NOTE 16. SHARE-BASED COMPENSATION

In 2015, the Company’s Board of Directors adopted, and stockholders approved, the Journey Medical Corporation 2015 Stock Plan (the “Plan”) authorizing the Company to grant up to 4,642,857 shares of Common Stock to eligible employees, directors, and consultants in the form of restricted stock, restricted stock units (“RSUs”), stock options and other types of grants. The amount, terms, and exercisability provisions of grants are determined by the Board of Directors. At the Company’s 2022 Annual Meeting, held on June 21, 2022, the Company’s stockholders approved, among other matters, an amendment to the Plan to increase the number of shares of Common Stock issuable under the Plan by 3,000,000 to 7,642,857. At December 31, 2023 there were 1,487,994 shares available for issuance under the Plan.

The Company grants stock options to employees, non-employees and Directors with exercise prices equal to the closing price of the underlying shares of the Company’s common stock on the Nasdaq Capital Market on the date that the options are granted. Options granted have a term of ten years from the grant date. Options granted generally vest over four-year period. Compensation cost for stock options is charged against operations on a straight-line basis over the vesting period. The Company estimates the fair value of stock options on the grant date by applying the Black-Scholes option pricing valuation model.

In 2023, the Company’s Board of Directors adopted, and stockholders approved, the Journey Medical Corporation 2023 Employee Stock Purchase Plan (the “2023 ESPP”). The Company initially reserved 300,000 shares of common stock for future issuance under the 2023 ESPP. As of December 31, 2023, 300,000 shares were available for issuance under the 2023 ESPP.

The following table summarizes the components of share-based compensation expense in the consolidated statements of operations for the years ended December 31, 2023 and 2022:

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Stock Options

The weighted-average key assumptions used in determining the fair value of options granted for the year ended December 31, 2023 are as follows:

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The weighted average grant-date fair value of stock options issued during the year ended December 31, 2023 was $1.27 per share. The weighted average grant-date fair value of stock options issued during the year ended December 31, 2022 was $2.67 per share.

The following table summarizes the Company’s stock option activity for the year ended December 31, 2023:

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For the years ended December 31, 2023 and 2022, the Company issued 82,300 and 155,649 shares, respectively, of Common Stock upon the exercise of outstanding stock options and received proceeds of $120,555 and $142,330, respectively. For the years ended December 31, 2023 and 2022, approximately $0.5 million and $0.8 million, respectively, of stock option compensation cost was charged against operations. At December 31, 2023, the Company had unrecognized share-based compensation expense related to all unvested options of $0.9 million, which the Company expects to recognize over a weighted-average period of approximately 1.9 years.

Restricted Stock Units

The following table summarizes the Company’s RSU activity for the year ended December 31, 2023:

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For the years ended December 31, 2023 and 2022 the Company issued 727,249 and 293,707 shares of Common Stock, respectively, upon the vesting of RSU’s amounting to $2.9 million and $0.9 million, respectively, in total aggregate fair market value. For the years ended December 31, 2023 and 2022, approximately $2.0 million and $3.6 million, respectively, of RSU compensation cost was charged against operations. At December 31, 2023 approximately 1,306,923 of RSU’s remained unvested and there was approximately $1.6 million of unrecognized compensation cost related to RSUs, which the Company expects to recognize over a weighted-average period of approximately 1.5 years.

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Employee Stock Purchase Plan

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The 2023 ESPP provides that eligible employees may contribute up to 10% of their eligible earnings toward a semi-annual purchase of the Company’s common stock. The 2023 ESPP is qualified under Section 423 of the Internal Revenue Code. The employee’s purchase price is derived from a formula based on the closing price of the common stock on the first day of the offering period versus the closing price on the last date of purchase (or, if not a trading day, on the immediately preceding trading day). The offering period under the 2023 ESPP has a duration of six months, and the purchase price with respect to each offering period beginning on or after such date is, until otherwise amended, equal to 85% of the lesser of (i) the fair market value of the Company’s common stock at the commencement of the applicable six-month offering period or (ii) the fair market value of the Company’s common stock on the purchase date. The Company estimates the fair value of the common stock under the 2023 ESPP using a Black-Scholes valuation model. The fair value was estimated on the date of grant for the offering period beginning August 1, 2023 using the Black-Scholes option valuation model and the straight-line attribution approach with the following assumptions: risk-free interest rate (5.5%); expected term (0.5 years); expected volatility (129%); and an expected dividend yield (0%). The Company recorded $46,700 of stock-based compensation under the 2023 ESPP for the year ended December 31, 2023. As of December 31, 2023, there was unrecognized stock-based compensation expense of $9,524 related to the current ESPP offering period, which ends January 31, 2024.

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