Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion contains management’s discussion and analysis of our financial condition and results of operations and should be read together with the historical financial statements and the notes thereto included in Item 8 “Financial Statements and Supplementary Data” and included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including but not limited to those described in the Item 1A “Risk Factors” section of this Annual Report on Form 10-K. Actual results may differ materially from those contained in any forward-looking statements. You should carefully read “Special Note Regarding Forward-Looking Statements” and Item 1A “Risk Factors.”
Overview
We are a performance beauty company with a customer-centric approach to delivering breakthrough products in the self-pay aesthetic market. In February 2019, we received the approval of our first product Jeuveau® (prabotulinumtoxinA-xvfs) from the U.S. Food and Drug Administration, or FDA. In May 2019, we commercially launched Jeuveau® in the United States.
Jeuveau® is a proprietary 900 kDa purified botulinum toxin type A formulation indicated for the temporary improvement in the appearance of moderate to severe glabellar lines, also known as “frown lines,” in adults. Our primary market is the self-pay aesthetic market, which includes medical products purchased by physicians and other customers that are then sold to consumers or used in procedures for aesthetic indications that are not reimbursed by any third-party payor, such as Medicaid, Medicare or commercial insurance. We believe we offer customers and consumers a compelling value proposition with Jeuveau®. Currently, onabotulinumtoxinA (BOTOX) is the neurotoxin market leader, and prior to the approval of Jeuveau®, was the only known 900 kDa botulinum toxin type A complex approved in the United States. We believe aesthetic physicians generally prefer the performance characteristics of the complete 900 kDa neurotoxin complex and are accustomed to injecting this formulation.
In August 2018, we received approval from Health Canada for the temporary improvement in the appearance of moderate to severe glabellar lines in adult patients under 65 years of age. We began marketing Jeuveau® in Canada in October 2019 through our distribution partner Clarion Medical Technologies, Inc., or Clarion. In September 2019, we also received approval from the European Commission, to market the product in all 27 European Union, or EU, member states plus the United Kingdom, Iceland, Norway and Liechtenstein. In January 2021, we received a positive decision from the European Commission to add the 50 unit product to the approval obtained in September 2019. We plan to launch Jeuveau® in Europe in the third quarter of 2022. We received acceptance of our submission to the Australian Therapeutics Good Administration, or TGA, for regulatory approval of our neurotoxin product in Australia in the first quarter of 2022. We expect to receive full TGA regulatory approval and launch the product in Australia in 2023.
In November 2021, we announced the initiation of a Phase II clinical trial designed to investigate a higher strength dose of Jeuveau® in the frown lines. We plan to enroll our first patient in the clinical trial in the first quarter of 2022.
Impact of Settlement Agreements
In February 2021, we settled litigation claims related to a complaint against us filed by Allergan, Inc. and Allergan Limited (together, “Allergan”) and Medytox, Inc. (“Medytox”) in the U.S. International Trade Commission related to Jeuveau® (the “ITC Action”) and certain related matters by entering into a Settlement and License Agreement with Medytox and Allergan, which we refer to as the U.S. Settlement Agreement, and another Settlement and License Agreement with Medytox which we refer to as the ROW Settlement Agreement. We refer to the U.S. Settlement Agreement and the ROW Settlement Agreement collectively as the Medytox/Allergan Settlement Agreements.
Under the Medytox/Allergan Settlement Agreements, we agreed to (i) make cash payments of $35.0 million in multiple payments over two years to Allergan and Medytox, of which we paid the first payment of $15.0 million in the third quarter of 2021 and $15.0 million during the first quarter of 2022, with final payment of $5.0 million due in 2023, (ii) pay to Allergan and Medytox royalties on the sale of Jeuveau®, based on a certain dollar amount per vial sold of the Licensed Products by or on our behalf in the United States, from December 16, 2020 to September 16, 2022, (iii) from December 16, 2020 to September 16, 2022, pay Medytox a low-double digit royalty on net sales of Jeuveau® sold by us or on our behalf in territories we have licensed outside the United States, and (iv) from September 16, 2022 to September 16, 2032, pay Medytox a mid-single digit royalty percentage on net sales of Jeuveau® in the United States and all territories we have licensed outside the United States. We also issued 6,762,652 shares of our common stock to Medytox.
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In addition, in March 2021, we entered into a Confidential Settlement and Release Agreement and certain related agreements with Daewoong Pharmaceutical Co. Ltd. (“Daewoong”), which we refer to as the Daewoong Arrangement, under which Daewoong paid us $25.5 million in April 2021, cancelled all remaining milestone payments up to $10.5 million in aggregate under the Daewoong Arrangement and agreed to reimburse us certain amounts (calculated on a dollar amount per vials sold basis in the United States) for sales of certain products with respect to which we are required to pay Medytox and Allergan royalties pursuant to the U.S. Settlement Agreement. See Note 11. Medytox/Allergan Settlement Agreements and Daewoong Arrangement for additional details on the litigation settlement agreements.
As a result of the royalty payments that we are required to pay under the Medytox/Allergan Settlement Agreements, after giving effect to the offset of a certain portion thereof that will be reimbursed to us under the Daewoong Arrangement, we expect that our cost of sales and gross profit margin will be materially negatively impacted through September 2022 and negatively impacted to a lesser extent from September 2022 to September 2032.
