Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
1 – Organization and Summary of Significant Accounting Policies
Organization
We are a clinical-stage biopharmaceutical company focused on incorporating our Regulatory Science Approach into the development of our
Next Generation Chemotherapy (NGC) drugs to improve the safety and efficacy of cancer treatment. Our NGC drugs are modifications of existing
FDA-approved oncology drugs resulting in an alteration of the metabolism and/or distribution while maintaining the well-known and established
existing mechanisms of killing the cancer cells. By modifying the NGC drugs in this manner, we believe our three NGC treatments will provide
improved safety-efficacy profiles when compared to their currently marketed counterparts.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions of the
Securities and Exchange Commission (“SEC”) on Form 10-Q and Article 8 of Regulation S-X.
Accordingly,
they do not include all the information and disclosures required by U.S. GAAP for complete financial statements. All material intercompany
accounts and transactions have been eliminated in consolidation. In the opinion of management, the accompanying unaudited condensed consolidated
financial statements include all adjustments necessary, which are of a normal and recurring nature, for the fair presentation of our
financial position and of the results of operations and cash flows for the periods presented. These condensed consolidated financial
statements should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form
10-K for the year ended December 31, 2022, as filed with the SEC. The results of operations for the interim periods shown in this report
are not necessarily indicative of the results that may be expected for any other interim period or for the full year.
Liquidity
We
have incurred losses since inception, devoting substantially all of our efforts toward research and development, and have an
accumulated deficit of $68.3
million at March 31, 2023. During the three months ended March 31, 2023, we generated a net loss of $4.0
million and we expect to continue to generate operating losses and negative cash flow from operations for the foreseeable
future. Based on our current plans, we believe our current cash balances are adequate for at least the next twelve months. Our
ability to execute our longer-term operating plans, including future clinical trials for our portfolio of drugs depend on
our ability to obtain additional funding from the sale of equity and/or debt securities, a strategic transaction or other funding
transactions. We plan to continue to actively pursue financing alternatives, but there can be no assurance that we will obtain the
necessary funding in the future when necessary.
We
had no
revenue during the three months ended March 31, 2023 and do not have any revenue under contract or any immediate sales prospects.
Our primary uses of cash are to fund our planned clinical trials, research and development expenditures and other operating
expenses. Cash used to fund operating expenses is impacted by the timing of when we incur and pay these expenses.
During
the three months ended March 31, 2023, we raised gross proceeds of $7.0
million (net proceeds of $6.4 million) from the sale of 8,432,192
shares of our common stock, as described in Note 2. We plan to use the net proceeds from these financings to prepare for future clinical trials; and on research and development
expenses, working capital and other general corporate purposes.
Use
of Estimates
In
preparing our condensed consolidated financial statements and related disclosures in conformity with U.S. GAAP and pursuant to the
rules and regulations of the SEC, we make estimates and judgments that affect the amounts reported in the condensed consolidated
financial statements and accompanying notes. Estimates are used for, but not limited to preclinical and clinical trial expenses,
stock-based compensation, intangible assets, future milestone payments and income taxes. These estimates and assumptions are
continuously evaluated and are based on management’s experience and knowledge of the relevant facts and circumstances. While
we believe the estimates to be reasonable, actual results could differ materially from those estimates and could impact future
results of operations and cash flows.
Income
Taxes
We
account for income taxes in accordance with ASC Topic 740, Income Taxes. Deferred income taxes are recorded for the expected tax
consequences of temporary differences between the basis of assets and liabilities for financial reporting purposes and amounts recognized
for income tax purposes. At March 31, 2023 and December 31, 2022, we recorded a valuation allowance equal to the full recorded amount
of our net deferred tax assets since it is more-likely-than-not that such benefits will not be realized. The valuation allowance is reviewed
quarterly and is maintained until sufficient positive evidence exists to support its reversal.
Under
ACS 740-270 Income Taxes – Interim Reporting, we are required to project our annual federal and state effective income tax
rate and apply it to the year-to-date ordinary operating tax basis loss before income taxes. Based on the projection, no current income
tax benefit or expense is expected for 2023 and the foreseeable future since the deferred tax liability has been offset completely at
December 31, 2021 and we expect to generate taxable net operating losses.
Concentration
of Credit Risk
Financial
instruments that potentially subject us to significant concentration of credit risk consist primarily of our cash and cash equivalents.
We utilize only well-established banks and financial institutions with high credit ratings. Balances on deposit are insured by the Federal
Deposit Insurance Corporation (FDIC) up to specified limits. Total cash held by our banks at March 31, 2023, exceeded FDIC limits.
