Annual report pursuant to Section 13 and 15(d)

Equity Incentive Plan

v3.22.4
Equity Incentive Plan
12 Months Ended
Dec. 31, 2022
Equity Incentive Plan  
Equity Incentive Plan

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:

 

 

·

 

Fair Value of Common Stock. The estimated fair value of the common stock underlying the Company’s stock option plan was determined by management by considering various factors as discussed below. All options to purchase shares of the Company’s common stock are intended to be exercisable at a price per share not less than the per-share fair value of the Company’s common stock underlying those options on the date of grant. In the absence of a public trading market for the Company’s common stock, before the initial public offering, on each grant date, the Company developed an estimate of the fair value of its common stock based on the information known to the Company on the date of grant, upon a review of any recent events and their potential impact on the estimated fair value per share of the common stock and in part on input from an independent third-party valuation firm. After the Company’s initial public offering, the fair value of common stock is measured as the Company’s closing price of common stock on the date of grant.

 

 

 

 

·

Risk-Free Interest Rate. The Company bases the risk-free interest rate used in the Black-Scholes valuation model on the implied yield available on U.S. Treasury zero-coupon issues with a term equivalent to that of the expected term of the options.

 

 

 

 

·

Expected Term. The expected term represents the period that the Company’s stock-based awards are expected to be outstanding. Because of the limitations on the sale or transfer of the Company’s common stock as a privately held company, the Company does not believe its historical exercise pattern is indicative of the pattern it will experience as a publicly traded company. The Company plans to continue to use the SAB 110 simplified method until it has sufficient trading history as a publicly traded company.

 

 

·

Volatility. The Company determines the price volatility based on the historical volatilities of industry peers as it has limited trading history for its common stock price. Industry peers consist of several public companies in the biotechnology industry with comparable characteristics, including clinical trials progress and therapeutic indications.

 

 

 

 

·

Dividend Yield. The expected dividend assumption is based on the Company’s current expectations about its anticipated dividend policy. To date, the Company has not declared any dividends to common shareholders, and therefore the Company has used an expected dividend yield of zero.

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

 

 

 

Year Ended December 31,

 

 

 

2022

 

 

2021

 

Grant date fair value

 

$ 1.46

 

 

$ 4.87

 

Risk-free interest rate

 

 

1.5 %

 

 

0.92 %

Dividend yield

 

 

0.00 %

 

 

0.00 %

Expected life in years

 

 

5.4

 

 

 

5.7

 

Expected volatility

 

 

123 %

 

 

122 %

 

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

 

 

2021

 

Research and development

 

$ 218,324

 

 

$ 354,201

 

General and administrative

 

 

712,001

 

 

 

1,551,207

 

 

 

$ 930,325

 

 

$ 1,905,408

 

 

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:

 

 

 

Number of Options Outstanding

 

 

Weighted-Average Exercise Price

 

 

Weighted-Average Remaining Contractual Term (in Years)

 

Balance at December 31, 2021

 

 

523,199

 

 

$ 5.84

 

 

 

8.8

 

Options granted

 

 

533,127

 

 

 

1.75

 

 

 

8.6

 

Options exercised

 

 

-

 

 

 

-

 

 

 

-

 

Options cancelled

 

 

-

 

 

 

-

 

 

 

-

 

Balance at December 31, 2022

 

 

1,056,326

 

 

$ 3.77

 

 

 

8.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at December 31, 2022

 

 

617,769

 

 

$ 4.33

 

 

 

8.3

 

 

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:

 

 

 

Number of

RSU’s outstanding

 

Balance at December 31, 2021

 

 

-

 

RSUs granted

 

 

219,634

 

RSUs settled

 

 

219,634

 

RSUs cancelled

 

 

-

 

Balance at December 31, 2022

 

 

-

 

 

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.