Note 4 - Stock-based Compensation

The Processa Pharmaceuticals Inc. 2019 Omnibus Equity Incentive Plan (the “2019 Plan”) allows us to make grants of stock options, restricted and unrestricted stock and other stock-based awards to employees, including our executive officers, consultants and directors. The 2019 Plan originally provided for the aggregate issuance of 3,000,000 shares of our common stock. On July 11, 2022, our shareholders approved an increase in the aggregate number of shares of our common stock available for issuance under our 2019 plan by 3,000,000 shares to 6,000,000 shares in total. As of September 30, 2022, 2,430,146 shares were available for future grants.

Stock Compensation Expense

We recorded stock-based compensation expense for the three and nine month periods ended September 30, 2022 and 2021 as follows:

Schedule of Stock-based Compensation Expense 

No tax benefits were attributed to the stock-based compensation expense because a valuation allowance was maintained for all net deferred tax assets relating to this expense.

Stock Options

No stock options were granted, cancelled or forfeited during the nine months ended September 30, 2022. As of September 30, 2022, we had fully vested outstanding options for the purchase of 178,496 shares with a weighted average exercise price of $17.07 and a weighted average remaining contractual life of 2.8 years.

Restricted Stock Awards

Activity in our Restricted Stock Awards (“RSAs”) during the nine months ended September 30, 2022 was as follows:

 Schedule of Information About RSA Outstanding

As of September 30, 2022, unrecognized stock-based compensation expense of approximately $296,000 for RSAs is expected to be fully recognized over 0.92 years.

During the nine months ended September 30, 2022, we granted and issued RSAs for 59,766 shares of our common stock to consultants for services to be provided in 2022. These RSAs had a cumulative fair market value of $196,500 on the dates of grant and were expensed as stock-based compensation. We also granted RSAs for 109,720 shares of our common stock to our directors for their 2022 service which had a fair market value of $378,000 on the dates of grant. Additionally, on March 31, 2022, we issued 17,572 shares of our common stock to our directors in satisfaction of the $120,000 of directors’ fees we had accrued at December 31, 2021. On May 31, 2022, a director did not seek reelection and forfeited the RSAs for 18,208 shares of our common stock related to their 2022 service. On August 5, 2022, RSAs for 53,609 shares of common stock vested. Of these, 42,491 were issued and 11,118 shares were withheld to pay for federal, state and local income taxes.

We did not cancel any RSAs during the nine months ended September 30, 2022. Unvested RSAs representing 67,124 shares are expected to vest in the fourth quarter of 2022, 49,388 shares are expected to vest in 2023, and the remainder are expected to vest in 2024.

Restricted Stock Units

Activity in our Restricted Stock Units (“RSUs”) during the nine months ended September 30, 2022 was as follows:

 Schedule of Information About RSU Outstanding

As of September 30, 2022, unrecognized stock-based compensation expense of approximately $4.7 million for RSUs is expected to be fully recognized over a weighted average period of 0.35 years. The unrecognized expense excludes approximately $343,000 of expense related to certain RSUs with a performance milestone that is not currently probable of occurring.

During the nine months ended September 30, 2022, we granted RSUs related to the future issuance of 332,363 shares of our common stock pursuant to agreements with our Executive team and certain other employees where a portion of their base compensation is paid in RSUs. The value of an RSU award is based on the average share price of the month services were provided. These RSUs vest quarterly, but must meet distribution requirements before any shares of common stock are issued. Effective July 1, 2022, we established a $5.00 per share floor for the computation of the number of shares our Executive team members could earn under this program.

On April 1, 2022, we also granted RSUs for 1,979,818 shares of our common stock, of which RSUs related to the future issuance of 879,819 shares were subject to shareholder approval, which was received on July 11, 2022. These RSUs vest on January 1, 2023 and are subject to distribution requirements before any shares of common stock are issued. The RSUs that were not subject to shareholder approval had a fair value on April 1, 2022 of $3.3 million and the RSUs that were subject to shareholder approval had a fair value on July 11, 2022 of $2.9 million. The $3.3 million is being recognized ratably over the period from April 1, 2022 through December 31, 2022 and the $2.9 million is being recognized ratably over the period from July 2022 through December 31, 2022.

Holders of our vested RSUs will be issued shares of our common stock upon the satisfaction of the distribution restrictions contained in their Restricted Stock Unit Award Agreement. The distribution restrictions are typically different (longer) than the vesting schedule, imposing an additional restriction on the holder. Unlike RSAs, while employees may hold fully vested RSUs, the individual does not hold any shares or have any rights of a shareholder until the distribution restrictions are met. Upon distribution to the employee, each RSU converts into one share of our common stock. The RSUs contain dividend equivalent rights.

Warrants

No stock purchase warrants were granted and 18,107 expired during the nine months ended September 30, 2022. At September 30, 2022, we had outstanding and vested stock purchase warrants for the purchase of 285,618 shares with a weighted average exercise price of $10.25 and a weighted average remaining contractual life of 1.1 years.

Effective May 3, 2022, we extended the expiration date of a warrant held by a consultant by one year in connection with the extension of their service agreement. No other terms of the warrant, including the exercise price of $7.18, were changed. We are recognizing the expense of approximately $33,000 related to this warrant modification over a one-year period beginning May 2022.