Evolus, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Evolus is a commercial-stage aesthetics company whose sole marketed product is Jeuveau, a botulinum toxin treatment for glabellar lines. U.S. sales began in May 2019; Canada sales are through a distribution partner.
Financial results
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net revenue | $10.5 | $0.0 |
| Gross profit / margin | $6.3 / 59.8% | $0.0 / not applicable |
| Operating loss | $(17.4) | $(25.3) |
| Net loss | $(19.7) | $(11.0) |
| Operating cash used | $(27.9) | $(19.2) |
SG&A rose $13.8 million to $31.3 million, primarily from building the U.S. sales force and commercial infrastructure; it included a $2.6 million bad-debt provision. R&D fell to $0.5 million as U.S. Jeuveau clinical trials were completed. Gross margin was affected by coupon activity; management reported $10.2 million of provisions, primarily for coupons, in the revenue discussion.
Net loss increased despite the narrower operating loss, principally because Q1 2019 included a $14.5 million income-tax benefit following a valuation-allowance release. Q1 2020 included a $9.9 million gain from revaluing the founders’ contingent royalty obligation, compared with a $4.9 million charge in Q1 2019. Interest expense increased to $2.5 million from $0.6 million.
Liquidity, debt and balance sheet
- At March 31, cash and cash equivalents were $34.7 million and short-term Treasury investments were $65.0 million, totaling $99.6 million in liquid resources. Working capital was $103.5 million; accumulated deficit was $232.8 million.
- Cash and cash equivalents declined $75.2 million during the quarter. Investing cash use was $46.2 million, largely reflecting net purchases of short-term investments, capitalized software and equipment; the decline in cash alone does not represent the change in total liquid resources.
- Oxford term debt was $73.8 million net of discounts, with $75.0 million principal outstanding. The effective interest rate was approximately 11.6%; interest-only payments run through May 2022, followed by amortization. The debt is secured by substantially all company assets. Evolus reported covenant compliance at quarter-end.
- A further $25.0 million Oxford tranche depended on sales milestones. The company said it did not expect to meet the requirements by the September 30, 2020 deadline. The founders’ contingent promissory note was $18.2 million and matures in November 2021; the contingent royalty obligation had a fair value of $34.2 million.
Changes, outlook and material risks
- COVID-19 restrictions closed or disrupted customer practices, sharply reducing elective procedures and beginning to affect sales and collections from mid-March. Management expected revenue to decline significantly during the outbreak and for a period afterward; it could not estimate the pandemic’s full financial impact.
- Management expected operating losses and negative operating cash flows to continue for at least 12 months, but believed available cash, equivalents and investments would fund operations for at least 12 months from issuance of the statements, based on its expected cash burn. This outlook depends on sales, collections, cost reductions, litigation and debt-covenant compliance.
- In April, after quarter-end, Evolus announced expense reductions including separating approximately 100 employees, temporarily reducing executive salaries and director fees, and reducing the board by two members. It expected approximately $2.9 million in separation costs. The company also delayed its planned European launch to 2021 and said it would rely more on its digital platform.
- Jeuveau depends on Daewoong as its sole manufacturer and license partner. Failure to meet minimum purchases could jeopardize exclusivity. The company’s sole-product concentration and the product’s self-pay, elective nature increase exposure to economic conditions, competition and customer adoption.
- Medytox’s California litigation and the related U.S. International Trade Commission case challenge the product’s provenance and seek, among other remedies, restrictions on Jeuveau’s importation and sale. Evolus said it could not estimate a possible loss in the California case. The ITC evidentiary hearing occurred in February; an initial determination was due June 5, 2020, with a final determination targeted for October 6. An adverse outcome could disrupt the company’s only product and could trigger Oxford credit-facility consequences.
- Management reported no goodwill or long-lived-asset impairment at March 31, but warned that prolonged pandemic effects could lead to future impairment or further changes in the fair value of the contingent royalty obligation. No material loss accrual was recorded for the described legal matters.
Most important facts for investors to verify
- Whether Jeuveau sales, customer collections and coupon-related net pricing recover after pandemic restrictions, and whether the reported 59.8% gross margin is sustainable.
- Whether the $99.6 million of quarter-end cash and investments, together with announced cost reductions, is sufficient under actual cash-burn conditions.
- Whether the company can meet Oxford covenants and manage debt service without the unavailable or unearned $25.0 million tranche.
- Developments and rulings in the Medytox litigation and ITC case, including any impact on Jeuveau supply, exclusivity, imports or sales.
- Daewoong’s continuing ability to manufacture and supply Jeuveau, and Evolus’s ability to retain license exclusivity and meet purchase requirements.