The Pharmakon Term Loans
On December 14, 2021, we entered into a loan agreement with BPCR Limited Partnership, BioPharma Credit Investments V (Master) LP, and Biopharma Credit PLC (collectively, “Pharmakon”). Pursuant to the terms of the agreement, Pharmakon agreed to make term loans to us in two tranches (“Pharmakon Term Loans”). The first tranche of $75.0 million was funded on December 29, 2021. The second tranche of $50.0 million may be drawn at our election no later than December 31, 2022, subject to the terms and conditions of the Pharmakon Term Loans. As of March 3, 2022, we have not drawn the second tranche. The Pharmakon Term Loans will mature on the sixth year anniversary of the closing date of the first tranche. See “—Liquidity and Capital Resources—The Pharmakon Term Loans” for further information.
Daewoong Convertible Note
On July 6, 2020, pursuant to a Convertible Promissory Note Purchase Agreement with Daewoong, we issued to Daewoong a Convertible Promissory Note for the principal amount of $40.0 million, which we refer to as the Daewoong Convertible Note, which was funded on July 30, 2020. On March 23, 2021, the outstanding principal balance, together with all accrued and unpaid interest thereon, in the amount of $40.8 million was converted, at the conversion price of $13.00 per share, into the right to receive 3,136,869 shares of our common stock under the Conversion Agreement. See “—Liquidity and Capital Resources—The Daewoong Convertible Note” for further information.
Royalties and Notes Payable to Evolus Founders
We are obligated to make the following future payments to the founders of Evolus, which we refer to as the Evolus Founders: quarterly royalty payments of a low single digit percentage of net sales of Jeuveau®. These obligations terminate in the quarter following the 10-year anniversary of the first commercial sale of Jeuveau® in the United States. The fair value of the obligations are valued quarterly and are referred to in our financial statements as the contingent royalty obligation. In November 2021, we also paid $20.0 million to satisfy in full a promissory note that matured in November 2021.
COVID-19 Impact
The ongoing COVID-19 outbreak and restrictions intended to slow its spread resulted in temporary business closures for many of our customers starting in mid-March 2020, which negatively affected our sales during the first half of 2020. Starting in June 2020, we experienced an increase in sales that continued throughout the rest of 2020 and into 2021 as many states started easing restrictions on elective procedures and many of our customers re-opened their businesses. The COVID-19 pandemic has the potential to negatively impact our supply chain through reduced availability of commercial transport, which can impact our ability to distribute Jeuveau® to our customers.
The COVID-19 pandemic and its effects continue to evolve, with developments including fluctuations in the rate of infections during 2021 and 2022 as a result of new and more contagious and/or vaccine resistant variants of the virus, which have led, and may lead in the future, to further government restrictions to combat increasing rates of infection. We continue to monitor the evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities and may take actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. As such, given the dynamic nature of this situation, we cannot reasonably estimate the full impact of COVID-19 on our financial condition, results of operations or cash flows in the future.
Management’s Use of Adjusted Gross Profit Margin
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Adjusted gross profit and adjusted gross profit margin are not required by, nor presented in accordance with United States generally accepted accounting principles, or GAAP. Adjusted gross profit is defined as total net revenues less product cost of sales, excluding the one-time settlement payment from Daewoong and amortization of an intangible asset. Adjusted gross profit margin is calculated as adjusted gross profit divided by total net revenues. Management believes that adjusted gross profit margin is an important measure for investors because management uses adjusted gross profit margin as a key performance indicator to evaluate the profitability of sales without giving effect to costs that are not core to our cost of sales, such as the settlement payment from Daewoong and the amortization of an intangible asset. Adjusted gross profit margin should not be considered a measure of financial performance under GAAP, and the items excluded from adjusted gross profit margin should not be considered in isolation or as alternatives to financial statement data presented in the financial statements as an indicator of financial performance or liquidity. As adjusted gross profit margin is not a measurement determined in accordance with GAAP and is therefore susceptible to varying methods of calculation, this metric, as presented, has limitations as an analytical tool and may not be comparable to other similarly titled measures of other companies.
The following are reconciliations of adjusted gross profit to gross profit, the most directly comparable to GAAP measure, and adjusted gross profit margin to gross profit margin, the most directly comparable GAAP measure:
Year Ended December 31,
Total net revenues $ 99.7 $ 56.5
Cost of sales:
Product cost of sales (excludes amortization of intangible assets) 43.5 18.3
Settlement payment from Daewoong (25.5) —
Amortization of distribution right intangible asset 2.9 3.0
Gross profit margin 79.0 % 62.4 %
Add: Settlement payment from Daewoong (25.5) —
Add: Amortization of distribution right intangible asset 2.9 3.0
Adjusted gross profit $ 56.2 $ 38.2
Adjusted gross profit margin 56.3 % 67.6 %
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Results of Operations
Comparison of the Years Ended December 31, 2021 and 2020
The following table summarizes our results of operations for the periods indicated:
Year Ended December 31,
Revenue:
Product revenue, net $ 99.0 $ 55.8
Service revenue 0.7 0.7
Operating expenses:
Product cost of sales (excludes amortization of intangible assets) 43.5 18.3
Settlement payment from Daewoong (25.5) —
Selling, general and administrative 112.1 98.2
Research and development 2.1 1.7
Revaluation of contingent royalty obligation to Evolus Founders 6.3 (2.0)
Depreciation and amortization 5.6 7.0
Litigation settlement expenses — 83.4
Restructuring costs — 3.0
Non-operating expense, net (1.4) (9.9)
Loss from extinguishment of debts, net (1.0) —
Loss before income taxes (46.8) (163.0)
Income tax expense — 0.1
Net Revenues
We currently operate in one reportable segment and all of our net revenues are derived from sales of Jeuveau®. Net revenues consist of revenues, net of adjustments primarily for customer rebates, coupon program, rewards related to the consumer loyalty program and co-branded marketing programs. Revenues are recognized when the control of the promised goods is transferred to the customer in an amount that reflects the consideration allocated to the related performance obligations and to which we expect to be entitled in exchange for those products or services.
