Spectral AI, Inc. Stock Compensation Disclosure

11. STOCK-BASED COMPENSATION

 

Each option and warrant to purchase common stock of Legacy Spectral was converted into an option and warrant, respectively, to purchase Spectral AI’s common stock based on the Exchange Ratio, with corresponding adjustments to the exercise price. Accordingly, the options and warrants to purchase 46,592,862 and 762,712, respectively, shares of the common stock of Legacy Spectral were converted into options and warrants to purchase 4,519,191 and 73,978, respectively, shares of Spectral AI’s common stock. Legacy Spectral’s 600,000 RSUs were converted into 58,197 Spectral AI RSUs, based on the Exchange Ratio.  

  

2018 Long Term Incentive Plan 

 

On July 24, 2018, Legacy Spectral’s Board of Directors adopted the 2018 Long Term Incentive Plan (the “2018 Plan”) which permitted granting of incentive stock options (which must meet all statutory requirements), non-qualified stock options, stock appreciation rights, restricted stock, stock units, performance shares, performance units, incentive bonus awards, and other cash-based or stock-based awards. In May 2024, all awards outstanding under the 2018 Plan were replaced with corresponding awards to be issued pursuant to the 2023 Plan, as discussed below, and no new grants will be made under the 2018 Plan.

2022 Long Term Incentive Plan

 

On September 27, 2022, Legacy Spectral’s stockholders approved the adoption of the 2022 Long Term Incentive Plan (the “2022 Plan”) which permitted granting of incentive stock options (they must meet all statutory requirements), non-qualified stock options, stock appreciation rights, restricted stock, stock units, performance shares, performance units, incentive bonus awards, and other cash-based or stock-based awards. In May 2024, all awards outstanding under the 2022 Plan were replaced with corresponding awards to be issued pursuant to the 2023 Plan, as discussed below, and no new grants will be made under the 2022 Plan.

 

2023 Long Term Incentive Plan

 

On May 14, 2024, the Company’s shareholders approved the adoption of the 2023 Long Term Incentive Plan (the “2023 Plan”) which permits granting of incentive stock options (they must meet all statutory requirements), non-qualified stock options, stock appreciation rights, restricted stock, stock units, performance shares, performance units, incentive bonus awards, and other cash-based or stock-based awards. The options, restricted stock units and other securities issued pursuant to the 2018 Plan and 2022 Plan have been replaced with a corresponding award issued pursuant to the 2023 Plan. No new grants will be made under the 2022 Plan and the 2018 Plan and all outstanding grants under the 2018 Plan and 2022 Plan will be assumed by the 2023 Plan. The maximum aggregate number of shares that may be issued under the Plan shall not exceed 8,000,000, plus the number of shares that are automatically added on January 1st of each year for a period of up to ten years, commencing on January 1, 2024 and ending on (and including) January 1, 2033, in an amount equal to the lesser of (i) five percent (5%) of the total number of shares of stock outstanding on December 31st of the preceding calendar year, and (ii) an amount determined by the Board of Directors. Pursuant to the 2023 Plan, stock options must expire within 10 years and must be granted with exercise prices of no less than the fair value of the common stock on the grant date, as determined by the Board of Directors. As of December 31, 2024, under the 2023 Plan, 3,594,488 shares of common stock were issuable upon exercise of outstanding options and 169,400 restricted stock units (“RSUs”) were issuable. Under the 2023 Plan, 4,236,112 shares remain available for issuance through grants of future options. The 2023 Plan provides that the Compensation Committee shall determine the vesting conditions of awards granted under the 2023 Plan, and the Compensation Committee has from time-to-time approved vesting schedules for certain awards that deviate from the vesting conditions described in the previous sentence.

 

Restricted Stock Units

 

On January 3, 2024, pursuant to the 2022 Plan, the Company granted its then-CFO a market condition RSU of up to 150,000 shares of the Company’s common stock. The award had a grant date fair value of approximately $0.4 million using a Monte Carlo simulation model. The RSUs under this market-based award will vest partially based on achievement of stock price targets of the Company’s common stock. 50,000 RSUs vest when the 180-day VWAP meets or exceeds $8.00 per share, 50,000 RSUs vest when the 180-day VWAP meets or exceeds $12.00 per share, and 50,000 RSUs are not market-based and will vest over the continued service period of three years. These market-based conditions must be met in order for portions of the RSU award to vest, and it is therefore possible that certain awards ultimately would not vest. The grant date fair value of each RSU grant is expensed over the requisite service period. Compensation expense relating to share-based awards with market-based conditions is not reversed if these awards are forfeited based solely on failing to meet such market-based conditions.

