Share-Based Payment Plans

12 Months Ended

Jun. 30, 2020

Share-based Payment Arrangement [Abstract]

13. Share-Based Payment Plans

Overview of Employee Share-Based Compensation Plans

In November 2014, our former parent company, AVITA Medical, adopted the Employee Share Plan and the Incentive Option Plan (collectively, the “

2016 Plans

”). The Employee Share Plan was amended at the 2018 Annual General Meeting. The 2016 Plans previously authorized the issuance of stock options or other share-based instruments representing up to 7.5% of outstanding capital. Any increase in the maximum number of shares issuable under the 2016 Plans was subject to shareholder approval or to an increase in the total number of ordinary shares outstanding. The maximum shares allowed to be issued was 1,610,093, 1,403,475 and 958,034 as of June 30, 2020, 2019 and 2018 respectively. Upon redomiciliation of the AVITA Group to the United States, the 2016 Plans were terminated with respect to future grants and accordingly, there are no more shares available to be issued under the 2016 Plans. In addition, upon redomiciliation, the Company had an implicit 100-1 reverse stock split and all share information presented below has been presented on a reverse split stock basis. At the 2020 annual meeting of stockholders that will be held in late September or early October, the Company intends to seek shareholder approval for a new employee stock option plan.

The 2016 Plans were governed by the Compensation Committee. Subject to Board approval where required by applicable law, the Compensation Committee previously had the authority, in its sole discretion, to grant options under the 2016 Plans, to interpret the provisions of the 2016 Plans, and to prescribe, amend, and rescind rules and regulations relating to the 2016 Plans or any issue or grant thereunder as it may deem necessary or advisable, subject to any other approval if required by applicable law. All decisions made by the Compensation Committee pursuant to the provisions of the 2016 Plans were final, conclusive and binding on all persons.

The number of awards issued, the exercise price and the vesting schedule under the 2016 Plans were determined by the

Compensation

Committee, in accordance with the provisions of the 2016 Plans. Options granted under the 2016 Plans have an exercise price equal to the share price at the date of grant, or such other exercise price that the

Compensatio

Committee determines to be appropriate under the circumstances. The contractual term of awards granted under the 2016 Plans is ten years from the date of its grant. Unless otherwise specified, the vesting period of awards under the 2016 Plan was: (i) vest over a four year period in four equal installments, 25% at the end of each year from the date of grant, and /or (ii) subject to other performance criteria and hurdles, as determined by the Compensation Committee.

The following table summarizes information about the Company’s stock-based award plans as of June 30, 2020:


	Outstanding Options		Outstanding Restricted Stock Units		Shares Available for Future Issuance
2016 Plan		1,260,524		0		0
RSU Awards		0		339,359		0

Share-Based Payment Expenses

Share-based payment transactions are recognized as compensation cost based on the fair value of the instrument on the date of grant. The Company uses the Binomial option valuation model to estimate the grant date fair value of employee stock options.

During the years ended June 30, 2020, 2019 and 2018, the Company recorded stock-based compensation expense of $16.5 million, $1.9 million, and $1.4 million. No income tax benefit was recognized in the consolidated statement of comprehensive loss for share-based payment arrangements for June 30, 2020, 2019 and 2018.

A summary of stock option activity under the employees share option plan

arrangement as of June 30, 2020 and changes during the year then ended is presented below:


	Service Only Stock Options			Performance Based Stock Options			Total Stock Options			Service Only Stock Options		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding at June 30, 2019		817,077			319,717			1,136,794		$	8.83		8.02	$	24,679,478
Granted		192,133			67,500			259,633			38.16
Exercised		(70,282	)		(29,700	)		(99,982	)		6.37
Expired		(9,270	)		—			(9,270	)		29.45
Forfeited		(25,305	)		(1,346	)		(26,651	)		18.14

Outstanding at June 30, 2020		904,353			356,171			1,260,524			14.72		8.42		22,185,034

Exercisable at June 30, 2020		279,776			221,923			501,699		$	10.25		8.10	$	10,520,968

The weighted-average grant-date fair value of options granted during the years 2020, 2019, and 2018 was $26.56, $6.67, and $5.11, respectively. The total intrinsic value of options exercised during the years ended June 30, 2020, 2019 and 2018 was $3.1 million, $1.7 million, and $0, respectively. Intrinsic value is measured using the fair market value at the date of exercise for options exercised, or at June 30 for outstanding options, less the applicable exercise price.

Cash received from the exercise of options was approximately $474,000 and $252,000 and $0 for the year ended June 30, 2020, 2019 and 2018, respectively.

