or a Phase 3 trial would be of similar design but would differ in the number of patients. The FDA also noted that only a single pivotal clinical trial may be required for an NDA approval to treat ulcerated NL if the percent responders in the treatment arm is highly significant (p << 0.05) compared to the placebo arm. The FDA noted that the final determination of accepting only a single trial for approval would be dependent on the FDA review of the trial results.

PCS11T

On May 24, 2020, we entered into a condition precedent License Agreement (the “Aposense Agreement”) with Aposense, LTD., (“Aposense”), pursuant to which we were granted a contingent license in the patent rights and the know-how to develop and commercialize their next generation irinotecan cancer drug, PCS-11T. Granting of the license is conditioned on the following being satisfied within 9 months of May 24, 2020 (or the Aposense Agreement shall terminate): (i) our closing of an equity financing and successful up-listing to Nasdaq and (ii) Aposense obtaining the approval of the Israel Innovation Authority for the consummation of the transactions contemplated by the Aposense Agreement.

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 allows 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 is expected to make the therapeutic window of PCS11T wider than all other irinotecan products such that the anti-tumor effect of PCS11T will occur at a much lower dose with a milder adverse effect profile than irinotecan. Irinotecan serves as a water-soluble pro-drug of SN-38, with SN-38 being significantly more potent as a topoisomerase I inhibitor 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 dollars, irinotecan has a narrow therapeutic window and includes an FDA “Black Box” warning for both neutropenia and severe diarrhea. Its adverse effects include diarrhea, neutropenia, leucopenia, lymphocytopenia, and anemia, which are major impediments to optimal dosing for efficacy since the dose must often be reduced with repeated treatment cycles. 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 adverse events. 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 that PCS11T has an efficacy advantage over Irinotecan as demonstrated by tumor eradication at much lower doses than irinotecan across various tumor xenograft models. PCS11T produced a marked, dose-related sustained tumor growth inhibition (TGI) in all the evaluated models. TGI in all of these models was significantly improved in comparison to irinotecan. Tumor regression was also observed in several models. PCS11T does not affect acetyl choline esterase (AChE) activity in human and rat plasma in vitro, which would suggest that PCS11T will show an improved safety profile, unlike irinotecan, which is known for its cholinergic related side-effects.

Prior to the License Agreement, Aposense had met with the FDA at a Pre-IND meeting. At that meeting, agreement was reached related to the necessary manufacturing and toxicological study requirements for filing the IND and the subsequent design of the Phase 1B study for PCS11T in the treatment of solid tumors. Depending upon our available funds, we are currently planning to manufacture the product at a GMP facility, conduct the required toxicological studies required to file the IND and initiate the Phase 1B study in oncology patients with solid tumors in late 2021.

PCS100

On August 29, 2019, we entered into an exclusive license agreement with Akashi Therapeutics, Inc. (“Akashi”) to develop and commercialize an anti-fibrotic, anti-inflammatory drug, PCS100, which also promotes healthy muscle fiber regeneration. In previous clinical trials in Duchenne Muscular Dystrophy (DMD), PCS100 showed promising improvement in the muscle strength of non-ambulant pediatric patients. Although the FDA placed a clinical hold on the DMD trial after a serious adverse event in a pediatric patient, the FDA has removed the drug off clinical hold and defined how PCS100 can resume clinical trials in DMD. Once we have obtained adequate funding, we plan to develop PCS100 in rare adult fibrotic related diseases such as focal segmental glomerulosclerosis, idiopathic pulmonary fibrosis or Scleroderma. At the present time we are evaluating the potential GMP manufacturing facilities and the potential indications for PCS100.

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 U.S. 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’s 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, 2019,2020, 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.

Going Concern and Management’s PlansLiquidity

Our condensed consolidated financial statementsWe have been prepared using U.S. GAAPincurred losses since inception, devoting substantially all of our efforts toward research and are based on the assumption that we will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. We face certain risks and uncertainties that are present in many emerging pharmaceutical company regarding product development, and commercialization, limited working capital, recurringhave an accumulated deficit of approximately $30.7 million at June 30, 2021. During the six months ended June 30, 2021, we generated a net loss of approximately $5.3 million and we expect to continue to generate operating losses and negative cash flow from operations for the foreseeable future. However, we believe our cash balance at June 30, 2021 is adequate to fund our budgeted operations well into 2023. Our ability to execute our longer-term operating plans, including unplanned future profitability,clinical trials for our portfolio of drugs depend on our ability to obtain future capital, protectionadditional funding from the sale of patents, technologies and property rights, competition, rapid technological change, navigating the domestic and major foreign markets’ regulatory and clinical environment, recruiting and retaining key personnel, dependence on third party manufacturing organizations, third party collaboration and licensing agreements, lack of sales and marketing activities.equity and/or debt securities, a strategic transaction or other funding transactions. We currently have no customers or pharmaceutical products to sell or distribute. These risks and other factors raise substantial doubt about our abilityplan to continue as a going concern.to actively pursue financing alternatives, but there can be no assurance that we will obtain the necessary funding in the future when necessary.

We have relied primarily on private placements with a small group of accredited investors to finance our businesshad 0 revenue during the six months ended June 30, 2021 and operations. As described in more detail below, we entered into two line of credit agreements last year with related parties providing a revolving commitment of an aggregate of up to $1.4 million. We have not had any revenue since our inception. We are looking at ways to add a revenue stream to offset some of our expenses but do not currently have any revenue under contract or any immediate sales prospects. At June 30, 2020, we had an accumulated deficitOur primary uses of $12.6 million, and during the six months ended June 30, 2020, we incurred a net loss of $1,607,750 and used $897,029 in net cash from operating activities from continuing operations. At June 30, 2020, we had cash and cash equivalents totaling $452,654.

On September 20, 2019, we entered into two separate Line of Credit Agreements (“LOC Agreements”) to borrow up to $700,000 with current shareholders and related parties: DKBK Enterprises, LLC (“DKBK”) and CorLyst, LLC (“CorLyst”) ($1.4 million total). Under the LOC Agreements, all funds borrowed bear an 8% annual interest rate. The lenders have the right to convert all or any portion of the debt and interest into shares of our common stock. Our Chief Executive Officer (CEO) is also the CEO and Managing Member of both lenders. DKBK directly holds 16,166 shares of our common stock, less than 1% of our outstanding common stock, and CorLyst beneficially owns 1,095,649 shares, representing 19.9% of our outstanding common stock. In April and June 2020, we drew $500,000 under the LOC Agreement with DKBK. On July 21, 2020, we drew an additional $200,000, bringing the total amount drawn under the LOC Agreement with DKBK to $700,000.

