Notes
to Consolidated Financial Statements
NOTE
1 – NATURE OF BUSINESS
Company
Overview
Promet
Therapeutics, LLC (“Promet”), a Delaware limited liability company, was a private company founded on August 31, 2015
(inception). On October 2, 2017, Heatwurx, Inc. (“Heatwurx”), a nonoperating public shell corporation, entered into
an Asset Purchase Agreement with Promet and Heatwurx’s wholly-owned subsidiary, Processa Therapeutics LLC (“Processa”),
a Delaware limited liability company, and closed on this agreement effective October 4, 2017. Under this agreement, Heatwurx acquired
all of the assets and assumed all the liabilities of Promet, in exchange for 222,217,112 shares of the common stock of Heatwurx,
which, at the closing, constituted 90% of the Company’s issued and outstanding common stock on a fully diluted basis. Immediately
following the closing, there were 246,907,902 shares of common stock issued and outstanding, of which the prior Heatwurx shareholders
own 24,690,790 shares after giving effect to 13,673,402 shares issued for Heatwurx’s Series D Preferred stock and existing
debt that converted into common stock prior to closing of the asset purchase transaction. At the closing, Heatwurx assigned to
Processa all of the assets and operations of Promet that constitutes the operating business of Promet. Authorized capital stock
consists of 350,000,000 shares of $0.0001 par value common stock and 10,000,000 shares of $0.0001 par value preferred stock.
The
closing of the Asset Purchase Agreement on October 4, 2017 resulted in a change in control of Heatwurx by Promet (see Note 3).
The Heatwurx executive management, officers and directors resigned and Promet executive management, officers and directors were
appointed. Following the closing, Heatwurx changed its trading symbol from “HUWX” to “PCSA” on the OTC
Pink exchange effective as of October 10, 2017. Heatwurx changed its name to Processa Pharmaceuticals, Inc. (the “Company”)
and authorized a one-for-seven exchange, or reverse split, of its shares effective October 23, 2017. On December 8, 2017, the
Company received approval from the Financial Industry Regulatory Authority to implement the one-for-seven reverse split in trading
markets. As a result, the consolidated financial statements have been retrospectively adjusted to reflect shares outstanding after
the one-for-seven reverse split. Following the asset purchase transaction, the Company abandoned Heatwurx’s prior business
plan and is now only pursuing Promet’s proposed business with a focus on developing drugs to treat patients that have a
high unmet medical need.
As
a result of the above, these consolidated financial statements represent Promet as the accounting acquirer (legal acquiree) and
Processa Pharmaceuticals, Inc. from October 4, 2017 forward as the accounting acquiree (legal acquirer) and the legal capital
stock (number and type of equity interests issued) is that of Heatwurx, which subsequently changed its name to Processa Pharmaceuticals,
Inc., the legal parent, in accordance with guidance on reverse acquisitions accounted for as a capital transaction instead of
a business combination (See Note 2 – Basis of Presentation and Earnings Per Share and Note 3 – Reverse Acquisition).
All
references to the “Company” and Processa Pharmaceuticals, Inc. refer to Heatwurx, Inc., Processa Therapeutics, LLC,
and Promet Therapeutics, LLC, which was assigned at acquisition to Processa Therapeutics, LLC.
Description
of Business
We
are an emerging clinical stage biopharmaceutical company focused on the development of drug products that are intended to provide
treatment for and improve the survival and/or quality of life of patients who have a high unmet medical need condition or who
have no alternative treatment. Within this group of pharmaceutical products, we currently are developing one product for two indications
(i.e., the use of a drug to treat a particular disease) and searching for additional products for our portfolio. Our operations
are performed in the state of Maryland and are still in the organizational and research and development phase of operations. As
a result, we have a limited operating history and only a preliminary business plan from which investors may evaluate our future
prospects. We have not had any sources of revenue from inception through December 31, 2017 and have a history of operating losses
from operations.
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
As
of December 31, 2017, the Company had an accumulated deficit of approximately $3.859 million incurred over approximately 28 months
of its existence. Our current capital is insufficient to fully fund our total business plan and the development of our planned
product candidates. Our ability to achieve revenue-generating operations and, ultimately, achieve profitability will depend on
whether we can obtain additional capital when we need it, complete the development of our technology, receive regulatory approval
of our planned product candidates and find strategic collaborators that can incorporate our planned product candidates into new
or existing drugs which can be successfully commercialized. There can be no assurance that we will ever generate revenues or achieve
profitability.
Recent
Developments
On
or about October 4, 2017, the Company received $1.25 million from the first tranche of Senior Convertible Notes that are expected
to convert into securities of the Company that are placed in the next placement round at a price that will not be greater than
90% of the offering price in that placement (See Note 6). This first tranche was from current Heatwurx and Promet shareholders.
On November 21, 2017, an additional tranche of $1,330,000 of Senior Convertible Notes was issued to third party accredited investors.
We are in the process of raising additional funds by potentially selling additional Senior Convertible Notes, convertible loans
or other securities. No assurance however can be given that the Company will be successful in doing so.
On
October 4, 2017, the Company and CoNCERT Pharmaceuticals Inc. (“CoNCERT”) entered into an exclusive option and license
agreement for the CTP-499 compound. However, under the terms of this agreement, if the Company fails to meet the conditions set
forth in the agreement, which include a requirement for us to have not less than $8 million in funding for the support of the
drug as defined within the agreement, or if the Company elects not to exercise the option, then the product reverts back to ownership
by CoNCERT. Since CPT-499 is currently our drug product lead candidate, should we lose our rights to CTP-499, our planned growth
and business plan would be materially and adversely affected. On March 19, 2018, we modified the Option and License Agreement
with CoNCERT effective January 2018 (see Notes 10 and 14), which enabled us to exercise our option to license the CoNCERT patent
rights and know-how to develop and commercialize compounds (CTP-499 and each metabolite thereof) and products, as defined in the
agreement.
Status
as an Emerging Growth Company
We
are an “emerging growth company” as that term is defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS
Act”). Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised
financial accounting standards until private companies (i.e., those that have not had a registration statement declared effective
under the Securities Act of 1933, as amended (the “Securities Act”), or do not have a class of securities registered
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are required to comply with such new or
revised financial accounting standards.
The
JOBS Act also provides that an emerging growth company can elect to opt out of the extended transition period provided by Section
102(b)(1) of the JOBS Act and comply with the requirements that apply to nonemerging growth companies, but any such election to
opt out is irrevocable. We may still take advantage of all of the other provisions of the JOBS Act, which include, but are not
limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, the
reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and the exemptions
from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute
payments not previously approved.
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation and Earnings per Share
The
accompanying consolidated financial statements have been prepared in accordance with United States generally accepted accounting
principles (“U.S. GAAP”), and reflect all of our activities, including those of our wholly-owned subsidiary. All material
intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. These adjustments consist of normal and recurring accruals, as well as non-recurring
charges.
The
acquisition of Promet by Heatwurx has been accounted for as a reverse acquisition in accordance with U.S. GAAP, Financial Accounting
Standards Board (“FASB”), Accounting Standards Codification (“ASC”) 805-40-45,
Business Combinations
- Reverse Acquisitions
. Under this method of accounting, Heatwurx, a nonoperating public shell corporation with nominal net
liabilities, acquired all the assets of Promet, a private operating entity, through issuance of 90 percent of the issued and outstanding
common stock of Heatwurx immediately after the asset acquisition. As a result of the change in control, Promet comprises the ongoing
operations and assets of the combined entity and Promet senior management comprises the senior management of the Company and Promet
is considered the accounting acquirer. Heatwurx has been treated as the “acquired” company for financial reporting
purposes. The transaction is considered to be a capital transaction in substance. Accordingly, for accounting purposes, it is
assumed that Promet issued shares to Heatwurx at fair value for Heatwurx’s net liabilities to be assumed by Promet at closing
of the reverse acquisition. The fair value of the net liabilities assumed from Heatwurx, net of the par value of the assumed shares
issued to Heatwurx is recognized as a reduction of additional paid-in capital.
As
a result of the above, the operations prior to the asset purchase transaction are those of Promet. The assets and liabilities
of Promet are recognized and measured at the historical carrying amounts. The accumulated deficit and other equity balances of
Promet have been carried forward and adjusted to reflect the legal shares and par value of Heatwurx with the difference allocated
to additional paid-in capital. Additional paid-in capital is also reduced by the fair value over the historical cost of the net
liabilities assumed from Heatwurx, since the transaction is accounted for as a capital transaction, not a business combination.
Earnings
per share (“EPS”) is calculated using the equity structure of Processa Pharmaceuticals, Inc., including the equity
interests issued to Promet in the asset acquisition transaction (see Note 3). Prior to the reverse acquisition, EPS is based on
Promet’s net income and weighted average common shares outstanding that were received in the asset purchase transaction.
Subsequent to the reverse acquisition, EPS is based on the actual number of common shares of Processa Pharmaceuticals, Inc. outstanding
during that period.
The
Company completed a reverse split or a one-for-seven exchange of its shares. As a result, the consolidated financial statements
have been retrospectively adjusted to reflect the one-for-seven reverse split.
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
Segments
The
Company operates in one segment. Management uses one measurement of profitability and does not segregate its business for internal
reporting. During 2017 and 2016 all of the Company’s long-lived assets were located within the United States.
Going
Concern and Management’s Plan
The
Company’s consolidated financial statements are prepared using U.S. GAAP and are based on the assumption that the Company
will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course
of business. The Company faces certain risks and uncertainties that are present in many emerging growth companies regarding product
development and commercialization, limited working capital, recurring losses and negative cash flow from operations, future profitability,
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,
dependence on third party manufacturing organizations, third party collaboration and licensing agreements, lack of sales and marketing
activities and 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.
The
Company has relied exclusively on private placements with a small group of accredited investors to finance its business and operations.
We do not have any prospective arrangements or credit facilities as a source of future funds. The Company has had no revenue since
inception on August 31, 2015. The Company does not currently have any revenue under contract nor does it have any immediate sales
prospects. As of December 31, 2017, the Company had an accumulated deficit of approximately $3.859 million incurred since inception.
For the year ended December 31, 2017, the Company incurred a net loss from continuing operations of approximately $1.856 million
and used approximately $1.655 million in net cash from operating activities from continuing operations. The Company had total
cash and cash equivalents of approximately $2.847 million as of December 31, 2017. We have raised proceeds of $2.58 million from
the Senior Convertible Notes issued through December 31, 2017.
No
additional Senior Convertible Notes have been issued through the date this report was issued. On March 19, 2018, we modified the
Option and License Agreement with CoNCERT Pharmaceuticals, Inc. effective January 2018 (see Notes 10 and 14), which enabled us
to exercise our option to license the CoNCERT patent rights and know-how to develop and commercialize compounds (CTP-499 and each
metabolite thereof) and products, as defined in the agreement. Although we have other drugs being positioned into our pipeline,
the loss of our rights to CTP-499 would have materially and adversely affected our planned growth and business plan. We expect
our operating costs to be substantial as we incur costs related to the clinical trials for our product candidates and that we
will operate at a loss for the foreseeable future.
We
are in the process of raising additional funds by potentially selling additional Senior Convertible Notes, convertible loans or
other securities. However, no assurance can be given that we will be successful in raising adequate funds needed. If we are unable
to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue
the development or commercialization of one or more of our product candidates, restrict our operations or obtain funds by entering
into agreements on unattractive terms, which would likely have a material adverse effect on our business, stock price and our
relationships with third parties with whom we have business relationships, at least until additional funding is obtained.
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
Uncertainty
concerning our ability to continue as a going concern may hinder our ability to obtain future financing, as well as adversely
affect our collaborative drug development relationships. Continued operations and our ability to continue as a going concern are
dependent on our ability to obtain additional funding in the near future and thereafter, and no assurances can be given that such
funding will be available at all or will be available in sufficient amounts 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
yielding funds, we will rapidly exhaust our resources and will 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 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 the Company’s ability to continue as a going concern within one year after the
date that these consolidated financial statements are available to be issued. The accompanying 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 the Company be unable to continue as a going concern
based on the outcome of these uncertainties described above.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions by management that
affect reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are
continuously evaluated and are based on management’s experience and knowledge of the relevant facts and circumstances. While
management believes the estimates to be reasonable, actual results could differ materially from those estimates and could impact
future results of operations and cash flows.
Cash
and Cash Equivalents
Cash
and cash equivalents includes cash on hand and money market funds. The Company considers all highly liquid investments with a
maturity at the date of purchase of three months or less to be cash equivalents. Money market funds were $1,300,815 and $0 at
December 31, 2017 and 2016, respectively.
Certificates
of Deposit
The
certificates of deposit were purchased through an investment company and were held at multiple banks. The maturities of the certificates
of deposit are typically six months or less.
Fair
Value Measurements and Disclosure
The
Company applies ASC 820, “Fair Value Measurements and Disclosures,” which expands disclosures for assets and liabilities
that are measured and reported at fair value on a recurring basis. Fair value is defined as an exit price, representing the amount
that would be received upon the sale of an asset or payment to transfer a liability in an orderly transaction between market participants.
Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing
an asset or liability. A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:
Level
1 – Quoted market prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has
the ability to access at the measurement date.
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
Level
2 – Quoted market prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets
or liabilities in markets that are not active, or other inputs that are observable, either directly or indirectly. Fair value
determined through the use of models or other valuation methodologies.
Level
3 – Significant unobservable inputs for assets or liabilities that cannot be corroborated by market data. Fair value is
determined by the reporting entity’s own assumptions utilizing the best information available, and includes situations where
there is little market activity for the asset or liability.
The
asset’s or liability’s fair value measurement within the fair value hierarchy is based upon the lowest level of any
input that is significant to the fair value measurement.
Fair
Value of Financial Instruments
The
carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and the senior convertible notes approximate
fair value because of the short-term maturity of these instruments, including the mandatory conversion of the senior convertible
notes into the common stock of the Company upon the earlier of (i) meeting certain funding levels on the next Private Investment
in Public Equity (“PIPE”) financing we undertake or (ii) the one-year anniversary of the issuance of the senior convertible
note.
Due
From/To Related Parties and Administrative Fees
Administrative
fees are collected from a related party, Corlyst, LLC (“Corlyst”), for shared costs related to payroll, health care
insurance and rent based on actual costs incurred and recognized as a reduction of the operating expense being reimbursed (see
Note 4). Corlyst pays certain operating expenses on behalf of the Company and the Company reimburses Corlyst based on actual costs
incurred and recognizes the appropriate expense. The amounts due from and due to Corlyst are billed monthly and are due on demand
at the beginning of each month.
Property
and Depreciation
Property
is stated at cost, less accumulated depreciation. Depreciation is computed under the straight-line method over the estimated useful
lives of the assets. Expenditures for maintenance and routine repairs are charged to expense as incurred; expenditures for improvements
and major repairs that materially extend the useful lives of assets are capitalized. Depreciation expense for the years ended
December 31, 2017 and 2016 was $1,865 and $1,381, respectively.
Following
are the estimated useful lives for the various classifications of assets:
Software
|
3
years
|
|
|
Equipment
|
5
years
|
Impairment
of Long-lived Assets
The
Company periodically reviews its long-lived assets to determine potential impairment by comparing the carrying value of the long-lived
assets with the estimated future net undiscounted cash flows expected to result from the use of the assets, including cash flows
from disposition, at least annually or more frequently if events or changes in circumstances indicate a potential impairment may
exist. Should the sum of the expected future net cash flows be less than the carrying value, the Company would recognize an impairment
loss at that date. An impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value
(estimated discounted future cash flows) of the long-lived assets. The Company performs its impairment analysis in October of
each year. Based on management’s evaluation, $15,330 of carrying costs related to the software was impaired and an impairment
loss recorded for the year ended December 31, 2017. No impairment of long-lived assets was recognized for the year ended December
31, 2016.
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
Debt
Issuance Costs
The
Company recognizes debt issuance costs incurred on the Senior Convertible Notes as a reduction of the carrying amount of the Senior
Convertible Notes on the face of the consolidated balance sheet. The debt issuance costs are amortized to interest expense using
the interest method over the term of the Senior Convertible Notes. The amortization of the debt issuance costs was $23,370 for
the year ended December 31, 2017 and zero for the year ended December 31, 2016.
Compensated
Absences
For
the years ended December 31, 2017 and 2016, the Company recorded a liability for paid time off earned by permanent employees but
not taken, in accordance with human resource policies.
Advertising
Costs
Advertising
costs are recognized as expense in the year incurred. Total advertising and marketing expense for the years ended December 31,
2017 and 2016 was $135 and $3,850, respectively.
Research
and development
Research
and development costs are expensed as incurred and consist of direct and overhead-related expenses. Research and development costs
totaled $926,117 and $1,536,996 for the years ended December 31, 2017 and 2016, respectively. Expenditures to acquire technologies,
including licenses, which are utilized in research and development and that have no alternative future use are expensed when incurred.
Technology the Company develops for use in its products is expensed as incurred until technological feasibility has been established
after which it is capitalized and depreciated. No costs have been capitalized during the years ended December 31, 2017 and 2016.
Stock-Based
Compensation
The
Company accounts for the cost of employee services received in exchange for the award of equity instruments based on the fair
value of the award, determined on the date of grant. Significant assumptions utilized in determining the fair value of our stock
options include the volatility rate, estimated term of the options, risk-free interest rate and forfeiture rate. The term of the
options will be based on the contractual term of the options as determined by the Board of Directors when the 2011 Equity Incentive
Plan is amended or terminated and approved by the stockholders to the extent required by applicable laws and regulations. The
expense is to be recognized over the period during which an employee is required to provide services in exchange for the award.
The Company estimates forfeitures at the time of grant and makes revisions, if necessary, at each reporting period if actual forfeitures
differ from those estimates. The Company has not estimated future unvested forfeitures since there were no option grants outstanding
at December 31, 2017. Upon the issuance of 90% of Heatwurx’s common stock to Promet on October 4, 2017, there was a Change
in Control event, as defined in the Amended and Restated Heatwurx, Inc. 2011 Equity Incentive Plan. As of September 30, 2017,
prior to the Change in Control event, all 269,500 unexercised options and all 40,000-unexercised performance options outstanding
at December 31, 2016 were cancelled.
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
Non-employee
share-based compensation charges generally are immediately vested and have no future performance requirements by the non-employee
and the total share-based compensation charge is recorded in the period of the measurement date.
Income
Taxes
As
a result of the asset purchase transaction (see Note 1 Company Overview above and Note 3), there was a change in control of the
Company. Prior to the closing of the asset purchase transaction, Promet was treated as a partnership for federal income tax purposes
and thus was not subject to income tax at the entity level. Therefore, no provision or liability for income taxes has been included
in these financial statements through the date of the asset purchase on October, 4, 2017. In addition, Promet determined that
it was not required to record a liability related to uncertain tax positions as a result of the requirements of ASC 740-10-25
Income Taxes.
The
net deferred tax assets of Heatwurx were principally federal and state net operating loss carry forwards. The Heatwurx net deferred
tax assets were fully reserved with a valuation allowance.
Subsequent
to the closing of the asset purchase, Processa Pharmaceuticals, Inc. will file a consolidated federal income tax return in the
United States, which includes eligible subsidiaries. In addition, we file income tax returns in state and local jurisdictions
as applicable. The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
The
provision for income taxes includes federal and state income taxes currently payable and deferred taxes resulting from temporary
differences between the financial statement and tax basis of assets and liabilities at the enacted tax rates. Changes in deferred
income tax assets and liabilities are included as a component of income tax expense. The effect on deferred income tax assets
and liabilities attributable to changes in enacted tax rates are charged or credited to income tax expense in the period of enactment.
Valuation allowances are recorded to reduce deferred tax assets when it is more-likely-than-not that a tax benefit will not be
realized. A full valuation allowance was recorded against the Company’s deferred tax assets at December 31, 2017. The Company
had no deferred tax assets and no valuation allowance at December 31, 2016.
With
respect to uncertain tax positions, the Company would recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not
that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position.
Estimated interest and penalties related to uncertain tax positions are included as a component of interest expense and general
and administrative expense, respectively. The Company had no unrecognized tax benefits or uncertain tax positions at December
31, 2017 or 2016.
Net
Income (Loss) per Share
The
Company computes basic and diluted earnings per share amounts pursuant to ASC 260-10-45. Basic earnings per share is computed
by dividing net income (loss) available to common shareholders, by the weighted average number of shares of common stock outstanding
during the period, as retrospectively restated for the one-for-seven reverse stock split, excluding the effects of any potentially
dilutive securities. Diluted earnings per share is computed by dividing net income (loss) available to common shareholders by
the diluted weighted average number of shares of common stock during the period. The diluted weighted average number of common
shares outstanding is the basic weighted number of shares adjusted for any potentially diluted debt or equity. The computation
does not assume conversion, exercise or contingent exercise of securities since that would have an anti-dilutive effect on earnings
(loss) during the years ended December 31, 2017 and 2016.
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
Equity
The
asset purchase of Promet by Heatwurx is accounted for as a reverse acquisition. As a result, these consolidated financial statements
represent Promet as the accounting acquirer (legal acquiree) and Heatwurx from October 4, 2017 forward as the accounting acquiree
(legal acquirer). However, the legal capital stock (number and type of equity interests issued) is that of Heatwurx, which subsequently
changed its name to Processa Pharmaceuticals, Inc., the legal parent, in accordance with guidance on reverse acquisitions accounted
for as a capital transaction (See Note 2 – Basis of Presentation and Earnings per Share and Note 3 – Reverse Acquisition).
The
accumulated deficit and other equity balances of Promet have been carried forward and adjusted to reflect the legal capital shares
and par value of Heatwurx, including the shares issued to Promet in the reverse acquisition transaction with the difference allocated
to additional paid-in capital. Additional paid-in capital is also reduced by the fair value/ historical cost of the net liabilities
assumed from Heatwurx since the transaction is accounted for as a capital transaction, not a business combination.
Subsequent
events
The
Company has evaluated subsequent events and transactions for potential recognition or disclosure through April 16, 2018, the date
the financial statements were issued, in accordance with ASC 855-10-50. Refer to Note 14 below for further information.
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”). The Company has implemented all new accounting pronouncements that are in effect and that may impact
its financial statements. It has evaluated recently issued accounting pronouncements and determined that there was no material
impact on its financial position or results of operations.
From
May 2014 through December 2017, the FASB issued several ASUs related to ASU 2014-09, “Revenue from Contracts with Customers
(Topic 606)”. These ASUs are intended to provide greater insight into both revenue that has been recognized and revenue
that is expected to be recognized in the future from existing contracts. The new guidance is effective for interim and annual
periods beginning after December 15, 2017, although entities may adopt one year earlier if they choose. The two permitted transition
methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting
period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified
retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial
application. The Company is currently in the pre-revenue stages of operations; therefore, we do not currently anticipate there
would be any change to timing or method of recognizing revenue. As such, we do not believe this new standard will have a material
impact on our results of operations, financial condition or cash flows.
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
In
February 2016 through December 2017, the FASB issued several ASUs related to ASU-2016-02, “Leases (Topic 842).” The
guidance requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease
liability) and a right of use asset representing its right to use the underlying asset for the lease term. For finance leases:
the right-of-use asset and a lease liability will be initially measured at the present value of the lease payments, in the statement
of financial position; interest on the lease liability will be recognized separately from amortization of the right-of-use asset
in the statement of comprehensive income; and repayments of the principal portion of the lease liability will be classified within
financing activities and payments of interest on the lease liability and variable lease payments within operating activities in
the statement of cash flows. For operating leases: the right-of-use asset and a lease liability will be initially measured at
the present value of the lease payments, in the statement of financial position; a single lease cost will be recognized, calculated
so that the cost of the lease is allocated over the lease term on a generally straight-line basis; and all cash payments will
be classified within operating activities in the statement of cash flows. Under Topic 842 the accounting applied by a lessor is
largely unchanged from that applied under previous GAAP. The amendments in Topic 842 are effective for the Company beginning January
1, 2019. Management is currently evaluating the impact of adopting the new guidance on the Company’s financial statements.
NOTE
3 – REVERSE ACQUISITION
On
October 4, 2017, Heatwurx acquired Promet’s net assets of $1,017,342 at historical cost in exchange for approximately 90
percent or 222,217,112 shares of common stock issued by the Company (or 31,745,242 shares post reverse split). Immediately following
the transaction, total shares issued and outstanding were 246,907,902 (or 35,272,626 shares post reverse split), representing
the total legal capital of the Company. The transaction has been accounted for as a reverse acquisition in accordance with ASC
805-40-45,
Business Combinations - Reverse Acquisitions
. As a result, Heatwurx is considered the acquired company. The
consolidated financial statements are under the name of Processa Pharmaceuticals, Inc., the legal parent (accounting acquiree)
but represent Promet, the legal subsidiary (accounting acquirer) with an adjustment, to retrospectively adjust Promet’s
legal capital to reflect the legal capital (number and type of shares) of Processa Pharmaceuticals, Inc. and Heatwurx from October
4, 2017 forward as the accounting acquiree (legal acquirer).
Promet’s
assets and liabilities are recognized and measured at their precombination carrying amounts. Heatwurx, which subsequently changed
its name to Processa Pharmaceuticals, Inc., recognized and measured its assets and liabilities at October 4, 2017 in accordance
with guidance applicable to business combinations. The net liabilities were all short term in nature and were recognized at their
precombination carrying amounts. The accumulated deficit reflects Promet balances before the reverse acquisition. See Note 2 –
Basis of Presentation and Earnings per Share and Note 2 – Equity for the recognition and measurement of common stock and
additional paid-in capital.
Promet
incurred acquisition-related transaction costs of $58,763, which are included in general and administrative expense, a component
of operating expenses in the consolidated statements of operations. The operating results for Heatwurx are included in the accompanying
consolidated financial statements from October 4, 2017 forward.
