Stockholders’ Equity (Deficit)

Convertible Series A Preferred Stock

Prior to IPO, the Company had 2,500,000 shares of Series A preferred stock authorized, of which 1,250,000 were issued and outstanding to Alphaeon. 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, 2019.

Preferred Stock

The Company has 10,000,000 authorized shares of preferred stock with a par value of $0.00001 per share. As of December 31, 2019, none were issued and outstanding.

Common Stock

The Company has 100,000,000 authorized shares of common stock with a par value of $0.00001 per share. As of December 31, 2019, 33,562,665 shares 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 $55,742 (comprised of $39,700 related to the contingent royalty obligation and $16,042 related to the contingent promissory note at that date). See Note 3, Fair Value Measurements and Short-Term Investments 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 (see Note 11, Related Party Transactions). Additionally, the Company paid $5,000 to Alphaeon in satisfaction of a portion of the outstanding related party borrowings (see Note 11, Related Party Transactions). The remaining balance of related party borrowings of $13,188 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 and 2019, an additional 1,091,000 shares and 1,337,821 shares, respectively, were reserved under the evergreen provision of the Plan. As of December 31, 2019, the Company has available an aggregate of 2,249,380 shares of common stock for future issuance under the Plan.

Stock-Based Award Activity and Balances

Options are granted at exercise prices based on the Company’s grant date common share price. The restricted stock units (“RSUs”) and options generally vest over a one-to four-year period. There have been no awards granted with performance conditions or market conditions for the period presented. 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 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 fair value of RSU grants is determined at the grant date based on the common share price. The Company records stock-based compensation expense net of actual forfeitures when they occur.

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. 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 weighted-averages for key assumptions used in determining the fair value of stock options granted were as follows:



	Year Ended December 31,
	2019	2018
Volatility	59.32%	57.76%
Risk-free interest rate	2.42%	2.65%
Expected life (years)	6.17	6.24
Dividend yield rate	—%	—%

A summary of stock option activity under the Plan for the year ended December 31, 2019, is presented below:



					Weighted
			Weighted		Average
			Average		Remaining	Aggregate
	Stock		Exercise		Contractual	Intrinsic
	Options		Per Share		Terms (Years)	Value
Outstanding, December 31, 2018	3,257,801		$	11.99	9.26	$	7,119
Granted	1,321,451		$	18.63
Exercised	(273,734	)	$	9.98
Cancelled/forfeited	(328,117	)	$	15.15
Outstanding, December 31, 2019	3,977,401		$	14.07	8.51	$	7,198
Exercisable, December 31, 2019	800,595		$	12.50	8.28	$	1,880
Vested and expected to vest, December 31, 2019	3,977,401		$	14.07	8.51	$	7,198

The aggregate intrinsic value of outstanding and exercisable options represents the excess of the fair market value of our common stock over the exercise price of underlying options as of December 31, 2019 and 2018. The total intrinsic value of options exercised in the years ended December 31, 2019 and 2018 was $2,311 and $0, respectively.

During the years ended December 31, 2019 and 2018, the Company recorded expenses related to stock options of $8,302 and $4,099, respectively. As of December 31, 2019, there was $21,529 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 2.6 years.

A summary of RSUs activity under the Plan for the year ended December 31, 2019, is presented below:



			Weighted
	Restricted		Average
	Stock		Grant Date
	Units		Fair Value
Outstanding, December 31, 2018	271,404		$	16.53
Granted	3,000		$	18.33
Vested	(25,125	)	$	24.81
Forfeited	(19,409	)	$	13.71
Outstanding, December 31, 2019	229,870		$	15.89

During the years ended December 31, 2019 and 2018, the Company recorded expenses related to restricted stock units of $1,216 and $1,304, respectively. Total fair value of RSUs vested during the years ended December 31, 2019 and 2018 was $357 and $771, respectively. As of December 31, 2019, there was $1,377 of total unrecognized compensation cost, net of actual forfeitures, related to RSU-based compensation arrangements granted under the Plan. The cost is expected to be recognized over a weighted-average period of 0.7 years.

The following table summarizes stock-based compensation expense arising from the above Plan:



	Year Ended December 31,
	2019		2018
Selling, general and administrative	$	8,862	$	5,570
Research and development	656		1,401
Total stock-based compensation expense	$	9,518	$	6,971

In addition, during the years ended December 31, 2019 and 2018, the Company capitalized $106 and $0, respectively, of stock-based compensation expense in capitalized software. Capitalized software is a component of intangible assets and is presented in the accompanying condensed balance sheets. See Note 4, Goodwill and Intangible Assets for capitalized software information.

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. 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 $451. 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 $980 and reflected in selling, general and administrative on the statements of operations and comprehensive loss for the year ended December 31, 2018.