 In December 2019, we closed our bridge financing and issued $805,000 of 2019 Senior Notes to accredited investors. In order to preserve cash, in August 2019 we began delaying some cash outflows, primarily through the deferred payment of certain salaries ($210,800 has been included in accrued expenses at June 30, 2020) until such time as we have raised sufficient funding.

In May 2020, we entered into a promissory note in favor of the Bank of America under the Small Business Administration Paycheck Protection Program of the Coronavirus Aid, Relief and Economic Security Act of 2020 (the “CARES Act”) for a $162,459 loan (“the PPP Loan”). We plan to use the loan proceeds for payroll costs, rent and utilities in accordance with the relevant terms and conditions of the CARES Act.

We have begun the process of raising capital in an underwritten public offering, however, we have faced delays due to the global pandemic caused by the novel coronavirus, COVID-19. Based on our current plan, we will need to raise additional capitalare to fund our future operations. While we believe our current resources are adequate to complete the closeout of our current Phase 2A trial for NL, we do not currently have resources to conduct other futureplanned clinical trials, such as the Phase 2B/3 clinical trial approved by the FDA, or to develop our other drug candidates without raising additional capital. We believe that our existing cash and LOC Agreements will enable us to fund our operating expenses and capital expenditure requirements into the third quarter of 2020.

Additional funding may not be available to us on acceptable terms, or at all. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scope of, or suspend our current or future clinical trial plans, or research and development programs. We may seek to raise any necessary additional capital through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangementsexpenditures and other marketing and distribution arrangements. 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, making capital expenditures or declaring dividends.

Uncertainty concerning our ability to continue as a going concern may hinder our ability to obtain future financing. Continued operations and our ability to continue as a going concern are dependent on our ability to obtain additional funding in the future and thereafter, and no assurances can be given that such funding will be available at all, in a sufficient amount, or on reasonable terms. Without additional funds from debt or equity financing, sales of assets, sales or out-licenses of intellectual property or technologies, or other transactions providing funds, we will rapidly exhaust our resources and be unable to continue operations. Absent additional funding, we believe that our cash and cash equivalents will not be sufficientoperating expenses. Cash used 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 onoperating expenses is impacted by the timing of when we incur and amount of our projected net loss from continuing operations and cash to be used in operating activities during that period of time.pay these expenses.

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:to preclinical and clinical trial expenses, stock-based compensation, determining the fair value of acquiredintangible assets, and assumed liabilities, 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 Assets

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

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

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

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

Impairment of Long-Lived Assets and Intangibles Other Than Goodwill

We account for the impairment of long-lived assets in accordance with ASC 360, Property, Plant and Equipment and ASC 350, Intangibles – Goodwill and Other, which require that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to its expected future undiscounted net cash flows generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amounts of the assets exceed the fair value of the assets based on the present value of the expected future cash flows associated with the use of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Based on management’s evaluation, there was no0 impairment loss recorded during the six months ended June 30, 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 to employees over the requisite service period based on the estimated grant-date fair value of the awards. For awards that contain performance vesting conditions, we do not recognize compensation expense until achieving the performance condition is probable. Stock-based awards with graded-vesting schedules are recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award. We value restricted stock awards (RSAs) and restricted stock units (RSUs) based on the closing share price on the date of grant. We estimate the fair value of stock option and warrant grants using the Black-Scholes option pricing model, and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. Stock-based compensation costs are recorded as general and administrative or research and development costs in the statements of operations based upon the underlying individual’s or consultant’s role.

Stock-based compensation awards during the six months ended June 30, 2021 consisted of the following: 

Stock Based Compensation Awards

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 and vested RSUs during the year.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 six months ended June 30, 20202021 and 20192020 excludes the impact of 740,899 and 719,083 potentially dilutive common shares respectively, related to outstanding stock options, unvested restricted stock awards (RSAs), unvested restricted stock units (RSUs) and warrants and, in 2020, the conversion of our 2017 and 2019 Senior Notes and related party line of credit (LOC) since those shares would have an anti-dilutive effect on loss per share.

Our diluted net loss per share for the six months ended June 30, 2021 and 2020 excluded 709,954 and 797,964, respectively, of potentially dilutive common shares, respectively, related to outstanding stock options, unvested RSAs, unvested RSUs and warrants and, in 2020, the conversion of our Senior Notes and related party LOC since those shares would have had an anti-dilutive effect on loss per share during the periods then ended.

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 financial position or results of operations.

Note 2 – License Agreement with Ocuphire Pharma, Inc.

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

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

We are required to use commercially reasonable efforts, at our sole cost and expense to oversee such commercialization efforts, to research, develop and commercialize products in one or more countries, including meeting specific diligence milestones that consist of: (i) first patient administered drug in a Clinical Trial of a Product prior to June 16, 2024; and (ii) first patient administered drug in a Pivotal Clinical Trial of a Product or first patient administered drug in a Clinical Trial for a Second Indication of a Product prior to June 16, 2026. Either party may terminate the agreement in the event of a material breach of the agreement that has not been cured following written notice and a 120-day opportunity to cure such breach.

Note 3 – Property and Equipment

Property and equipment at June 30, 2021 and December 31, 2020 consisted of the following: 

Schedule of Property and Equipment

Note 24 – Intangible Assets

Intangible assets at June 30, 20202021 and December 31, 20192020 consisted of the following:

Summary of Intangible Assets

Amortization expense was $397,664$397,664 for the six months ended June 30, 20202021 and 20192020 and is included within research and development expense in the accompanying condensed consolidated statements of operations. OurAs of June 30, 2021, our estimated amortization expense for the next year2021 will be approximately $795,000$790,000 and approximately $788,000 per year and for annual periods thereafter approximately $788,000 per year.thereafter.

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

Note 35 – 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 June 30, 2020,2021 and December 31, 2019,2020, we recorded a valuation allowance equal to the full recorded amount of our net deferred tax assets related to deferred start-up costs, purchased in-process research and development expenditures, federal orphan drug tax credit and certain other minor temporary differences since it is more-likely-than-not that such benefits will not be realized. The valuation allowance is reviewed quarterly and is maintained until sufficient positive evidence exists to support its reversal.