Heatwurx’s
assets acquired and liabilities assumed (see below) and the par value of the common stock allocated to Heatwurx stockholders is
recognized as a reduction of additional paid-in capital at the acquisition date.
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
Net recognized values of
Heatwurx identifiable
assets and liabilities
|
|
|
|
|
|
|
|
|
Cash
|
|
|
6,280
|
|
|
|
|
|
Accounts payable
|
|
|
(26,098
|
)
|
|
|
|
|
Accrued
expenses
|
|
|
(17,932
|
)
|
|
|
|
|
Net
liabilities assumed
|
|
|
|
|
|
$
|
(37,750
|
)
|
NOTE
4 – RELATED PARTY TRANSACTIONS
A
shareholder, Corlyst, LLC, pays the Company for administrative services performed by the Company. These administrative fees are
included as a reduction of the related general and administrative expenses in the Company’s statement of operations. These
fees were charged beginning in October 2016 and totaled $111,799 and $32,327 for the years ended December 31, 2017 and 2016, respectively.
The receivable balances due from Corlyst at December 31, 2017 and 2016 were $62,709 and $0, respectively.
During
2016 and 2017, Corlyst paid certain operating expenses on behalf of the Company and the Company reimbursed Corlyst based on actual
costs incurred at later dates. The accounts payable amounts due to Corlyst at December 31, 2017 and 2016 were $336 and $95, respectively.
In addition, there was $100 due to an officer included in due to related parties as of December 31, 2017.
A
director of the Company is the manager of the JMW Fund, LLC, the San Gabriel Fund, LLC, and the Richland Fund, LLC, collectively
known as the “Funds”. These Funds own 14,180,543 shares of common stock in the aggregate at December 31, 2017 or 2,025,792
shares of common stock restated for the reverse stock split. In addition, the Funds own $1 million in Senior Convertible Notes
at December 31, 2017.
Entities
affiliated with the Chairman of the Board of Directors, Chief Executive Officer and Interim Chief Financial Officer of the Company
own $250,000 in Senior Convertible Notes at December 31, 2017.
Heatwurx
had secured notes payable with the Funds in the aggregate amount of $1,289,361; on September 29, 2017, prior to the asset purchase
closing, Heatwurx converted the principal and accrued interest of $412,716 into 8,510,386 shares of common stock or 1,215,813
shares of common stock restated for the reverse stock split. The Funds also had an aggregate principal balance of $138,000 and
accrued interest of $50,887 on the Heatwurx revolving line of credit converted into 944,436 shares of common stock on September
29, 2017 or 134,924 shares of common stock restated for the reverse stock split.
NOTE
5– NOTES PAYABLE
On
September 29, 2017, prior to the Asset Purchase closing, principal of all existing Heatwurx notes payable in the amount of $1,939,341
and related accrued interest in the amount of $613,114 were converted to 12,953,902 shares of common stock or 1,850,625 shares
of common stock restated for the reverse stock split. As of December 31, 2017, there were no Heatwurx notes payable outstanding.
NOTE
6 – SENIOR CONVERTIBLE NOTES
As
of October 4, 2017, certain entities affiliated with current shareholders (see Note 4) had purchased $1.25 million of our senior
secured convertible notes (“Senior Notes”) in a bridge financing undertaken by us to support the Processa operations.
On November 21, 2017, additional third party accredited investors contributed $1.33 million in financing proceeds. As of December
31, 2017, $2.58 million of Senior Notes were issued and outstanding.
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
Principal
and interest under each Senior Note is due on the earlier of (i) the mandatory and automatic conversion of the Senior Note into
the next Private Investment in Public Equity (“PIPE”) financing we undertake, provided the PIPE financing yields gross
proceeds of at least $4 million at a conversion price per share equal to the lower of (a) $72 million pre-money valuation or (b)
a 10% discount to the pre-money valuation (Qualified Financing) or (ii) the one-year anniversary of that Senior Note (Maturity
Date). The Senior Notes bear interest at 8% per year, and are payable in kind (in common stock). At the Maturity Date, the outstanding
principal and accrued interest on the Senior Note will be automatically converted into shares of common stock of the Company equal
to the lesser of (i) $72 million pre-money valuation or (ii) any adjusted price resulting from the application of down round pricing
during the anti-dilution period through December 31, 2018. In such event, the anti-dilution period, as defined, will be extended
for a further 12 months. There can be no assurance that we will be successful in achieving the financing levels targeted under
the Senior Convertible Notes or the PIPE financing.
Holders
of Senior Notes (a) may elect to receive 110% of principal plus accrued interest in the event there is a change of control prior
to conversion of the Senior Notes, (b) are entitled to full ratchet 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, (c) are entitled to
certain registration rights for the securities underlying the Senior Notes and (d) have been granted certain preemptive rights
pro rata to their respective interests through December 31, 2018. The Senior Notes can be prepaid by the Company at any time following
the date of issuance with seven days prior written notice to the note holder.
The
Senior Notes are secured by a security interest in the assets of the Company and contain negative covenants that do not permit
the Company to incur additional indebtedness or liens on property or assets owned, repurchase common stock, pay dividends, or
enter into any transaction with affiliates of the Company 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.
The
Company retained Boustead Securities Ltd. (“Boustead”), a registered broker-dealer, as its exclusive financial adviser
and has agreed to pay Boustead (i) six percent (6%) of gross proceeds received by the Company and (ii) warrants to purchase securities
in the amount of three percent (3%) of the equity issued or issuable in connection with the Senior Notes bridge financing. These
warrants will be issued upon achieving certain financing levels under the next PIPE financing we undertake. No warrants are issuable,
and none have been issued as of December 31, 2017. To the extent that the Company raises more than $8 million (the “Excess
Investment”) then as to that portion of the Excess Investment that is attributable to funds provided by existing holders
of Company equity or by shareholders of the Company, including their respective affiliated holders (the “Affiliated Excess
Investment”), the Company shall pay Boustead a cash fee equal to two percent (2%) of the Excess Investment and six percent
(6%) of the balance of the Excess Investment, if any. Boustead may allow a portion of its fees payable hereunder to be shared
with another registered broker-dealer assisting in the private capital raise.
Senior
Notes and the underlying common stock that the Senior Notes will convert into have not been registered under the United States
Securities Act of 1933, as amended (the “Act”). The Senior Notes and the underlying common stock that the Senior Notes
will convert into shall be issued solely to investors who are “accredited investors” within the meaning of Rule 501(a)
of Regulation D promulgated under the Act. There is no public market for the Senior Notes and there is no public market for the
securities of the Company (or shares of common stock of the Company issued to Promet at the closing of the Asset Purchase Agreement
discussed in Note 1) upon conversion of the Senior Notes.
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
Debt
and accrued interest at December 31, 2017 and interest expense for the year ended December 31, 2017 are as follows:
|
|
Debt
Balance
|
|
|
Accrued
Interest
|
|
|
Interest
Expense
|
|
Senior Convertible Notes
|
|
$
|
2,580,000
|
|
|
$
|
35,693
|
|
|
$
|
35,693
|
|
Unamortized Debt
Issuance Cost
|
|
|
(131,430
|
)
|
|
|
-
|
|
|
|
23,370
|
|
Balance, December 31, 2017
|
|
$
|
2,448,570
|
|
|
$
|
35,693
|
|
|
$
|
59,063
|
|
The
Company incurred $154,800 in debt issuance costs on the Senior Notes with Boustead, which were offset against the debt balance.
All debt issuance costs are being amortized over the term of the Senior Notes using the effective interest method. The face interest
rate of the Senior Notes is 8 percent. The effective interest rate on the Senior Notes was 7.72 percent before debt issuance costs
since no payments of interest are due until maturity and 13.96 percent including the debt issuance costs based on the repayment
terms of the Senior Notes.
Future
maturities of debt and accrued interest, contractual interest expense to be incurred and amortization of debt issuance costs as
of December 31, 2017 are $2,580,000, $206,400, $170,707 and $131,430, respectively, for the year ended December 31, 2018.
NOTE
7 – INCOME TAXES
The
Company files income tax returns in the U.S. federal jurisdiction and in the state of Maryland. There are currently no income
tax examinations underway for these jurisdictions.
The
Company provides deferred income taxes for differences between the tax reporting bases and the financial reporting bases of assets
and liabilities at the enacted tax rates. The Company determined that it was not required to record a liability related to uncertain
tax positions as a result of implementing the requirements of ASC 740-10-25 Income Taxes. Should the Company incur interest and
penalties relating to tax uncertainties, such amounts would be classified as a component of interest expense and general and administrative
expense, respectively. The liability related to uncertain tax positions is not expected to increase or decrease within the next
twelve months.
As
of December 31, 2017, the Company’s tax year for 2016, 2015 and 2014 are subject to examination by the Internal Revenue
Service and the state taxing authorities of Maryland, Colorado, Utah, North Dakota and California.
As
discussed in Note 2 – Income Taxes, the historical information presented in the financial statements is that of Promet.
Prior to the closing of the asset purchase transaction on October 4, 2017, Promet was treated as a partnership for federal income
tax purposes and thus the partners were taxed separately on their proportionate share of Promet’s income, deductions, losses
and credits. Therefore, no provision or liability for income taxes has been included in these financial statements through the
date of the asset purchase on October 4, 2017.
In
addition, as a result of the asset purchase transaction, Promet was issued 90 percent of the total issued and outstanding common
stock of Heatwurx, including the shares issued to Promet. The transaction resulted in an ownership change as defined by Internal
Revenue Code Section 382. The net deferred tax assets of Heatwurx, prior to the asset purchase transaction, were principally federal
and state net operating loss carry forwards.
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
The
Company has no current federal or state tax provision recognized in the consolidated financial statements. Since the asset purchase
transaction, the Company has incurred operating losses of approximately $606,400. The total deferred tax asset as of December
31, 2017 includes approximately $347,500 ($95,632 net of tax) of general and administrative expenses treated as deferred start-up
expenditures for tax purposes and approximately $258,600 ($71,155 net of tax) of tax losses resulting in tax loss carryforwards.
The Company has had no revenues and recognized cumulative loses since inception. Due to the uncertainty regarding future profitability
and recognition of taxable income to utilize the amortization of deferred start-up expenditures and the tax loss carryforwards,
a full valuation allowance against any potential deferred tax assets has been recognized for the year ended December 31, 2017
as discussed below.
As
of December 31, 2017, the Company is evaluating its qualified research expenditures for application to federal and state research
and development tax credits to offset potential future tax liabilities. The federal research and development tax credits have
a 20-year carryforward period. The Maryland research and development tax credits have a 7-year carryforward period. There is no
recognition of a deferred tax asset for research and development tax credits as of December 31, 2017.
The
Company is subject to U.S. Federal and state income taxes. The provision (benefit) for income taxes for the tax years ended December
31, 2017 and 2016 are as follows:
|
|
Years
Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Total current
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(116,783
|
)
|
|
|
-
|
|
State
|
|
|
(50,004
|
)
|
|
|
-
|
|
Total deferred tax benefit
|
|
|
(166,787
|
)
|
|
|
-
|
|
Valuation allowance
|
|
|
166,787
|
|
|
|
-
|
|
Net deferred
tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total tax provision
(benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
On
December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“TCJA”) was signed into law. Among its provisions, the TCJA
reduces the statutory U.S. Corporate income tax rate from 34% to 21% effective January 1, 2018. The TCJA includes provisions that,
in certain instances, impose U.S. income tax liabilities on future earnings of foreign subsidiaries and limit the deductibility
of future interest expenses. The TCJA also provides for accelerated deductions of certain capital expenditures made after September
27, 2017 through bonus depreciation and an indefinite tax loss carryforward period for losses incurred after December 31, 2017.
However, these tax loss carry forwards can only offset 80 percent of future taxable income. Losses incurred prior to January 1,
2018 continue to carry forward for twenty years. The application of the TCJA may change due to regulations subsequently issued
by the U.S. Treasury Department.
Upon
the enactment of the TCJA, we recorded a reduction in our deferred income tax assets of approximately $72,300 for the effect of
the aforementioned change in the U.S. statutory income tax rate with an offsetting decrease in the valuation allowance established
against the deferred tax assets. As a result, there was no change or recognition of an income tax provision or benefit in the
consolidated statement of operations for the year ended December 31, 2017.
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
In
December 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin 118 (“SAB 118”) to provide
clarification in implementing the TCJA when registrants do not have the necessary information available to complete the accounting
for an element of the TCJA in the period of its enactment. SAB 118 provides for tax amounts to be classified as provisional and
subject to remeasurement for up to one year from the enactment date for such elements when the accounting effect is not complete,
but can be reasonably estimated. We consider our estimates of the tax effects of the TCJA on the components of our tax provision
to be reasonable and no provisional estimates subject to remeasurement will be necessary to complete the accounting.
