Evolus, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited results are presented against the comparable 2022 periods. Evolus is a performance-beauty company whose only marketed product was Jeuveau, a botulinum toxin used for aesthetic treatment of frown lines. All figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total net revenue | $49.3m | $37.2m | $91.1m | $71.1m |
| Gross profit margin | 68.7% | 55.4% | 68.9% | 57.1% |
| Adjusted gross profit margin | 70.2% | 57.4% | 70.5% | 59.2% |
| Loss from operations | $(15.1)m | $(21.3)m | $(27.2)m | $(36.8)m |
| Net loss | $(18.1)m | $(23.5)m | $(32.9)m | $(41.0)m |
| Operating cash flow | Not separately presented | Not separately presented | $(33.9)m | $(59.1)m |
Q2 product revenue was $48.7m and service revenue was $0.7m. Management attributed revenue growth primarily to higher sales volumes. Adjusted gross profit margin is a non-GAAP measure, defined by the company as excluding amortization of the distribution-right intangible asset.
- Expenses: Q2 selling, general and administrative expense was $41.2m, up 11.7%, mainly reflecting personnel costs associated with commercial expansion. Research and development was $1.2m, down from $1.6m. In-process R&D expense was $4.4m, including the upfront payment for the Symatese agreement, compared with $2.0m in Q2 2022.
- Interest and tax: Q2 interest expense was $3.2m, versus $2.1m; six-month interest expense was $6.0m, versus $4.1m. Income tax expense was minimal.
- Cash and liquidity: Cash and equivalents were $41.7m at June 30, down from $53.9m at year-end 2022. Working capital was $55.1m. Six-month investing cash use was $0.7m; financing provided $22.5m, principally from a $25.0m Pharmakon loan draw.
- Debt and obligations: Pharmakon term debt had $100.0m principal outstanding and a $94.8m net carrying value after unamortized discounts and issuance costs. The remaining $25.0m second-tranche installment was scheduled for December 15, 2023, subject to loan terms. The debt is secured by substantially all company assets, bears variable interest, and is interest-only until March 2026. The company reported compliance with covenants at June 30. The balance sheet also included a $47.1m contingent royalty obligation to Evolus founders.
Material changes versus prior comparable periods
- Revenue increased 32.8% in Q2 and 28.1% for the first six months, with management citing higher sales volumes. Six-month revenue included $1.3m of Canadian service revenue, versus $0.7m in 2022.
- Margins improved substantially year over year. Management cited the end of the prior, higher settlement-related royalty arrangements and the reduction in Medytox royalties; the remaining Medytox royalty is a mid-single-digit percentage of Jeuveau net sales through September 2032.
- Operating and net losses narrowed, although selling and administrative costs, interest expense, and the Symatese-related in-process R&D charge increased.
- Cash used in operations improved year over year, but remained significant. The 2023 period included the final $5.0m cash settlement payment to Medytox and Allergan; the 2022 period included a $15.0m payment.
- Cash declined by $12.2m in the first half of 2023. Cash was $84.5m at June 30, 2022, compared with $41.7m at June 30, 2023.
Outlook, risks and unusual items
- Liquidity outlook: Management expects operating losses and negative operating cash flows to continue for at least the next 12 months, but believes cash, expected operating cash generation and the remaining $25.0m Pharmakon installment will fund operations for at least 12 months from issuance of the statements. The company cautions that estimates may prove incorrect and additional financing may be needed; its $50.0m ATM facility had not been used as of the filing.
- Growth plans: Evolus expects Jeuveau growth to depend on expanding customers and purchases amid competition. It began a phased European launch in September 2022 and received Australian approval in January 2023. Management reported successful completion of the Phase II higher-strength Jeuveau study, with interim data indicating a similar safety profile to controls and median duration of at least 26 weeks; final results were expected in Q4 2023.
- Evolysse: The Symatese agreement grants exclusive U.S. commercialization and distribution rights for five dermal filler candidates. Subject to FDA approval, management expected Lift and Smooth launches in the first half of 2025, Sculpt in 2026, and Lips and Eye in 2027. Symatese is responsible for obtaining U.S. regulatory approval; future milestone, development, royalty and minimum-purchase obligations apply.
- Business and market risks: The company depends on a single marketed product and a sole Jeuveau manufacturer and supplier, Daewoong. Competition, discretionary consumer spending, inflation, supply disruption, regulatory outcomes, partner performance and access to capital could affect results. Management noted that inflation could raise operating cash needs, although it had not materially affected reported periods.
- Legal matters: A securities class action, derivative litigation and a books-and-records demand remained unresolved. Management could not reasonably estimate a loss range for the described proceedings. No related amounts were accrued for the class action or derivative matters. The final $5.0m cash installment under the Allergan/Medytox settlement was paid in Q1 2023; Medytox royalties continue through 2032.
- Other items: The company recorded a $4.4m Symatese upfront payment as in-process R&D expense. In July 2023, it amended its headquarters lease to add space beginning August 2024 and extend the lease to January 2030. A director gave notice of resignation effective September 30, 2023. Management assessed disclosure controls as effective at a reasonable assurance level.
Investor verification priorities
- Confirm the pace and quality of Jeuveau sales growth, customer retention, pricing, rebates and sales volumes, and whether growth translates into better cash generation.
- Track cash burn, the December 2023 Pharmakon installment, variable-rate interest expense, debt covenants and any financing or ATM issuance.
- Verify progress, FDA timelines, costs and contractual milestones for the Evolysse products, including the extent of reliance on Symatese.
- Assess ongoing Medytox and founder royalty effects on margins, as well as minimum-purchase and exclusivity requirements under the Daewoong and Symatese agreements.
- Monitor litigation developments and any material adverse effect, settlement or change in estimated exposure.