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 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$3,037,147 for the acquired temporary difference between intangible assets (see Note 2)4) for the financial reporting basis of $11,038,929$11,038,929 and the tax basis of $1,782.$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 dateyear-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 and six months ended June 30, 20202021 and 2019.2020. No current income tax expense is expected for the foreseeable future as we expect to generate taxable net operating losses.

Note 46 – Stock-based Compensation

We did not grant any stock options to our employees or non-employees during the six months ended June 30, 2020. During the six months ended June 30, 2019, we granted 129,919 stock options to employees and non-employees under the 2019 Omnibus Incentive Plan. At June 30, 2020, we had outstanding options to purchase 169,329 shares of our common stock of which options for the purchase of 56,853 shares of our common stock were vested. We recorded $192,532 $1,173,622and $125,035 $192,532of stock-based compensation expense for the six months ended June 30, 2021 and 2020, and 2019, respectively.

Note 5 – 2019 Senior 8% Convertible Notes Payable

During the fourth quartersix months ended June 30, 2021, we awarded the following equity instruments:

Equity Instruments Awarded

We valued the RSAs and RSUs based on the closing share price on the date of 2019 existing shareholders purchased $805,000grant. The fair values of 8% Senior Convertible Notes (“2019 Senior Notes”) from us.the stock options and warrants granted were estimated using the Black-Scholes option pricing model at the date of grant. The 2019 Senior Notes bear interestRSUs, stock options and warrants issued to consultants were for services provided in 2021. Of the awards granted to consultants, 12,500 RSUs and 100,000 warrants vested upon grant but represent services that will be provided over a one-year service period. As such, at 8% per year and if converted,June 30, 2021, we recognized $209,565 related to these awards as a prepaid expense for the interest is payableportion of services the consultant has yet to provide. We did not grant any awards during the same period in kind (in common stock). The 2019 Senior Notes mature on December 15, 2020.

At June 30, 2020 and December 31, 2019,2021, we had $805,000the following awards outstanding related to stock-based compensation:

Stock-based Compensation Awards Outstanding

The weighted average exercise price of 2019 Senior Notes outstanding.

The 2019 Senior Notes are convertible bystock options and warrants outstanding at June 30, 2021 was $17.06 and $7.18, respectively. At June 30, 2021, we had warrants for the holder upon (i) completionpurchase of listing our common stock on either the Nasdaq Capital Market or the New York Stock Exchange or if we raise at least $14 million, prior to December 15, 2020, the maturity date of the 2019 Senior Notes, in one or more qualified financings. If the 2019 Senior Notes are not paid or converted prior to their maturity date, the principal and any accrued interest will be automatically or mandatorily converted into our common stock. The 2019 Senior Notes, plus any accrued interest, is convertible into310,365 shares of our common stock outstanding which expire at a conversion price equal tovarious dates through February 16, 2023. Warrants for the lowerpurchase of (i) $14.28 per share or (ii) a price per share equal to a 10% discount to the pre-money valuation of a Qualified Financing or an Equity State Transaction, both as defined in the 2019 Senior Note agreement, occurring after the closing of the 2019 Senior Note financing. Upon either mandatory conversion or conversion at the holder’s option, the holder will also receive stock purchase warrants on a 1:1 basis to the number of shares of common stock received that have an exercise price equal to the greater of (i) the closing price of our common stock on the date of conversion or (ii) $19.04 per share.

The 2019 Senior Notes provide the holders with (a) the option of receiving 110% of principal plus accrued interest in the event there is a change of control prior to conversion of the 2019 Senior Notes; (b) weighted-average anti-dilution protection in event of any sale of securities at a net consideration per share that is less than the applicable conversion price per share to the holder until we have raised an additional $14 million from the sale of certain securities; and (c) certain preemptive rights pro rata to their respective interests through December 31, 2021.

The 2019 Senior Notes contains negative covenants that do not permit us to incur additional indebtedness or liens on property or assets owned, repurchase common stock, pay dividends, or enter into any transaction with affiliates of ours that would require disclosure in a public filing with the Securities and Exchange Commission. Upon an event of default, the outstanding principal amount of the Senior Notes, plus accrued but unpaid interest and other amounts owing in respect thereof through the date of acceleration, shall become immediately due and payable in cash at the holder’s election, if not cured within the cure period.

We incurred $4,280 in debt issuance costs related to the 2019 Senior Notes. The debt issuance costs are amortized to interest expense using straight line amortization over the term of the 2019 Senior Notes.

Note 6 – Related Party Line of Credit Agreements

On September 20, 2019, we entered into two separate Line of Credit Agreements (“LOC Agreements”) with DKBK Enterprises, LLC (“DKBK”) and CorLyst, LLC (“CorLyst”), both related parties (“Lenders”), which provide a revolving commitment of up to $700,000 each ($1.4 million total). Under the LOC Agreements, all funds borrowed bear an 8% annual interest rate. The lenders have the right to convert all or any portion of the debt and interest into210,365 shares of our common stock at a conversion price equal towere issued in connection with PIPE transactions and other fundraising efforts we had over the lower of (i) $14.28 per share, (ii) a price per share equal to a 10% discount to the pre-money valuation of a Qualified Financing or an Equity Stake Transaction, or (iii) at an adjusted price; all as defined in the 2019 Senior Note agreement. The Lenders will also receive stock purchase warrants on a 1:1 basis to the number of shares of common stock received that have an exercise price equal to the greater of (i) the closing price of our common stock on the date of conversion or (ii) $19.04 per share at the time of conversion.last three years.

Our Chief Executive Officer (CEO) is also the CEO and Managing Member of both lenders. DKBK directly holds 16,166 shares of our common stock, representing less than 1% of our outstanding common stock, and CorLyst beneficially owns 1,095,649 shares of our common stock, representing 19.9% of our outstanding common stock at June 30, 2020. In April and June 2020, we drew $500,000 under the LOC Agreement with DKBK. On July 21, 2020, we drew an additional $200,000, bringing the total amount drawn under the LOC Agreement with DKBK to $700,000.