Deferred
Income Taxes
- The Company does not recognize the deferred income tax asset at this time because the realization of the
asset is not more-likely-than-not. As of December 31, 2017, the Company had deferred start-up expenditures and net operating losses
for both federal and state income tax purposes of approximately $166,787 as described above. As of December 31, 2016 and through
October 4, 2017, the Company had no net operating losses for federal and state income tax purposes since Promet’s partners
were taxed separately on their proportionate share of Promet’s income, deductions, losses and credits.
The
net operating losses are available for application against future taxable income for 20 years, expiring in 2037. The benefit associated
with the amortization of the deferred start-up expenditures and the net operating loss carry forward will more-likely-than-not
go unrealized unless future operations are successful. Since the success of future operations is indeterminable, the potential
benefits resulting from these deferred tax assets have not been recorded in the financial statements.
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Non-current
|
|
|
|
|
|
|
|
|
Net
operating loss carry forward - Federal
|
|
$
|
49,822
|
|
|
$
|
-
|
|
Net operating loss
carry forward - State
|
|
|
21,333
|
|
|
|
-
|
|
Start-up
expenditures and amortization
|
|
|
95,632
|
|
|
|
-
|
|
Total non-current deferred tax assets
|
|
|
166,787
|
|
|
|
-
|
|
Valuation allowance
for deferred tax assets
|
|
|
(166,787
|
)
|
|
|
-
|
|
Total deferred
tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which
those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, the projected
future taxable income and tax planning strategies in making this assessment. Based on management’s analysis, a full reserve
has been established against this asset. The change in the valuation allowance in 2017 and 2016 was $166,787 and $0, respectively.
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
A
reconciliation of the Company’s effective income tax rate and statutory income tax rate at December 31, 2017 and 2016 is
as follows:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
Federal statutory income
tax rate
|
|
|
34.00
|
%
|
|
|
0.00
|
%
|
State tax rate, net
|
|
|
5.45
|
%
|
|
|
0.00
|
%
|
Permanent differences
|
|
|
-0.02
|
%
|
|
|
0.00
|
%
|
Impact of change in federal income tax
rates
|
|
|
-11.92
|
%
|
|
|
0.00
|
%
|
Deferred tax
asset valuation allowance
|
|
|
-27.51
|
%
|
|
|
0.00
|
%
|
Effective income
tax rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
NOTE
8 –STOCKHOLDERS’ EQUITY
On
December 8, 2017, we completed a one-for-seven reverse split in trading markets. As a result, the consolidated financial statements
have been retrospectively adjusted to reflect shares outstanding after the one-for-seven reverse split.
Common
Stock
– As of December 31, 2017 and 2016, the Company had authorized 350,000,000 and 43,261,049
shares of common stock with a $0.0001 par value. At December 31, 2017 and 2016 there were 35,272,626 and 31,745,242 common shares
issued and outstanding, respectively. Common shares attributable to Promet’s controlling interest were 31,745,242 at December
31, 2017 and 2016. Common shares attributable to the minority shareholders’ interest were 3,527,384 and zero at December
31, 2017 and 2016, respectively.
Preferred
Stock
- As of December 31, 2017, the Company has authorized 10,000,000 shares of Preferred Stock with a $0.0001 par value.
No shares were issued and outstanding.
On
September 29, 2017, prior to the asset purchase closing, Heatwurx converted 178,924 shares of Series D Preferred Stock and all
accrued dividends in the amount of $118,658 into 719,500 shares of common stock or 102,789 shares of common stock restated for
the reverse stock split.
Stock
and Performance Options
- The Amended and Restated Heatwurx, Inc. 2011 Equity Incentive Plan (the “Plan”)
approved by the Heatwurx Board of Directors and stockholders in October 2012 has 1,800,000 shares of common stock or 257,143 shares
of common stock after the reverse-split reserved for issuance under the Plan. The Plan is being reviewed by the new Promet appointed
Board of Directors and may be amended or terminated. Amendments are subject to stockholder approval to the extent required by
applicable laws and regulations. Unless terminated sooner, the Plan will automatically terminate on April 15, 2021. There are
currently no outstanding option grants to officers, directors, employees and consultants under the Plan. If unexercised options
expire or are terminated, the underlying shares will again become available for grants under the Plan.
During
the year ended December 31, 2016, there were no options or performance options granted or exercised and 321,667 unexercised options
with a weighted average exercise price of $1.69 were cancelled. At December 31, 2016, there were 269,500 unexercised options with
a weighted average exercise price of $1.88 and a weighted average remaining life of 2.04 years and 40,000 unexercised performance
options with a weighted average exercise price of $2.00. Upon the issuance of 90% of Heatwurx’s common stock to Promet on
October 4, 2017, there was a Change in Control event, as defined in the Plan. As of September 30, 2017, prior to the Change in
Control event, all 269,500 unexercised options and all 40,000-unexercised performance options outstanding at December 31, 2016
were cancelled. No stock-based compensation expense was recognized for the years ended December 31, 2017 and 2016.
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
Warrants
- During the year ended December 31, 2016, there were no warrants granted, exercised or cancelled. At December 31, 2016,
there were 2,000,304 warrants outstanding with a weighted average exercise price of $2.36 and a weighted average remaining life
of 0.63 years. During the nine months ended September 30, 2017, 723,181 warrants with a weighted average exercise price of $2.99
were cancelled a result of non-exercise prior to their exercise date. At September 30, 2017, there were 1,277,123 warrants with
a weighted average exercise price of $2.00 and a weighted average remaining life of 0.08 years that were cancelled in October
2017 as a result of non-exercise prior to their exercise date. As a result, there were no warrants issued, issuable or outstanding
at December 31, 2017. See Note 6 for discussion of warrants.
NOTE
9 – NET LOSS PER COMMON SHARE
The
Company computes loss per share of common stock using the two-class method required for participating securities. The Company’s
participating securities include all series of its convertible preferred stock. Undistributed earnings allocated to these participating
securities are added to net loss in determining net loss applicable to common stockholders. The Company has preferred stock authorized
but no preferred stock issued and outstanding at December 31, 2017 and 2016.
The
dilutive effect of convertible securities, including the preferred stock, if issued, and the Senior Convertible Notes, are reflected
in diluted earnings per share using the if-converted method. As a result, (i) the preferred dividends applicable to the convertible
preferred stock are deducted from income from continuing operations and net income in computing income available to common stockholders
and, (ii) the interest expense and nondiscretionary adjustments on income that would have been calculated differently had the
interest on the Senior Convertible Notes never been recognized, both net of income tax, are added back to the numerator. The convertible
preferred stock and the Senior Convertible Notes assume the conversion to common stock at the beginning of the period or the date
of issuance, if later, resulting in common shares being included in the denominator.
Other
convertible securities that may be dilutive on their own but antidilutive when included with other potential common shares in
computing diluted earnings per share include options and warrants since the treasury stock method applied to options and warrants
has no effect on the numerator in the calculation. However, including potential common shares in the denominator (including convertible
preferred stock and Senior Convertible Notes) of a diluted per share computation for continuing operations will always result
in an antidilutive per share amount when the Company reports a loss from continuing operations or a loss from continuing operations
available to common stockholders (after any preferred dividend deductions).
No
potential common shares shall be included in the computation of any diluted per share amount when a loss from continuing operations
or a loss from continuing operations available to common stockholders (after preferred dividend deduction) exists, even if the
entity reports net income (as a result of discontinued operations) since it would be antidilutive. As a result, if there is a
loss from continuing operations or a loss from continuing operations available to common stockholders, diluted earnings per share
would be computed in the same manner as basic loss per share.
There
were no outstanding options or warrants issued for the period from August 31, 2015 (inception) through December 31, 2017. See
Notes 6 and 8 for further discussion of warrants related to the Senior Convertible Notes and the PIPE financing.
The
Company has reported a loss from continuing operations and a loss from continuing operations available to common stockholders
for all periods presented. As a result, there is no assumed conversion, exercise or contingent exercise of potential common shares
included in the computation of the diluted per share amounts since it would have an antidilutive effect, therefore, basic and
diluted loss per share are computed by dividing net loss applicable to common stockholders by the weighted-average number of shares
of common stock outstanding.
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
The
calculation of the numerator and denominator for basic and diluted net loss per common share is shown in the table below. The
weighted-average shares of common stock used in calculating basic earnings per share for the 2017 calculation uses the number
of shares issued to Promet in the asset purchase transaction from January 1, 2017 through the acquisition date of October 4, 2017
plus all the legal capital issued and outstanding of Heatwurx, including Promet’s shares, from the closing date through
December 31, 2017. All shares were restated for the one-for-seven reverse split.
The
2016 calculation uses the common shares issued to Promet in the asset purchase transaction, restated for the one-for-seven reverse
split and weighted for the issuance dates of Promet’s member interests.
|
|
For
the year ended
|
|
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
Net loss from continuing
operations
|
|
$
|
(1,856,315
|
)
|
|
$
|
(1,917,066
|
)
|
Less: Preferred
stock dividends
|
|
|
-
|
|
|
|
-
|
|
Net loss from continuing operations
applicable to common stockholders - basic
|
|
|
(1,856,315
|
)
|
|
|
(1,917,066
|
)
|
|
|
|
|
|
|
|
|
|
Dilution adjustments (not computed since
they are antidilutive):
|
|
|
|
|
|
|
|
|
Preferred stock dividend
|
|
|
-
|
|
|
|
-
|
|
Interest on senior
convertible notes, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net loss from
continuing operations applicable to common stockholders - diluted
|
|
$
|
(1,856,315
|
)
|
|
$
|
(1,917,066
|
)
|
|
|
|
|
|
|
|
|
|
Promet common shares issued and outstanding
|
|
|
31,745,242
|
|
|
|
31,745,242
|
|
Heatwurx common
shares issued and outstanding
|
|
|
3,527,384
|
|
|
|
-
|
|
Total common shares issued and outstanding
- basic
|
|
|
35,272,626
|
|
|
|
31,745,242
|
|
|
|
|
|
|
|
|
|
|
Potential common shares (not computed
since they are antidilutive):
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
-
|
|
|
|
-
|
|
Conversion of preferred stock to common shares
|
|
|
-
|
|
|
|
-
|
|
Conversion of senior convertible
notes to common shares
|
|
|
-
|
|
|
|
-
|
|
Total common
shares issued and outstanding - diluted
|
|
|
35,272,626
|
|
|
|
31,745,242
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares outstanding used in calculating net loss per common share - basic
|
|
|
32,595,680
|
|
|
|
29,321,049
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares outstanding used in calculating net loss per common share - diluted
|
|
|
32,595,680
|
|
|
|
29,321,049
|
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic
|
|
$
|
(0.06
|
)
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share - diluted
|
|
$
|
(0.06
|
)
|
|
$
|
(0.07
|
)
|
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
NOTE
10 – COMMITMENTS AND CONTINGENCIES
Operating
Lease Obligations
The
Promet leases office space and equipment from third parties under non-cancelable operating leases. The office lease commenced
on October 1, 2016 and expires September 30, 2019 with monthly rent at inception of $5,535 that escalates $1,107 annually on each
October. Rent expense under the current office lease for the years ended December 31, 2017 and 2016 was $105,954 and $50,997,
respectively. Rent expense for the year ended December 31, 2017 includes straight-line rent expense of $13,284 and $22,929 of
common area maintenance and real estate tax reimbursements. At December 31, 2017, the accrued rent liability was $13,284, of which
$3,321 was a current liability and $9,963 was a non-current liability.
The
equipment lease commenced in June 2017 and expires in August 2020. Monthly rent of $586 over the 39-month lease term includes
a monthly operating usage cost allowance of $125. Additional charges for excess usage, as defined in the agreement, are charged
quarterly. The lessor charges monthly sales tax of 6 percent. Rent expense under the equipment lease for the years ended December
31, 2017 and 2016 was $6,626 and $5,362, respectively.
Future
minimum rental payments under the leases as of December 31, 2017, are as follows:
|
|
Office
|
|
|
Equipment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
$
|
83,025
|
|
|
$
|
7,036
|
|
|
$
|
90,061
|
|
2019
|
|
|
69,741
|
|
|
|
7,036
|
|
|
|
76,777
|
|
2020
|
|
|
-
|
|
|
|
4,691
|
|
|
|
4,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total future
minimum lease payments
|
|
$
|
152,766
|
|
|
$
|
18,762
|
|
|
$
|
171,528
|
|
Option
and License Agreement with CoNCERT Pharmaceuticals
On
October 4, 2017, Promet entered into an option and license agreement with CoNCERT Pharmaceuticals, Inc. (“CoNCERT”).
The agreement provides the Company with an option to license the CoNCERT patent rights and know-how to develop and commercialize
compounds (CTP-499 and each metabolite thereof) and products, as defined in the agreement. The option period ends, and the agreement
terminates nine months from the date of the agreement if not exercised. Promet has the right to exercise the option during the
option period; provided Promet (i) has raised gross proceeds of at least $8 million in one or more equity or other financings
after the date of the agreement, and (ii) has a post-money valuation, following its then most recent equity financing, of at least
$40.5 million.
