|12 Months Ended|
Dec. 31, 2022
|Retirement Benefits [Abstract]|
18. Employee Benefits
The Group has established a defined contribution plan (the “U.S. 401(k) Plan”) pursuant to Section 401(k) of the U.S. Internal Revenue Code. Under the U.S. 401(k) Plan, eligible employees voluntarily contribute up to 80% of their compensation in a given year, subject to limits on the amount of annual contributions, and the Group will match a portion of those contributions. The Group has established a separate defined contribution plan (the “U.K. Plan”) in the U.K. to eligible employees. Under the U.K. plan, the employee voluntarily elects to either contribute a percentage of their salary
directly to the U.K. Plan or exchange a percentage of their salary and have the Group contribute to the U.K. Plan on their behalf. During fiscal year 2022, the Group paid fixed contributions totaling $7.2 million (2021: $6.3 million, 2020: $5.2 million).
Equity Incentive Plans
On December 15, 2022, we completed a 1-for-25 reverse share split (the “2022 Reverse Share Split”) of its Class A ordinary shares and Class B ordinary shares that was applied retrospectively throughout the Consolidated Financial Statements. The description of activity in the narratives and tables below have been adjusted to reflect the 2022 Reverse Share Split. Refer to Note 19 for more details in relation to this reverse share split.
On October 21, 2021 we effected a reclassification (the “2021 Reclassification”) whereby all outstanding shares of Babylon, including the various options previously granted under the below plans, were reclassified to Class A ordinary shares or Class B ordinary shares, subject to a conversion ratio of approximately 0.3 (the “2021 Conversion Ratio”). The description of activity in the narratives and tables below have been adjusted to reflect the Reclassification.
On July 27, 2015, the Board of Directors adopted the Babylon Holdings Limited Long Term Incentive Plan (the “LTIP”). Following the Reclassification, the options subsist over Class A ordinary shares. Upon approval of the Babylon Holdings Limited 2021 Equity Incentive Plan, including the Non-Employee Sub-Plan (collectively, the "2021 Plan"), the LTIP Plan was no longer available for future awards.
On February 21, 2021, the Board of Directors adopted the Company Share Option Plan (“CSOP”) which was intended to qualify as a company share option plan that meet certain requirements under the Income Tax Act of 2003. The options granted under the CSOP are, subject to certain qualifying conditions being met, potentially U.K. tax-favored options. Upon approval of the 2021 Plan, the CSOP Plan was no longer available for future awards.
In March 2021, the Company made an offer to all existing U.K. participants in the LTIP to convert their LTIP share options into the CSOP or into restricted stock awards (“RSAs”). All employees who elected to have their LTIP option converted to a new CSOP or RSA had their existing LTIP options forfeited and were granted an increased number of share options in line with the increased exercise price under the CSOP and RSA plans resulting in an equivalent economic value as compared to the grantee’s original award. There were no changes made to other terms, including vesting conditions or the period the original share options were granted. For the participants who accepted the offer to transfer their LTIP awards into RSAs or CSOP options, their LTIP options were cancelled and replaced with an equivalent economic value of RSAs or CSOP options during year ending December 31, 2021.
On October 21, 2021, the shareholders approved the 2021 Plan. The 2021 Plan provides for an automatic share reserve increase, or “evergreen” feature, whereby the share reserve will automatically be increased on January 1st of each year commencing on January 1, 2022 and ending on and including January 1, 2031, in an amount equal to the least of: (i) 1,813,408 Class A ordinary shares; (ii) 5% of the total number of all classes of our shares that have been issued as at December 31st of the preceding calendar year, in each case, subject to applicable law and our having sufficient authorized but unissued shares; and (iii) such number of Class A ordinary shares as our board of directors may designate prior to the applicable January 1 (collectively referred to as the “evergreen” feature). In addition, the 2021 Plan provides for recycling of a maximum of 956,091 Class A ordinary shares underlying 2021 Plan awards and options granted under our legacy LTIP and CSOP Plans, in each case which have expired, lapsed, terminated or meet other recycling criteria set forth in the 2021 Plan (collectively referred to as the “share recycling” feature). Upon approval of the 2021 Plan, the LTIP and CSOP were no longer available for future awards. The 2021 Plan provides for the grant of options, share appreciation rights (“SARs”), restricted shares (“RSAs”), restricted share units (“RSUs”), and other stock-based awards, including performance share units (“PSUs”). As of December 31, 2022, there are 779,131 Class A ordinary shares available for issuance pursuant to future awards under the 2021 Plan considering the evergreen and share recycling features processed during the year ending December 31, 2022.
