Note 5 - 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”) and we terminated our prior equity incentive compensation plan, the Heatwurx, Inc. 2011 Amended and Restated Equity Plan (the “2011 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. An aggregate of 500,000 shares of our common stock were initially available for issuance under the 2019 Plan. Shares available under the 2019 Plan may be authorized but unissued shares, shares purchased on the open market or treasury shares.

We recorded stock-based compensation expense for the years ended December 31, 2020 and 2019 as follows:

As of December 31, 2020, there was a total of $1,426,301 unrecognized compensation expense, related to the unvested stock options and restricted stock awards which are expected to be recognized over a weighted average period of 2.53 years.

Restricted Stock Awards  

During the year ended December 31, 2020, we granted 343,110 restricted stock awards to our employees and directors. On August 5, 2020, we issued 324,360 restricted stock awards under the 2019 Omnibus Incentive Plan to our employees and directors, of which 214,078 shares of common stock vested on October 6, 2020 when we successfully completed our underwritten public offering and up-listed to the Nasdaq Capital Market. The remaining 110,282 shares of common stock vest on the first and second year anniversary of the grant date. Certain employees forfeited 23,804 shares to pay for federal, state and local income taxes, leaving 319,306 restricted stock awards outstanding. In the fourth quarter of 2020, we issued 12,500 and 6,250 restricted stock awards to our Chief Operating Officer and Senior Director of Clinical Operations upon hire, respectively, which vest one year from their hiring dates. We valued the restricted stock awards based on the closing shares price on the date of grant.

The following table summarizes the information about restricted stock awards (“RSA”) outstanding for the year ended December 31, 2020.

The unvested restricted stock awards contain dividend and voting rights.

Stock Options

On June 20, 2019, we granted stock options for the purchase of 129,919 shares of our common stock to employees and directors. The stock options awarded contained either service or performance vesting conditions, as described below, have a contractual term of five years and an exercise price equal to the closing price of our common stock on the OTCQB on the date of grant of $16.80. We did not grant any stock option during the year ended December 31, 2020.

Stock options representing the purchase of 65,148 shares of common stock (of the 129,919 stock options granted on June 20, 2019) contained service vesting conditions. The service condition related solely to employees rendering service over a three-year period. These awards vested one-third on the first anniversary of the grant date, and then vest ratably over the remaining twenty-four months, 1/36^th of the original award each month.

Stock options representing the purchase of 64,771 shares of common stock (of the 129,919 stock options granted on June 20, 2019) vest upon meeting the following performance criteria: (i) 12,958 options vested on August 29, 2019 when we in-licensed an additional drug asset; (ii) 12,958 options vested on December 31, 2020 when we completed our current Phase 2A clinical trial for PCS499; and (iii) 38,855 options vested on October 6, 2020 when we up-listed from the OTCQB to the Nasdaq market.

The fair value of each stock option grant was estimated using the Black-Scholes option-pricing model at the date of grant. We lack company-specific historical and implied volatility information and therefore, determined our expected stock volatility based on the historical volatility of a publicly traded set of peer companies and expect to continue to do so until such time as it has adequate historical data regarding the volatility of our own traded stock price. Due to the lack of historical exercise history, 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 our option awards granted during the years ended December 31, 2019 was estimated using the following assumptions:

The following table summarizes our stock option activity for the years ended December 31, 2020 and 2019:

The weighted average grant-date fair value per share of options granted during the year ended December 31, 2019 was $9.88. No forfeiture rate was applied to these stock options. The aggregate fair value of stock options vested during the years ended December 31, 2020 and 2019 was $921,227 and $415,313, respectively.

No stock options were exercised during the years ended December 31, 2020 or 2019.