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Stock-Based Compensation

9 Months Ended

Sep. 30, 2021

Share-based Payment Arrangement [Abstract]

15. Stock-Based Compensation

2020 Stock Plan

In December 2020, in connection with the Reverse Recapitalization, the Company’s Board of Directors approved the 2020 Stock Plan (the “2020 Stock Plan”) and reserved 12,000,000 shares of Common Stock for issuance thereunder, all of which may be issued pursuant to incentive stock options or any other type of award under the 2020 Stock Plan. The 2020 Stock Plan became effective immediately upon the closing of the Reverse Recapitalization. The maximum number of shares of Common Stock that may be issued pursuant to the exercise of incentive stock options under the 2020 Stock Plan is 12,000,000. Selected employees, officers, directors, and consultants are eligible to participate in the traditional stock option grants, stock appreciation rights, restricted stock awards, restricted stock units, other stock awards, and performance awards under the 2020 Stock Plan. The purpose of this 2020 Stock Plan is to enable us to offer competitive equity compensation packages in order to attract and retain the talent necessary for the combined company.

The 2020 Stock Plan is administered by the Company’s Board of Directors. The exercise prices, vesting periods, and other restrictions are determined at the discretion of the Company’s Board of Directors, except that the exercise price per share of options may not be less than 100% of the fair market value of the Common Stock on the date of grant. Stock options awarded under the 2020 Stock Plan expire ten years after the grant date, unless the Company’s Board of Directors sets a shorter term. Stock options and restricted stock granted to employees, officers, members of the Company’s Board of Directors, and consultants generally vest over a four-year period. If an option or other award granted under the 2020 Stock Plan expires, terminates, or is cancelled, the unissued shares subject to that option or award shall again be available under the 2020 Stock Plan. If shares awarded pursuant to the 2020 Stock Plan are forfeited to or repurchased at original cost by the Company, the number of shares forfeited or repurchased at original cost shall again be available under the 2020 Stock Plan.

As of September 30, 2021, the Company’s Board of Directors granted rights to 3,819,930 restricted stock awards and stock options under the 2020 Stock Plan. As of September 30, 2021, 8,180,070 shares remained available for future grant.

As of December 31, 2020, the Company’s Board of Directors granted rights to 1,507,062 restricted stock awards under the 2020 Stock Plan. As of December 31, 2020, 10,492,938 shares remained available for future grant.

2014 Stock Plan

Following the closing of the Reverse Recapitalization, the 2014 Stock Plan is administered by the Company’s Board of Directors. Stock options awarded under the 2014 Stock Plan expire ten years after the grant date. Stock options and restricted stock granted to employees, officers, members of the Company’s Board of Directors, and consultants typically vest over a four-year period.

As a result of the Reverse Recapitalization (see Note 3), stock options outstanding under the 2014 Stock Plan of 53,286,115 were converted into 7,032,591 of stock options of the Company based on the Exchange Ratio determined in accordance with the terms of the Merger Agreement. The exchange of Clene Nanomedicine’s stock options for Clene Inc. stock options was treated as a modification of the awards. The modification of the stock options did not result in a material incremental compensation expense to be recognized at the closing of the Reverse Recapitalization.

During the year ended December 31, 2020, the Company’s Board of Directors granted stock options for 270,555 shares under the 2014 Stock Plan. Effective as of the closing of the Reverse Recapitalization on December 30, 2020, no additional awards may be made under the 2014 Stock Plan and as a result, (i) any shares in respect of stock options that are expired or terminated under the 2014 Stock Plan without having been fully exercised will not be available for future awards; (ii) any shares in respect of restricted stock that are forfeited to, or otherwise repurchased by the Company, will not be available for future awards; and (iii) any shares of Common Stock that are tendered to the Company by a participant to exercise an award will not be available for future awards.

Stock-based compensation expense for the three months ended September 30, 2021 and 2020 was approximately $2.4 million and $0.2 million, respectively, and approximately $9.9 million and $0.6 million for the nine months ended September 30, 2021 and 2020, respectively. Stock-based compensation is recorded in research and development and general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss) as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2021		2020		2021		2020
Research and development	$	858	$	134	$	3,861	$	364
General and administrative		1,567		75		6,084		190
Total stock-based compensation	$	2,425	$	209	$	9,945	$	554

Stock Options

The following sets forth the outstanding stock options and related activity for the nine months ended September 30, 2021 (in thousands, except share and per share data):

Equity	Number of Options			Weighted Average Exercise Price Per Share		Weighted Average Remaining Term (Years)		Intrinsic Value
Outstanding - December 31, 2020		7,032,591		$	0.97		5.34	$	62,462
Granted		2,574,441			8.85		9.61		-
Exercised		(409,867	)		1.04		-		2,373
Forfeited		(133,742	)		8.66		-		-
Outstanding - September 30, 2021		9,063,423		$	3.09		5.90	$	38,863
Options vested and exercisable - September 30, 2021		6,000,723		$	0.82		4.33	$	36,247
Stock options vested and expected to vest - September 30, 2021		9,063,423		$	3.09		5.90	$	38,863

As of September 30, 2021 and December 31, 2020, we had approximately $15.2 million and $2.4 million of unrecognized stock-based compensation costs related to non-vested stock options which is expected to be recognized over a weighted-average period of 2.33 years and 2.04 years, respectively.