Upon
exercise of the option, Promet will have an exclusive, royalty-bearing right and license, including a right to sublicense, under
CoNCERT intellectual property and joint intellectual property, to develop, manufacture, use and commercialize, including filing
for, obtaining and maintaining regulatory approval for, products in all medical fields on a global basis. Promet shall control
and be solely responsible for the commercialization of products in all medical fields on a global basis, including all costs and
expenses. On March 19, 2018, we modified the Option and License Agreement with CoNCERT effective March 2018 (see Note 14), which
enabled us to exercise our option to license the CoNCERT patent rights and know-how to develop and commercialize compounds (CTP-499
and each metabolite thereof) and products, as defined in the agreement.
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
In
addition, Promet will have the right and license, including a right to sublicense, under CoNCERT intellectual property and joint
intellectual property, to develop compounds and products in all medical fields on a global basis. Promet shall control and be
solely responsible for the development of and regulatory activities with respect to compounds and products in all medical fields
on a global basis, including all costs and expenses.
Promet
shall use commercially reasonable efforts to develop and obtain regulatory approval for one product in the U.S. and at least one
other major market and subject to obtaining regulatory approval in the applicable major market, commercialize one product in the
U.S. and at least one other major market. Failure to comply with the diligence obligation under the license agreement may result
in the termination of the license agreement by CoNCERT in accordance with the relevant terms of the agreement.
In
partial consideration for the rights granted to Promet , if the option is exercised, pursuant to the terms of a customary stock
purchase agreement on mutually acceptable terms based on shares issued that enabled Promet to exercise the option under the license
agreement discussed above, Promet shall issue to CoNCERT, for no additional consideration, shares representing the lesser of (a)
the number of shares determined by dividing $8 million by the price per share paid by other investors in the financing round that
enabled Promet to exercise the option under the license agreement discussed above or (b) the number of shares rounded down to
the nearest whole share equal to 19.9 percent of the issued and outstanding shares of Promet immediately following the issuance
of shares to CoNCERT. Following the execution of the stock purchase agreement, CoNCERT shall also be entitled to the same right
to participate in future financing rounds of Promet (and subject to the same exceptions) as applicable to any investor in the
financing round that enabled Promet to exercise the option under the license agreement.
Promet
will incur royalty obligations to CoNCERT on a country-by-country and product-by-product basis that commence on the date of this
agreement and expire on a country-by-country and product-by-product basis on the later of (i) expiration or invalidation of the
last valid claim covering such product in such country or (ii) the tenth anniversary of the date of the first commercial sale
to a non-sublicensee third party of such product in such country. Promet shall pay to CoNCERT royalties, on a product-by-product
basis, on worldwide net sales of products during each year as follows: (a) four percent (4%) of sales less than or equal to $100
million; (b) five percent (5%) of sales greater than $100 million and less than or equal to $500 million; (c) six percent (6%)
of sales greater than $500 million and less than or equal to $1 billion; and, (d) for that portion greater than $1 billion, (i)
with respect to net sales made by Promet or any of its affiliates, ten percent (10%) of net sales, and (ii) with respect to net
sales made by any sub-licensee, the greater of (1) 6% of such net sales or (2) 50% of all payments received by Promet or any of
its affiliates with respect to such net sales. Royalties are subject to adjustment as provided in the terms of the agreement.
CoNCERT
shall have one Board observer to attend all Board meetings of the Company in a nonvoting observer capacity subject to the Company’s
right to exclude the CoNCERT observer for confidentiality and other reasons as defined in the agreement. CoNCERT’s Board
Observer right will expire when CoNCERT’s ownership interest in Promet decreases below ten percent of the outstanding voting
stock of Promet.
The
term of the agreement commences on the date of the agreement and shall continue in full force and effect until the expiration
of the last royalty term. On a country-by-country and product-by-product basis, upon the expiration of the royalty term in such
country with respect to such product, Promet shall have a fully paid-up, perpetual, irrevocable license under the CoNCERT intellectual
property and CoNCERT’s interest in the joint intellectual property with respect to such product in such country.
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
Purchase
Obligations
The
Company enters into contracts in the normal course of business with contract research organizations and subcontractors to further
develop its products. The contracts are cancellable, with varying provisions regarding termination. If a contract with a specific
vendor were to be terminated, the Company would only be obligated for products or services that it received as of the effective
date of the termination and any applicable cancellation fees. The Company had purchase obligations of $895,740 and $0 at December
31, 2017 and 2016, respectively.
NOTE
11 – CONCENTRATION OF CREDIT RISK
The
Company maintains its operating cash in two commercial banks. Balances on deposit are insured by the Federal Deposit Insurance
Corporation (FDIC) up to specified limits. Total cash held by one bank was $2,900,393 and the second bank held a cash balance
of $2,184 at December 31, 2017.
NOTE
12 – SUPPLEMENTAL CASH FLOW INFORMATION
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
-
|
|
|
$
|
-
|
|
Cash paid for income
taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Noncash
financing and investing activities
|
|
|
|
|
|
|
|
|
Assumption of liabilities
related to reverse acquisition
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
26,098
|
|
|
$
|
-
|
|
Accrued expenses
|
|
|
17,932
|
|
|
|
-
|
|
Issuance of common
stock related to reverse acquisition recognized in:
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
352
|
|
|
|
-
|
|
Additional
paid-in capital
|
|
|
(38,102
|
)
|
|
|
-
|
|
Total
|
|
|
(37,750
|
)
|
|
|
-
|
|
Cash
received related to net liabilities assumed in a reverse acquisition transaction
|
|
$
|
6,280
|
|
|
$
|
-
|
|
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
NOTE
13 – QUARTERLY DATA
A
summary of revenues, operating expenses, other income and net loss attributable to common stockholders for each of the last two
years follows (this information is unaudited):
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
|
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Annual
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Operating expenses
|
|
|
(233,940
|
)
|
|
|
(280,335
|
)
|
|
|
(712,852
|
)
|
|
|
(575,306
|
)
|
|
|
(1,802,433
|
)
|
Interest expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(59,063
|
)
|
|
|
(59,063
|
)
|
Other income
|
|
|
1,498
|
|
|
|
1,889
|
|
|
|
1,285
|
|
|
|
509
|
|
|
|
5,181
|
|
Net loss attributable
to common stockholders
|
|
$
|
(232,442
|
)
|
|
$
|
(278,446
|
)
|
|
$
|
(711,567
|
)
|
|
$
|
(633,860
|
)
|
|
$
|
(1,856,315
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares - basic
and diluted
|
|
|
31,745,242
|
|
|
|
31,745,242
|
|
|
|
31,745,242
|
|
|
|
35,119,261
|
|
|
|
32,595,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per
common share - basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Operating expenses
|
|
|
(280,956
|
)
|
|
|
(575,281
|
)
|
|
|
(829,064
|
)
|
|
|
(236,219
|
)
|
|
|
(1,921,520
|
)
|
Interest expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other income
|
|
|
7
|
|
|
|
869
|
|
|
|
1,698
|
|
|
|
1,880
|
|
|
|
4,454
|
|
Net loss attributable
to common stockholders
|
|
$
|
(280,949
|
)
|
|
$
|
(574,412
|
)
|
|
$
|
(827,366
|
)
|
|
$
|
(234,339
|
)
|
|
$
|
(1,917,066
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares - basic
and diluted
|
|
|
26,870,217
|
|
|
|
26,870,217
|
|
|
|
31,745,242
|
|
|
|
31,745,242
|
|
|
|
29,321,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per
common share - basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.07
|
)
|
NOTE
14 – SUBSEQUENT EVENTS
Amendment
of Option and License Agreement between Promet Therapeutics, LLC and CoNCERT Pharmaceuticals, Inc.
Promet
Therapeutics, LLC (“Promet”) and CoNCERT Pharmaceuticals Inc. (“CoNCERT”) entered into an exclusive option
and license agreement for the CTP-499 compound (the “Agreement”) in October 2017 (see Note 10). On March 19, 2018,
Promet and CoNCERT amended the Agreement and Promet exercised the exclusive option for the CTP-499 compound and assigned the Agreement
to Processa. The option was exercised in March 2018 in exchange for CoNCERT receiving (i) $8 million of common stock of Processa
that was owned by Promet or approximately 2,090,300 shares representing 6.58% of Promet’s common stock holding or 5.93%
of total Processa common stock issued and outstanding, and (ii) 15% of any sublicense revenue earned by Processa for a period
equivalent to the royalty term (as defined in the Agreement) until (a) Processa raises $8 million of gross proceed; after the
$8M is raised CoNCERT receives 0% sublicense revenue and (b) CoNCERT can sell its shares of Processa common stock without restrictions
pursuant to the terms of the amended Agreement. All other terms of the Agreement remain unchanged.
Cybersecurity
Fraud
In
January 2018, we incurred a loss of $144,200 due to fraud from a cybersecurity breach. As a result, we have implemented certain
review and approval procedures internally and with our banks; our technology consultants have implemented system changes; and,
we reported the fraud to our banks and to a national law enforcement agency. We do not have insurance coverage against the type
of fraud that occurred, therefore, recovery of the loss is remote. While we are taking steps to prevent such an event from reoccurring,
we cannot provide assurance that similar issues will not reoccur. Failure of our control systems to prevent or detect and correct
errors or fraud could have a material and adverse effect on our financial condition.
The
following are the consolidated financial statements of the Company as of March 31, 2018 (Unaudited) and December 31, 2017
(Audited) and for the three months ended March 31, 2018 and 2017 (Unaudited).
Processa
Pharmaceuticals, Inc.
Consolidated
Balance Sheets
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,776,639
|
|
|
$
|
2,847,429
|
|
Due
from related party
|
|
|
26,684
|
|
|
|
62,709
|
|
Prepaid
expenses
|
|
|
40,189
|
|
|
|
41,446
|
|
Total
Current Assets
|
|
|
1,843,512
|
|
|
|
2,951,584
|
|
Property
And Equipment
|
|
|
|
|
|
|
|
|
Software
|
|
|
19,740
|
|
|
|
19,740
|
|
Equipment
|
|
|
9,327
|
|
|
|
9,327
|
|
Total
Cost
|
|
|
29,067
|
|
|
|
29,067
|
|
Less:
accumulated depreciation
|
|
|
5,358
|
|
|
|
3,246
|
|
Property
and equipment, net
|
|
|
23,709
|
|
|
|
25,821
|
|
Other
Assets
|
|
|
|
|
|
|
|
|
Security
deposit
|
|
|
5,535
|
|
|
|
5,535
|
|
Intangible
asset, net of accumulated amortization
|
|
|
11,013,494
|
|
|
|
-
|
|
Total
Other Assets
|
|
|
11,019,029
|
|
|
|
5,535
|
|
Total
Assets
|
|
$
|
12,886,250
|
|
|
$
|
2,982,940
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Senior
convertible notes, net of debt issuance costs
|
|
$
|
2,484,710
|
|
|
$
|
2,448,570
|
|
Accrued
interest
|
|
|
87,293
|
|
|
|
35,693
|
|
Accounts
payable
|
|
|
104,880
|
|
|
|
50,686
|
|
Due
to related parties
|
|
|
436
|
|
|
|
436
|
|
Accrued
expenses
|
|
|
170,310
|
|
|
|
64,428
|
|
Total
Current Liabilities
|
|
|
2,847,629
|
|
|
|
2,599,813
|
|
Non-current
Liabilities
|
|
|
|
|
|
|
|
|
Accrued
rent liability
|
|
|
6,642
|
|
|
|
9,963
|
|
Deferred
tax liability
|
|
|
2,755,613
|
|
|
|
-
|
|
Total
Liabilities
|
|
|
5,609,884
|
|
|
|
2,609,776
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES - SEE NOTE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
Common
stock, par value $0.0001, 350,000,000 shares authorized; 35,272,626 issued and outstanding at March 31, 2018 and December
31, 2017
|
|
|
3,527
|
|
|
|
3,527
|
|
Preferred
stock, par value $0.0001, 10,000,000 shares authorized; zero shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Additional
paid-in capital
|
|
|
12,228,723
|
|
|
|
4,228,723
|
|
Accumulated
deficit
|
|
|
(4,955,884
|
)
|
|
|
(3,859,086
|
)
|
Total
Stockholders’ Equity
|
|
|
7,276,366
|
|
|
|
373,164
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
12,886,250
|
|
|
$
|
2,982,940
|
|
The
accompanying notes are an integral part of these unaudited consolidated financial statements.
Processa
Pharmaceuticals, Inc.
