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Share-based Compensation | 9 Months Ended
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Sep. 30, 2021
Share-based Payment Arrangement [Abstract] |
Share-based Compensation | 5. SHARE-BASED COMPENSATION As discussed in Note 2 of these condensed consolidated financial statements, prior to the Company’s IPO, Rallybio Holdings was Liquidated and as a result of the Liquidation, the unitholders of Rallybio Holdings received 100% of the common stock of the Company outstanding prior to the completion of the IPO. The number of shares of common stock that the holders of each class of units received in the Liquidation was based on the value of Rallybio Holdings prior to the Liquidation, determined by the initial public offering price per share of $13.00. Additionally, any shares of common stock issued in respect of unvested common or incentive units were issued as shares of restricted common stock and continue to be subject to vesting in accordance with the vesting schedule applicable to the initial awards. The Company evaluated the liquidation of Rallybio Holdings units and subsequent issuance of common stock awards of the Company as a modification under ASC 718, Share Based Payments. Under ASC 718, a modification is a change in the terms or conditions of a stock-based compensation award. In assessing the modification, the Company considered the fair value, vesting conditions and classification as an equity or liability award before liquidation and replacement, compared to the Company’s common stock received as of the Liquidation to determine whether modification accounting must be applied. As the number of shares of common stock of the Company that the unitholders of Rallybio Holdings received in the Liquidation was based on the fair value of those units in Rallybio Holdings immediately prior to the Liquidation, unvested units were replaced with restricted common shares with the same vesting terms as the initial awards, and the classification of the awards as equity awards did not change from this action, no incremental stock-based compensation expense resulted from the modification. 2021 Equity Incentive Plan—In connection with the Company's IPO, the board of directors adopted the Rallybio Corporation 2021 Equity Incentive Plan (the "2021 Plan"). The 2021 Plan reserves 5,440,344 shares of common stock for future issuances of shares to employees, directors and consultants in the form of stock options, SARs, restricted and unrestricted stock and stock units, performance awards and other awards that are convertible into or otherwise based on the Company's common stock. Dividend equivalents may also be provided in connection with awards under the 2021 Plan. The share pool will automatically incr ease on January 1st of each year from 2022 to 2031 by the lesser of (i) five percent of the number of shares of the Company's common stock outstanding as of such date and (ii) the number of shares of the Company's common stock determined by the board of directors on or prior to such date. Additionally, in connection with the Company's IPO, the board of directors adopted the 2021 Employee Stock Purchase Plan, ("ESPP"), which reserves 291,324 shares of common stock for future issuances under this plan. Restricted Common Shares — In 2018, founders were issued 706,701 common shares, including 530,027 common shares that were to vest over a four year period. In 2018, founders were also issued 188,454 restricted common shares, pursuant to restricted share agreements, which were to begin vesting upon achievement of certain performance conditions. Restricted common shares issued to the founders were to vest 25% upon the one-year anniversary of the initiation of a clinical program through one of its controlled subsidiaries, and monthly thereafter over the next 36 months. In 2019, it was determined that the performance condition of these restricted common shares became probable, vesting started, and the shares started expensing over the vesting period. The weighted average fair value of both the 530,027 and 188,454 restricted common shares granted during 2018 was $0.96 per share. During the nine months ended September 30, 2021, the Company granted 1,589,622 restricted common shares to employees. The weighted average fair value of restricted common shares granted to employees for the nine months ended September 30, 2021 was $3.65 per share. No grants of restricted common shares were made during the three months ended September 30, 2021. The restricted common shares that were granted during the nine months ended September 30, 2021 resulted from the Liquidation of profit interest incentive units of Rallybio Holdings that were granted during the nine months ended September 30, 2021, see Note 2. The assumptions that went into the option pricing models for determining the fair value of Rallybio Holdings incentive units granted during the nine months ended September 30, 2021 and 2020, prior to the Liquidation of Rallybio Holdings are as follows and do not include the retrospective adjustments described in Note 2:
|  | NINE MONTHS ENDED SEPTEMBER 30, |
|  | 2021 |  |  | 2020 |
Expected volatility |  | 71.7% - 99.5% |  |  |  | 95.0 | %
Expected term (years) |  | 0.58 - 1.00 |  |  |  | 1.50 |
Risk free interest rate |  | 0.04% - 0.10% |  |  |  | 0.16 | %
Expected dividend yield |  |  | — |  |  |  | — |
A summary of the status of our nonvested restricted common stock at September 30, 2021 and changes during the nine months ended September 30, 2021 is as follows:
|  | Restricted Shares |
Nonvested restricted stock at December 31, 2020 |  |  | 1,184,252 |
Shares granted |  |  | 1,589,622 |
Shares vested |  |  | (365,520 | )
Outstanding nonvested restricted stock at September 30, 2021 |  |  | 2,408,354 |
Stock Options — During the three months ended September 30, 2021, the Company granted 1,232,759 non-qualified stock options to employees and directors. Non-employee directors were granted 80,640 stock options on the date of the IPO that vest on the earlier of the one-year anniversary of the date of grant or the next annual meeting of the Company's stockholders that follows the date of grant, subject to the director’s continued service on our board of directors through the vesting date at a grant date fair value of $9.15 per share. Executive officers and the Company's Chief Medical Officer were granted 640,000 stock options on the date of the IPO that vest 25% on the one-year anniversary of the date of grant, and monthly thereafter over the next 36 months, generally subject to the employee’s continued service through the applicable vesting date at a grant date fair value of $9.47 per share. The remaining option grants for the three months ended September 30, 2021 vest over four years and relate to new hires and service award grants and were granted at a grant date fair value of $9.34 per share. All options granted during the three months ended September 30, 2021 remain unvested and all are expected to vest. The fair value of the stock options granted during the three months ended September 30, 2021 was determined using the Black-Scholes option pricing model with the following assumptions:
|  | THREE MONTHS ENDED SEPTEMBER 30, |
|  | 2021 |
Expected volatility |  | 87.76% - 87.87% |
Expected term (years) |  | 5.50 - 6.08 |
Risk free interest rate |  | 0.79% - 0.97% |
Expected dividend yield |  |  | — |
Exercise price |  | 12.80 -13.00 |
Given the Company’s common stock has not been trading for a sufficient period of time, the Company utilizes a collection of volatilities of peer companies to estimate the expected volatility of its common stock. The expected term is calculated utilizing the simplified method. Share-based compensation is classified in the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2021 and 2020 as follows:
|  | THREE MONTHS ENDED SEPTEMBER 30, |  |  | NINE MONTHS ENDED SEPTEMBER 30, |
(in thousands) |  | 2021 |  |  | 2020 |  |  | 2021 |  |  | 2020 |
Research and development |  | $ | 266 |  |  | $ | 47 |  |  | $ | 620 |  |  | $ | 107 |
General and administrative |  |  | 789 |  |  |  | 228 |  |  |  | 1,496 |  |  |  | 368 |
|  | $ | 1,055 |  |  | $ | 275 |  |  | $ | 2,116 |  |  | $ | 475 |

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- Definition The entire disclosure for share-based payment arrangement. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 718 -URI http://asc.fasb.org/topic&trid=2228938 + Details
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