Stock-Based Compensation

Approval of the 2018 Incentive Award Plan

In September 2018, the Company’s Board of Directors adopted and its stockholders approved the 2018 Incentive Award Plan (the “2018 Plan”), under which the Company may grant cash and equity incentive awards to employees and non-employees. The 2018 Plan becomes effective immediately prior to the completion of the IPO. An aggregate of 3,658,602 shares of common stock are initially available for issuance under awards granted pursuant to the 2018 Plan. The number of shares may be increased in accordance with the terms of the 2018 Plan. Shares issued under the 2018 Plan may be authorized but unissued shares, or shares purchased in the open market or treasury shares. As of September 30, 2018, no shares were issued under the 2018 Plan.

Approval of the 2018 Employee Stock Purchase Plan

In September 2018, the Company’s Board of Directors adopted and its stockholders approved the 2018 Employee Stock Purchase Plan (the “ESPP”). A total of 922,250 shares of common stock are initially reserved for issuance under the ESPP. The number of shares may be increased in accordance with the terms of the ESPP.

Stock Option Activity

A summary of the Company’s stock option activity under the 2012 Plan and related information is as follows:



			Options Outstanding
	Shares Available for Grant		Shares Subject to Options Outstanding		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value

								(in thousands)
Balance as of December 31, 2017	1,698,790		7,391,052		$	3.63	8.8	$	7,595
Granted	(1,966,069	)	1,966,069		6.45
Exercised	—		(864,418	)	2.98
Canceled	775,633		(775,633	)	4.10
Repurchase of early exercised shares	1,230		—
Balance as of September 30, 2018	509,584		7,717,070		$	4.38	8.5	$	91,809
Vested and Exercisable as of September 30, 2018			2,797,623		$	3.38	7.7	$	36,085

Aggregate intrinsic value represents the difference between the estimated fair value of the underlying common stock and the exercise price of outstanding, in-the-money options. The total intrinsic value of the options exercised was $2.2 million and $346,000 for the three months ended September 30, 2018 and 2017, and $3.9 million and $594,000 for the nine months ended September 30, 2018 and 2017, respectively.

The weighted-average grant date fair value of options granted was $5.45 and $2.90 per share for the three months ended September 30, 2018 and 2017, and $4.65 and $2.87 per share for the nine months ended September 30, 2018 and 2017, respectively.

Future stock-based compensation for unvested options granted to employees as of September 30, 2018 and December 31, 2017 was $16.1 million and $15.0 million, which is expected to be recognized over a weighted-average period of 2.9 years and 2.9 years, respectively.

Stock‑Based Compensation Expense

The following table presents the effect of employee and non‑employee option-related stock‑based compensation expense:



	Three Months Ended September 30,					Nine Months Ended September 30,
	2018		2017			2018		2017

	(in thousands)
Cost of precision oncology testing	$	112	$	(25	)	$	254	$	104
Research and development expense	617		17			1,035		307
Sales and marketing expense	428		(526		)	1,061		14
General and administrative expense	674		1,342			1,938		1,673
Total stock-based compensation expense	$	1,831	$	808		$	4,288	$	2,098

Valuation of Stock Options

The grant date fair value of employee stock options was estimated using a Black-Scholes option-pricing model with the following weighted-average assumptions:



	Three Months Ended September 30,		Nine Months Ended September 30,
	2018	2017	2018	2017

Expected term (in years)	5.87 – 6.09	6.02 – 6.08	5.01 – 6.51	6.02 – 6.08
Expected volatility	69.7% – 70.2%	74.3% – 75.1%	68.7% – 72.5%	74.3% – 75.1%
Risk-free interest rate	2.7% – 2.9%	2.0% – 2.0%	2.5% – 2.9%	1.9% – 2.0%
Expected dividend yield	—%	—%	—%	—%