Prior to the consummation of the Reverse Recapitalization, the exercise price of the stock options granted was based on the fair market value of the common shares of the Company as of the grant date as determined by the Board of Directors, with input from management. The Board of Directors determined the fair value of the common stock at the time of grant of the options by considering a number of objective and subjective factors, including third-party valuation reports, valuations of comparable companies, sales of redeemable convertible Preferred Stock, sales of common stock to unrelated third parties, operating and financial performance, the lack of liquidity of the Company’s capital stock, and general and industry-specific economic outlook.

Stock options are valued using the Black-Scholes valuation model. Since we have limited trading history of our Common Stock, the expected volatility is derived from the average historical stock volatilities of several unrelated public companies within our industry that we consider to be comparable to its own business over a period equivalent to the expected term of the stock option grants. The risk-free interest rate for periods within the contractual life of the stock options is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected dividend is assumed to be zero as we have never paid dividends and have no current plans to do so. The expected term represents the period that stock-based awards are expected to be outstanding. For option grants that are considered to be “plain vanilla,” we determine the expected term using the simplified method. The simplified method deems the term to be the average of the time-to-vesting and the contractual life of the options. For other option grants, we estimate the expected term using historical data on employee exercises and post-vesting employment termination behavior taking into account the contractual life of the award.

During the nine months ended September 30, 2021, we granted stock options for 2,574,441 shares under the 2020 Stock Plan. The assumptions used to calculate the value of the stock option awards granted for the nine months ended September 30, 2021 are presented as follows:

	Nine months ended September 30, 2021
Expected stock price volatility		84.8 – 87.4%
Risk-free interest rate		0.59 – 0.94%
Expected dividend yield		0.00%
Expected term		6.00 years

The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2021 was $8.85.

Restricted Stock Awards

On December 30, 2020, we granted rights to awards of the following shares of restricted stock under the 2020 Stock Plan:

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370,101 shares to various employees and non-employee directors, which vest on various dates between June 30, 2021 and January 15, 2022, subject to the employee’s continuous employment through such vesting date. The restricted stock awards convert to shares of Common Stock on a one-for-one basis upon vesting. The award represents 5% of the converted stock options under 2014 Stock Plan as a result of the Reverse Recapitalization and complements the 5% closing payment shares held in escrow for Clene Nanomedicine common shareholders (see Note 3). The grant-date fair value of these awards was $4.0 million based on the closing price of CLNN shares listed on Nasdaq of $10.82 per share on December 30, 2020, the date of the Reverse Recapitalization. As of September 30, 2021, there were 224,109 shares of Common Stock issued upon the vesting of restricted stock awards. As of December 31, 2020 no shares were vested.

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454,781 shares to various employees and non-employee directors, which were eligible to vest based on certain market conditions, subject to the employee’s continuous employment through such vesting date. The award complements the Milestone 1 earn-out share entitlement of Clene Nanomedicine shareholders and vests based on the same market condition (see Note 3). The grant-date fair value of these awards, using a Monte Carlo simulation, was $4.3 million. Based on the outcome of the market condition as of the September 30, 2021 and December 31, 2020 measurement dates, no shares were vested.

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341,090 shares to various employees and non-employee directors, which were eligible to vest based on certain market conditions, subject to the employee’s continuous employment through such vesting date. The award complements the Milestone 2 earn-out share entitlement of Clene Nanomedicine. shareholders and vests based on the same market condition (see Note 3). The grant-date fair value of these awards, using a Monte Carlo simulation, was $3.5 million. Based on the outcome of the market condition as of the September 30, 2021 and December 31, 2020 measurement dates, no shares were vested.

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341,090 shares to various employees and non-employee directors, which were eligible to vest based on certain performance conditions tied to the completion of the COVID-19 coronavirus treatment study, subject to the employee’s continuous employment through such vesting date. The award complements the Milestone 3 earn-out share entitlement of Clene Nanomedicine shareholders and vests based on the same performance condition (see Note 3). The grant-date fair value of these awards was $3.7 million, based on the closing price of CLNN shares listed on Nasdaq of $10.82 per share on December 30, 2020, the date of the Reverse Recapitalization. We did not recognize compensation expense because the occurrence of achieving this milestone was not probable. As of the September 30, 2021 and December 31, 2020 measurement dates, no shares were vested.

The following table summarizes the restricted stock award activity during the nine months ended September 30, 2021:

	Number of Restricted Stock Awards			Weighted- Average Grant Date Fair Value
Outstanding and unvested balance as of December 31, 2020		1,507,062		$	10.30
Converted to shares of Common Stock upon vesting		(224,109	)		-
Forfeited		(37,464	)		10.82
Outstanding and unvested balance as of September 30, 2021		1,245,489		$	10.14

The assumptions used to calculate the value of the rights to restricted stock awards granted in 2020 in the Monte Carlo valuation model include projected stock price, volatility, and risk-free rate based on the achievement of certain stock price milestones. Our significant unobservable inputs as of December 31, 2020 were as follows: (i) 85% of expected stock price volatility, (ii) risk-free interest rate of 0.4%, and (iii) expected term of five years. The weighted average grant-date fair value of rights to restricted stock awards granted as of December 31, 2020 was $10.3034.

The stock-based compensation expense associated with the rights to restricted stock awards was $0.8 million and $6.8 million for the three and nine months ended September 30, 2021. As of September 30, 2021 and December 31, 2020, total unrecognized compensation cost related to the unvested stock-based awards was $0.9 million and $15.5 million, respectively, which is expected to be recognized over a weighted average period of less than 1 month and 6 months, respectively. We did not issue any restricted stock awards during the nine months ended September 30, 2020.