Stock-Based Compensation

12 Months Ended

Dec. 31, 2019

Stock-Based Compensation

Stock-Based Compensation

9.    Stock-Based Compensation

Equity Plans

2015 Equity Incentive Plan

General.    The Company’s board of directors adopted its 2015 Equity Incentive Plan, or the 2015 Plan, in June 2015. The Company’s 2015 Plan replaced all of its prior stock plans.

Share Reserve.    The initial number of shares of the Company’s common stock available for issuance under the 2015 Plan was 3,451,495 shares. As of December 31, 2019, 14,062,396 shares were reserved for future issuance under the 2015 plan, which includes unissued and forfeited shares from the 2007 plan. The number of shares reserved for issuance under the 2015 Plan will be increased automatically on the first business day of each fiscal year, commencing in 2016, by a number equal to the smallest of:

● 3,500,000 shares;

● 4% of the shares of common stock outstanding on the last business day of the prior fiscal year; or

● the number of shares determined by the Company’s board of directors.

Stock options vest as determined by the compensation committee. In general, they will vest over a four-year period following the date of grant. Stock options expire at the time determined by the compensation committee but in no event more than ten years after they are granted. These awards generally expire earlier if the participant's service terminates earlier.

Restricted Shares and Stock Units.    Restricted shares and stock units may be awarded under the 2015 Plan in return for any lawful consideration, and participant who receive restricted shares or stock units generally are not required to pay cash for their awards. In general, these awards will be subject to vesting. Vesting may be based on length of service, the attainment of performance-based milestones or a combination of both, as determined by the compensation committee.

2015 Employee Stock Purchase Plan

General.    The Company’s 2015 Employee Stock Purchase Plan, or 2015 ESPP, was adopted by its board of directors in June 2015 and its stockholders approved it in June 2015. The 2015 ESPP is intended to qualify under Section 423 of the Internal Revenue Code.

Share Reserve.    The Company has reserved 893,548 shares of its common stock for issuance under the 2015 ESPP. As of December 31, 2019, 1,638,280 shares were available for issuance under the 2015 ESPP. The number of shares reserved for issuance under the 2015 ESPP will automatically be increased on the first business day of each of the Company’s fiscal years, commencing in 2016, by a number equal to the least of:

● 880,000 shares;

● 1% of the shares of common stock outstanding on the last business day of the prior fiscal year; or

● the number of shares determined by the Company’s board of directors.

The number of shares reserved under the 2015 ESPP will automatically be adjusted in the event of a stock split, stock dividend or a reverse stock split (including an adjustment to the per-purchase period share limit).

Purchase Price.    Employees may purchase each share of common stock under the 2015 ESPP at a price equal to 85% of the lower of the fair market values of the stock as of the beginning or the end of the six-month offering periods. An employee’s payroll deductions under the ESPP are limited to 15% of the compensation, and up to a maximum of 5,000 shares may be purchased during any offering period. A participant shall not be granted an option under the ESPP if such option would permit the participant’s rights to purchase stock to accrue at a rate exceeding $25,000 fair market value of stock for each calendar year in which such option is outstanding at any time.

Offering Periods.    Each offering period will last a number of months determined by the compensation committee, not to exceed 27 months. A new offering period will begin periodically, as determined by the compensation committee. Offering periods may overlap or may be consecutive. Unless otherwise determined by the compensation committee, two offering periods of six months' duration will begin in each year on May 1 and November 1.

The following table summarizes the offering activity during the years ended December 31, 2019 and 2018:

	Number of	Total
	Shares Purchased	Proceeds
Offering Period			(in thousands)
November 1, 2017 - April 30, 2018	206,447	$	1,855
May 1, 2018 - October 31, 2018	184,825	$	1,763
November 1, 2018 - April 30, 2019	132,177	$	2,147
May 1, 2019 - October 31, 2019	136,084	$	2,176

Stock Options

The following table summarizes option activity during the year ended December 31, 2019:

	Outstanding Options
					Weighted-
			Weighted-		Average
	Shares		Average		Remaining	Aggregate
	Available for	Number of	Exercise		Contractual	Intrinsic
(in thousands, except for contractual life and exercise price)	Grant	Shares	Price		Life	Value
					(In years)
Balance at December 31, 2018	5,431	9,463	$	7.69	6.91	$	61,718
Additional shares authorized	2,483	—	$	—
Options granted	(1,838)	1,838	$	18.01
Options exercised	—	(2,464)	$	5.29
Options forfeited	340	(340)	$	13.13
Balance at December 31, 2019	6,416	8,497	$	10.39	6.88	$	197,955
Exercisable at December 31, 2019		4,835	$	7.27	5.56	$	127,753
Vested and expected to vest at December 31, 2019		8,288	$	10.29	6.83	$	193,940

The total intrinsic value of stock options exercised during the years ended December 31, 2019, 2018 and 2017 was $70.0 million, $25.6 million and $3.7 million, respectively. The total fair value of stock options vested during the years ended December 31, 2019, 2018 and 2017 was $11.0 million, $11.3 million, and $12.1 million, respectively.