Consolidated
Statements of Operations
(Unaudited)
|
|
Three
Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
Research
and development costs
|
|
$
|
807,661
|
|
|
$
|
139,922
|
|
General
and administrative expenses
|
|
|
483,955
|
|
|
|
94,018
|
|
Total
operating expenses
|
|
|
1,291,616
|
|
|
|
233,940
|
|
|
|
|
|
|
|
|
|
|
Operating
Loss
|
|
|
(1,291,616
|
)
|
|
|
(233,940
|
)
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense)
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(87,740
|
)
|
|
|
-
|
|
Interest
income
|
|
|
1,024
|
|
|
|
1,498
|
|
Total
other income (expense)
|
|
|
(86,716
|
)
|
|
|
1,498
|
|
|
|
|
|
|
|
|
|
|
Net
Operating Loss Before Income Tax Benefit
|
|
|
(1,378,332
|
)
|
|
|
(232,442
|
)
|
|
|
|
|
|
|
|
|
|
Income
Tax Benefit
|
|
|
281,534
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(1,096,798
|
)
|
|
$
|
(232,442
|
)
|
|
|
|
|
|
|
|
|
|
Net
Loss per Common Share - Basic and Diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
Average Common Shares Used to Compute
Net Loss Applicable to Common Shares - Basic and Diluted
|
|
|
35,272,626
|
|
|
|
31,745,242
|
|
The
accompanying notes are an integral part of these unaudited consolidated financial statements.
Processa
Pharmaceuticals, Inc.
Consolidated
Statement of Changes in Stockholders’ Equity
(Unaudited)
|
|
Common
Stock
|
|
|
Preferred
Stock
|
|
|
Additional
Paid-In
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
Balance,
December 31, 2017
|
|
|
35,272,626
|
|
|
$
|
3,527
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
4,228,723
|
|
|
$
|
(3,859,086
|
)
|
|
$
|
373,164
|
|
Recognize
the fair value of exclusive license intangible asset acquired from CoNCERT in exchange for 2,090,301 common shares of Processa
owned by Promet
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,000,000
|
|
|
|
-
|
|
|
|
8,000,000
|
|
Net
Loss for the Three Months Ended March 31, 2018
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,096,798
|
)
|
|
|
(1,096,798
|
)
|
Balance,
March 31, 2018
|
|
|
35,272,626
|
|
|
$
|
3,527
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
12,228,723
|
|
|
$
|
(4,955,884
|
)
|
|
$
|
7,276,366
|
|
The
accompanying notes are an integral part of these unaudited consolidated financial statements.
Processa
Pharmaceuticals, Inc.
Consolidated
Statements of Cash Flows
(Unaudited)
|
|
Three
Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(1,096,798
|
)
|
|
$
|
(232,442
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
2,112
|
|
|
|
-
|
|
Amortization
of intangible asset
|
|
|
25,435
|
|
|
|
-
|
|
Deferred
income tax (benefit) expense
|
|
|
(281,534
|
)
|
|
|
-
|
|
Amortization
of debt issuance costs
|
|
|
36,140
|
|
|
|
-
|
|
Net
changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid
expenses
|
|
|
1,257
|
|
|
|
18,147
|
|
Vendor
deposit
|
|
|
-
|
|
|
|
227,657
|
|
Accrued
interest
|
|
|
51,600
|
|
|
|
-
|
|
Accounts
payable
|
|
|
54,194
|
|
|
|
4,397
|
|
Due
from related parties
|
|
|
36,025
|
|
|
|
(95
|
)
|
Accrued
rent liability
|
|
|
-
|
|
|
|
6,642
|
|
Accrued
liabilities
|
|
|
102,561
|
|
|
|
(83,004
|
)
|
Net
cash used in operating activities
|
|
|
(1,069,008
|
)
|
|
|
(58,698
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
-
|
|
|
|
(882
|
)
|
Acquisition
of intangible asset
|
|
|
(1,782
|
)
|
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(1,782
|
)
|
|
|
(882
|
)
|
|
|
|
|
|
|
|
|
|
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(1,070,790
|
)
|
|
|
(59,580
|
)
|
CASH
AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
BEGINNING
OF PERIOD
|
|
|
2,847,429
|
|
|
|
1,071,894
|
|
END
OF PERIOD
|
|
$
|
1,776,639
|
|
|
$
|
1,012,314
|
|
|
|
|
|
|
|
|
|
|
NON-CASH
FINANCING AND INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Recognize
exclusive license intangible asset acquired from CoNCERT
|
|
$
|
(11,037,147
|
)
|
|
$
|
-
|
|
Recognize
deferred tax liability for basis difference for intangible asset
|
|
|
3,037,147
|
|
|
|
|
|
Recognize
additional paid-in capital for consideration paid from the transfer of 2,090,301 common shares of Processa owned by Promet
to CoNCERT
|
|
|
8,000,000
|
|
|
|
-
|
|
Cash
paid for intangible asset acquired from CoNCERT
|
|
$
|
-
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these unaudited consolidated financial statements.
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
(Unaudited)
Note
1 - Organization and Summary of Significant Accounting Policies
Business
Activities and Organization
Company
Overview
Processa
Pharmaceuticals, Inc. (the “Company” and formerly known as “Heatwurx” ) and its wholly-owned subsidiary,
Processa Therapeutics LLC (“Processa”), a Delaware limited liability company, acquired all the net assets of a private
company, including the rights to the CoNCERT Agreement mentioned below, Promet Therapeutics, LLC (“Promet”), a Delaware
limited liability company on October 4, 2017 in exchange for 31,745,242 shares (post reverse split) of the common stock of the
Company which, at the closing, constituted approximately 90% of the Company’s issued and outstanding common stock on a fully
diluted basis. Immediately following the closing, there were 35,272,626 shares (post reverse split) of common stock issued and
outstanding. At the closing, Processa was assigned all of the assets and operations of Promet that constituted the operating business
of Promet and Promet, which continues as an active company, received the Processa shares mentioned above and agreed to provide
the Processa shares needed if the option in the CoNCERT Agreement (see below) was exercised. Upon closing on October 4, 2017,
there was a change in control of the Company to Promet. The Company abandoned its prior business plan and adopted Promet’s
business plan focused on developing drugs to treat patients that have a high unmet medical need. Subsequent to closing and effective
October 10, 2017, the Company changed its trading symbol to “PCSA” on the OTC Pink Marketplace (“OTCQB”).
The Company effected a one-for-seven reverse split of its shares in December 2017. As a result, the 2017 consolidated financial
statements have been retrospectively adjusted to reflect shares outstanding after the one-for-seven reverse split.
The
net asset acquisition transaction was accounted for as a reverse acquisition. Prior to the acquisition, Heatwurx (subsequently
renamed Processa Pharmaceuticals, Inc.) had nominal net liabilities and operations. It was considered a non-operating public shell
corporation. Therefore, Promet was considered the accounting acquirer (and legal wholly-owned subsidiary of Heatwurx, now called
Processa Pharmaceuticals, Inc.) and Heatwurx was considered the accounting acquiree (and legal acquirer). As a result, the consolidated
financial statements of the Company reflect the financial condition, results of operations and cash flows of Promet for all periods
presented prior to October 4, 2017 and Processa for the periods subsequent to October 4, 2017. The legal capital stock (number
and type of equity interests issued) is that of Processa Pharmaceuticals, Inc., the legal parent, in accordance with guidance
on reverse acquisitions accounted for as a capital transaction instead of a business combination (See Note 2 – Basis of
Presentation and Earnings Per Share and Note 3 – Reverse Acquisition in Item 8 of the Company’s annual Report on Form
10-K filed with the SEC on April 17, 2018).).
All
references to the “Company” and Processa Pharmaceuticals, Inc. refer to Heatwurx, Inc., Processa Therapeutics, LLC,
and the net assets acquired from Promet Therapeutics, LLC, which were assigned at acquisition to Processa Therapeutics, LLC and
Promet’s operations prior to October 4, 2017.
On
March 19, 2018, Promet, Processa and CoNCERT Pharmaceuticals Inc. (“CoNCERT”) amended the Option and License Agreement
(the “Agreement”) executed in October 2017. The Agreement was assigned to Processa and Processa exercised the exclusive
option for the CTP-499 compound. The option was exercised in exchange for CoNCERT receiving (i) $8 million of common stock of
Company that was owned by Promet (or 2,090,301 shares representing 6.58% of Promet’s common stock holding or 5.93% of total
the Company’s common stock issued and outstanding), and (ii) 15% of any sublicense revenue earned by the Company for a period
equivalent to the royalty term (as defined in the Agreement) until the earliest of (a) Processa raising $8 million of gross proceeds;
and (b) CoNCERT can sell its shares of Processa common stock without restrictions pursuant to the terms of the amended Agreement.
All other terms of the Agreement remain unchanged. As a result, the Company recognized an intangible asset and additional paid-in
capital in the amount of $8 million resulting from Promet satisfying Processa’s liability to CoNCERT. There was no change
in the total shares issued and outstanding, however, Promet’s controlling interest in Processa was reduced from 90% to 84%.
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
(Unaudited)
Description
of Business
Processa
is an emerging pharmaceutical company focused on the clinical development of drug products that are intended to improve the survival
and/or quality of life for patients who have a high unmet medical need or who have no alternative treatment. Within this group
of pharmaceutical products, we currently are developing one product for two indications (i.e., the use of a drug to treat a particular
disease) and searching for additional products for our portfolio.
Processa’s
lead product, PCS-499 (previously known as CTP-499), is an oral tablet that is an analog of an active metabolite of an already
approved FDA drug. The advantage of PCS-499 is that it potentially may work in many conditions because it has multiple pharmacological
targets that it affects that are important in the treatment of these conditions. Based on its pharmacological activity, Processa
has identified other unmet medical need conditions where the use of PCS-499 may result in clinical efficacy. These include Necrobiosis
Lipoidica (NL) and Radiation-Induced Fibrosis (RIF) in head and neck cancer patients. Processa has met with the FDA on the NL
condition and has developed a strategy for moving the program for NL forward starting with a Phase 2 clinical trial in NL patients
in late 2018. Processa will meet with the FDA to further define the program for use of PCS-499 for the RIF condition in the next
few months.
Processa
is looking to acquire additional drug candidates to help patients who have an unmet medical need. Processa has evaluated over
50 potential assets for acquisition and are continuing to evaluate new assets to acquire.
Our
operations are performed in the state of Maryland and are still in the organizational and research and development phase of operations.
As a result, we have a limited operating history and only a preliminary business plan from which investors may evaluate our future
prospects. We have not had any sources of revenue from inception (August 31, 2015) through March 31, 2018 and have a history of
operating losses from operations. Our ability to generate meaningful revenue from any products in the United States depends on
obtaining FDA authorization. Even if our products are authorized and approved by the FDA, we must still meet the challenges of
successful marketing, distribution and consumer acceptance.
As
of March 31, 2018, the Company had an accumulated deficit of approximately $5.0 million incurred since inception and expects to
incur substantial operating losses for the foreseeable future. Our current capital is insufficient to fully fund our total business
plan and the development of our planned product candidates for a period of one-year from the date these consolidated financial
statements are available to be issued. Our ability to achieve revenue-generating operations and, ultimately, achieve profitability
will depend on whether we can obtain additional capital when we need it, complete the development of our technology, receive regulatory
approval of our planned product candidates and any stand along development planned product candidates into new or existing drugs
which can be successfully commercialized. There can be no assurance that we will ever generate revenues or achieve profitability.
These risks and other factors could have a material adverse effect on the Company and raise substantial doubt about our ability
to continue as a going concern.
Basis
of Presentation
The
accompanying unaudited consolidated financial statements have been prepared in accordance with United States generally accepted
accounting principles (“U.S. GAAP”) for interim financial information and with the instructions of the Securities
and Exchange Commission (“SEC”) on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all
of 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 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 consolidated
financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on April 17, 2018. The results of operations
for the interim period 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.
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
(Unaudited)
As
a result of the modification of the Option and License Agreement with CoNCERT and the acquisition of an exclusive license intangible
asset used in research and development activities described above, the Company adopted a new intangible asset policy and disclosure
(See Note 1 – Intangible Assets and Note 2) and recognized a deferred tax liability for the acquired temporary difference
between the financial reporting basis and the tax basis of the intangible asset (See Note 5).
Going
Concern and Management’s Plan
The
Company’s consolidated financial statements are prepared using U.S. GAAP and are based on the assumption that the Company
will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course
of business. The Company faces certain risks and uncertainties that are present in many emerging growth companies regarding product
development and commercialization, limited working capital, recurring losses and negative cash flow from operations, future profitability,
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,
dependence on third party manufacturing organizations, third party collaboration and licensing agreements, lack of sales and marketing
activities and 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.
The
Company has relied exclusively on private placements with a small group of accredited investors to finance its business and operations.
We do not have any prospective arrangements or credit facilities as a source of future funds. The Company has had no revenue since
inception on August 31, 2015. The Company does not currently have any revenue under contract nor does it have any immediate sales
prospects. As of March 31, 2018, the Company had an accumulated deficit of approximately $5.0 million incurred since inception.
For the three months ended March 31, 2018, the Company incurred a net loss from continuing operations of approximately $1.1 million
and used approximately $1.1 million in net cash from operating activities from continuing operations. The Company had total cash
and cash equivalents of approximately $1.8 million as of March 31, 2018.
No
additional sources of capital have been obtained or committed through the date these consolidated financial statements were available
to be issued. We expect our operating costs to be substantial as we incur costs related to the clinical trials for our product
candidates and that we will operate at a loss for the foreseeable future.
We
are in the process of raising additional funds by potentially selling additional Senior Convertible Notes, convertible loans or
other securities. However, no assurance can be given that we will be successful in raising adequate funds needed. If we are unable
to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue
the development or commercialization of one or more of our product candidates, restrict our operations or obtain funds by entering
into agreements on unattractive terms, which would likely have a material adverse effect on our business, stock price and our
relationships with third parties with whom we have business relationships, at least until additional funding is obtained.
Uncertainty
concerning our ability to continue as a going concern may hinder our ability to obtain future financing, as well as adversely
affect our collaborative drug development relationships. Continued operations and our ability to continue as a going concern are
dependent on our ability to obtain additional funding in the near future and thereafter, and no assurances can be given that such
funding will be available at all or will be available in sufficient amounts 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
yielding funds, we will rapidly exhaust our resources and will 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 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 the Company’s ability to continue as a going concern within one year after the
date that these consolidated financial statements are available to be issued. The accompanying 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 the Company be unable to continue as a going concern
based on the outcome of these uncertainties described above.
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
(Unaudited)
Use
of Estimates
The
preparation of the accompanying unaudited consolidated financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts (including assets, liabilities, revenues and expenses) and related
disclosures, including contingent assets and liabilities. Estimates have been prepared on the basis of the most current and best
available information. However, actual results could differ materially from those estimates.
Cash
and Cash Equivalents
Cash
and cash equivalents includes cash on hand and money market funds. The Company considers all highly liquid investments with a
maturity at the date of purchase of three months or less to be cash equivalents. Money market funds were $961,193 and $1,300,815
at March 31, 2018 and December 31, 2017, respectively.
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
and those that have no alternative future uses (in research and development projects or otherwise) and therefore no separate economic
value are research and development costs 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 and those with an indefinite useful life are not amortized. The useful life is the best
estimate of the period over which the asset is expected to contribute directly or indirectly to the future cash flows of the Company.
The useful life is based on the duration of the expected use of the asset by the Company 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. If an income approach is used to measure the fair value of an intangible asset,
the Company considers 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 the Company, the useful life is considered indefinite.
Intangibles
with a finite useful life are amortized on the straight-line method unless the pattern in which the economic benefits of the intangible
asset are consumed or used up are reliably determinable. The Company evaluates 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.
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.
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
(Unaudited)
Impairment
of Long-Lived Assets and Intangibles Other Than Goodwill
The
Company accounts for the impairment of long-lived assets in accordance with ASC 360, Property, Plant and Equipment and ASC 350,
Intangibles – Goodwill and Other which requires 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 expected future
undiscounted net cash flows expected to be 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 no impairment
loss recorded for the three months ended March 31, 2018 and 2017, respectively.
Fair
Value Measurements and Disclosure
The
Company applies ASC 820, “Fair Value Measurements and Disclosures,” which expands disclosures for assets and liabilities
that are measured and reported at fair value on a recurring basis. Fair value is defined as an exit price, representing the amount
that would be received upon the sale of an asset or payment to transfer a liability in an orderly transaction between market participants.
Fair
value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset
or liability. A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:
Level
1 – Quoted market prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has
the ability to access at the measurement date.
Level
2 – Quoted market prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets
or liabilities in markets that are not active, or other inputs that are observable, either directly or indirectly. Fair value
determined through the use of models or other valuation methodologies.
Level
3 – Significant unobservable inputs for assets or liabilities that cannot be corroborated by market data. Fair value is
determined by the reporting entity’s own assumptions utilizing the best information available and includes situations where
there is little market activity for the asset or liability.
The
asset’s or liability’s fair value measurement within the fair value hierarchy is based upon the lowest level of any
input that is significant to the fair value measurement. The Company’s policy is to recognize transfers between levels of
the fair value hierarchy in the period the event or change in circumstances that caused the transfer. There were no transfers
into or out of Level 1, 2, or 3 during the periods presented.
Net
Income (Loss) per Share
The
Company computes basic and diluted earnings per share amounts pursuant to ASC 260-10-45. Basic earnings per share is computed
by dividing net income (loss) available to common shareholders, by the weighted average number of shares of common stock outstanding
during the period, excluding the effects of any potentially dilutive securities. Diluted earnings per share is computed by dividing
net income (loss) available to common shareholders by the diluted weighted average number of shares of common stock during the
period. The diluted weighted average number of common shares outstanding is the basic weighted number of shares adjusted for any
potentially diluted debt or equity and options. The diluted computation does not assume conversion, exercise or contingent exercise
of securities since that would have an anti-dilutive effect on earnings (loss) during the three months ended March 31, 2018 and
2017.
Subsequent
Events
The
Company has evaluated subsequent events and transactions for potential recognition or disclosure through May18, 2018, the date
the financial statements were available to be issued, in accordance with ASC 855-10-50. Refer to Note 9 below for further information.
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
(Unaudited)
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”). The Company has implemented all new accounting pronouncements that are in effect and that may impact
its financial statements. It has evaluated recently issued accounting pronouncements and determined that there was no material
impact on its financial position or results of operations.
From
May 2014 through March 31, 2018, the FASB issued several ASUs related to ASU 2014-09, “Revenue from Contracts with Customers
(Topic 606). The new guidance is effective for interim and annual periods beginning after December 15, 2017, although entities
may adopt one year earlier if they choose. The two permitted transition methods under the new standard are the full retrospective
method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying
the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative
effect of applying the standard would be recognized at the date of initial application. The Company is currently in the pre-revenue
stages of operations; therefore, we do not currently anticipate there would be any change to timing or method of recognizing revenue.
As such, the adoption of this standard did not have a material impact on our results of operations, financial condition or cash
flows.
In
February 2016 through March 31, 2018, the FASB issued several ASUs related to ASU-2016-02, “Leases (Topic 842).” The
guidance requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease
liability) and a right of use asset representing its right to use the underlying asset for the lease term. For operating leases:
the right-of-use asset and a lease liability will be initially measured at the present value of the lease payments, in the statement
of financial position; a single lease cost will be recognized, calculated so that the cost of the lease is allocated over the
lease term on a generally straight-line basis; and all cash payments will be classified within operating activities in the statement
of cash flows. The amendments in Topic 842 are effective for the Company beginning January 1, 2019. The Company’s office
lease expires September 30, 2019. Management is currently evaluating the impact of adopting the new guidance on the Company’s
consolidated financial statements.
Note
2 – Intangible Asset
Intangible
assets consist of the capitalized costs of $11,038,929, including transaction costs of $1,782, associated with the exercise of
the option to acquire the exclusive license from CoNCERT related to patent rights and know-how to develop and commercialize compounds
and products for CTP-499 (also known as the Company’s lead product PCS-499) and each metabolite thereof and the related
income tax effects. The capitalized costs include $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 in accordance with ASC 740-10-25-51
Income Taxes
. In accordance with ASC Topic 730,
Research and
Development
, the Company capitalized the costs of acquiring the exclusive license rights to CTP-499 as the exclusive license
rights represent intangible assets to be used in research and development activities that have future alternative uses.
The
negotiation of the modification to the Agreement was finalized in mid-February 2018 and the legal documents were executed and
the option was exercised on March 19, 2018 in exchange for CoNCERT receiving (i) $8 million of common stock of Processa that was
owned by Promet (or 2,090,301 shares representing 6.58% of Promet’s common stock holding or 5.93% of total Processa common
stock issued and outstanding), and (ii) 15% of any sublicense revenue earned by Processa for a period equivalent to the royalty
term (as defined in the Agreement) until the earliest to occur of (a) Processa raising $8 million of gross proceeds; and (b) CoNCERT
can sell its shares of Processa common stock without restrictions pursuant to the terms of the amended Agreement. All other terms
of the Agreement remained unchanged. The license agreement was assigned to and deemed to have been exercised by the Company. As
a result of the transaction, the Company recognized an intangible asset for the fair value of the common stock consideration paid
of $8 million with an offsetting amount in additional paid-in capital resulting from Promet satisfying Processa’s liability
to CoNCERT.
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
(Unaudited)
The
Company estimated the fair value of the common stock issued based on the market approach and CoNCERT’s requirement to receive
shares valued at $8 million. The market approach was based on the final negotiated number of shares of stock determined on a volume
weighted average price of Processa common stock quoted on the OTCQB (principal market) over a 45 day period preceding the mid-February
2018 finalized negotiation of the modification to the option and license agreement with CoNCERT, an unrelated third party, for
the exclusive license rights to CTP-499. However, Processa has less than 300 shareholders, the volume of shares trading
for Processa’s common stock is not significant and the OTCQB is not a national exchange, therefore the volume weighted average
price quotes for the Processa stock are from markets that are not active and therefore are Level 2 inputs. The total cost recognized
for the exclusive license acquired represents the allocated fair value related to the stock transferred to CoNCERT plus the recognition
of the deferred tax liability related to the acquired temporary difference and the transaction costs incurred to complete the
transaction as discussed above.
Intangible
assets consist of the following:
|
|
March
31, 2018
|
|
|
March
31, 2017
|
|
Gross
intangible assets
|
|
|
|
|
|
|
|
|
Exclusive
license rights to CTP-499
|
|
$
|
11,038,929
|
|
|
$
|
-
|
|
Less:
Accumulated amortization
|
|
|
(25,435
|
)
|
|
|
-
|
|
Total
intangible assets, net
|
|
$
|
11,013,494
|
|
|
$
|
-
|
|
Amortization
expense was $25,435 and $0 for the three months ended March 31, 2018 and 2017, respectively. The weighted average amortization
period for the intangible asset is 14 years based on the average remaining patent lives for CTP-499 and the estimated royalty
period for a fully paid-up license under the terms of the license agreement. Amortization expense is included within research
and development expense in the accompanying consolidated statements of operations. As of March 31, 2018, the estimated future
amortization expense each year for the next five years and annual periods thereafter until fully amortized amounts to $788,495
per year.
Note
3 – Senior Convertible Notes
As
of October 4, 2017, certain entities affiliated with current shareholders had purchased $1.25 million of our senior secured convertible
notes (“Senior Notes”) in a bridge financing undertaken by us to support the Processa operations. On November 21,
2017, additional third party accredited investors contributed $1.33 million in financing proceeds. As of March 31, 2018, $2.58
million of Senior Notes were issued and outstanding.
Principal
and interest under each Senior Note is due on the earlier of (i) the mandatory and automatic conversion of the Senior Note into
the next Private Investment in Public Equity (“PIPE”) financing we undertake, provided the PIPE financing yields minimum
gross proceeds and a pre-money valuation as defined in the financing agreement or (ii) the one-year anniversary of that Senior
Note (Maturity Date). The Senior Notes bear interest at 8% per year and are payable in kind (in common stock). At the Maturity
Date, the outstanding principal and accrued interest on the Senior Note will be automatically converted into shares of common
stock of the Company equal to the lesser of (i) a pre-money valuation or (ii) any adjusted price resulting from the application
of down round pricing during the anti-dilution period through December 31, 2018 as defined in the financing agreement. There can
be no assurance that we will be successful in achieving the financing levels targeted under the Senior Convertible Notes or the
PIPE financing.
Holders
of Senior Notes (a) may elect to receive 110% of principal plus accrued interest in the event there is a change of control prior
to conversion of the Senior Notes, (b) are entitled to full ratchet anti-dilution protection in event of any sale of securities
at a net conversion per share that is less than the applicable conversion price per share to the holder, (c) are entitled
to certain registration rights for the securities underlying the Senior Notes and (d) have been granted certain preemptive rights
pro rata to their respective interests through December 31, 2018. The Senior Notes can be prepaid by the Company at any time following
the date of issuance with seven days prior written notice to the note holder.
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
(Unaudited)
The
Senior Notes are secured by a security interest in the assets of the Company and contain negative covenants that do not permit
the Company to incur additional indebtedness or liens on property or assets owned, repurchase common stock, pay dividends, or
enter into any transaction with affiliates of the Company 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.
The
Company retained Boustead Securities Ltd. (“Boustead”), a registered broker-dealer, as its exclusive financial adviser
and has agreed to pay Boustead (i) six percent (6%) of gross proceeds received by the Company and (ii) warrants to purchase securities
in the amount of three percent (3%) of the equity issued or issuable in connection with the Senior Notes bridge financing. These
warrants will be issued upon achieving certain financing levels under the next PIPE financing we undertake. No additional funds
have been raised since the November 21, 2017 financing proceeds. As a result, no warrants are issuable, and none have been issued
as of March 31, 2018.
The
Company incurred $154,800 in debt issuance costs on the Senior Notes with Boustead, which were reported as a reduction of the
carrying amount of the Senior Convertible Notes on the face of the consolidated balance sheets. The debt issuance costs are amortized
to interest expense using the interest method over the term of the Senior Convertible Notes. The effective interest rate on the
Senior Notes was 7.72%before debt issuance costs since no payments of interest are due until maturity and 13.96%including the
debt issuance costs based on the repayment terms of the Senior Notes.
