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Stock-Based Compensation

6 Months Ended

Jun. 30, 2023

Share-Based Payment Arrangement [Abstract]

10. Stock-Based Compensation

Stock-based compensation expense recognized for all equity awards has been reported in the condensed consolidated statements of operations and comprehensive loss as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Research and development expense	$	652	$	55	$	1,260	$	109
General and administrative expense		1,446		301		3,088		511
Total stock-based compensation expense	$	2,098	$	356	$	4,348	$	620

As of June 30, 2023, the total unrecognized stock-based compensation expense was $30.2 million, which is expected to be recognized over a remaining weighted-average period of approximately 2.93 years.

In November 2022, in connection with the Merger, the Company assumed restricted stock units granted by Silverback, of which 10,651 were outstanding as of December 31, 2022 and 5,082 are outstanding as of June 30, 2023.

Equity Incentive Plans

In September 2018, ARS Pharma adopted the 2018 Equity Incentive Plan. As a result of the Merger, on November 8, 2022 ARS Pharma, as the accounting acquirer, is deemed to have assumed Silverback’s 2016 and 2020 Equity Incentive Plans, and Employee Stock Purchase Plan (“ESPP”). During the three and six months ended June 30, 2023, there were 21,899 shares of common stock purchased under the ESPP.

As of June 30, 2023, the 2016 and 2020 Equity Incentive Plans authorized a total of 16,018,660 shares, of which 3,104,826 shares are available for future grant, and 9,753,600 shares are outstanding. As of June 30, 2023, the 2018 Equity Incentive Plan authorized a total of 6,634,333 shares, of which 294,113 shares are available for future grant, and 5,634,900 shares are outstanding. The Company does not intend to grant future stock options or other equity awards under the 2018 Equity Incentive Plan.

Stock Options

Stock options granted under the Company’s equity incentive plans expire no later than 10 years from the date of grant and generally vest over a four-year period, with vesting either occurring at a rate of 25% at the end of the first year and thereafter in 36 equal monthly installments or on a monthly basis. In the case of awards granted to our non-employee board members, vesting generally occurs on a monthly basis over three years or in full on an annual basis. The Company issues new shares of common stock upon the exercise of stock options.

A summary of the Company’s stock option activity for the six months ended June 30, 2023 is as follows:


	Shares Subject to Options Outstanding			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2022		12,063,560		$	6.07
Granted		4,749,600		$	8.03
Exercised		(1,353,688	)	$	3.00
Forfeited		(76,054	)	$	21.32
Outstanding at June 30, 2023		15,383,418		$	6.87		6.82	$	38,180,094
Exercisable at June 30, 2023		10,630,299		$	6.35		5.59	$	38,052,504

The exercisable shares subject to options outstanding at June 30, 2023 in the table above include vested and early exercisable awards. The aggregate intrinsic value in the table above is calculated as the difference between the exercise price of the underlying options and the estimated fair value of the Company’s common stock for all options that were in-the-money at June 30, 2023. The aggregate intrinsic value of options exercised during the six months ended June 30, 2023 and 2022 was $5.7 million and $1.2 million, respectively.

The weighted-average grant date fair value per share of option grants for the six months ended June 30, 2023 and 2022 was $6.31 and $2.31, respectively. The total fair value of shares vested during the six months ended June 30, 2023 and 2022 was $1.6 million and $0.4 million, respectively.

The fair value of stock options granted was estimated using a Black-Scholes option-pricing model (“Black-Scholes”) with the following weighted-average assumptions:


	Six Months Ended June 30,
	2023			2022
Expected term (in years)		6.0			6.1
Expected volatility		95.3	%		91.3	%
Risk-free interest rate		3.9	%		2.1	%
Expected dividend yield		—			—

The fair value of stock options was determined using the Black-Scholes assumptions below. Each of these inputs is subjective and generally requires significant judgement.


			Fair Value of Common Stock. Prior to the Merger on November 8, 2022, grant date fair market value of the shares of common stock underlying stock options was determined by ARS Pharma’s Board of Directors. Prior to the Merger, there was no public market for the ARS Pharma’s common stock, therefore the ARS Pharma Board of Directors determined the fair value of common stock at the time of grant of the option by considering a number of objective and subjective factors including independent third-party valuations of the ARS Pharma common stock, sales of convertible preferred stock to unrelated third parties, operating and financial performance, the lack of liquidity of capital stock and general and industry specific economic outlook, amongst other factors. Following the Merger, the fair market value of the Company's common stock is based on its closing price as reported on the date of grant on the primary stock exchange on which the Company’s common stock is traded.


			Expected Term. The expected term represents the period that the options granted are expected to be outstanding. The expected term of stock options issued is determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term) as the Company has concluded that its stock option exercise history does not provide a reasonable basis upon which to estimate expected term.


			Expected Volatility. Given the Company’s limited historical stock price volatility data, the Company derived the expected volatility from the average historical volatilities over a period approximately equal to the expected term of comparable publicly traded companies within its peer group that were deemed to be representative of future stock price trends as the Company has limited trading history for its common stock. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available.


			Risk-free Interest Rate. The risk-free interest rate is based on the U.S. Treasury rate, with maturities similar to the expected term of the stock options.


			Expected Dividend Yield. The Company has never paid dividends on its common stock and does not anticipate paying any dividends in the foreseeable future. Therefore, the Company uses an expected dividend yield of zero.