Note 3 - Stock-based Compensation

On June 19, 2019, our stockholders approved, and we adopted the Processa Pharmaceuticals Inc. 2019 Omnibus Equity Incentive Plan (the “2019 Plan”). The 2019 Plan allows us, under the direction of our Board of Directors or a committee thereof, 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 provides for the aggregate issuance of 6,000,000 shares of our common stock. At September 30, 2023, we had 467,735 shares available for future grants under the 2019 Plan.

Stock Compensation Expense

We recorded stock-based compensation expense for the three and nine months ended September 30, 2023 and 2022 as follows:

 Schedule of Stock-based Compensation Expense 

During the nine months ended September 30, 2023, we also recorded an expense of $1.3 million related to the warrants we issued to Spartan (see Note 2), which is not included in the table above. 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

During the nine months ended September 30, 2023, stock options to purchase 36,885 shares of common stock expired and there were no exercises or grants of stock options. At September 30, 2023, we had outstanding and exercisable options for the purchase of 141,611 shares with a weighted average exercise price of $18.22, a weighted average remaining contractual life of 2.4 years. At September 30, 2023, we did not have any unrecognized stock-based compensation expense related to our granted stock options.

Restricted Stock Awards

Activity with respect to our Restricted Stock Awards (RSAs) during the nine months ended September 30, 2023 was as follows:

 Schedule of Restricted Stock Awards (“RSAs”) Activity

On January 1, 2023, we granted RSAs totaling 90,000 shares of common stock to three directors for their service for the six-month period ending June 30, 2023 to align their compensation plan with their service period and changed the annual service period to begin and end on the date of respective Annual Meetings rather than the calendar year. Our directors are compensated through a combination of cash and equity. On March 8, 2023, the directors increased the cash component and decreased the equity component of their compensation by equal amounts on a retroactive basis, to the beginning of their respective service periods. Accordingly, we cancelled RSAs representing 26,118 shares of previously issued, but unvested common stock.

On July 14, 2023, we granted RSAs totaling 125,000 shares of common stock to a consultant (of which 50,000 have been issued as of September 30, 2023) for services to be provided through March 18, 2024. The remaining RSAs are subject to vesting restrictions. On August 31, 2023, in connection with the resignation of our Chief Operating Officer (COO), unvested RSAs representing 25,000 shares of common stock were forfeited and we reversed previously recognized expense of $73,000.

At September 30, 2023, unrecognized stock-based compensation expense of $30,000 for RSAs representing 75,000 shares of common stock is expected to be recognized over a weighted average period of 0.41 years. The weighted-average grant-date fair value of RSAs granted during the nine months ended September 30, 2022 was $7.74.

Restricted Stock Units

Activity with respect to our Restricted Stock Units (“RSUs”) during the nine months ended September 30, 2023 was as follows:

 Schedule of Restricted Stock Units (“RSUs”) Activity

On August 8, 2023, Mr. George Ng was appointed as our Chief Executive Officer and as a Board Director. In addition to cash compensation, the Compensation Committee awarded 800,000 restricted stock units (“RSUs”) to Mr. Ng. Vesting for 400,000 RSUs occurs ratably over a three-year period. The remaining 400,000 RSUs will vest on the achievement of certain performance metrics, with the first 200,000 performance-based RSUs vesting when gross proceeds of $10,000,000 is raised, and the second 200,000 performance-based RSUs vesting when additional gross proceeds of $10,000,000 is raised. On August 31, 2023, in connection with the termination of our COO, vested and unvested RSUs representing 436,043 shares of common stock were forfeited and/or cancelled and we reversed previously recognized expense of $38,000.

At September 30, 2023, unrecognized stock-based compensation expense of $1.1 million for RSUs is expected to be fully recognized over a weighted average period of 1.4 years. The unrecognized expense excludes $441,000 of expense related to certain RSUs with a performance milestone that is not probable of occurring at this time. The weighted-average grant-date fair value of RSUs granted during the nine months ended September 30, 2022 was $3.11.

Holders of our vested RSUs have our promise to issue shares of our common stock upon meeting the distribution restrictions contained in their Restricted Stock Unit Award Agreement. The distribution restrictions are different (longer) than the vesting schedule, imposing an additional restriction on the holder. Unlike RSAs, while certain 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

During the nine months ended September 30, 2023, we granted warrants to purchase a total of 3,160,130 shares of our common stock as compensation for services provided under an amended consulting agreement with Spartan, the placement agent for the Offering described in Note 2. The warrants were issued and exercisable on April 17, 2023 with an exercise price of $1.02 and expiration date of April 17, 2026. The warrants contain both call and cashless exercise provisions. We recorded $1,310,875 as a general and administrative expense representing the fair value of these warrants on February 14, 2023, the date we amended the consulting agreement since there were no contingent conditions on that date through April 17, 2023, the date of issuance. At September 30, 2023, we had outstanding and exercisable stock purchase warrants for the purchase of 3,366,480 shares with a weighted average exercise price of $1.61 and a weighted average remaining contractual life of 2.3 years.

At September 30, 2023, we did not have any unrecognized stock-based compensation expense related to our granted stock purchase warrants.