Stock-Based Compensation Expense

12 Months Ended

Dec. 31, 2022

Stock-Based Compensation Expense Disclosure [Abstract]

Stock-based Compensation Expense

10. Stock-based Compensation Expense

Stock-Based Compensation

The Company uses stock-based compensation, including restricted stock units to provide long-term performance incentives for its employees and board directors. The Company measures employee and director stock-based compensation awards based on the award’s estimated fair value on the date of grant. Forfeitures are recognized as they occur. Expense associated with these awards is recognized using the straight-line attribution method over the requisite service period for stock options, restricted stock units (“RSUs”) and restricted stock and is reported in our consolidated statements of stockholders’ equity.

The fair value of the Company’s stock options is estimated, using the Black-Scholes option-pricing model. The resulting fair value is recognized on a straight-line basis over the period during which an employee is required to provide service in exchange for the award. The Company has elected to recognize forfeitures as they occur. Stock options generally vest over four years and have a contractual term of ten years.

Determining the grant date fair value of options requires management to make assumptions and judgments. These estimates involve inherent uncertainties and if different assumptions had been used, stock-based compensation expense could have been materially different from the amounts recorded.

The assumptions and estimates for valuing stock options are as follows:

● Fair value per share of Company’s common stock. Because there was no public market for Cyngn’s common stock prior to the IPO, its Board of Directors, with the assistance of a third-party valuation specialist, determined the common stock fair value at the time of the grant of stock options by considering a number of objective and subjective factors, including its actual operating and financial performance, market conditions and performance of comparable publicly traded companies, developments and milestones in the company, and the likelihood of achieving a liquidity event among other factors. Since the Company’s common stock began publicly trading on the Nasdaq, the value of its common stock underlying stock options or RSUs have been valued based on prevailing market prices.

● Expected volatility. Because the Company’s common stock had no publicly traded history prior to the IPO, it estimated the expected volatility using its own stock price volatility to the extent applicable or a combination of its stock price volatility and the stock price volatility of peer companies, for a period equal to the expected term of the options.

● Expected term. The expected term of employee stock options represents the weighted-average period that the stock options are expected to remain outstanding. The Company estimates the expected term of options granted based upon the “simplified method” provided under Staff Accounting Bulletin, Topic 14, or SAB Topic 14.

● Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect during the period the options were granted corresponding to the expected term of the awards.

● Estimated dividend yield. The estimated dividend yield is zero, as the Company does not currently intend to declare dividends in the foreseeable future.

Equity Incentive Plans

In February 2013, the Company’s Board of Directors adopted the 2013 Equity Incentive Plan (“2013 Plan”). The 2013 Plan authorizes the award of stock options, stock appreciation rights, restricted stock awards, stock appreciation rights, RSUs, performance awards, and other stock or cash awards.

In October 2021, the Company’s Board of Directors adopted the Cyngn Inc. 2021 Equity Incentive Plan (the “2021 Plan”). The 2021 Plan replaces the 2013 Plan. However, awards outstanding under the 2013 Plan will continue to be governed by their existing terms.

As of December 31, 2022 and 2021, approximately 3.6 million and 10.5 million shares of common stock were reserved and available for issuance under the 2021 Plan and 2013 Plan, respectively.

Options issued under the Plan generally vest based on continuous service provided by the option holder over a four-year period.  Compensation expense related to these options is recognized on a straight-line basis over the four-year period based upon the fair value at the grant date. 

The following table summarizes information about the Company’s stock options outstanding as well as stock options vested and exercisable as of December 31, 2022, and activity during the year then ended: 

	Shares			Weighted-average exercise price		Weighted-average remaining contractual term (years)		Aggregate intrinsic value
Outstanding as of December 31, 2021		8,769,694		$	1.20		7.15	$	15,746,916
Granted		6,842,500			1.20
Exercised		(717,041	)		0.16				1,012,175
Cancelled/forfeited		(180,043	)	$	2.77
Outstanding as of December 31, 2022		14,715,110		$	1.23		7.84	$	2,571,013
Vested and expected to vest at December 31, 2022		14,715,110		$	1.23		7.84	$	2,571,013
Vested and exercisable at December 31, 2022		6,266,135		$	0.73		5.65	$	2,555,579

The following table summarizes information about the Company’s RSUs as of December 31, 2022, and activity during the year then ended: 

	Shares			Weighted- average grant date fair value
Unvested shares at December 31, 2021		-		$	-
RSUs granted		244,566			5.52
RSUs vested		(28,530	)		5.52
RSUs forfeited		-			-
Unvested Shares at December 31, 2022		216,036		$	5.52

The fair value of a stock option is estimated using an option-pricing model that takes into account as of the grant date the exercise price and expected life of the option, the current price of the underlying stock and its expected volatility, expected dividends on the stock, and the risk-free interest rate for the expected term of the option. The Company has used the simplified method in calculating the expected term of all option grants based on the vesting period and contractual term. Compensation costs related to share-based payment transactions are recognized in the financial statements upon satisfaction of the requisite service or vesting requirements.

The weighted average per share grant-date fair value of options granted during the years ended December 31, 2022 and 2021 was $0.59 and $2.78, respectively.

The following weighted average assumptions were used in estimating the grant date fair values in December 31, 2022 and 2021:

	December 31,
	2022			2021
Fair value of common stock	$	1.20		$	2.78
Expected term (in years)		6.03			6.15
Risk-free rate		3.77	%		0.95	%
Expected volatility		48.72	%		51.0	%
Dividend yield		0	%		0	%

For the year ended December 31, 2022 and 2021, the Company recorded stock-based compensation expense from stock options and RSUs of approximately $2.9 million and $1.1 million, respectively.

As of December 31, 2022, total stock-based compensation cost related to outstanding unvested stock options that are expected to vest was $ 9.3 million. This unrecognized stock-based compensation cost is expected to be recognized over a weighted-average period of approximately 3.5 years. Income tax benefits recognized from stock-based compensation expense recognized for the year ended December 31, 2022 were immaterial due to cumulative losses and valuation allowances.