AVITA Medical, Inc. (RCEL) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations for the years ended June 30, 2021 and 2020, should be read in conjunction with our consolidated financial statements and related notes included in this Annual Report.
Results of Operations
The table below summarizes the results of our continuing operations for each of the periods presented (in thousands).
| Year Ended June 30, | $ | % | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Statement of Operations Data: | 2021 | 2020 | Change | Change | ||||||||||||
| Revenues | $ | 29,232 | $ | 14,263 | $ | 14,969 | 105 | % | ||||||||
| Cost of sales | (5,949 | ) | (2,973 | ) | (2,976 | ) | 100 | % | ||||||||
| Gross profit | 23,283 | 11,290 | 11,993 | 106 | % | |||||||||||
| BARDA income | 2,055 | 3,926 | (1,871 | ) | (48 | )% | ||||||||||
| Operating Expenses: | ||||||||||||||||
| Sales and marketing expenses | (14,660 | ) | (15,706 | ) | 1,046 | (7 | )% | |||||||||
| General and administrative expenses | (22,400 | ) | (33,025 | ) | 10,625 | (32 | )% | |||||||||
| Research and development expenses | (14,818 | ) | (9,164 | ) | (5,654 | ) | 62 | % | ||||||||
| Total operating expenses | (51,878 | ) | (57,895 | ) | 6,017 | (10 | )% | |||||||||
| Operating loss | (26,540 | ) | (42,679 | ) | 16,139 | (38 | )% | |||||||||
| Interest expense | (22 | ) | (33 | ) | 11 | (33 | )% | |||||||||
| Other income | 17 | 686 | (669 | ) | (98 | )% | ||||||||||
| Loss before income taxes | (26,545 | ) | (42,026 | ) | 15,481 | (37 | )% | |||||||||
| Income tax benefit (expense) | (38 | ) | (4 | ) | (34 | ) | 850 | % | ||||||||
| Net loss | $ | (26,583 | ) | $ | (42,030 | ) | $ | 15,447 | (37 | )% |
Year Ended June 30, 2021, compared to Year Ended June 30, 2020
Total net revenue increased 105% to $29.2 million, compared to $14.3 million in the corresponding period in the prior year. RECELL® commercial revenues were $21.5 million, while RECELL revenues associated U.S. Department of Health and Human Services’ Biomedical Advanced Research and Development Authority within the Office of the Assistant Secretary for Preparedness and Response (“BARDA”) were $7.7 million. Revenues associated with BARDA were attributable to the purchase of RECELL units for emergency preparedness by BARDA. RECELL commercial revenues, increased 50% or $7.2 million.
Gross profit margin was 80% compared with 79% in the same period in the prior year, driven largely by lower shipping costs and increased production along with the extension of our shelf-life.
BARDA income consisted of funding from BARDA, under the Assistant Secretary for Preparedness and Response, within the U.S. Department of Health and Human Services, under ongoing USG Contract No. HHSO100201500028C. Under the BARDA contract, income of $2.1 million was recognized during the year ended June 30, 2021, compared to income of $3.9 million for the year ended June 30, 2020. BARDA income declined as a result of wind-down of certain activities associated with supporting the U.S. FDA approval of the RECEL System as well as the compassionate use, continued access programs and pivotal trials for the treatment of pediatric scald injuries.
Total operating expenses decreased 10% or $6 million to $51.9 million, compared with $57.9 million incurred in the same period in the prior year. Sales and marketing expenses decreased $1 million or 7% to $14.7 million, compared to $15.7 million recognized in the same period in the prior year. The decrease in sales and marketing expenses is primarily due to fewer conferences, lower travel expenses due to COVID-19 related travel restrictions and higher costs incurred in the prior year associated with the product launch. General and administrative expenses decreased 32% or $10.6 million to $22.4 million compared with $33 million recognized in the same period in the prior year. The decrease was driven by higher share-based compensation expenses in the prior year associated with certain performance milestones being met along with higher costs related to the Redomiciliation. Research and development expenses increased 61% or $5.6 million to $14.8 million, compared to $9.2 million recognized in the same period in the prior year. The increase was primarily attributed to ramping up of clinical trials related activities for treatment of vitiligo as well as other research and development costs associated with furthering the Company’s pipeline.
32
Table of Contents
Net loss after tax decreased 37% or $15.4 million to $26.6 million, over the $42 million recognized in the same period in the prior year. The decrease in net loss was driven by higher revenue during the year, and lower operating expenses described above.
