Note 5 - 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 December 31, 2022, 2,387,622 shares were available for future grants.

Stock Compensation Expense

We recorded stock-based compensation expense for the years ended December 31, 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

We did not grant any stock options during 2022 and made one grant in 2021 to a consultant for the purchase of 30,000 shares.

The fair value of the stock option grant was estimated using the Black-Scholes option-pricing model at the date of grant. The expected volatility of stock options granted on or after September 1, 2021 will be calculated using the Company’s historical closing stock prices. The expected term of our stock options was determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The risk-free interest rate was determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that we have never paid cash dividends and do not expect to pay any cash dividends in the foreseeable future.

The fair value of the option award granted during the year ended December 31, 2021 was estimated using the following assumptions:

 Schedule of Stock Option Valuation Assumption

The following table summarizes our stock option activity during the years ended December 31, 2022 and 2021:

 Schedule of Stock Option Activity

The weighted average grant-date fair value per share of options granted during the year ended December 31, 2021 was $5.23. No forfeiture rate was applied to these stock options. The aggregate fair value of stock options vested at December 31, 2022 and 2021 was $1,910,240 and $1,659,909, respectively. No stock options were exercised during the years ended December 31, 2021 or 2022.

Restricted Stock Awards

Activity in our Restricted Stock Awards (“RSAs”) during the years ended December 31, 2022 and 2021 was as follows:

 Schedule of Restricted Stock Awards (“RSAs”) Activity

As of December 31, 2022, unrecognized stock-based compensation expense of approximately $199,000 for RSAs is expected to be fully recognized in 2023 and 2024.

During the year ended December 31, 2022, we granted RSAs related to the future issuance of 187,058 shares of our common stock as follows:

On May 31, 2022, one of our directors did not seek reelection and forfeited RSAs for 18,208 shares of our common stock related to their 2022 service. On January 1, 2023, we awarded RSAs for 90,000 shares to three directors, which vest on the earlier of July 1, 2023 or our 2023 Annual Meeting of Stockholders.

Restricted Stock Units

Activity in our Restricted Stock Units (“RSUs”) during the years ended December 31, 2022 and 2021 was as follows:

 Schedule of Restricted Stock Units (“RSUs”) Activity

As of December 31, 2022, unrecognized stock-based compensation expense of approximately $472,000 for RSUs is expected to be fully recognized over a weighted average period of 1.7 years. The unrecognized expense excludes approximately $320,000 of expense related to certain RSUs with a performance milestone that is not currently probable of occurring.

During the year ended December 31, 2022, we granted RSUs related to the future issuance of 417,073 shares of our common stock pursuant to agreements with our Executive team and certain other employees where a portion of their base compensation was paid in RSUs. The value of an RSU award was 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. This program ended for all participants by December 31, 2022.

On April 1, 2022, we also granted RSUs for 1,979,818 shares of our common stock which vest on January 1, 2023 and are subject to distribution requirements before any shares of common stock are issued. The RSUs had a fair value of $6.2 million, which was fully recognized in stock-based compensation expense during the year ended 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.

On June 1, 2022, in connection with the termination of a long-term employee, we accelerated the vesting of 62,940 restricted stock units. The incremental compensation costs recognized related to the acceleration of vesting of these awards totaled $90,228.

On January 1, 2023, we awarded RSUs for 966,503 shares to employees, of which 310,895 vest over one year and the remainder vest over three years.

Warrants

No stock purchase warrants were granted and 18,107 expired during the year ended December 31, 2022. As shown in the table below at December 31, 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 0.9 years.

The following table summarizes our warrant activity during the years ended December 31, 2022 and 2021.

 Schedule of Warrants Activity

Our outstanding warrants expire at various dates through September 1, 2024.

In January 2021, we issued a warrant for the purchase of 100,000 shares of our common stock, with a fair value of $321,158, to a consultant in exchange for service to be provided in 2021. There were no vesting conditions associated with this warrant. In May 2022, we extended the expiration date of this warrant by one year to January 11, 2024 and recognized approximately $33,000 of incremental expense related to the warrant modification during the year ended December 31, 2022, based on an expected volatility of 84.39%. No other terms of the warrant, including the exercise price of $7.18, were changed.

In September 2021, we also issued a warrant for the purchase of 50,000 shares of our common stock, with a fair value of $139,900, to another consultant in exchange for service to be provided in 2021 and 2022. The warrant expires on September 1, 2024 and has an exercise price of $8.00 per share. The warrants were fully vested by June 30, 2022.

We used the Black-Scholes option pricing model to calculate the grant date fair value of the two warrants with the following assumptions: 

 Schedule of Stock Option Warrant Valuation Assumption

We recognize expense based on the fair value of the warrants over their service or vesting periods and recorded $103,374 and $391,108 related to these warrants during the years ended December 31, 2022 and 2021, respectively.

In February 2021, we also issued warrants for the purchase of 79,268 shares of our common stock to our placement agent in connection with a private placement of 1,321,132 shares of our common stock as described in Note 6. These warrants are exercisable for cash at $9.30 per share and expire on February 16, 2023.

In February 2023, we amended our financial consulting agreement with Spartan by extending the term until February 10, 2024. We will compensate Spartan for financial consulting services provided under the amendment by granting warrants to purchase 3,160,130 shares of our common stock on April 17, 2023 with an exercise price of $1.02. The warrants will expire three years from the date of issuance and contain both call and cashless exercise provisions (see Note 1).