Note 7 – Paycheck Protection Program Loan

In May 2020, we entered into a $162,459 $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 of, the PPP which was established under the CARES Act and is administered by the U.S. Small Business Administration. The current termsterm 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%1.00%. Payments of principal and interest on the PPP Loan iswere 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, or a portion, of the loan granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for certain permissible purposes as set forth in the PPP, including, but not limited to, payroll costs, mortgage interest, rent or utility costs, (collectively, “Qualifying Expenses”), and on the maintenance of employee and compensation levels during a certain time period following the funding of the PPP Loan. We have used the entire proceeds of our PPP Loan for payroll costs. However, no assurance is providedcosts and applied for full forgiveness on January 18, 2021. On February 11, 2021, Bank of America submitted a decision to the Small Business Administration that the full amount should be forgiven. In August 2021, we will be able to obtain forgivenessreceived notice of the PPP Loan in whole or in part. As of June 30, 2020, $72,203 of the total $162,459 PPP-related debt is classified as a current liability on our condensed consolidated balance sheets.loan forgiveness.

Note 8 – Stockholders’ Equity

On September

During the six months ended June 30, 2019, our Pledge Agreement with PoC Capital was amended to reduce the committed funds under this Agreement from $1.8 million to $900,000, which was paid in full as2021 we granted a total of December 31, 2019. As part of the Pledge Agreement amendment, PoC Capital forfeited the pledged collateral (56,64017,800 shares of our common stock and warrants toissued a warrant for the purchase 56,640of 100,000 shares of our common stock)stock to consultants in accordance with consulting agreements for services that will be provided during 2021. The total value of these issuances was $446,477. We are amortizing this amount over the amendedrelated contract lives and at June 30, 2021, included $209,565 as a prepaid expense, representing the portion of services yet to be provided. We also granted 37,500 RSAs to an employee in accordance with their employment agreement. The forfeited

On February 24, 2021, we sold in a private placement 1,321,132 shares of our common stock to accredited and stockinstitutional investors for gross proceeds of $10.2 million. Net proceeds from the offering were $9.9 million. We issued warrants for the purchase warrants have been returned to us.

We determined the sale of the 2019 Senior Notes in late 2019 which are convertible into common stock at a conversion rate of $14.28 per share, triggered the full ratchet anti-dilution provision of common stock we sold in our 2018 Private Placement Transactions. As a result, those shareholders were entitled to 28,971 shares of common stock in the fourth quarter of 2019, which we issued on June 18, 2020. We accounted for these shares at December 31, 2019 as a deemed dividend payable at their par value.

On June 25, 2020, we amended our Certificate of Incorporation reducing the number of authorized79,268 shares of our common stock from 100,000,000 to 30,000,000. We believe 100,000,000 authorized our placement agent. These warrants are exercisable for cash at $9.30 per share and expire on February 24, 2023.

On June 16, 2021, we issued 44,689 shares of our common stock was disproportionately large in relationto Ocuphire Pharma, Inc. pursuant to the Company’s outstanding common stock and our anticipated future needs, and the reduction will reduce our future Delaware franchise tax.agreement we entered into with them (see Note 2).

We have not had any sales of our preferred stock since weThere were incorporated on March 29, 2011 and there were no 0issued or outstanding shares of preferred stock at June 30, 20202021 or December 31, 2019.2020.

Note 9 – Net Loss per Share of Common Stock

Basic net loss per share is computed by dividing net loss by the weighted average common shares outstanding.outstanding and vested RSUs. Diluted net loss per share is computed by dividing net loss by the weighted average common shares outstanding, which includes potentially dilutive effect of stock options, unvested RSAs, unvested RSUs, warrants and senior convertible notes. Since we experienced a loss for bothall periods presented, including any dilutive common shares outstanding were excluded from the computation as shown below, as they would have an anti-dilutive impact on diluted net loss per share, and as shown below were excluded from the computation.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 and six months ended June 30, 20202021 and 20192020 was as follows:

Schedule of Net Loss Per Share Basic and Diluted

The following potentially dilutive securities were excluded from the computation of diluted net incomeloss per share as their effect would have been anti-dilutive for the periods presented.

Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share

Note 10 – 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. 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 statementstatements of operations totaled $23,995$21,801 and $24,729$23,995 for the three months ended June 30, 20202021 and 2019,2020, respectively, and $48,201$45,831 and $49,302$48,201 for the six months ended June 30, 20202021 and 2019, respectively.2020. The weighted average remaining lease terms and discount rate for our operating leases were as follows at June 30, 2020:2021:

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

Maturities of our lease liabilities for all operating leases were as follows as of June 30, 2020:2021:

Note 11 – License Agreement with Aposense, Ltd.

On May 24, 2020 we executed a condition precedent License Agreement (“Aposense Agreement”) with Aposense under which they will provide us with an exclusive worldwide license (excluding China) to research, develop and commercialize products comprising or containing PCS11T. The grantSchedule of license is conditioned on the following being satisfied within 9 monthsMaturities of May 24, 2020 (or the Aposense Agreement shall terminate): (i) our closing of an equity financing and successful up-listing to Nasdaq and (ii) Aposense obtaining the approval of the Israel Innovation AuthorityLease Liabilities for the consummation of the transactions contemplated by the Aposense Agreement. Within five business days of satisfying the conditions, we must issue Aposense a number of shares of common stock determined by dividing $2.5 million by the price per share paid by such investors in equity financing. Such shares will be subject to a lock-up, with 40% of such shares released from such lock up after six months and the remaining two 30% tranches to be released upon completion of the next two subsequent quarters. As additional consideration, we will pay Aposense development and regulatory milestone payments (up to $3.0 million per milestone) upon the achievement of certain milestones, which primarily consist of having a drug indication approved by a regulatory authority in the United States or another country. In addition, we must pay Aposense one-time sales milestone payments based on the achievement during a calendar year of one or more thresholds for annual sales for products made and pay royalties based on annual licensing sales. We are also required to split any milestone payments we receive with Aposense based on any sub-license agreement we may enter into.all Operating Leases

We are required to use commercially reasonable efforts, at our sole cost and expense, to research, develop and commercialize products in one or more countries, including meeting specific diligence milestones that consist of (i) submitting an IND for a drug indication within 30 months following the satisfaction of the license conditions above; (ii) dosing of a first patient with a product within 42 months following the satisfaction of the license conditions above; (iii) dosing of a first patient with a product in a pivotal clinical trial within 72 months following the satisfaction of the license conditions above and (iv) an NDA submission within 120 months following the satisfaction of the license conditions above. Either party may terminate the Aposense Agreement in the event of a material breach of the license agreement that has not been cured following written notice and a 90-day opportunity to cure such breach (which is shortened to 15 days for a payment breach).