Recent
Accounting Pronouncements
From
time to time, the Financial Accounting Standards Board (“FASB”) or other standard setting bodies issue new accounting pronouncements.
Updates to the FASB Accounting Standards Codification are communicated through issuance of an Accounting Standards Update (“ASU”).
We have implemented all new accounting pronouncements that are in effect and that may impact our condensed consolidated financial statements.
We have evaluated recently issued accounting pronouncements and determined that there is no material impact on our consolidated financial
position or results of operations.
Note
2 – Stockholders’ Equity
Preferred
Stock
There
were no issued or outstanding shares of preferred stock at either March 31, 2023 or December 31, 2022.
Common
Stock
During
the three months ended March 31, 2023, we issued 8,432,192 shares of our common stock through several fundraising efforts.
ATM
Offering
On
August 20, 2021, we entered into the Sales Agreement with Oppenheimer & Co. Inc. (the “Sales Agent”) under which we
may issue and sell up to $30.0
million from time to time under the ATM Offering. We expect to use net proceeds from the ATM Offering over time as a source for
working capital and general corporate purposes. During the three months ended March 31, 2023, we sold 569,648
shares at an average price of $1.22
per share for aggregate gross proceeds of $693,000 (net proceeds of $672,000) prior to deducting sales commissions. On February 5, 2023, in connection with our Registered Direct Offering,
we suspended the Sales Agreement with the Sales Agent, but we expect to reinstate it during 2023.
Lincoln
Park Capital Fund, LLC Purchase Agreement
On
March 23, 2022, we entered into the Purchase Agreement with Lincoln Park, pursuant to which Lincoln Park has committed to purchase up
to $15.0 million of shares (the “Purchase Shares”) of our common stock, subject to the terms and conditions in the Purchase
Agreement with Lincoln Park, including that the closing sale
price of the common stock on the purchase date is not below a threshold price of $1.00. Any proceeds that we receive under the Purchase Agreement are expected to be used for working capital and
general corporate purposes. During the three months ended March 31, 2023, we sold 50,000 shares at an average price of $1.08 per share
for aggregate gross proceeds of $54,000 under the Purchase Agreement with Lincoln Park.
Registered
Direct Offering
On
February 14, 2023, we closed a registered direct offering (the “Offering”)
for the sale of 7,812,544 shares
of common stock at a purchase price of $0.80 per
share for gross proceeds of $6.3
million (net proceeds of $5.6
million). The
Purchase Agreement provides that, subject to certain exceptions, until the earlier of (i) 90 days after the closing of the Offering
or (ii) the trading day following the date that our common stock’s closing price exceeds $2.00 for a period of 10 consecutive
trading days, neither we nor our subsidiary will issue or enter into any agreement to issue or announce the issuance or proposed
issuance of any shares of common stock or common stock equivalents.
We
paid the Placement Agent a cash fee of 8.0%
of the gross proceeds from the Offering, excluding proceeds received from our insiders, and reimbursed the Placement Agent for legal
fees of $60,000.
The engagement agreement with the Placement Agent requires us to indemnify the Placement Agent and certain of its affiliates against
certain customary liabilities. On February 14, 2023, we amended our consulting agreement with Spartan originally entered into on
August 24, 2022, extending the term of the consulting agreement until February 10, 2024. As compensation for services under the
agreement, on April 17, 2023, we granted Spartan a warrant to purchase 3,160,130 shares
of our common stock with an exercise price of $1.02.
The warrant will expire three
years from the date
of issuance and contains both call and cashless exercise provisions.
Note
3 - Stock-based Compensation
On
June 19, 2019, our stockholders approved, and we adopted the Processa Pharmaceuticals Inc. 2019 Omnibus Equity Incentive Plan (the “2019
Plan”). The 2019 Plan allows us, under the direction of our Board of Directors or a committee thereof, to make grants of stock
options, restricted and unrestricted stock and other stock-based awards to employees, including our executive officers, consultants and
directors. The 2019 Plan provides for the aggregate issuance of 6,000,000 shares of our common stock. At March 31, 2023, we have 1,394,122 shares available
for future grants.
Stock
Compensation Expense
We
recorded stock-based compensation expense for the three month ended March 31, 2023 and 2022 as follows:
Schedule
of Stock-based Compensation Expense
| |
2023 | | |
2022 | |
Research and development | |
$ | 99,621 | | |
$ | 191,875 | |
General and administrative | |
| 241,883 | | |
| 637,022 | |
Total | |
$ | 341,504 | | |
$ | 828,897 | |
At
March 31, 2023, we recorded an expense and related accrued liability of $1.3
million related to the warrant we issued to Spartan, which is not included in the table
above. No tax benefits were attributed to the stock-based compensation expense because a valuation allowance was maintained
for all net deferred tax assets relating to this expense.
