Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations

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 cash and history of losses; our ability to achieve profitability; our ability to obtain adequate financing to fund our business operations in the future; our ability to secure required U.S. Food and Drug 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 licensors by the anticipated patents that we own or license and the cost to us of maintaining, enforcing and defending those patents; our and our licensors' ability to protect non-patented intellectual property rights; our exposure to and ability to defend third-party claims and challenges to our and our licensors' anticipated patents and other intellectual property rights; our ability to remain listed on the Nasdaq Capital Market; 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" herein, in the "Risk Factors' included in the Company's Current Report on Form 8-K filed on October 5, 2026, and in the Company's Annual Report on Form 10-K for the year ended December 31, 2025, 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.

References to the "Company," "we," "us" or "our" refer to the operations of Processa Pharmaceuticals, Inc. and its direct and indirect subsidiaries for the periods described herein.

Overview

We are a clinical-stage pharmaceutical company advancing differentiated therapeutic programs for immunological and inflammatory diseases. In July 2026, we acquired Vidya Therapeutics, Inc. ("Vidya"), a clinical-stage biotechnology company developing VT-7208, a Bruton's tyrosine kinase inhibitor ("BTKi") therapy for immune-mediated diseases with an initial focus on food allergy, chronic spontaneous urticaria ("CSU") and relapsing multiple sclerosis ("RMS"). We also intend to explore VT-7208 in additional immune-mediated diseases. Our second program is a preclinical oral neonatal Fc receptor (FcRn) antagonist being explored for treatment of immune-mediated diseases. We are also continuing the development of our legacy pharmaceutical assets, including PCS499, PCS12852 and PCS11T, while evaluating strategic opportunities designed to maximize their clinical and long-term value.

Recent Developments

Vidya Acquisition

On July 28, 2026, we acquired Vidya, which brought Vidya's lead asset VT-7208 into our pipeline. In connection with our acquisition of Vidya, we received $200.0 million in gross proceeds from a private placement financing of shares of our non-voting convertible preferred stock (the "2026 Private Placement"). We intend to use the net proceeds of $187.1 million from the 2026 Private Placement to fund operations into the second half of 2029 and through key clinical milestones, including top-line data from Phase 2 proof-of-concept clinical trials for food allergy, CSU and RMS.

Elion Settlement Agreement

On July 23, 2026, we entered into a settlement agreement (the "Settlement Agreement") with Elion Oncology, Inc. ("Elion") to resolve all claims arising from the parties' litigation concerning the license agreement dated August 23, 2020, relating to the commercialization of PCS6422 (the "Elion License Agreement"). Under the Settlement Agreement, the Elion License Agreement was terminated, the PCS6422 program was returned to Elion, and the parties exchanged mutual releases of all claims relating to the Elion License Agreement, the PCS6422 program, and the related litigation. As a result of the settlement and the return of the PCS6422 program to Elion, we are terminating the Phase 2 clinical trial of PCS6422 in advanced or metastatic breast cancer. On August 7, 2026, the stipulation of dismissal became effective, resulting in the dismissal of the litigation with prejudice.

In connection with the settlement, we paid Elion $0.7 million. We also agreed to grant Elion a non-voting equity interest equal to 7.5% of the fully diluted pre-money equity capitalization of any newly formed entity whose assets include one or more of PCS499, PCS12852, or PCS11T, provided that the formation or spin-out of such entity is completed within one year following the effective date of the Settlement Agreement.

2026 Fundraising

During the nine months ended September 30, 2026, we sold a cumulative 219,491 shares of our common stock to certain investors in private placement transactions and through our ATM Offering for a total of $0.6 million in net proceeds. Concurrent with our acquisition of Vidya, we entered into a definitive agreement for the 2026 Private Placement to raise $200.0 million in gross proceeds, which we expect to use to support the advancement of VT-7208 through multiple clinical milestones, including data from a Phase 2 proof-of-concept clinical trial in food allergy anticipated in the second half of 2027, data from a Phase 2 proof-of-concept clinical trial in CSU anticipated in the first half of 2028, and data from a Phase 2 proof-of-concept clinical trial in RMS anticipated in the second half of 2028.

Our Drug Pipeline

We recently announced U.S. Food and Drug Administration clearance of the investigational new drug application for the planned Phase 2 clinical trial of VT-7208 in CSU. In addition to advancing the clinical-stage BTKi program in multiple indications, we have entered into a research collaboration and exclusive option agreement with Generian Pharmaceuticals, Inc. to advance a preclinical oral neonatal Fc receptor (FcRn) antagonist program. We are also evaluating the future development of our legacy pharmaceutical assets, including PCS499 for the treatment of primary glomerular disease, PCS12852 for the treatment of gastroparesis and constipation disorders, and PCS11T for the treatment of lung, pancreatic, ovarian, colorectal, gastric, cervical and other cancers, while evaluating strategic opportunities designed to maximize their clinical and long-term value.

