Equity-Based Compensation

12 Months Ended

Dec. 31, 2022

Share-Based Payment Arrangement [Abstract]

Equity-Based Compensation

Note 10. Equity-Based Compensation

The Company has included equity-based compensation expense as part of cost of revenue and operating expenses in the accompanying Consolidated Statements of Income as follows:

	Year Ended December 31,
	2022		2021		2020
	(in thousands)
Cost of revenue	$	8,704	$	3,563	$	1,452
Research and development		10,449		6,326		2,693
Selling and marketing		4,373		2,513		2,092
General and administrative		9,114		3,480		1,920
Total	$	32,640	$	15,882	$	8,157

The actual tax benefit realized from windfall tax deductions related to awards vested or exercised were $2.1 million, $13.3 million, and $2.7 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Award Activity

Option Awards

The following table summarizes activity for options to acquire shares of the Company’s common stock in the years ended December 31, 2022, 2021 and 2020:

	Number of Shares Subject to Options (in thousands)			Weighted- Average Exercise Price		Weighted- Average Grant Date Fair Value		Weighted- Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value (in thousands) (1)
Balance at December 31, 2019		341		$	1.27				6.4	$	3,960
Granted		10		$	15.82	$	11.45
Exercised		(56	)	$	1.86	$	5.04
Canceled		(8	)	$	4.18	$	4.68
Balance at December 31, 2020		287		$	1.59				5.5	$	14,484
Granted		5		$	73.64	$	56.34
Exercised		(76	)	$	1.13	$	8.40
Canceled		—		$	—	$	—
Balance at December 31, 2021		216		$	3.42				4.6	$	20,965
Granted		10		$	59.54	$	44.56
Exercised		(5	)	$	7.16	$	7.41
Canceled		(9	)	$	43.30	$	33.53
Balance at December 31, 2022		212		$	4.21				3.7	$	5,420
Exercisable as of December 31, 2022		196		$	1.22				3.3	$	5,608

(1)Aggregate intrinsic value is calculated as the difference between (i) the exercise price of options and (ii) the market value of the Company’s common stock as of the applicable date.

The total fair value of options that vested during the years ended December 31, 2022, 2021 and 2020 was $126,000, $76,000 and $223,000, respectively. As of December 31, 2022, the remaining unrecognized compensation expense related to all outstanding option awards was $433,000 and is expected to be recognized over a weighted-average period of 3.4 years.

RSU Awards

RSUs are awards that entitle the holder to receive shares of the Company’s common stock upon satisfaction of vesting conditions. Each RSU represents the contingent right to receive one share of the Company’s common stock upon vesting and settlement.

The following table summarizes activity for RSUs relating to shares of the Company’s common stock in the years ended December 31, 2022, 2021, and 2020:

	Number of Shares (in thousands)			Weighted-Average Grant Date Fair Value
Balance at December 31, 2019		1,511		$	6.54
Granted		1,389		$	24.86
Vested and settled		(655	)	$	7.97
Forfeited		(160	)	$	11.17
Balance at December 31, 2020		2,085		$	17.93
Granted		477		$	95.33
Vested and settled		(836	)	$	15.43
Forfeited		(107	)	$	37.83
Balance at December 31, 2021		1,619		$	40.74
Granted		1,895		$	49.98
Vested and settled		(699	)	$	34.01
Forfeited		(184	)	$	61.11
Balance at December 31, 2022		2,631		$	47.76

The RSU awards granted in the years ended December 31, 2022, 2021 and 2020 will result in aggregate equity-based compensation expense of $94.8 million, $45.5 million and $34.5 million, respectively, to be recognized over the vesting periods from the grant date of each award granted in the period. The RSU awards granted in the year ended December 31, 2022 included 663,013 shares of RSU awards assumed as part of the Fulgent Pharma acquisition, see more details in Note 14, Related Party, and Note 15, Business Combinations. As of December 31, 2022, the remaining unrecognized compensation expense related to all outstanding RSU awards was $110.6 million and is expected to be recognized over a weighted-average period of 3.0 years.

Fair Value Assumptions for Option Awards

The Company uses the Black-Scholes option-pricing model to measure the fair value of option awards. The Black-Scholes option-pricing model requires the input of various assumptions, each of which is subjective and requires significant judgment. These assumptions include the following:

•Expected Term. The expected term represents the period that the Company’s equity-based awards are expected to be outstanding. The Company determines the expected term assumption based on the vesting terms, exercise terms and contractual terms of the options.

•Risk-Free Interest Rate. The Company determines the risk-free interest rate by using the equivalent to the expected term based on the U.S. Treasury yield curve in effect as of the date of grant.

•Dividend Yield. The assumed dividend yield is based on the Company’s expectation that it will not pay dividends in the foreseeable future, which is consistent with its history of not paying dividends.

•Expected Volatility. The Company calculates expected volatility based on historical volatility data of its stock that is publicly traded.

•Forfeiture Rate. The Company accounts for forfeitures as they occur.

Awards to Employees

The table below sets forth the weighted-average assumptions used in the Black-Scholes option-pricing model to estimate the fair value of options to acquire shares of the Company’s common stock granted to employees during the years ended December 31, 2022, 2021 and 2020.

	Year Ended December 31,
	2022			2021			2020
Expected term (in years)		6.1			6.1			6.1
Risk-free interest rates		2.6	%		1.1	%		0.4	%
Dividend yield		—			—			—
Expected volatility		88.7	%		94.6	%		87.5	%

Determination of Fair Value on Grant Dates

The fair value of the shares of the Company’s common stock underlying option and RSU awards is determined by the Company’s board of directors or the compensation committee thereof based on the closing sales price of the Company’s common stock on the date of grant as reported by the Nasdaq Global Market.