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Processa Pharmaceuticals, Inc.
0001533743
10-Q
2019-03-31
--12-31
Non-accelerated Filer
Q1
2019
0.0001
0.0001
0.0001
0.0001
350000000
350000000
38674265
38674265
38674265
38674265
10000000
10000000
24943
20343
47165
21583
47165
21583
-750832
-1096798
-750832
-1096798
1248532
1740961
2847429
1776639
230000
230000
2090301
PCSA
23000
3037147
11059429
11059429
10238950
10437782
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>Note 2 – Intangible Assets</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Intangible assets at March 31, 2019
and December 31, 2018 consisted of the following:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<table cellspacing="0" cellpadding="0" style="font: 11pt Calibri, Helvetica, Sans-Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">March 31, 2019</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">December 31, 2018</font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 57%; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Gross intangible assets</font></td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 18%; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">11,059,429</font></td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 19%; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">11,059,429</font></td>
<td style="width: 1%; line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Less: accumulated amortization</font></td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">(820,479</font></td>
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">(621,647</font></td>
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Total intangible assets, net</font></td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">10,238,950</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">10,437,782</font></td>
<td style="line-height: 107%"> </td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Amortization expense was $198,832 and
$25,435 for the three months ended March 31, 2019 and 2018, respectively, and is included within research and development expense
in the accompanying condensed consolidated statements of operations. Our estimated amortization expense for the next two years
will be approximately $795,000 per year and for annual periods thereafter approximately $788,000 per year.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">The capitalized costs for the license
rights to PCS-499 included the $8 million purchase price, $1,782 in transaction costs and $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 <i>Income Taxes</i>. In accordance
with ASC Topic 730, <i>Research and Development</i>, we capitalized the costs of acquiring the exclusive license rights to
PCS-499, as the exclusive license rights represent intangible assets to be used in research and development activities that
management believes has future alternative uses.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>Note 3 – Income Taxes</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">We account for income taxes in accordance
with ASC Topic 740, <i>Income Taxes.</i> Deferred income taxes are recorded for the expected tax consequences of temporary differences
between the tax basis of assets and liabilities for financial reporting purposes and amounts recognized for income tax purposes.
As of March 31, 2019, and December 31, 2018, we recorded a valuation allowance equal to the full recorded amount of our net deferred
tax assets related to deferred start-up costs and other minor temporary differences since it is more-likely-than-not that such
benefits will not be realized. The valuation allowance is reviewed quarterly and is maintained until sufficient positive evidence
exists to support its reversal.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">A deferred tax liability was recorded
on March 19, 2018 when Processa received CoNCERT’s license and “Know-How” in exchange for Processa stock that
had been issued in the Internal Revenue Code Section 351 Transaction. The Section 351 Transaction treats the acquisition of the
license and Know-How for stock as a tax-free exchange. As a result, under ASC 740-10-25-51 <i>Income Taxes</i>, Processa recorded
a deferred tax liability of $3,037,147 for the acquired temporary difference between intangible assets (see Note 2) for the financial
reporting basis of $11,038,929 and the tax basis of $1,782. The deferred tax liability will be reduced for the effect of non-deductibility
of the amortization of the intangible asset and may be offset by the deferred tax assets resulting from net operating tax losses.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Under ACS 740-270 <i>Income Taxes –
Interim Reporting</i>, we are required to project our annual federal and state effective income tax rate and apply it to the year
to date ordinary operating tax basis loss before income taxes. Based on the projection, we expect to recognize the tax benefit
from our projected ordinary tax loss, which can be used to offset the deferred tax liabilities related to the intangible assets
and resulted in the recognition of a deferred tax benefit shown in the condensed consolidated statements of operations for three
months ended March 31, 2019 and 2018. No current income tax expense is expected for the foreseeable future as we expect to generate
taxable net operating losses.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>Note 6 – Net Loss per Share
of Common Stock</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Basic net loss per share is computed
by dividing net loss by the weighted average common shares outstanding. Diluted net loss per share is computed by dividing net
loss by the weighted average common shares outstanding, which includes potentially dilutive effect of stock options, warrants and
senior convertible notes. Since we experienced a loss for both periods presented, including any dilutive common shares outstanding
would have an anti-dilutive impact on diluted net loss per share, and as shown below were excluded from the computation. The treasury-stock
method is used to determine the dilutive effect of our stock options and warrants grants, and the if-converted method is used to
determine the dilutive effect of the Senior Notes.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">The computation of net loss per share
for the three months ended March 31, 2019 and 2018 was as follows:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 11pt Calibri, Helvetica, Sans-Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td colspan="6" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>For the three months ended</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>March 31,</b></p></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif"><b>2019</b></font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif"><b>2018</b></font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif"><b>Basic and diluted net loss per share:</b></font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"> </td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="width: 72%; padding-left: 10pt; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Net loss</font></td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 11%; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">(750,832</font></td>
<td style="width: 1%; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 11%; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">(1,096,798</font></td>
<td style="width: 1%; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 10pt; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Weighted-average number of common shares-basic and diluted</font></td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">38,674,265</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">35,272,626</font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"> </td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 20pt; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Basic and diluted net loss per share</font></td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">(0.02</font></td>
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">(0.03</font></td>
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">The following potentially dilutive securities
were excluded from the computation of diluted net income per share as their effect would have been anti-dilutive for the periods
presented.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 11pt Calibri, Helvetica, Sans-Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif"><b>2019</b></font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif"><b>2018</b></font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 72%; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Stock options and purchase warrants</font></td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 11%; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">3,917,763</font></td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 11%; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="width: 1%; line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Senior convertible notes</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">124,789</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">1,305,577</font></td>
<td style="line-height: 107%"> </td></tr>
</table>
<p style="margin: 0pt"></p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>Note 8 – Related Party Transactions</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">A shareholder, CorLyst, LLC, reimburses
us for shared costs related to payroll, health care insurance and rent based on actual costs incurred, which are recognized as
a reduction of our general and administrative operating expenses being reimbursed in our condensed consolidated statement of operations.
