STOCK-BASED COMPENSATION

6 Months Ended

Jun. 30, 2024

Share-Based Payment Arrangement [Abstract]

Stock-based compensation expense, which includes expense for both equity and liability-classified awards, reported in the condensed consolidated statements of operations, was as follows:


	Three Months Ended				Six Months Ended
(in thousands)	June 30, 2024		July 2, 2023		June 30, 2024		July 2, 2023
Cost of screening revenue (exclusive of amortization of intangible assets)	$	451	$	446	$	921	$	819
Cost of development services revenue	12		4		23		4
Research and development	9,625		10,343		21,068		19,303
Sales and marketing	4,889		4,844		10,352		8,886
General and administrative	10,970		9,912		22,689		18,053
Stock-based compensation expense, before taxes	25,947		25,549		55,053		47,065
Related income tax benefits	(6,300)		(6,163)		(13,368)		(11,353)
Stock-based compensation expense, net of taxes	$	19,647	$	19,386	$	41,685	$	35,712

2024 Incentive Award Plan

The GRAIL, Inc. 2024 Incentive Award Plan (the “2024 Plan”) was adopted by GRAIL and approved by Illumina, in its capacity as GRAIL’s sole stockholder, in May 2024 to facilitate the grant of cash and equity incentive awards to non-employee directors, employees, and consultants of the Company and its subsidiaries and to enhance the ability of the Company and any of its subsidiaries to obtain and retain the services of these individuals following the Spin-Off. This plan authorizes the issuance of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalents, performance-based awards, and other stock or cash based awards. The maximum number of shares authorized for issuance under the 2024 Plan is the sum of (a)

8,656,817 shares; and (b) annual increase on the first day of each calendar year beginning on and including January 1, 2025 and ending on and including January 1, 2034, equal to the lesser of (i) 5% of the aggregate number of shares outstanding on the final day of the immediately preceding calendar year and (ii) such smaller number of shares as is determined by the GRAIL board of directors. As of June 30, 2024, approximately 2.1 million shares remained available for future grants under the 2024 Plan.

A summary of the Company’s restricted stock unit activity is as follows:


	Restricted Stock Units	Weighted-Average Grant-Date Fair Value Per Share
(Units in thousands)
Outstanding at January 1, 2024	—	$—
Conversion	6,485	$15.37
Awarded	79	$17.00
Vested	—	$—
Cancelled	—	$—
Outstanding at June 30, 2024	6,564	$15.39

2024 Employee Stock Purchase Program

The GRAIL, Inc. 2024 Employee Stock Purchase Plan (the “ESPP”) was adopted by GRAIL and approved by Illumina, in its capacity as GRAIL’s sole stockholder, in May 2024. As previously disclosed in the Information Statement, the number of shares of Company common stock initially available under the ESPP is equal to (a) 414,021 (b) an annual increase on the first day of each calendar year beginning on and including January 1, 2025 and ending on and including January 1, 2034, equal to the lesser of (i) 1% of the aggregate number of shares outstanding on the final day of the immediately preceding calendar year and (ii) such smaller number of shares as is determined by the GRAIL board of directors. There are 0.4 million shares of Company common stock initially available for issuance pursuant to the ESPP. As of June 30, 2024, no shares had been granted under the ESPP plan.

2024 Transition Incentive Award

During the second quarter of 2024, one-time cash-based incentive awards were granted to GRAIL employees, including executives, for retention purposes (“2024 Transition Incentive Awards”) with a total grant date fair value of $40.2 million which were treated as a liability-classified awards. Each award vests entirely in one year or less from its grant date, subject to the applicable holder’s continued service through the vesting date or, if earlier upon (i) the applicable holder’s termination due to death or disability or (ii) following a “change in control” (as defined in the award agreement evidencing the 2024 Transition Incentive Award), the applicable holder’s termination without “cause” or for “good reason” (each as defined in the award agreement evidencing the 2024 Transition Incentive Award). In connection with the Spin-Off, the 2024 Transition Incentive Awards were converted into GRAIL RSUs in accordance with the Employee Matters Agreement by dividing the aggregate award value by the volume-weighted average share price over the first four trading days following the Spin-Off. On the modification date, June 28, 2024, the liability-classified awards in the amount of $4.4 million were reclassified to Additional Paid-In Capital. As the result of this modification, the 2024 Transition Incentive Awards that were outstanding on the Distribution Date were converted into GRAIL RSUs covering 2.5 million shares.

Cash-Based Equity Awards

The Cash-Based Equity Award program was adopted following Illumina’s acquisition of GRAIL in 2021 to provide GRAIL employees with dollar-denominated long-term incentive awards that increased or decreased in value based on corresponding changes in GRAIL’s calculated value. GRAIL’s stand-alone value calculation was estimated by the Company based on its analysis and on input from independent valuation advisors. To estimate

the value of GRAIL for the purposes of the Cash-Based Equity Awards, various assumptions were used, including long-range financial projections, as well as the discount rate and terminal growth rate. The awards generally vested in four equal installments on the first four anniversaries of the grant date, subject to continued employment through the applicable vesting date. In April 2024, Illumina’s Compensation Committee and Board of Directors (as applicable) approved an adjustment of the ordinary course payouts for all outstanding Cash-Based Equity Awards providing that the Cash-Based Equity Awards would be paid based on their nominal (face) values without adjustment based on changes in equity value. Subsequent to this adjustment to the Cash-Based Equity Awards and continuing until the Award Modification, the Cash-Based Equity Awards were expensed based on such nominal (face) value in accordance with their applicable vesting schedules. The payments in respect of the Cash-Based Equity Awards between the adoption of such adjustment and the Distribution Date were paid out in cash at the applicable Cash-Based Equity Awards’ nominal (face) value. Payments in respect of the Cash-Based Equity Awards before such adjustment were paid out in cash based on the adjusted value of the Cash-Based Equity Award on the applicable vesting date.

