Eton Pharmaceuticals, Inc. Stock Compensation Disclosure

`Note 9 — Share-Based Payment Awards

 

The Company’s board of directors and stockholders approved the Eton Pharmaceuticals, Inc. 2017 Equity Incentive Plan in May 2017 (the “2017 Plan”), which authorized the issuance of up to 5,000,000 shares of the Company’s common stock. In conjunction with the Company’s IPO in November 2018, the Company’s stockholders and board of directors approved the 2018 Equity Incentive Plan, as amended (the “2018 Plan”) which succeeded the 2017 Plan. The Company has granted RSAs, stock options and RSUs for its common stock under the 2017 Plan and 2018 Plan as detailed in the tables below. There were 692,581 shares available for future issuance under the 2018 Plan as of December 31, 2024.

 

Shares that are expired, terminated, surrendered or canceled without having been fully exercised will be available for future awards under the 2018 Plan. In addition, the 2018 Plan provides that commencing January 1, 2019 and through January 1, 2028, the share reserve will be increased by 4% of the total number of shares outstanding as of the preceding December 31, subject to a reduction at the discretion of the Company’s board of directors. On January 1, 2023, the share reserve was increased by 1,014,124 shares based on the 25,353,119 shares of common stock outstanding at December 31, 2022. On January 1, 2024, the share reserve was increased by 1,027,522 shares based on the 25,688,062 shares of common stock outstanding at December 31, 2023. The exercise price for stock options granted is not less than the fair value of common stock as determined by the board of directors as of the date of grant. The Company uses the closing stock price on the date of grant as the exercise price.

 

To date, all stock options issued have been non-qualified stock options, and the exercise prices were set at the fair value for the shares at the dates of grant. Options typically have a ten-year life, except for options to purchase 50,000 shares of the Company’s common stock granted to product consultants in July 2017 that expired, unexercised, in July 2022 as the Company was not able to file certain product submissions to the FDA prior to the five-year expiration date. Furthermore, these option awards to the Company’s product consultants would not vest unless certain product submissions are made to the FDA, and accordingly, the Company has not recorded any expense for these contingently vesting option awards to its product consultants.

 

In July 2022 and September 2022, the Company’s board of directors approved modifications of certain outstanding awards of two senior executives, one of whom retired in May 2022 and the other whose employment was terminated in July 2022. The combined awards had an exercise price range of $1.37 to $8.61 which were set to expire 90 days after retirement or termination as the case may be, and the Company extended the expiration dates to April 2023. No other terms were modified. Due to these modifications, the Company incurred a modification expense of approximately $104 that is included in general and administration expense on the Statement of Operations for the year ended December 31, 2022.

 

In  August 2024, the Company’s board of directors approved a modification of certain outstanding awards of a senior executive who retired in  August 2024. The combined awards had an exercise price range of $3.47 to $8.61 which were set to expire 90 days after retirement or termination as the case  may be, and the Company extended the expiration dates to  November 2025 in conjunction with ongoing consulting services. No other terms were modified. Due to these modifications, the Company incurred a modification expense of $75 that is included in general and administration expense on the Statements of Operations for the year ended December 31, 2024.

 

For the years ended December 31, 2024, 2023 and 2022, the Company’s total stock-based compensation expense was $3,165, $3,137 and $4,218, respectively. Of these amounts, $2,899, $2,864, and $3,954 was recorded in general and administrative expenses, respectively, and $266, $273, and $264 was recorded in R&D expenses, respectively.

 

Stock Options

 

The following table summarizes stock option activity during the year ended December 31, 2024:

 

										Weighted Average
						Weighted Average				Remaining
						Exercise				Contractual				Aggregate Intrinsic
		Shares				Price				Term				Value
Options outstanding as of January 1, 2024			4,839,226			$	4.57
Issued			1,621,118				4.83
Exercised			(266,353	)			4.47
Forfeited/Cancelled			(275,375	)			4.55
Options outstanding as of December 31, 2024			5,918,616			$	4.65				7.0			$	51,316
Options exercisable at December 31, 2024			4,044,105			$	4.71				6.2			$	34,837
Options vested and expected to vest at December 31, 2024			5,918,616			$	4.65				7.0			$	51,316

 

The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those stock options that had strike prices lower than the fair value of the Company’s common stock at December 31. The intrinsic value of the options exercised during 2024 was $1,867.