Net revenues of Jeuveau® sales increased by $43.1 million, or 76.3%, to $99.7 million for the year ended December 31, 2021 from $56.5 million for the year ended December 31, 2020, with a majority of the increase attributable to higher sales volume and the rest to a higher net average selling price of Jeuveau® in the United States. We anticipate our continued sales growth will depend on our ability to grow our customer base and increase purchases by our current customers.
Cost of Sales
Product Cost of Sales
Product cost of sales, excluding amortization of intangible assets, primarily consisted of the cost of inventory purchased from Daewoong. In addition, during the period from December 2020 to September 2022, product cost of sales, excluding amortization of intangible assets, also included certain royalties on the sale of Jeuveau® payable to Medytox and Allergan pursuant to the Medytox/Allergan Settlement Agreements, partially offset by reimbursement receivable from Daewoong pursuant to the Daewoong Arrangement with respect to such royalties.
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Product cost of sales, excluding amortization of intangible assets, increased by $25.2 million, or 137.9%, to $43.5 million for the year ended December 31, 2021 from $18.3 million from the year ended December 31, 2020 primarily due to higher sales volume and the additional net royalties under the Medytox/Allergan Settlement Agreements, offset by payments we receive under the Daewoong Arrangement. We anticipate that our product cost of sales will fluctuate in line with changes in revenues.
Settlement Payment from Daewoong
In the first quarter of 2021, we recorded a one-time settlement receipt of $25.5 million from Daewoong in connection with the Daewoong Settlement Agreement.
Gross Profit Margin
Our gross profit margin was 79.0% and 62.4% for the years ended December 31, 2021 and 2020, respectively. Our adjusted gross profit margin, calculated as total net revenues less product cost of sales, excluding amortization of intangible assets and the one-time settlement payments from Daewoong, as a percentage of net revenues was 56.3% and 67.6% for the years ended December 31, 2021 and December 31, 2020, respectively. We anticipate our gross profit margin and adjusted gross profit margin will be impacted negatively and materially through September 2022, offset by payments we receive under the Daewoong Arrangement, and to a lesser degree for ten years thereafter, by our payments under the Medytox/Allergan Settlement Agreements. We also anticipate our gross profit margin and adjusted gross profit margin will fluctuate as we implement various marketing programs that may affect the average selling price for Jeuveau® and as we expand internationally.
Selling, General and Administrative
Selling, general and administrative expenses increased by $13.9 million, or 14.1%, to $112.1 million for the year ended December 31, 2021 from $98.2 million for the year ended December 31, 2020, primarily resulting from increasing our commercial activities, including direct-to-consumer marketing, partially offset by reduced personnel costs. Selling, general and administrative expenses may fluctuate in the future primarily due to potential changes in marketing strategies and future launches internationally.
Research and Development
Research and development expenses increased by $0.3 million, or 19.9%, to $2.1 million for the year ended December 31, 2021 from $1.7 million for the year ended December 31, 2020. The increase was primarily attributable to increased clinical activities. We expect that our overall research and development expense will increase as we conduct the Phase II Extra Strength clinical trial in 2022 and if and when we seek to develop further product candidates and as we pursue regulatory approvals in other jurisdictions.
Revaluation of Contingent Royalty Obligation Payable to Evolus Founders
The change in the fair value of the contingent royalty obligation payable to Evolus Founders is recorded in operating expenses in each reporting period. During the years ended December 31, 2021 and 2020, the revaluation charge of $6.3 million and gain of $2.0 million, respectively, were primarily driven by changes in management assumptions relating to revenue forecasts, the discount rate used and the timing of cash flows.
Depreciation and Amortization
Depreciation and amortization decreased by $1.4 million, or 20.0%, to $5.6 million for the year ended December 31, 2021 from $7.0 million for the year ended December 31, 2020 due to the decrease in amortization of the distribution right asset related to Jeuveau® over 20 years as well as amortization of the internal-use software costs.
Litigation Settlement Expenses
Pursuant to settlement agreements we entered into with Allergan and Medytox in connection with the settlement of claims relating to certain intellectual property disputes related to Jeuveau® in February 2021, we recorded a charge in operating expenses and related liability of $83.4 million in December 2020, which consisted of $35.0 million in deferred cash payments and $48.4 million from the issuance of 6,762,652 of shares of our common stock.
Restructuring Costs
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Restructuring costs during the year ended December 31, 2020 primarily included $3.0 million of termination benefits relating to actions we took to separate more than 100 employees to preserve liquidity and minimize the impact of COVID-19 on our business.
Non-Operating Expense, Net
Non-operating expenses, net, decreased by $8.5 million, or 85.9%, to $1.4 million for the year ended December 31, 2021 from $9.9 million for the year ended December 31, 2020, primarily due to lower interest expense resulting from the repayment of the long-term debt from Oxford Finance, LLC in January 2021 and the conversion of the Daewoong Convertible Note in March 2021.