The weighted-average grant date fair value of options granted during the years ended December 31, 2019, 2018 and 2017 was $8.01, $4.85 and $5.71 per share, respectively.

Performance-based Awards

In June 2017, the Board approved a stock option grant of 425,000 shares to the Company’s executive chairman, of which 200,000 shares are performance-based options. The vesting of these performance-based options is contingent

upon the completion of requisite service for the next three years and the achievement of certain milestones within such time period. The milestones are (i) to successfully secure a specified strategic arrangement, at which point 50,000 shares will begin vesting over one year in equal quarterly installments, (ii) to successfully secure a specified licensing arrangement, at which point 75,000 shares will begin vesting over one year in equal quarterly installments, and (iii) to successfully secure specified licensing arrangements related to oncology, at which point 75,000 shares will begin vesting over one year in equal quarterly installments. Each milestone is independent of the other.

Milestones (i) and (ii) described above were achieved during the first quarter of 2019 and 2018, respectively. Milestone (iii) described above was achieved during the third quarter of 2019. During the year ended December 31, 2019 and 2018 total stock-based compensation expense recorded for the performance-based options was $0.6 million, $0.4 million, respectively. For the year ended December 31, 2017, the Company did not recognize any compensation expense associated with the performance-based options since none of the milestones were achieved or were probable of being achieved.

In December 2018, the Board approved a performance-based option grant of 600,000 shares to the Company’s executive chairman. The vesting of these performance-based options is contingent upon the achievement of a certain milestone, and provided that the completion of requisite service is through the date of such vesting, at which point the performance-based options will become fully vested and exercisable. The revenue milestone was concluded to be probable of being achieved in the third quarter of 2019, and the Company recognized $3.3 million of stock-based compensation expense in the year ended December 31, 2019.

In January 2019, the Board approved a stock option grant of 200,000 shares and 100,000 restricted stock units to the Company’s chief executive officer, which are performance-based awards with market conditions. Such awards will vest based on the achievement of certain values of the Company’s common stock at two separate thresholds within certain periods and are contingent upon the completion of requisite service through the date of such vesting. The Company utilized a Monte Carlo Simulation to determine the grant date fair value of such awards and the period when such award will become probable. The first milestone was achieved in the third quarter of 2019, resulting in 18,750 of restricted stock units and 37,500 stock options to vest. For the year ended December 31, 2019 the Company recorded approximately $0.6 million of stock-based compensation related to such awards.

Additionally, the Board approved 100,000 restricted stock units each to the Company’s chief financial officer and chief operating officer in March 2019. These two awards also have performance and market conditions, which are based on the same stock value performance target as that of the chief executive officer’s before such awards vest and are contingent upon the completion of requisite service through the date of such vesting. The Company utilized a Monte Carlo Simulation to determine the grant date fair value of such awards and the period when such award will become probable. The first milestone was achieved in the third quarter of 2019, resulting in 25,000 of restricted stock units to vest for each individual. For the year ended December 31, 2019, the Company recorded approximately $1.2 million of stock-based compensation related to such awards.

In May 2019, the Board approved a grant of 188,099 restricted stock units to several employees, which are performance-based awards. Such awards will vest based on the achievement of a certain product line revenues over a calendar year. The other performance target requires the achievement of a certain run rate for tests in another product line and are contingent upon the completion of requisite service through the date of such vesting. The revenue milestone was probable of being achieved in the third quarter of 2019. The Company recorded approximately $1.3 million of stock-based compensation related to such awards year ended December 31, 2019.

In September 2019, the Board approved a grant of 50,000 restricted stock units to the Chief Business Officer. Such awards will vest based on the achievement of certain values of the Company’s common stock at a specific threshold within certain periods and are contingent upon the completion of requisite service through the date of such vesting. The Company utilized a Monte Carlo Simulation to determine the grant date fair value of such awards and the period when such award will become probable. For the year ended December 31, 2019, the Company recorded approximately $0.3 million of stock-based compensation related to such awards.