Stock
Options
During
the three months ended March 31, 2023, stock options to purchase 36,885
shares of common stock expired and there were no exercises or grants of stock options.
At March 31, 2023, we had outstanding and exercisable options for the purchase of 141,611
shares with a weighted average exercise price of $18.22,
a weighted average remaining contractual life of 2.9
years. At March 31, 2023, we did not have any
unrecognized stock-based compensation expense related to our granted stock options.
Restricted
Stock Awards
Activity
with respect to our Restricted Stock Awards (RSAs) during the three months ended March 31, 2023 was as follows:
Schedule
of Restricted Stock Awards (“RSAs”) Activity
| |
Number of
shares | | |
Weighted- average grant-date fair value per share | |
Outstanding at January 1, 2023 | |
| 61,888 | | |
$ | 4.72 | |
Granted | |
| 90,000 | | |
| 1.10 | |
Cancelled | |
| (26,118 | ) | |
| 1.72 | |
| |
| | | |
| | |
Outstanding and unvested at March 31, 2023 | |
| 125,770 | | |
$ | 2.75 | |
On
January 1, 2023, we granted RSAs totaling 90,000
shares of common stock to three directors for their service for the six month period ending June 30, 2023 in order to align their
compensation plan with their service period and change the annual service period to begin and end on the date of respective Annual
Meetings rather than the calendar year. Our directors are compensated through a combination of cash and equity. On March 8, 2023,
the directors increased the cash component and decreased the equity component of their
compensation by equal amounts on a retroactive basis, to the beginning of their respective service periods. Accordingly, we cancelled
RSAs representing 26,118
shares of common stock.
At
March 31, 2023, the total unrecognized stock-based compensation expense related to the outstanding and unvested RSAs was $163,100,
which is expected to be recognized over a weighted average period of 0.5
years.
Restricted
Stock Units
Activity
with respect to our Restricted Stock Units (“RSUs”) during the three months ended March 31, 2023 was as follows:
Schedule
of Restricted Stock Units (“RSUs”) Activity
| |
Number of
shares | | |
Weighted- average grant-date fair value per share | |
Outstanding at January 1, 2023 | |
| 2,713,977 | | |
$ | 3.69 | |
Granted | |
| 966,503 | | |
| 1.10 | |
| |
| | | |
| | |
Outstanding at March 31, 2023 | |
| 3,680,480 | | |
| 3.01 | |
Vested and unissued | |
| 2,585,247 | | |
| 3.50 | |
| |
| | | |
| | |
Unvested at March 31, 2023 | |
| 1,095,233 | | |
$ | 1.86 | |
At March 31, 2023, unrecognized stock-based compensation expense of $1.2 million for RSUs is expected to be fully recognized
over a weighted average period of 2.1 years. The unrecognized expense excludes $322,000 of expense related to certain RSUs
with a performance milestone that is not probable of occurring at this time.
Holders
of our vested RSUs have our promise to issue shares of our common stock upon meeting the distribution restrictions contained
in their Restricted Stock Unit Award Agreement. The distribution restrictions are different (longer) than the vesting schedule,
imposing an additional restriction on the holder. Unlike RSAs, while certain employees may hold fully vested RSUs, the individual does
not hold any shares or have any rights of a shareholder until the distribution restrictions are met. Upon distribution to the employee,
each RSU converts into one share of our common stock. The RSUs contain dividend equivalent rights.
Warrants
During
the three months ended March 31, 2023, we agreed to grant a warrant to purchase a total of 3,160,130
shares of our common stock as compensation for services provided under an amended consulting agreement with Spartan, the placement
agent for the Offering. The warrant was issued and
exercisable on April 17, 2023 with an exercise price of $1.02
and expiration date of April 17, 2026. The warrant contains both call and cashless exercise provisions. We recorded $1,310,875
as a general and administrative expense and related accrued liability representing the fair value of this warrant on February 14,
2023, the date we amended the consulting agreement, since there were no contingent conditions on that date through April 17,
2023.
At
March 31, 2023, we had outstanding stock purchase warrants, including the warrant issued on April 17, 2023, for the purchase of 3,366,480 shares
with a weighted average exercise price of $1.61 and a weighted average remaining contractual life of 2.8 years. Stock purchase warrants
for the purchase of 206,350 shares were exercisable at March 31, 2023 and the remaining outstanding stock purchase warrants will be exercisable in the second quarter of 2023.
At March 31, 2023, we did not have any unrecognized stock-based compensation expense related to our granted stock purchase warrants.
