Stock-Based Compensation

2012 Stock Plan and 2018 Incentive Award Plan

In June 2012 and September 2018, the Board of Directors adopted and its stockholders approved the Company’s 2012 Stock Plan (as amended and restated, the “2012 Plan”) and the Company’s 2018 Incentive Award Plan (the “2018 Plan”), respectively, under which the Company may grant cash and equity incentive awards such as stock options, restricted shares, stock units and stock appreciation rights to its employees and nonemployees. Stock options granted may be either incentive stock options or nonstatutory stock options. Shares issued under the 2018 Plan may be authorized but unissued shares, or shares purchased in the open market or treasury shares. Upon effectiveness of the 2018 Plan in connection with the IPO in October 2018, the 2012 Plan was terminated and the 508,847 shares remaining available for future grant under the 2012 Plan were not made available for grant under the 2012 Plan or the 2018 Plan. Any outstanding awards granted under the 2012 Plan remained outstanding, subject to the terms of the 2012 Plan and applicable award agreement; and if any of those awards are forfeited or cancelled without payment therefor, the shares covered by those awards will not become available for future grant or issuance under the 2012 Plan or the 2018 Plan. No further grants will be made under the 2012 Plan. As of June 30, 2019, 3,658,602 shares were approved and reserved for issuance under the 2018 Plan.

Stock Option Activity

A summary of the Company’s stock option activity under the 2012 Plan and the 2018 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, 2018	3,556,507		7,588,405		$	4.58	8.3	$	250,495
Granted	(55,712	)	55,712		70.53
Exercised	—		(1,677,990	)	3.28
Canceled	886		(288,655	)	6.08
Restricted stock units granted	(173,733	)	—		—
Restricted stock units canceled	30,410		—		—
Balance as of June 30, 2019	3,358,358		5,677,472		$	5.54	8.1	$	458,782
Vested and Exercisable as of June 30, 2019			2,370,282		$	4.12	7.7	$	194,852

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 $108.3 million and $478,000 for the three months ended June 30, 2019 and 2018, respectively, and $116.4 million and $1.8 million for the six months ended June 30, 2019 and 2018, respectively.

Starting January 1, 2019, the Company adopted ASU 2018-07 which aligns the accounting treatment of nonemployee awards with employee awards, and the fair value of stock options issued to employees and nonemployee consultants are both determined as of the grant date. The weighted-average grant date fair value of options granted was $51.94 and $4.24 per share for the three months ended June 30, 2019 and 2018, respectively, and $43.35 and $4.06 per share for the six months ended June 30, 2019 and 2018, respectively.

Future stock-based compensation for unvested options as of June 30, 2019 and December 31, 2018 was $15.3 million and $17.5 million, respectively, which is expected to be recognized over a weighted-average period of 2.3 years and 2.7 years, respectively.

Restricted Stock Units

A summary of the Company’s restricted stock unit activity under the 2012 Plan and the 2018 Plan and related information is as follows:



	Restricted Stock Units Outstanding		Weighted-Average Grant Date Fair Value

Unvested balance as of December 31, 2018	—		$	—
Granted	173,733		55.25
Vested	(1,106	)	65.50
Canceled	(30,410	)	42.72
Unvested balance as of June 30, 2019	142,217		$	57.85

Future stock-based compensation for unvested restricted stock units as of June 30, 2019 was $7.4 million, which is expected to be recognized over a weighted-average period of 3.3 years.

Stock‑Based Compensation Expense

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018

	(unaudited)
	(in thousands)
Cost of precision oncology testing	$	126	$	79	$	296	$	142
Research and development expense	1,428		214		2,638		418
Sales and marketing expense	646		259		1,472		633
General and administrative expense	1,015		628		1,991		1,264
Total stock-based compensation expense	$	3,215	$	1,180	$	6,397	$	2,457

Valuation of Stock Options

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



	Three Months Ended June 30,		Six Months Ended June 30,
	2019	2018	2019	2018

	(unaudited)
Expected term (in years)	5.50 – 6.16	5.85 – 6.20	5.50 – 6.22	5.01 – 10.00
Expected volatility	66.9% – 68.3%	80.7% – 81.0%	66.7% – 68.3%	80.7% – 86.5%
Risk-free interest rate	1.9%	3.0%	1.9% – 2.7%	2.5% – 2.9%
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:

Expected Term

The expected term represents the period that the options granted are expected to be outstanding. After the adoption of ASU 2018-07 on January 1, 2019, the expected term of stock options issued to employees and nonemployee consultants 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. Prior to the adoption of ASU 2018-07, the expected term of stock options issued to employees was determined using the simplified method, and the expected term of stock options issued to nonemployee consultants was based on the contractual term of the award.

Expected Volatility

Prior to the commencement of trading of the Company’s common stock on the Nasdaq Global Select Market on October 4, 2018 in connection with the IPO, there was no active trading market for the Company's common stock.

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 has limited 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.

2018 Employee Stock Purchase Plan

In September 2018, the 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 were initially reserved for issuance under the ESPP. The number of shares may be increased in accordance with the terms of the ESPP.

Subject to any plan limitations, the ESPP allows eligible employees to contribute, normally through payroll deductions, up to 10% of their earnings for the purchase of the Company’s common stock at a discounted price per share. The price at which common stock is purchased under the ESPP is equal to 85% of the fair market value of the Company's common stock on the first or last day of the offering period, whichever is lower. Except for the initial offering period, the ESPP provides for separate six-month offering periods beginning on February 1 and August 1 of each year. The initial offering period ran from October 2, 2018 through January 31, 2019.

For the three and six months ended June 30, 2019, nil and 119,702 shares of common stock were purchased under the ESPP. The total compensation expense related to the ESPP for the three and six months ended June 30, 2019 was $440,000 and $1,006,000. As of June 30, 2019, the unrecognized stock-based compensation expense related to the ESPP was $151,000 which is expected to be recognized over the remaining term of the offering period of 0.1 years.

The fair value of the stock purchase right granted under the ESPP was estimated on the first day of each offering period using the Black-Scholes option pricing model. The valuation assumptions used were substantially consistent with the assumption used to value stock options with the exception of the expected term which was based on the term of each purchase period. For the six months ended June 30, 2019, the following assumptions were used to calculate the stock-based compensation for each stock purchase right granted under the ESPP: a weighted-average expected life of 0.5 years; expected volatility of 60.2%; a risk-free interest rate of 2.5%; and a zero dividend yield.

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 June 30, 2019 and December 31, 2018, 29,513 and 44,268 shares of common stock were subject to repurchase at weighted-average prices of $4.66 and $4.66 per share, respectively. As of June 30, 2019 and December 31, 2018, the cash proceeds received for unvested shares of common stock of $137,000 and $206,000, respectively, were recorded within other long-term liabilities on the condensed consolidated balance sheet. 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.