We did not receive reimbursements during the three months ended March 31, 2019 and 2018. Amounts due from CorLyst at March 31,
2019 and December 31, 2018 were $47,165 and $21,583, respectively.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>Note 9 – Commitments and Contingencies</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><i><u>Purchase Obligations</u></i></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">We enter into contracts in the normal
course of business with contract research organizations and subcontractors to further develop our products. The contracts are
cancellable, with varying provisions regarding termination. If a contract with a specific vendor were to be terminated, we would
only be obligated for products or services that we received as of the effective date of the termination and any applicable cancellation
fees. We had purchase obligations of approximately $23,000 at March 31, 2019.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><i><u>Use of Estimates</u></i></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 27pt"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">In preparing our condensed consolidated
financial statements and related disclosures in conformity with GAAP and pursuant to the rules and regulations of the SEC, we
make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes.
Estimates are used for, but not limited to: stock-based compensation, determining the fair value of acquired assets and assumed
liabilities, intangible assets, and income taxes. These estimates and assumptions are continuously evaluated and are based on
management’s experience and knowledge of the relevant facts and circumstances. While we believe the estimates to be reasonable,
actual results could differ materially from those estimates and could impact future results of operations and cash flows.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><i><u>Intangible Assets</u></i></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">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.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">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, <i>Intangibles – Goodwill and Other. </i>Those that have no alternative
future uses (in research and development projects or otherwise) and therefore no separate economic value are considered research
and development costs and are expensed as incurred. Amortization of intangibles used in research and development activities is
a research and development cost.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Intangibles with a finite useful life
are amortized using the straight-line method unless the pattern in which the economic benefits of the intangible assets are consumed
or used up are reliably determinable. The useful life is the best estimate of the period over which the asset is expected to contribute
directly or indirectly to our future cash flows. The useful life is based on the duration of the expected use of the asset by us
and the legal, regulatory or contractual provisions that constrain the useful life and future cash flows of the asset, including
regulatory acceptance and approval, obsolescence, demand, competition and other economic factors. We evaluate the remaining useful
life of intangible assets each reporting period to determine whether any revision to the remaining useful life is required. If
the remaining useful life is changed, the remaining carrying amount of the intangible asset will be amortized prospectively over
the revised remaining useful life. If an income approach is used to measure the fair value of an intangible asset, we consider
the period of expected cash flows used to measure the fair value of the intangible asset, adjusted as appropriate for company-specific
factors discussed above, to determine the useful life for amortization purposes.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">If no regulatory, contractual, competitive,
economic or other factors limit the useful life of the intangible to us, the useful life is considered indefinite. Intangibles
with an indefinite useful life are not amortized until its useful life is determined to be no longer indefinite. If the useful
life is determined to be finite, the intangible is tested for impairment and the carrying amount is amortized over the remaining
useful life in accordance with intangibles subject to amortization. Indefinite-lived intangibles are tested for impairment annually
and more frequently if events or circumstances indicate that it is more-likely-than-not that the asset is impaired.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><i><u>Impairment of Long-Lived Assets
and Intangibles Other Than Goodwill</u></i></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">We account for the impairment of long-lived
assets in accordance with ASC 360<i>, Property, Plant and Equipment</i> and ASC 350, <i>Intangibles – Goodwill and Other,
</i>which require that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to its expected future undiscounted net cash flows generated
by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which
the carrying amounts of the assets exceed the fair value of the assets based on the present value of the expected future cash
flows associated with the use of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell. Based on management’s evaluation, there was no impairment loss recorded during the three months
ended March 31, 2019.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><i><u>Net Loss Per Share</u></i></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0 0 0 42.55pt; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Basic loss per share is computed by
dividing our net loss available to common shareholders by the weighted average number of shares of common stock outstanding during
the year. Diluted loss per share is computed by dividing our net loss available to common shareholders by the diluted weighted
average number of shares of common stock during the period. Since we experienced a net loss for both periods presented, basic
and diluted net loss per share are the same. As such, diluted loss per share for the three months ended March 31, 2019 and 2018
excludes the impact of potentially dilutive common shares related to the conversion of our Senior Notes and outstanding stock
options and warrants since those shares would have an anti-dilutive effect on loss per share.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><i><u>Recently Adopted Accounting Pronouncements</u></i></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">On January 1, 2019, we adopted Accounting
Standards Codification (ASC) 842, <i>Leases</i>. ASC 842 was issued to increase transparency and comparability among entities
by recognizing right-of-use assets and lease liabilities on the balance sheet and disclosing key information about our lease agreements.
