Evolus, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. Evolus is a performance-beauty company whose revenue depends on Jeuveau, its only commercial product, an injectable botulinum toxin approved for glabellar lines. The quarter and nine-month periods ended September 30, 2021; comparisons are with the same 2020 periods. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Three months 2021 | Three months 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total net revenue | $26.7 | $17.7 | $65.0 | $36.0 |
| GAAP gross margin | 54.2% | 68.3% | 93.2% | 63.2% |
| Adjusted gross margin | 56.9% | 72.5% | 57.4% | 69.4% |
| Operating loss | $(19.1) | $(8.8) | $(26.4) | $(45.0) |
| Net loss | $(19.4) | $(11.5) | $(28.6) | $(52.3) |
| Basic and diluted loss per share | $(0.35) | $(0.34) | $(0.60) | $(1.55) |
Q3 product revenue rose 50.8% year over year, primarily on higher sales volume, with the remainder attributed to higher U.S. net average selling price. Nine-month revenue increased 80.6%. Q3 selling, general and administrative expense increased to $31.7 million from $21.9 million, reflecting greater commercial activity, including direct-to-consumer marketing. Nine-month SG&A was $78.8 million versus $70.8 million.
Q3 cost of sales excluding intangible amortization rose to $11.5 million from $4.9 million, driven by higher volume and settlement-related royalties. Nine-month GAAP gross margin of 93.2% is unusually high because it includes a $25.5 million Daewoong settlement payment recorded as a reduction of cost of sales. Adjusted gross margin excludes that payment and distribution-right amortization; it fell to 57.4% from 69.4%.
Cash and cash equivalents were $107.8 million at September 30, 2021, with positive working capital of $67.0 million and stockholders’ equity of $97.4 million. Cash was $102.6 million at December 31, 2020. Operating activities used $24.3 million in the first nine months, compared with $55.6 million in 2020; investing activities provided $4.4 million and financing activities provided $25.2 million. The company reported an accumulated deficit of $404.7 million.
The Oxford term loan was repaid in January 2021, and the Daewoong convertible note was converted to equity in March. Remaining obligations included a $19.95 million current promissory note payable to the Evolus founders and $19.95 million in accrued litigation settlement liabilities, of which $15.0 million was current. Total liabilities were $117.8 million. Cash and liquidity were bolstered by an April follow-on offering, which generated approximately $92.4 million net, and ATM sales that generated $10.9 million net during the nine months.
Material changes, outlook and risks
- Settlement arrangements: Evolus agreed to pay Medytox and Allergan $35.0 million over two years and issued Medytox 6.76 million shares. It also owes royalties on Jeuveau sales: specified per-vial and low-double-digit royalties through September 2022, followed by mid-single-digit royalties through September 2032. Daewoong paid Evolus $25.5 million and agreed to reimburse certain royalties through September 2022. Management expects settlement royalties, net of reimbursement, to materially pressure margins through September 2022 and to have a lesser adverse effect thereafter.
- Liquidity outlook: Management said current capital resources were expected to fund operations for at least 12 months from issuance of the filing. The company nevertheless expected operating losses and negative operating cash flows to continue for at least the next 12 months and may need additional financing. Near-term obligations included a $20.0 million founder-note payment in November 2021 and a further $15.0 million settlement payment due in the first quarter of 2022.
- Commercial plans: Evolus planned a European launch in early 2022 and expected to enroll the first patient in a higher-strength Jeuveau Phase II trial by Q1 2022. It gave no specific revenue or earnings guidance. Sales growth depends on expanding its customer base and increasing purchases from existing customers.
- Key risks: The business relies on a single product and a sole manufacturer and supplier, Daewoong. Risks include competition, physician and consumer adoption, elective-procedure and discretionary-spending sensitivity, COVID-19 effects on demand and supply chains, and the ability to meet Daewoong minimum-purchase requirements and preserve license exclusivity. Failure to comply with settlement terms could jeopardize commercialization rights.
- Legal matters: A securities class action and consolidated shareholder derivative litigation remained pending. The derivative action was stayed pending a decision on the anticipated class-action motion to dismiss. Management considered the complaints without merit, but could not reasonably estimate a loss range and accrued no liability.
- Other notable items: The company recorded a $4.0 million nine-month expense from revaluing the founders’ contingent royalty obligation, versus a $9.9 million gain in 2020; valuation depends on forecast revenue, discount rates and payment timing. Management reported disclosure controls were effective at a reasonable assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Jeuveau sales growth and customer adoption can continue, particularly as competition, pricing and discretionary consumer demand evolve.
- The cash-flow effect of settlement payments and royalties, including Daewoong reimbursements, and the realized gross-margin impact through and after September 2022.
- How the $20.0 million founder-note payment and remaining settlement liabilities were funded, and whether available liquidity remains adequate as losses and cash use continue.
- Daewoong’s supply reliability, reimbursement performance, and Evolus’s ability to satisfy minimum-purchase conditions and retain exclusivity.
- Developments in the securities and derivative litigation, and any resulting costs or liabilities.
- The extent of future dilution from equity financing, stock compensation, or sales under the remaining ATM authorization.