Quarterly report pursuant to Section 13 or 15(d)

SHARE-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS

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SHARE-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS
3 Months Ended
Mar. 31, 2023
Share-Based Payment Arrangement [Abstract]  
SHARE-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS SHARE-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS
2021 Equity Plan
In connection with the Business Combination, the Company’s Board adopted, and its shareholders approved, the 2021 Equity Incentive Plan (the “2021 Equity Plan”). A total of 31,900,000 Ordinary Shares are authorized and reserved for issuance under the 2021 Equity Plan which provides for the grant of stock options (either incentive or non-qualified), stock appreciation rights (“SARs”), restricted stock, restricted stock units (“RSUs”), performance shares, performance share units and other share-based awards with respect to the Ordinary Shares. Shares associated with underlying awards that are expired, forfeited, or otherwise terminated without the delivery of shares, or are settled in cash, and any shares tendered to or withheld by the Company for the payment of an exercise price or for tax withholding will again be available for issuance under the 2021 Equity Plan.
During the three months ended March 31, 2023, the Company granted 2,175,000 performance-based non-qualified stock options ("PBNQSO") that vest based on the achievement of certain performance goals for fiscal years 2023-2027 (the “5-Year Option”) to its chief executive officer and independent directors. The Company recognizes compensation costs related to the 5-Year Option granted in 2023 based on the estimated fair value of the awards on the date of grant. The Company estimates the grant date fair value, and the resulting share-based compensation expense, using the Black-Scholes option-pricing model. The Company records forfeitures as they are incurred. The grant date fair value of the PBNQSO is expensed proportionately for each tranche over the applicable service period. The fair value of performance-based stock
options is recognized as compensation expense beginning at the time in which the performance conditions are deemed probable of achievement, over the remaining requisite service period.
On March 8, 2023, in connection changes in the Company’s leadership structure, it amended the performance terms and conditions of the outstanding 5-Year Options previously granted to its former chief executive officer (the “Executive”) where by 50% of such outstanding options eligible to vest in each of fiscal years from 2023 through 2026 will remain subject to the existing performance terms and conditions. The remaining 50% of such outstanding options will be eligible to vest in such fiscal years subject to the performance terms and conditions related to the Executive’s position and duties as Vice Chairman. For the remaining 50% of outstanding options, the Company’s compensation committee will establish performance goals and communicate them to the Executive and assess achievement annually. For accounting purposes, the Company will recognize compensation expense related to the remaining 50% of outstanding options when the specified performance goal for future periods have been established and communicated to the Executive.
In March 2023, based on the Company’s performance for 2022, its compensation committee verified and determined the Annual Operational Performance per Diluted Share (“AOP”) for the 2022 tranche of the 5-Year Option to be $8.39. As a result, it was determined that a mutual understanding of the key terms and conditions for the 2022 tranche had been ascertained and the grant date was therefore established. The cumulative compensation expense for the 2022 tranche was adjusted based on the fair value calculated using the Black-Scholes option-pricing model at the grant date. As the AOP for the 2022 tranche was below the minimum vesting AOP target of $11.35 employees separated from the Company through the date of determination of the 2022 AOP relinquished 240,000 options retained by them relating the 2022 tranche and such options were cancelled by the Company.
As of March 31, 2023 there were 11,274,171 PBNQSO outstanding. The exercise prices of these PBNQSO ranged from $8.26 to $14.00 per Ordinary Share and expire ten years from the grant date.