In connection with the Spin-Off, outstanding Cash-Based Equity Awards were modified and converted into GRAIL RSUs in accordance with the Employee Matters Agreement determined by dividing the Aggregate Award Value (as discussed below) for such Cash-Based Equity Award by the volume-weighted average share price of GRAIL stock on the first four trading days following the Spin-Off. All other terms and conditions of the awards, including vesting and payment terms, were unaffected by the conversion. All other terms and conditions of the awards, including vesting and payment terms, were unaffected by the conversion.

For each Cash-Based Equity Award, the “Aggregate Award Value” is equal to, (i) for the portion of such award originally scheduled to vest in 2024, the initial grant value of such portion, and (ii) for the remaining unvested portion of such award, the initial grant value of such portion adjusted up or down based on a percentage, with such percentage determined by (A) GRAIL’s average closing market capitalization for the four trading days immediately following the distribution date minus the aggregate equity value of GRAIL at the time the Cash-Based Equity Award was granted, as reflected in the consolidated financial statements of Illumina (the “Baseline Equity Value”), divided by (B) the Baseline Equity Value.

Upon modification, the awards became equity-classified. The value of tranches of the Cash-Based Equity Awards that vest in future years (exclusive of the 2024 Transition Incentive Awards described above) was reduced and, as a result, there was no incremental compensation cost. Approximately 1,300 grantees were impacted by this modification. On the modification date, June 28, 2024, the liability-classified awards were reclassified to Additional Paid-In Capital at their fair value in the amount of $50.3 million. Due to the higher value of the 2024 tranche of the Cash-Based Equity Awards, compensation cost will be recognized over the vesting period to ensure compensation cost has been recognized at least equal to the amount that is legally vested. As the result of this modification, the Cash-Based Equity Awards that were outstanding on the Distribution Date were converted to 4.0 million RSUs to be settled in GRAIL shares.

Cash-Based Equity Award activity was as follows:


(in thousands)
Beginning balance December 31, 2023	$	292,189
Granted	66,864
Cancelled	(11,751)
Vested and paid in cash	(53,807)
Change in fair value	(9,535)
Outstanding balance, June 28, 2024 (Award Modification Date)	$	283,960
Conversion of outstanding awards to GRAIL RSUs	(283,960)
Outstanding balance, June 30, 2024	$	—

Performance-Based Award

The Company has one performance-based award outstanding for a former employee for which vesting is based on future revenues. The award has an aggregate potential value of up to $78.0 million and expires, to the extent unvested, in August 2030. One-fourth of the total potential value of the award vests immediately upon the achievement of cumulative net revenues in any period of four consecutive fiscal quarters of $500.0 million, $750.0 million, $1.5 billion, and $2.0 billion. The Company assesses the probability of achieving the performance conditions associated with the award on a quarterly basis at each reporting period. If and to the extent that the liability becomes due and payable prior to 12:01 a.m. Eastern Time December 24, 2026 (the “Disposal Funding Period”) and paid by GRAIL, in cash, during the Disposal Funding Period, Illumina shall reimburse GRAIL all or such portion of the liability paid by GRAIL in accordance of the terms of the Separation and Distribution Agreement. As of June 30, 2024, it was not probable that the performance conditions associated with the award will be achieved and, therefore, no stock-based compensation expense, or corresponding loss recovery asset or liability, has been recognized in the condensed consolidated financial statements.

Performance Options

In connection with the Spin-Off, unvested performance-based stock options previously issued to GRAIL employees to purchase Illumina common stock were converted into performance-based stock options to purchase GRAIL common stock (“Performance Options”) in accordance with the Employee Matters Agreement. As of the Distribution Date, there were two remaining unvested Performance Options. On June 28, 2024, the modification date, the Company accounted for the modification of these two Performance Options as Type I and Type IV modifications, respectively. These options were converted at a ratio equal to the average of the volume weighted average per share price of Illumina stock trading during the four days immediately preceding the Distribution Date divided by the average of volume weighted average per share price of GRAIL common stock on the first four trading days immediately following the Distribution Date. For the Performance Option with Type I modification, the incremental charge recognized of the difference in the fair value of the option before and immediately after the modification was immaterial. As the result of this modification, the Performance Options that were outstanding on the Distribution Date were converted to 0.1 million options which remain outstanding as of June 30, 2024. For the Performance Option with Type IV modification, the fair value of the award as of the Modification Date will be used for expense purposes once the award becomes probable of achievement.

As of June 30, 2024, approximately $2.2 million of total unrecognized compensation cost related to the Performance Options was expected to be recognized over a period of approximately 3.2 years. There were no outstanding Performance Options exercisable as of June 30, 2024. The aggregate intrinsic value of the Performance Options outstanding as of June 30, 2024 and December 31, 2023 was $0.2 million and $0.9 million, respectively. The outstanding Performance Options, in general, have contractual terms of ten years from the respective grant dates. The Performance Options generally vest monthly over three years upon the achievement of Company-specified performance targets and are subject to continued service through the applicable vesting date.