Evolus, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Evolus is a performance beauty company whose revenue currently depends on Jeuveau, its sole commercial product, used for glabellar lines. The product is manufactured solely by Daewoong.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total net revenue | $37.2 million | $26.1 million | $71.1 million | $38.3 million |
| Net loss | $23.5 million | $15.6 million | $41.0 million | $9.2 million |
| Operating loss | $21.3 million | $15.3 million | $36.8 million | $7.3 million |
| GAAP gross margin | 55.4% | 53.9% | 57.1% | 120.4% |
| Adjusted gross margin | 57.4% | 56.7% | 59.2% | 57.7% |
Q2 product revenue grew 42.5% year over year; first-half revenue increased 85.6%. Management attributed growth primarily to higher sales volumes and a slightly higher U.S. average selling price. The first-half 2021 GAAP gross margin was unusually high because it included a one-time $25.5 million Daewoong settlement receipt; adjusted margin excludes that receipt and distribution-right amortization.
Q2 selling, general and administrative expense rose to $36.9 million from $26.5 million, reflecting higher personnel costs, commercial activity, and preparation for European launch. First-half SG&A increased to $70.3 million from $47.1 million. Q2 included a $2.0 million upfront in-process R&D charge under a new collaboration agreement. First-half interest expense was $4.1 million, primarily related to the Pharmakon term loan.
Cash, debt, and liquidity
- Cash and cash equivalents were $84.5 million at June 30, down from $146.3 million at December 31, 2021. Working capital was $82.4 million.
- Operating activities used $59.1 million in the first half of 2022, versus $7.8 million provided in the comparable 2021 period. The 2022 outflow included the $15.0 million settlement payment and increases in receivables and inventory. Investing activities used $0.6 million; financing activities used $1.9 million.
- Pharmakon debt had $75.0 million principal outstanding and a $71.5 million net carrying value. It bears interest at three-month U.S. dollar LIBOR, subject to a 1% floor, plus 8.5%; the reported effective rate was approximately 10.89%. A further $50.0 million tranche remained available, subject to loan conditions, through December 31, 2022. Principal amortization is scheduled to begin in 2025.
- Management said current capital resources were expected to fund operations for at least 12 months from issuance of the financial statements, while also expecting operating losses and negative operating cash flows to continue for at least the next 12 months. The company stated that additional capital could be needed and may not be available on acceptable terms.
Changes, outlook, and key risks
- Management expected Jeuveau to launch in Europe in Q3 2022 and anticipated Australian regulatory approval and launch in 2023. Enrollment in a Phase II higher-strength-dose trial was completed in Q2; study completion was anticipated in the first half of 2023. These are plans, not guaranteed outcomes.
- Management expected margins to remain pressured through September 2022 by settlement royalties, partly offset by Daewoong reimbursements. From September 17, 2022, Allergan royalties were expected to end and Medytox royalties to shift to a mid-single-digit percentage of net sales through September 2032. Management expected margins to improve, subject to sales mix, pricing, marketing and international expansion.
- The company paid $15.0 million of its settlement obligations in Q1 2022; the remaining $5.0 million is due in 2023. The company also records a $45.4 million fair-value liability for low-single-digit royalties payable to its founders through Q2 2029.
- Key exposures include dependence on Jeuveau and Daewoong as sole supplier, competition, customer adoption and discretionary consumer spending, inflation and economic uncertainty, product and regulatory risks, and potential financing needs. The settlement agreements and Daewoong license terms also affect margins and exclusivity.
- A securities class action and shareholder derivative litigation remain unresolved. Management said it could not reasonably estimate a range of loss. The filing also reports a June 2022 license and research collaboration with a 3D-printing biomaterials company, with potential future research, milestone and royalty obligations.
- After quarter-end, the board appointed CEO David Moatazedi as principal financial officer on July 28, 2022, until a successor is appointed. The filing also disclosed August 1 amendments to termination benefits for the CEO and chief medical officer.
Important facts for investors to verify
- Whether revenue growth and customer demand can continue, and how selling prices, discounts and competition affect margins.
- Actual cash burn, working-capital needs, and availability and conditions of the undrawn $50.0 million Pharmakon tranche.
- Implementation and financial impact of the post-September 2022 Medytox royalty terms and the end of Allergan royalties, including Daewoong reimbursement performance.
- Progress and timing of European and Australian launches and the higher-strength clinical program.
- Developments in the securities and derivative litigation, and ongoing compliance with the Daewoong supply and exclusivity requirements.