Equity Incentive Plan

12 Months Ended

Dec. 31, 2025

5. Equity Incentive Plan

Under our 2021 Omnibus Equity Incentive Plan as amended (“2021 Plan”), we 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 our employees, directors, and consultants. The five percent evergreen provision resulted in an additional 12,588 and 4,061 shares of Common Stock issuable pursuant to the 2021 Plan as of January 1, 2025, and 2024, respectively. As of December 31, 2025, the number of shares authorized for issuance under the 2021 Plan was 20,581. As of December 31, 2025, there remained 13 shares reserved for issuance under the 2021 Plan, as amended.

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 our Board and consultants.

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 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 stock options granted during the following periods:

	2025			2024
	Years Ended December 31,
	2025			2024
Grant date fair value	$	11.59		$	47.73
Risk-free interest rate		4.7	%		3.9	%
Dividend yield		0.00	%		0.00	%
Expected life in years		5.9			7.9
Expected volatility		110	%		107	%

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
	Years Ended December 31,
	2025		2024
Research and development	$	31,785	$	251,313
Selling, general and administrative		111,947		406,336
Stock-based compensation expense	$	143,732	$	657,649

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		7.8
Options granted		15,250		13.80		-
Options exercised		-		-		-
Options cancelled		-		-		-
Balance at December 31, 2025		20,477	$	25.27		8.9

Options exercisable at December 31, 2025		7,250	$	33.51		8.7

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 676 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 total fair value of stock options vested during the years ended December 31, 2025, and 2024, was $145,587 and $60,263, respectively.

The aggregate intrinsic value of options outstanding and exercisable as of December 31, 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 December 31, 2025, which was $2.32 per share. The intrinsic value of options outstanding and exercisable as of December 31, 2025, was zero.

As of December 31, 2025, 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 2.6 years.

Dermata Therapeutics, Inc. 10-K