Note
4 – Net Loss per Share of Common Stock
Net
Loss Per Share
Basic
net loss per share is computed by dividing our net loss available to common shareholders by the weighted average number of shares of
common stock outstanding (which excludes unvested RSAs and includes vested RSUs) during the period. Diluted loss per share is computed
by dividing our net loss available to common shareholders by the diluted weighted average number of shares of common stock (which includes
the potentially dilutive effect of stock options, unvested RSAs, unvested RSUs and warrants) during the period. Since we experienced
a net loss for both periods presented, basic and diluted net loss per share are the same. As such, diluted loss per share for the three
months ended March 31, 2023 and 2022 excludes the impact of potentially dilutive common shares since those shares would have an anti-dilutive
effect on net loss per share.
The
computation of net loss per share for the three months ended March 31, 2023 and 2022 was as follows:
Schedule
of Net Loss Per Share Basic and Dilute
| |
2023 | | |
2022 | |
| |
Three months ended March 31, | |
| |
2023 | | |
2022 | |
Basic and diluted net loss per share: | |
| | | |
| | |
Net loss available to common stockholders | |
$ | (4,022,073 | ) | |
$ | (3,227,131 | ) |
Weighted average number of common shares-basic and diluted | |
| 22,770,789 | | |
| 15,831,118 | |
| |
| | | |
| | |
Basic and diluted net loss per share | |
$ | (0.18 | ) | |
$ | (0.20 | ) |
Our
diluted net loss per share for the three months ended March 31, 2023 and 2022 excluded 4,729,094
(including the committed warrant to purchase 3,160,130 shares of common stock) and 795,342
of potentially dilutive common shares, respectively, related to outstanding stock options, warrants and unvested restricted stock
since those shares would have had an anti-dilutive effect on net loss per share during the periods then ended.
Note
5 – 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. Our office space
lease includes both lease (e.g., fixed payments including rent, taxes, and insurance costs) and non-lease components (e.g., common-area
or other maintenance costs), which are accounted for as a single lease component as we have elected the practical expedient to group
lease and non-lease components for all leases. We also lease office equipment under an operating lease. Our leases do not provide an
implicit rate and, as such, we have used our incremental borrowing rate of 8% in determining the present value of the lease payments
based on the information available at the lease commencement date.
Lease
costs included in our condensed consolidated statements of operations totaled $22,461 and $21,918 for the three months ended March 31,
2023 and 2022, respectively. The weighted average remaining lease terms and discount rate for our operating leases were as follows at
March 31, 2023:
Schedule
of Weighted Average Remaining Lease Terms and Discount Rate for Operating Leases
Remaining lease term (years) for our facility lease | |
| 2.5 | |
Remaining lease term (years) for our equipment lease | |
| 1.0 | |
Weighted average remaining lease term (years) for our facility and equipment leases | |
| 2.5 | |
Weighted average discount rate for our facility and equipment leases | |
| 8.0 | % |
Annual
lease liabilities for all operating leases were as follows at March 31, 2023:
Schedule
of Annual Lease Liabilities for all Operating Leases
| |
| | |
2023 | |
$ | 70,600 | |
2024 | |
| 92,356 | |
2025 | |
| 70,040 | |
Total lease payments | |
| 232,996 | |
Less: Interest | |
| (22,472 | ) |
Present value of lease liabilities | |
| 210,524 | |
Less: current maturities | |
| (81,166 | ) |
Non-current lease liability | |
$ | 129,358 | |
Note
6 – Related Party Transactions
CorLyst,
LLC (“CorLyst”) reimburses us for shared costs related to payroll, health insurance and rent based on actual costs incurred,
which are recognized as a reduction of our general and administrative operating expenses being reimbursed in our condensed consolidated
statement of operations. We recorded $30,205 and $31,262 of reimbursements during the three months ended March 31, 2023 and March 31,
2022, respectively. No amounts were due from CorLyst at March 31, 2023 or 2022. Our CEO is also the CEO of CorLyst, and CorLyst is a
shareholder.
Note
7 – Commitments and Contingencies
Purchase
Obligations
We
enter into contracts in the normal course of business with contract research organizations (CROs) and subcontractors to further
develop our products. The contracts are cancelable, with varying provisions regarding termination. If we terminated a cancelable
contract with a specific vendor, we would only be obligated for products or services that we received at the effective date of
the termination and any applicable cancellation fees. At March 31, 2023, we are contractually obligated to pay up to $3.0
million of future services under the agreements with the CROs. Our actual contractual obligations will also vary depending on the
progress and results of the remaining clinical trials.