Stock-Based Compensation and Employee Benefit Plans

2002 Stock Plan

Our 2002 Stock Plan (the "2002 Plan") was approved in April 2002 and amended in June 2011. In August 2012 and in connection with the adoption of the 2012 Plan, shares authorized for issuance under the 2002 Plan were cancelled, except for those shares reserved for issuance upon exercise of outstanding stock options. Any outstanding stock options granted under the 2002 Plan remain outstanding, subject to the terms of the 2002 Plan, until such shares are issued under those awards (by exercise of stock options) or until the awards terminate or expire by terms.

Grants under the 2002 Plan generally vest ratably over a four-year period from the vesting commencement date and expire ten years from grant date. Original grants under the 2002 Plan were for "common stock". Pursuant to the Twelfth Amended and Restated Articles of Incorporation authorized in July 2018, all such shares automatically converted to Class B shares of common stock.

As of December 31, 2019, options to purchase 1,856,154 shares of Class B common stock were outstanding with a weighted average exercise price of $23.21 per share.

2012 Equity Incentive Plan

Our 2012 Equity Incentive Plan (the "2012 Plan") was approved in August 2012. The 2012 Plan provided for the grant of incentive stock options, non-statutory stock options, stock appreciation rights and restricted stock awards ("RSUs"), all of which may be granted to employees, including officers, and to non-employee directors and consultants except we may grant incentive stock options only to employees.

Grants under the 2012 Plan generally vest ratably over a four-year period from the vesting commencement date and expire ten years from grant date. Original grants under the 2012 Plan were for "common stock". Pursuant to the Twelfth Amended and Restated Articles of Incorporation authorized in July 2018, all such shares automatically converted to Class B shares of common stock. As of December 31, 2019, options to purchase 9,982,756 shares of Class B common stock were outstanding with a weighted average exercise price of $27.12 per share and no shares were available for future grant. As of December 31, 2019, we had outstanding RSUs that may be settled for 6,656,094 shares of Class B common stock under the plan.

2018 Equity Incentive Plan

The 2018 Equity Incentive Plan (the "2018 Plan") was approved in April 2018. The 2018 Plan became effective upon the IPO and will serve as the successor to the 2012 Plan. We have reserved 20,278,268 shares of Class A common stock under the 2018 Plan and no more than 26,666,667 shares of Class A common stock will be issued pursuant to the exercise of incentive stock options.

The 2018 Plan authorizes the award of stock options, restricted stock awards, stock appreciation rights, RSUs, performance awards and stock bonuses. The 2018 Plan provides for the grant of awards to employees, directors, consultants, independent contractors and advisors provided the consultants, independent contractors, directors and advisors render services not in connection with the offer and sale of securities in a capital-raising transaction. The exercise price of stock options is at least equal to the fair market value of Class A common stock on the date of grant. Grants under the 2018 Plan generally vest ratably over a four-year period from the vesting commencement date and expire ten years from grant date.

As of December 31, 2019, options to purchase 5,998,406 shares of Class A common stock were outstanding with a weighted average exercise price of $9.42 per share and 3,456,172 shares of outstanding RSUs that may be settled for Class A common stock which were granted pursuant to the plan. As of December 31, 2019, we had 17,233,144 shares of Class A common stock available for future grant.

Stock-Based Compensation Expense

We used the following weighted-average assumptions in applying the Black-Scholes valuation model:



	Years Ended December 31,
	2019	2018	2017

Risk-free interest rate	1.7% - 2.6%	2.5% - 3.1%	2.0% - 2.1%
Expected term (years)	6.4 - 6.7	6.2 - 6.7	6.1 - 6.6
Expected dividend yield	—	—	—
Expected volatility	45.7% - 50.2%	52.4% - 56.1%	55.6% - 61.0%

The following table summarizes the components of stock-based compensation expense in the consolidated statements of operations (in thousands):



	Years Ended December 31,
	2019		2018		2017
			As Restated		As Revised

Cost of revenue	$	45,429	$	29,680	$	6,355
Research and development	40,949		39,029		5,560
Sales and marketing	32,478		32,284		4,685
General and administrative	77,435		67,489		12,501
	$	196,291	$	168,482	$	29,101

Stock-based Compensation - During the years ended December 31, 2019, 2018 and 2017, we recognized $196.3 million, $168.5 million and $29.1 million of total stock-based compensation costs, respectively. As of December 31, 2019, 2018 and 2017, we capitalized $7.3 million, $13.6 million and $1.8 million of stock-based compensation cost, respectively, into inventory and property, plant and equipment.

Stock Option and RSU Activity

The following table summarizes the stock option activity under our stock plans during the reporting period (in thousands), except per share amounts:



	Outstanding Options
	Number of Shares		Weighted Average Exercise Price		Remaining Contractual Life (Years)	Aggregate Intrinsic Value

						(in thousands)
Balances at December 31, 2017	11,604,403		$	26.42	6.01	$	52,682
Granted	4,202,284		19.79
Exercised	(398,704	)	3.98
Cancelled	(849,563	)	12.51
Balances at December 31, 2018	14,558,420		25.93		6.78	3,084
Granted	4,956,064		5.6
Exercised	(358,564	)	4.26
Cancelled	(1,318,604	)	25.33
Balances at December 31, 2019	17,837,316		20.76		6.94	14,964
Vested and expected to vest at December 31, 2019	17,159,824		21.17		6.85	13,471
Exercisable at December 31, 2019	9,161,918		28.82		4.89	500

Stock Options - During the years ended December 31, 2019, 2018 and 2017, we recognized $36.2 million, $33.3 million and $29.2 million of stock-based compensation costs for stock options, respectively.

During the years ended December 31, 2019, 2018 and 2017, the intrinsic value of stock options exercised was $2.6 million, $9.2 million and $3.4 million, respectively.

We granted 4,956,064 options for Class A common stock during the year ended December 31, 2019 and 4,202,284 options for Class A and Class B common stock during the year ended December 31, 2018. The weighted-average grant-date fair value of the awards was $5.60 and $19.79, respectively.

As of December 31, 2019 and 2018, we had unrecognized compensation costs related to unvested stock options of $41.9 million and $70.4 million, respectively. This cost is expected to be recognized over the remaining weighted-average period of 2.8 years and 2.8 years, respectively. We had no excess tax benefits in the years ended December 31, 2019 and 2018. Cash received from stock options exercised totaled $1.5 million and $1.6 million for the years ended December 31, 2019 and 2018, respectively.

A summary of our RSUs activity and related information is as follows:



	Number of Awards Outstanding		Weighted Average Grant Date Fair Value

Unvested Balance at December 31, 2017	3,140,578		$	30.95
Granted	13,873,506		16.02
Vested	(17,793	)	19.67
Forfeited	(211,491	)	21.22
Unvested Balance at December 31, 2018	16,784,800		18.74
Granted	3,219,959		11.81
Vested	(8,921,807	)	18.03
Forfeited	(970,686	)	17.34
Unvested Balance at December 31, 2019	10,112,266		17.29

Restricted Stock Units (RSUs) - The estimated fair value of RSU awards is based on the fair value of our common stock on the date of grant. The total weighted-average grant-date fair value of RSUs granted during the years ended December 31, 2019, 2018 and 2017, was $11.81, $16.02 and $30.96, respectively.

During the years ended December 31, 2019, 2018 and 2017, we recognized $141.3 million, $142.4 million and $1.3 million of stock-based compensation costs for RSUs, respectively.

As of December 31, 2019, we had $52.0 million of unrecognized stock-based compensation cost related to unvested RSUs. This cost is expected to be recognized over a weighted average period of 1.1 years. As of December 31, 2018, we had $163.8 million of unrecognized stock-based compensation cost related to unvested RSUs. This expense was expected to be recognized over a weighted average period of 0.8 years.

The following table presents the stock activity and the total number of shares available for grant under our stock plans as of December 31, 2019:



	Plan Shares Available for Grant


Balances at December 31, 2017	1,037,616
Added to plan	40,924,861
Granted	(18,075,790	)
Cancelled	1,061,054
Expired	(7,489,894	)
Balances at December 31, 2018	17,457,847
Added to plan	7,585,422
Granted	(8,176,023	)
Cancelled	2,289,290
Expired	(1,923,392	)
Balances at December 31, 2019	17,233,144

2018 Employee Stock Purchase Plan

In April 2018, we adopted the 2018 Employee Stock Purchase Plan ("ESPP"). The ESPP became effective upon our IPO in July 2018. The ESPP is intended to qualify under Section 423 of the Internal Revenue Code. The aggregate number of our shares that may be issued over the term of our ESPP is 33,333,333 Class A common stock. A total of 3,333,333 shares of our Class A common stock were initially reserved for issuance under the plan. The number of shares reserved for issuance under our ESPP will increase automatically on the 1st day of January of each of the first nine years following the first offering date by the number of shares equal to 1% of the total outstanding shares of our common stock and common stock equivalents as of the immediately preceding December 31 (rounded to the nearest whole share). For the year ended December 31, 2019, we added 1,415,507 shares to the ESPP under these provisions.

The ESPP allows eligible employees to purchase shares, subject to purchase limits of 2,500 shares during each six month period or $25,000 worth of stock for each calendar year, of our Class A common stock through payroll deductions at a price per share equal to 85% of the lesser of the fair market value of our Class A common stock (i) on the first trading day of the applicable offering date and (ii) the last trading day of each purchase date.

During the years ended December 31, 2019 and 2018, we recognized $10.3 million and $4.6 million of stock-based compensation costs for the ESPP, respectively. We issued 1,718,433 shares in 2019 and there were 3,030,407 shares available for issuance under the ESPP as of December 31, 2019.

We use the Black-Scholes option pricing model to determine the fair value of shares purchased under the 2018 ESPP with the following weighted average assumptions on the date of grant:



	Year Ended December 31,
	2019	2018

Risk-free interest rate	1.5% - 2.6%	2.2% - 2.7%
Expected term (years)	0.5 - 2.0	0.6 - 2.0
Expected dividend yield	—	—
Expected volatility	45.9% - 54.0%	47.0% - 52.7%

2019 Executive Awards

In November 2019, the Board of Directors approved stock option awards ("2019 Executive Awards") to certain executive staff. The 2019 Executive Awards consist of three vesting tranches with a vesting schedule based on the attainment of market conditions and assuming continued employment and service through each vesting date.

Stock-based compensation costs associated with the 2019 Executive Awards is recognized over the service period, even though no tranches of the 2019 Performance Awards vest unless a market condition is achieved. The grant date fair value of the options is determined using a Monte Carlo simulation.

Employee Benefit Plan

We maintain a tax-qualified 401(k) retirement plan for all employees who satisfy certain eligibility requirements including requirements relating to age. Under the 401(k) plan, employees may elect to defer up to 60% of eligible compensation, subject to applicable annual IRS Code limits. We do not match any contributions made by employees, including executives, but have the discretion to do so. Therefore, the costs of the plan were immaterial for the years ended December 31, 2019 and 2018. We intend for the 401(k) plan to qualify under Section 401(a) and 501(a) of the Internal Revenue Code so that contributions and income earned on contributions are not taxable to employees until withdrawn from the plan.