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Stock-Based Compensation

9 Months Ended

Sep. 30, 2021

Share-based Payment Arrangement [Abstract]

. Stock-Based Compensation

2019 Plan

In 2019, the Company adopted the 2019 Equity Incentive Plan (the 2019 Plan). The 2019 Plan provides for the Company to grant qualified stock options, non-qualified stock options, and restricted stock awards to employees, non-employee directors and consultants of the Company under terms and provisions established by the board of directors. Under the terms of the 2019 Plan, options are granted at an exercise price no less than fair value of the Company’s common stock on the grant date, except in certain cases related to employees outside of the U.S. However, for any employee who is a 10% or greater stockholder, options are granted at an exercise price no less than 110% of the fair value of the Company’s common stock on the grant date. Option awards granted typically have 10-year terms measured from the option grant date. However, if any employee is a 10% or greater stockholder, the awards have 5-year terms measured from the option grant date. While no shares are available for future issuance under the 2019 Plan, it continues to govern outstanding equity awards granted thereunder.

2021 Plan and ESPP

The compensation committee of the Company's board of directors adopted and the Company's stockholders approved the 2021 Equity Incentive Plan (2021 Plan) and the 2021 Employee Stock Purchase Plan (the ESPP ), which became effective immediately prior to the effectiveness of the Company's IPO. The 2021 Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock units, stock appreciation rights and other stock-based awards. The Company's employees, officers, directors and consultants are eligible to receive awards under the 2021 Plan. As of September 30, 2021, the total number of shares authorized for issuance under the 2021 Plan was 2,558,790.

The ESPP allows employees, including executive officers, to contribute up to 15% of their earnings, subject to certain limitations, for the purchase of the Company's common stock at a price per share equal to the lower of (a) 85% of the fair market value of a share of common stock on the first day of the offering period, or (b) 85% of the fair market value of a share of common stock on the last day of the offering period. There were 255,879 shares of common stock reserved for future issuance under our ESPP plan and no shares purchased as of September 30, 2021.

Stock Options

Awards with vesting conditions under both plans typically include vesting 25% on the first anniversary of the grant date with the remainder vesting monthly over the following three years.


	Options Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contract Terms (in years)		Aggregate Intrinsic Values (in thousands)
Balance as of December 31, 2020		435,342		$	0.52		9.19	$	415
Options granted		2,386,990			3.11
Options cancelled and forfeited		(25,551	)		1.86
Options exercised		(59,466	)		1.86				150
Balance as of September 30, 2021		2,737,315		$	2.74		9.33	$	41,727
Vested and expected to vest, September 30, 2021		2,737,315		$	2.74		9.33	$	41,727
Options exercisable as of September 30, 2021		206,339		$	0.31		8.39	$	3,646

The aggregate intrinsic value disclosed in the above table is based on the difference between the exercise price of the stock option and the estimated fair value of the Company’s common stock as of the respective period-end dates. The weighted-average grant date fair value of stock options granted during the nine months ended September 30, 2021, was $6.71 per share.

The Black-Scholes option pricing model for employee and nonemployee stock options incorporates the following assumptions:



Fair Value of Common Stock — Prior to the completion of the Company's IPO, the fair value of the Company's common stock was determined by using straight-line interpolation between the value of common stock derived from valuations performed by independent third party specialists, further described in Note 2 to the consolidated financial statements Summary of Significant Accounting Policies – Fair Value of Common Stock in the Company's final prospectus dated August 9, 2021 and filed with the Securities and Exchange Commission, or SEC, on August 11, 2021 pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended. After the completion of the Company's IPO, the fair value of each share of common stock is based on the closing price of the Company's common stock on the date of grant as reported on the Nasdaq Global Market.

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Volatility — The expected stock price volatilities are estimated based on the historical and implied volatilities of comparable publicly traded companies as the Company does not have sufficient history of trading its common stock.



Risk-free Interest Rate — The risk-free interest rates are based on US Treasury yields in effect at the grant date for notes with comparable terms as the awards.



Expected Term — The expected term represents the period that the Company’s stock options are expected to be outstanding and is determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term).



Dividend Yield — The expected dividend yield assumption is based on the Company’s current expectations about its anticipated dividend policy.

The fair value of the Company’s stock option awards was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions for the nine months ended September 30, 2021:


Expected term (in years)		5.80 - 6.08
Expected volatility		78.25% - 79.57%
Risk-free interest rate		0.94% - 1.13%
Expected dividend yield		0.00%

Restricted Stock

The Company has restricted stock awards with service and performance conditions. Awards with a service condition vest 25% on the first anniversary of the grant date and monthly thereafter. Awards with a performance condition will vest upon the Company’s initiation of a registrational clinical trial to study the efficacy of ETX-810. The probability of achieving performance conditions is assessed each reporting period. As of September 30, 2021, this performance condition was assessed and deemed not probable, and the Company has recognized no stock-based compensation expense relating to these performance awards. The Company also granted restricted stock awards to employees and non-employees with service conditions that are subject to repurchase by the Company at the original purchase price in the event that the award recipient’s employment or relationship is terminated prior to the shares vesting.

The activity for restricted stock awards is as follows:


	Number of Shares			Weighted-Average Grant Date Fair Value
Unvested at December 31, 2020		66,681		$	1.00
Granted		297,724			8.55
Vested		(15,766	)		1.42
Unvested at September 30, 2021(1)		348,639			7.03

(1) Includes 21,750 restricted stock awards granted in 2018 and still outstanding for the period ended September 30, 2021, subject to only performance conditions.

Stock-Based Compensation

The following table sets forth stock-based compensation for stock options, restricted stock awards, and performance awards included in the Company’s consolidated statements of operations and comprehensive loss (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Research and development expense	$	297	$	45	$	626	$	220
General and administrative expense		939		4		1,957		14
Total stock-based compensation expense	$	1,236	$	49	$	2,583	$	234

As of September 30, 2021, there was $13.3 million of total unrecognized compensation cost related to unvested stock options and unvested restricted stock awards granted, which is expected to be recognized over a weighted average period of 3.19 years.