Income Taxes (Benefit) Expense
Income tax expense was de minimis for the year ended December 31, 2021 compared to $0.1 million for the year ended December 31, 2020. This was primarily attributable to the decrease in state income taxes.
Liquidity and Capital Resources
As of December 31, 2021, we had cash and cash equivalents of $146.3 million, positive working capital of $121.1 million and stockholders’ equity of $81.9 million.
We have a limited history of generating revenues and began shipping Jeuveau® in May 2019. As of December 31, 2021, we had an accumulated deficit of $422.9 million. We incurred net losses of $46.8 million and $163.0 million in the years ended December 31, 2021 and 2020, respectively. We used net cash of $33.4 million and $57.9 million in operating activities for the twelve months ended December 31, 2021 and 2020, respectively. We expect to continue to incur significant expenses for the foreseeable future as we increase marketing efforts for Jeuveau® and maintain our regulatory approvals.
Follow-On Public Offering
In April 2021, we completed a follow-on public offering and sold 10,350,000 shares of our common stock, which included the exercise in full by the underwriters of their option to purchase an additional 1,350,000 shares of our common stock at a price to the public of $9.50 per share. We received net proceeds of approximately $92.4 million from the offering, after deducting underwriting discounts and commissions, excluding other offering expenses.
“At-the-market” Offerings of Common Stock
In March 2021, we entered into an “at-the-market” sales agreement with SVB Leerink LLC (the “Sales Agent”) pursuant to which shares of our common stock may be sold from time to time for aggregate gross proceeds of up to $75.0 million (the “ATM Program”). The Sales Agent is entitled to compensation, at a commission rate equal to 3.0% of the gross proceeds from the sale of our common shares under the ATM Program.
For the twelve months ended December 31, 2021, we sold a total of 934,367 shares of our common stock pursuant to the ATM Program at the prevailing market prices for total net proceeds of $10.9 million and paid total commissions of $0.3 million to the Sales Agent.
The Pharmakon Term Loans
On December 14, 2021, we entered into a loan agreement with Pharmakon. Pursuant to the terms of the agreement, Pharmakon agreed to make term loans to us in two tranches. The first tranche of $75.0 million was funded on December 29, 2021. The second tranche of $50.0 million may be drawn at our election no later than December 31, 2022. We received net proceeds of approximately $68.7 million from Pharmakon, after issuance costs and debt discounts. As of March 3, 2022, we have not drawn the second tranche. We shall make 12 equal quarterly payments of principal on the outstanding Pharmakon Term Loans commencing in March 2025 and continuing through the maturity date. The Pharmakon Term Loans will mature on the sixth year anniversary of the closing date of the first tranche. The term loan bears an annual interest rate equal to the
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U.S. Dollar LIBOR rate (subject to a LIBOR rate floor of 1.0%) plus 8.5%, and matures in December 2027. The proceeds of the Pharmakon Term Loans will be used to fund the Company’s general corporate and working capital requirements.
Contingent Royalties and Promissory Note Payable to the Evolus Founders
We are obligated to make the following future payments to the founders of Evolus, which we refer to as the Evolus Founders: quarterly royalty payments of a low single digit percentage of net sales of Jeuveau®. These obligations terminate in the quarter after the 10-year anniversary of the first commercial sale of Jeuveau® in the United States. The fair value of the obligations is valued quarterly and is referred to in our financial statements as the contingent royalty obligation. In November 2021, we also paid $20.0 million to satisfy in full a promissory note that matured in November 2021.
As of December 31, 2021 and 2020, we recorded an aggregate balance of $44.7 million and $41.5 million, respectively, on our balance sheet for the royalty payment obligation.
The Oxford Loan and Security Agreement
On March 15, 2019, we entered into a Loan and Security Agreement, or the credit facility, with Oxford Finance, LLC, as collateral agent, or Oxford, and the lenders party thereto from time to time, pursuant to which the lender would make term loans available to us of up to $100.0 million. The credit facility provided that the term loans would be funded in two advances. The first tranche of $75.0 million was funded on the closing date, and the second tranche of $25.0 million was never drawn. The credit facility bore an annual interest rate equal to the greater of 9.5%, or the 30-day U.S. Dollar LIBOR rate plus 7.0%. We agreed to pay interest-only for the first 36 months until May 2022, followed by a 23-month amortization period.
On January 4, 2021, we entered into a letter agreement with Oxford, pursuant to which (i) we paid Oxford $76.4 million, or the Payoff Amount, to discharge in full all outstanding obligations, included accrued interest, under the Loan and Security Agreement, and (ii) effective upon such repayment, the Loan and Security Agreement, and all unfunded commitments thereunder, guarantees and other security interests granted to Oxford, and all other obligations of and restrictions on us under the Loan and Security Agreement, terminated.
As a condition to entering into the letter agreement, Oxford agreed to waive a total of approximately $4.3 million of fees comprised of (i) approximately $2.8 million of the Final Payment (as defined in Note 6. Term Loans and (ii) the prepayment fee of $1.5 million otherwise payable pursuant to the terms of the Loan and Security Agreement.
The Daewoong Convertible Note
On July 6, 2020, we entered into a Convertible Promissory Note Purchase Agreement with Daewoong for the purchase and sale of a Convertible Promissory Note for the principal amount of $40.0 million, which we refer to as the Daewoong Convertible Note, which was funded on July 30, 2020. Additionally, on July 6, 2020, we, Daewoong, and Oxford entered into a Subordination Agreement pursuant to which the Convertible Note would be subordinated to our obligations under the Loan and Security Agreement with Oxford and us.
