PROCESSA PHARMACEUTICALS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operation (form 10-Q)

Forward Looking Statements

This Quarterly Report on Form 10-Q contains "forward-looking statements" that
reflect, when made, the Company's expectations or beliefs concerning future
events that involve risks and uncertainties. Forward-looking statements
frequently are identified by the words "believe," "anticipate," "expect,"
"estimate," "intend," "project," "will be," "will continue," "will likely
result," or other similar words and phrases. Similarly, statements herein that
describe the Company's objectives, plans or goals also are forward-looking
statements. Actual results could differ materially from those projected, implied
or anticipated by the Company's forward-looking statements. Some of the factors
that could cause actual results to differ include: our limited operating
history, limited cash and history of losses; our ability to achieve
profitability; our ability to obtain adequate financing to fund our business
operations in the future; the impact of the global pandemic caused by COVID-19,
including its impact on our ability to obtain financing or complete clinical
trials; our ability to secure required FDA or other governmental approvals for
our product candidates and the breadth of the indication sought; the impact of
competitive or alternative products, technologies and pricing; whether we are
successful in developing and commercializing our technology, including through
licensing; the adequacy of protections afforded to us and/or our licensor by the
anticipated patents that we own or license and the cost to us of maintaining,
enforcing and defending those patents; our and our licensor's ability to protect
non-patented intellectual property rights; our exposure to and ability to defend
third-party claims and challenges to our and our licensor's anticipated patents
and other intellectual property rights; and our ability to continue as a going
concern. For a discussion of these and all other known risks and uncertainties
that could cause actual results to differ from those contained in the
forward-looking statements, see "Risk Factors" in the Company's Annual Report on
Form 10-K for the year ended December 31, 2021, which is available on the SEC's
website at www.sec.gov. All forward-looking statements are qualified in their
entirety by this cautionary statement, and the Company undertakes no obligation
to revise or update this Quarterly Report on Form 10-Q to reflect events or
circumstances after the date hereof.



For purposes of this Management's Discussion and Analysis of Financial Condition
and Results of Operations, references to the "Company," "we," "us" or "our"
refer to the operations of Processa Pharmaceuticals, Inc. and its direct and
indirect subsidiaries for the periods described herein.



15







Overview



Our mission is to develop drug products that improve the survival and/or quality
of life for patients with high unmet medical need conditions for which few or no
treatment options currently exist. We are a diversified clinical-stage
development company, not a discovery company, that seeks to identify and develop
drugs for patients who need better treatment options. To increase the
probability of development success, our pipeline only includes drugs which have
previously demonstrated some efficacy in the targeted population or a drug with
very similar pharmacological properties that has been shown to be effective

in
the population.

Our screening criteria for identifying and selecting new candidates include:

  ? addressing an unmet or underserved clinical need,
  ? having demonstrated evidence of efficacy in humans, and

? leveraging our regulatory science approach to improve the probability of

    approval.

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



Our pipeline includes drugs that (i) already have clinical proof-of-concept data
demonstrating the desired pharmacological activity in humans or, minimally,
clinical evidence in the form of case studies or clinical experience
demonstrating the drug or a similar drug pharmacologically can successfully
treat patients with the targeted indication; (ii) target indications for which a
single positive pivotal study demonstrating efficacy might provide enough
evidence that the clinical benefits of the drug and its approval outweighs the
risks associated with the drug or the present standard of care (e.g., some
orphan indications, many serious life-threatening conditions, some serious
quality of life conditions); and/or (iii) target indications where the
prevalence of the condition and the likelihood of patients enrolling in a study
meet the desired timeframe to demonstrate that the drug can, at some level,
treat or potentially treat patients with the condition.



To advance our mission, we have assembled an experienced and successful
development team with a track record of drug approvals and successful exits. Our
team is experienced in developing drug products through all principal regulatory
tiers from IND enabling studies to NDA submission. Throughout their careers, the
combined scientific, development and regulatory experience of our team members
have resulted in more than 30 drug approvals by the FDA, over 100 meetings with
the FDA, and involvement with more than 50 drug development programs, including
drug products targeted to patients who have an unmet medical need. Although we
believe that the skills and experience of our team members in drug development
and commercialization is an important indicator of our future success, the past
successes of our team members in developing and commercializing pharmaceutical
products do not guarantee that they will successfully develop and commercialize
drugs in our current pipeline. In addition, the growth in revenues of companies
in which our executive officers and directors served was due to many factors and
does not guarantee that they will successfully operate or manage us or that we
will experience similar growth in revenues, even if they continue to serve as
executive officers and/or directors.



Our ability to generate meaningful revenue from any products depends on our
ability to out-license the drugs before or after we obtain FDA NDA approval.
Even if our products are authorized and approved by the FDA, it should be noted
that the products must still meet the challenges of successful marketing,
distribution, and consumer acceptance.



16







Our Strategy



Our strategy is to obtain and develop drugs that will not only treat patients
with unmet medical need conditions, but, with our regulatory science approach,
also have the potential to be more efficiently developed with a greater
probability of development success than what typically occurs in the
biotech-pharma industry, as well as a better return on investment given lower
development costs, more efficient development, and high commercial value. Given
the prior successes of our regulatory science approach, we have selected drugs
for our portfolio which may have a greater chance for approval in a population
of patients who desperately need better treatment options. We have applied
rigorous standards to identify drugs for our portfolio, namely:

i. The drug must represent a treatment option to patients with a high unmet

medical need condition by improving survival and/or quality of life for

these patients,

ii. The drug or its metabolite or a drug with similar pharmacological

properties must have demonstrated some evidence of efficacy in the target

population, and

iii. The drug presents opportunities to be developed such that within 2-4 years,

critical value-added clinical milestones can be achieved while advancing

the drug closer to commercialization and adding to the potential for a high

       return on investment.

To add significant value to our in-licensed drugs within 2 to 4 years, the drugs
must be in the clinical development stage and not in discovery stage, and during
those 2 to 4 years we must be able to obtain clinical data to support the added
value. The additional clinical data could range from clinical proof-of-concept
data which further demonstrate that the proposed pharmacology occurs clinically
in the targeted patient population to a pivotal well-designed randomized
controlled trial.