Note 1211 – Related Party Transactions

A shareholder, CorLyst, LLC, 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. We recorded $25,928 and $52,464In September 2020, CorLyst prepaid shared expenses to us for the fourth quarter of 2020 through the July 2021. At June 30, 2021, we recognized $11,742in prepaid reimbursements duringas due to related parties in the six months endedaccompanying condensed consolidated balance sheet. At June 30, 2020, and 2019, respectively. Amountswe had $500,000 outstanding under a convertible related party LOC. This LOC was converted into shares of our common stock on October 6, 2020. NaNamounts were due from CorLyst at June 30, 20202021 and December 31, 2019 were $24,713 and $0, respectively.2020.

At June 30, 2020, we also had approximately $1,700 due from certain employees for health insurance contributions. We did not have comparable a similar receivable at December 31, 2019.

Note 1312 – 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.products and complete our clinical trials. The contracts are cancellable, with varying provisions regarding termination. If we terminated a cancellable contract with a specific vendor, were to be terminated, 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 had no purchaseare contractually obligated to pay up to approximately $4.1 million of future services under the agreements with the CROs, but our actual contractual obligations at June 30, 2020.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, 2019,2020, 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

We are an emerging pharmaceuticala clinical-stage biopharmaceutical company focused on the clinical development of drug products that are intended to improve the survival and/or quality of lifeprovide treatment for patients who have a high unmet medical need condition that effects survival or the patient’s quality of life and for which few or no treatment options currently exist.

We are a development company, not a discovery company, that seeks to identify and develop drugs for patients who need better treatment options than presently exist for their medical condition. In order to increase the probability of development success, our pipeline only includes drugs which have previously demonstrated some efficacy in the targeted population or a drug with very similar pharmacological properties has been shown to be effective in the population.

Our screening criteria for identifying and selecting new candidates include:

In many instances, these clinical candidates have significant pre-clinical and clinical data that we may leverage to high value inflection points while de-risking the programs and adding in optionality to potential future indications. Our regulatory science approach developed by our team over decades of work with regulatory authorities attempts to balance the “risk/benefit” equation to identify a regulatory path with lower risk and shorter timelines to deliver urgent or unmet medical needs to patients, physicians and caregivers.

Our pipeline 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 might allow a single positive pivotal study demonstrating efficacy provides 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-frame 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 successful development team with a track record of drug approvals and 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 has 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. Within this groupAlthough 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 we currently are developing one product for multiple indications (i.e.,does not guarantee that they will successfully develop and commercialize drugs in our current pipeline. In addition, the usegrowth in revenues of a drugcompanies at which our executive officers and directors served in was due to treat a particular disease)many factors and does not guarantee that they will begin developing newly acquired drugs (PCS11T and PCS100) once adequate funding has been obtained. We continue searching for additional products for our portfolio that meet our criteria.

On October 4, 2017, we acquired all the net assets of Promet Therapeutics, LLC (“Promet) a private Delaware limited liability company, including the rights to the CoNCERT Agreement in exchange for 4,535,036 shares of our common stock. Immediately following the transaction, the former equity holders of Promet owned approximately 84% and held approximately 6% of the shares for the benefit of CoNCERT in relation to the CoNCERT contribution of the license to Processa as part of the Section 351 transaction, and our stockholders immediately prior to the transaction owned approximately 10% of our common stock. In March 2018, Promet released 298,615 shares to CoNCERT in connection with exercising the license and option agreement. Promet has since distributed the remaining 4,236,421 shares of the common stock it held to its partners. We accounted for the net asset acquisition transaction as a “reverse acquisition” merger under the acquisition method for GAAP, where Promet was considered the accounting acquirer; and for tax purposes, as a tax-free contribution under Internal Revenue Code Section 351.

We have a limited operating history as we were formed on March 29, 2011. Since that date, our operations have focused on acquiring the rights to PCS499, PCS11T, PCS100; organizing and staffing our company; business planning; raising capital; establishing our intellectual property portfolio and conducting clinical trials. We do not have any drug candidates approved for sale and have not yet generated any revenue from drug sales. We have funded our operations through the private sale of equity and equity-linked securities to accredited investors. Since inception, we have incurred operating losses. As of June 30, 2020, we had an accumulated deficit of $12.6 million. We expect to continue to incur significant expenses and operating losses for the foreseeable future. We anticipate that our expenses will increase significantly in connection with our ongoing activities, as we:

Going Concern and Management’s Plan

Our condensed consolidated financial statements have been prepared using U.S. GAAP and are based on the assumptionsuccessfully operate or manage us or that we will experience similar growth in revenues, even if they continue to serve as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. We face certain risks and uncertainties that are present in many emerging pharmaceutical companies regarding product development and commercialization, limited working capital, recurring losses and negative cash flow from operations, future profitability,executive officers and/or directors.

Our ability to obtain future capital, protection of patents, technologies and property rights, competition, rapid technological change, navigating the domestic and major foreign markets’ regulatory and clinical environment, recruiting and retaining key personnel, dependencegenerate meaningful revenue from any products depends on third party manufacturing organizations, third party collaboration and licensing agreements, lack of sales and marketing activities. We currently have no customers or pharmaceutical products to sell or distribute. These risks and other factors raise substantial doubt about our ability to continue as a going concern.

We have relied primarily on private placements with a small group of accredited investors to financeout-license the drugs before or after we obtain FDA NDA approval. Even if our businessproducts are authorized and operations. As described in more detail below, we recently entered into two line of credit agreements with related parties providing a revolving commitment of an aggregate of up to $1.4 million. We have not had any revenue since our inception. We are looking at ways to add a revenue stream to offset some of our expenses but do not currently have any revenue under contract or any immediate sales prospects. At June 30, 2020, we had an accumulated deficit of $12.6 million, and during the six months ended June 30, 2020, we incurred a net loss for the six months of $1,607,750 and used $897,029 in net cash from operating activities from continuing operations. At June 30, 2020, we had cash and cash equivalents totaling $452,654.

