| Share-based Compensation |
12. Share-based Compensation (i) Share-based Compensation of the Company The Company conditionally adopted a share option scheme on April 24, 2015 (as amended on April 27, 2020) (the “Share Option Scheme”). Pursuant to the Share Option Scheme, the Board of Directors of the Company may, at its discretion, offer any employees and directors (including Executive and Non-executive Directors but excluding Independent Non-executive Directors) of the Company, holding companies of the Company and any of their subsidiaries or affiliates, and subsidiaries or affiliates of the Company share options to subscribe for shares of the Company. As at June 30, 2024, the aggregate number of shares issuable under the Share Option Scheme was 41,977,648 ordinary shares. The Company will issue new shares to satisfy share option exercises. Additionally, the number of shares authorized but unissued was 628,640,280 ordinary shares. Share options granted are generally subject to a four-year vesting schedule, depending on the nature and the purpose of the grant. Share options subject to the four-year vesting schedule, in general, vest 25% upon the first anniversary of the vesting commencement date as defined in the grant letter, and 25% every subsequent year. However, certain share option grants may have a different vesting schedule as approved by the Board of Directors of the Company. No outstanding share options will be exercisable or subject to vesting after the expiry of a maximum of ten years from the date of grant. A summary of the Company’s share option activity and related information is as follows: | | | | | | | | | | | | | | | Weighted average | | | | | Number of | | Weighted average | | remaining | | Aggregate | | | share | | exercise price in | | contractual life | | intrinsic value | | | options | | US$ per share | | (years) | | (in US$’000) | Outstanding at January 1, 2023 | | 39,521,395 | | 4.34 | | 6.55 | | 11,525 | Granted | | 1,221,900 | | 2.50 | | | | | Exercised | | (6,480,930) | | 2.30 | | | | | Cancelled | | (2,832,340) | | 4.61 | | | | | Expired | | (1,893,370) | | 5.55 | | | | | Outstanding at December 31, 2023 | | 29,536,655 | | 4.57 | | 6.67 | | 9,924 | Granted (note) | | 1,359,561 | | 3.63 | | | | | Exercised | | (103,450) | | 2.20 | | | | | Cancelled | | (661,800) | | 4.63 | | | | | Expired | | (826,925) | | 5.41 | | | | | Outstanding at June 30, 2024 | | 29,304,041 | | 4.50 | | 6.30 | | 7,910 | Vested and exercisable at December 31, 2023 | | 18,198,170 | | 5.10 | | 5.91 | | 1,753 | Vested and exercisable at June 30, 2024 | | 21,511,195 | | 4.93 | | 5.61 | | 2,728 |
Note: This was granted to an executive director in March 2024 where the number of share options exercisable is subject to certain performance targets based on a market condition covering the 3-year period from 2023 to 2025 which has been reflected in estimating the grant date fair value. The grant date fair value of such award is US$1.29 per share using the Monte Carlo simulation model. Vesting of such award will occur in March 2026 if the performance targets are met. In estimating the fair value of share options granted, the following assumptions were used in the Monte Carlo simulation model for the award granted during the six months ended June 30, 2024 and Polynomial model for the award granted during the year ended December 31, 2023: | | | | | | | | Six Months Ended | | Year Ended | | | | June 30, 2024 | | December 31, 2023 | | Weighted average grant date fair value of share options (in US$ per share) | | 1.29 | | 1.14 | | Significant inputs into the valuation model (weighted average): | | | | | | Exercise price (in US$ per share) | | 3.63 | | 2.50 | | Share price at effective date of grant (in US$ per share) | | 3.63 | | 2.50 | | Expected volatility (note (a)) | | 54.3 | % | 53.3 | % | Risk-free interest rate (note (b)) | | 4.15 | % | 3.69 | % | Contractual life of share options (in years) | | 10 | | 10 | | Expected dividend yield (note (c)) | | 0 | % | 0 | % |
Notes: (a) | The Company calculated its expected volatility with reference to the historical volatility prior to the issuances of share options. |
(b) | The risk-free interest rates reference the US Treasury yield curves. |
(c) | The Company has not declared or paid any dividends and does not currently expect to do so prior to the exercise of the granted share options, and therefore uses an expected dividend yield of zero in the valuation models. |
The Company will issue new shares to satisfy share option exercises. The following table summarizes the Company’s share option exercises: | | | | | | | Six Months Ended June 30, | | | 2024 | | 2023 | | | | (in US$’000) | Cash received from share option exercises | | 228 | | 1,058 | Total intrinsic value of share option exercises | | 161 | | 1,898 |
The Group recognizes compensation expense on a graded vesting approach over the requisite service period. The following table presents share-based compensation expense included in the Group’s condensed consolidated statements of operations: | | | | | | | Six Months Ended June 30, | | | 2024 | | 2023 | | | | (in US$’000) | Research and development expenses | | 801 | | 1,664 | Selling and administrative expenses | | 597 | | 1,522 | Cost of revenue | | 34 | | 53 | | | 1,432 | | 3,239 |