 

For the years ended December 31, 2024, 2023 and 2022, there were 266,353, 207,626 and 25,000 shares issued for exercise of stock options, respectively for proceeds of $1,190, $149 and $35, respectively.

 

The assumptions used to calculate the estimated fair value of options granted during the years ended December 31, 2024, 2023 and 2022 under the BSM were as follows:

 

		December 31, 2024				December 31, 2023				December 31, 2022
Expected dividends			—	%			—	%			—	%
Expected volatility			70	%			70	%			70	%
Risk-free interest rate			3.5 - 4.4	%			3.5 - 4.7	%			1.5 - 3.9	%
Expected term (in years)			6.2				6.3				5.9
Weighted average grant date fair value		$	3.22			$	2.32			$	2.32

 

Expected Term — The Company has opted to use the “simplified method” for estimating the expected term of options granted to employees and directors, whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option (generally 10 years). The expected term of options granted to non-employees equals the contractual life of the options.

 

Expected Volatility — Expected volatilities are based on the Company's historical volatility subsequent to our IPO, which we believe represents the most accurate basis for estimating expected future volatility under the current conditions.

 

Risk-Free Interest Rate — The risk-free rate assumption is based on the U.S. Treasury instruments with maturities similar to the expected term of the Company’s stock options.

 

Expected Dividend — The Company has not issued any dividends in its history and does not expect to issue dividends over the life of the options and therefore has estimated the dividend yield to be zero.

 

Fair value of Common Stock —The Company uses the closing stock price on the date of grant for the fair value of the common stock.

 

As of December 31, 2024, there was a total of $5,390 of unrecognized compensation costs related to non-vested stock option awards which will be recognized over a weighted average period of 2.2 years.

 

Restricted Stock Units (RSUs)

 

The following table summarizes restricted stock unit activity during the year ended December 31, 2024:

 

						Weighted Average Grant-Date
		December 31, 2024				Fair Value Per Unit
Outstanding and unvested as of January 1, 2024			274,204			$	2.63
Granted			65,266			$	6.74
Vested			(90,402	)		$	2.63
Forfeited			(23,000	)		$	2.63
Outstanding and unvested as of December 31, 2024			226,068			$	3.82

 

Stock-based compensation related to RSUs was $241, $239 and $114 for the years ended  December 31, 2024, 2023 and 2022, respectively. As of December 31, 2024, there was $740 of unrecognized stock-based compensation expense related to unvested RSUs which will be recognized over a weighted average period of 2.2 years.

 

Employee Stock Purchase Plan

 

In December 2018, the Company’s board of directors adopted an initial offering of the Company’s common stock under the Company’s ESPP. The Company’s ESPP provides for an initial reserve of 150,000 shares and this reserve is automatically increased on January 1 of each year by the lesser of 1% of the outstanding common shares at December 31 of the preceding year or 150,000 shares, subject to reduction at the discretion of the Company’s board of directors.

 

The terms of the ESPP permit employees of the Company to use payroll deductions to purchase stock at a price per share that is at least the lesser of (1) 85% of the fair market value of a share of common stock on the first date of an offering or (2) 85% of the fair market value of a share of common stock on the date of purchase. After the initial offering period, subsequent twelve-month offering periods automatically commence over the term of the ESPP on the day that immediately follows the conclusion of the preceding offering, each consisting of two purchase periods approximately six months in duration ending on or around June 10 and December 10 each year, subject to a restart feature if the Company’s stock price drops at the end of a six-month period within the twelve-month offering period.

 

The Company recorded an expense of $205, $135, and $128 in 2024, 2023 and 2022, respectively, related to the ESPP. For the years ended December 31, 2024, 2023 and 2022, there were 80,933, 86,782 and 69,884 share issuances, respectively, under the ESPP. The weighted average grant date fair value of share awards in 2024, 2023 and 2022 was $1.35, $1.27, and $1.17 per share, respectively. Employees contributed $283, $230 and $174 to the ESPP during 2024, 2023 and 2022, respectively. Of these amounts, $42 and $24 at December 31, 2024 and 2023, respectively, are included in accrued liabilities in the accompanying balance sheets. As of December 31, 2024, there were 692,581 shares available for issuance under the ESPP.