Recent Developments



On March 23, 2022, we entered into a purchase agreement (the "Purchase
Agreement") with Lincoln Park Capital Fund, LLC ("Lincoln Park"), pursuant to
which Lincoln Park has committed to purchase up to $15.0 million of shares (the
"Purchase Shares") of our common stock, subject to the terms and conditions in
the Purchase Agreement. We issued 123,609 shares of common stock (valued at
$450,000) to Lincoln Park as a commitment fee in connection with entering into
the Purchase Agreement and agreed to reimburse Lincoln Park $25,000 for fees
incurred in connection with the Purchase Agreement. Concurrent with entering
into the Purchase Agreement, we also entered into a registration rights
agreement with Lincoln Park (the "Registration Rights Agreement"), pursuant to
which we agreed to take certain actions relating to the registration under the
Securities Act of 1933, as amended, of the offer and sale of the shares of
common stock available for issuance under the Purchase Agreement. See Note 3 to
the Condensed Consolidated Financial Statements for additional details
concerning the Purchase Agreement. We put this facility in place to ensure that
financing will not hinder the continued development of our pipeline should we
run into unexpected circumstances in the future.



Impact of COVID-19



The COVID-19 pandemic continues to create uncertainties in expected timelines by
causing delays in clinical trials and disruptions in the supply chain for raw
materials used in clinical trial work. We have experienced delays in the
enrollment of patients in our PCS499 Phase 2B trial due to COVID-19 and the
rareness of the disease. Some potential patients died from COVID-19 prior to
screening and others continue to be reluctant to travel to our testing sites for
fear of contracting COVID-19. Delays in enrollment lengthen the time of studies
and increase their costs, which could materially impact our business in future
periods. While we are hopeful the infection rate of COVID-19 will continue to
decline, we cannot predict the future impact COVID-19 will have on our current
and future clinical trials. Continued delays could materially impact our
business in future periods and further extend our timelines.



Our Drug Pipeline



We currently have five drugs: four in various stages of clinical development
(Next Generation Capecitabine previously identified as PCS6422, PCS12852,
PCS499, and PCS3117) and one in nonclinical development (PCS11T). A summary

of
each drug is provided below:



                               [[Image Removed]]



17

PCS6422 ("Next Generation Capecitabine" when administered with Capecitabine)

On August 23, 2020, we in-licensed PCS6422 from Elion Oncology, Inc. ("Elion"),
pursuant to which we acquired an exclusive license to develop, manufacture and
commercialize PCS6422 globally.



PCS6422 is an oral, potent, selective, and irreversible inhibitor of
dihydropyrimidine dehydrogenase (DPD), the enzyme that rapidly metabolizes a
common chemotherapy drug known as 5-Fluorouracil (5-FU), into inactive
metabolites, such as ?-fluoro-?-alanine (F-Bal). F-Bal is a metabolite that has
no anti-cancer activity but causes unwanted side effects, which notably leads to
dose interruptions and significantly affects a patient's quality of life. F-Bal
is thought to cause Hand-Foot Syndrome (HFS) and other side effects associated
with 5-FU, and greater formation of F-Bal appears to be associated with a
decrease in the antitumor activity of 5-FU. HFS can affect activities of daily
living, quality of life, and may require dose interruptions/adjustments and even
therapy discontinuation resulting in suboptimal tumor effects. We believe that
the inhibition of DPD by PCS6422 will significantly reduce 5-FU side effects
related to a decrease in F-Bal, although the timeframe and magnitude for DPD
inhibition have been shown to vary, ranging from 2-14 days depending on the de
novo formation of DPD within a patient and the dosage regimen of PCS6422. With
the inhibition of DPD, the level of the 5-FU anti-cancer metabolites could also
be higher within cancer and normal cells leading to an improved efficacy profile
and/or increased side effects associated with these anabolites such as
neutropenia. By combining capecitabine (an oral pro-drug form of 5-FU) with
PCS6422, the change in 5-FU metabolism should result in an increase in the
systemic exposure of 5-FU based on the 5-FU Area Under the Plasma Concentration
Curve (AUC) per mg of capecitabine dosed. This results in needing less
capecitabine to kill cancer cells and treat each patient, making the combination
of PCS6422 and capecitabine (the "Next Generation Capecitabine") more potent
than current FDA approved capecitabine.



Fluoropyrimidines (e.g., 5-FU, capecitabine) remain the cornerstone of treatment
for many types of cancers, either as monotherapy or in combination with other
chemotherapy agents by an estimated two million patients annually. Xeloda®, the
brand name of capecitabine, is an oral pro-drug of 5-FU and approved as
first-line therapy for metastatic colorectal and breast cancer. However, its use
is limited by adverse effects such as the development of HFS in up to 60% of
patients.



Elion evaluated the potential for the combination of PCS6422 with capecitabine
as a treatment of advanced gastrointestinal (GI) tumors. Nonclinical efficacy
data indicated that in colorectal cancer models, pretreatment with PCS6422
enhanced the antitumor activity of capecitabine. PCS6422 dramatically increased
the antitumor potency of capecitabine without increasing the toxicity. The
antitumor efficacy of the combination of PCS6422 and capecitabine was tested in
several xenograft animal models with human breast, pancreatic and colorectal
cancer cells. These preclinical xenograft models demonstrate that PCS6422
potentiates the antitumor activity of capecitabine and significantly reduces the
dose of capecitabine required to be efficacious.



Other DPD enzyme inhibitors (e.g., Gimeracil used in Teysuno® approved only
outside the US) act as competitive reversible inhibitors. These agents must be
present when 5-FU or capecitabine are administered to inhibit 5-FU breakdown by
DPD in order to improve the efficacy and safety profiles of 5-FU. Given the
reversible nature of their effect on DPD, over time 5-FU metabolism to F-Bal
will return if the reversible inhibitor is not present, decreasing the amount of
5-FU in the cancer cells and decreasing the potential cytotoxicity on the cancer
cells. There is also evidence that administering large amounts of DPD inhibitors
directly with 5-FU may also decrease the antitumor effect of the 5-FU. Because
PCS6422 is an irreversible inactivator of DPD, it is dosed the day before
capecitabine administration and its effect on DPD can last longer than the
reversible DPD inhibitors and beyond the time 5-FU exists in the cancer cell,
even after PCS6422 has been completely eliminated out of the body. We believe
this can optimize the potential cytotoxic effect of the 5-FU nucleotide
metabolites and minimize the catabolism of 5-FU to F-Bal.



Prior to Elion's involvement, two multicenter Phase 3 studies were conducted in
patients with colorectal cancer with PCS6422 administered in 10-fold excess to
5-FU and administered with the 5-FU. Unfortunately, we believe the dose of
PCS6422 during these trials was not optimal and that PCS6422 was not
administered early enough to irreversibly affect the DPD enzyme, thus the
regimen tended to produce less antitumor benefit than the control arm with the
standard regimen of 5-FU/leucovorin (LV) without PCS6422. In addition, later
preclinical work suggested that when PCS6422 was present in excess of 5-FU and
at the same time, it diminished the antitumor activity of 5-FU, which we believe
supports the rationale of dosing PCS6422 such that the exposure at the time of
5-FU or capecitabine administration is as low as possible, yet continues to
inhibit DPD activity to less than 10% of normal activity.



Elion met with the FDA in 2019 and agreed upon the clinical development program
required for the combination of PCS6422 and capecitabine as first-line therapy
for metastatic colorectal cancer when treatment with fluoropyrimidine therapy
alone is preferred. On May 17, 2020, an IND for the Phase 1B study was granted
safe to proceed by the FDA. This Phase 1B study was designed to evaluate: (i)
the safety and tolerability of PCS6422 and several doses of capecitabine in
advanced GI tumor patients; (ii) the pharmacokinetics of PCS6422, capecitabine,
5-FU and selected metabolites; (iii) the activity of DPD over time after PCS6422
administration; and (iv) the maximum tolerated dose in up to 30 patients over
multiple cycles.



On August 2, 2021, we enrolled the first patient in our Phase 1B dose-escalation
maximum tolerated dose trial in patients with advanced refractory
gastrointestinal (GI) tract tumors. Our interim analysis of Cohorts 1 and 2A
found no dose-limiting toxicities (DLTs), no drug related adverse events greater
than Grade 1, and no HFS. In the Phase 1B study, it was demonstrated that the
irreversible inhibition of DPD by PCS6422 could alter the elimination of 5-FU
making NGC significantly more potent (greater than 50 times more potent) and
potentially lead to higher levels of the anabolites which can kill replicating
cancer and normal cells. By administering NGC to cancer patients, the balance
between anabolites and catabolites changes depending on the dosage regimens of
PCS6422 and capecitabine used, making the efficacy-safety profile of NGC
different than that of FDA-approved capecitabine and requiring further
evaluation of the PCS6422 and capecitabine regimens to determine the optimal NGC
regimens for patients. In order for NGC to provide a safer and more efficacious
profile for cancer patients compared to existing chemotherapy, understanding how
the different regimens of PCS6422 and capecitabine may affect the systemic and
tumor exposure to the anabolites, as well as the systemic exposure to the
catabolites, is required. This can be achieved by following the timeline of DPD
irreversible inhibition and the formation of new DPD using the plasma
concentrations of 5-FU and its catabolites.



In an effort to better estimate the timeline of DP inhibition and formation of
new DPD, we modified the protocol for the Phase 1B trial. We began enrolling
patients in the amended Phase 1B trial in April 2022. On November 1, 2022, we
announced that data from the Phase 1B trial identified multiple dosage regimens
with potentially better safety and efficacy profiles than currently existing
chemotherapy regimens. Since 5-FU exposure is dependent on both the PCS6422
regimen and the capecitabine regimen, safe regimens were identified as well as
regimens that cause DLTs. One regimen in the Phase 1B trial did cause DLTs in 2
patients, one of whom died. The Phase 1B study is continuing to enroll patients
and is expected to complete enrollment in the first half of 2023. The next study
will be a Phase 2B trial to determine which regimens provide an improved
efficacy-safety profile over present therapy using the principles of the FDA's
Oncology Project Optimus initiative to help guide the design of the trial. This
FDA initiative requires us to consider NGC regimens that are not at the maximum
tolerated dose or exposure level. In 2023, we plan to meet with FDA to discuss
the design of our Phase 2B trial and initiate the trial.



18







PCS12852



On August 19, 2020, we in-licensed PCS12852 from Yuhan Corporation ("Yuhan"),
pursuant to which we acquired an exclusive license to develop, manufacture and
commercialize PCS12852 globally, excluding South Korea.



PCS12852 is a novel, potent, and highly selective 5-hydroxytryptamine 4 (5-HT4)
receptor agonist. Other 5-HT receptor agonists with less 5-HT4 selectivity have
been shown to successfully treat gastrointestinal (GI) motility disorders such
as gastroparesis, chronic constipation, constipation-predominant irritable bowel
syndrome, and functional dyspepsia. Less selective 5-HT4 agonists, such as
cisapride, have been either removed from the market or not approved because of
the cardiovascular side effects associated with the drugs binding to other
receptors, especially receptors other than 5-HT4. PCS12852 has been shown in
nonclinical studies to have a cardiovascular side effect only at concentrations
greater than 1,000 times the maximum concentration seen in humans.



Two clinical studies, both of which have demonstrated the effectiveness of
PCS12852 on GI motility, were previously conducted by Yuhan. In a Phase 1 trial
(Protocol YH12852-101), the initial safety and tolerability of PCS12852 were
evaluated after single and multiple oral doses in healthy subjects. PCS12852 was
shown to increase GI motility in this study, increasing stool frequency with
faster onset when compared to prucalopride, a less specific 5-HT4 agonist
FDA-approved drug for the treatment of chronic idiopathic constipation. Based on
an increase of ?1 spontaneous bowel movement (SBM)/week from baseline during
7-day multiple dosing, the PCS12852 dose group had a higher percentage of
patients with an increase than the prucalopride group. All doses of PCS12852
were safe and well tolerated and no SAEs occurred during the study. The most
frequently reported AEs were headache, nausea and diarrhea which were temporal,
manageable and reversible within 24 hours. There were no clinically significant
changes in platelet aggregation and ECG parameters including a change in QTc
prolongation in the study. In a Phase 1/2A clinical trial (Protocol
YH12852-102), the safety, tolerability, gastric emptying rate and
pharmacokinetics of multiple doses of a PCS12852 immediate release (IR)
formulation and a delayed release (DR) formulation were evaluated. PCS12852 was
safe and well tolerated after single and multiple administrations. The most
frequent AEs for both the IR and DR formulations of PCS12852 were headache,
nausea and diarrhea, but the incidences of these AEs were comparable with those
of the 2mg prucalopride group. These AEs, which were transient and mostly mild
in severity, are also commonly observed with other 5-HT4 agonists. Both
formulations of PCS12852 also increased the gastric emptying rate and increased
GI motility.