The Daewoong Convertible Note bore interest at a rate of 3.0% payable semi-annually in arrears on June 30th and December 31st of each year and was scheduled to mature on July 30, 2025, subject to earlier conversion as provided below.
On March 25, 2021, pursuant to the Conversion Agreement with Daewoong, the outstanding principal balance, including interest paid in kind, that was added to the outstanding principal under the terms of the Daewoong Convertible Note, together with all accrued and unpaid interest thereon, in the amount of $40.8 million was converted into 3,136,869 shares of our common stock, at the conversion price of $13.00 per share.
Litigation Settlement
On February 18, 2021, upon entering into the Medytox/Allergan Settlement Agreements, we agreed to pay to Allergan and Medytox $35.0 million in multiple payments over two years, of which we paid $15.0 million in the third quarter of 2021 and $15.0 million during the first quarter of 2022, with final payment of $5.0 million due in 2023. We also issued 6,762,652 shares of common stock to Medytox. In addition, during the period from December 16, 2020 to September 16, 2022, we agreed to pay to Allergan and Medytox royalties on the sale of Jeuveau®, based on a certain dollar amount per vial sold in the United States, and a low-double digit royalty on net sales of Jeuveau® sold in other Evolus territories. During the period from
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September 17, 2022 to September 16, 2032, we agreed to pay to Medytox a mid-single digit royalty percentage on all net sales of Jeuveau®. The royalty payments will be made quarterly.
As described in “—Overview—Impact of Settlement Agreements,” on March 23, 2021, upon entering the Daewoong Arrangement, Daewoong paid us $25.5 million in April 2021, cancelled all remaining milestone payments up to $10.5 million in aggregate under the Daewoong Arrangement and agreed to reimburse us certain amounts (calculated on a dollar amount per vials sold basis in the United States) for sales of certain products with respect to which we are required to pay Medytox and Allergan royalties pursuant to the U.S. Settlement Agreement.
License and Supply Agreement
The Daewoong Agreement includes certain minimum annual purchases we are required to make in order to maintain the exclusivity of the license. We may, however, meet these minimum purchase obligations by achieving certain market share in its covered territories. These potential minimum purchase obligations are contingent upon the occurrence of future events, including receipt of governmental approvals and our future market share in various jurisdictions.
Operating Leases
Our corporate headquarters in Newport Beach, California is under a five-year non-cancelable operating lease, which expires on January 31, 2025 with an option to extend the term for an additional 60 months. Lease payments increase based on an annual rent escalation clause that occurs on each February 1 anniversary. We may, under certain circumstances, terminate the lease on the 36 months anniversary of the lease commencement date by providing a written notice 12 months prior to such anniversary and paying a termination fee equal to six months basic rent plus certain other expenses.
Current and Future Capital Requirements
We believe that our current capital resources, which consist of cash and cash equivalents, cash generated from operations, and cash available under the Pharmakon Term Loans, as well as the public debt and equity markets, will be sufficient to satisfy both our short-term and long-term cash requirements for working capital to support our daily operations and meet commitments under our contractual obligations with third parties. This includes our obligation to make an additional $15.0 million payment pursuant to the Medytox/Allergan Settlement Agreements in the first quarter of 2022.
We have based our projections of capital requirements on assumptions that may prove to be incorrect and we may use all our available capital resources, which consist of cash and cash equivalents, cash generated from operations, and cash available under the Pharmakon Term Loans, as well as the public debt and equity markets, sooner than we expect. Our cash requirements depend on numerous factors, including but not limited to the impact of any potential disruptions to our supply chain resulting from the COVID-19 pandemic, inflation and other long-term commitments and contingencies. Because of the numerous risks and uncertainties associated with research, development and commercialization of our products, we are unable to estimate the exact amount of our operating capital requirements. Any future funding requirements will depend on many factors, including, but not limited to:
•the timing and amounts of the royalty and other payments payable in connection with the Medytox/Allergan Settlement Agreements and the reimbursement receivable from Daewoong in connection with the Daewoong Arrangement;
•the amounts of the royalty payable to the Evolus Founders;
•the number and characteristics of any future product candidates we may develop or acquire;
•the timing and costs of any ongoing or future clinical programs we may conduct;
•our ability to forecast demand for our products, scale our supply to meet that demand and manage working capital effectively;
•the cost of manufacturing our product or any future product candidates and any products we successfully commercialize, including costs associated with our supply chain;
•the cost of commercialization activities for Jeuveau® or any future product candidates are approved or cleared for sale, including marketing, sales and distribution costs;
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•the cost of maintaining a sales force, the productivity of that sales force, and the market acceptance of our products;
•our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of any such agreements that we may enter into;
•any product liability or other lawsuits related to our products;
•the cost of any current litigation, including our ongoing securities class action lawsuit and shareholder derivative lawsuit;
•the expenses needed to attract and retain skilled personnel;
•the costs associated with being a public company;
•the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing intellectual property and any other future intellectual litigation we may be involved in; and
•the timing, receipt and amount of sales of any future approved or cleared products.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Year Ended December 31,
(in millions)
Net cash (used in) provided by:
Operating activities $ (33.4) $ (57.9)
Investing activities 4.0 12.2
Change in cash and cash equivalents 43.7 (7.3)
Cash and cash equivalents, beginning of period 102.6 109.9
Cash and cash equivalents, end of period $ 146.3 $ 102.6
Operating Activities
For the year ended December 31, 2021, operating activities used $33.4 million of cash, which primarily resulted from our net loss of $46.8 million as adjusted for certain non-cash charges including $9.6 million of stock-based compensation expense, $0.6 million of provision of allowance for doubtful accounts, $0.9 million of amortization of debt discount and issuance costs, $5.6 million of depreciation and amortization and $6.3 million in revaluation of our contingent royalty obligation. In addition, net operating assets and liabilities changed by $11.5 million primarily driven by $15.0 million of accrued litigation settlement expenses and various timing of inventory purchases and payments, collections from customers and payments to vendors.
