Stock-Based Compensation

3 Months Ended

Mar. 31, 2020

Share-based Payment Arrangement [Abstract]

Stock Option Activity

A summary of the Company’s stock option activity under the 2012 Stock Plan (as amended and restated, the “2012 Plan”) and the 2018 Incentive Award Plan (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, 2019	2,726,225		4,494,889		$	10.90	7.7	$	306,392
2018 plan annual increase⁽¹⁾	3,689,000		—
Granted	(6,902	)	6,902		84.61
Exercised	—		(242,003	)	6.21
Canceled	12,406		(31,798	)	10.90
Restricted stock units granted	(14,548	)	—		—
Restricted stock units canceled	16,164		—		—
Balance as of March 31, 2020	6,422,345		4,227,990		$	11.29	7.5	$	253,161
Vested and Exercisable as of March 31, 2020			2,034,629		$	5.77	7.1	$	130,646


(1)	Effective as of January 1, 2020, an additional 3,689,000 shares of common stock became available for issuance under the 2018 Plan, as a result of the operation of an automatic annual increase provision therein.

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 $17.2 million and $8.1 million for the three months ended March 31, 2020 and 2019, respectively.

The weighted-average grant date fair value of options granted was $55.05 and $25.90 per share for the three months ended March 31, 2020 and 2019, respectively.

Future stock-based compensation for unvested options as of March 31, 2020 was $23.0 million, which is expected to be recognized over a weighted-average period of 2.6 years.

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, 2019	496,131		$	82.08
Granted	14,548		85.30
Vested	(5,594	)	67.81
Canceled	(16,164	)	71.97
Balance as of March 31, 2020	488,921		$	82.67

Future stock-based compensation for unvested restricted stock units as of March 31, 2020 was $33.8 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 March 31,
	2020		2019

	(unaudited)
	(in thousands)
Cost of precision oncology testing	$	303	$	170
Research and development expense	2,364		1,210
Sales and marketing expense	1,798		826
General and administrative expense	1,873		976
Total stock-based compensation expense	$	6,338	$	3,182

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 March 31,
	2020	2019

	(unaudited)
Expected term (in years)	6.06	6.22
Expected volatility	73.3%	66.7%
Risk-free interest rate	1.6%	2.7%
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 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 were initially reserved for issuance under the ESPP. Effective as of January 1, 2020, an additional 942,614 shares of common stock became available for issuance under the ESPP, as a result of the operation of an automatic annual increase provision therein.

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. For subsequent years starting with 2020, the ESPP provides for separate six-month offering periods beginning on May 15 and November 15 of each year.

No shares were purchased under the ESPP for the three months ended March 31, 2020. For the three months ended March 31, 2019, 119,702 shares of common stock were purchased under the ESPP. The total compensation expense related to the ESPP for the three months ended March 31, 2020 and 2019 was $0.5 million and $0.6 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 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. No ESPP shares were granted for the three months ended March 31, 2020. For the three months ended March 31, 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.

As of March 31, 2020, the unrecognized stock-based compensation expense related to the ESPP was $0.3 million, which is expected to be recognized over the remaining term of the offering period of 0.1 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 March 31, 2020 and December 31, 2019, 21,212 shares and 23,981 shares of common stock were subject to repurchase at weighted-average price of $4.66 per share. As of March 31, 2020 and December 31, 2019, the cash proceeds received for unvested shares of common stock of $0.1 million and $0.1 million, respectively, was recorded within other long-term liabilities on the condensed consolidated balance sheet, respectively. 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.