Results of Operations

Comparison of the three and nine months ended September 30, 2026 and 2025

The following table summarizes our net loss during the periods indicated (in thousands):

Revenues

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

Research and Development Expenses

Our research and development costs are expensed as incurred. Research and development expenses include (i) program and testing related expenses including external consulting and professional fees related to the product testing and our development activities and (ii) internal research and development staff salaries and other payroll costs including stock-based compensation, payroll taxes and employee benefits.

Costs for the three and nine months ended September 30, 2026 and 2025 were as follows (in thousands):

The increase in overall research and development expenses was primarily due to the $0.9 million of research and development expenses incurred by Vidya during the three and nine months ended September 30, 2026. During the three months ended September 30, 2026, the increase was offset by a decrease of $0.6 million in clinical trial costs as we terminated the Phase 2 clinical trial of NGC-Cap.

During the nine months ended September 30, 2026, we experienced a decrease in overall research and development expenses, primarily due to a decrease in preclinical, clinical trial, and other costs of $2.2 million as we had put a hold on our Phase 2 clinical trial of NGC-Cap while we conducted interim analysis and eventually terminated the clinical trial.

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.

We estimate preclinical and clinical trial expenses based on the services performed, pursuant to contracts with research institutions and CROs that conduct and manage preclinical studies and 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 services are recorded as prepaid expenses and expensed when the services are rendered.

General and Administrative Expenses

The increase in overall general and administrative expenses was primarily due to the $1.6 million of general and administrative expenses incurred by Vidya and the $0.7 million settlement payment to Elion during the three and nine months ended September 30, 2026.

Our general and administrative expenses for the three months ended September 30, 2026 increased by approximately $2.5 million to $4.3 million from $1.8 million for the three months ended September 30, 2025. In addition to the costs incurred by Vidya and the settlement payment to Elion, we experienced increases in professional fees of approximately $0.5 million. The increases were offset by decreases in investment management fees of $0.2 million related to our cryptocurrency wallet and salaries and payroll-related expenses of $0.1 million for one-time bonuses, both of which were paid in 2025.

Our general and administrative expenses for the nine months ended September 30, 2026 increased by approximately $2.9 million to $7.5 million from $4.6 million for the nine months ended September 30, 2025. In addition to the costs incurred by Vidya and the settlement payment to Elion, we experienced increases in professional fees of approximately $0.9 million and insurance expense of approximately $0.2 million. The increases were offset by decreases in employee stock-based expenses of $0.2 million; investment management fees of $0.1 million; and office, rent and other miscellaneous expenses of $0.2 million.

Other Income (Expense)

Other income (expense) for the three and nine months ended September 30, 2026 and 2025 was as follows (in thousands):

Our other income for the three and nine months ended September 30, 2026 increased due to interest earned on funds from the 2026 Private Placement.

Income Tax Benefit

We did not recognize any income tax benefit for the three and nine months ended September 30, 2026 or 2025.

Cash Flows

The following table sets forth our sources and uses of cash and cash equivalents for the nine months ended September 30, 2026 and 2025 (in thousands):

Net cash used in operating activities

We used net cash in our operating activities of $10.8 million and $8.5 million during the nine months ended September 30, 2026 and 2025, respectively. The increase in cash used in operating activities during the nine months ended September 30, 2026 compared to the same period in 2025 was primarily related to the $2.5 million in expenses incurred by Vidya for its operations during the nine months ended September 30, 2026.

As we advance VT-7208 through three Phase 2 proof-of-concept clinical trials and explore additional immune-mediated diseases, and evaluate the preclinical oral FcRn antagonist and legacy product candidates 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 anticipate our clinical trial costs will increase in the second half of 2026 when compared to prior periods as we advance three planned Phase 2 clinical trials of VT-7208, since activities in 2025 were primarily related to the completion of our Phase 1B trial and setup of our NGC-Cap Phase 2 trial.

Net cash used in investing activities

We used $1.9 million for fees incurred in connection with the asset acquisition, $0.5 million in investing activities to purchase digital assets and received $0.2 million for the sale of digital assets during the nine months ended September 30, 2026. We did not use any cash in investing activities during the same period in 2025.

