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SHARE-BASED PAYMENT | 12 Months Ended
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Dec. 31, 2022
Share-Based Payment Arrangement [Abstract] |
SHARE-BASED PAYMENT | 22. SHARE-BASED PAYMENT In 2012, Microvast, Inc. adopted a Share Incentive Plan (the “2012 Plan”). The 2012 Plan permits the grant of options to purchase common stock, share appreciation rights, non-vested shares and non-vested share units. The maximum aggregate number of shares of common stock that may be issued pursuant to all awards under the share incentive plan is 17 percent of the total issued and outstanding company shares on a fully-diluted basis. The share options, non-vested shares and non-vested share units granted to the employees or nonemployees shall vest and become non-forfeitable with respect to one-third of the total number of the non-vested share and non-vested share units immediately upon the occurrence of initial public offering, sale or transfer of all or substantially all of the business, operations or assets of Microvast, Inc. or its subsidiaries, taken as a whole, to a third party, or such other sale or transfer of common stock in Microvast, Inc. as determined, in each case, by Microvast, Inc. pursuant to legal documents and other obligations binding upon it (the “Initial Vesting Date”), and on each of the first and second anniversaries of the Initial Vesting Date; provided that through each applicable vesting date, the employee or nonemployee is employed. The Merger in 2021 did not constitute the satisfaction of a performance condition that would trigger the vesting of equity awards as stipulated in the 2012 Plan. In connection with the Merger, all outstanding share awards granted under the 2012 Plan, 209,906 options and 143,652 capped non-vested share units, were converted into 33,647,927 options and 23,027,399 capped non-vested share units of the Company, respectively, using the Common Exchange Ratio of 160.3 as described in Note 3. Upon conversion, the Company modified the terms of the equity awards by removing the performance condition of the occurrence of an initial public offering and similar transaction under the 2012 Plan, and adopted a new vesting schedule of one-third of the total number on each of the first, second and third anniversaries of the Closing Date (the “Modification”). The Modification was considered a Type III modification under the Accounting for Share-Based Payments (Topic 718), in which the original awards were canceled, and the modified awards were considered granted on the modification date. Post-modification share-based compensation expense related to these new awards will be recognized over the remaining service period using modification date fair values. Following the Merger, no further awards will be granted under the 2012 Plan. All stock award activity was retroactively restated to reflect the conversion. On July 21, 2021, the stockholders of the Company approved the Microvast Holdings, Inc. 2021 Equity Incentive Plan (the “2021 Plan”), effective upon the Closing Date. The 2021 Plan provides for the grant of incentive and non-qualified stock option, restricted stock units, restricted share awards, stock appreciation awards, and cash-based awards to employees, directors, and consultants of the Company. Options awarded under the 2021 Plan expire no more than 10 years from the date of grant. The 2021 Plan reserves 5% of the fully-diluted shares of Common Stock outstanding immediately following the Closing Date (not including the shares underlying awards modified from the 2012 Plan) for issuance in accordance with the 2021 Plan’s terms. As of December 31, 2022, 16,490,228 shares of Common Stock was available for grant under the 2021 Plan. On April 14, 2022, the Company's former Chief Financial Officer's ("Former CFO") employment with the Company was terminated. Simultaneously, a transition services agreement was entered into between the Company and the Former CFO for the provision of advisory services to the Company with an initial term of 18 months commencing on the date of the Former CFO's termination of employment. Upon the Former CFO's termination of employment, all 1,122,100 stock options and 2,860,713 capped non-vested share units held by the Former CFO immediately vested in full and a $4,897 cash payment was made to the Former CFO related to the settlement of capped non-vested share units. The Former CFO's stock options remain exercisable until three months following the termination of his transition services agreement with the