We elected practical expedients upon transition that allows us to not reassess the lease classification of our leases, whether
initial direct costs qualify for capitalization for our leases or whether any expired contracts are or contain leases. Additionally,
we elected the optional transition method that allows for a cumulative effect adjustment in the period of adoption and we did not
restate prior periods. The adoption of the new guidance on leasing resulted in the recognition of a right-of-use asset of $293,198
and lease obligations of $303,161. The difference between the right-of-use asset and the lease obligations is due to deferred rent
liability related to our facility operating lease at December 31, 2018.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 13.5pt"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">The adoption of the new guidance did
not have a material impact on the condensed consolidated statement of operations. For further details regarding the adoption of
this standard, see Note 7, “Operating Leases.”</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Intangible assets at March 31, 2019
and December 31, 2018 consisted of the following:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<table cellspacing="0" cellpadding="0" style="font: 11pt Calibri, Helvetica, Sans-Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">March 31, 2019</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">December 31, 2018</font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 56%; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Gross intangible assets</font></td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 18%; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">11,059,429</font></td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 20%; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">11,059,429</font></td>
<td style="width: 1%; line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Less: accumulated amortization</font></td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">(820,479</font></td>
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">(621,647</font></td>
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Total intangible assets, net</font></td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">10,238,950</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">10,437,782</font></td>
<td style="line-height: 107%"> </td></tr>
</table>
<p style="margin: 0pt"></p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">The computation of net loss per share
for the three months ended March 31, 2019 and 2018 was as follows:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 11pt Calibri, Helvetica, Sans-Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td colspan="6" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>For the three months ended</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>March 31,</b></p></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif"><b>2019</b></font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif"><b>2018</b></font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif"><b>Basic and diluted net loss per share:</b></font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"> </td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="width: 72%; padding-left: 10pt; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Net loss</font></td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 11%; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">(750,832</font></td>
<td style="width: 1%; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 11%; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">(1,096,798</font></td>
<td style="width: 1%; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 10pt; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Weighted-average number of common shares-basic and diluted</font></td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">38,674,265</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">35,272,626</font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"> </td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 20pt; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Basic and diluted net loss per share</font></td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">(0.02</font></td>
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">(0.03</font></td>
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
</table>
<p style="margin: 0pt"></p>
1782
P2Y
1542897
2020376
15264
17375
12077897
12481068
10238950
10437782
2954152
2780050
2004047
2134346
724724
645704
128220
103259
283057
292102
19179844
19121285
3867
3867
-8374966
-7624134
12077897
12481068
397766
470228
484750
821388
-882516
-1291616
5985
1024
4600
87740
-881131
-1378332
-130299
-281534
-0.02
-0.03
38674265
35272626
35272626
38674265
38674265
35272626
9123745
9701018
3527
4228723
-3859086
3867
19121285
-7624134
-1800000
3867
3527
19179844
12228723
-1685000
-8374966
-4955884
373164
7276366
36140
-130299
-281534
198832
25435
2111
2112
-492429
-1069008
34924
102561
-9045
54194
4600
51600
-10632
-1257
-1782
124789
3917763
1305577
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">The following potentially dilutive securities
were excluded from the computation of diluted net income per share as their effect would have been anti-dilutive for the periods
presented.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 11pt Calibri, Helvetica, Sans-Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif"><b>2019</b></font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif"><b>2018</b></font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 72%; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Stock options and purchase warrants</font></td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 11%; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">3,917,763</font></td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 11%; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="width: 1%; line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Senior convertible notes</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">124,789</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">1,305,577</font></td>
<td style="line-height: 107%"> </td></tr>
</table>
<p style="margin: 0pt"></p>
-492429
-1070790
-11037147
3037147
8000000
true
true
true
38674265
58559
58559
58559
1700000
795000
788000
384400
58559
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><i><u>Stock-based Compensation</u></i></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Stock-based compensation expense is
based on the grant-date fair value estimated in accordance with the provisions of ASC 718, <i>Compensation-Stock Compensation</i>.
