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”). 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 3,000,000 shares of our common stock, with 1,899,696 shares available for future grants at December 31, 2021.

We recorded stock-based compensation expense for the years ended December 31, 2021 and 2020 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.

As of December 31, 2021, there was a total of $2,430,142 unrecognized compensation expense, related to the unvested stock options, restricted stock awards (RSAs), restricted stock units (RSUs) and warrants which are expected to be recognized over a weighted average period of 1.7 years, excluding the impact of RSUs for the future issuance of 39,786 shares for which meeting the criteria is not yet probable.

Restricted Stock Awards

During the years ended December 31, 2021 and 2020, we issued 37,500 and 336,860 RSAs, respectively, under the 2019 Omnibus Incentive Plan to our employees and directors. We valued the RSAs based on the closing share price on the date of grant. RSAs are “shares that the recipient receives, but the rights to sell or transfer the shares are restricted until the vesting condition passes.” Recipients of RSAs are entitled to voting and dividend rights, even if they have not vested, so we consider these shares to be issued and outstanding once they have been granted.

At December 31, 2021, 281,721 RSAs have vested as follows:

During the years ended December 31, 2021 and 2020, 9,176 and 23,804 vested RSAs, respectively, were forfeited to pay for federal, state and local income taxes, and an additional 1,530 unvested RSAs were forfeited upon employment termination during the year ended December 31, 2021. The remaining 91,109 unvested RSAs vest over time with years of employment.

The following table summarizes the information about RSAs outstanding for the years ended December 31, 2020 and 2021.

 Schedule of Information About RSA Outstanding

Included in accrued expenses at December 31, 2021 is $120,000 in fees earned by our Directors, which will be satisfied with the issuance of RSAs for 17,572 shares of our common stock in 2022. This expense was accounted for as stock-based compensation in 2021.

Restricted Stock Units

During the year ended December 31, 2021, we granted restricted stock units (RSUs) related to the future issuance of 457,593 shares of our common stock as follows:

The following table summarizes the information about RSUs outstanding for the year ended December 31, 2021.

 Schedule of Information About RSU Outstanding

Holders of our vested RSUs have our promise to issue shares of our common stock upon the earlier to occur of 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. The RSUs contain dividend equivalent rights.

Stock Options

We made one stock option grant to a consultant for the purchase of 30,000 shares during the year ended December 31, 2021 and did not grant any stock options during the same period in 2020.

The fair value of each stock option grant was estimated using the Black-Scholes option-pricing model at the date of grant. We lacked company-specific historical and implied volatility information and therefore, we determined our expected stock volatility based on the historical volatility of a publicly traded set of peer companies. The expected volatility of stock option 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, 2020 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, 2021 and 2020 was $1,659,909 and $1,221,952, respectively.

 Stock Option [Member]

No stock options were exercised during the years ended December 31, 2021 or 2020.

Warrants

The following table summarizes our warrant activity during the years ended December 31, 2021 and 2020. We did not issue any warrants during 2020.

 Schedule of Warrants Activity

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

On January 26, 2021, we issued a warrant for the purchase of 100,000 shares of our common stock to a consultant in exchange for service to be provided in 2021. The warrant expires on January 11, 2023 and has an exercise price of $7.18 per share. There were no vesting conditions associated with this warrant.

On September 1, 2021, we also issued a warrant for the purchase of 50,000 shares of our common stock 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 warrant vests 12,500 options on each of September 30, 2021, December 31, 2021, March 31, 2022, and June 30, 2022, subject to continued service.

We determined the fair value of the warrants granted at the date of grant to be $321,158 and $139,900, respectively, using the Black-Scholes option pricing model 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 $391,108 related to these warrants during the year ended December 31, 2021.

On February 16, 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 7. These warrants are exercisable for cash at $9.30 per share and expire on February 16, 2023.