The Company issues equity settled compensation to employees of the Company and advisors, whereby services are rendered in exchange for rights over shares in the Company. Employees of all subsidiaries of the Company participate within this scheme through a variety of plans described above.
Under these plans, options are granted to employees at the start of their employment and typically expire between 10 to 15 years. Generally, upon completion of the first year of employment, 25.0% of options will vest, and the remainder will vest monthly over the next three years. In certain circumstances, additional options are granted to employees to recognize performance. Such options vest in the same manner as those granted on joining. RSUs, RSAs and PSUs granted under the 2021 Plan vest in accordance with the individual award agreements and are summarized within the corresponding award types below. The estimated forfeiture rate for share-based payments was 35.9%, 20.4%, and 22.1% for the years ended December 31, 2022, 2021 and 2020, respectively. The company estimates the number of awards that will be forfeited when recognizing share-based payment expense throughout the award’s vesting period. The cumulative effect on current and prior periods for a change in the estimate or actual forfeitures is recognized in the current period of the change. This change in estimate will impact current and future period share-based payment expense in the period the estimate is changed.
Stock-based compensation expense is recognized using the graded vesting method. Stock-based payments are recognized as expense for RSUs, RSAs, PSUs and options, net of estimated forfeitures, as follows:
Restricted Stock Awards
RSAs granted prior the implementation of the 2021 Plan traditionally followed similar vesting schedules as options including 25.0% vesting upon satisfying one year of employment, and the remainder vesting monthly over the next three years. RSAs granted under the 2021 Plan vest pursuant to the terms of the individual agreements which typically include a specified service condition term and any unvested shares are forfeited upon separation from the Company.
The following table displays RSA activity and weighted average grant date fair values for the year ended December 31, 2022:
The total grant-date fair value of RSAs granted during the year ended December 31, 2022 and 2021 was $15.2 million and $6.7 million respectively. No RSAs were granted during the year ended December 31, 2020.
The Company recorded stock-based compensation expense related to RSAs of $5.9 million during the year ended December 31, 2022 (2021: $3.6 million).
As of December 31, 2022, the unrecognized compensation cost related to unvested RSAs is $4.1 million, which is expected to be recognized over a weighted average period of 2.67 years.
Restricted Stock Units
The following table displays RSU activity and weighted average grant date fair values for the year ended December 31, 2022:
The total grant-date fair value of RSUs granted during the years ended December 31, 2022 and 2021 was $74.2 million and $37.2 million, respectively. No RSUs were granted during the year 2020.
The Company recorded stock-based compensation expense related to RSUs of $28.6 million during the year ended December 31, 2022 (2021: 6.5 million).
As of December 31, 2022, the Company had $46.2 million in unrecognized compensation cost related to unvested RSUs which is expected to be recognized over a weighted average period of 2.8 years.
Performance Share Units
The following table displays PSU activity and weighted average fair values for the periods presented:
The total grant-date fair value of PSUs granted during the year ended December 31, 2022 was $8.3 million. No PSUs were granted during the years 2021 and 2020.
The Company recorded stock-based compensation expense related to PSUs of $0.6 million during the year ended December 31, 2022.
As of December 31, 2022, the Company had $5.3 million in unrecognized compensation cost related to unvested PSUs, which is expected to be recognized over a weighted average period of 2.1 years.