We expense stock-based compensation to employees over the requisite service period based on the estimated grant-date fair value
of the awards. Stock-based awards with graded-vesting schedules are recognized on a straight-line basis over the requisite service
period for each separately vesting portion of the award. We estimate the fair value of stock option grants using the Black-Scholes
option pricing model, and the assumptions used in calculating the fair value of stock-based awards represent management’s
best estimates and involve inherent uncertainties and the application of management’s judgment. Stock-based compensation
costs are recorded as general and administrative or research and development costs in the statements of operations based upon
the underlying individual’s role.</p>
-25582
36025
1782
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><i><u>Basis of Presentation</u></i></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America (“U.S. GAAP”) for interim financial information and with the instructions of the Securities and Exchange
Commission (“SEC”) on Form 10-Q and Rule 10-01 of Regulation S-X.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Accordingly, they do not include all
the information and disclosures required by U.S. GAAP for complete financial statements. All material intercompany accounts and
transactions have been eliminated in consolidation. In the opinion of management, the accompanying unaudited 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 our Annual Report on Form 10-K
for the year ended December 31, 2018, as filed with the SEC (as amended). The results of operations for the interim periods shown
in this report are not necessarily indicative of the results that may be expected for any other interim period or for the full
year.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Certain amounts have been reclassified
in our March 31, 2018 statement of operations to confirm to the current year presentation.</p>
8000000
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><i><u>Research and Development</u></i></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Research and development costs are
expensed as incurred and consisted of direct and overhead-related expenses.</p>
8000000
8000000
820479
621647
1685000
1800000
false
275251
293198
58504
225381
247200
257832
5535
5535
115000
115000
216965
115000
-19276
293198
-9963
303161
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>Note 1 – Organization and Summary
of Significant Accounting Policies</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><i><u>Business Activities and Organization</u></i></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Processa Pharmaceuticals, Inc. is 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 multiple indications (i.e.,
the use of a drug to treat a particular disease) and searching for additional products for our portfolio.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Our lead product, PCS-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 it affects that are important in the treatment of these
conditions. Based on its pharmacological activity, we have identified multiple unmet medical need conditions where the use of PCS-499
may result in clinical efficacy. The lead indication currently under development for PCS-499 is Necrobiosis Lipoidica (NL). On
June 22, 2018, the FDA granted orphan-drug designation to PCS-499 for the treatment of NL. On September 28, 2018, the FDA cleared
our IND for PCS-499 in NL such that we could move forward with the Phase 2a safety-dose tolerability trial. We dosed our first
NL patient in this Phase 2a clinical trial on January 29, 2019. As of May 1, 2019, we have enrolled nine patients in the trial
with one of these patients discontinuing in the trial because of the inconvenience associated with a clinical trial. No adverse
effects were noted in this patient. All eight of the other patients are receiving 1.8 gm of PCS-499 daily with no dose limiting
side effects. One of these patients has been dosed for three months while two others will soon reach three months of treatment
on PCS-499. As expected, we have not seen any significant change in the NL lesion in the one patient who has been treated for three
months. Our expectation is that changes in the NL lesion will take at least six months to see any major effect. We anticipate all
12 patients planned for this trial will be enrolled on or before June 2019. In addition, we expect to request a meeting with the
FDA before the end of 2019 to further discuss the development of PCS-499, including the next clinical trial.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">We continue to evaluate other unmet
need conditions for PCS-499, as well as other potential assets and are developing strategies, including the regulatory pathway
and commercialization plans for product(s) for these unmet medical conditions.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><i><u>Basis of Presentation</u></i></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America (“U.S. GAAP”) for interim financial information and with the instructions of the Securities and Exchange
Commission (“SEC”) on Form 10-Q and Rule 10-01 of Regulation S-X.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Accordingly, they do not include all
the information and disclosures required by U.S. GAAP for complete financial statements. All material intercompany accounts and
transactions have been eliminated in consolidation. In the opinion of management, the accompanying unaudited 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 our Annual Report on Form 10-K
for the year ended December 31, 2018, as filed with the SEC (as amended). The results of operations for the interim periods shown
in this report are not necessarily indicative of the results that may be expected for any other interim period or for the full
year.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Certain amounts have been reclassified
in our March 31, 2018 statement of operations to confirm to the current year presentation.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><i><u>Going Concern and Management’s
Plans</u></i></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Our condensed consolidated financial
statements have been prepared using U.S. GAAP and are based on the assumption that we will continue as a going concern, which contemplates
the realization of assets and liquidation of liabilities in the normal course of business. We face certain risks and uncertainties
that are present in many emerging 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. We currently have no customers or pharmaceutical
products to sell or distribute. These risks and other factors raise substantial doubt about our ability to continue as a going
concern.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">We have relied exclusively on private
placements with a small group of accredited investors to finance our business and operations. We do not have any prospective arrangements
or credit facilities as a source of future funds. We have not had any revenue since our inception. We are looking at ways to add
a revenue stream to offset some of our expenses but do not currently have any revenue under contract or any immediate sales prospects.