Yuhan had also conducted extensive toxicological studies for the product that demonstrated that the product is safe for use and can be moved into Phase 2 studies.

We received guidance from the FDA in the first half of 2021 and in October 2021
we received notice of safe to proceed for PCS12852 evaluation in a Phase 2A
randomized, placebo-controlled study in patients with gastroparesis. We enrolled
our first patient on April 5, 2022 and completed enrollment on September 2,
2022. The purpose of the Phase 2A trial was to evaluate the safety, efficacy,
and pharmacokinetics of two different dosing regimens for PCS12852. Data
obtained from this study will be used to better design the Phase 2B efficacy
study. Since patients with gastroparesis have an abnormal pattern of upper GI
motility in the absence of mechanical obstruction, the Phase 2A study was
designed to evaluate the change in gastric emptying in patients with
gastroparesis from two different dosing regimens of PCS12852 compared to
placebo. The only FDA-approved drug to treat gastroparesis is metoclopramide, a
dopamine D2 receptor antagonist that has documented serious side effects which
limit dosing to no more than 12 weeks. Other 5-HT4 drugs have been used
clinically but the side effects, mainly caused by binding to other receptors,
has resulted in these drugs not being a viable option to treat patients with
gastroparesis.



Early results from this Phase 2A study which included 25 patients with moderate
to severe gastroparesis, demonstrated improvements in gastric emptying in
patients receiving 0.5 mg of PCS12852 as compared to placebo, and statistical
significance was shown at p < 0.10 even though there were only a total of 14
patients in the 0.5 mg and placebo groups of this study. The mean (±SD) t50
change from baseline was decreased for 0.5 mg of PCS12852 compared with placebo
by -31.90 ± 50.53 min vs -9.36 ±42.43 min, respectively. Differences were not
observed between the placebo and the 0.1 mg dose. Adverse events associated with
the administration of PCS12852 were generally mild to moderate as expected,
occurred within the first few days after administration, and quickly resolved
without any sequelae. There were no clinically significant cardiovascular safety
events or serious adverse events (SAEs) reported during the study. Additional
data from the study will be available at the end of 2022 and we plan to initiate
a Phase 2B study in 2023.



19







PCS499



PCS499, an oral tablet of a deuterated analog of one of the major metabolites of
pentoxifylline (PTX or Trental®), is classified by FDA as a new molecular
entity. PCS499 and its metabolites act on multiple pharmacological targets that
are important in a variety of conditions. We have targeted ulcerative
Necrobiosis Lipoidica (uNL) as our lead indication for PCS499. NL is a chronic,
disfiguring condition affecting the skin and tissue under the skin typically on
the lower extremities with no currently approved FDA treatments. NL presents
more commonly in women than in men and occurs more often in people with
diabetes. Ulceration has been reported to occur in up to 30% of NL patients,
which can lead to more severe complications, such as deep tissue infections and
osteonecrosis threatening the life of the limb.



The degeneration of tissue occurring at the NL lesion site may be caused by a
number of pathophysiological changes, which makes it extremely difficult to
develop effective treatments for this condition. Because PCS499 and its
metabolites appear to affect most of the biological pathways that contribute to
the pathophysiology associated with NL, PCS499 may provide a novel treatment
solution for NL.



On June 18, 2018, the FDA granted orphan-drug designation for PCS499 for the
treatment of NL. On September 28, 2018, the IND for PCS499 in NL became
effective, such that we initiated and completed a Phase 2A multicenter,
open-label prospective trial designed to determine the safety and tolerability
of PCS499 in patients with NL. The study initially had a nine-month treatment
phase and a nine-month optional extension phase. In December 2019, we informed
patients and sites that the study would conclude after the treatment phase and
there would no longer be an extension phase. The first NL patient enrolled in
this Phase 2A clinical trial was dosed on January 29, 2019, and the study
completed enrollment on August 23, 2019. The last patient visit took place

in
February 2020.

The primary objective of the Phase 2A trial was to evaluate the safety and
tolerability of PCS499 in patients with ulcerated and non-ulcerated NL and to
use the safety and efficacy data to design future clinical trials. Based on
toxicology studies and healthy human volunteer studies, we and the FDA agreed
that a PCS499 dose of 1.8 grams/day would be the highest dose administered to NL
patients in this Phase 2A trial. As anticipated, the PCS499 dose of 1.8
grams/day, 50% greater than the maximum tolerated dose of PTX, appeared to be
well tolerated with no serious adverse events (SAEs) reported. All adverse
events (AEs) reported in the study were mild in severity. As expected,
gastrointestinal symptoms were the most frequent AEs and were reported in four
patients, all of which resolved within 1-2 weeks of starting dosing.



Two of the twelve patients in the study presented with uNL and had ulcers for
more than two months prior to dosing. At baseline, the reference ulcer in one of
the two patients measured 3.5 cm2 and had completely closed by Month 2 of
treatment. The second patient had a baseline reference ulcer of 1.2 cm2 which
completely closed by Month 9 during the patient's treatment extension period. In
addition, while in the trial, both patients also developed small ulcers at other
sites, possibly related to contact trauma, and these ulcers resolved within one
month. The other ten patients, presenting with mild to moderate non-ulcerated
NL, had more limited improvement of the NL lesions during treatment.
Historically, 13 - 20% of all the patients with NL naturally progress to
complete healing over many years after presenting with NL. Although the natural
healing of the uNL patients has not been evaluated independently, medical
experts who treat NL patients suggest that the natural progression of an open
ulcerated wound to complete closure may be significantly less than 13% over 1-2
years and likely close to 0% in patients with the larger ulcers.