Company. Because he continues to provide advisory services to the Company, the Former CFO is an eligible person rendering services under the 2012 Plan, and the accelerated vesting and extended exercise period of his stock options were in accordance with the terms and conditions of the Former CFO's employment agreement and stock option award agreement. As such, the changes are not considered a modification under ASC 718. During the year ended December 31, 2022, $16,778 of share-based compensation expense was recognized in connection with the vesting of the Former CFO's awards. Share options On April 14, 2022 and June 7, 2022, the Company granted 1,800,000 and 600,000 stock options to two new executive officers and two employees, subject to service conditions, respectively. The service conditions require the participant’s continued employment with the Company through the applicable vesting dates. On July 7, 2022, the Company granted 500,000 stock options to an employee with an exercise price of $2.42. The vesting of these options is subject to a service condition of continued employment with the Company through the applicable vesting dates and performance condition which requires the achievement of certain performance criteria as defined in the award agreement. The criteria is probable to achieve and therefore related expenses were recognized. During the year ended December 31, 2022, the Company recorded share-based compensation expense of $60,020 related to the option awards. The grant date fair value of the stock options was determined using the Black Scholes model with the following assumptions:
| Year Ended December 31, 2022
Exercise price | $2.42-$5.69
Expected terms (years) | 6.00
Volatility | 56.16%-57.84%
Risk-free interest rate | 2.79%-3.02%
Expected dividend yields | 0.00 | %
Weighted average fair value of options granted | $1.33-$3.19
The exercise prices for each award were extracted from the option agreements. The expected terms for each award were derived using the simplified method, and is estimated to occur at the midpoint of the vesting date and the expiration date. The volatility of the underlying common stock during the lives of the options was estimated based on the historical stock price volatility of comparable listed companies over a period comparable to the expected term of the options. Risk-free interest rate was estimated based on the market yield of US Government Bonds with maturity close to the expected term of the options. The dividend yield was estimated by the Company based on its expected dividend policy over the expected term of the options. During the year ended December 31, 2021, the modification date fair value of the stock options was determined using the Binomial-Lattice Model with the following assumptions:
| After modification
Exercise price | $4.37-$6.28
Expected terms (years) | 4.5-9.4
Volatility | 47.6%-53.1%
Risk-free interest rate | 1.26%-1.87%
Expected dividend yield | 0.00%
Weighted average fair value of options modified | $4.70-$5.36
Share options - Continued Exercise price was extracted from option agreements. Expected lives was derived from option agreements. The volatility of the underlying common shares during the lives of the options was estimated based on the historical stock price volatility of comparable listed companies over a period comparable to the expected term of the options and the implied volatility of the Company. Risk-free interest rate was estimated based on the market yield of US Government Bond with maturity close to the expected term of the options, plus country risk spread. The dividend yield was estimated by the Company based on its expected dividend policy over the expected term of the options. Share options activity for the years ended December 31, 2022 was as follows:
Share options life |  | Number of Shares |  | Weighted Average Exercise Price (US$) |  | Weighted Average Grant Date Fair Value (US$) |  | Weighted Average Remaining Contractual
Outstanding as of January 1, 2022 |  | 33,503,657 |  |  | 6.19 |  |  | 4.95 |  |  | 7.9
Granted |  | 2,900,000 |  |  | 4.81 |  |  | 2.69 |  |  |
Forfeited |  | (312,586) |  |  | 6.28 |  |  | 4.87 |  |  |
Outstanding as of December 31, 2022 |  | 36,091,071 |  |  | 6.08 |  |  | 4.80 |  |  | 6.8
Expected to vest and exercisable as of December 31, 2022 |  | 36,091,071 |  |  | 6.08 |  |  | 4.80 |  |  | 6.8
Exercisable as of December 31, 2022 |  | 11,875,830 |  |  | 6.20 |  |  | 5.00 |  |  | 7.0
