Evolus, Inc. quarterly report, Q1 FY2018

Evolus, Inc. — Q1 2018 Form 10-Q

Reporting period: Three months ended March 31, 2018. Filing signed May 10, 2018. Evolus is a pre-commercial medical aesthetics company whose sole product candidate is DWP-450 (prabotulinumtoxinA), an injectable botulinum toxin for aesthetic use. It had generated no product revenue and had not obtained regulatory approval as of the filing.

Key financial metrics

Metric	Q1 2018	Q1 2017 / comparison
Revenue	None	None
Research and development expense	$1.7 million	$2.7 million
General and administrative expense	$3.5 million	$1.2 million
Total operating expenses	$6.0 million	$4.0 million
Net loss	$6.2 million	$4.0 million
Net loss per share, basic and diluted	$0.30	$0.24
Net cash used in operating activities	$2.2 million	$5.6 million
Cash and cash equivalents, March 31	$49.6 million	$0 at March 31, 2017

Margins are not meaningful because the company had no revenue. At March 31, 2018, total assets were $127.4 million, total liabilities $75.4 million, stockholders’ equity $52.0 million, accumulated deficit $82.3 million, and working capital $46.5 million. Current liabilities were $3.6 million. The filing reported no conventional current borrowings or note obligation at quarter-end; significant non-current obligations included a $40.6 million contingent royalty liability and a $16.1 million contingent promissory note liability.

The February IPO raised approximately $56.3 million net of underwriting discounts and commissions, excluding other offering costs. The company also paid ALPHAEON $5.0 million and received a forgiveness/recharacterization of remaining historical related-party borrowings as a capital contribution. Operating cash use declined year over year, but the quarterly net loss increased.

Material changes and unusual items

Q1 2018 G&A expense rose $2.3 million year over year, reflecting increased personnel, stock-based compensation, professional services and operating costs, partly offset by lower ALPHAEON-allocated expenses.
R&D expense fell $1.0 million, primarily because Phase III trials had been completed in 2017.
The company recorded a $0.9 million non-cash charge from remeasurement of the contingent royalty obligation. Its fair value is based on projected product sales and discount-rate assumptions.
The company was released at the IPO closing from its guarantee and security obligations related to ALPHAEON’s convertible notes. The $138.7 million year-end 2017 note obligation and related-party receivable were removed in connection with the IPO and related transactions.
Historical pre-IPO financials include allocations of ALPHAEON costs and may not represent the costs Evolus would have incurred as an independent company.

Outlook, risks and contingencies

At filing, FDA review of the U.S. BLA had a May 15, 2018 PDUFA date. The EMA and Health Canada applications were under review, with decisions expected in the second half of 2018. These were expectations, not guaranteed outcomes.
Management said available capital was expected to fund operations for at least 12 months and, based on its planned use of IPO proceeds, through launch and initial commercialization if FDA approval was obtained. It warned that additional trials, approval delays, slower adoption or higher launch costs could require earlier or additional financing. There was no committed credit facility.
If approved, Evolus planned a U.S. specialty sales force of about 65 representatives in the first year, with growth to about 150 over time. It expected operating losses and cash use to increase as it prepared for commercialization. No quantified revenue or earnings guidance was provided.
Daewoong is the sole manufacturer. FDA and UK MHRA inspections identified manufacturing observations; Daewoong submitted corrective-action responses, but regulators could require further action, reinspection or decline to approve the facility, potentially delaying or preventing approval.
Medytox alleges misappropriation of its botulinum toxin strain and trade secrets. On April 27, 2018, the California court dismissed Medytox’s case against Daewoong without prejudice; claims against Evolus, ALPHAEON and SCH remained stayed pending the South Korean proceedings. Evolus said it could not estimate the likelihood of success or possible loss.
Medytox’s FDA Citizen Petition seeks to delay BLA approval pending review of the strain’s identity/source and application data. The filing says the petition or issues raised could delay or prevent approval.
Under the Clarion Canada distribution agreement, failure to receive Health Canada approval before October 31, 2018 could trigger $1.0 million in liquidated damages, payable within 30 days of December 31, 2018. No liability was recorded at March 31.
The company assumed contributor payment obligations with a recorded fair value of $56.7 million at March 31, including low-single-digit royalties on net sales and a $20.0 million promissory note due 2.5 years after first U.S. commercial sale. The royalty obligations are subject to quarterly remeasurement.
ALPHAEON owned 78.6% of shares outstanding as of May 10, 2018 and retained control. The company also relied on a one-year services agreement with ALPHAEON, renewable annually and terminable on 60 days’ notice.

Important facts for investors to verify

Whether and when FDA, EMA and Health Canada approvals were obtained, including any label restrictions or post-approval requirements.
Resolution of Daewoong’s manufacturing inspection observations and the status of the sole-source supply arrangement.
Developments in the Medytox litigation and Citizen Petition, including potential effects on product rights, approval timing and financial exposure.
Actual cash burn, launch spending and financing needs compared with management’s stated runway assumptions.
Assumptions underlying the $40.6 million contingent royalty valuation and $16.1 million fair value of the contingent note, as well as the related-party payment terms.
Progress building the sales organization and evidence of physician and consumer adoption if the product is approved.