On March 25, 2020, we met with the FDA and discussed the clinical program, as
well as the nonclinical and clinical pharmacology plans to ultimately support
the submission of the PCS499 New Drug Application (NDA) in the U.S. for the
treatment of ulcers in NL patients. With input from the FDA, we designed the
next trial as a randomized, placebo-controlled Phase 2B study to evaluate the
ability of PCS499 to completely close ulcers in patients with uNL and better
understand the potential response of uNL patients on drug and on placebo. We
currently have selected nine clinical trial sites in the United States and are
evaluating additional sites to add to our study. We had four sites in Europe,
but these sites were unable to recruit patients timely, largely due to COVID-19,
so we decided to close them and concentrate our efforts on recruiting patients
within the United States.



We began recruiting for the clinical trial in the first half of 2021. On May 19,
2021, we dosed our first patient in the randomized, placebo-controlled trial and
are planning to complete an interim analysis of the data from this trial during
the first half of 2023. We have experienced delays in the enrollment of patients
in the PCS499 Phase 2B trial due to COVID-19. Many potential patients also have
co-morbidities, such as diabetes, and have been unwilling to travel to the
testing sites for fear of contracting COVID-19. Potential patients in this trial
have died from COVID-19 prior to screening. We have initiated a number of
programs to hopefully increase the enrollment rate in this study, including
paying for travel to study sites and informing physicians who might be treating
these patients that a trial is occurring.



After obtaining the results from this Phase 2B study, we expect to have an end
of Phase 2 meeting with the FDA to agree on the design of the Phase 3 study,
with the intent to define a Special Protocol Assessment for the Phase 3 study
and to agree on the next steps to obtain approval.



20







PCS3117



On June 16, 2021, we executed a License Agreement with Ocuphire Pharma, Inc.
("Ocuphire Agreement") under which we received a license to research, develop
and commercialize PCS3117 globally, excluding Republic of Singapore, China,

Hong
Kong, Macau, and Taiwan.



PCS3117 is a novel, investigational, oral small molecule nucleoside compound.
PCS3117 is an analog of the endogenous nucleoside, cytidine, and an analog of
the cancer drug gemcitabine. Once intracellularly activated (phosphorylated) by
the enzyme UCK2, it is incorporated into the DNA or RNA of cells and inhibits
both DNA and RNA synthesis, which induces apoptotic cell death of tumor cells.
PCS3117 has received orphan drug designation from the FDA and the European
Commission for the treatment of patients with pancreatic cancer.



Gemcitabine is usually used as second line therapy for metastatic pancreatic
cancer and non-small cell lung cancer, as well as used as second line therapy
for other types of cancer. The difference between PCS3117 and gemcitabine is how
they are activated to cancer killing nucleotides. PCS3117 also has additional
pharmacological pathways which will result in cancer cell apoptosis. Since 45% -
85% of pancreatic cancer and non-small cell lung cancer patients are inherently
resistant or acquire resistance to gemcitabine, the differences between PCS3117
and gemcitabine could potentially provide a therapeutic alternative to patients
who do not or will not respond to gemcitabine.

Resistance to gemcitabine or PCS3117 is likely caused by:

  ? an increase in the cytidine deaminase (CDA) enzyme which breaks down
    gemcitabine and PCS3117,

? a deficiency in transportation of gemcitabine or PCS3117 across the cell

    membrane,
  ? down regulation of the activation enzyme (dCK for gemcitabine, UCK2 for
    PCS3117),
  ? a change in ribonucleotide reductase activity, and
  ? non-genetic influences that alter gene expression.




PCS3117 has shown broad spectrum anti-tumor activity against over 100 different
human cancer cell lines and efficacy in 17 different mouse xenograft models. In
preclinical trials, PCS3117 retained its anti-tumor activity in human cancer
cell lines made resistant to the anti-tumor effects of gemcitabine. In August
2012, the completion of an exploratory Phase 1 clinical trial of PCS3117 in
cancer patients to investigate the oral bioavailability, safety and tolerability
of the compound was reported. In that study, oral administration of a 50 mg dose
of PCS3117 indicated an oral bioavailability of 56% and a plasma half-life
(T1/2) of 14 hours. In addition, PCS3117 appeared to be well tolerated in all
subjects throughout the dose range evaluated.



Final results from a Phase 1B clinical trial of PCS3117 were presented in June
2016 showing evidence of single agent activity. Patients in the study had
generally received four or more cancer therapies prior to enrollment. In this
study, 12 patients experienced stable disease persisting for up to 276 days and
three patients showed evidence of tumor burden reduction. A maximum tolerated
dose of 700 mg was identified in the study. At the doses evaluated, PCS3117
appeared to be well tolerated with a predictable pharmacokinetic profile
following oral administration.



In March 2016, a multi-center Phase 2A clinical trial of PCS3117 in patients
with relapsed or refractory pancreatic cancer was initiated to further evaluate
safety and efficacy. The study was designed as a two-stage study with 10
patients in stage 1 and an additional 40 patients in stage 2. According to
pre-set criteria, if greater than 20% of the patients had an increase in
progression free survival of more than four months, or an objective clinical
response rate and reduction in tumor size, additional pancreatic cancer patients
would be enrolled into stage 2. Secondary endpoints included time to disease
progression, overall response rate and duration of response, as well as
pharmacokinetic assessments and safety parameters. In January 2018, the final
data from this trial showed evidence of tumor shrinkage in some patients with
metastatic pancreatic cancer that was resistant to gemcitabine and who had
failed on multiple prior treatments was presented. In this study, 31% of
patients experienced progression free survival for two months or more and five
patients, or 12%, had disease stabilization for greater than four months.
Although the pre-set criteria of 20% of the patients having an increase in
progression free survival for four months was not met, some of the gemcitabine
refractory patients did respond to PCS3117. However, an evaluation of why
patients were resistant to PCS3117 was not undertaken within the study.