The table below summarizes the results of our continuing operations for each of the periods presented (in thousands).
| Year Ended June 30, | $ | % | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Statement of Operations Data: | 2020 | 2019 | Change | Change | ||||||||||||
| Revenues | $ | 14,263 | $ | 5,474 | $ | 8,789 | 161 | % | ||||||||
| Cost of sales | (2,973 | ) | (1,271 | ) | (1,702 | ) | 134 | % | ||||||||
| Gross profit | 11,290 | 4,203 | 7,087 | 169 | % | |||||||||||
| BARDA income | 3,926 | 5,921 | (1,995 | ) | (34 | )% | ||||||||||
| Operating Expenses: | ||||||||||||||||
| Sales and marketing expenses | (15,706 | ) | (12,549 | ) | (3,157 | ) | 25 | % | ||||||||
| General and administrative expenses | (33,025 | ) | (15,099 | ) | (17,926 | ) | 119 | % | ||||||||
| Research and development expenses | (9,164 | ) | (8,004 | ) | (1,160 | ) | 14 | % | ||||||||
| Total operating expenses | (57,895 | ) | (35,652 | ) | (22,243 | ) | 62 | % | ||||||||
| Operating loss | (42,679 | ) | (25,528 | ) | (17,151 | ) | 67 | % | ||||||||
| Interest expense | (33 | ) | (27 | ) | (6 | ) | 22 | % | ||||||||
| Other income | 686 | 332 | 354 | 107 | % | |||||||||||
| Loss before income taxes | (42,026 | ) | (25,223 | ) | (16,803 | ) | 67 | % | ||||||||
| Income tax benefit (expense) | (4 | ) | 121 | (125 | ) | (103 | )% | |||||||||
| Net loss | $ | (42,030 | ) | $ | (25,102 | ) | $ | (16,928 | ) | 67 | % |
Year Ended June 30, 2020, compared to Year Ended June 30, 2019
Total net revenue increased 161% to $14.3 million, compared to $5.5 million. Similar to prior years, most of the current year increase in sales occurred in the United States as a result of the September 2018 FDA approval and commencement of the U.S. national market launch of the RECELL System in January 2019. U.S. sales during the year ended June 30, 2020, totaled $13.8 million compared to $4.4 million in the prior year.
Gross profit margin was 79% compared to 77% for the same period in 2019 driven largely by increased production.
BARDA income consisted of funding from BARDA, under the Assistant Secretary for Preparedness and Response, within the U.S. Department of Health and Human Services, under ongoing USG Contract No. HHSO100201500028C. Under the BARDA contract, income of $3.9 million was recognized during the year ended June 30, 2020, compared to income of $5.9 million for the year ended June 30, 2019. BARDA income declined as a result of wind-down of certain activities associated with supporting the U.S. FDA approval of the RECEL System as well as the compassionate use and continued access programs.
Total operating expenses increased 62% or $22.2 million to $57.9 million, compared to $35.7 million incurred in the same period in the prior year. Sales and marketing expenses increased 25% or $3.2 million to $15.7 million, compared to $12.6 million recognized in the same period in the prior year. This increase was primarily attributed to commercialization activities being provided for the entire fiscal year ended June 30, 2020, versus the prior fiscal year where those activities were rendered for less than twelve months. General and administrative expenses increased 119% or $17.9 million to $33 million compared to $15.1 million recognized in the same period in the prior year. The increase was primarily a result of higher share-based compensation and higher costs related to the Redomiciliation together with additional headcount associated with the growth of the Company and the Company’s status as a cross listed entity on NASDAQ and the ASX. Share-based compensation increased $14.6 million primarily due to the increase in the grant date fair value of awards granted during the year due to higher stock prices and accelerated expense due to meeting of certain performance milestones. Research and development expenses increased 14% or $1.2 million to $9.2 million compared to $8.0 million recognized during the same period in the prior year
Net loss after tax increased 67% or $16.9 million to $42 million compared to $25.1 million in the same period in the prior year. The increase in net loss was driven by the higher operating expenses described above, partially offset by the higher revenue during the year. As a result of the U.S. national launch of the RECELL System in January 2019, and the expansion of research and development including multiple pivotal clinical studies seeking premarket approval from the FDA, operating expenses are expected to increase in future periods. These expenses are expected to be partially offset by increased commercial sales of the RECELL System as well as income under the BARDA contract.
33
Table of Contents
B. Liquidity and Capital Resources
We expect to utilize cash reserves until U.S. sales of our products reach a level sufficient to fund ongoing operations. The AVITA Group has historically funded its research and development activities, and more recently its substantial investment in sales and marketing activities, through raising capital by issuing securities, and it is expected that similar funding will be obtained to provide working capital if and when required. If the Company is unable to raise capital in the future, the Company may need to curtail expenditures by scaling back certain research and development or other programs.
On March 1, 2021, the Company issued 3,214,250 shares of common stock at the offering price of $21.50 per share. The gross proceeds from the offering are approximately $69.1 million. The Company incurred $5.1 million in capital issuance expenses. The offering was made pursuant to a shelf registration statement on Form S-3 (File No. 333-249419) that was previously filed with the SEC on October 9, 2020 and declared effective on October 16, 2020 and that was also publicly released on the ASX. The final prospectus supplement relating to and describing the terms of the offering was filed with the SEC on February 25, 2021 (in the United States) and released on the ASX on March 1, 2021 (in Australia).
During the year ended June 30, 2020, we raised additional capital via a private placement in the amount of $81.7 million (through our former parent company, AVITA Medical). We sold the equivalent of 2,033,898 shares at an issue price of $40.17 per share for total net proceeds of $76.6 million, after deducting commission and offering expenses.
During the year ended June 30, 2019, we completed a series of equity transactions (through our former parent company, AVITA Medical). The second tranche of the June 2018 Placement (defined below) closed on July 27, 2018, raising an aggregate of $2.4 million through the issuance of the equivalent of 650,000 shares in the Company at $3.70 per share. During December 2018, we completed a placement to raise $28.8 million over two tranches. We completed the first tranche on December 10, 2018 and issued the equivalent of 3,100,471 shares in the Company at a price of $5.76 per share raising gross proceeds of $17.9 million. The settlement of the second tranche for $10.9 million was approved by the shareholders at an extraordinary meeting held during January 2019. The second tranche closed on January 18, 2019 and raised gross proceeds of $10.9 million through the sale of the equivalent of 1,899,530 shares in the Company at the same price as the first tranche, being $5.76 per share. In addition, on January 10, 2019, we completed a Share Purchase Plan under which we effectively offered existing eligible shareholders the opportunity to purchase shares in the Company at a purchase price of $5.74 per share. As part of the Share Purchase Plan, we received gross proceeds of $1.3 million for the issuance of the equivalent of 220,612 shares in the Company.
The AVITA Group also benefits from cash inflows from the BARDA contract, awarded to the AVITA Group in September 2015 and subsequently expanded through a series of modifications. These payments from BARDA offset operating costs from various activities undertaken to support the FDA regulatory approval process for RECELL in the United States, preparation for the planned commercial launch of RECELL in the United States, and RECELL clinical programs in the United States. Further, there were no material expenditure commitments from the BARDA contract. With the U.S. FDA approval of RECELL for the treatment of burns in September 2018, and the U.S. market launch of the product in January 2019, sales of goods are expected to be an increasing source of revenue in the future. On July 13, 2020, the Company announced that BARDA will procure the RECELL System and agreed to the purchase, storage and delivery of RECELL Systems utilizing a vendor-managed inventory (“VMI”) plan valued at $7.6 million. Further, BARDA has expanded the awarded contract to provide supplemental funding of $1.6 million to support emergency deployment of RECELL Systems for use in mass casualty or other emergency situations. Delivery of RECELL system under the VMI plan commenced in the third quarter of fiscal year 2021 and as of year-end a total of 5,614 RECELL system units have been delivered into the VMI and accepted by BARDA. As of June 30, 2021, we had received cumulative payments of $30.9 million under the BARDA contract. For the year ended June 30, 2021, we have recognized $7.6 million of revenue related to the sale of the RECELL system to BARDA and $154,000 related to services provided to BARDA for emergency preparedness.
Given the above, we believe there is presently sufficient working capital to support our committed research and development programs and other activities over the next twelve months and the Company believes it has the ability to realize its assets and pay its liabilities and commitments in the normal course of business.
34
Table of Contents
The following table summarizes our cash flows for the periods presented:
| Years Ended June 30, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In Thousands) | 2021 | 2020 | 2019 | |||||||||
| Net cash used in operations | $ | (25,901 | ) | $ | (22,747 | ) | $ | (19,250 | ) | |||
| Net cash used in investing activities | (1,174 | ) | (847 | ) | (1,227 | ) | ||||||
| Net cash provided by financing activities | 64,049 | 77,057 | 29,709 | |||||||||
| Effect of foreign exchange rate on cash and restricted cash | 133 | 3 | 156 | |||||||||
| Net increase in cash and restricted cash | 37,107 | 53,466 | 9,388 | |||||||||
| Cash and restricted cash at beginning of year | 73,840 | 20,374 | 10,986 | |||||||||
| Cash and restricted cash at end of year | 110,947 | 73,840 | 20,374 |
Years Ended June 30, 2021, and 2020
Net cash used in operating activities was $25.9 million and $22.7 million during the years ended June 30, 2021, and 2020, respectively. The increase was primarily due to higher BARDA receivables attributable from the purchase of RECELL units by BARDA.
Net cash used in investing activities was $1.2 million and $0.8 million during the years ended June 30, 2021, and 2020, respectively. Cash flows used for investing activities was primarily attributable to payments for the purchase of a property and equipment.
Net cash provided by financing activities was $64 million and $77.1 million for the years ended June 30, 2021, and 2020, respectively. The AVITA Group completed a series of financing transactions during the year ended June 30, 2021, and 2020 and received proceeds from the issuance of shares and exercise of options.
Capital management
We aim to manage capital so that the Company continues as a going concern while also maintaining optimal returns to stockholders and benefits for other stakeholders. We also aim to maintain a capital structure that ensures the lowest cost of capital available to the Company. We regularly review the Company’s capital structure and seek to take advantage of available opportunities to improve outcomes for the Company and its stockholders.
For the year ended June 30, 2021, there were no dividends paid and we have no plans to commence the payment of dividends. We have no committed plans to issue further shares on the market but will continue to assess market conditions and the Company’s cash flow requirements to ensure the Company is appropriately funded in order to pursue its various opportunities.
There is no significant external borrowing at the reporting date. Neither the Company nor any of the subsidiaries are subject to externally imposed capital requirement.
C. Research and Development, Patents and Licenses
In recent years, we have continued our practice of building valuable research collaborations with institutions based primarily in the United States and other regions to enable us to develop a point-of-care solution for the potential treatment of a wide range of skin injuries or defects which may be suitable for use with the RECELL System. These collaborative arrangements ensure that we work with well-respected key option leaders and laboratories without incurring significant ongoing administrative and personnel costs. All clinical, research and development of RECELL System, including clinical studies, is performed in compliance with the appropriate governing authorities, regulators, and standards. We maintain in-house general counsel and research and development project expertise to coordinate these research collaborations.
Our research and development expenses consist primarily of expenses for contracted research and development activities conducted by major contract research organizations on our behalf, including personnel, testing facilities and other payments in accordance with our research and clinical agreements. Research and development expenses were $14.8 million, and $9.2 million, during the years ended June 30, 2021, and 2020, respectively.
35
Table of Contents
D. Trend Information
While our RECELL System has reached commercialization for specific applications in certain jurisdictions, the United States remains our primary point of commercial and clinical focus. In addition, we are currently seeking to expand the breadth of clinical indications for which the RECELL System is approved for use in the United States we have no plans to conduct clinical studies outside of the United States at this time. While we seek to advance the commercial opportunities for the RECELL System, it is not possible for us to predict with any degree of accuracy the outcome of our business in the future.
E. Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements (as defined in the rules and regulations of the SEC) that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material investors.
F. Contractual Obligations and Commitments
The Company does not have any contractual obligations or purchase commitments, except for lease obligations for the period ended June 30, 2021. For details of lease obligations refer to Note 4 in the consolidated financial statements.
G. Critical Accounting Policies and Estimates
The SEC defines “critical accounting policies” as those that require the application of management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.
The preparation of consolidated financial statements in conformity with U.S. Generally Accepted Accounting Practices, or U.S. GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base those estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.
The following listing is not intended to be a comprehensive list of all of our accounting policies. Our significant accounting policies are described in Note 2 to our consolidated financial statements contained elsewhere in this Annual Report. In many cases, the accounting treatment of a particular transaction is dictated by U.S. GAAP, with no need for our judgment in its application. There are also areas in which our judgment in selecting an available alternative would not produce a materially different result. We have identified the following as our critical accounting policies.
Revenue Recognition
The Company adopted ASC Topic 606 – Revenue from Contracts with Customers, on July 1, 2018. Under Topic 606, the Company recognizes revenue when its customers obtain control of promised goods or services, in an amount that reflects the consideration which the Company expects to be entitled in exchange for those goods or services.
To determine revenue recognition for arrangements that are within the scope of Topic 606, the Company performs the following five steps:
1.Identify the contract with a customer
2.Identify the performance obligations
3.Determine the transaction price
4.Allocate the transaction price to the performance obligations
5.Recognize revenue when/as performance obligation(s) are satisfied
In order for an arrangement to be considered a contract, it must be probable that the Company will collect the consideration to which it is entitled for goods or services to be transferred. Once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised with each contract, determines whether those are performance obligations and the related transaction price. The Company then recognizes the sale of goods based on the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied.
36
Table of Contents
The Company’s revenue consists primarily of the sale of the RECELL System to hospitals or other treatment centers and to BARDA (collectively, “customers”), predominately in the United States. The Company evaluated the BARDA contract and concluded that a portion of the arrangement, such as the procurement of the RECELL system and the emergency preparedness, represents a transaction with a customer and as such are in the scope of ASC 606. Amounts received from BARDA for the research and development of the Company’s product are classified as BARDA income in the consolidated statement of operations and are accounted for under IAS 20. For further details refer to BARDA Income and Receivables below.
Revenues for commercial customers (hospitals and treatment centers) are recognized as control of the product is transferred to customers, at an amount that reflects the consideration expected to be received in exchange for the product. Revenues are recognized net of volume discounts. As such, revenue is recognized only to the extent a significant reversal of revenues is not expected to occur in subsequent periods. For the Company’s contracts that have an original duration of one year or less, the Company used the practical expedient applicable to such contracts and does not consider the time value of money. Further, because of the short duration of these contracts, the Company has not disclosed the transaction price for the remaining performance obligations as of each reporting period or when the Company expects to recognize this revenue. The Company has further applied the practical expedient to exclude sales tax in the transaction price and expense contract fulfilment costs such as commissions and shipping and handling expenses as incurred.
For revenues related to the BARDA contract with-in the scope of ASC 606, the Company identified two performance obligations (i) the procurement of 5,614 RECELL units, (ii) emergency preparedness services. Through this contract the Company promises to procure the product through a vendor management inventory arrangement and to stand ready to provide emergency deployment services related to the product. Emergency preparedness services include procuring necessary storage containers, housing, and maintaining the containers (and product), and providing shipping and handling services in the event of an emergency situation. This stand ready obligation is a series of distinct services that are substantially the same and have the same pattern of transfer to the customer, overtime as services are consumed.
The total transaction price for the portion of the BARDA contract that is with-in the scope of ASC 606, was determined to be $9.2 million. The transaction price was allocated on a stand-alone selling price basis as follows: $7.6 million to the procurement of the RECELL product, which is classified as revenues when recognized in the consolidated statement of operations and $1.6 million to the emergency deployment services is be classified as revenues when recognized in the consolidated statement of operations. The $1.6 million for emergency deployment includes variable consideration which is deemed immaterial to the contract as a whole. The Company estimated the stand-alone selling price of the procurement of the RECELL product based on historical pricing of the Company’s product at the initial execution of the contract. The Company estimated the stand-alone selling price of the emergency deployment services performed based on the Company’s projected cost of providing the services plus an applicable profit margin as denoted in the contract.
The Company’s performance obligations are either satisfied at a point in time or over time as services are provided. The product procurement performance obligation is satisfied at a point in time, upon transfer of control of the product. As such, the related revenue for these performance obligations is recognized at a point in time as revenue within the Company’s consolidated statement of operations. In addition to guidance under ASC 606, the Company recognizes revenue from the sales of RECELL product to BARDA for placement into vaccine stockpiles in accordance with Securities and Exchange Commission (SEC) Interpretation, Commission Guidance regarding Accounting for Sale of Vaccines and BioTerror Countermeasures to the Federal Government for Placement into the Pediatric Vaccine Stockpile or the Strategic National Stockpile (SNS). Under this guidance, revenue is recognized when product is placed in the BARDA vendor-managed inventory as control of the product has been transferred to the customer at the time of delivery to the VMI. RECELL units that have been delivered to BARDA have a product replacement obligation at no cost to BARDA due to product’s limited shelf-life. The estimated cost of the expired inventory over the term of the contract is accrued on a per unit basis at the time of delivery. The liability is released upon replacement of the product along with a corresponding reduction to inventory. The emergency preparedness services performance obligation is satisfied over time. Revenue for the emergency deployment will be recognized on a straight-line basis during the term of the contract as services are consumed over time. Services recognized are included in sales within the consolidated statement of operations. Contract costs to fulfil the performance obligation are incremental and expected to be recovered are capitalized and amortized on a straight-line basis over the term of the contract. Contract costs are included in other long-term assets, respectively.
