Shared-based Compensation

12 Months Ended

Dec. 31, 2019

Share-based Payment Arrangement [Abstract]

Shared-based Compensation

NOTE 18. SHARE-BASED COMPENSATION

Stock Incentive Plans

In June 2015, the Company’s shareholders approved the 2015 Stock Incentive Plan (the 2015 Plan), which has subsequently been amended, as approved by the Company’s shareholders, on multiple occasions, including in 2017, 2018 and 2019. Under the 2015 Plan, stock options (including incentive stock options), stock appreciation rights, restricted stock awards, performance awards and other share- or cash-based awards may be issued at the discretion of the Compensation Committee of the Board from time to time. No ordinary shares are to be granted under previously approved plans, including the Company’s 2000, 2004, 2007, 2010 and Assumed Stock Incentive Plans. All awards previously granted and outstanding under these prior plans remain subject to the terms of those prior plans.

During the third quarter of 2017, the Company issued approximately 1.0 million stock options and 0.1 million restricted stock units that were initially subject to shareholder approval and were subsequently approved by shareholders on June 7, 2018 at the Company’s Annual General Meeting of Shareholders. The options have an exercise price equal to the closing share price on their issuance date in August 2017. For accounting and disclosure purposes, these stock options and restricted stock units were considered to have been granted in 2018 upon approval by shareholders.

As further described below, certain of the Company’s outstanding Performance Share Units (PSUs) are measured against targets covering three independent successive one-year performance periods, which are generally established for each performance period during the first quarter of that calendar year. The determination of the grant-date(s) underlying such PSUs depends in part on the date(s) on which each of the performance targets with respect to those PSUs are approved. Therefore, for certain PSUs, a single unit may give rise to multiple grant dates depending, in part, on the dates on which the respective performance targets are approved.

Beginning in 2017, long-term cash incentive (LTCI) awards were provided to certain employees. LTCI awards were designed to vest ratably, in equal amounts, over a three-year service period. Upon vesting, each vested LTCI unit would be settled in cash in an amount equal to the price of Endo’s ordinary shares on the vest date. As of September 30, 2018, approximately 3.0 million unvested LTCI awards were outstanding for approximately 570 employees. The outstanding awards had a weighted average remaining requisite service period of 2.3 years. A corresponding liability of $14.9 million was recorded as of September 30, 2018 in Accounts payable and accrued expenses and Other liabilities in the Company’s Consolidated Balance Sheets. On October 1, 2018, the Compensation Committee of the Board authorized the Company to settle each of the outstanding unvested LTCI awards in shares, rather than cash, upon vesting in accordance with the original vesting terms of the awards. With the authorization of the Compensation Committee, management’s intent to settle the awards in shares rather than cash is a modification that changes the awards’ classification from liability to equity, effective October 1, 2018. The accounting for the modification occurred in the fourth quarter of 2018. Prior to this modification, LTCI awards were excluded from amounts in this Note 18. Share-based Compensation. Subsequent to this modification, LTCI awards are generally treated the same as restricted stock units (RSUs), including for accounting, financial statement classification and disclosure purposes. However, adjustments to pre-modification amounts of LTCI expense that are recorded in the Consolidated Statements of Operations subsequent to this modification, including adjustments related to actual or estimated forfeitures, are excluded from the determination of share-based compensation expense.

At December 31, 2019, approximately 7.7 million ordinary shares were reserved for future grants under the 2015 Plan. As of December 31, 2019, stock options, restricted stock awards, PSUs, RSUs and LTCI awards have been granted under the stock incentive plans.

Generally, the grant-date fair value of each award is recognized as expense over the requisite service period. However, expense recognition differs in the case of certain performance share units where the ultimate payout is performance-based. For these awards, at each reporting period, the Company estimates the ultimate payout and adjusts the cumulative expense based on its estimate and the percent of the requisite service period that has elapsed.

Presented below are the components of total share-based compensation as recorded in our Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017 (in thousands).

	2019		2018		2017
Selling, general and administrative expenses	$	44,159	$	44,454	$	38,292
Research and development expenses	4,501		2,251		4,197
Cost of revenues	10,482		7,366		7,660
Total share-based compensation expense	$	59,142	$	54,071	$	50,149

As of December 31, 2019, the total remaining unrecognized compensation cost related to all non-vested share-based compensation awards for which a grant date has been established as of December 31, 2019 amounted to $48.3 million.

Stock Options

From time to time, the Company grants stock options to its employees as part of their annual share compensation awards and, in certain circumstances, on an ad hoc basis or upon their commencement of service with the Company.

Employee stock options generally vest ratably, in equal amounts, over a three or four-year service period and generally expire ten years from the grant date. The fair value of option grants is estimated at the date of grant using the Black-Scholes option-pricing model. This model utilizes assumptions related to volatility, the risk-free interest rate, the dividend yield (which is assumed to be zero as the Company has not paid cash dividends to date and does not currently expect to pay cash dividends) and the expected term of the option. Expected volatilities utilized in the model are based mainly on the historical volatility of the Company’s share price over a period commensurate with the expected life of the share option as well as other factors. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant. We estimate the expected term of options granted based on our historical experience with our employees’ exercise of stock options and other factors.