In November 2017, a Phase 2A trial of PCS3117 in combination with ABRAXANE in
patients newly diagnosed with metastatic pancreatic cancer was initiated. The
multicenter, single-arm, open-label study was designed to evaluate PCS3117 in
combination with ABRAXANE in first line metastatic pancreatic cancer patients.
In February 2019, the target enrollment of 40 evaluable patients in this trial
was reached. An overall response rate of 23% had been observed in 40 patients
that had at least one scan on treatment. Preliminary and unaudited data
indicated that the median progression free survival for patients in the study
was approximately 5.6 months. The most commonly reported related adverse events
were nausea, diarrhea, fatigue, alopecia, decreased appetite, rash, vomiting,
and anemia. Again, an evaluation of the cause of treatment resistance to PCS3117
was not undertaken.

We are currently defining the potential paths to approval, which include an evaluation of which population of pancreatic cancer patients to target, FDA acceptable primary endpoints for the population, and other ways (e.g., biomarkers) to identify patients likely to respond to PCS3117 over gemcitabine.

21







PCS11T

On May 24, 2020, we in-licensed PCS11T from Aposense, Ltd. ("Aposense"), pursuant to which we were granted Aposense's patent rights and Know-How to develop and commercialize their next generation irinotecan cancer drug, PCS11T.

PCS11T is a novel lipophilic anti-cancer pro-drug that is being developed for
the treatment of the same solid tumors as prescribed for irinotecan. This
pro-drug is a conjugate of a specific proprietary Aposense molecule connected to
SN-38, the active metabolite of irinotecan. The proprietary molecule in PCS11T
has been designed to allow PCS11T to bind to cell membranes to form an inactive
pro-drug depot on the cell with SN-38 preferentially accumulating in the
membrane of tumors cells and the tumor core. This unique characteristic may make
the therapeutic window of PCS11T wider than other irinotecan products such that
the antitumor effect of PCS11T could occur at a much lower dose with a milder
adverse effect profile than irinotecan. Despite the widespread use of
commercially marketed irinotecan products in the treatment of metastatic
colorectal cancer and other cancers resulting in peak annual sales of
approximately $1.1 billion, irinotecan has a narrow therapeutic window and
includes an FDA "Black Box" warning for both neutropenia and severe diarrhea.
Therefore, there is a substantial unmet need to overcome the limitations of the
current commercially marketed irinotecan products, improving efficacy and
reducing the severity of treatment emergent AEs. We believe the potential wider
therapeutic window of PCS11T will likely lead to more patients responding with
less side effects when on PCS11T compared to other irinotecan products.



Pre-clinical studies conducted to date showed that PCS11T demonstrated tumor
eradication at much lower doses than irinotecan across various tumor xenograft
models. PCS11T does not affect acetylcholine esterase (AChE) activity in human
and rat plasma in vitro, which would suggest that PCS11T will show an improved
safety profile, compared to irinotecan, which is known for its
cholinergic-related side effects.



We are currently evaluating the manufacturing process and sites for drug
substance and drug product. In addition, we are defining the potential paths to
approval, which include defining the targeted patient population and type of
cancer. We hope to submit an IND in 2024, followed by a Phase 1B trial in
oncology patients with solid tumors.



22







Results of Operations

Comparison of the three and nine months ended September 30, 2022 and 2021

The following table summarizes our operations during the periods indicated:

                                               Three Months Ended September 30,                    Nine Months Ended September 30,
                                            2022             2021            Change            2022              2021            Change
Operating Expenses
Research and development expenses       $  3,136,838     $  1,722,364     $

1,414,474 $ 8,319,907 $ 4,806,845 $ 3,513,062 Acquisition of in-process research and development

                                    -           50,953          (50,953 )               -          566,583         (566,583 )

General and administrative expenses 2,920,280 1,338,113

 1,582,167         6,137,674        3,391,105        2,746,569

Operating Loss                            (6,057,118 )     (3,111,430 )                      (14,457,581 )     (8,764,533 )

Other Income (Expense)
Forgiveness of PPP loan and related
accrued interest                                   -                -                -                 -          163,771         (163,771 )
Interest income, net                          36,708            1,771           34,937            45,672            8,163           37,509

Net Operating Loss Before Income Tax
Benefit                                   (6,020,410 )     (3,109,659 )    

(2,910,751 ) (14,411,909 ) (8,592,599 ) (5,819,310 ) Income Tax Benefit

                                 -          122,442         (122,442 )               -          348,859         (348,859 )

Net Loss                                $ (6,020,410 )   $ (2,987,217 )                    $ (14,411,909 )   $ (8,243,740 )




Revenues.

We do not currently have any revenue under contract or any immediate sales prospects.

23

Research and Development Expenses.

Our research and development costs are expensed as incurred. Research and
development expenses include: (i) amortization of the exclusive PCS499 license
intangible asset used in research and development activities; (ii) internal
research and development staff related salaries and other payroll costs
including stock-based compensation, payroll taxes and employee benefits; and
(iii) program and testing related expenses, including external consulting and
professional fees related to the product testing and our development activities.
Non-refundable advance payments for goods and services to be used in future
research and development activities are recorded as prepaid expenses and
expensed when the research and development activities are performed.



Our research and development expenses increased during both the three and nine
month periods ended September 30, 2022 when compared to the same periods in 2021
as shown below.



                                   Three Months Ended September 30,              Nine Months Ended September 30,
                                     2022                    2021                  2022                   2021
Amortization of intangible
assets                         $         197,124       $         195,700     $        591,372       $        593,365
Research and development
salaries and benefits                  1,502,065                 546,415            3,068,241              1,246,887
Preclinical, clinical trial
and other costs                        1,437,649                 980,249            4,660,294              2,966,593
Total                          $       3,136,838       $       1,722,364     $      8,319,907       $      4,806,845

During the three and nine months ended September 30, 2022, when compared to the
same periods in 2021, we experienced increases in payroll and related costs of
approximately $162,000 and $393,000, respectively, and increases in stock-based
compensation of approximately $793,000 and $1.4 million, respectively, as a
result of expanding our development team, and increasing salary rates and
stock-based compensation.