The fair value of the performance-based awards with market conditions granted estimated using a Monte Carlo simulation model used the following inputs for the year ended December 31, 2019:

	December 31,
	2019
Risk-free interest rate		1.63% – 2.61%
Expected dividend yield		—
Expected volatility		50.00%
Expected term (years)		7.25

The risk-free interest rate input was based on U.S. Treasury note yields with remaining terms comparable to the expected term input used in the valuation model. The expected dividend yield was selected to be zero as the vesting condition is based on total shareholder return, which includes changes in price, plus reinvestment of dividends paid. The expected volatility was based on historical daily price changes for a period of time that corresponds with the expected term input used in the valuation model. The expected term input was based on the contractual remaining period of time until the award vests in accordance with the award agreement.

Restricted Stock Units

The following table summarizes restricted stock unit activity for the year ended December 31, 2019:

		Weighted-
		Average
	Number of	Grant Date
	Shares	Fair Value
Balance at December 31, 2018	1,084	$	11.72
Granted	2,019	$	20.97
Vested	(541)	$	12.56
Canceled/Forfeited	(158)	$	16.68
Balance at December 31, 2019	2,404	$	19.86

Stock-Based Compensation Expense

Employee and non-employee stock-based compensation expense was calculated based on awards ultimately expected to vest and have been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods, if actual forfeitures differ from those estimates.

The following table presents the effect of employee and non-employee stock-based compensation expense on selected statements of operations line items for the years ended December 31, 2019, 2018 and 2017.

	Year ended December 31,
	2019						2018						2017
	Employee		Non-Employee		Total		Employee		Non-Employee		Total		Employee		Non-Employee		Total
	(in thousands)
Cost of revenues	$	905	$	32	`	937	$	564	$	5	$	569	$	544	$	—	$	544
Research and development		5,354		—		5,354		4,043		—		4,043		3,214		—		3,214
Selling, general and administrative		21,730		603		22,333		9,474		112		9,586		7,644		—		7,644
Total	$	27,989	$	635	$	28,624	$	14,081	$	117	$	14,198	$	11,402	$	—	$	11,402

As of December 31, 2019, approximately $50.2 million of unrecognized compensation expense related to unvested option awards and RSUs, net of estimated forfeitures. The unrecognized compensation expense will be recognized over a weighted-average period of approximately 2.86 years.

Valuation of Stock Option Grants to Employees and Non-Employees

Upon the adoption of ASU 2018-07 on January 1, 2019, the fair value of stock options granted to both employees and non-employees is estimated on the grant date using the Black-Scholes option-pricing model except for the performance-based options with a market condition. Prior to January 1, 2019, the Company only estimated the fair value of the stock options granted to its employees on the grant date, while the fair value of its unvested non-employee stock options was remeasured at the end of each reporting period up until their vesting date. The fair value of the stock options is amortized on a straight‑line basis over the requisite service period of the awards, which is generally the vesting period.

The Company utilizes Black-Scholes option pricing model when estimating the fair value of stock options. For the year ended December 31, 2019 the following valuation assumptions were applied on both the employee and non-employee options. For the years ended December 31, 2018 and 2017, the valuation assumptions as follows were only used for stock options granted to employees.

	Year ended December 31,
	2019					2018					2017
Expected term (years)	5.23		—	10.00		5.24		—	5.62		5.14		—	5.24
Expected volatility	42.53	%	—	45.84	%	40.28	%	—	42.53	%	40.75	%	—	62.93	%
Expected dividend rate				0	%				0	%				0	%
Risk-free interest rate	1.60	%	—	2.60	%	2.37	%	—	3.06	%	1.67	%	—	2.16	%

For the years ended December 31, 2018 and 2017, the Company used a different set of Black-Scholes valuation assumptions when estimating the fair value of stock options granted to its non-employees. The fair value was remeasured at the end of each reporting period up until December 31, 2018. The following table summarizes the valuation assumptions used:

	Year ended December 31,
	2018					2017
Expected term (years)	2.72		—	2.76		2.67		—	2.71
Expected volatility	41.36	%	—	43.84	%	41.22	%	—	52.18	%
Expected dividend rate				0	%				0	%
Risk-free interest rate	2.36	%	—	2.86	%	1.42	%	—	1.95	%

Expected Term:    The expected term of options represents the period of time that options are expected to be outstanding. The Company determines its expected term by calculating the average of—(1) its employees’ historical stock options exercise behavior, and (2) the weighted-average of the time-to-vesting and the total contractual life of the options. For employee stock options that are not granted "at-the-money," the Company uses the binomial lattice model to calculate the expected term. Regarding non-employee stock options, the Company estimated the expected term by assessing their historical exercise behavior and length of service, and calculated the average of these two components.

Expected Volatility:    The Company derived the expected volatility from the average historical volatilities of comparable publicly traded companies within its peer group over a period approximately equal to the expected term.

Expected Dividend Rate:    The Company has not paid and does not anticipate paying any dividends in the near future.

Risk-Free Interest Rate:    The risk-free interest rate assumption is based on U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the expected term.