During the three months ended March 31, 2019, we had an accumulated deficit of $8.4 million, incurred a net loss for the three
months of $750,832 and used $492,429 in net cash from operating activities from continuing operations. At March 31, 2019, we had
cash and cash equivalents totaling $1.2 million and a Clinical Trial Funding commitment from an investor (PoC Capital) of $1.7
million. During the three months ended March 31, 2019, PoC Capital paid $115,000 of costs on our behalf related to our Phase 2a
trial for NL directly to our CRO. Subsequent to March 31, 2019, PoC Capital has paid an additional $216,965 directly to our CRO.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Based on our current plan and our available
resources (including the Clinical Trial Funding commitment from PoC Capital), we will need to raise additional capital before the
end of the second quarter of 2019 in order to fund our future operations. While we believe our current resources are adequate to
complete our current Phase 2a trial for NL, we do not currently have resources to conduct other future trials without raising additional
capital. As noted above, the timing and extent of our spending will depend on the costs associated with, and the results
of our Phase 2a trial for NL. Our anticipated spending and our cash flow needs could change significantly as the trial progresses.
There may be costs we incur during our trial that we do not currently anticipate in order to complete the trial, requiring us to
need additional capital sooner than currently expected.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Additional funding may not be available
to us on acceptable terms, or at all. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the
scope of, or suspend our current or future clinical trials, or research and development programs. We may seek to raise any necessary
additional capital through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances,
licensing arrangements and other marketing and distribution arrangements. To the extent that we raise additional capital through
marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties,
we may have to relinquish valuable rights to our product candidates, future revenue streams, research programs or product candidates
or to grant licenses on terms that may not be favorable to us. If we raise additional capital through public or private equity
offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation
or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through debt financing,
we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt,
making capital expenditures or declaring dividends.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Uncertainty concerning our ability to
continue as a going concern may hinder our ability to obtain future financing. Continued operations and our ability to continue
as a going concern are dependent on our ability to obtain additional funding in the future and thereafter, and no assurances can
be given that such funding will be available at all, in a sufficient amount, or on reasonable terms. Without additional funds from
debt or equity financing, sales of assets, sales or out-licenses of intellectual property or technologies, or other transactions
providing funds, we will rapidly exhaust our resources and be unable to continue operations. Absent additional funding, we believe
that our cash and cash equivalents will not be sufficient to fund our operations for a period of one year or more after the date
that these 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.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">  </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">As a result, substantial doubt exists
about our ability to continue as a going concern within one year after the date that these condensed consolidated financial statements
are available to be issued. The accompanying condensed consolidated financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of recorded assets, or the amounts and classification of liabilities
that might be different should we be unable to continue as a going concern based on the outcome of these uncertainties described
above.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><i><u>Use of Estimates</u></i></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 27pt"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">In preparing our condensed consolidated
financial statements and related disclosures in conformity with GAAP and pursuant to the rules and regulations of the SEC, we make
estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates
are used for, but not limited to: stock-based compensation, determining the fair value of acquired assets and assumed liabilities,
intangible assets, and income taxes. These estimates and assumptions are continuously evaluated and are based on management’s
experience and knowledge of the relevant facts and circumstances. While we believe the estimates to be reasonable, actual results
could differ materially from those estimates and could impact future results of operations and cash flows.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><i><u>Intangible Assets</u></i></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">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.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">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, <i>Intangibles – Goodwill and Other. </i>Those that have no alternative
future uses (in research and development projects or otherwise) and therefore no separate economic value are considered research
and development costs and are expensed as incurred. Amortization of intangibles used in research and development activities is
a research and development cost.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Intangibles with a finite useful life