For the year ended December 31, 2020, operating activities used $57.9 million of cash, which primarily resulted from our net loss of $163.1 million as adjusted for certain non-cash charges including $10.6 million of stock-based compensation expense, $2.1 million of provision of allowance for doubtful accounts, $2.7 million of amortization of debt discount and issuance costs, $7.0 million of depreciation and amortization and $48.4 million of non-cash portion of accrued settlement expenses, partially offset by a gain of $2.0 million in revaluation of our contingent royalty obligation In addition, net operating assets and liabilities changed by $35.6 million primarily driven by $35.0 million of accrued litigation settlement expenses and various timing of inventory purchases and payments, collections from customers and payments to vendors.
Investing Activities
Cash provided by investing activities was $4.0 million for the year ended December 31, 2021 compared to $12.2 million of cash provided for the year ended December 31, 2020. The change in cash used in investing activities was attributable to maturities of short-term investments with no new purchases during the year ended December 31, 2021.
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Financing Activities
Cash provided by financing activities increased by $34.7 million to $73.1 million for the year ended December 31, 2021 from $38.3 million for the year ended December 31, 2020.
For the year ended December 31, 2021, cash provided by financing activities resulted from the net proceeds from our follow-on offering of $92.4 million, sales of $10.9 million of our common shares under the ATM Program, and $72.0 million net proceeds from long-term debt with Pharmakon, offset by the repayment of long-term debt with Oxford of $76.3 million and repayment of the promissory note payable to Evolus Founders of $20.0 million.
For the year ended December 31, 2020, cash provided by financing activities consisted of the $40.0 million proceeds from the Convertible Note in July 2020, partially offset by a $1.1 million in royalty and milestone payments to Evolus Founders.
Indebtedness
See “—Liquidity and Capital Resources” for a description of our Pharmakon Term Loans.
Material Cash Requirements
Our material cash requirements from known contractual and other obligations primarily consist of (i) principal and interest payments related to our Pharmakon Term Loans (future interest payments on our outstanding Pharmakon Term Loans total approximately $33.5 million, with $7.2 million due within twelve months), (ii) quarterly royalty payments to the Evolus Founders of a low single digit percentage of net sales of Jeuveau® (these obligations terminate in the quarter after the 10-year anniversary of the first commercial sale of Jeuveau® in the United States), (iii) $15.0 million during the first quarter of 2022, and a final payment of $5.0 million due in 2023 related to the Medytox/Allergan Settlement Agreements, (iv) quarterly royalty payments to Allergan and Medytox on the sale of Jeuveau® during the period from December 16, 2020 to September 16, 2022 based on a certain dollar amount per vial sold in the United States, and a low-double digit royalty on net sales of Jeuveau® sold in other Evolus territories (during the period from September 17, 2022 to September 16, 2032, we agreed to pay to Medytox a mid-single digit royalty percentage on all net sales of Jeuveau®) and (v) obligations under operating leases related to our office spaces.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities, revenue and expenses at the date of the financial statements as well as the expenses incurred during the reporting period. Generally, we base our estimates on historical experience and on various other assumptions in accordance with GAAP that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions and such differences could be material to the financial position and results of operations. On an ongoing basis, we evaluate our estimates and assumptions in light of changes in circumstances, facts and experience.
While our significant accounting policies are more fully described in the notes to our financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies to be most critical for fully understanding and evaluating our financial condition and results of operations, as these policies relate to the more significant areas involving management’s judgments and estimates.
Revenue Recognition
We recognize revenue when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration to which we expect to be entitled in exchange for the goods or services. In order to achieve that core principle, a five-step approach is applied: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue allocated to each performance obligation when (or as) we satisfy the performance obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account for revenue recognition.
We generate product revenue from the sale of Jeuveau® in the United States and service revenue from the sale of Jeuveau® through a distribution partner in Canada. For product revenue, we recognize revenue when control of Jeuveau® is transferred
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to a customer upon receipt. For service revenue, we are determined to be the agent in the distribution of Jeuveau® in Canada and record the sale as service revenue on a net basis.
Product revenues are recorded net of sales-related adjustments, wherever applicable, for the volume rebates, coupon program, consumer loyalty program and co-branded marketing programs.
