Evolus, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report; the filing also describes material events after year-end.
Business context
Evolus was a pre-commercial aesthetics company focused on Jeuveau (prabotulinumtoxinA-xvfs), an injectable botulinum toxin for moderate-to-severe glabellar lines. The FDA approved Jeuveau on February 1, 2019, after the reporting period. The company planned a U.S. launch in spring 2019 using its own specialty sales force of about 140 representatives. Health Canada approval was received in August 2018; European approval remained pending.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Product revenue | None | None |
| Research and development | $6.5 million | $6.7 million |
| General and administrative | $29.1 million | $4.8 million |
| Total operating expenses | $46.1 million | $11.7 million |
| Net loss | $46.9 million | $4.5 million |
| Net loss per share, basic and diluted | $1.92 | $0.27 |
| Cash used in operating activities | $25.7 million | $13.2 million |
- Cash at year-end was $93.2 million; working capital was $89.1 million, stockholders’ equity was $84.4 million, and accumulated deficit was $123.0 million.
- Operating cash use rose as the company expanded ahead of commercialization. Financing provided $118.8 million, primarily from the February IPO and July follow-on offering, which generated net proceeds of $56.3 million and $67.7 million, respectively.
- Gross margin and other product profitability measures are not meaningful because Evolus had no product sales. Revenue growth and sales margins are not yet established.
- Year-end liabilities included $50.2 million in estimated founder royalty obligations and a $16.9 million carrying value for a contingent founder promissory note. The royalty obligation was revalued upward by $10.5 million in 2018, increasing operating expense.
- After year-end, Evolus paid $9.2 million to the founders and $2.0 million to Daewoong following FDA approval, and paid $1.6 million in employee bonuses.
Material changes versus the prior year
- Net loss increased by $42.4 million. G&A rose $24.3 million as Evolus hired staff, built commercial infrastructure, incurred public-company and legal costs, and prepared for launch; the $10.5 million founder royalty revaluation also contributed.
- Research and development declined slightly, mainly because certain clinical and research costs ended in 2017, partly offset by higher personnel and stock-based compensation expense.
- The 2017 net loss was reduced by a $7.3 million income tax benefit; FY2018 recorded a $0.1 million tax provision. Therefore, net-loss comparisons reflect both higher 2018 operating costs and the absence of that prior-year tax benefit.
- Shares outstanding increased from 16.5 million at year-end 2017 to 27.3 million at year-end 2018, including shares issued in the IPO and follow-on offering.
Outlook, risks and unusual items
- Management expected operating losses and cash use to continue as Evolus commercialized Jeuveau, and stated that year-end cash plus subsequent financing was expected to fund operations for at least 12 months. The company remained dependent on successful market adoption and could require additional capital.
- On March 15, 2019, Evolus entered a credit facility of up to $100 million: $75 million was funded after year-end, while a further $25 million is conditional on sales milestones. The facility carries interest at the greater of 9.5% or 30-day U.S. dollar LIBOR plus 7.0%, is secured by substantially all assets, and includes restrictive covenants and default remedies.
- Daewoong is the sole manufacturer and supplier. Evolus’s license exclusivity is subject to minimum purchase or market-share requirements; loss of supply or exclusivity could materially disrupt the business.
- Medytox alleges misappropriation of its botulinum toxin strain and trade secrets in litigation involving Evolus and Daewoong. Separately, Allergan and Medytox filed an ITC complaint in January 2019; the ITC instituted an investigation in March. Requested remedies include blocking U.S. imports and sales. Evolus said it could not estimate the likelihood or amount of loss.
- Other material risks include dependence on a single product, intense competition led by BOTOX, uncertain physician and consumer adoption in a self-pay market, regulatory and post-approval requirements, and ALPHAEON’s control of 56% of outstanding shares.
- The U.S. launch was planned for spring 2019 and Canadian commercialization for the first half of 2019. The company expected an EU regulatory opinion in the first quarter of 2019 and, if favorable, approval by the end of the second quarter; these were expectations, not assurances.
Investor verification priorities
- Verify Jeuveau’s launch timing, sales, pricing, repeat purchasing and adoption by physicians and consumers.
- Track the Medytox litigation and ITC investigation, including any import or sales restrictions, and their potential effect on the Daewoong license and supply.
- Confirm the terms, covenant compliance and cash cost of the Oxford facility, and whether sales milestones permit access to the additional $25 million.
- Review Daewoong minimum purchase obligations, remaining milestone payments and the sustainability of manufacturing capacity.
- Assess founder royalties, the $20 million contingent note’s maturity trigger, and the effect of these obligations on future cash flows.
Audit and controls: Ernst & Young issued an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting as of December 31, 2018; the auditor did not provide an internal-control attestation.