On September 20, 2019, we entered into two separate Line of Credit Agreements (“LOC Agreements”) to borrow up to $700,000 with current shareholders and related parties DKBK Enterprises, LLC (“DKBK”) and CorLyst, LLC (“CorLyst”) ($1.4 million total). Under the LOC Agreements, all funds borrowed bear an 8% annual interest rate. The lenders have the right to convert all or any portion of the debt and interest into shares of our common stock. Our Chief Executive Officer (CEO) is also the CEO and Managing Member of both lenders. DKBK directly holds 16,166 shares of our common stock, less than 1% of our outstanding common stock, and CorLyst beneficially owns 1,095,649 shares, representing 19.9% of our outstanding common stock. In April and June 2020, we drew $500,000 under the LOC Agreement with DKBK. On July 21, 2020, we drew an additional $200,000, bringing the total amount drawn under the LOC Agreement with DKBK to $700,000.

In December 2019, we closed our bridge financing and issued $805,000 of 2019 Senior Notes to accredited investors. In order to preserve cash, in August 2019 we began delaying some cash outflows, primarily through the deferred payment of certain salaries ($210,800 has been included in accrued expenses at June 30, 2020) until such time as we have raised sufficient funding.

In May 2020, we entered into a promissory note in favor of the Bank of America under the Small Business Administration Paycheck Protection Program of the Coronavirus Aid, Relief and Economic Security Act of 2020 (“the CARES Act”), for a $162,459 loan (“the PPP Loan”). We have used the loan proceeds for payroll costs in accordance with the relevant terms and conditions of the CARES Act.

We have begun the process of raising capital in an underwritten public offering, however, we have faced delays due to the global pandemic caused by the novel coronavirus, COVID-19. Based on our current plan, we will need to raise additional capital to fund our future operations. While we believe our current resources are adequate to complete the closeout of our current Phase 2A trial for NL, we do not currently have resources to conduct other future trials, such as the Phase 2B/3 clinical trial approved by the FDA, orit should be noted that the products must still meet the challenges of successful marketing, distribution and consumer acceptance.

Our Drug Pipeline

Our clinical pipeline (shown below) summarizes each drug, organized by the therapeutic area (i.e., non-oncology and oncology) and stage of development (i.e., Preclinical to developPhase 3).

We currently have five drugs: four in various stages of clinical development (PCS499, PCS12852, PCS3117, and PCS6422) and one in nonclinical development (PCS11T). We group our other drug candidates without raising additional capital. We believe that our existing cashdrugs into non-oncology (PCS499 and LOC Agreements will enable us to fund our operating expensesPCS12852) and capital expenditure requirements into the third quarteroncology (PCS3117, PCS6422 and PCS11T). A summary of 2020.

Additional funding may not be available to us on acceptable terms, or at all. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scope of, or suspend our current or future clinical trial plans, or research and development programs. We may seek to raise any necessary additional capital through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing and distribution arrangements. 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 interesteach 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, making capital expenditures or declaring dividends.five drugs is provided below:

Uncertainty concerning our ability to continue as a going concern may hinder our ability to obtain future financing. Continued operations and our ability to continue as a going concern are dependent on our ability to obtain additional funding in the future and thereafter, and no assurances can be given that such funding will be available at all, in a sufficient amount, or on reasonable terms. Without additional funds from debt or equity financing, sales of assets, sales or out-licenses of intellectual property or technologies, or other transactions providing funds, we will rapidly exhaust our resources and be unable to continue operations. 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.

Status of our Phase 2A Clinical Trial in Necrobiosis Lipoidica

Our lead

	●	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 completed a Phase 2A trial for PCS499 in patients with ulcerative and non-ulcerative necrobiosis lipoidica (NL) in late 2020, and in May 2021 we enrolled the first patient in our Phase 2B trial for the treatment of ulcerative NL. We expect to complete our interim analysis of the Phase 2B trial in the first half of 2022 (1H’22); complete the trial in the second half of 2022 (2H’22); and, depending on the results, begin a pivotal Phase 3 trial in 2023.
	●	PCS12852 is a highly specific and potent 5HT4 agonist which has already been evaluated in clinical studies in South Korea for gastric emptying and gastrointestinal motility. We are planning on submitting an IND application in the third quarter of 2021 (3Q’21) for the treatment of gastroparesis based on our pre-IND communications with the FDA. We anticipate beginning to enroll patients for a Phase 2A trial in the 1H’22, with expected completion in the first half of 2023 (1H’23).
	●	PCS3117, which we licensed in June 2021, is a cytosine analog, similar to gemcitabine (Gemzar®) but different enough in chemical structure that some patients are more likely to respond to PCS3117 than gemcitabine. We are developing potential biomarkers to predict which patients are more likely to respond to PCS3117 than gemcitabine and other chemotherapy agents to provide a more targeted, precision medicine approach to the treatment of pancreatic and/or non-small cell lung cancer. Over the next 6-12 months, we will be developing and refining these biomarker assays for use in our clinical trials, which should be completed in the 1H’22. We anticipate validating our approach and confirming our hypothesis in a planned Phase 2B study expected to start in the 2H’22 and, depending on the results, conducting a Phase 3 pivotal trial in 2023-2024.
	●	PCS6422 is an orally administered irreversible enzyme inhibitor administered in combination with capecitabine. On August 2, 2021, we enrolled the first patient in our Phase 1B dose-escalation maximum tolerated dose trial in patients with advanced refractory gastrointestinal (GI) tract tumors. We anticipate completing an interim cohort analysis in the fourth quarter of 2021 (4Q’21); determine the maximum tolerated dose (MTD) in the second half of 2022; and, depending on the results, begin a pivotal Phase 2B/3 trial in 2023-2024.
·	●	Our only non-clinical asset is PCS11T, an analog of SN38 (SN38 being the active metabolite of irinotecan) and a next generation irinotecan drug for multiple types of cancers. PCS11T is presently in the IND pre-clinical toxicology stage. We hope to submit an IND in the 2H’22 or 1H’23, followed by a Phase 1B maximum tolerated dose trial.

PCS499

PCS499, an oral tablet of a deuterated analog of one of the major metabolites of pentoxifylline (PTX or Trental^®). The advantage of PCS499, is that it potentially may work in many conditions becauseclassified by FDA as a new molecular entity. PCS499 and its metabolites act on multiple pharmacological targets that are important in the treatmenta variety of these conditions. Based on its pharmacological activity, weWe have identified unmet medical need conditions where the use of PCS499 may result in clinical efficacy. Thetargeted Necrobiosis Lipoidica (NL) as our lead indication currently under development for PCS499 is Necrobiosis Lipoidica (NL).PCS499. NL is a chronic, disfiguring condition affecting the skin and the 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 ulcerationoccurs more often in people with diabetes. Ulceration occurs in approximately 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 ismay be caused by a number of pathophysiological changes, which has mademake it extremely difficult to develop effective treatments for this condition. PCS499 may provide a solution sinceBecause PCS499 and its metabolites appear to affect a numbermost of the biological pathways several of whichthat contribute to the pathophysiology associated with NL, PCS499 may provide a novel treatment solution for NL.

