Stock-Based Compensation

12 Months Ended

Dec. 31, 2019

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Stock-Based Compensation

Stock-Based Compensation

2012 Stock Plan and 2018 Incentive Award Plan

In June 2012 and September 2018, the Company’s 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 non-employees. 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 508,847 shares reserved under the 2012 Plan were forfeited. Any outstanding awards granted under the 2012 Plan remain outstanding, subject to the terms of the 2012 Plan and applicable award agreement, and further cancellation of awards granted under the 2012 Plan are not available for grant in the future. No further grants will be made under the 2012 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, 2017	1,698,790		7,391,052		$	3.63	8.6	$	3,325
Shares authorized	3,658,602		—
Shares forfeited	(508,847	)	—
Granted	(2,088,639	)	2,088,639		7.19
Exercised	—		(1,007,387	)	3.09
Canceled	795,371		(883,899	)	4.57
Repurchase of early exercised shares	1,230		—
Balance as of December 31, 2018	3,556,507		7,588,405		$	4.58	8.3	250,495
Shares authorized	—		—
Shares forfeited	—		—
Granted	(324,579	)	324,579		88.18
Exercised	—		(2,999,419	)	3.87
Canceled	12,636		(418,676	)	6.64
Repurchase of early exercised shares	—		—
Balance as of December 31, 2019	3,244,564		4,494,889		$	10.90	7.7	$	306,392
Vested and Exercisable as of December 31, 2019			1,908,216		$	5.27	7.2	$	139,337

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 $218.2 million, $8.4 million and $0.6 million for the years ended December 31, 2019, 2018 and 2017, respectively.

The weighted-average grant date fair value of options granted was $52.37, $5.17 and $2.90 per share for the years ended December 31, 2019, 2018 and 2017, respectively.

Future stock-based compensation for unvested options as of December 31, 2019 was $26.0 million, which is expected to be recognized over a weighted-average period of 2.7 years.

In December 2019, the Company modified one of the performance based awards issued to a nonemployee which resulted in reversal of expense of $1.0 million due to options not vested.

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
Balance as of December 31, 2018	—		$	—
Granted	567,425		78.61
Vested	(22,208	)	47.78
Canceled	(49,086	)	57.51
Balance as of December 31, 2019	496,131		$	82.08

Future stock-based compensation for unvested restricted stock units as of December 31, 2019 was $36.5 million, which is expected to be recognized over a weighted-average period of 3.5 years.

Stock‑Based Compensation Expense

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

	Year Ended December 31,
	2019		2018		2017
	(in thousands)
Cost of precision oncology testing	$	863	$	512	$	162
Research and development expense	5,907		1,684		507
Sales and marketing expense	4,716		1,727		80
General and administrative expense	5,468		2,928		2,921
Total stock-based compensation expense	$	16,954	$	6,851	$	3,670

Valuation of Stock Options

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

	Year Ended December 31,
	2019	2018	2017
Expected term (in years)	5.50 – 6.22	5.01 – 6.51	6.02 – 6.08
Expected volatility	63.2% – 68.7%	68.7% – 78.8%	74.1% – 75.1%
Risk-free interest rate	1.6% – 2.7%	2.5% – 3.0%	1.9% – 2.2%
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

Prior to the IPO, the grant date fair value of the Company’s common stock was 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. Subsequent to the IPO, the fair value of the Company’s common stock is determined by the closing price, on the date of grant, of its common stock, which is traded on the Nasdaq Global Select Market.

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

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. Due to limited historical data for the trading of the Company’s common stock, expected volatility is estimated based on the average volatility for comparable publicly traded peer group companies in the same industry plus the Company's expected volatility for the available periods. The comparable companies are chosen based on their similar size, stage in the life cycle or area of specialty.

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 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.

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. The initial offering period ran from October 2, 2018 to January 31, 2019, the second offering period ran from February 1, 2019 to July 31, 2019, and the third offering period began on August 1, 2019 and ran to November 14, 2019. On a going forward basis, the ESPP will provide for separate six-month offering periods beginning on May 15 and November 15 of each year.

During the year ended December 31, 2019, 232,333 shares were purchased under the ESPP. No shares were purchased under the ESPP during the year ended December 31, 2018. The total compensation expense related to the ESPP for year ended December 31, 2019 and December 31, 2018 was $2.3 million and $0.3 million, respectively.

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 following assumptions were used to calculate the stock-based compensation for each stock purchase right granted under the ESPP:

	Year Ended December 31,
	2019	2018
Expected term (in years)	0.29 – 0.5	0.33
Expected volatility	58.8% – 60.3%	43.6%
Risk-free interest rate	1.6% – 2.5%	2.4%
Expected dividend yield	—%	—%

Future stock-based compensation under the ESPP as of December 31, 2019 was $0.8 million, which is expected to be recognized over a weighted-average period of 0.4 years.

Liabilities for Early Exercise of Employee Options

The Company allowed certain stock option holders to exercise unvested options to purchase shares of the Company’s 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 December 31, 2019 and 2018, 23,981 shares and 44,268 shares of common stock were subject to repurchase at weighted-average price of $4.66 per share. As of December 31, 2019 and December 31, 2018, the cash proceeds received for unvested shares of common stock of $0.1 million and $0.2 million was recorded within other long-term liabilities on the consolidated balance sheet, respectively. The shares issued pursuant to unvested options have been included in shares issued and outstanding on the consolidated balance sheet and consolidated statement of redeemable noncontrolling interest and stockholders’ equity as such shares are considered legally outstanding.