The total unrecognized equity-based compensation costs as of December 31, 2022 related to the stock options was $88,845, which is expected to be recognized over a weighted-average period of 1.6 years. The aggregate intrinsic value of the share options as of December 31, 2022 was $ nil. Capped Non-vested share units The capped non-vested shares units ("CRSUs") represent rights for the holder to receive cash determined by the number of shares granted multiplied by the lower of the fair market value and the capped price, which will be settled in the form of cash payments. The CRSUs were accounted for as liability classified awards. On June 27, 2022, the Board of Directors and Compensation Committee approved a modification of the settlement terms of 20,023,699 CRSUs under the 2021 Plan from cash settlement to share settlement (the “CRSU Modification ”). Pursuant to the CRSU Modification, on each vesting date, if the stock price is higher than the capped price, the number of shares to be issued will be calculated based on the following formula: Number of shares to be issued = Capped price* Number of shares vested /Vesting date stock price If the stock price is equal to or less than the capped price, the Company will grant a fixed number of shares on each vesting date based on the vesting schedule. All other terms of the CRSUs remain unchanged. The CRSU Modification resulted in a change of the CRSUs’ classification from liability to equity, as the predominant feature of the modified CRSUs was the granting of a fixed number of shares on each vesting date instead of a fixed monetary amount. The determination of the predominant feature was based on the estimated probability of how the awards will be settled using the Monte Carlo model. At the CRSU Modification date, the Company reclassified the amounts previously recorded as a share-based compensation liability to additional paid-in capital. The modified CRSUs were accounted for as an equity award going forward from the date of the CRSU Modification with compensation expenses recognized for each tranche at the fair value measured on the modification date. Capped Non-vested share units - Continued At the CRSU Modification date, the Company used the Monte Carlo valuation model in determining the fair value of the CRSUs with assumptions as follows:
|  | Modification Date
Expected term (years) |  | 0.07 | ~ | 2.07
Volatility |  | 50.93 | % | ~ | 73.89%
Risk-free interest rate |  | 1.15 | % | ~ | 3.05%
Expected dividend yields |  | 0.00%
Expected term was the time left (in years) from the CRSU Modification date to the vesting date based on the terms of the applicable award agreements. The volatility of the underlying common stock was estimated based on the historical stock price volatility of comparable listed companies over a period comparable to the expected term of the awards. Risk-free interest rate was estimated based on the market yield of US Government Bonds with maturity close to the expected term of the awards. The dividend yield was estimated by the Company based on its expected dividend policy over the expected term of the awards. During the year ended December 31, 2022, the Company recorded share-based compensation expense of $32,804, related to these CRSUs awards. CRSUs' activity for the years ended December 31, 2022 was as follows:
| Number on Non-Vested Shares |  | Weighted Average Grant Date Fair Value per Share (US$)
Outstanding as of January 1, 2022 | 23,027,399 |  |  | 8.74 | 1
Vested | (9,582,930) |  |  | 4.37 |
Outstanding as of December 31, 2022 | 13,444,469 |  |  | 2.38
The total unrecognized equity-based compensation costs as of December 31, 2022 related to the CRSUs was $12,448. Restricted Stock Units Following the Merger, the Company granted 693,232 restricted stock units (“RSUs”) and 1,274,222 performance-based restricted stock unit (“PSU”) awards subject to service, performance and/or market conditions. The service condition requires the participant’s continued services or employment with the Company through the applicable vesting date, and the performance condition requires the achievement of the performance criteria defined in the award agreement. The market condition is based on the Company’s TSR. For RSU awards with performance conditions, stock-based compensation expense is only recognized if the performance conditions become probable to be satisfied. Restricted Stock Units - Continued The fair value of RSUs is determined by the price of Common Stock at the grant date and is amortized over the vesting period on a straight-line basis. The fair value of PSU awards that include vesting based on market conditions are estimated using the Monte Carlo valuation method. Compensation cost for PSU awards is recognized based on the grant date fair value which is recognized over the vesting period on a straight-line basis. Accordingly, the Company recorded stock-based compensation expense of $1,358 related to these RSU awards and $2,048 related to these PSU awards during the year ended December 31, 2022. The following assumptions were used for the respective periods below to calculate the fair value of common shares to be issued under TSR awards on the date of grant using the Monte Carlo pricing model:
| Year Ended December 31, 2021 | Year Ended December 31, 2022
Expected term (years) | 2.18-2.35 | 2.68
Volatility | 63.06%-64.31% | 59.50 | %
Risk-free interest rate | 0.31%-0.55% | 2.72 | %
Expected dividend yields | 0.00 | % | 0.00 | %
Expected term was derived based on the remaining time from the grant date through the end of the performance period. The volatility of the underlying common stock during the lives of the awards was estimated based on the historical stock price volatility of comparable listed companies over a period comparable to the expected term of the awards. Risk-free interest rate was estimated based on the market yield of US Government Bond with maturity close to the expected term of the awards. The dividend yield was estimated by the Company based on its expected dividend policy over the expected term of the awards. The restricted stock units activity for the years ended December 31, 2022 was as follows:
| Number of Non-Vested Shares |  | Weighted Average Grant Date Fair Value Per Share (US$)
Outstanding as of January 1, 2022 | 671,441 |  |  | 9.08 |
Grant | 1,239,854 |  |  | 4.93 |
Vested | (110,940) |  |  | 6.26 |
Forfeited | (577,518) |  |  | 5.30 |
Outstanding as of December 31, 2022 | 1,222,837 |  |  | 6.92 |
The total unrecognized equity-based compensation costs as of December 31, 2022 related to the non-vested restricted stock units was $5,113. Series B2 Preferred subscribed by employees On October 30, 2015, the Company issued 79,107 Series B2 Preferred to certain employees of the Company. The Series B2 Preferred were issued for cash consideration of $366.0 per share (“Series B2 Award”) and all the Series B2 Preferred were fully paid on the date of issuance. The Series B2 Award shall vest with respect to one-fourth of the total number immediately upon the occurrence of a qualified IPO or Initial Vesting Date, and on each of the first, second and third anniversaries of the Initial Vesting Date; provided that through each applicable vesting date, the holder of the Series B2 Award remains employed with the Company. If a holder of the Series B2 Award terminates employment before the vesting, the Company could repurchase the Series B2 Preferred for a per share price equal to the lower of the original Series B2 Preferred subscription price or 70% of the fair market value of such Series B2 Preferred. The Company’s repurchase right upon employment termination is viewed as forfeiture and the Company accounted for the Series B2 Award as a stock option. As of December 31, 2020, 53,319 Series B2 Preferred shares were legally issued and outstanding. Upon the Merger, these Series B2 Preferred were converted into 8,545,490 Common Stock, however, the Series B2 Award was not vested as the performance condition was not reached. In September 2021, the performance and service condition was exempted for the Series B2 holders and the awards were fully vested. The exemption of performance and service condition was considered a Type III modification under Topic 718, in which the original awards were canceled, and the modified awards were considered granted on the modification date. Post-modification stock-based compensation expense related to these new awards of $39,227 was recognized using modification date fair values determined based on the difference between the exercise price and the Common Stock price on the modification date. Accordingly, the deposit liability was reclassified to equity upon the vesting. The following summarizes the classification of share-based compensation:
| Year Ended December 31,
| 2020 |  | 2021 |  | 2022
Cost of revenues | $ | — |  |  | $ | 4,309 |  |  | $ | 7,712 |
General and administrative expenses | — |  |  | 59,492 |  |  | 67,261 |
Research and development expenses | — |  |  | 13,064 |  |  | 13,987 |
Selling and marketing expenses | — |  |  | 6,029 |  |  | 6,745 |
Construction in progress | — |  |  | 237 |  |  | 525 |
Total | $ | — |  |  | $ | 83,131 |  |  | $ | 96,230 |

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