are amortized using the straight-line method unless the pattern in which the economic benefits of the intangible assets are consumed
or used up are reliably determinable. The useful life is the best estimate of the period over which the asset is expected to contribute
directly or indirectly to our future cash flows. The useful life is based on the duration of the expected use of the asset by us
and the legal, regulatory or contractual provisions that constrain the useful life and future cash flows of the asset, including
regulatory acceptance and approval, obsolescence, demand, competition and other economic factors. We evaluate the remaining useful
life of intangible assets each reporting period to determine whether any revision to the remaining useful life is required. If
the remaining useful life is changed, the remaining carrying amount of the intangible asset will be amortized prospectively over
the revised remaining useful life. If an income approach is used to measure the fair value of an intangible asset, we consider
the period of expected cash flows used to measure the fair value of the intangible asset, adjusted as appropriate for company-specific
factors discussed above, to determine the useful life for amortization purposes.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">If no regulatory, contractual, competitive,
economic or other factors limit the useful life of the intangible to us, the useful life is considered indefinite. Intangibles
with an indefinite useful life are not amortized until its useful life is determined to be no longer indefinite. If the useful
life is determined to be finite, the intangible is tested for impairment and the carrying amount is amortized over the remaining
useful life in accordance with intangibles subject to amortization. Indefinite-lived intangibles are tested for impairment annually
and more frequently if events or circumstances indicate that it is more-likely-than-not that the asset is impaired.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">  </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><i><u>Impairment of Long-Lived Assets
and Intangibles Other Than Goodwill</u></i></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">We account for the impairment of long-lived
assets in accordance with ASC 360<i>, Property, Plant and Equipment</i> and ASC 350, <i>Intangibles – Goodwill
and Other,</i> which require that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an asset to its expected future undiscounted net cash
flows generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the
amount by which the carrying amounts of the assets exceed the fair value of the assets based on the present value of the expected
future cash flows associated with the use of the asset. Assets to be disposed of are reported at the lower of the carrying amount
or fair value less costs to sell. Based on management’s evaluation, there was no impairment loss recorded during the three
months ended March 31, 2019.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><i><u>Stock-based Compensation</u></i></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Stock-based compensation expense is
based on the grant-date fair value estimated in accordance with the provisions of ASC 718, <i>Compensation-Stock Compensation</i>.
We expense stock-based compensation to employees over the requisite service period based on the estimated grant-date fair value
of the awards. Stock-based awards with graded-vesting schedules are recognized on a straight-line basis over the requisite service
period for each separately vesting portion of the award. We estimate the fair value of stock option grants using the Black-Scholes
option pricing model, and the assumptions used in calculating the fair value of stock-based awards represent management’s
best estimates and involve inherent uncertainties and the application of management’s judgment. Stock-based compensation
costs are recorded as general and administrative or research and development costs in the statements of operations based upon the
underlying individual’s role.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><i><u>Net Loss Per Share</u></i></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0 0 0 42.55pt; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Basic loss per share is computed by
dividing our net loss available to common shareholders by the weighted average number of shares of common stock outstanding during
the year. Diluted loss per share is computed by dividing our net loss available to common shareholders by the diluted weighted
average number of shares of common stock during the period. Since we experienced a net loss for both periods presented, basic and
diluted net loss per share are the same. As such, diluted loss per share for the three months ended March 31, 2019 and 2018 excludes
the impact of potentially dilutive common shares related to the conversion of our Senior Notes and outstanding stock options and
warrants since those shares would have an anti-dilutive effect on loss per share.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><i><u>Research and Development</u></i></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Research and development costs are expensed
as incurred and consisted of direct and overhead-related expenses.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><i><u>Recently Adopted Accounting Pronouncements</u></i></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">On January 1, 2019, we adopted Accounting
Standards Codification (ASC) 842, <i>Leases</i>. ASC 842 was issued to increase transparency and comparability among entities
by recognizing right-of-use assets and lease liabilities on the balance sheet and disclosing key information about our lease agreements.
We elected practical expedients upon transition that allows us to not reassess the lease classification of our leases, whether
initial direct costs qualify for capitalization for our leases or whether any expired contracts are or contain leases. Additionally,
we elected the optional transition method that allows for a cumulative effect adjustment in the period of adoption and we did not
restate prior periods. The adoption of the new guidance on leasing resulted in the recognition of a right-of-use asset of $293,198
and lease obligations of $303,161. The difference between the right-of-use asset and the lease obligations is due to deferred rent
liability related to our facility operating lease at December 31, 2018.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 13.5pt"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">The adoption of the new guidance did
not have a material impact on the condensed consolidated statement of operations. For further details regarding the adoption of
this standard, see Note 7, “Operating Leases.”</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>Note 5 – Senior Convertible
Notes</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">At March 31, 2019 and December 31,
2018, we had $230,000 of Senior Convertible Notes outstanding held by Canadian individuals that cannot be converted until the
Alberta Securities Commission permits the issuance of our common stock units (consisting of shares of our common stock and stock
purchase warrants) to these Canadian holders. If the Alberta Securities Commission does not allow us to convert this debt into
common stock units, we will be required to repay the principal and related accrued interest of approximately $255,000.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>Note 7 - Operating Leases</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">We lease our office space under an operating
lease agreement. This lease does not have significant rent escalation, concessions, leasehold improvement incentives, or other
build-out clauses. Further, the lease does not contain contingent rent provisions. We also lease office equipment under an operating
lease. Our office space lease includes both lease (e.g., fixed payments including rent, taxes, and insurance costs) and non-lease
components (e.g., common-area or other maintenance costs), which are accounted for as a single lease component as we have elected
the practical expedient to group lease and non-lease components for all leases. Our leases do not provide an implicit rate and,
as such, we have used our incremental borrowing rate of 8% in determining the present value of the lease payments based
on the information available at the lease commencement date.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">  </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Lease costs included in our statement
of operations totaled $24,563 and $27,981 for the three months ended March 31, 2019 and 2018, respectively. The weighted average
remaining lease terms and discount rate for our operating leases were as follows at March 31, 2019:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 11pt Calibri, Helvetica, Sans-Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 87%; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Weighted average remaining lease term (years) for our facility and equipment leases</font></td>
<td style="width: 2%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 9%; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">3.35</font></td>
<td style="width: 1%; line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Weighted average discount rate for our facility and equipment leases</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">8.00</font></td>
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">%</font></td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Maturities of our lease liabilities
for all operating leases were as follows as of March 31, 2019:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 11pt Calibri, Helvetica, Sans-Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 79%; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">2019</font></td>
<td style="width: 2%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 17%; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">73,508</font></td>
<td style="width: 1%; line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">2020</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">92,603</font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">2021</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">90,495</font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">2022</font></td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">69,741</font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 10pt; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Total lease payments</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">326,347</font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-left: 20pt; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Less: Interest</font></td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">(42,462</font></td>
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 10pt; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Present value of lease liabilities</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">283,885</font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-left: 10pt; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Less: current maturities</font></td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">(58,504</font></td>
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 10pt; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Non-current lease liability</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">225,381</font></td>
<td style="line-height: 107%"> </td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"></p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><i><u>Business Activities and Organization</u></i></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Processa Pharmaceuticals, Inc. is 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 multiple indications (i.e.,
the use of a drug to treat a particular disease) and searching for additional products for our portfolio.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Our lead product, PCS-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 it affects that are important in the treatment of these
conditions. Based on its pharmacological activity, we have identified multiple unmet medical need conditions where the use of PCS-499
may result in clinical efficacy. The lead indication currently under development for PCS-499 is Necrobiosis Lipoidica (NL). On
June 22, 2018, the FDA granted orphan-drug designation to PCS-499 for the treatment of NL. On September 28, 2018, the FDA cleared
our IND for PCS-499 in NL such that we could move forward with the Phase 2a safety-dose tolerability trial. We dosed our first
NL patient in this Phase 2a clinical trial on January 29, 2019. As of May 1, 2019, we have enrolled nine patients in the trial
with one of these patients discontinuing in the trial because of the inconvenience associated with a clinical trial. No adverse
effects were noted in this patient. All eight of the other patients are receiving 1.8 gm of PCS-499 daily with no dose limiting
side effects. One of these patients has been dosed for three months while two others will soon reach three months of treatment
on PCS-499. As expected, we have not seen any significant change in the NL lesion in the one patient who has been treated for three
months. Our expectation is that changes in the NL lesion will take at least six months to see any major effect. We anticipate all
12 patients planned for this trial will be enrolled on or before June 2019. In addition, we expect to request a meeting with the
FDA before the end of 2019 to further discuss the development of PCS-499, including the next clinical trial.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">We continue to evaluate other unmet
need conditions for PCS-499, as well as other potential assets and are developing strategies, including the regulatory pathway
and commercialization plans for product(s) for these unmet medical conditions.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><i><u>Going Concern and Management’s
Plans</u></i></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Our condensed consolidated financial
statements have been prepared using U.S. GAAP and are based on the assumption that we will continue as a going concern, which contemplates
the realization of assets and liquidation of liabilities in the normal course of business. We face certain risks and uncertainties
that are present in many emerging 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. We currently have no customers or pharmaceutical
products to sell or distribute. These risks and other factors raise substantial doubt about our ability to continue as a going
concern.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">We have relied exclusively on private
placements with a small group of accredited investors to finance our business and operations. We do not have any prospective arrangements
or credit facilities as a source of future funds. We have not had any revenue since our inception. We are looking at ways to add
a revenue stream to offset some of our expenses but do not currently have any revenue under contract or any immediate sales prospects.
