Evolus, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; filed October 29, 2020. Evolus is a commercial-stage aesthetics company whose revenue depends on Jeuveau, its sole commercial product, a botulinum toxin used for glabellar lines.
Financial performance and liquidity
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net revenue | $17.7 | $13.2 | $36.0 | $15.5 |
| Gross profit | $12.8 | $9.4 | $24.9 | $11.1 |
| Gross margin | 72.5% | 71.8% | 69.4% | 71.7% |
| Operating loss | $(8.8) | $(25.1) | $(45.0) | $(86.4) |
| Net loss | $(11.5) | $(27.0) | $(52.3) | $(75.5) |
| Net loss per share | $(0.34) | $(0.98) | $(1.55) | $(2.76) |
- Q3 revenue rose 34%, primarily on higher U.S. sales volume and Canadian-related service revenue. Nine-month revenue increased 132%, reflecting the 2019 U.S. launch and higher 2020 sales volume, partly offset by lower average selling prices. Q3 included $0.7 million of Canadian service revenue.
- Q3 selling, general and administrative expense declined to $21.9 million from $30.9 million; nine-month expense declined to $70.8 million from $83.3 million. Cost reductions, including delayed projects and discretionary spending cuts, contributed. More than 100 employees were separated in 2020.
- Nine-month gross margin fell to 69.4% from 71.7%, mainly due to first-quarter 2020 promotions. Cost of sales increased with sales volume. Research and development expense decreased; management said it may rise if the company pursues additional development or regulatory approvals.
- Cash used in operating activities was $55.6 million in the first nine months, versus $77.5 million in 2019. Cash and cash equivalents were $85.1 million, and short-term investments were $25.0 million at September 30. Working capital was $119.7 million.
- Total liabilities included approximately $133.0 million of debt obligations: Oxford term loan, net, of $74.0 million; Daewoong convertible note of $40.2 million; and founder promissory note of $18.8 million. The Oxford loan carries a rate of at least 9.5%, with principal amortization scheduled to begin in May 2022. The $25 million second Oxford tranche was unavailable after the company failed to meet its sales milestone.
- Stockholders’ equity was $35.1 million, versus $79.5 million at December 31, 2019; accumulated deficit was $265.4 million.
Material changes, outlook and risks
- ITC proceeding: In July 2020, an administrative law judge found a Section 337 violation based on alleged trade-secret misappropriation and recommended a ten-year exclusion order and cease-and-desist order affecting Jeuveau imports and U.S. sales. The ITC gave notice on September 21 that it would review the determination; a final decision was expected in November 2020, followed by a 60-day presidential review period. Evolus disputed the finding and said it would continue its defense. The filing states the outcome and potential loss could not be estimated.
- An adverse ITC outcome could prevent U.S. sales of the company’s sole product, threaten its ability to continue as a going concern, and potentially trigger an Oxford loan default. Oxford could accelerate repayment and exercise remedies against collateral, including cash. The board formed an independent committee to evaluate alternatives if the outcome were negative.
- Management said current cash and investments were expected to fund operations for at least 12 months from issuance, subject to risks and contingencies. The filing also states resources would not be expected to cover the next 12 months if Evolus were unsuccessful in the ITC action. Management expects continued operating losses and negative operating cash flows; no quantified revenue or earnings guidance was provided.
- COVID-19 reduced elective procedures and sales beginning in mid-March. Sales increased from June as customers reopened, but management cited uncertainty from infection trends, customer activity, and consumer discretionary spending. The company reduced expenses, cut headcount, and delayed its planned European launch to 2021.
- A $9.9 million nine-month gain from remeasurement of the founder royalty obligation reduced reported operating expenses; management attributed the revaluation chiefly to lower revenue forecasts, a higher discount rate, ITC uncertainty, and cash-flow timing. This noncash valuation item contributed to the year-over-year improvement in operating loss.
- On October 16, 2020, a putative securities class action was filed against Evolus and certain officers concerning disclosures about Jeuveau and the ITC risks. The complaint had not been served as of the filing; the company said it could not estimate a loss and recorded no liability. A separate Medytox lawsuit also remained unresolved, with no loss estimate.
- Daewoong is Evolus’s sole Jeuveau manufacturer and supplier. The company’s commercial rights and supply are subject to the Daewoong agreement and related litigation. Daewoong may receive up to $10.5 million in remaining contingent milestone payments; minimum purchase obligations also apply, subject to stated conditions.
Important facts for investors to verify
- Subsequent ITC, presidential-review, and appeal outcomes, and any effect on Jeuveau importation, sales, and Oxford loan status.
- Cash burn, customer collections, and whether liquidity remains adequate under both favorable and adverse legal scenarios.
- Quarterly Jeuveau sales, average selling price, promotions, gross margin, and customer demand as COVID-19 conditions evolve.
- Oxford covenant compliance and repayment terms, the Daewoong note’s conversion and interest terms, and founder obligations.
- Progress and potential exposure in the Medytox and securities litigation, including any changes to the company’s ability to obtain indemnification from Daewoong.