Evolus, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited results. Evolus is a single-product aesthetic company; it began U.S. commercial shipments of Jeuveau in May 2019. Unless noted, amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2019 | Nine months 2019 | Comparable 2018 |
|---|---|---|---|
| Net revenue | $13.2 million | $15.5 million | No revenue |
| Gross profit / gross margin | $9.4 million / 71.8% | $11.1 million / 71.7% | No sales |
| Operating expenses | $34.6 million | $97.5 million | $11.5 million / $33.6 million |
| Operating loss | $25.1 million | $86.4 million | $11.5 million / $33.6 million |
| Net loss | $27.0 million | $75.5 million | $11.8 million / $34.4 million |
| Net loss per share, diluted | $0.98 | $2.76 | $0.48 / $1.47 |
Cash flow: Operating activities used $77.5 million in the first nine months of 2019, versus $13.7 million in 2018. Investing activities used $37.4 million, principally reflecting net purchases of short-term investments and capitalized software. Financing activities provided $60.8 million, primarily from Oxford debt proceeds.
Balance sheet at September 30: Cash and cash equivalents were $39.1 million and short-term investments were $34.9 million, or $74.0 million combined. Working capital was $69.2 million; total assets were $182.7 million; stockholders’ equity was $17.0 million; accumulated deficit was $198.6 million. Long-term debt, net of discounts and issuance costs, was $73.2 million. The company also reported a $17.7 million contingent promissory note payable to Evolus founders and a $48.9 million contingent royalty obligation.
Changes versus the prior period
- Revenue commenced in 2019 following Jeuveau’s U.S. launch; Q3 revenue was $13.2 million, compared with none in Q3 2018.
- SG&A rose to $30.9 million in Q3 and $83.3 million year to date, largely due to launch marketing, hiring a U.S. sales force, and building commercial infrastructure. The J.E.T. introductory program ended in August; shipments through that program were not recognized as revenue.
- Despite new product revenue, losses widened: Q3 net loss increased to $27.0 million from $11.8 million, and nine-month net loss increased to $75.5 million from $34.4 million.
- Gross margin was approximately 72% on recognized sales. The company had no comparable prior-period product sales.
Outlook, risks, and unusual items
- Management outlook: Evolus expects continuing operating losses and significant expenses while commercializing Jeuveau. Management stated that available cash, cash equivalents, and short-term investments were expected to fund operations for at least 12 months from issuance of the statements. No specific revenue or earnings guidance was provided. Additional financing may be needed; availability and terms are uncertain.
- Product and markets: Jeuveau was approved by the European Commission in September 2019, with a European launch planned for 2020. Canadian marketing began in October 2019 through a distributor. All reported revenue to date was from U.S. sales.
- Debt: Oxford funded a $75 million term-loan tranche in March 2019; a further $25 million may be drawn by September 30, 2020 only if sales milestones and other conditions are met. The loan bears interest at the greater of 9.5% or 30-day U.S. dollar LIBOR plus 7%, is secured by substantially all company assets, and includes covenants and default provisions. The company reported covenant compliance at September 30.
- Contingencies and litigation: Medytox alleges trade-secret misappropriation and challenges the rights underlying Jeuveau; Allergan and Medytox also brought a related U.S. International Trade Commission case. The ITC’s target date for final determination was October 2020. Requested relief could bar imports and U.S. sales. The company said it could not estimate the likelihood or possible loss; no related litigation accrual was reported in the filing.
- Supply and licensing: Daewoong is the sole manufacturer and supplier, and the license and supply agreement is central to commercialization. Loss of rights, supply interruption, or adverse litigation outcomes could materially harm the business. Up to approximately $11.5 million of further Daewoong milestones remained potentially payable, including $1.0 million accrued upon EU approval.
- Other notable items: A $14.9 million nine-month income-tax benefit primarily reflected release of part of the deferred-tax valuation allowance after FDA approval and reclassification of the Jeuveau intangible. The contingent founder royalty obligation was remeasured through operating expense, adding $8.0 million in the first nine months.
Key facts for investors to verify
- Whether Jeuveau sales growth, customer demand, realized pricing, rebate and coupon costs, and gross margin support the commercial investment.
- Cash burn and liquidity runway, including the conditions for accessing the remaining $25 million Oxford tranche and any additional financing needs.
- Developments in the Medytox and ITC proceedings, particularly any risk to importation, sales, or the Daewoong license and supply agreement.
- Daewoong’s manufacturing capacity and compliance, and the company’s ability to satisfy minimum purchase and milestone obligations.
- Whether management’s planned European launch and Canadian distribution generate meaningful revenue without materially increasing costs.