Evolus, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Evolus is a self-pay aesthetics company whose revenue depends on Jeuveau, its only commercial product, a botulinum toxin approved for glabellar lines. The company launched Jeuveau in Great Britain in September 2022 and reported Canadian distribution-partner revenue as service revenue.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total net revenue | $33.9m | $26.7m | $105.0m | $65.0m |
| Operating loss | $17.9m | $19.1m | $54.7m | $26.4m |
| Net loss | $20.3m | $19.4m | $61.2m | $28.6m |
| Operating cash flow | Not separately provided | Not separately provided | $(76.1)m | $(24.3)m |
Q3 revenue rose 27.0%, primarily on higher sales volume; nine-month revenue rose 61.5%, reflecting higher volume and a slightly higher U.S. average selling price. Product revenue was $33.2m in Q3 and $103.6m year to date; service revenue was $0.7m and $1.4m, respectively.
- Margins: Q3 GAAP gross margin was 58.0%, versus 54.2%; adjusted gross margin was 60.2%, versus 56.9%. Nine-month GAAP gross margin was 57.4%, versus 93.2%, while adjusted gross margin was 59.5%, versus 57.4%. The 2021 GAAP comparison included a one-time $25.5m Daewoong settlement receipt that reduced cost of sales; adjusted margin excludes that receipt and distribution-right amortization.
- Expenses: Q3 selling, general and administrative expense was $34.8m, up 9.8%, and research and development expense was $1.4m, versus $0.3m. Nine-month SG&A rose 33.4% to $105.1m. The company also expensed a $2.0m upfront payment for a 3D-printing/biomaterials collaboration.
- Liquidity and debt: Cash and equivalents were $65.6m at September 30, down from $146.3m at December 31, 2021. Working capital was $64.7m. Long-term debt, net of discount and issuance costs, was $71.7m against $75.0m principal; the loan carries a floating rate and had an effective rate of approximately 12.22%. A further $50.0m tranche was available, subject to loan terms, through December 31, 2022; it had not been drawn by quarter-end.
- Other obligations: The balance sheet included a $45.5m contingent royalty obligation to Evolus founders, payable through the second quarter of 2029, and a $5.0m settlement payment due in 2023. Total liabilities were $163.5m and stockholders’ equity was $29.2m.
Changes, outlook and risks
- Operating cash use increased to $76.1m for the first nine months, from $24.3m a year earlier. The 2022 period included the $15.0m settlement payment, inventory build and timing of customer collections and vendor payments. Cash declined by $80.7m over the period.
- Management said it expects continued operating losses and negative operating cash flows for at least the next 12 months, but believes available capital resources will fund operations through at least that period. It also warned that forecasts may prove incorrect and additional capital may be needed.
- The Medytox/Allergan restricted-period royalties ended September 16, 2022. From September 17, 2022 through September 16, 2032, Evolus owes Medytox a mid-single-digit royalty on net sales; management expects lower royalty burden to support improved margins, while noting margins may vary with discounts and international expansion.
- Management anticipated Australia regulatory approval and launch in 2023, a phased rollout to additional European countries, and completion of the higher-strength Jeuveau Phase II study in the first half of 2023. The filing provides no numerical revenue or earnings guidance.
- Principal risks include reliance on a single product and Daewoong as sole manufacturer and supplier; competition and consumer sensitivity to discretionary spending; ability to maintain license exclusivity through purchase or market-share requirements; settlement agreement compliance and royalty costs; rising rates, inflation and foreign-exchange movements; and ongoing securities class-action and derivative litigation. Management could not reasonably estimate a loss range for the described lawsuits.
Investor verification priorities
- Check subsequent revenue, customer demand, average selling prices and gross margins after the lower Medytox royalty rate took effect.
- Verify cash consumption, inventory levels and collections, and whether the company drew the additional Pharmakon tranche before its deadline.
- Review variable-rate debt costs, future financing needs and progress toward management’s stated liquidity runway.
- Track Daewoong supply, license exclusivity and minimum-purchase requirements, plus regulatory and launch progress in Australia and Europe.
- Monitor the higher-strength clinical program, the $5.0m 2023 settlement payment and developments in the pending shareholder litigation.