The table below summarizes the PBNQSO activity for the three months ended March 31, 2023:
Number of Options
Weighted-Average
Exercise/Conversion
Price
Weighted-Average
Remaining Contractual
Life (years)
Aggregate
Intrinsic Value
(in thousands)
Outstanding at December 31, 2022
10,339,171  $ 9.75 
Granted 2,175,000  $ 8.31 
Exercised —  $ — 
Forfeited (1,000,000) $ 10.00 
Cancelled (240,000) $ 10.00 
Outstanding at March 31, 2023
11,274,171  $ 9.45  8.94 $ — 
Options vested and exercisable 245,004  $ 10.00  7.00 $ — 
The weighted-average assumptions used to fair value the PBNQSO at period end date or grant date using the Black-Scholes option-pricing model were as follows:
Period End Date
Grant Date
Dividend yield —  % —  %
Risk-free interest rate 3.58  %
3.93% to 4.18%
Expected volatility 46.30  % 45.00  %
Expected term (years)
5.10 to 5.85
6.50
Weighted average exercise price of options granted $ 9.78  $ 8.31 
Weighted average fair value of options granted $ 3.24  $ 4.24 
Non-cash share-based compensation expense recognized by the Company for the three months ended March 31, 2023 and 2022 was $(3.1) million and $5.0 million, respectively. The Company recognized negative compensation expense during the three months ended March 31, 2023 as a result of the remeasurement to the period end fair value of previously
issued PBNQSO primarily due to a decrease in the Ordinary Share price as of the period end and also due to reversal of share-based compensation expense upon forfeitures.
Compensation expense is recognized based upon probability assessments of PBNQSO that are expected to vest in future periods. Such probability assessments are subject to revision and, therefore, unrecognized compensation expense is subject to future changes in estimate. As of March 31, 2023, there was approximately $27.2 million of total unrecognized compensation expense related to non-vested PBNQSO expected to vest, which is expected to be recognized over a weighted-average period of 1.7 years.
Founder Advisory Amounts
Upon consummation of the Business Combination, the Company assumed the advisory agreement entered into on December 12, 2019 by EverArc ("Founder Advisory Agreement") with EverArc Founders, LLC, a Delaware limited liability company ("EverArc Founder Entity"), pursuant to which the EverArc Founder Entity, for the services provided to the Company, including strategic and capital allocation advice, is entitled to receive both a fixed amount (the “Fixed Annual Advisory Amount”) and a variable amount (the “Variable Annual Advisory Amount,” each an “Advisory Amount” and collectively, the “Advisory Amounts”) until the years ending December 31, 2027 and 2031, respectively. Under the Founder Advisory Agreement, at the election of the EverArc Founder Entity, at least 50% of the Advisory Amounts will be paid in Ordinary Shares and the remainder in cash.
The Fixed Annual Advisory Amount will be equal to 2,357,061 Ordinary Shares (1.5% of 157,137,410 Ordinary Shares outstanding) for each year through December 31, 2027 and is valued using the period end volume weighted average closing share price of our Ordinary Shares for ten consecutive trading days. The Variable Annual Advisory Amount for each year through December 31, 2031 is based on the appreciation of the market price of Ordinary Shares if such market price exceeds certain trading price minimums at the end of each reporting period and is valued using a Monte Carlo simulation model. Because up to 50% of the Advisory Amounts could be settled through a cash payment, 50% are classified as a liability and the remaining 50% is classified within equity. For Advisory Amounts classified within equity, the Company does not subsequently remeasure the fair value. For the Advisory Amounts classified as a liability, the Company remeasures the fair value at each reporting date, accordingly, the compensation expense recorded by the Company in the future will depend upon changes in the fair value of the liability-classified Advisory Amounts.
As of March 31, 2023 and December 31, 2022, the fair value of the Fixed Annual Advisory Amount was calculated to be $91.1 million and $104.4 million, respectively, based on the period end volume weighted average closing share price for ten consecutive trading days of Ordinary Shares of $7.73 and $8.86, respectively. As of March 31, 2023 and December 31, 2022, the fair value of the Variable Annual Advisory Amount, determined using a Monte Carlo simulation model, was $201.9 million and $237.0 million, respectively.
For the three months ended March 31, 2023 and 2022, the Company recognized a reduction in the compensation expense related to the founders advisory fees-related party due to a decrease in fair value for liability-classified Advisory Amounts of $24.2 million and $59.8 million, respectively.