A summary of the activity for each of the years ended December 31, 2019, 2018 and 2017 is presented below:

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value (1)
Outstanding as of January 1, 2017	4,325,209		$	41.70
Granted	5,288,675		$	10.42
Forfeited	(623,987	)	$	28.32
Expired	(741,767	)	$	40.29
Outstanding as of December 31, 2017	8,248,130		$	22.79
Granted	971,590		$	7.55
Exercised	(94,392	)	$	9.89
Forfeited	(605,737	)	$	19.01
Expired	(446,873	)	$	36.80
Outstanding as of December 31, 2018	8,072,718		$	20.62
Exercised	(557	)	$	7.55
Forfeited	(125,739	)	$	14.38
Expired	(665,883	)	$	40.37
Outstanding as of December 31, 2019	7,280,539		$	18.93	6.30	$	—
Vested and expected to vest as of December 31, 2019	7,212,334		$	19.00	6.29	$	—
Exercisable as of December 31, 2019	5,003,163		$	21.60	6.07	$	—

__________

(1) The intrinsic value of a stock option is the excess, if any, of the closing price of the Company’s ordinary shares on the last trading day of the fiscal year over the exercise price. The aggregate intrinsic values presented in the table above represent sum of the intrinsic values of all corresponding stock options that are “in-the-money,” if any.

The range of exercise prices for the above stock options outstanding at December 31, 2019 is from $7.55 to $86.54.

The total intrinsic values of options exercised during the years ended December 31, 2019 and 2018 were less than $0.1 million and $0.6 million, respectively. No tax benefits from stock option exercises were realized during the years ended December 31, 2019, 2018 and 2017. The weighted average grant-date fair values of the stock options granted during the years ended December 31, 2018 and 2017 were $3.97 and $4.73 per option, respectively, determined using the following weighted average assumptions:

	2018		2017
Expected term (years)	4.0		4.0
Risk-free interest rate	2.7	%	1.7	%
Dividend yield	—		—
Expected volatility	63	%	58	%

As of December 31, 2019, the weighted average remaining requisite service period of non-vested stock options was 0.9 years and the total remaining unrecognized compensation cost related to non-vested stock options amounted to $3.1 million.

Restricted Stock Units and Performance Share Units

From time to time, the Company grants RSUs and PSUs to its employees as part of their annual share compensation awards and, in certain circumstances, on an ad hoc basis or upon their commencement of service with the Company.

RSUs vest ratably, in equal amounts, over a three or four-year service period. PSUs vest in full after a three-year service period and are conditional upon the achievement of performance and/or market conditions established by the Compensation Committee of the Board.

PSUs awarded in 2019, 2018 and 2017 were based upon two discrete measures: relative total shareholder return (TSR) and an adjusted free cash flow performance metric (FCF), each accounting for 50% of the PSU awards upon issuance. TSR performance is measured against the three-year TSR of a custom index of companies. For PSUs awarded in 2019, FCF performance is measured against a target covering a single three-year performance period, which is generally established at the grant date. For PSUs awarded in 2018 and 2017, FCF performance is measured against targets covering three independent successive one-year performance periods, which are generally established for each performance period during the first quarter of that calendar year. Upon the completion of the three-year performance period, the PSUs vest and the actual number of shares awarded is adjusted to between zero and 200% of the target award amount based upon the performance criteria described above. In addition to meeting the performance conditions, grant recipients are also generally subject to being employed by the Company until the conclusion of the three-year vesting period in order to receive the awards. TSR is considered a market condition under applicable authoritative guidance, while FCF is considered performance condition.

RSUs are valued based on the closing price of Endo’s ordinary shares on the date of grant. PSUs with TSR conditions are valued using a Monte-Carlo variant valuation model, while those with adjusted free cash flow conditions are valued taking into consideration the probability of achieving the specified performance goal. The Monte-Carlo variant valuation model considered a variety of potential future share prices for Endo as well as our peer companies in a selected market index.

A summary of our non-vested RSUs and PSUs for the years ended December 31, 2019, 2018 and 2017 is presented below:

	Number of Shares		Aggregate Intrinsic Value (1)
Non-vested as of January 1, 2017	1,685,060
Granted	4,168,477
Forfeited	(552,981	)
Vested	(575,883	)
Non-vested as of December 31, 2017	4,724,673
Granted	5,609,561
LTCI modification (2)	2,989,965
Forfeited	(753,653	)
Vested	(1,551,074	)
Non-vested as of December 31, 2018	11,019,472
Granted	6,687,695
Forfeited	(918,425	)
Vested	(3,872,453	)
Non-vested as of December 31, 2019	12,916,289		$	60,577,395
Vested and expected to vest as of December 31, 2019	12,098,438		$	56,741,674

__________

(1) The aggregate intrinsic values of RSUs and PSUs presented in the table above are calculated by multiplying the closing price of the Company’s ordinary shares on the last trading day of the fiscal year by the corresponding number of RSUs and PSUs.

(2) As a result of the October 1, 2018 modification to the Company’s LTCI awards described above, modified LTCI awards are treated as RSUs for disclosure purposes; thus, the table above reflects an increase to the non-vested number of shares on the modification date.

As of December 31, 2019, the weighted average remaining requisite service period of the units presented in the table above was 1.6 years and the corresponding total remaining unrecognized compensation cost amounted to $39.4 million in the case of RSUs and LTCI awards and $5.8 million in the case of PSUs. The weighted average grant-date fair value of the units granted during the years ended December 31, 2019, 2018 and 2017 was $7.72, $6.88 and $11.42 per unit, respectively.