Contract Liabilities
The Company receives payments from customers based on contractual terms. Trade receivables are recorded when the right to consideration becomes unconditional. The Company satisfies its performance obligation on product sales when the products are shipped or delivered, depending on the terms of the sale. Payment terms on invoiced amounts are typically 30-90 days, and do not
37
Table of Contents
include a financing component. Contract liabilities are recorded when the Company receives payment prior to satisfying its obligation to transfer goods to a customer.
See Note 12 to our Consolidated Financial Statements included in this Annual Report for additional detail on revenue recognition.
Government Grants / BARDA Income and Receivables
The AVITA Group was granted a BARDA contract in September 2015, wherein BARDA provided funding to the AVITA Group to support the ongoing U.S. clinical regulatory program towards FDA premarket approval, Compassionate Use program, clinical and health economics research, and U.S. pediatric burn programs.
Income under the BARDA contract is earned under a cost-plus-fixed-fee arrangement in which the Company is reimbursed for direct costs incurred plus allowable indirect costs and a fixed-fee earned. Billings under the contracts are based on approved provisional indirect billing rates, which permit recovery of fringe benefits, general and administrative expenses and a fixed fee.
The Company has concluded that grants are not within the scope of ASC 606, as they do not meet the definition of a contract with a “customer”. The Company has further concluded that Subtopic 958-605, Not-for-Profit-Entities-Revenue Recognition also does not apply, as the Company is a business entity, and the grants are with governmental agencies. Government grants and related receivables are recognized when there is reasonable assurance that the grant will be received, and all attaching conditions will be complied with. When the grant relates to an expense item, it is recognized as income over the periods necessary to match the grant on a systematic basis to the costs that it is intended to compensate. When the grant relates to an asset, the fair value is credited to deferred income and is released to the profit or loss over the expected useful life of the relevant asset by equal annual installments.
Share-Based Compensation
The Company records compensation expense for share-based payments to employees, including grants of stock options, restricted stock units and performance-based awards based on the fair market value of the awards on the date of grant. The fair value of share-based compensation awards is amortized over the vesting period of the award. Compensation expense for performance-based awards is measured based on the number of shares ultimately expected to vest, estimated at each reporting date based on management’s expectations regarding the relevant performance criteria.
The Company estimates the fair value of tenure-based share options using the Black-Scholes option pricing model on the date of grant. The Company estimates the fair value of options with a performance condition using the Monte-Carlo simulation model. Restricted stock units are valued based on the market price on the grant date.
The following assumptions were used in the valuation of stock options.
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Expected volatility – determined using the average of the historical volatility using daily intervals over the expected term and the derived volatility using the longest term available of 12 months. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Expected dividends - based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Expected term – the expected term of the Company’s stock options for tenure only vesting has been determined utilizing the “simplified” method as described in the SEC’s Staff Accounting Bulletin No. 107 relating to stock-based compensation. The simplified method was chosen because the Company has limited historical option exercise experience due to its short operating history of awards granted, the first plan was established in 2016 and was primarily used for Executives awards. Further, the Company does not have sufficient history of exercises in the U.S. market given the recent redomiciliation to the United States in the prior fiscal year. The expected term of options with a performance condition was set to the contractual term of 10 years. The contractual term was used options with performance condition were awarded to C-Suite executives and the Company assumes that they will hold them longer than rank and file executives. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Risk-free interest rate – the risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for a period approximately equal to the expected term of the award. |
See Note 13 to our Consolidated Financial Statements included in this Annual Report for additional detail on share-based compensation.
38
Table of Contents
Income Taxes
Income taxes are accounted for using the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized.
The Company reviews its uncertain tax positions regularly. An uncertain tax position represents the Company’s expected treatment of a tax position taken in a filed return or planned to be taken in a future tax return or claim that has not been reflected in measuring income tax expense for financial reporting purposes. The Company recognizes the tax benefit from an uncertain tax position when it is more-likely-than-not that the position will be sustained upon examination on the basis of the technical merits or the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired.
See Note 14 to our Consolidated Financial Statements included in this Annual Report for additional detail on income taxes.
39
Table of Contents