Stock-Based Compensation

6 Months Ended

Jun. 30, 2020

Stock-Based Compensation

Stock-Based Compensation

9. Stock-Based Compensation

2015 Equity Incentive Plan

In June 2015, the Board adopted, and the Company’s stockholders approved, the Company’s 2015 Equity Incentive Plan (the “2015 Plan”), which, by its terms, took effect as of the Company’s IPO on July 2, 2015. The 2015 Plan replaced the Company’s 2007 Stock Plan (the “2007 Plan”). No further awards have been granted under the 2007 Plan after July 1, 2015.  However, any remaining awards that were outstanding under the 2007 Plan will continue to be governed by the terms of that plan. The Company initially reserved 3,451,495 shares of its common stock for issuance under the 2015 Plan; in addition, the Company authorized the reservation of up to 9,890,310 shares of common stock to cover shares reserved but unissued under the 2007 Plan and shares subject to outstanding awards under the 2007 Plan that expire or lapse unexercised or shares issued under the 2007 Plan that are subsequently reacquired by the Company.

Performance-based Awards

The Company grants certain senior-level executives performance stock options and units which vest based on either market and time-based service conditions or performance and time-based service conditions, which are referred to herein as performance-based awards. The Company has assessed the performance-based award with the appropriate valuation method and has recognized the applicable stock-based compensation expense. The following table summarizes the performance-based and market-based awards as of June 30, 2020:

Period Granted	Options Granted	RSUs Granted	Options Vested	RSUs Vested	Milestone	Valuation Method
(in thousands)
Q1 2019	200	300	119	184	(1)	Monte-Carlo Simulation
Q2 2019	—	188	—	—	(2)	Fair Market Value
Q3 2019	—	50	—	25	(1)	Monte-Carlo Simulation
Q1 2020	150	300	—	—	(1)	Monte-Carlo Simulation
Q1 2020	—	436	—	—	(3)	Fair Market Value
Q1 2020	129	—	—	—	(3)	Black-Scholes-Merton
Q2 2020	—	21	—	—	(3)	Fair Market Value

________________________________

(1) The awards will vest based on the achievement of certain values of the Company’s common stock at multiple thresholds within certain periods and are contingent upon the completion of requisite service through the date of such vesting.

(2) The vesting of the awards will be triggered after the end of the achievement milestone, as measured by the Company.

(3) The awards will vest based on achievement of certain revenue target and are contingent upon the completion of requisite service through the date of such vesting.

The Company has recognized $3.8 million and $5.2 million in stock-based compensation for performance-based awards for the three and six months ended June 30, 2020, respectively. The Company has recognized $0.8 million and $0.8 million in stock-based compensation for performance-based awards for the three and six months ended June 30, 2019, respectively.

   The fair value of performance-based awards with market conditions granted estimated using a Monte Carlo simulation model used the following inputs for the period ended June 30, 2020:

	June 30,
	2020
Risk-free interest rate		0.61	%	—	1.64	%
Expected dividend yield					0.00	%
Expected volatility		55	%	—	65	%
Expected term (years)		5.25		—	7.25

Employee Stock Purchase Plan

There have not been any changes to the Company’s 2015 Natera, Inc. Employee Stock Purchase Plan (the “ESPP”) as disclosed in Form 10-K for the fiscal year ended December 31, 2019.  The Company has made 893,548 shares available for issuance under the Plan, a number that is automatically increased by the least of (i) 1% of the total number of shares of common stock actually issued and outstanding on the last business day of the prior fiscal year, (ii) 880,000 shares of common stock (subject to certain adjustments pursuant to Subsection (c) below), or (iii) a number of shares of common stock determined by the Board.

The first offering period of 2020 started on November 1, 2019 and ended on April 30, 2020, and 97,247 shares were purchased in the six months ending June 30, 2020 for proceeds of $3.1 million.