Volume rebates are contractually offered to certain customers, and the rebates payable to each customer are determined based on the contract and quarterly purchase volumes, which are readily available. The coupon program ended in June 2020, and all unredeemed coupons were expired. The consumer loyalty program allows participating customers to earn rewards for qualifying treatments to their patients (i.e. consumers) using Jeuveau® and redeem the rewards for Jeuveau® in the future at no additional cost. The loyalty program represents a customer option that provides a material right and, accordingly, is a performance obligation. At the time Jeuveau® product is sold to customers, the invoice price is allocated between the product sold and the estimated material right reward, or Reward, that the customer might redeem in the future. The standalone selling price of the Reward is measured based on historical sales data, estimated average selling price of Jeuveau® at the time of redemption, expected customer and consumer participation rates in the loyalty program, and estimated number of qualifying treatments to be performed by customers. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to establish the liability for the Reward. However, if the actual customer and consumer participation rates and number of qualifying treatments in any future periods materially differ from the estimates, we may be exposed to adjustments that could be material. The portion of invoice price allocated to the Reward is initially recorded as deferred revenue, and when customers redeem the Reward and the related product is delivered, the deferred revenue is reversed and included in net revenues. Through the co-branded marketing programs, eligible customers with a certain level of Jeuveau® purchases receive advertising co-branded with us. At the time Jeuveau® is sold to customers, the invoice price is allocated between the product sold and the advertisement. The standalone selling price of the advertisement is measured based on estimated market value of similar advertisement adjusted for the customer’s portion of the advertisement. The portion of invoice price allocated to the advertisement is initially recorded as deferred revenue, and when the advertisement airs, the deferred revenue is recognized in net revenues at that time.
Accounts receivable are recorded at the invoiced amount and do not bear interest. We assess the probability that we will collect the entitled consideration in exchange for the goods sold, by considering the customer’s ability and intention to pay when consideration is due. On a recurring basis, we estimate the amounts of receivables considered uncollectible to reflect an allowance for doubtful accounts.
Contingent Royalty Obligation to the Evolus Founders
We determine the fair value of the contingent royalty obligation payable to the Evolus Founders under the Amended Purchase Agreement based on significant unobservable inputs using a discounted cash flows method. Changes in the fair value of this contingent royalty obligation are determined each period end and recorded in operating expenses in the statements of operations and comprehensive loss and in the current and non-current liabilities in the balance sheets. The significant unobservable input assumptions that can significantly change the fair value includes (i) projected net revenues during the payment period, (ii) the discount rate and (iii) the timing of payments. Significant increases (decreases) in the discount rate would result in a significantly lower (higher) fair value measurement, which could materially impact the fair value reported on the balance sheet.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in a business combination. We review goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. We perform an annual qualitative assessment of goodwill in the fourth quarter each calendar year to determine if any events or circumstances exist, such as an adverse change in business climate or a decline in the overall industry demand, that would indicate that it would more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill. If events or circumstances do not indicate that the fair value of a reporting unit is below its carrying amount, then goodwill is not considered to be impaired and no further testing is required. If further testing is required, we perform a two-step process. The first step involves comparing the fair value of our reporting unit to its carrying value, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step of the test is performed by comparing the carrying value of the goodwill in the reporting unit to its implied fair value. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value. For the purpose of impairment testing, we have determined that there is one reporting unit. There has been no impairment of goodwill for any of the periods presented.
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Intangible Assets
Intangible assets are consisted of a definite-lived distribution right of Jeuveau® and capitalized internal-use software. The distribution right is amortized over the period the asset is expected to contribute to our future cash flows. We determined the pattern of this intangible asset’s future cash flows could not be readily determined with a high level of precision. As a result, the distribution right intangible asset is being amortized on a straight-line basis over the estimated useful life of 20 years.
We capitalize certain internal-use software costs associated with the development of its mobile and web-based customer platforms. These costs include personnel expenses and external costs that are directly associated with the software projects. These costs are included as intangible assets in the accompanying balance sheets. The capitalized internal-use software costs are amortized on a straight-line basis over the estimated useful life of two years upon being placed in service.
We review long-term and identifiable definite-lived intangible assets or asset groups for impairment when events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset or an asset group, further impairment analysis is performed. An impairment loss is measured as the amount by which the carrying amount of the asset or asset groups exceeds the fair value for assets to be held and used or fair value less cost to sell for assets to be disposed of. We also review the useful lives of its assets periodically to determine whether events and circumstances warrant a revision to the remaining useful life. Changes in the useful life are adjusted prospectively by revising the remaining period over which the asset is amortized. There was no material impairment of long-lived assets for any periods presented.
Recently Issued and Adopted Accounting Pronouncements
We describe the recently issued accounting pronouncements that apply to us in Item 8. Financial Statements and Supplementary Data -Note 2.Basis of Presentation and Summary of Significant Accounting Policies-Recent Accounting Pronouncements.
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Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
Not applicable.
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Item 8. Financial Statements and Supplementary Data.
Evolus, Inc.
Index to Financial Statements
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID: 42) 60
Financial Statements:
Balance Sheets 61
Statements of Operations and Comprehensive Loss 62
Statements of Stockholders’ Equity (Deficit) 63
Statements of Cash Flows 64
Notes to Financial Statements 66
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Evolus, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Evolus, Inc. (the Company) as of December 31, 2021 and 2020, the related statements of operations and comprehensive loss, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2017.
Irvine, California
March 3, 2022
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Evolus, Inc.
