We have issued performance-based stock options and performance-based RSUs, the vesting of which is generally contingent upon the achievement of certain performance criteria related to our operating performance, as well as successful and timely development and market acceptance of future product introductions. In addition, certain of the performance RSUs have additional service requirements subsequent to the achievement of the performance criteria. Compensation expense is recognized over the requisite service period, which is defined as the longest explicit, implicit or derived service period based on management’s estimate of the probability of the performance criteria being satisfied, adjusted at each balance sheet date. For both service-based and performance-based RSUs, we account for forfeitures as they occur as a reduction to stock-based compensation expense and additional paid-in-capital.

For performance-based options with a vesting schedule based entirely on the attainment of both performance and market conditions, stock-based compensation expense is recognized for each pair of performance and market conditions over the longer of the expected achievement period of the performance and market conditions, beginning at the point in time that the relevant performance condition is considered probable of achievement. The fair value of such awards is estimated on the grant date using Monte Carlo simulations.

On May 24, 2018, our stockholders approved the Board of Directors’ grant of 6,365,856 stock option awards to Patrick W. Smith, our CEO (the “CEO Performance Award”). The CEO Performance Award consists of 12 vesting tranches with a vesting schedule based entirely on the attainment of both operational goals (performance conditions) and market capitalization goals (market conditions), assuming continued employment either as the CEO or as both Executive Chairman and Chief Product Officer and service through each attainment date. Each of the 12 vesting tranches of the CEO Performance Award have a 10-year contractual term and will vest upon certification by the Board of Directors that both (i) the market capitalization goal for such tranche, which begins at $2.5 billion for the first tranche and increases by increments of $1.0 billion thereafter, and (ii) any one of the following eight operational goals focused on revenue or eight operational goals focused on Adjusted EBITDA have been met for the previous four consecutive fiscal quarters. Adjusted EBITDA for purposes of the CEO Performance Award ("Adjusted EBITDA (CEO Performance Award)") is defined as net income (loss) attributable to common stockholders before interest expense, investment interest income, provision (benefit) for income taxes, depreciation and amortization, and stock-based compensation expense.

(1)	In connection with the business acquisition that was completed during the three months ended June 30, 2018, the revenue goals were adjusted for the acquiree’s Target Revenue, as defined in the CEO Performance Award agreement.

As of March 31, 2021, the following operational goals were achieved, with vesting of the related tranche pending certification by the Compensation Committee:

●

Adjusted EBITDA (CEO Performance Award) of $155.0 million

●

Total revenue of $710.1 million

As of March 31, 2021, the following operational goals were considered probable of achievement:

●

Total revenue of $860.1 million, $1,010.1 million, and $1,210.1 million; and

●

Adjusted EBITDA (CEO Performance Award) of $175.0 million, $190.0 million, $200.0 million, $210.0 million, $220.0 million, and $230.0 million.

The operational goal of $125.0 million Adjusted EBITDA (CEO Performance Award) was previously achieved and the related options vested in March 2021.

Stock-based compensation expense associated with the CEO Performance Award is recognized over the requisite service period, which is defined as the longest explicit, implicit or derived service period, based on management’s estimate of the probability and timing of the performance criteria being satisfied, adjusted at each balance sheet date. Expense recognition begins at the point in time when the relevant operational goal is considered probable of being met. The

probability of attaining an operational goal and the expected attainment date for meeting a probable operational goal are based on a subjective assessment of our forward-looking financial projections, taking into consideration statistical analysis. The statistical model and the assessment that determine the estimated attainment dates are subject to a number of estimated inputs, including expected volatility rates, management’s forward-looking financial projections, in particular for operational goals that are anticipated to be attained in the near future, and adjustment of other estimates based on the passage of time. During the period we recorded an additional $51.4 million in stock-based compensation expense as a result of updated estimates for the CEO Performance Award and eXponential Stock Performance Plan (discussed below).

The first seven market capitalization goals have been achieved as of March 31, 2021. As of March 31, 2021, 0.5 million stock options have vested. As all twelve operational goals are considered probable of achievement, we recorded stock-based compensation expense of $132.4 million related to the CEO Performance Award from the Grant Date through March 31, 2021. The number of stock options that would vest related to the remaining unvested tranches is approximately 5.8 million shares. As of March 31, 2021, we had $113.6 million of total unrecognized stock-based compensation expense for the performance goals that were considered probable of achievement, which will be recognized over a weighted-average period of 3.17 years.

eXponential Stock Performance Plan

On February 12, 2019, our shareholders approved the 2019 Stock Incentive Plan (the “2019 Plan”), which was adopted by the Board of Directors to reserve a sufficient number of shares to facilitate our eXponential Stock Performance Plan (“XSPP”) and grants of eXponential Stock Units (“XSUs”) under the plan. Initial awards under the plan were granted in January 2019, with additional employee awards granted since that date. During the three months ended March 31, 2021, and 2020 we granted an additional ten thousand and forty three thousand XSUs, respectively.