During the three months ended March 31, 2019, we had an accumulated deficit of $8.4 million, incurred a net loss for the three
months of $750,832 and used $492,429 in net cash from operating activities from continuing operations. At March 31, 2019, we had
cash and cash equivalents totaling $1.2 million and a Clinical Trial Funding commitment from an investor (PoC Capital) of $1.7
million. During the three months ended March 31, 2019, PoC Capital paid $115,000 of costs on our behalf related to our Phase 2a
trial for NL directly to our CRO. Subsequent to March 31, 2019, PoC Capital has paid an additional $216,965 directly to our CRO.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Based on our current plan and our available
resources (including the Clinical Trial Funding commitment from PoC Capital), we will need to raise additional capital before the
end of the second quarter of 2019 in order to fund our future operations. While we believe our current resources are adequate to
complete our current Phase 2a trial for NL, we do not currently have resources to conduct other future trials without raising additional
capital. As noted above, the timing and extent of our spending will depend on the costs associated with, and the results
of our Phase 2a trial for NL. Our anticipated spending and our cash flow needs could change significantly as the trial progresses.
There may be costs we incur during our trial that we do not currently anticipate in order to complete the trial, requiring us to
need additional capital sooner than currently expected.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Additional funding may not be available
to us on acceptable terms, or at all. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the
scope of, or suspend our current or future clinical trials, or research and development programs. We may seek to raise any necessary
additional capital through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances,
licensing arrangements and other marketing and distribution arrangements. To the extent that we raise additional capital through
marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties,
we may have to relinquish valuable rights to our product candidates, future revenue streams, research programs or product candidates
or to grant licenses on terms that may not be favorable to us. If we raise additional capital through public or private equity
offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation
or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through debt financing,
we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt,
making capital expenditures or declaring dividends.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Uncertainty concerning our ability to
continue as a going concern may hinder our ability to obtain future financing. Continued operations and our ability to continue
as a going concern are dependent on our ability to obtain additional funding in the future and thereafter, and no assurances can
be given that such funding will be available at all, in a sufficient amount, or on reasonable terms. Without additional funds from
debt or equity financing, sales of assets, sales or out-licenses of intellectual property or technologies, or other transactions
providing funds, we will rapidly exhaust our resources and be unable to continue operations. Absent additional funding, we believe
that our cash and cash equivalents will not be sufficient to fund our operations for a period of one year or more after the date
that these 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.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">  </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">As a result, substantial doubt exists
about our ability to continue as a going concern within one year after the date that these condensed consolidated financial statements
are available to be issued. The accompanying condensed consolidated financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of recorded assets, or the amounts and classification of
liabilities that might be different should we be unable to continue as a going concern based on the outcome of these uncertainties
described above.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">The weighted average remaining lease
terms and discount rate for our operating leases were as follows at March 31, 2019:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 11pt Calibri, Helvetica, Sans-Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 87%; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Weighted average remaining lease term (years) for our facility and equipment leases</font></td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 10%; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">3.35</font></td>
<td style="width: 1%; line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Weighted average discount rate for our facility and equipment leases</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">8.00</font></td>
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">%</font></td></tr>
</table>
<p style="margin: 0pt"></p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">Maturities of our lease liabilities
for all operating leases were as follows as of March 31, 2019:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 11pt Calibri, Helvetica, Sans-Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 79%; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">2019</font></td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 18%; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">73,508</font></td>
<td style="width: 1%; line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">2020</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">92,603</font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">2021</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">90,495</font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">2022</font></td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">69,741</font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 10pt; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Total lease payments</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">326,347</font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-left: 20pt; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Less: Interest</font></td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">(42,462</font></td>
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 10pt; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Present value of lease liabilities</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">283,885</font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-left: 10pt; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Less: current maturities</font></td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">(58,504</font></td>
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 10pt; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Non-current lease liability</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">225,381</font></td>
<td style="line-height: 107%"> </td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"></p>
283885
303161
1782
3037147
11038929
1782
9000
24563
27981
P3Y4M6D
0.0800
73508
92603
90495
69741
326347
-42462
0.08
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0 0 0 11pt; text-align: justify; text-indent: -11pt"><b>Note
4 - Stock-based Compensation</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">We did not grant any stock options
to employees or non-employees during the three months ended March 31, 2019 or 2018. At March 31, 2019, we had outstanding
options to purchase 384,400 shares of our common stock of which options for the purchase of 9,000 shares of our common stock were
vested. We recorded $58,559 of stock-based compensation expense for the three months ended March 31, 2019 as general and administrative
expense. No expense was recorded during the three months ended March 31, 2018 since we had not stock options outstanding at March
31, 2018.</p>
17947
If the Alberta Securities Commission does not allow us to convert this debt into common stock units, we will be required to repay the principal and related accrued interest of approximately $255,000.