Note 3 - 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 150,000 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 150,000 shares to 300,000 shares in total. As of December 31, 2023, 27,326 shares were available for future grants.

Stock Compensation Expense

We recorded stock-based compensation expense for the years ended December 31, 2023 and 2022 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

The following table summarizes our stock option activity during the years ended December 31, 2022 and 2023:

 Schedule of Stock Option Activity

No forfeiture rate was applied to these stock options. The aggregate intrinsic value of outstanding options, all of which are exercisable, was $0 at both December 31, 2023 and 2022. No stock options were exercised during the years ended December 31, 2023 or 2022 and there is no unamortized expense at either December 31, 2023 or 2022 since the options are fully vested.

Restricted Stock Awards

The following table summarizes our restricted stock award (RSA) activity during the years ended December 31, 2022 and 2023:

 Schedule of Restricted Stock Awards (“RSAs”) Activity

As of December 31, 2023, unrecognized stock-based compensation expense for RSAs of $5,825 is expected to be fully recognized in 2024.

On January 1, 2023, we granted RSAs totaling 4,500 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 1,305 shares of previously issued, but unvested common stock.

On July 14, 2023, we granted RSAs totaling 6,250 shares of common stock to a consultant (of which 3,750 vested and were issued as of December 31, 2023) for services to be provided through March 18, 2024. RSAs for up to 2,500 shares of common stock are subject to regaining Nasdaq compliance, with RSAs for only 1,250 shares of common stock vesting if we regain Nasdaq compliance through a reverse stock split. Because we effected a reverse stock-split on January 22, 2024 (which we have retroactively applied to all share counts reported in this Annual Report on Form 10-K) and regained Nasdaq compliance on February 2, 2024. Effective December 31, 2023, we cancelled the RSAs for 1,250 shares of common stock that will not vest. On August 31, 2023, in connection with the resignation of our Chief Operating Officer, unvested RSAs representing 1,250 shares of common stock were forfeited and we reversed previously recognized expense of $72,733.

Restricted Stock Units

The following table summarizes our restricted stock unit (RSU) activity during the years ended December 31, 2022 and 2023:

 Schedule of Restricted Stock Units (“RSUs”) Activity

As of December 31, 2023, unrecognized stock-based compensation expense for RSUs of $839,121 is expected to be fully recognized over a weighted average period of 1.49 years. The unrecognized expense excludes $442,024 related to certain RSUs with a performance milestone that is not currently probable of occurring.

During the year ended December 31, 2023, we granted RSUs related to the future issuance of 76,078 shares of our common stock to employees and directors, which have service vesting requirements. On August 8, 2023, we also granted RSUs related to the future issuance of 40,000 shares of our common stock as part of the compensation package to our new Chief Executive Officer, George Ng. Vesting for 20,000 RSUs occurs ratably over a three-year period. The remaining 20,000 RSUs will vest upon the achievement of certain performance metrics, with the first 10,000 performance-based RSUs vesting when gross proceeds of $10,000,000 is raised, and the second 10,000 performance-based RSUs vesting when additional gross proceeds of $10,000,000 is raised.

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 January 1, 2024, we granted RSUs totaling $1.3 million, contingent upon receiving shareholder approval to increase the number of shares available under our 2019 Omnibus Incentive Plan (“Incentive Plan”), which we plan to obtain in June 2024. The number of shares to be issued under the RSUs will be based on the greater of: (i) $30.00 per share or (ii) the closing price per share on the day we receive shareholder approval to increase the number of shares available under the Incentive Plan. We will grant a maximum of 42,149 shares under these RSU grants.

Warrants

The following table summarizes our warrant activity during the years ended December 31, 2022 and 2023.

 Schedule of Warrants Activity

In February 2023, we amended our financial consulting agreement with Spartan by extending the term until February 10, 2024. We compensated Spartan for financial consulting services provided under the amendment by granting warrants to purchase 158,007 shares of our common stock on April 17, 2023, with an exercise price of $20.40. The warrants expire on April 17, 2026, and contain both call and cashless exercise provision. We also granted warrants to purchase 15,000 shares of our common stock to a consultant on November 18, 2023, of which warrants to purchase 7,500 shares of our common stock were exercisable, with an exercise price of $7.40. These warrants expire on November 18, 2025.

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