On June 22,18, 2018, the FDA granted orphan-drug designation for PCS499 for the treatment of NL. On September 28, 2018, the FDA cleared our IND for PCS499 in NL became effective, such that we could move forward withinitiated 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 mainlast patient visit took place in February 2020.

The primary objective of the Phase 2A trial was to evaluate the safety and tolerability of PCS499 in patients with NL and to use the collected safety and efficacy data to design future clinical trials. Based on toxicology studies and healthy human volunteer studies, Processa 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 events and reported in four patients, all of which resolved within 1-2 weeks of starting dosing.

Two of the twelve patients presentingin the study presented with more severe ulcerated NL 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 9.9 during the patient’s treatment extension period. In addition, while in the trial, both patients also developed small ulcers at other sites, as a result ofpossibly related to contact trauma, to the site and these ulcers resolved within one month. The other ten patients, presenting with mild to moderate NL and no ulceration, had somemore limited improvement of the NL lesions but not as dramatic as the more serious ulcerated patients.during treatment. Historically, less than13 - 20% of all the patients with NL naturally progress to complete healing over the first one to twomany years after presenting with NL. Although the natural healing of the more severeulcerated NL patients with ulcers has not been evaluated independently, medical experts who treat NL patients believesuggest that the natural progression of an open ulcerated wound to complete closure would be significantly less than the 20% reported as the maximum percentage of13% over 1-2 years and probably close to 0% in patients who naturally heal over the 12-24 months after NL presentation with the likelihood and time of healing possibly being dependent on the size of the ulcer. Although our study enrolled only two ulcerated patients, the existing ulcers and trauma ulcers in both patients completely closed supporting that the diverse pharmacology of PCS499 and its metabolites (similar to PTX) positively effects the open ulcers in NL. In addition, those patients without ulcers in our clinical trial also saw positive changes in their NL lesion, although to a much lesser extent than the closing of the more seriouslarger ulcers.

We have completed the patient portion of our Phase 2A trial of PCS499 in NL, with the last patient completing the trial during the first quarter of 2020. We are in the process of closing the trial, but the close out of our two sites has been delayed as a result of COVID-19.

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 will be designinghave designed the next trial as a randomized, placebo controlled trialplacebo-controlled Phase 2B study to evaluate the ability of PCS499 to completely close ulcers in patients with NL along with an open labelled safetyand better understand the potential response of NL patients on drug and on placebo. We have selected several clinical trial that will serve as an extension study for thosesites in the United States and are evaluating the inclusion of additional clinical trial sites, both within and outside of the United States.

On May 19, 2021, we dosed our first patient in the randomized, placebo-controlled trial. We initially planned to begin recruiting fortrial and are planning an interim analysis of the randomized, placebo controlleddata from this trial in the fourth quarter 2020 but withfirst half of 2022. After obtaining the COVID-19 pandemic,results from this Phase 2B study, we expect to begin recruiting patients in early 2021. The decisionhave an end of Phase 2 meeting with the FDA to conductagree on the study as adesign of the Phase 3 study, with further input from the FDA viato define a Special Protocol Assessment for the Phase 3 study and to agree on the next steps to obtain approval.

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 performother receptors, especially receptors other than 5-HT4.

Two clinical studies, both which have demonstrated the effectiveness of PCS12852 on GI motility, have been previously conducted by Yuhan with PCS12852. In a smaller Phase 2B1 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 percent 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 stillsafe for use and can be moved into Phase 2 studies.

We plan to be determinedsubmit an IND application in the third quarter of 2021 based on financial considerations, current pandemic concerns and other priorities within our portfolio. A Phase 2B orguidance 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 trial would beefficacy study. Since patients with gastroparesis have an abnormal pattern of similar design but would differupper GI motility in the numberabsence of patients.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 FDA alsoonly 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 a single pivotal clinical trial may be required for an NDA approval to treat ulcerated NL ifat concentrations greater than 1,000 times the percent respondersmaximum concentration seen in the treatment arm is highly significant (p << 0.05) compared to the placebo arm. The FDA indicated that the final determination of accepting only a single trial for approval would be dependent on the FDA review of the trial results.humans.

PCS3117

On June 16, 2021, we executed a License Agreement with Akashi Therapeutics,Ocuphire Pharma, Inc.

On August 29, 2019, we entered into (“Ocuphire Agreement”) under which provided us with an exclusive license agreement (the “Akashi Agreement”) with Akashi Therapeutics, Inc. (“Akashi”) to develop and commercialize an anti-fibrotic, anti-inflammatory drug, PCS100, which also promotes healthy muscle fiber regeneration. In previous clinical trials in Duchenne Muscular Dystrophy (DMD), PCS100 showed promising improvement in the muscle strength of non-ambulant pediatric patients. Although the FDA placed a clinical hold on the DMD trial after a serious adverse event in a pediatric patient, the FDA has removed the drug off clinical hold and defined how PCS100 can resume clinical trials in DMD. Once we have obtained adequate funding, we plan to develop PCS100 in rare adult fibrotic related diseases such as focal segmental glomerulosclerosis, idiopathic pulmonary fibrosis or Scleroderma.

The Akashi Agreement provides us with a worldwide license to research, develop make and commercialize products comprisingPCS3117 (formerly RX-3117) 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 containing PCS100. As partial considerationRNA 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 Food and Drug Administration and the European Commission for the license, we paid $10,000treatment of patients with pancreatic cancer.

Gemcitabine is presently used as first 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 Akashi upon full executioncancer 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 respond to or will not respond to gemcitabine.

Resistance to gemcitabine or PCS3117 are 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 Akashi Agreement. This upfront paymentcompound was expensedreported. 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 tested.

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 tested, 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 researchtwo-stage study with 10 patients in stage 1 and development cost.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 is 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. As additional consideration,of July 24, 2019, 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 5.4 months. The most commonly reported related adverse events were nausea, diarrhea, fatigue, alopecia, decreased appetite, rash, vomiting and anemia. Again, evaluation of the cause of treatment resistance to PCS3117 was not undertaken.