Net cash provided by financing activities

During the nine months ended September 30, 2026, we received $187.1 million in net proceeds from the issuance of Series A Preferred Stock, and sold a cumulative 219,491 shares of our common stock to certain investors in private placement transactions and through our ATM Offering for a total of $0.6 million in net proceeds.

During the nine months ended September 30, 2025, we received net proceeds of $12.9 million in public offerings completed in January and June 2025 from selling a cumulative 1,016,232 shares of common stock and pre-funded warrants to purchase up to 828,388 shares of common stock. The public offering in January also included accompanying Series A Warrants to purchase up to 322,027 shares of our common stock and Series B Warrants to purchase up to 161,014 shares of common stock and the public offering in June included accompanying warrants to purchase up to 1,120,000 shares of common stock. We also received $0.7 million from the exercise of warrants to purchase 116,497 shares of common stock sold in our June offering.

Liquidity

As of September 30, 2026, our principal sources of liquidity consisted of cash and cash equivalents of $180.2 million. We believe our current available cash and cash equivalents will be sufficient to fund our operations for at least the next 12 months from the date of issuance of these financial statements. As of September 30, 2026, our cash and cash equivalents were invested primarily in cash deposits and cash equivalent investments.

The Series A Preferred Stock are convertible into shares of common stock, subject to receiving stockholder approval of the issuance of shares of common stock upon conversion of Series A Preferred Stock and exercise of the Assumed Options (see Note 2 for additional information on the planned proposals for the stockholder meeting). Under the terms of the Certificate of Designation of Preferences, Rights and Limitations of the Series A Preferred Stock (the "Certificate of Designation"), if we fail to deliver to the holder of the Series A Preferred Stock shares of our common stock underlying such shares of Series A Preferred Stock at any time nine months after the initial issuance of the Series A Preferred Stock, holders of the Series A Preferred Stock are entitled to require us to make cash payments by wire transfer of immediately available funds equal to the Fair Value (as defined in the Certificate of Designation) of such undelivered shares, subject to the applicable conversion-notice and delivery requirements, exceptions and availability of legally available funds. As a result, we concluded that the proceeds received from the private placement financing cannot be relied upon to mitigate the conditions that raised substantial doubt because the availability of those proceeds is subject to conditions that are not entirely within our control. Our plan to address this potential cash-settlement obligation is to obtain the requisite stockholder approval at a meeting expected to take place in the first quarter of 2027 and thereafter complete the conversion of the Series A Preferred Stock and delivery of the underlying common stock, subject to applicable beneficial ownership limitations. Accordingly, we concluded that substantial doubt about our ability to continue as a going concern continues to exist within one year after the date these financial statements are available to be issued.

We have incurred losses since inception, currently devoting substantially all our efforts toward research and development of our product candidates, including conducting clinical trials and providing general and administrative support for these operations, and have an accumulated deficit of $290.6 million at September 30, 2026. During the nine months ended September 30, 2026, we generated a net loss of $189.8 million. To date, none of our drug candidates have been approved for sale, and therefore we have not generated any product revenue and do not expect positive cash flow from operations in the foreseeable future. We will continue to be dependent upon equity and/or debt financing until we are able to generate positive cash flows from our operations.

We plan to raise additional funds in the future through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing and distribution arrangements, but will only do so if the terms are acceptable to us. 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 diluted, and the terms of these securities may include liquidation, warrants or other preferences that adversely affect your rights as a common stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through future collaborations, strategic alliances or licensing arrangements with pharmaceutical partners, we may have to relinquish valuable rights to our technologies, future revenue streams or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate our product development, future commercialization efforts, or grant rights to develop and market our product candidates that we would otherwise prefer to develop and market ourselves.

Contractual Obligations and Commitments

During the nine months ended September 30, 2026, there have been no significant changes to the contractual obligations reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2025.

Off Balance Sheet Arrangements

At September 30, 2026, 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.

We acquired in-process research and development ("IPR&D") in the Vidya Acquisition that was recorded at the fair value of the consideration given. This represents research and development projects which were in process, but not yet completed, and which we may advance following the Vidya Acquisition, including the development of VT-7208. The fair value of IPR&D projects acquired in an asset acquisition with no alternative future use are charged to expense on the acquisition date. Substantially all of the fair value of the gross assets acquired was concentrated in the acquired IPR&D, a single identifiable asset, and the transaction therefore passed the screen test under ASC 805. Accordingly, the acquired set of assets did not meet the definition of a business. Additionally, the acquired assets did not include the outputs or meaningful processes necessary to be considered a business under ASC 805. The IPR&D costs were immediately expensed.

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.