Effective October 30, 2020, the authorized number of shares of the Company’s common stock was increased from 150,000,000 to 300,000,000 shares.

The Company had no warrants outstanding as of March 31, 2021 or December 31, 2020.

The Company’s 2015 Incentive Award Plan, 2017 Employment Inducement Incentive Award Plan and Livongo Acquisition Incentive Award Plan (collectively, the “Plans”) provide for the issuance of incentive and non-statutory options and other equity-based awards to its employees and non-employee service providers.

In connection with the closing of the Livongo merger, the Company assumed the Livongo Health, Inc. 2019 Equity Incentive Plan, the Livongo Health, Inc. Amended and Restated 2014 Stock Incentive Plan and the Livongo Health, Inc. Amended and Restated 2008 Stock Incentive Plan (collectively, the “Assumed Plans”). At the effective time of the Livongo merger on October 30, 2020, each outstanding Livongo equity award issued under the Assumed Plans was converted into a corresponding award with respect to the Company’s common stock, with the number of shares underlying such award adjusted based on the “Equity Award Adjustment Ratio” (as defined below), and remained outstanding in accordance with the terms that were applicable to such award prior to the Livongo merger. The exercise price of each outstanding Livongo stock option was also adjusted based on the Equity Award Adjustment Ratio. The “Equity Award Adjustment Ratio” means the quotient determined by dividing (i) the volume weighted average closing price of Livongo common stock on the four trading days ending on October 29, 2020, by (ii) the volume weighted average closing price of the Company’s common stock on the New York Stock Exchange on the four trading days beginning on October 29, 2020.

All stock-based awards to employees are measured based on the grant-date fair value or replacement grant date fair value in relation to the Livongo transaction, and are generally recognized on a straight line basis in the Company’s consolidated statement of operations over the period during which the employee is required to perform services in exchange for the award (generally requiring a four-year vesting period for each stock option and a three-year vesting period for each restricted stock unit (“RSU”)).

Options issued under the Plans are exercisable for periods not to exceed ten years, and vest and contain such other terms and conditions as specified in the applicable award document. Options to buy common stock are issued under the Plans, with exercise prices equal to the closing price of shares of the Company’s common stock on the New York Stock Exchange on the date of award. The Company had 12,229,932 shares available for grant at March 31, 2021.

Activity under the Plans is as follows (in thousands, except share and per share amounts and years):

The total grant-date fair value of stock options granted during the quarters ended March 31, 2021 and 2020 were $0.4 million and $0.3 million, respectively.

The Company estimates the fair value of stock options granted using the Black Scholes option pricing model.

The assumptions used in the Black-Scholes option-pricing model are determined as follows:

Volatility. The expected volatility was derived from the historical stock volatilities of the Company’s stock volatility over a period equivalent to the expected term of the stock option grants.

Expected Term. The expected term represents the period that the stock-based awards are expected to be outstanding. When establishing the expected term assumption, the Company utilizes historical data.

Risk-Free Interest Rate. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with terms similar to the expected term on the options.

Dividend Yield. The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and therefore, it used an expected dividend yield of zero.

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions and fair value per share:

The Company determined that a Monte Carlo valuation model is most suitable for valuation of options for the replaced and replacement awards from the Livongo merger, for the following reasons:

For the quarters ended March 31, 2021 and 2020, the Company recorded compensation expense related to stock options of $28.2 million and $3.9 million, respectively.

As of March 31, 2021, the Company had $97.2 million in unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a weighted-average period of approximately 1.1 years.

Restricted Stock Units

In May 2017, the Company commenced issuing RSUs, pursuant to the 2015 Incentive Award Plan and to certain employees and members of the Board of Directors under the 2017 Employment Inducement Incentive Award Plan.

The fair value of the RSUs is determined on the date of grant. The Company records compensation expense in the consolidated statement of operations on a straight-line basis over the vesting period for RSUs and on an accelerated tranche by tranche basis for performance-based awards. The vesting period for employees and members of the Board of Directors ranges from one to four years.