 

On February 29, 2024, pursuant to the 2022 Plan, the Company granted both its CFO and CEO awards of RSUs up to 150,000 shares of the Company’s common stock. The two awards together had a grant date fair value of approximately $0.6 million using a Monte Carlo simulation model. The portion of RSUs that are market-based awards will vest partially based on achievement of stock price targets of the Company’s common stock. 37,500 RSUs vest when the 180-day VWAP meets or exceeds $8.00 per share, 37,500 RSUs vest when the 180-day VWAP meets or exceeds $10.00 per share. The market-based conditions must be met in order for the market-based portion of the RSU awards to vest, and it is therefore possible that certain awards ultimately would not vest. 75,000 RSUs are not market-based and will vest over the continued service period of three years. The grant date fair value of each RSU grant is expensed over the requisite service period. Compensation expense relating to share-based awards with market-based conditions is not reversed if these awards are forfeited based solely on failing to meet such market-based conditions.

 

On February 29, 2024, the Company amended the terms of the January 3, 2024 RSU grant to its then-CFO to provide for identical vesting terms to those provided in the February 29, 2024 RSU grant. The Company determined the amended RSU grant represents a modification of the original award, however, the incremental compensation cost of the amendment was not material.

In October 2024, in connection with the resignation of the then-CEO, 300,000 unvested RSUs were forfeited and the Company granted 100,000 RSUs that immediately vested to the then-CEO. The previously recognized compensation cost related to the forfeited RSUs was reversed upon forfeiture, and the fair value of the awards granted in October 2024 was expensed as of the grant date.

 

A summary of RSU activities for the year ended December 31, 2024 are presented below:

 

		Number of Shares				Weighted Average Grant Date Fair Value per Share
Nonvested as of January 1, 2024			58,197			$	4.65
Granted			550,000			$	1.98
Vested			(129,097	)		$	0.99
Forfeited			(309,699	)		$	2.24
Nonvested as of December 31, 2024			169,401			$	1.73

 

During the year ended December 31, 2024 and 2023, the Company granted 550,000 and 58,197 restricted stock units, respectively, with a weighted-average grant date fair value of $1.98 per share and $4.65 per share, respectively. As of December 31, 2024, total unrecognized compensation expense related to restricted stock units was $0.3 million, which is expected to be recognized over a weighted-average period of 1.5 years.

 

Stock Options

 

The fair value of each employee and non-employee stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. Legacy Spectral’s stock became publicly traded on June 22, 2021 on the AIM Market of the London Stock Exchange, and lacks company-specific historical and implied volatility information. On September 11, 2023 the Company completed the Business Combination and was listed on NASDAQ under the symbol MDAI. Legacy Spectral estimated its expected stock volatility based on the historical volatility of a publicly traded set of peer companies. Spectral AI continues to estimate its expected stock volatility based on the historical volatility of a publicly traded set of peer companies. Due to the lack of historical exercise history, the expected term of Legacy Spectral’s and Spectral AI’s stock options for employees has been determined utilizing the simplified method by taking an average of the vesting periods and the original contractual terms for each award. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the US. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is zero based on the fact that Legacy Spectral and Spectral AI have never paid cash dividends and Spectral AI does not expect to pay any cash dividends in the foreseeable future. 

  

The Company’s stock options generally vest ratably annually over 3 years and have a contractual term of 10 years. In applying the Black Scholes option pricing model, the Company used the following assumptions for stock options granted during the years ended December 31, 2024 and 2023:

 

		Year ended December 31, 2024				Year ended December 31, 2023
Fair value of common stock		$	1.51			$	4.57
Expected term (years)			4.8				6.0
Volatility (annual)			66	%			72	%
Risk-free rate			4.2	%			3.6	%
Dividend yield (per share)			0	%			0	%

A summary of stock options activity for the year ended December 31, 2024 is presented below:

 

		Stock Options				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life (in years)				Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2024			3,598,944			$	2.20				6.5			$	8,087
Options granted			643,437			$	1.55
Options forfeited			156,156	)		$	3.88
Options cancelled			(209,880	)		$	3.56
Options exercised			(281,857	)		$	1.07
Outstanding as of December 31, 2024			3,594,488			$	2.01				6.0				3,825
Options vested and exercisable as of December 31, 2024			2,941,842			$	1.87				5.5				3,285

 

The aggregate intrinsic value of 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 exercise prices lower than the fair value of the common stock as of the respective date.

 

The weighted-average grant date fair value of stock options granted during the years ended December 31, 2024 and 2023 was $0.90 and $3.20 per share, respectively.

 

As of December 31, 2024, there was approximately $0.7 million of unrecognized stock-based compensation related to stock option grants that will be amortized over a weighted average period of 0.8 years.

 

The Company recorded stock-based compensation expense for stock options, RSUs, and restricted stock awards of $1.03 million for the year ended December 31, 2024 and $1.2 million for the year ended December 31, 2023 in general and administrative expenses in the consolidated statements of operations.

 

During the year ended December 31, 2018, the Company granted 973,803 stock options to investors (the “Investor Options”) that were approved by the Board of Directors outside of the 2018 Plan. During the year ended December 31, 2023, 34,779 of the Investor Options were exercised and the remaining 904,245 Investor Options expired in November 2023. The Investor Options had an exercise price of $2.06 per share. As of December 31, 2024, there is no unrecognized stock-based compensation expense related to the Investor Options.