Evolus, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Evolus sells Jeuveau, its only commercial product, for aesthetic treatment of glabellar lines; it relies on Daewoong as its sole manufacturer and supplier. Unless indicated otherwise, amounts below are in millions of dollars.
Financial results and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net revenue | $26.1 | $7.8 | $38.3 | $18.3 |
| Operating loss | $(15.3) | $(18.9) | $(7.3) | $(36.3) |
| Net loss | $(15.6) | $(21.1) | $(9.2) | $(40.9) |
| GAAP gross margin | 53.9% | 65.6% | 120.4% | 58.2% |
| Adjusted gross margin | 56.7% | 75.0% | 57.7% | 66.3% |
Q2 revenue comprised $25.4 million of product revenue and $0.7 million of service revenue. Q2 diluted net loss per share was $0.31, compared with $0.63 a year earlier. Six-month operating cash flow was positive $7.8 million, versus $41.9 million used in the prior-year period. Investing activities provided $4.4 million; financing activities provided $17.0 million. Cash and cash equivalents were $131.7 million at June 30, with no short-term investments.
At June 30, total assets were $239.9 million and total liabilities $133.7 million; stockholders’ equity was $106.1 million. Working capital was negative $74.6 million. The company had $19.6 million of current promissory-note obligations to the Evolus founders and a $42.7 million contingent royalty obligation. The Oxford term loan was paid off in January; the $40.8 million Daewoong convertible note was converted to equity in March.
Changes, unusual items, and management commentary
- Q2 revenue rose 234.6% year over year; six-month revenue increased 109.3%. Management attributed growth primarily to stronger U.S. sales as customer activity recovered from pandemic disruptions, plus Canadian service revenue.
- Six-month 2021 results include a one-time $25.5 million payment from Daewoong recorded as a reduction of cost of sales. This drove GAAP six-month gross margin above 100%; it is not representative of recurring product economics. Excluding that payment and distribution-right amortization, adjusted gross margin was 57.7%, down from 66.3%.
- Q2 adjusted gross margin also declined year over year, to 56.7% from 75.0%, reflecting higher sales volume and settlement-related royalties. Management expects settlement royalties, net of Daewoong reimbursements, to materially pressure gross margins through September 2022 and to a lesser extent through September 2032.
- Q2 SG&A rose 50.6% to $26.5 million as commercial and corporate activity increased from pandemic-related reductions in 2020. Six-month SG&A fell 3.7% to $47.1 million, reflecting earlier spending restraint. Management expects operating losses and negative operating cash flows to continue for at least the next 12 months.
- Management said existing capital resources should fund operations for at least 12 months from issuance of the statements, but future funding needs depend on sales, spending, settlement payments, royalties, and other factors. No specific revenue or profitability guidance was provided; the company planned a European launch in early 2022.
Key obligations, risks, and contingencies
- The Medytox/Allergan settlement requires $35 million in cash payments over two years, including $30 million due within 12 months, royalties, and 6.76 million shares issued to Medytox. Management identified payments of $15 million in Q3 2021 and $15 million in Q1 2022. A separate $20 million founders’ promissory note is due in Q4 2021.
- Daewoong paid $25.5 million, agreed to reimburse certain settlement royalties and canceled up to $10.5 million of remaining milestone payments. Evolus remains dependent on Daewoong for supply, and its exclusive license has minimum purchase or market-share requirements.
- The company’s California and ITC disputes with Medytox and Allergan were settled and dismissed, and the ITC remedial orders were rescinded. Securities class-action and shareholder derivative litigation remained pending; management said it could not reasonably estimate any loss and had accrued no liability for these suits.
- COVID-19 recovery supported sales, but renewed restrictions, variants, or reduced consumer discretionary spending could again affect elective procedures. Other principal risks include reliance on one product, competition, settlement compliance and costs, supply disruption, regulatory requirements, intellectual-property claims, and potential need for additional capital.
Important facts for investors to verify
- Whether Jeuveau sales growth and customer adoption can continue, and how much revenue is attributable to repeat purchasing versus new customers.
- Recurring gross margin after settlement royalties and Daewoong reimbursements, excluding the one-time $25.5 million settlement payment.
- Timing and amounts of Medytox/Allergan settlement installments, royalty reimbursements, and the founders’ note payment.
- Cash burn and liquidity after scheduled obligations; positive operating cash flow in the first half should be assessed alongside working-capital movements and management’s expectation of future negative cash flows.
- Daewoong’s continuing supply performance and Evolus’s ability to meet license requirements, as well as progress and costs associated with the planned European launch.
- Status and potential financial impact of the securities class action and derivative litigation, and compliance with the settlement agreements.