Debt
and accrued interest at March 31, 2018 and interest expense for the three months ended March 31, 2018 are as follows:
|
|
|
|
|
Unamortized
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
|
|
|
Debt
|
|
|
Senior
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
Issuance
|
|
|
Convertible
|
|
|
Accrued
|
|
|
Interest
|
|
|
|
Notes
|
|
|
Costs
|
|
|
Notes,
Net
|
|
|
Interest
|
|
|
Expense
|
|
Balance,
December 31, 2017
|
|
$
|
2,580,000
|
|
|
$
|
(131,430
|
)
|
|
$
|
2,448,570
|
|
|
$
|
35,693
|
|
|
$
|
59,063
|
|
Accrued
interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
51,600
|
|
|
|
51,600
|
|
Amortize
debt issuance costs
|
|
|
-
|
|
|
|
36,140
|
|
|
|
36,140
|
|
|
|
-
|
|
|
|
36,140
|
|
Balance,
March 31, 2018
|
|
|
2,580,000
|
|
|
|
(95,290
|
)
|
|
|
2,484,710
|
|
|
|
87,293
|
|
|
$
|
87,740
|
|
Current
portion
|
|
|
(2,580,000
|
)
|
|
|
95,290
|
|
|
|
(2,484,710
|
)
|
|
|
(87,293
|
)
|
|
|
|
|
Long-term
portion
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
Note
4 – Stockholders’ Equity
On
March 19, 2018, Promet, Processa and CoNCERT amended the Agreement executed in October 2017. The Agreement was assigned to Processa
and Processa exercised the exclusive option for the CTP-499 compound (see Note 1 – Company Overview and Note 2 – Intangible
Asset) in exchange for CoNCERT receiving, in part, $8 million of common stock of the Company that was owned directly by Promet
(or 2,090,301 shares at $3.83 per share representing 6.58% of Promet’s common stock holding or 5.93% of total the Company’s
common stock issued and outstanding) in satisfaction of the obligation due for the exclusive license for CTP-499 acquired by Processa.
There was no change in the total shares issued and outstanding of 35,272,626, however, Promet’s controlling interest was
reduced from 90% to 84%. Promet contributed the payment of the obligation due for the exclusive license to the Company without
consideration paid to them. As a result of the transaction, the Company recognized an exclusive license intangible asset with
a fair value of $8 million and an offsetting increase in additional paid-in capital resulting from Promet satisfying Processa’s
liability to CoNCERT.
There
were no changes in or issuances of preferred stock, stock options or warrants from December 31, 2017.
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
(Unaudited)
Note
5 – Income Taxes
The
Company accounts 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. The Company records a valuation allowance to reduce the Company’s
deferred tax assets to the amount of future tax benefit that is more likely than not to be realized.
As
required under ASC 740-270,
Interim Financial Reporting
, the Company has estimated its annual effective tax rate for the
full fiscal year and applied that rate to its year-to-date consolidated pre-tax ordinary loss before income taxes in determining
its benefit for income taxes. The Company recorded a benefit for income taxes of approximately $282,000 and $0 for the three-month
period ended March 31, 2018 and 2017, respectively.
As
of March 31, 2018, and December 31, 2017, the Company maintained a valuation allowance equal to the full recorded amount of the
Company’s net deferred tax assets related to intangible start-up costs 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 when CoNCERT sold its license and “Know-How” to Processa for stock in an Internal
Revenue Code Section 351 transaction on March 19, 2018 (see Note 1 – Company Overview and Note 2 – Intangible Asset).
A 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 for the acquired temporary difference
between the financial reporting basis of approximately $11,038,929 and the tax basis of approximately $1,782. The deferred tax
liability may be offset by the deferred tax assets resulting from 2017 and 2018 taxable net operating losses. Thus, a partial
release of valuation allowance occurred in Q1 2018 as it relates to the NOL. There remains a valuation allowance on intangible
start-up costs. Under ACS 740-270
Income Taxes – Interim Reporting
, the Company is required to project its 2018 federal
and state effective income tax rate and apply it to the March 31, 2018 operating loss before income taxes. Based on the projection,
the Company expects to recognize the tax benefit from the 2017 net operating loss carryover and the projected 2018 taxable loss,
which resulted in the recognition of a deferred tax benefit shown in the consolidated statements of operations for 2018.
As
discussed in Note 2 – Income Taxes in the consolidated financial statements included in Item 8 of the 2017 Form 10-K filed
with the SEC on April 17, 2018, the historical information presented in the consolidated financial statements prior to October
4, 2017 is that of Promet in accordance with Accounting Standards Codification (“ASC”) 805-40-45,
Business Combinations
– Reverse Acquisitions
. Prior to the closing of the asset purchase transaction on October 4, 2017, Promet was treated
as a partnership for federal income tax purposes and thus was not subject to income tax at the entity level. Therefore, no provision
or liability for income taxes has been included in these consolidated financial statements through the date of the asset purchase
on October 4, 2017.
The
Company expects to be in an overall taxable loss position for 2018. However, the Company expects to recognize a deferred tax benefit
in 2018 to the extent the 2017 net operating loss carryover and the 2018 net operating losses can be used to offset the deferred
tax liability related to the intangible asset. No current income tax expense is expected for the foreseeable future as the Company
expects to generate taxable net operating losses.
Note
6 – Net Loss per Share of Common Stock
The
Company has preferred stock authorized but no preferred stock issued and outstanding at March 31, 2018 and 2017. There were no
outstanding options or warrants issued at March 31, 2018 and 2017.
The
Company has reported a loss from continuing operations and a loss from continuing operations available to common stockholders
for all periods presented. As a result, there is no assumed conversion, exercise or contingent exercise of potential common shares
included in the computation of the diluted per share amounts since it would have an antidilutive effect, therefore, basic and
diluted loss per share are computed by dividing net loss applicable to common stockholders by the weighted-average number of shares
of common stock outstanding.
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
(Unaudited)
The
weighted-average shares of common stock used in calculating basic and diluted loss per share for the 2018 calculation uses the
total shares issued and outstanding of 35,272,626. There has been no change in total shares issued and outstanding since December
31, 2017. The weighted-average shares of common stock used in calculating basic and diluted loss per share for the 2017 calculation
uses the 31,745,242 shares issued to Promet in the asset purchase transaction for the period from January 1, 2017 through the
acquisition date of October 4, 2017 in accordance with ASC 805-40-45,
Business Combinations – Reverse Acquisitions
.
All shares were restated for the one-for-seven reverse split.
The
calculation of the numerator and denominator for basic and diluted net loss per common share is shown in the following table.
|
|
For the three months ended
|
|
|
|
March
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net
loss from continuing operations applicable to common stockholders - basic and diluted
|
|
$
|
(1,096,798
|
)
|
|
$
|
(232,442
|
)
|
|
|
|
|
|
|
|
|
|
Total common
shares issued and outstanding
|
|
|
35,272,626
|
|
|
|
31,745,242
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares outstanding used in calculating net loss per common share - basic and diluted
|
|
|
35,272,626
|
|
|
|
31,745,242
|
|
|
|
|
|
|
|
|
|
|
Net loss per
common share - basic and diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
Note
7 – Related Party Transactions
A
shareholder, Corlyst, LLC, reimburses the Company for shared costs related to payroll, health care insurance and rent based on
actual costs incurred and recognized as a reduction of the general and administrative operating expenses being reimbursed in the
Company’s consolidated statements of operations. The reimbursed amounts totaled $26,684 and $29,430 for the three months
ended March 31, 2018 and 2017, respectively. The receivable balances due from Corlyst at March 31, 2018 and December 31, 2017
were $26,684 and $62,709, respectively.
During
2016 and 2017, Corlyst paid certain operating expenses on behalf of the Company and the Company reimbursed Corlyst based on actual
costs incurred at later dates. The accounts payable amounts due to Corlyst at March 31, 2018 and December 31, 2017 were $336 and
$336, respectively. In addition, there was $100 due to an officer included in due to related parties as of March 31, 2018 and
December 31, 2017.
A
director of the Company is the manager of the JMW Fund, LLC, the San Gabriel Fund, LLC, and the Richland Fund, LLC, collectively
known as the “Funds”. In addition, the Funds own $1 million in Senior Convertible Notes at March 31, 2018 and December
31, 2017.
Entities
affiliated with the Chairman of the Board of Directors, Chief Executive Officer and Interim Chief Financial Officer of the Company
own $250,000 in Senior Convertible Notes at March 31, 2018 and December 31, 2017.
Note
8 – Commitments and Contingencies
Purchase
Obligations
The
Company enters into contracts in the normal course of business with contract research organizations and subcontractors to further
develop its products. The contracts are cancellable, with varying provisions regarding termination. If a contract with a specific
vendor were to be terminated, the Company would only be obligated for products or services that it received as of the effective
date of the termination and any applicable cancellation fees. The Company had purchase obligations of approximately $1,006,000
and $896,000 at March 31, 2018 and December 31, 2017, respectively.
Processa
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
(Unaudited)
Cybersecurity
Fraud
In
January 2018, the Company incurred a loss of $144,200 due to fraud from a cybersecurity breach. As a result, we have implemented
certain review and approval procedures internally and with our banks; our technology consultants have implemented system changes;
and, we reported the fraud to our banks and the Federal Bureau of Investigation Cyber Crimes Unit. The Company does not have insurance
coverage against the type of fraud that occurred, therefore, recovery of the loss is remote. While we are taking steps to prevent
such an event from reoccurring, we cannot provide assurance that similar issues will not reoccur. Failure of our control systems
to prevent or detect and correct errors or fraud could have a material and adverse effect on our financial condition. The loss
is included in general and administrative expenses in the consolidated statement of operations for the three months ended March
31, 2018.
Note
9 – Subsequent Events
On
May 15, 2018 Processa Pharmaceuticals (the “Company”) entered into Subscription and Purchase Agreements (the “Purchase
Agreements”) with certain accredited investors and conducted a closing pursuant to which the Company sold 1,112,656 shares
of the Company’s Common Stock, par value $0.001 per share (the “Common Stock”), at a purchase price of $2.27
per share. In addition, each investor received a warrant to purchase one share of Common Stock for each Common Stock purchased
by such investor at an exercise price equal to $2.724, subject to adjustment thereunder. The closing is the initial closing (the
“Initial Closing”) of the Company’s previously announced private placement (the “Private Placement”)
of up to $8 million of Common Stock (the Maximum Offering Amount”).
The
Company received total gross proceeds of approximately $2.5 million from the Initial Closing, prior to deducting placement agent
fees and estimated expenses payable by the Company associated with the Initial Closing. The Company currently intends to use the
proceeds of the Private Placement to fund research and development of its lead product candidate, PCS-499, including clinical
trial activities, and for general corporate purposes. Pursuant to the Purchase Agreements, the Company may periodically conduct
additional closings until the earlier of June 29, 2018 or the Company has sold the Maximum Offering Amount.
The
Securities were sold in a private placement pursuant to exemptions from the registration requirements of the Securities Act of
1933, as amended (the “Securities Act”), afforded by Rule 506 of Regulation D promulgated thereunder.
Boustead
Securities acted as placement agent The placement agent received approximately $128,056 in connection with the Initial Closing
and a Placement Agent Warrant to purchase up to 33,380 shares of Common Stock at an exercise price equal to $2.724.
Anti-Dilution
Protection
The
Common Stock, but not the Warrants, will have full ratchet anti-dilution protection rather than weighted-average anti-dilution
protection. Except as provided, until the Company has issued equity securities or securities convertible into equity securities
for a total of an additional $20.0 million in cash or assets, including the proceeds from the exercise of the Warrants issued
in the Offering, in the event the Company issues additional equity securities or securities convertible into equity securities
at a purchase price less than $2.27 per share of Common Stock, the Purchase Price shall be adjusted and new shares of Common Stock
issued as if the Purchase Price was such lower amount (or, if such additional securities are issued without consideration, to
a price equal to $0.01 per share).
The
following issuances shall not trigger anti-dilution adjustment: (i) shares of Common Stock issued in the Private Placement and
securities issuable upon exercise of the Warrants; (ii) securities issued upon the conversion of any outstanding debenture, warrant,
option, or other convertible security; (iii) Common Stock issuable upon a stock split, stock dividend, or any subdivision of shares
of Common Stock, provided that such securities have not been amended since the date of the Agreement to increase the number of
such securities or to decrease the exercise price, exchange price or conversation price of such securities (other than in connection
with stock splits or combinations) or to extend the term of such securities; (iv) shares of Common Stock (or options to purchase
such shares of Common Stock) issued or issuable to employees or directors of, or consultants to, the Company pursuant to any plan
approved by the Company’s Board of Directors and (v) securities issued pursuant to acquisitions or strategic transactions
approved by a majority of the disinterested directors of the Company, provided that such issuance shall only be to a person (or
to the equity holders of a person) which is, itself or through its subsidiaries, believed by the Company to be an operating company
or an owner of an asset in a business synergistic with the business of the Company.
PROCESSA
PHARMACEUTICALS, INC.
6,379,267
SHARES OF COMMON STOCK
PROSPECTUS
,
2018