The determination of the fair value of stock options on the date of grant using a Black-Scholes option-pricing model is affected by the estimated fair value of the Company’s common stock, as well as assumptions regarding a number of variables that are complex, subjective and generally require significant judgment to determine. The valuation assumptions were determined as follows:

Fair Value of Common Stock

The grant date fair value of the Company’s common stock has been determined by the Company’s Board of Directors with the assistance of management and an independent third-party valuation specialist. The grant date fair value of the Company’s common stock was determined using valuation methodologies which utilizes certain assumptions including probability weighting of events, volatility, time to liquidation, a risk-free interest rate and an assumption for a discount for lack of marketability (Level 3 inputs). In determining the fair value of the Company’s common stock, the methodologies used to estimate the enterprise value of the Company were performed using methodologies, approaches, and assumptions consistent with the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.

Expected Term

The expected term represents the period that the options granted are expected to be outstanding and is determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term) as the Company has concluded that its stock option exercise history does not provide a reasonable basis upon which to estimate expected term.

Expected Volatility

The Company derived the expected volatility from the average historical volatilities over a period approximately equal to the expected term of comparable publicly traded companies within its peer group that were deemed to be representative of future stock price trends as the Company does not have any trading history for its common stock. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available.

Risk-Free Interest Rate

The risk-free interest rate is based on the U.S. Treasury rate, with maturities similar to the expected term of the stock options.

Expected Dividend Yield

The Company does not anticipate paying any dividends in the foreseeable future and, therefore, uses an expected dividend yield of zero.

Valuation of Stock Option Grants to Non-Employees

Total options outstanding as of September 30, 2018 and December 31, 2017 included 495,867 and 651,801 shares of options, respectively, that were granted to non-employees, of which 16,830 and 18,446 shares were granted during the nine months ended September 30, 2018 and 2017, respectively. Stock-based compensation expense related to stock options granted to non-employees is recognized as the stock option is earned and the services are rendered. The fair value of stock options granted to non-employees was estimated on the date of grant using the Black-Scholes option pricing model. The valuation assumptions used were substantially consistent with the assumption used to value the employee options with the exception of the expected term which was based on the contractual term of the award. The fair value of the stock options granted to non-employees is calculated at each reporting date using the Black-Scholes options-pricing model with the following assumptions:



	Three Months Ended September 30,		Nine Months Ended September 30,
	2018	2017	2018	2017

Expected term (in years)	5.4 – 9.5	6.0 – 10.0	5.4 – 10.0	6.0 – 10.0
Expected volatility	64.9% – 71.5%	72.3% – 72.8%	64.9% – 71.5%	66.3% – 73.4%
Risk-free interest rate	2.8% – 3.1%	1.8% – 2.0%	2.3% – 3.1%	1.8% – 2.1%
Expected dividend yield	—%	—%	—%	—%

Stock-based compensation related to grant of options to non-employees was $434,000 and $69,000 for the three months ended September 30, 2018 and 2017, and $658,000 and $225,000 for the nine months ended September 30, 2018 and 2017, respectively.

Liabilities for Early Exercise of Employee Options

The Company allowed certain stock option holders to exercise unvested options to purchase shares of common stock. Shares received from such early exercises are subject to repurchase in the event of the optionee’s employment termination, at the original issuance price, until the options are fully vested. As of September 30, 2018 and December 31, 2017, 44,268 and 18,600 shares of common stock were subject to repurchase at weighted-average prices of $4.66 and $2.82 per share, respectively. As of September 30, 2018, the cash proceeds received for unvested shares of common stock of $206,000 was recorded within long-term liabilities on the condensed consolidated balance sheet. As of December 31, 2017, the cash proceeds received for unvested shares of common stock recorded within other current and long-term liabilities on the condensed consolidated balance sheet were insignificant. The shares issued pursuant to unvested options have been included in shares issued and outstanding on the condensed consolidated balance sheet and condensed consolidated statement of redeemable noncontrolling interest and stockholders’ equity as such shares are considered legally outstanding.