The shares typically have three equal tranches, with each tranche vesting upon the achievement of an agreed upon share price on the New York Stock Exchange over any 20 trading days within a 30-day period, and accelerate vesting upon a change of control. The PSUs typically expire after 4-years from the grant date and any unvested shares are forfeited upon separation from the Company.
The grant-date fair value and derived implicit service period of PSUs granted under the 2021 Plan were determined using a Monte Carlo simulation model, and involve input of subjective assumptions, including share price and volatility. For the share price, the Company used the publicly traded share price on the date of the grant. For volatility, the Company determined the % using historical volatilities for selected comparable peer companies.
There were no options granted during the year ended December 31, 2022. Options were granted in prior years under the LTIP, CSOP or 2021 Plan described above. The fair value of each employee and non-employee stock option award was estimated on the date of grant for each option using the Black-Scholes option pricing model. The group uses the following key assumptions to determine the grant date fair value of options in the period they were granted as follows:
Fair Value of Underlying Stock
The fair value of the Company’s Class A ordinary shares is determined by the closing price, on the date before the grant, of its Class A ordinary shares, which is traded on the NYSE. Prior to the Merger described in Note 1, the estimated fair value of the Class A ordinary shares had been determined by the Board of Directors as of the date of each grant, with input from management, considering the most recently available third-party valuations of the Group’s Class A ordinary shares, and the assessment of additional objective and subjective factors that they believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant.
The Company uses an average historical stock price volatility of a peer group of comparable publicly traded healthcare companies representative of our expected future stock price volatility, as there is not sufficient trading history for our Class A ordinary shares. For purposes of identifying these peer companies, the Company considers the industry, stage of development, size and financial leverage of potential comparable companies. For each grant, the Company measures historical volatility over a period equivalent to the expected term.
Risk-Free Interest Rate
The risk-free interest rate is based on the implied yield currently available on U.S. Treasury zero-coupon issues with maturities similar to the expected term of the award.
Expected Dividend Yield
The Company has not paid and does not anticipate paying any dividends in the foreseeable future. Accordingly, the Company estimates the dividend yield to be zero.
The Company determines the expected term of awards using the simplified method which is used when there is insufficient historical data about exercise patterns and post-vesting employment termination behavior. The simplified method is based on the vesting period and the contractual term for each grant. The mid-point between the vesting date and the maximum contractual expiration date is used as the expected term under this method.
The following table displays option activity, aggregate intrinsic values, and weighted average exercise prices and remaining contractual lives for the year ended December 31, 2022:
No options were granted during the year ended December 31, 2022. The total grant-date fair value of options granted during the years 2021 and 2020 was $59.3 million and $20.5 million, respectively.
Due to the cumulative effect of the change in estimated forfeitures recognized in the current period for current and prior period options, $(0.5) million of stock-based compensation expense was recognized during the year ended December 31, 2022. During the year ended December 31, 2021, the Company recognized $26.6 million of stock-based compensation expense.
As of December 31, 2022, the Company had $0.8 million in unrecognized compensation cost related to unvested options, which is expected to be recognized over a weighted average period of 0.9 years.Included within the forfeited / cancelled quantity during the year ended December 31, 2022 are 51,654 stock options that were replaced by 80,000 RSAs included within the granted quantity reported within the RSA table above. This transaction was accounted for as a modification occurring in July 2022, the date the replacement RSA was granted and the option was cancelled. The Company determined that the replacement RSA’s fair value exceeds the cancelled options fair value on the date of modification by $1.7 million of which, the Company recognized $1.1 million in stock-based compensation expense associated with the modification during the year ended December 31, 2022 with the remaining $0.6 million to be recognized over the next 0.5 years.
The entire disclosure for an entity's employee compensation and benefit plans, including, but not limited to, postemployment and postretirement benefit plans, defined benefit pension plans, defined contribution plans, non-qualified and supplemental benefit plans, deferred compensation, share-based compensation, life insurance, severance, health care, unemployment and other benefit plans.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef