Stockholders’ Equity (Deficit)

On February 12, 2018, the Company completed its IPO of 5,047,514 shares of common stock, which included the exercise by the underwriters of their option to purchase 47,514 additional shares of common stock, for net proceeds of $56.3 million, after deducting underwriting discounts and commissions, excluding other offering costs.

In July 2018, the Company completed the Follow-On Offering in which the Company sold 3,600,000 shares of its common stock, which included the exercise in full by the underwriters of their option to purchase an additional 600,000 shares of common stock in August 2018, at a price to the public of $20.00 per share. The Company received net proceeds of approximately $67.7 million from the Follow-On Offering, after deducting underwriting discounts and commissions, and excluding other offering expenses.

Convertible Series A Preferred Stock

At December 31, 2017, the Company had 2,500,000 shares of Series A preferred stock authorized, of which 1,250,000 were issued or outstanding. ALPHAEON, as the previous sole holder of Series A preferred stock prior to the IPO, had certain dividends, conversion, redemption, voting, protective, and liquidation preferences. The number of shares of common stock to which a preferred stockholder was entitled was the product obtained by multiplying the Series A preferred stock conversion rate by the number of shares of preferred stock being converted, subject to adjustments as provided in the amended and restated certificate of incorporation.

In connection with the IPO, all shares of Series A preferred stock were converted into 2,065,875 shares of common stock. In addition, the Company also amended and restated its certificate of incorporation. As a result, shares of Series A convertible preferred stock were canceled, with none authorized, issued or outstanding as of December 31, 2018.

Preferred Stock

In connection with the completion of its IPO, the Company also amended and restated its certificate of incorporation to provide for 10,000,000 authorized shares of preferred stock with a par value of $0.00001 per share. At December 31, 2018, the Company had 10,000,000 shares of preferred stock authorized, of which none were issued and outstanding.

Common Stock

In connection with the completion of its IPO, the Company also amended and restated its certificate of incorporation to provide for 100,000,000 authorized shares of common stock with a par value of $0.00001 per share. At December 31, 2018, the Company had 100,000,000 shares of common stock authorized, of which 27,274,991 were issued and outstanding.

Equity Related Transactions

As of February 12, 2018, the Company assumed from ALPHAEON the revised payment obligations under the Amended Purchase Agreement of $55.7 million (comprised of $39.7 million related to the contingent royalty obligation and $16.0 million related to the contingent promissory note at that date). See Note 6, Fair Value Measurements for more information. Pursuant to the Amended Purchase Agreement, ALPHAEON agreed to offset and reduce the amount of related party borrowings by the estimated value of the revised payment obligations on a dollar-for-dollar basis and pursuant to the Services Agreement. Additionally, the Company paid $5.0 million to ALPHAEON in satisfaction of a portion of the outstanding related party borrowings (see Note 4, Related Party Transactions). The remaining balance of related party borrowings of $13.2 million was recharacterized as a capital contribution from ALPHAEON pursuant to the Services Agreement.

2017 Omnibus Incentive Plan and Stock-based Compensation Allocation

On November 21, 2017, the board of directors and the then-sole stockholder of the Company approved the Company’s 2017 Omnibus Incentive Plan (the “Plan”). The Plan provides for the grant of incentive options to employees of the Company, and for the grant of nonstatutory options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance stock awards and other forms of stock compensation to the Company’s employees, including officers, directors, consultants and employees of the Company. The maximum number of shares of common stock that may be issued under the Plan is 4,361,291 shares, plus an annual increase on each anniversary of November 21, 2017 equal to 4% of the total issued and outstanding shares of the Company’s common stock as of such anniversary (or such lesser number of shares as may be determined by the Company’s board of directors). On November 21, 2018, an additional 1,091,000 were reserved under the evergreen provision of the Plan. As of December 31, 2018, the Company reserved an aggregate of 1,888,484 shares of common stock for future issuance under the Plan.

Stock-Based Award Activity and Balances

The fair value of restricted stock units (“RSUs”) is estimated at the Company’s grant date common share price. Options are granted at exercise prices based on the Company’s grant date common share price. The RSUs and options generally vest over a two- to four-year period. There have been no awards with performance conditions and no awards with market conditions. The options generally have a contractual term of ten years. The Black‑Scholes option pricing model has various inputs, including the grant date common share price, exercise price, risk‑free interest rate, volatility, expected life and dividend yield. The Company records share‑based compensation expense net of actual forfeitures. The change of any of these inputs could significantly impact the determination of the fair value of the Company’s options as well as significantly impact its results of operations.

The significant assumptions used in the Black-Scholes option-pricing are as follows:

•

Determining Fair Value of the underlying common stock. For options awards granted after the completion of the Company’s IPO, the fair value for its underlying common stock was determined using the fair value of the grant date price as reported on the Nasdaq Global Select Market. Since the Company’s common stock was not traded in a public stock market exchange prior to the Company’s IPO, prior to such date the Board of Directors considered numerous factors including new business and economic developments affecting the Company and independent appraisals, when appropriate, to determine the fair value of the Company’s common stock. Independent appraisal reports were prepared using conventional valuation techniques, such as discounted cash flow analyses, from which a discount factor for lack of marketability was applied. This determination of the fair value of the common stock was performed on a contemporaneous basis. Prior to the Company’s initial public offering, the Board of Directors determined the Company’s common stock fair market value on as needed basis.

•

Expected Volatility. The Company has limited data regarding company‑specific historical or implied volatility of its share price. Consequently, the Company estimates its volatility based on the average historical volatility of the stock price from a set of peer companies, since our shares do not have sufficient trading history. Management considers factors such as stage of life cycle, competitors, size, market capitalization and financial leverage in the selection of similar entities.

•

Expected Term. The expected term represents the period of time in which the options granted are expected to be outstanding. The Company estimates the expected term of options with consideration of vesting date, contractual term, and historical experience for exercise and post-vesting employment or contractual termination behavior after its common stock has been publicly traded. The expected term of “plain vanilla” options is estimated based on the midpoint between the vesting date and the end of the contractual term under the simplified method permitted by the SEC implementation guidance. The weighted‑average expected term of the Company’s options is approximately six years.


•	Risk‑Free Rate. The risk‑free interest rate is selected based upon the implied yields in effect at the time of the option grant on U.S. Treasury zero‑coupon issues with a term approximately equal to the expected life of the option being valued.


•	Dividends. The Company does not anticipate paying cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield rate of zero.

The Company did not grant stock options, restricted stock units, or restricted stock awards during the year ended December 31, 2017. The weighted-averages for key assumptions used in determining the fair value of stock options granted were as follows:



	Year Ended December 31,
	2018	2017
Volatility	57.76%	—%
Risk-free interest rate	2.65%	—%
Expected life in years	6.24	—
Dividend yield rate	—%	—%

A summary of stock option activity under the Plan for the year ended December 31, 2018, is presented below:




				Weighted
		Weighted		Average	Aggregate
		Average		Remaining	Intrinsic
	Stock	Exercise		Contractual	Value
	Options	Per Share		Terms (Years)	(in thousands)
Outstanding, December 31, 2017	—	$	—	—	$	—
Granted	3,840,724	11.68		9.33	8,632
Exercised	—	—		—	—
Cancelled/forfeited	(582,923)	9.98		9.02	(1,513		)
Outstanding, December 31, 2018	3,257,801	$	11.99	9.26	$	7,119
Exercisable, December 31, 2018	—	$	—	—	$	—

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the Company’s common stock for those awards that have an exercise price below the estimated fair value at December 31, 2018.

During the year ended December 31, 2018, the Company recorded expense of $4.1 million related to stock options. As of December 31, 2018, there was $18.9 million of total unrecognized compensation cost, net of actual forfeitures, related to stock option based compensation arrangements granted under the Plan. The cost is expected to be recognized over a weighted-average period of 3.3 years.

A summary of the status of the Company’s nonvested options as of and changes during the year ended December 31, 2018, are presented below:



		Weighted-Average
	Stock	Grant Date
	Options	Fair Value
Outstanding, December 31, 2017	—	$	—
Granted	3,840,724	11.68
Cancelled/forfeited	(582,923)	9.98
Outstanding, December 31, 2018	3,257,801	$	11.99

A summary of restricted stock unit activity under the Plan for the year ended December 31, 2018, is presented below:




		Weighted
	Restricted	Average
	Stock	Grant Date
	Units	Fair Value
Outstanding, December 31, 2017	—	$	—
Granted	321,516	14.38
Vested	(34,602)	9.98
Forfeited	(15,510)	9.98
Outstanding, December 31, 2018	271,404	$	15.19

During the year ended December 31, 2018, the Company recorded expense of $1.3 million related to restricted stock units. As of December 31, 2018, there was $2.8 million of total unrecognized compensation cost, net of actual forfeitures, related to stock option based compensation arrangements granted under the Plan. The cost is expected to be recognized over a weighted-average period of 1.9 years.

The following table summarizes stock-based compensation expense (in thousands) amounts recorded in the accompanying statements of operations and comprehensive loss pursuant to the Plan in 2018 and allocated to Evolus by ALPHAEON in 2017:



	Year Ended December 31,
	2018		2017
General and administrative	$	5,570	$	551
Research and development	1,401		35
	$	6,971	$	586

Separation of Service with the Former President and Chief Executive Officer

In May 2018, the Company entered into a separation agreement (the “Separation Agreement”) with its then President and Chief Executive Officer, Murthy Simhambhatla, Ph.D. Pursuant to the Separation Agreement, the Company modified previously granted stock options resulting in an incremental vesting of 100,424 stock options and related stock-based compensation expense of $0.5 million. As part of the Separation Agreement, the Company issued 34,602 shares of common stock net of tax withholding for vested restricted stock units. An additional 50,112 shares of common stock were immediately vested and will be issued in February 2020. Stock-based compensation expense relating to the issuance of common stock and accelerated vesting was approximately $1.0 million. The aforementioned non-cash charges are reflected in general and administrative on the statements of operations and comprehensive loss for the year ended December 31, 2018.