Stock Options

The following table summarizes option activity for the three months ended June 30, 2020:

	Outstanding Options
					Weighted-
			Weighted-		Average
	Shares		Average		Remaining	Aggregate
	Available for	Number of	Exercise		Contractual	Intrinsic
	Grant	Shares	Price		Life	Value
(in thousands, except for contractual life and exercise price)					(In years)
Balance at December 31, 2019	6,416	8,497	$	10.39	6.88	$	197,955
Additional shares authorized	3,120	—
Options granted	(446)	446	$	26.75
Options exercised	—	(1,037)	$	10.42
Options forfeited/cancelled	84	(84)	$	16.00
RSUs granted	(4,670)	—
RSUs forfeited/cancelled	210	—
Balance at June 30, 2020	4,714	7,822	$	11.26	6.55	$	301,915
Exercisable at June 30, 2020		5,523	$	5.77	8.84	$	226,552
Vested and expected to vest at June 30, 2020		7,682	$	11.16	6.52	$	297,314

Restricted Stock Units

The following table summarizes restricted stock unit (“RSU”) activity for the six months ended June 30, 2020:

		Weighted-
		Average
		Grant Date
	Shares	Fair Value
(in thousands, except for grant date fair value)
Balance at December 31, 2019	2,404	$	19.86
Granted	2,335	$	27.89
Vested	(578)	$	15.50
Cancelled/forfeited	(105)	$	21.58
Balance at June 30, 2020	4,056	$	24.10

Stock-Based Compensation Expense

Stock based compensation is related to stock options and RSUs granted to the Company’s employees and is measured at the grant date based on the fair value of the award. The fair value is recognized as expense over the requisite service period, which is generally the vesting period of the respective awards on a straight-line basis. No compensation cost is recognized when the requisite service has not been met and the awards are therefore forfeited.

Employee stock-based compensation expense was calculated based on awards ultimately expected to vest and has 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. Non-employee stock-based compensation expense was not adjusted for estimated forfeitures up until the occurrence of the actual forfeiture of the associated awards.

The following tables present the effect of employee and non-employee stock-based compensation expense on selected statements of operations line items for the three months ended June 30, 2020 and 2019.

	Three months ended June 30,
	2020						2019
	Employee		Non-Employee		Total		Employee		Non-Employee		Total
	(in thousands)
Cost of revenues	$	441	$	—	$	441	$	215	$	10	$	225
Research and development		2,631		282		2,913		1,264		—		1,264
Selling, general and administrative		8,527		76		8,603		4,226		89		4,315
Total	$	11,599	$	358	$	11,957	$	5,705	$	99	$	5,804

	Six months ended June 30,
	2020						2019
	Employee		Non-Employee		Total		Employee		Non-Employee		Total
	(in thousands)
Cost of revenues	$	755	$	—	$	755	$	383	$	10	$	393
Research and development		4,313		442		4,755		2,157		—		2,157
Selling, general and administrative		13,779		85		13,864		6,873		432		7,305
Total	$	18,847	$	527	$	19,374	$	9,413	$	442	$	9,855

As of June 30, 2020, approximately $95.7 million of unrecognized compensation expense, adjusted for estimated forfeitures, related to unvested option awards and RSUs will be recognized over a weighted-average period of approximately 2.9 years.

Valuation of Stock Option Grants to Employees and Non-employees

The Company utilizes Black-Scholes option pricing model when estimating the fair value of stock options. For the three and six months ended June 30, 2020, the following valuation assumptions were applied on both the employee and non-employee options. In the same period of the prior year, the valuation assumptions as follows were only used for stock options granted to employees.

	Three months ended June 30,								Six months ended June 30,
	2020			2019					2020					2019
Expected term (years)		10.0		5.30		—	10.00		5.27		—	10.00		5.30		—	10.00
Expected volatility		53.94	%	42.71	%	—	43.49	%	49.94	%	—	58.53	%	42.53	%	—	43.49	%
Expected dividend rate		0.00	%				0.00	%				0.00	%				0.00	%
Risk-free interest rate		0.71	%	1.78	%	—	2.51	%	0.44	%	—	1.70	%	1.78	%	—	2.60	%

As of June 30, 2020, total options outstanding include 65,485 shares of option awards that were granted to non-employees, of which 20,262 shares are unvested. 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 Company believes that the estimated fair value of the stock options is more readily measurable than the fair value of the services rendered.