Evolus, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited financial statements; dollar amounts below are in millions unless stated otherwise. Evolus is a performance-beauty company whose sole commercial product and revenue source is Jeuveau, a botulinum toxin product for glabellar lines.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $7.8 | $2.3 | $18.3 | $2.3 |
| Gross profit | $5.9 | $1.7 | $12.1 | $1.7 |
| Gross margin | 75.0% | 71.4% | 66.3% | 71.4% |
| Operating loss | $(18.9) | $(36.0) | $(36.3) | $(61.3) |
| Net loss | $(21.1) | $(37.6) | $(40.9) | $(48.5) |
| Net loss per share, basic and diluted | $(0.63) | $(1.37) | $(1.21) | $(1.77) |
Q2 revenue increased 238% year over year, largely reflecting the product’s May 2019 launch and higher sales volume. For the first half, revenue rose 692% for the same launch-related reason. Gross margin improved in Q2 due mainly to lower coupon-related revenue adjustments, but declined for the half year due to coupon and loyalty-reward adjustments.
Q2 operating expenses included $3.0 million of restructuring costs and a $2.4 million charge from revaluing the founders’ contingent royalty obligation. The six-month period included a $7.5 million revaluation gain on that obligation, partly offsetting operating costs. Q2 SG&A fell 49.7% year over year to $17.6 million, reflecting cost reductions and the end of the J.E.T. promotional program; six-month SG&A declined 6.8% to $48.9 million. Six-month R&D declined to $0.7 million. The prior-year six-month net loss benefited from a $14.8 million tax benefit, versus $0.3 million of tax expense in 2020.
Cash, liquidity and debt
- At June 30, cash and cash equivalents were $29.8 million and short-term U.S. Treasury investments were $55.0 million, totaling $84.8 million in cash and investments. Working capital was $88.5 million; accumulated deficit was $253.9 million.
- Operating cash use was $41.9 million in the first half, compared with $52.4 million in 2019. Investing activities used $36.8 million, primarily reflecting net purchases of short-term investments; financing activities used $1.4 million. Cash alone declined $80.1 million during the half, in part as funds were placed in short-term investments.
- Oxford debt had $75.0 million of principal outstanding and a $74.2 million net carrying value. It bears interest at the greater of 9.5% or 30-day LIBOR plus 7.0%; principal payments are scheduled to begin in May 2022. The company said it did not expect to meet the sales milestone needed to draw the remaining $25.0 million tranche by its September 2020 deadline. The facility is secured by substantially all company assets.
- On July 30, 2020, Evolus received $40.0 million from Daewoong under a subordinated convertible note bearing 3% interest and maturing July 2025, subject to conversion. Daewoong may convert beginning 12 months after issuance at an initial $13.00 per share, subject to contractual terms.
- Other obligations include the founders’ contingent royalty liability, reported at $36.3 million fair value, and a contingent promissory note with an $18.5 million carrying value. The founders’ note is described as maturing in November 2021.
Material developments, outlook and risks
- ITC litigation is the central risk. In July 2020, after the quarter, an administrative law judge issued an initial determination finding a trade-secret misappropriation violation and recommended a 10-year exclusion order preventing Jeuveau imports and a cease-and-desist order preventing U.S. sales. Evolus petitioned for review and said it strongly disagreed. An ITC final determination was expected in November 2020, followed by a 60-day presidential review period; any permitted sales during that period would require a bond, potentially making sales unattractive. A final adverse result could eliminate U.S. sales of the company’s sole product, materially harm its business and going-concern prospects, and trigger an Oxford default and remedies, potentially including foreclosure on cash. The company could not estimate the likelihood or potential loss.
- COVID-19 disrupted demand. Customer closures and deferred elective procedures reduced sales beginning in mid-March. Approximately 90% of Q2 sales occurred in the second half of the quarter as some states eased restrictions. Evolus said June sales had recovered relative to earlier Q2 months, but it could not estimate the full near-term impact, particularly given infection resurgence and consumer-spending uncertainty.
- Cost reductions and plans. Beginning in April, the company delayed nonessential projects, curtailed discretionary spending, separated more than 100 employees, temporarily reduced executive salaries and board fees, reduced the board by two members, and delayed its planned European launch to 2021. It increasingly relied on its digital platform to support sales. Management expected operating losses and negative operating cash flows to continue for at least 12 months.
- Liquidity outlook. Management believed available resources, including the subsequently funded Daewoong note, were sufficient to fund operations for at least the next 12 months, subject to the ITC, COVID-19, sales, financing and other risks. The filing does not provide numerical revenue or earnings guidance.
- Other significant exposures. Evolus depends on Daewoong as its sole Jeuveau manufacturer and exclusive license provider; the product is manufactured at a single South Korean facility. The Daewoong agreement has minimum purchase and market-share provisions. Medytox’s California litigation remains unresolved; Evolus said it could not assess the likelihood of success or estimate a possible loss. The company also faces competition, elective-spending sensitivity, customer collection risk, potential impairment of goodwill or intangible assets, and uncertainty around maintaining Oxford covenant compliance.
Key facts investors should verify
- The final ITC decision, any presidential review, appeal developments, restrictions on imports or sales, and related Oxford lender actions.
- Jeuveau sales trends and customer demand following COVID-related reopening and amid any renewed restrictions.
- Cash burn, working-capital collections, and whether the $40 million Daewoong note and other resources sustain the stated liquidity runway.
- Oxford covenant status, the potential default consequences of ITC outcomes, and the company’s ability to meet future debt and founder obligations.
- Daewoong supply continuity, license exclusivity and minimum-purchase requirements, plus developments in Medytox litigation.