The XSUs are grants of RSUs, each with a term of approximately nine years, that vest in 12 equal tranches. Each of the 12 tranches will vest upon certification by the Compensation Committee of the Board of Directors that both (i) the market capitalization goal for such tranche, which begins at $2.5 billion for the first tranche and increases by increments of $1.0 billion thereafter, and (ii) any one of eight operational goals focused on revenue or eight operational goals focused on Adjusted EBITDA (CEO Performance Award) have been met for the previous four consecutive fiscal quarters.

The XSPP contains an anti-dilution provision incorporated into the plan based on shareholder feedback, which affects the calculation of the market capitalization goals in the plan. The plan defines a maximum number of shares outstanding that may be used in the calculation of the market capitalization goals (the “XSU Maximum”). If the actual number of shares outstanding exceeds the XSU Maximum guardrail, then the lower pre-defined number of shares in the XSU Maximum, rather than the higher actual number of shares outstanding, is used to calculate market capitalization for the determination of the market capitalization goals in the XSPP, which, together with the operational goals, determines whether XSUs vest for participating employees.

The XSU Maximum is defined as the actual number of shares outstanding on the original XSU grant date of January 2, 2019, increased by a 3% annual rate over the term of the XSPP and by shares issued upon the exercise of CEO Performance Award options. The XSU Maximum is also adjusted for acquisitions, spin-offs or other changes in the number of outstanding shares of common stock, if such changes have a corresponding adjustment on the market capitalization goals.

New shares issued for any other reasons, including shares issued upon vesting of XSUs, RSUs, and Performance Stock Units (“PSUs”) as well as shares issued to raise capital through equity issuances or in other transactions, do not increase the XSU Maximum.

The market capitalization and operational goals are identical to the CEO Performance Award, but a different number of shares is used to calculate the market capitalization goals if shares outstanding exceed the XSU Maximum. Additionally, because the grant date is different than that of the CEO Performance Award, the measurement period for

market capitalization is not identical. As of March 31, 2021, actual shares outstanding exceeded the XSU Maximum as a result of the common stock offering completed in June 2020. Accordingly, market capitalization as calculated for the purposes of achieving additional goals uses the lower XSU Maximum share amount rather than actual shares outstanding.

The first six market capitalization goals have been achieved as of March 31, 2021, and the seventh market capitalization goal was achieved in April 2021. The first XSU tranche vested in March 2021. As all twelve operational goals are considered probable of achievement, we recorded stock-based compensation expense of $94.8 million related to the XSU awards from their respective grant dates through March 31, 2021. The number of XSU awards that would vest related to the remaining eleven tranches is approximately 4.9 million shares. As of March 31, 2021, we had $96.7 million of total unrecognized stock-based compensation expense, which will be recognized over a weighted-average period of 3.00 years.

Restricted Stock Units

The following table summarizes RSU activity for the three months ended March 31, 2021 (number of units and aggregate intrinsic value in thousands):


	Number of	Weighted Average		Aggregate
	Units	Grant-Date Fair Value		Intrinsic Value
Units outstanding, beginning of year	1,107	$	76.10
Granted	57		152.58
Released	(184)		47.57
Forfeited	(25)		91.87
Units outstanding, end of period	955		85.76	$	136,019

Aggregate intrinsic value represents our closing stock price on the last trading day of the period, which was $142.42 per share, multiplied by the number of RSUs outstanding. As of March 31, 2021, there was $64.3 million in unrecognized compensation costs related to RSUs under our stock plans for shares that are expected to vest. We expect to recognize the cost related to the RSUs over a weighted average period of 2.22 years. RSUs are released when vesting requirements are met.

Certain RSUs that vested in the three months ended March 31, 2021 were net-share settled such that we withheld shares to cover the employees’ tax obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. Total shares withheld related to RSUs were less than 0.1 million and had a value of $6.9 million on their respective vesting dates as determined by the closing stock price on such dates. Payments for the employees’ tax obligations are reflected as a financing activity within the condensed consolidated statements of cash flows. We record a liability for the tax withholding to be paid by us as a reduction to additional paid-in capital.

