Annual report pursuant to Section 13 and 15(d)

Share-Based Compensation

v3.20.4
Share-Based Compensation
12 Months Ended
Dec. 31, 2020
Share-based Payment Arrangement [Abstract]  
Share-Based Compensation Shared-Based Compensation
The Equity Incentive Plan (the Plan) was adopted and approved in 2012 and re-approved in May 2014. The Plan was amended as to Section 2.2 by the shareholders of the Company in June 2016 and amended and restated in June 2020. The purpose of the Plan is to advance the interest of the Company by encouraging equity participation in the Company through the acquisition of Common Shares.
The Plan requires the exercise price of each option to be determined by the Board of Directors and not to be less than the closing market price of the Company’s stock on the day immediately prior to the date of grant. Any options which expire may
be re-granted. The Board of Directors approves the vesting criteria and periods at its discretion. The options issued under the plan are accounted for as equity-settled share-based payments
As of December 31, 2020 and 2019, 126.7 million and 111.8 million, common shares were issued and outstanding, resulting in a maximum of 15.8 million and 14.0 million, respectively, options available for issuance under the Plan. An aggregate total of 12.0 million and 6.2 million, options are presently outstanding in the Plan, representing 9.4% and 5.5%, respectively, of the issued and outstanding shares of the Company.
Stock Options
The following table summarizes the number of options outstanding under the Plan and inducement grants outside of the Plan for the years ended December 31, 2020, 2019 and 2018.
Number of Shares (in thousands) Weighted-Average Exercise Price Weighted-Average Remaining Contractual Life (Years) Aggregate Intrinsic Value (in thousands)
Balance as of December 31, 2017 4,864  $ 3.87 
Granted 3,003  $ 5.29 
Exercised/released (276) $ 3.53 
Outstanding at December 31, 2018 7,591  $ 4.44  4.17 $ 18,076 
Granted 2,520  $ 6.00 
Granted inducement 1,600  $ 6.28 
Exercised/released (3,578) $ 4.03 
Cancelled/forfeited (311) $ 5.40 
Outstanding at December 31, 2019 7,822  $ 5.47  6.64 $ 115,655 
Granted 7,568  $ 15.61 
Inducement grants 925  $ 14.36 
Exercised/released (1,593) $ 4.39 
Balance as of Cancelled/forfeited (236) $ 11.82 
Outstanding at December 31, 2020 14,486  $ 11.35  7.51 $ 35,891 
Vested and expected to vest at December 31, 2020 3,246  $ 8.03 
Exercisable - Options at December 31, 2020 5,063  $ 6.94 
On November 20, 2020, the Company’s Compensation Committee granted the newly appointed Executive Vice President, General Counsel, Corporate Secretary & Chief Compliance Officer, a non-qualified stock option to purchase an aggregate of 298,924 common shares on November 16, 2020. The option has a per share exercise price of $13.40, the closing trading price on November 13, 2020. One-third of the shares underlying the option vest in November 2021, and the balance of the shares vest in a series of 24 equal monthly installments thereafter.
On October 2, 2020, the Company’s Compensation Committee granted 9 new employees non-qualified stock options to purchase an aggregate of 96,000 common shares, at a per share exercise price of $14.73, the closing trading price on September 30, 2020. One-third of the options vest in October 2021, and the balance of the options vests in a series of 24 equal monthly installments thereafter.
On September 4, 2020 the Company granted 105 new employees non-qualified stock options to purchase an aggregate of 530,000 common shares, at a per share exercise price of $14.83, the closing trading price on August 31, 2020. One-third of the options vest in September 2021, and the balance of the options vests in a series of 24 equal monthly installments thereafter.
On April 29, 2019, the Company granted 1.6 million inducement stock options to the new Chief Executive Officer pursuant to Section 613(c) of the TSX Company Manual at a price of $6.28. The first 25% of these options vest on the one year anniversary of the grant, and the remaining 75% vest in equal amounts over 36 months following the one year anniversary date and are exercisable for a term of ten years.
On May 2, 2016, the Company granted 200 thousand inducement stock options to a new employee pursuant to Section 613(c) of the TSX Company Manual at a price of $2.92. These options vest in equal amounts over 36 months and are exercisable for a term of five years. The employee had exercised 150 thousand of these options as of December 31, 2019. There are zero options remaining at December 31, 2020.
The inducement options noted above were granted as an inducement material to the new employees entering into employment with Aurinia in accordance with Nasdaq Listing Rule 5635(c)(4). The inducement stock options also have a ten-year term and are subject to the terms and conditions of the stock option agreement pursuant to which the option was granted. The inducement options are recorded outside of the Plan.
Dr. Richard Glickman and the Company entered into a transition agreement whereby upon his retirement as Chairman of the Board and Chief Executive Officer of the Company, Dr. Glickman would continue to provide substantive services as an adviser to the Company for a period of 12 months commencing May 6, 2019. Management applied judgment, at that time, in assessing if the services to be provided were substantive. Unvested stock options at May 6, 2019 were modified such that they vest in equal installments over the next 12 months, subject to Dr. Glickman remaining an adviser to the Company at each of the vesting dates.
The transition agreement resulted in 100 thousand stock options that would have been forfeited at May 6, 2020 vesting on an accelerated timeline. Therefore, the Company considered that the amount expensed for such awards to date should be reversed. The Company recognized these 100 thousand stock options as a new grant based on the fair value at the date of the transition agreement which will be expensed as they vest over the transition period. The Company also revised the allocation over the remaining vesting period to reflect the graded nature of the vesting over the transition period.
The Company used the Black-Scholes option pricing model to estimate the fair value of the options granted in 2020, 2019 and 2018. The expected life is based upon the contractual term, taking into account expected employee exercise and expected post-vesting employment termination behavior. The Company considers historical volatility of its Common Shares in estimating its future stock price volatility. The risk-free interest rate for the expected life of the options was based on the yield available on government benchmark bonds with an approximate equivalent remaining term at the time of the grant.
The following weighted average assumptions were used to estimate the fair value of the options granted during the years ended December 31, 2020, 2019 and 2018:
2020 2019 2018
Expected term (in years) 3 years 4 years 4 years
Volatility 52  % 52  % 55  %
Risk-free interest rate 0.55  % 1.61  % 2.04  %
Dividend yield 0.0  % 0.0  % 0.0  %

The weighted average grant date fair value of stock options granted during the years ended December 31, 2020, 2019 and 2018 was $5.58, $2.56 and $2.33, respectively. The total fair value of options vested during the years ended December 31, 2020, 2019 and 2018 was $14.9 million, $8.5 million and $10.7 million, respectively. As of December 31, 2020, there was $51.5 million of unrecognized share-based compensation expense related to unvested stock options granted. The expense is expected to be recognized over a weighted-average period of approximately 1.4 years.
Performance Awards
The Company also granted 439 thousand performance awards (PAs) to officers of the Company, which will vest as the performance milestones are met.
Compensation Expense
Share-based compensation expense before taxes for the years ended December 31, 2020, 2019 and 2018 totaled approximately $17.5 million, $7.4 million and $6.9 million, respectively, as shown in the table below.
(in thousands) 2020 2019 2018
Share-based compensation expense
Research and development $ 3,729  $ 2,693  $ 2,697 
General and administrative 13,616  4,721  4,163 
Capitalized under inventories 109  —  — 
Share-based compensation expense $ 17,454  $ 7,414  $ 6,860