Note 4 - 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 originally provided for the aggregate issuance of 3,000,000 shares of our common stock, with 627,086 shares available for future grants at June 30, 2022.

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.

Stock Compensation Expense

We recorded stock-based compensation expense for the three and six month periods ended June 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 six months ended June 30, 2022. At June 30, 2022, we had 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 3.1 years. Options exercisable at June 30, 2022 for the purchase of 176,315 shares of our common stock had a weighted average exercise price $17.02 and a weighted average remaining contractual life of 3.0 years. We had, as of June 30, 2022, total unrecognized stock-based compensation expense for these stock options of approximately $37,000, which is expected to be fully recognized by the end of the third quarter of 2022.

Restricted Stock Awards

On January 4, 2022, we granted and issued Restricted Stock Awards (“RSAs”) for 9,766 shares of our common stock to a consultant for services to be provided in 2022. These RSAs had a fair market value of $50,000 on the date of grant and were expensed as stock-based compensation during the six months ended June 30, 2022. Effective January 1, 2022, we also granted 72,832 RSAs to our directors for their 2022 service which had a fair market value of $252,000 on the date of grant and will cliff vest on December 31, 2022. Additionally, on March 31, 2022, we issued 17,572 RSAs 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 18,208 RSAs related to their 2022 service. We did not cancel any RSAs during the six months ended June 30, 2022.

At June 30, 2022, we had unvested RSAs for 145,733 shares with a weighted average grant date fair value of $6.13. Unvested RSAs representing 120,733 shares are expected to vest at various dates in 2022, 12,500 shares are expected to vest in 2023, and the remainder are expected to vest in 2024. As of June 30, 2022, the total unrecognized stock-based compensation expense related to the outstanding RSAs was approximately $310,000 which is expected to be recognized over a weighted average period of approximately 0.8 years.

Restricted Stock Units

Activity with respect to our Restricted Stock Units (“RSUs”) during the six months ended June 30, 2022 was as follows:

 Schedule of Information About RSU Outstanding

As of June 30, 2022, unrecognized stock-based compensation expense of approximately $4.0 million for RSUs is expected to be fully recognized over a weighted average period of 0.8 years. The unrecognized expense excludes approximately $349,000 of expense related to certain RSUs with a performance milestone that is not probable of occurring at this time.

During the six months ended June 30, 2022, we granted RSUs related to the future issuance of 243,131 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 are vested 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.

Included in RSUs awarded during the six months ended June 30, 2022 are RSUs awarded on April 1, 2022 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 while the RSUs that were approved by the shareholders on July 11, 2022 have a fair value, as of the approval date, of $2.9 million. The $3.3 million is being recognized ratably over the period April 1, 2022 through December 31, 2022, while the $2.9 million will be recognized ratably over the remainder of 2022 beginning in the third quarter of 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, cancelled or forfeited during the six months ended June 30, 2022. At June 30, 2022, we had outstanding and vested stock purchase warrants for the purchase of 303,725 shares with a weighted average exercise price of $10.66 and a weighted average remaining contractual life of 1.3 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 will recognize expense of approximately $33,000 related to this warrant modification over a one-year period beginning May 2022.