Equity Incentive Plan

9 Months Ended

Sep. 30, 2025

5. Equity Incentive Plan

Under the Company’s Omnibus Equity Incentive Plan (the “2021 Plan”) as amended, the Company may grant options to purchase shares of 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. At the Company’s 2024 Annual Meeting of Stockholders held on May 7, 2024, the Company’s stockholders approved an amendment to the Company’s 2021 Plan to increase the number of shares of Common Stock authorized for issuance thereunder from 4,193 shares to 7,993 shares. Further at the Company’s 2024 Annual Meeting of Stockholders, the Company’s stockholders approved an amendment to the Company’s 2021 Plan, to increase the evergreen provision from one percent to five percent of the total number of the Company’s Common Stock outstanding starting on January 1, 2025. The five percent evergreen provision resulted in an additional 12,588 shares of Common Stock issuable pursuant to the 2021 Plan as of January 1, 2025.

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 September 30, 2025, there remain 13 shares reserved for issuance under the 2021 Plan, as amended.

Stock Option Award Activity

A summary of the Company’s 2021 Plan stock option activity is as follows:

Schedule of Stock Option Activity

	Number of Options Outstanding		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in Years)
Balance at December 31, 2024		5,227	$	58.72		9.3
Options granted		15,250		13.80		-
Options exercised		-		-		-
Options cancelled		-		-		-
Balance at September 30, 2025		20,477	$	25.27		9.1

Options exercisable at September 30, 2025		6,235	$	34.97		8.9

In January 2024, the Board unanimously approved to provide employees and directors of the Company the opportunity to cancel outstanding, out-of-the-money, stock options without consideration, in accordance with an option cancellation agreement. Accordingly, 674 of the 675 stock options outstanding as of December 31, 2023, were cancelled in February 2024.

In accordance with accounting guidance provided in ASC 718, since the stock option cancellations were not accompanied by a concurrent grant, or offer to grant, a replacement award, any unrecognized compensation cost was recognized at the cancellation date. Accordingly, the Company recognized stock-based compensation expense of $568,372 resulting from the stock option cancellation during the first quarter of 2024.

The aggregate intrinsic value of options outstanding and exercisable as of September 30, 2025, 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 September 30, 2025, which was $5.02 per share. The intrinsic value of options outstanding and exercisable as of September 30, 2025, was zero.

As of September 30, 2025, the total unrecognized compensation cost related to stock options was approximately $0.2 million and the weighted average period over which this cost is expected to be recognized is 2.7 years.

Stock-based Compensation Expense

In general, stock-based compensation is allocated to research and development expense or selling, 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.

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

	2025		2024		2025		2024
	Three Months Ended September 30,				Nine Months Ended September 30,
	2025		2024		2025		2024
Research and development	$	7,951	$	4,677	$	23,672	$	246,637
Selling, general and administrative		29,889		16,315		90,591		381,197
Total	$	37,840	$	20,992	$	114,263	$	627,834
Stock-based compensation expense	$	37,840	$	20,992	$	114,263	$	627,834

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 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, which is calculated using the simplified method for stock-based awards granted to employees, as the Company has insufficient historical information to provide a basis for an estimate. The simplified method calculates the expected term as the average of the vesting term plus the contractual life of the options. As permitted under ASC 718, the Company has elected to use the contractual term as the expected term for certain non-employee awards, on an award-by-award basis.

	●	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 Company granted stock options in January 2025 and 2024. There were no stock option grants during the second or third quarters of 2025 or 2024. The following table presents the weighted-average assumptions used for stock options granted during the following periods:

	2025			2024
	Nine Months Ended September 30,
	2025			2024
Grant date fair value	$	11.59		$	91.50
Risk-free interest rate		4.65	%		4.0	%
Dividend yield		0.00	%		0.00	%
Expected life in years		5.9			5.9
Expected volatility		110	%		110	%

Dermata Therapeutics, Inc. 10-Q