We also experienced increases in preclinical, clinical trial and other costs
from activities in our three active clinical trials. Expenses include costs we
paid contract research organizations, regulatory filing and maintenance fees,
drug product testing and stability, consulting, and other clinical fees.
Additionally, on May 17, 2022, we amended the third Milestone Event of our
License Agreement with Elion changing the third Milestone Event as described in
Note 8 to our condensed consolidated financial statements. As a result, we
recorded research and development expense and a related liability of $189,000,
which represents the value of the shares we anticipate issuing to Elion upon
satisfaction of the third Milestone Event (as modified) at the fair value on the
date of modification. During the same period in 2021, we began our Phase 2B
clinical trial for PCS499, our Phase 1B clinical trial for PCS6422 and were
conducting pre-IND tasks for PCS12852.



The funding necessary to bring a drug candidate to market is subject to numerous
uncertainties. Once a drug candidate is identified, the further development of
that drug candidate may be halted or abandoned at any time due to a number of
factors. These factors include, but are not limited to, funding constraints,
safety or a change in market demand. For each of our drug candidate programs, we
periodically assess the scientific progress and merits of the programs to
determine if continued research and development is economically viable. Some
programs may be terminated due to the lack of scientific progress and lack of
prospects for ultimate commercialization. We anticipate our research and
development costs to increase in the future as we finalize our three current
clinical trials; plan/conduct future clinical trials, including the cost of
having drug product manufactured; continue our evaluation of the remaining drugs
in our portfolio; and expand our development team.



Our clinical trial cost accruals are based on estimates of patient enrollment
and related costs at clinical investigator sites, as well as estimates for the
services received and efforts expended pursuant to contracts with multiple
research institutions and CROs that conduct and manage clinical trials on our
behalf.



In accruing service fees, we estimate the time period over which services will
be performed and the level of patient enrollment and activity expended in each
period. If the actual timing of the performance of services or the level of
effort varies from the estimate, we will adjust the accrual accordingly.
Payments made to third parties under these arrangements in advance of the
receipt of the related series are recorded as prepaid expenses until the
services are rendered. At September 30, 2022, we recorded $1.2 million in
prepaid expenses for advanced payments made to our CROs related to our three
current clinical trials.



24

General and Administrative Expenses.

Our general and administrative expenses for the three months ended September 30,
2022 increased by approximately $1.6 million to $2.9 million from $1.3 million
for the three months ended September 30, 2021. The majority of the increase was
due to an increase in employee stock-based compensation of approximately $1.3
million. We also experienced net increases in other expenses including
professional fees, travel, salaries and other payroll-related costs of
approximately $255,000. Reimbursements from CorLyst totaled approximately
$31,000 for rent and other costs during the three months ended September 30,
2022 and 2021.



During the nine months ended September 30, 2022, our general and administrative
expenses increased by approximately $2.7 million to $6.1 million from $3.4
million for the nine months ended September 30, 2021. The majority of the
increase was due to an increase in employee stock-based compensation of
approximately $2.3 million. We also experienced net increases in other expenses
including professional fees, travel, salaries and other payroll-related costs of
approximately $439,000. Reimbursements from CorLyst totaled approximately
$95,000 for rent and other costs during the nine months ended September 30,
2022, approximately $2,000 more than reimbursements for the same period in 2021.



We expect the general and administrative expenses to continue to increase as we
add staff to support our growing research and development activities and the
administration required to operate as a public company.



Other Income

Net other income was approximately $37,000 and $1,800 for the three months ended
September 30, 2022 and 2021, respectively, and approximately $46,000 and
$172,000 for the nine months ended September 30, 2022 and 2021, respectively.
During the nine months ended September 30, 2021, we recognized $163,771 as other
income for the principal amount and accrued interest related to the forgiveness
of our Paycheck Protection Program (PPP) loan. Interest income represents
interest earned on money market funds. Interest expense in 2021 was related

to
our PPP loan.



Income Tax Benefit.



We did not recognize any income tax benefit for the three or nine months ended
September 30, 2022 compared to the $122,442 and $348,859 income tax benefit we
recognized for the three and nine months ended September 30, 2021, respectively,
as a result of our recording and amortizing the deferred tax liability created
in connection with our acquisition of CoNCERT's license and "Know-How" in
exchange for Processa stock that had been issued in the Internal Revenue Code
Section 351 transaction on March 19, 2018. The Section 351 transaction treated
the acquisition of the Know-How for stock as a tax-free exchange. As a result,
under ASC 740-10-25-51 Income Taxes, we recorded a deferred tax liability of
$3,037,147 for the acquired temporary difference between the financial reporting
basis of $11,038,929 and the tax basis of $1,782. The deferred tax liability has
been reduced for the effect of the non-deductibility of the amortization of the
intangible asset and has been offset by the deferred tax assets resulting from
net operating tax losses and was fully offset at December 31, 2021. This offset
resulted in the recognition of a deferred tax benefit shown in the consolidated
statements of operations in 2021 and prior periods.



25







Cash Flows

The following table sets forth our sources and uses of cash and cash equivalents for the nine months ended September 30, 2022 and 2021:

                                        Nine months ended
                                          September 30,
                                      2022             2021
Net cash (used in) provided by:
Operating activities              $ (7,107,758 )   $ (5,990,321 )
Financing activities                  (335,247 )      9,667,285

Net (decrease) increase in cash $ (7,443,005 ) $ 3,676,964

Net cash used in operating activities

We used net cash in our operating activities of $7,107,758 and $5,990,321 during
the nine months ended September 30, 2022 and 2021, respectively. The increase in
cash used in operating activities during the nine months ended September 30,
2022 compared to the same period in 2021 was primarily related to cash payments
made to conduct our three clinical trials and increased salaries to our
employees.



At September 30, 2022, our prepaid expense and other balance consisted primarily
of $1.2 million for advanced payments we made to our CROs that have not yet been
applied to our clinical trials, representing a $100,000 reduction from the
prepaid amount recorded at December 31, 2021 of $1.3 million. Our prepaid
expense and other at September 30, 2022 also included the unamortized non-cash
commitment fee we paid to Lincoln Park of approximately $372,000 and the
unamortized ATM offering related costs of $186,000. The remainder of the change
in prepaid expenses and other was the result of several other operating
activities, none of which, individually or in the aggregate, were considered
significant by management.