As of June 30, 2020, there was approximately $5.8 million of total unrecognized compensation cost related to stock options to be recognized over a weighted average period of 1.41 years.

Option Pricing Model

The fair value of each stock option is estimated on the date of grant using the Binomial valuation model. Expected volatilities are based on historical volatility of the Company’s shares over multiple trading periods, to estimate the future volatility of the Company’s shares over the contractual term of 10 years. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the Reserve Bank of Australia’s government bonds, not the U.S. Treasury yield curve in effect at the time of grant. As the Company has never declared dividends, no dividend yield is used in the calculation. Actual value realized, if any, is dependent on the future performance of the Company’s shares and overall stock market conditions. There is no assurance the value realized by an optionee will be at or near the value estimated by the Binomial model.

Included in the following table is a summary of the grant-date fair value of stock options granted and the related assumptions used in the Binomial models for stock options granted in fiscal 2020, 2019, and 2018.


	Year Ended June 30,
	2020		2019		2018
Expected volatility		75% - 90%		90%		90%
Weighted-average volatility		88%		90%		90%
Expected dividends		0%		0%		0%
Expected term (in years)		10.0		10.0		1.5 - 10.0
Risk-free interest rate		0.68% - 2.65%		1.50% - 2.65%		1.50%

Restricted Stock Units

Restricted stock units (RSUs) are granted to executives as part of their long-term incentive compensation. RSU awards are approved by the Compensation Committee as determined necessary. The RSU awards have a contractual term of 10 years and vest in accordance with the tenure or performance conditions as determined by the Compensation Committee. The grant date fair value is determined based on the price of the Company stock on the ASX on the date of grant. RSUs primarily consist of awards to the CEO and other executives. The terms of the awards are described below:

CEO RSUs

On November 30, 2017, 500,000

RSUs were issued to the CEO with the following vesting terms:

Tenure – 166,667

shares with a vesting period of

three-year

commencing on June 1, 2017.

Company Share Price –

166,667

shares to vest in three equal tranches subject to the Volume Weighted Average Price (VWAP) of Company share price (as at close of trade on the ASX on relevant date) achieving multiples

of 2x, 3x and 4x

the Company’s share price at the time of shareholder approval; and

Milestone performance –

166,666

shares to vest in two equal tranches upon satisfaction of the following milestones:

1. FDA PMA approval of RECELL for burns

2. Initial BARDA procurement under CLIN 2 of the BARDA Grant

On November 2019, 395,542

RSUs were issued to the CEO with the following vesting terms:

Tenure –

142,520

shares with a vesting period of

three-year

commencing on June 1, 2020.

Milestone performance –

253,033

RSUs will vest upon satisfaction of the following milestones:

First patient visit for treatment in an FDA approved U.S. soft tissue and trauma trial by the Company prior to March 3, 2020.

First patient visit for treatment in an FDA approved U.S pediatric trial by the Company prior to June 30, 2020,

First patient visit for treatment in an FDA approved U.S pilot vitiligo trial by the Company prior to September 30, 2020.

FDA application submission for approval of the next generation RECELL device prior to June 30, 2021.

FDA approval of the next generation RECELL device prior to June 30, 2022.

Other Executive Grants

During November 2019, 49,000 RSUs were to executives.

A summary of the status of the Company’s unvested shares as of June 30, 2020, and changes during the year ended June 30, 2020, is presented below:


Unvested Shares	Service Condition RSU			Performance Condition RSU			Total RSUs			Weighted Average Grant Date Fair Value per Unit
Unvested RSUs outstanding at June 30, 2019		166,667			333,333			500,000		$	4.48
Granted		146,521			298,022			444,543			39.12
Vested		(218,175	)		(387,009	)		(605,184	)		15.22
Forfeited		—			—			—			—

Unvested RSUs outstanding at June 30, 2020		95,013			244,346			339,359		$	30.70

The weighted-average grant-date fair value of the RSUs granted during 2020, 2019 and 2018 was $39.12, $0 and $4.48 per unit, respectively. The total fair value of shares vested during the years ended June 30, 2020, 2019 and 2018 was $9.2 million, $0, and $0, respectively.

As of June 30, 2020, there was $6.6 million of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the

RSU award agreements. This amount includes $1.9 million for performance

awards that have been determined to be not probable. The associated expense will be recognized once the performance conditions has been determined to be probable. The remaining unrecognized expense of $4.7 million

is expected to be recognized over a weighted average period of 0.69 years.