As at June 30, 2024, the total unrecognized compensation cost was US$4,078,000 and will be recognized on a graded vesting approach over the weighted average remaining service period of 1.80 years. (ii) LTIP The Company grants awards under the LTIP to participating directors and employees, giving them a conditional right to receive ordinary shares of the Company or the equivalent ADS (collectively the “Awarded Shares”) to be purchased by the Trustee up to a cash amount excluding any cash elected payments. Vesting will depend upon continued employment of the award holder with the Group and will otherwise be at the discretion of the Board of Directors of the Company. Additionally, some awards are subject to change based on annual performance targets prior to their determination date. LTIP awards prior to the determination date Performance targets vary by award, and may include targets for shareholder returns, financings, revenue, net income/(loss) after taxes and the achievement of clinical, regulatory, business development and manufacturing milestones. As the extent of achievement of the performance targets is uncertain prior to the determination date, a probability based on management’s assessment on the achievement of the performance target has been assigned to calculate the amount to be recognized as an expense over the requisite period with a corresponding entry to liability. LTIP awards after the determination date Upon the determination date, based on the actual achievement of performance target, the amount previously recorded in the liability will be adjusted through share-based compensation expense. The Company will pay a determined monetary amount, up to the maximum cash amount based on the actual achievement of the performance target specified in the award, to the Trustee to purchase the Awarded Shares. Any cumulative compensation expense previously recognized as a liability will be transferred to additional paid-in capital. Granted awards under the LTIP are as follows: | | | | | | | | | Maximum cash | | | | | | | amount | | Covered | | Performance target | Grant date | | (in US$ millions) | | financial years | | determination date | June 5, 2023 | | 54.9 | | 2023 | | note (a) | March 13, 2024 | | 0.7 | | note (b) | | note (b) |
Notes: (a) | The annual performance target determination date is the date of the announcement of the Group’s annual results for the covered financial year and vesting occurs two business days after the announcement of the Group’s annual results for the financial year falling two years after the covered financial year to which the LTIP award relates. |
(b) | This award does not stipulate performance targets and is subject to a vesting schedule of 25% on each of the first, second, third and fourth anniversaries of the date of grant. |
The Trustee has been set up solely for the purpose of purchasing and holding the Awarded Shares during the vesting period on behalf of the Company using funds provided by the Company. On the determination date, if any, the Company will determine the cash amount, based on the actual achievement of each annual performance target, for the Trustee to purchase the Awarded Shares. The Awarded Shares will then be held by the Trustee until they are vested. The Trustee’s assets include treasury shares and funds for additional treasury shares, trustee fees and expenses. The number of treasury shares (in ordinary shares equivalent) held by the Trustee were as follows: | | | | | | | Number of | | Cost | | | treasury shares | | (in US$’000) | As at January 1, 2023 | | 19,601,375 | | 76,064 | Purchased | | 2,725,515 | | 9,071 | Vested | | (4,714,205) | | (18,148) | As at December 31, 2023 | | 17,612,685 | | 66,987 | Purchased | | 10,259,133 | | 36,064 | Vested | | (10,952,145) | | (41,371) | As at June 30, 2024 | | 16,919,673 | | 61,680 |
For the six months ended June 30, 2024 and 2023, US$8,574,000 and US$5,041,000 of the LTIP awards were forfeited respectively based on the determined or estimated monetary amount as at the forfeiture date. The following table presents the share-based compensation expense recognized under the LTIP awards: | | | | | | | Six Months Ended June 30, | | | 2024 | | 2023 | | | | (in US$’000) | Research and development expenses | | 6,398 | | 5,700 | Selling and administrative expenses | | 3,203 | | 4,614 | Cost of revenue | | 279 | | 237 | | | 9,880 | | 10,551 | Recorded with a corresponding credit to: | | | | | Liability | | 2,844 | | 1,303 | Additional paid-in capital | | 7,036 | | 9,248 | | | 9,880 | | 10,551 |
For the six months ended June 30, 2024 and 2023, US$12,424,000 and US$4,563,000 were reclassified from liability to additional paid-in capital respectively upon LTIP awards reaching the determination date. As at June 30, 2024 and December 31, 2023, US$577,000 and US$10,502,000 were recorded in liabilities respectively. As at June 30, 2024, the total unrecognized compensation cost was approximately US$30,121,000, which considers expected performance targets and the amounts expected to vest, and will be recognized over the requisite periods.
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