Activity under the RSUs is as follows:


		Weighted-Average
		Grant Date
	RSUs	Fair Value Per RSU
Balance at December 31, 2020	3,550,595	$	162.11
Granted	402,210	$	218.88
Vested and issued	(708,798)	$	102.94
Forfeited	(115,243)	$	184.40
Balance at March 31, 2021	3,128,764	$	181.99
Vested and unissued at March 31, 2021	13,755	$	50.90
Non-vested at March 31, 2021	3,115,009	$	182.57

The total grant-date fair value of RSUs granted during the quarters ended March 31, 2021 and 2020 were $88.0 million and $39.5 million, respectively.

For the quarters ended March 31, 2021 and 2020, the Company recorded stock-based compensation expense related to the RSUs of $50.9 million and $9.4 million, respectively.

As of March 31, 2021, the Company had $473.2 million in unrecognized compensation cost related to non-vested RSUs, which is expected to be recognized over a weighted-average period of approximately 2.6 years.

Performance Stock Units

The Company began issuing grants Performance Stock Units (“PSUs”) to employees under the 2015 Incentive Award Plan in 2018. Stock-based compensation costs associated with our PSUs are initially determined using the fair market value of the Company's common stock on the date the awards are approved by the Compensation Committee of the Board of Directors (service inception date). The vesting of these PSUs is subject to certain performance conditions and a service requirement ranging from 1-3 years. Until the performance conditions are met, stock compensation costs associated with these PSUs are re-measured each reporting period based upon the estimated performance attainment on the reporting date. The ultimate number of PSUs that are issued to an employee is the result of the actual performance of the Company at the end of the performance period compared to the performance conditions and can range from 50% to 225% of the initial grant. Stock compensation expense for PSUs is recognized on an accelerated tranche by tranche basis for performance-based awards. Forfeitures are accounted for at the time the occur consistent with Company policy.

Activity under the PSUs is as follows:


		Weighted-Average
		Grant Date
	Shares	Fair Value Per PSU
Balance at December 31, 2020	429,319	$	76.60
Granted	516,031	$	131.67
Vested and issued	(268,201)	$	74.33
Balance at March 31, 2021	677,149	$	119.47
Vested and unissued at March 31, 2021	0	$	0
Non-vested at March 31, 2021	677,149	$	119.47

The total grant-date fair value of PSUs granted during the quarters ended March 31, 2021 and 2020 were $67.9 million and $13.1 million, respectively.

For the quarters ended March 31, 2021 and 2020, the Company recorded stock-based compensation expense related to the PSUs of $7.2 million and $4.6 million, respectively.

As of March 31, 2021, the Company had $40.1 million in unrecognized compensation cost related to non-vested PSUs, which is expected to be recognized over a weighted-average period of approximately 2.5 years.

Employee Stock Purchase Plan

In July 2015, the Company adopted the 2015 Employee Stock Purchase Plan (“ESPP”) in connection with its initial public offering. A total of 926,109 shares of common stock were reserved for issuance under this plan as of March 31, 2021. The Company’s ESPP permits eligible employees to purchase common stock at a discount through payroll deductions during defined offering periods. Under the ESPP, the Company may specify offerings with durations of not

more than 27 months and may specify shorter purchase periods within each offering. Each offering will have one or more purchase dates on which shares of its common stock will be purchased for employees participating in the offering. An offering may be terminated under certain circumstances. The price at which the stock is purchased is equal to the lower of 85% of the fair market value of the common stock at the beginning of an offering period or on the date of purchase.

During the quarter ended March 31, 2021, the Company had not issued any shares under the ESPP. During 2020, the Company issued 49,781 shares, under the ESPP. As of March 31, 2021, 599,103 shares remained available for issuance.

For the quarters ended March 31, 2021 and 2020, the Company recorded stock-based compensation expense related to the ESPP of $2.2 million and $0.4 million, respectively.

As of March 31, 2021, the Company had $1.0 million in unrecognized compensation cost related to the ESPP, which is expected to be recognized over a weighted-average period of approximately 0.1 year.

Total compensation costs for stock-based awards were recorded as follows (in thousands):


	Quarter Ended
	March 31,
	2021		2020
Cost of revenue (exclusive of depreciation and amortization, which is shown separately)	$	2,362	$	0
Advertising and marketing		5,082		1,259
Sales		21,167		2,919
Technology and development		26,726		2,104
General and administrative		30,963		12,033
Total stock-based compensation expense (1)	$	86,300	$	18,315

(1)	Excluding the amount capitalized related to internal software development projects.