In order to identify patients who would more likely respond to PCS3117 than gemcitabine, we will pay Akashibe refining existing assays and developing new assays of biological molecules (i.e., biomarkers) over the next 6-12 months that could help to identify which patients with pancreatic cancer or non-small cell lung cancer are more likely to respond to or activate PCS3117 over gemcitabine.

PCS6422

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.

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 affect 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 blocks DPD activity for up to two weeks until DPD levels recover via de novo synthesis. Thus, we believe inhibition of DPD will result in an improved safety profile given the decrease in F-Bal and potentially higher 5-FU intra-tumoral anti-cancer metabolites that could improve efficacy.

Fluoropyrimidines (e.g., 5-FU) 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 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 regulatory milestone payments (upcapecitabine 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 $3.0 million per milestone)be efficacious.

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 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 be 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 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. Later preclinical work suggested that when PCS6422 was present at the same time as and in excess to 5-FU, it diminished the antitumor activity of 5-FU, which we believe supports the proposed dosing PCS6422 several hours before 5-FU to allow PCS6422 to be cleared before the administration of 5-FU.

Elion met with the FDA in 2019 and agreed upon the achievementclinical development program required for the combination of certain milestones, which primarily consistPCS6422 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 havingescalating doses of capecitabine with a drug indication approved by a regulatory authorityfixed dose of PCS6422 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 have selected several clinical trial sites in the United States or another country. In addition, we must pay Akashi one-time sales milestone payments based onfor the achievement during a calendar year of one or more thresholds for annual sales for products made and pay royalties based on annual licensing sales. We are also required to split any milestone payments we receive with Akashi based on any sub-license agreement we may enter into.

We are required to use commercially reasonable efforts, at our sole cost and expense, to research, develop and commercialize products in one or more countries, including meeting specific diligence milestones that consist of (i) requesting a meeting with the FDA for a first indication within 18 months of the date of the Akashi Agreement, (ii) submitting an IND for a drug indication on or before June 30, 2022 and (iii) initiating a Phase 1 or 2 trial for a drug indication on or before December 30, 2022. Either party may terminate the Akashi Agreementstudy, which began patient recruitment in the eventfirst half of a material breach of2021. On August 2, 2021, we enrolled the license agreement that has not been cured following written notice and a 60-day opportunity to cure such breach (which is shortened to 15 days for a payment breach).first patient in the study.

License Agreement with Aposense, Ltd.PCS11T

On May 24, 2020, we entered into a condition precedent License Agreement (the “Aposense Agreement”in-licensed PCS11T (formerly known as ATT-11T) from Aposense, Ltd. (“Aposense”) with Aposense,, pursuant to which we were granted a contingent license in theAposense’s patent rights and the know-howKnow-How to develop and commercialize their next generation irinotecan cancer drug, PCS-11T. GrantingPCS11T.

PCS11T is a novel lipophilic anti-cancer pro-drug that is being developed for the treatment of the licensesame solid tumors as prescribed for irinotecan. This pro-drug is conditioneda 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 following being satisfied within 9 monthscell with SN-38 preferentially accumulating in the membrane of May 24, 2020 (ortumors cells and the Aposense Agreement shall terminate): (i) our closingtumor 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 equity financingFDA “Black Box” warning for both neutropenia and successful up-listingsevere diarrhea. There is, therefore, a substantial unmet need to Nasdaq and (ii) Aposense obtainingovercome the approvallimitations of the Israel Innovation Authoritycurrent 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 choline 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 planning to manufacture the consummationproduct at a GMP facility, conduct the required toxicological studies required to file the IND and initiate the Phase 1B study in oncology patients with solid tumors in 2022.

Impact of COVID-19

The COVID-19 pandemic has created uncertainties in the expected timelines for clinical stage biopharmaceutical companies such as ours, including possible delays in clinical trials and disruptions in the supply chain for raw materials used in clinical trial work. Such delays could materially impact our business in future periods. Furthermore, the spread of COVID-19, which has caused a broad impact globally, may materially affect us economically. While the economic impact brought by, and the duration of, COVID-19 is difficult to assess or predict, the COVID-19 pandemic and its resulting variants could result in further disruption of global financial markets, reducing our ability to access capital, which could negatively affect our liquidity. Policymakers around the globe have responded with fiscal policy actions to support the healthcare industries and economies as a whole. Whether this support continues is uncertain. Accordingly, the extent to which the COVID-19 global pandemic impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict. These developments include, but are not limited to, the duration and spread of the transactions contemplated byoutbreak, its resulting variants, its severity, the Aposense Agreement. Within five business days of satisfyingactions 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 we must issue Aposense shares of common stock, the number being determined by dividing $2.5 million by the price per share paid by such investors in the equity financing. Such shares will be subject to a lock-up, with 40% of such shares released from such lock up after six months and the remaining two 30% tranches to be released upon completion of the next two subsequent quarters. As additional consideration, we will pay Aposense development and regulatory milestone payments (up to $3.0 million per milestone) upon the achievement of certain milestones, which primarily consist of having a drug indication approved by a regulatory authority in the United States or another country. In addition, we must pay Aposense one-time sales milestone payments basedcan resume. For more information on the achievement during a calendar year of one or more thresholds for annual sales for products made and pay royalties basedrisks associated with COVID-19, refer to Part I, Item 1A, “Risk Factors” in our Annual Report on annual licensing sales. We are also required to split any milestone payments we receive with Aposense based on any sub-license agreement we may enter into.Form 10-K.

We are required to use commercially reasonable efforts, at our sole cost and expense, to research, develop and commercialize products in one or more countries, including meeting specific diligence milestones that consist of (i) submitting an IND for a drug indication within 30 months following the satisfaction of the license conditions above; (ii) dosing of a first patient with a product within 42 months following the satisfaction of the license conditions above; (iii) dosing of a first patient with a product in a pivotal clinical trial within 72 months following the satisfaction of the license conditions above and (iv) an NDA submission within 120 months following the satisfaction of the license conditions above. Either party may terminate the Aposense Agreement in the event of a material breach of the license agreement that has not been cured following written notice and a 90-day opportunity to cure such breach (which is shortened to 15 days for a payment breach).

Results of Operations

Comparison of the three and six months ended June 30, 20202021 and 20192020

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