Quarterly report pursuant to Section 13 or 15(d)

Share-based Compensation

Share-based Compensation

6 Months Ended

Jun. 30, 2022

Share-Based Payment Arrangement [Abstract]

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 then outstanding awards) and provides for grants of stock options, performance awards, restricted stock and restricted stock units (RSUs) that may be settled in cash and common shares. Also in June 2021, the Company's shareholders adopted and approved the Company's 2021 ESPP, which allows for the issuance of up to 2.5 million shares. 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.

During the second quarter of 2022, the Company modified the 2021 ESPP for the current and future offerings. The new ESPP terms shortened the plan from four (4) purchases over a 24 month Offering Period to two (2) purchases over a 12 month offering period. Additionally, the ESPP now contains a rollover mechanism; that is, if the stock price on the purchase date is less than the offering price (as that is determined under the 2021 ESPP), that offering is then canceled and any participants are rolled into the new 12 month offering period at the lower price.

As a result of the modification, $475 thousand of incremental expense was added to the estimated expense for the November 2022 and May 2023 purchase dates (to be amortized over the new 12 month offering period). Additionally, the originally scheduled purchase date in November 2023 is no longer planned given the new 12 month offering period; therefore, the modification also resulted in a “repurchase for no consideration” under ASC 718. The Company recognized an additional $651 thousand of unamortized expense for the cancelled November 2023 purchase, which was recorded during the second quarter of 2022.

Inducements

The Company’s Compensation Committee granted 11 new employees inducement stock options to purchase an aggregate of 93,200 common shares, at a per share exercise price of $11.38, the closing price of Aurinia's common stock on June 3, 2022, and an aggregate of 54,300 inducement RSUs. The inducement RSUs have a grant date and vesting commencement date of June 6, 2022. The stock options and RSUs were granted as inducements material to the new employees entering employment with Aurinia in accordance with Nasdaq Listing Rule 5635(c)(4).

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 Company used the Black-Scholes option pricing model to estimate the fair value of the options granted. 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 expected life is based upon the contractual term, taking into account expected employee exercise and expected post-vesting employment termination behavior.

The following weighted average assumptions were used to estimate the fair value of the options granted during the six months ended June 30, 2022 and June 30, 2021:


	2022			2021
Annualized volatility	70		%	66		%
Risk-free interest rate	1.83		%	0.35		%
Expected life of options in years	5.0 years			4.0 years
Estimated forfeiture rate	11.7		%	8.8		%
Dividend rate	0.0		%	0.0%
Fair value per common share option	$	7.00		$	6.59

The following table summarizes the option award activity during the six months ended June 30, 2022:


	June 30, 2022
	Number of shares (in thousands)	Weighted average exercise price $
Outstanding - Beginning of Period	12,074	$	12.84
Granted	3,061	11.96
Exercised	(77)	6.75
Forfeited	(703)	15.73
Outstanding - End of Period	14,355	$	12.54

Performance Awards and Restricted Stock Units

On October 23, 2020, the Company issued 439,000 PAs to executive management of the Company whose vesting was contingent upon meeting specific performance metrics based on the results for the year ended December 31, 2021. Each PA which vested entitled 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 June 30, 2022, approximately 88,000 PAs vested based on performance metrics achieved and 351,000 were canceled as of December 31, 2021 as performance metrics were not met.

On August 6, 2021, the Company granted approximately 619,000 PAs and 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.

During the quarter, the Company has granted RSUs and intends to grant RSUs throughout the year under the Plan, as well as inducements for certain new hires. The RSUs are fair valued based on the market price of our common shares on the date of the grant.

The following table summarizes the PAs and RSU activity for the six months ended June 30, 2022:


	June 30, 2022
	Number of shares (in thousands)	Weighted average exercise price $
Outstanding - Beginning of Period	347	$	13.33
Granted	1,863	12.01
Vested	(88)	13.56
Forfeited	(114)	13.99
Outstanding - End of Period	2,008	$	12.03

Compensation Expense

The Company recognized share-based compensation expense for the three and six month periods ended June 30, 2022 and June 30, 2021 as follows:


	Three months ended June 30,				Six Months Ended June 30,
(in thousands)	2022		2021		2022		2021
Research and development	$	1,066	$	1,089	$	2,042	$	2,163
Selling, general and administrative	8,883		6,548		14,855		13,189
Capitalized under inventories	106		116		181		222
Share-based compensation expense	$	10,055	$	7,753	$	17,078	$	15,574

As of June 30, 2022, there was $39.2 million of unrecognized share-based compensation expense related to unvested awards granted which is expected to be recognized over a weighted-average period of approximately 1.4 years.