7. Equity Incentive Plan

Under the Company’s 2021 Omnibus Equity Incentive Plan (the “2021 Plan”), the Company may grant options to purchase common stock, restricted stock awards, performance stock awards, incentive bonus awards, other cash-based awards or directly issue shares of common stock to employees, directors, and consultants of the Company.

Effective January 1, 2022, an evergreen provision contained in the Company’s 2021 Plan increased the total number of shares of common shares issuable under the 2021 Plan in an amount equal to one percent of the Company’s common shares outstanding as of December 31, 2021. This evergreen provision resulted in an additional 83,286 common shares issuable pursuant to the 2021 Plan, increasing the total authorized shares available for issuance under the 2021 Plan to 1,731,499 as of January 1, 2022. Stock awards may be granted at an exercise price per share of not less than 100% of the fair market value at the date of grant. Stock awards granted are exercisable over a maximum term of 10 years from the date of grant and generally vest over a period of four years for employees and one year for directors of the Company’s board and consultants.

As of December 31, 2022, there remain an additional 455,539 shares reserved for issuance under the 2021 Plan.

Fair Value Measurement

The Company uses the Black-Scholes option valuation model, which requires the use of highly subjective assumptions, to determine the fair value of stock-based awards. The fair value of each employee stock option is estimated on the grant date under the fair value method using the Black-Scholes model. The estimated fair value of each stock option is then expensed over the requisite service period, which is generally the vesting period. The assumptions and estimates that the Company uses in the Black-Scholes model are as follows:

The following table presents the weighted-average assumptions used for the stock option grants:

Stock-based Compensation Expense

In general, stock-based compensation is allocated to research and development expense or general and administrative expense according to the classification of cash compensation paid to the employee, director, or consultant to whom the stock award was granted.

On March 24, 2021, in connection with the conversion from an LLC to a C-Corporation, the Company converted 277,448 of Class B Common Units profits interests, for which no consideration had been received, into 277,448 options to purchase common stock at an exercise price of $5.74 to $6.314 per share. The fair value of common stock prior to IPO was determined in part based upon input from an independent third-party valuation firm. The Company considered the conversion of these Class B Common Units profits interests as a modification under ASC 718, Stock Compensation, in which the fair value of the Class B Common Units profits interests was measured at the modification date and compared to the fair value of the common stock options, with the difference of $1,339,993 resulting in incremental stock-based compensation expense recorded in the first quarter of 2021.

In December 2021, the Company’s board of directors authorized a stock option grant in lieu of a cash bonus for the Company’s Chairman and Chief Executive Officer. The stock-based compensation expense of $0.4 million related to the stock option grant was booked to the fiscal year ended December 31, 2021; however, the impact to additional paid-in capital was not booked until the first quarter of 2022, when the stock option award was granted.

The following table summarizes the total stock-based compensation expense related to stock options and RSUs included in the Company’s statements of operations:

As of December 31, 2022, total unrecognized compensation cost related to stock options was approximately $0.9 million and the weighted average period over which this cost is expected to be recognized is 2.4 years.

Stock Award Activity

A summary of the Company’s Equity Plans stock option activity is as follows:

The aggregate intrinsic value of options exercisable as of December 31, 2022, is calculated as the difference between the exercise price of the underlying options and the closing market price of the Company’s common stock on that date, which was $0.409 per share. The intrinsic value of options outstanding and exercisable as of December 31, 2022, was zero due to the underlying options exercise price above market value.

As of December 31, 2022, total unrecognized compensation cost related to stock options was approximately 0.9 million and the weighted average period over which this cost is expected to be recognized is 2.4 years.

Restricted Stock Unit Award Activity

A summary of the Company’s Equity Plan restricted stock unit, or RSU, award activity is as follows:

During the year ended December 31, 2022, the Company issued 219,634 RSUs as partial compensation to certain member of Dermata’s Board of Directors for their services during 2022. The Company recognized stock-based compensation expense of approximately $0.2 million for the year ended December 31, 2022 related to the restricted stock unit awards. There were no RSUs outstanding during fiscal year 2021, no RSU’s outstanding as of December 31, 2022, and there is no unrecognized compensation expense related to RSUs as of December 31, 2022.