Annual report pursuant to Section 13 and 15(d)

Share-Based Compensation

v3.22.0.1
Share-Based Compensation
 12 Months Ended
Dec. 31, 2021
Share-based Payment Arrangement [Abstract]  
Share-Based Compensation Shared-Based Compensation
The Company's Amended and Restated Equity Incentive Plan (the Plan), which was adopted and approved by the Company's shareholders in June 2021, allows for an issuance of up to an aggregate of 23.8 million shares (inclusive of outstanding awards). Also in June 2021, the Company's shareholders adopted and approved the Company's Employee Stock Purchase Plan (2021 ESPP), which allows for the issuance of up to 2.5 million shares of which 37 thousand were purchased during 2021. The 2021 ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code (the “Code”) but also permits the Company to include the employees, including non-United States employees, in offerings not intended to qualify under Section 423. The purpose of the 2021 ESPP is to provide eligible employees with opportunities to purchase the Company’s common shares at a discounted price.
As of December 31, 2021 and 2020, 141.6 million and 126.7 million, common shares were issued and outstanding.
Stock Options
The Plan requires the exercise price of each option not to be less than the closing market price of the Company’s common shares on the day immediately prior to the date of grant. 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.
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, 2021, 2020 and 2019.
Number of Shares
(in thousands)		 Weighted-Average Exercise Price Weighted-Average Remaining Contractual Life (in years) Aggregate Intrinsic Value
 (in thousands)
Balance as of December 31, 2018 7,591  $ 4.44 
Granted 2,520  $ 6.00 
Grant 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 7,129  $ 15.61 
Granted inducement 925  $ 14.36 
Exercised/released (1,593) $ 4.39 
Cancelled/forfeited (236) $ 11.82 
Outstanding at December 31, 2020 14,047  $ 11.35  7.51 $ 35,891 
Granted 2,277  $ 14.44 
Exercised/released (3,238) $ 7.21 
Cancelled/forfeited (1,012) $ 13.84 
Outstanding at December 31, 2021 12,074  $ 12.84  7.86 $ 121,141 
Vested and exercisable options at December 31, 2021 5,849  $ 11.87 
The weighted average grant date fair value of stock options granted during the years ended December 31, 2021, 2020 and 2019 was $7.34, $5.58 and $2.56, respectively. The total fair value of options vested during the years ended December 31, 2021, 2020 and 2019 was $24.9 million, $14.9 million and $8.5 million, respectively.
Total intrinsic value of options exercised was $50.3 million, $13.1 million and $63.3 million for years ended December 31, 2021, 2020 and 2019, respectively.
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 200,000 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 150,000 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.
In determining the fair value of the options granted, the Company uses the Black-Scholes option pricing model and reviews the following assumptions each reporting period:

Expected Term - Expected term (in years) is based upon the contractual term, taking into account expected employee exercise and expected post-vesting employment termination behavior. Based on the Company's historical expected lives data and the growth during 2021, the expected life extends further into the contractual life increasing the expected life. The increase of the expected life in 2021 is in line with historic data and what management expects in the future.

Volatility - The Company considers historical volatility of its common shares in estimating its future stock price volatility. The expected life is used to determine market volatility of the underlying stock. The change in the volatility from 52% in 2020 to 66% in 2021 was due to the Company's stock being more volatile throughout 2021 than in the prior year. Given the growth of the Company, the expected life used to determine previous market volatility and comparable peer group of 66% reflects an appropriate estimate of future volatility.

Risk-free interest rate - 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.

Dividend yield - The Company has never paid dividends on its common shares and has no plans to pay dividends on our common shares in the near future. Therefore, the Company dividend yield is zero.
The following weighted average assumptions were used to estimate the fair value of the options granted during the years ended December 31, 2021, 2020 and 2019:
2021 2020 2019
Expected term (in years) 4 years 3 years 4 years
Volatility 66  % 52  % 52  %
Risk-free interest rate 0.46  % 0.55  % 1.61  %
Dividend yield 0.0  % 0.0  % 0.0  %

Performance Awards and Restricted Stock Units
On October 23, 2020, the Company issued 439,000 performance awards (PAs) to executive management of the Company whose vesting is contingent upon meeting specific performance metrics based on the results for the year ended December 31, 2021. Each PA which vests entitles the participant to receive common shares on the basis of the performance metrics set. On March 18, 2021 performance metrics were set and formally communicated. Therefore, March 18, 2021 was the grant date and the fair value on the grant date was $13.56. As of December 31, 2021, approximately 88,000 PAs vested based on performance metrics achieved and 351,000 were cancelled as performance metrics were not met.

On August 6, 2021, the Company granted approximately 418,000 PAs and 201,000 restricted stock units (RSUs). The grant date for the PAs and RSUs was August 6, 2021 and the fair value on the grant date was $14.42 as this was the date performance measures were set and communicated to employees. The PAs vest on the employee's first anniversary of the grant date and the employee must achieve at least one of the performance metrics to obtain the portion of the award associated with the metric. The RSUs have no performance metrics and will vest on the one year anniversary of the grant. As of December 31, 2021, none of the August 6, 2021 PAs and RSUs have vested.
The Company recorded approximately $2.7 million of share-based compensation expense related to PAs and RSUs during the year ended December 31, 2021.
Compensation Expense
Share-based compensation expense for the years ended December 31, 2021, 2020 and 2019 totaled approximately $31.2 million, $17.5 million and $7.4 million, respectively, as shown in the table below.
(in thousands) 2021 2020 2019
Research and development $ 4,442  $ 3,730  $ 2,693 
Selling, general and administrative 26,432  13,615  4,721 
Capitalized under inventories 369  109  — 
Share-based compensation expense $ 31,243  $ 17,454  $ 7,414 
Unrecognized Share-Based Compensation Expense and Weighted Average Remaining Amortization Period
As of December 31, 2021, the unrecognized share-based cost, and the estimated weighted-average amortization period, using the straight-line attribution method, was as follows (in thousands, except amortization period):
Unrecognized share-based compensation expense Weighted average remaining amortization period (in years)
Stock Options $ 13,563  1.2
Restricted Stock Units 2,197  0.6
ESPP 3,296  1.1
Total unrecognized share-based compensation expense $ 19,056  1.1