ACURX PHARMACEUTICALS, INC

NOTES TO THE CONDENSED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

NOTE 7 – SHARE-BASED COMPENSATION

While the Company was a limited liability company in its pre-IPO phase of corporate development, the Company granted performance-based awards of restricted Class A Membership Interests to board members and corporate advisory council members in exchange for services. All of these awards of membership interests became fully vested upon consummation of the Company’s corporate conversion from Delaware limited liability company to Delaware corporation immediately prior to the Company’s IPO, with the Company recognizing all previously unrecognized compensation expense. The fair value of the membership interests granted during 2020 and 2019 was equal to the per-membership interest value of the most recent private placement ($3.25 per membership interest and $2.50 per membership interest, respectively, with a weighted average of $2.14 per membership interest).

Total share-based compensation expense associated with these awards has been recorded in the amount of $0 and $175,000 for the three months ended September 30, 2021 and 2020, respectively, and $755,556 and $508,333 for the nine months ended September 30, 2021 and 2020, respectively.

The following table summarizes the unvested Class A Membership Interests converted to common stock pursuant to a conversion ratio of one-for-two, and associated activity for the nine months ended September 30, 2021:

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In April 2021, the board of directors approved the creation of the 2021 Equity Incentive Plan (the “Plan”). The Plan became effective as of the completion of the corporate conversion. The Plan currently reserves an aggregate of 2,000,000 shares of common stock, subject to adjustments as provided in the Plan, of which 239,305 are currently still available for issuance. The purpose of the Plan is to attract, retain and incentivize directors, officers, employees, and consultants.

In June 2021, the Company granted stock options to purchase a total of 807,500 shares of common stock to its three executives and three non-employee management team members, to replace the Class B Membership Interests that were cancelled in March 2021. The options were issued at an exercise price of $6.26, with the employee options vesting 40% upon issuance and the balance over 36 months, and the non-employee options vesting at grant date. The Company recorded general and administrative expense of $181,720 and $1,837,605 for the three and nine months ended September 30, 2021.

In July 2021, the Company granted stock options to purchase a total 1,550,000 to its three executives pursuant to their respective employment agreements, the independent directors, and a consultants, all pursuant to the Plan. The options were issued at an exercise price of $6.18, with one-quarter of the executive’s options vesting upon issuance and the balance over 36 months, and the options granted to the directors and consultants vesting over 36 months. The Company recorded general and administrative expenses of $1,888,917 for the three and nine months ended September 30, 2021, respectively.

Compensation expense associated with these awards is recognized over the vesting period based on the fair value of the option at the grant date determined based on the Black-Scholes model. Option valuation models require the input of highly subjective assumptions including the expected price volatility. The Company’s employee stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value computation using the Black-Scholes methodology. Because there is no public market for the Company’s stock options and very little historical experience with the Company’s stock, similar public companies were used for the comparison of volatility and the dividend yield. The risk-free rate of return was derived from U.S. Treasury notes with comparable maturities

ACURX PHARMACEUTICALS, INC

NOTES TO THE CONDENSED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

The Company determined the fair value of the option awards using the Black-Scholes option pricing model using the following weighted average assumptions:

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A summary of the Company’s stock option activity is as follows:

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The total compensation expense not yet recognized as of September 30, 2021 was $7,399,003. The weighted average vesting period for the unvested options is 2.75 years. The intrinsic value of the stock options as of September 30, 2021 was $0, with a remaining weighted average contractual life of 9.75 years. The weighted average grant date fair value is $4.72 as of September 30, 2021. The Company records the impact of any forfeitures of options as they occur.