As we continue our three clinical trials and evaluate the other drugs in our
portfolio, we anticipate our research and development efforts and ongoing
general and administrative costs will continue to generate negative cash flows
from operating activities for the foreseeable future. We expect these amounts to
increase in the future as the drugs in our pipeline continue to advance and if
new or additional clinical trials begin.

Net cash (used in) provided by financing activities

We used net cash in financing activities during the nine months ended September
30, 2022 of $300,000 to purchase 100,000 shares of our common stock from a
licensee and $35,247 to pay income taxes owed on vested stock-based
compensation. During the nine months ended September 30, 2021, we closed a
private offering, raising net proceeds of $9.9 million, paid approximately
$28,000 for income taxes owed on vested stock-based compensation and incurred
$180,285 in expenses related to our ATM Offering.



26







Liquidity

At September 30, 2022, we had $9.1 million in cash and cash equivalents.

On March 23, 2022, we entered into the Purchase Agreement with Lincoln Park
under which we have the right, but not the obligation, to sell to Lincoln Park,
and Lincoln Park is obligated to purchase up to $15.0 million of our shares of
common stock, subject to the terms and conditions in the Purchase Agreement, as
more fully described in Note 3 to the Consolidated Financial Statements. We did
not sell any shares to Lincoln Park under the Purchase Agreement during the nine
months ended September 30, 2022. In addition, on August 20, 2021, we entered
into the Sales Agreement with the Sales Agent under which we may issue and sell
up to $30.0 million from time to time under the ATM Offering. We expect to use
net proceeds from the ATM Offering over time as a source for working capital and
general corporate purposes. During the year ended December 31, 2021, we sold
21,597 shares of our common stock under the ATM Offering at an average price of
approximately $8.33 per share for aggregate gross proceeds of approximately
$180,000 prior to deducting sales commissions. We did not sell any shares during
the nine months ended September 30, 2022.



We have incurred losses and net cash used in our operating activities during the
nine months ended September 30, 2022, which we expect to continue for the
foreseeable future. We have incurred losses since our inception, devoting
substantially all of our efforts toward research and development, and have an
accumulated deficit of approximately $51.2 million at September 30, 2022. During
the nine months ended September 30, 2022, we generated a net loss of
approximately $14.4 million, of which $7.0 million are non-cash expenses. Based
on our current plans, we believe our current cash balance along with amounts
available from the Purchase Agreement with Lincoln Park will be adequate for at
least the next twelve months. Our ability to execute our longer-term operating
plans, including unplanned future clinical trials for our portfolio of drugs
depend on our ability to obtain additional funding from the sale of equity
and/or debt securities, a strategic transaction or other funding transactions.
We plan to continue to actively pursue financing alternatives, but there can be
no assurance that we will obtain the necessary funding in the future when
needed.



Our estimate of future cash needs is based on assumptions that may prove to be
wrong, and we could utilize our available cash sooner than we currently expect.
Our ultimate success depends on the outcome of our planned clinical trials and
our research and development activities, as disclosed above. We expect to incur
additional losses in the future, and we will need to raise additional capital to
fully implement our business plan if the costs of our clinical trials are
greater than we expect or they take longer than anticipated. We also expect to
incur increased general and administrative expenses in the future. In addition,
there may be costs we incur as we develop these drug products that we do not
currently anticipate, requiring us to need additional capital sooner than
currently expected.

Our future capital requirements will depend on many factors, including:

? the cost of clinical trials for PCS499, PCS6422 and PCS12852, and the cost of

third-party manufacturing;

? the delays in patient enrollment due to the COVID-19 pandemic;

? the initiation, progress, timing, costs and results of drug manufacturing,

pre-clinical studies, and clinical trials of PCS3117 and PCS11T, as well as

any other future product candidates;

? the number and characteristics of product candidates that we pursue;

? the outcome, timing, and costs of seeking regulatory approvals;

? the costs associated with hiring additional personnel and consultants as our

pre-clinical and clinical activities increase;

? the emergence of competing therapies and other adverse market developments;

? the costs involved in preparing, filing, prosecuting, maintaining, expanding,

defending, and enforcing patent claims, including litigation costs and the

outcome of such litigation;

? the extent to which we in-license or acquire other products and technologies;

    and
  ? the costs of operating as a public company.

Until such time as we can generate substantial product revenues to support our
capital requirements, if ever, we expect to finance our cash needs through a
combination of public or private equity offerings, debt financings,
collaborations and licensing arrangements or other capital sources. We currently
have an effective S-3 shelf registration statement on file with the SEC, which
provides us flexibility and optionality to raise capital, including pursuant to
the ATM Offering and the Purchase Agreement with Lincoln Park, but there can be
no assurance that capital will continue to be available to us on acceptable
terms or at all. To the extent that we raise additional capital through the sale
of equity or convertible debt securities, the ownership interest of our
stockholders will be or could be diluted, and the terms of these securities may
include liquidation or other preferences that adversely affect the rights of our
common stockholders.



27

Contractual Obligations and Commitments

On October 3, 2022, we renewed our office lease. See Note 6 to the Consolidated
Condensed Financial Statements for more details. There have been no other
significant changes to the contractual obligations reported in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2021.

Off Balance Sheet Arrangements

At September 30, 2022, we did not have any off-balance sheet arrangements.

Critical Accounting Policies and Use of Estimates

Our discussion and analysis of our financial condition and results of operations
are based upon our Unaudited Condensed Consolidated Financial Statements, which
have been prepared in accordance with U.S. GAAP. The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities.



We believe that the estimates, assumptions, and judgments involved in the
accounting policies described in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section of our most recent Annual
Report on Form 10-K have the greatest potential impact on our financial
statements, so we consider these to be our critical accounting policies. Actual
results could differ from the estimates we use in applying our critical
accounting policies. We are not currently aware of any reasonably likely events
or circumstances that would result in materially different amounts being
reported.

There have been no changes in our critical accounting policies since our most recent Annual Report on Form 10-K.

Recently Issued Accounting Pronouncements

We have evaluated recently issued accounting pronouncements and determined that there is no material impact on our financial position or results of operations.

28

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