Performance Stock Units

The following table summarizes PSU activity, inclusive of XSUs, for the three months ended March 31, 2021 (number of units and aggregate intrinsic value in thousands):


	Number of	Weighted Average		Aggregate
	Units	Grant-Date Fair Value		Intrinsic Value
Units outstanding, beginning of year	5,618	$	35.71
Granted	190		43.83
Released	(765)		37.61
Forfeited	(41)		34.70
Units outstanding, end of period	5,002		35.74	$	712,357

Aggregate intrinsic value represents our closing stock price on the last trading day of the period, which was $142.42 per share, multiplied by the number of PSUs outstanding. As of March 31, 2021, there was $100.7 million in unrecognized compensation costs related to PSUs under our stock plans for shares that are expected to vest. We expect to recognize the cost related to the PSUs over a weighted average period of 2.98 years. PSUs are released when vesting requirements are met.

As of March 31, 2021, the performance criteria had been met for approximately 0.9 million of the 5.0 million PSUs outstanding.

On March 8, 2021, the Compensation Committee of our Board of Directors approved a one-time waiver of the holding period requirements for each XSPP participant who elected to receive XSUs in lieu of On-Target Earnings and is an Arizona resident. This waiver allows participants to sell a portion of their vested shares to satisfy income tax obligations pursuant to Arizona Proposition 208 which was passed in November 2020. Such one-time waiver applied only to 4% of the XSUs for the impacted participants which vested on March 8, 2021, which was approximately 13 thousand shares. We accounted for this change as a Type I modification under ASC 718 since there was no impact on attainment of the operational or market capitalization goals. We recognized additional stock-based compensation expense of $0.4 million for the three months ended March 31, 2021.

Certain PSUs that vested in the three months ended March 31, 2021 were net-share settled such that we withheld shares to cover the employees’ tax obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. Total shares withheld related to PSUs were approximately two thousand and had a value of $0.1 million on their respective vesting dates as determined by the closing stock price on such dates. Payments for the employees’ tax obligations are reflected as a financing activity within the condensed consolidated statements of cash flows. We record a liability for the tax withholding to be paid by us as a reduction to additional paid-in capital.

Stock Option Activity

The following table summarizes stock option activity for the three months ended March 31, 2021 (number of units and aggregate intrinsic value in thousands):


				Weighted
		Weighted		Average
	Number	Average		Remaining
	of	Exercise		Contractual	Aggregate
	Options	Price		Life (years)	Intrinsic Value
Options outstanding, beginning of year	6,366	$	28.58
Granted	—		—
Exercised	—		—
Expired / terminated	—		—
Options outstanding, end of period	6,366		28.58	6.91	$	724,689
Options exercisable, end of period	1,591		28.58	6.91		181,172

Aggregate intrinsic value represents the difference between the exercise price of the underlying stock option awards and the closing market price of our common stock of $142.42 on March 31, 2021. There were no options exercised for the three months ended March 31, 2021. The intrinsic value of options exercised for the three months ended March 31, 2020 was $0.3 million. As of March 31, 2021, total options outstanding included 4.8 million unvested performance-based stock options, which relate to the CEO Performance Award and are probable of achievement.

Stock-based Compensation Expense

The following table summarizes the composition of stock-based compensation expense for the three months ended March 31, 2021 and 2020 (in thousands):


	Three Months Ended March 31,
	2021		2020
Cost of products sold and services delivered	$	1,489	$	590
Sales, general and administrative expenses		71,015		14,970
Research and development expenses		17,106		4,635
Total stock-based compensation expense	$	89,610	$	20,195

Stock Incentive Plan

In February 2019, our shareholders approved the 2019 Plan authorizing an additional 6.0 million shares, plus remaining available shares under prior plans, for issuance under the new plan. Combined with the legacy stock incentive plans, there are 1.9 million shares available for grant as of March 31, 2021.

Stock Repurchase Plan

In February 2016, our Board of Directors authorized a stock repurchase program to acquire up to $50.0 million of our outstanding common stock subject to stock market conditions and corporate considerations. During the three months ended March 31, 2021 and 2020, no common shares were purchased under the program. As of March 31, 2021, $16.3 million remains available under the plan for future purchases. Any future purchases will be discretionary.