Balance Sheets
(in thousands, except par value and share data)
December 31,
ASSETS
Current assets
Short-term investments — 5,000
Operating lease right-of-use assets 2,722 3,414
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Contingent royalty obligation payable to Evolus Founders 5,314 3,446
Promissory note payable to Evolus Founders — 19,068
Term loan, net of discount and issuance costs — 74,384
Contingent royalty obligation payable to Evolus Founders 39,426 38,100
Term loan, net of discount and issuance costs 71,222 —
Deferred tax liability 40 25
Commitments and contingencies (Note 9)
Stockholders’ equity (deficit)
Total stockholders’ equity (deficit) 81,876 (72,958)
Total liabilities and stockholders’ equity (deficit) $ 257,483 $ 209,068
See accompanying notes to financial statements.
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Evolus, Inc.
Statements of Operations and Comprehensive Loss
(in thousands, except share and per share data)
Year Ended December 31,
Revenue:
Operating expenses:
Product cost of sales (excludes amortization of intangible assets) 43,534 18,299
Settlement payment from Daewoong (25,500) —
Revaluation of contingent royalty obligation to Evolus Founders 6,290 (2,007)
Depreciation and amortization 5,622 7,027
Litigation settlement expenses — 83,421
Restructuring costs — 2,956
Other income (expense):
Interest income 1 635
Loss from extinguishment of debts, net (968) —
Income tax expense 42 77
Other comprehensive gain:
Unrealized loss on available-for-sale securities, net of tax — (6)
Net loss per share, basic and diluted $ (0.94) $ (4.83)
See accompanying notes to financial statements.
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Evolus, Inc.
Statements of Stockholders’ Equity (Deficit)
(in thousands, except share data)
Shares Amount Shares Amount
Other comprehensive loss — — — — — (6) — (6)
Stock-based compensation expense — — — — 9,638 — — 9,638
See accompanying notes to financial statements.
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Evolus, Inc.
Statements of Cash Flows
(in thousands)
Year Ended December 31,
Cash flows from operating activities
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 5,622 7,027
Amortization of discount on short-term investments 272 (427)
Amortization of operating lease right-of-use assets 692 654
Amortization of debt discount and issuance costs 941 2,691
Paid-in-kind interest on convertible note — 506
Deferred income taxes 15 25
Revaluation of contingent royalty obligation to Evolus Founders 6,290 (2,007)
Loss from extinguishment of debts 968 —
Non-cash portion of accrued settlement expenses — 48,421
Changes in assets and liabilities:
Prepaid expenses and other current assets (7,264) (1,690)
Operating lease liabilities (838) (734)
Net cash used in operating activities (33,388) (57,871)
Cash flows from investing activities
Purchases of property and equipment (393) (815)
Additions to capitalized software (577) (2,323)
Purchases of short-term investments — (74,668)
Maturities of short-term investments 5,000 90,000
Net cash provided by investing activities 4,030 12,194
Cash flows from financing activities
Repayment of long term debt (76,323) —
Repayment of promissory note payable to Evolus Founders (20,000) —
Payment of contingent royalty obligation to Evolus Founders (3,097) (1,130)
Proceeds from issuance of convertible note — 40,000
Proceeds from issuance of long-term debt, net of discounts 71,958 —
Payments for debt issuance costs (3,263) —
Payment for debt obligation — (523)
Proceeds from follow-on offering, net of underwriting fees 92,426 —
Payments for offering costs (214) —
Issuance of common stock in connection with incentive equity plan 655 —
Proceeds from ATM sales of shares 10,910 —
Net cash provided by financing activities 73,052 38,347
Change in cash and cash equivalents 43,694 (7,330)
Cash and cash equivalents, beginning of period 102,562 109,892
See accompanying notes to financial statements.
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Evolus, Inc.
Statements of Cash Flows (Continued)
(in thousands)
Year Ended December 31,
Supplemental disclosure of cash flow information
Cash paid for interest $ 138 $ 7,244
Cash paid for income taxes $ 14 $ 65
Non-cash investing and financing information
Conversion of convertible note to equity $ 39,808 $ —
Capitalized software recorded in accounts payable and accrued expenses $ 10 $ —
See accompanying notes to financial statements.
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Evolus, Inc.
Notes to Financial Statements
(in thousands, except share and per share data)
Note 1. Description of Business
Description of Business
Evolus, Inc., (“Evolus” or the “Company”) is a performance beauty company focused on delivering products in the self-pay aesthetic market. The Company received the approval of its first product Jeuveau® (prabotulinumtoxinA-xvfs) from the U.S. Food and Drug Administration (the “FDA”) in February 2019. The product was also approved by Health Canada in August 2018 and the European Commission (“EC”) in September 2019. Jeuveau® is a proprietary 900 kDa purified botulinum toxin type A formulation indicated for the temporary improvement in the appearance of moderate to severe glabellar lines, also known as “frown lines,” in adults. The Company commercially launched Jeuveau® in the United States in May 2019 and in Canada through a distribution partner in October 2019. The Company currently generates all of its net revenues from Jeuveau®. The Company is headquartered in Newport Beach, California.
Liquidity and Financial Condition
The accompanying financial statements have been prepared on a basis that assumes that the Company will continue as a going concern, and do not include any adjustments that may result from the outcome of this uncertainty. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of the Company’s liabilities and commitments in the normal course of business and does not include any adjustments to reflect the possible future effects of the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Since inception, the Company has incurred recurring net operating losses and negative cash flows from operating activities and management expects operating losses and negative cash flows to continue for at least the next 12 months. As of December 31, 2021, the Company had $146,256 in cash and cash equivalents and an accumulated deficit of $422,882.
In December 2021, the Company entered into a $125,000 Term Loan agreement with BPCR Limited Partnership, BioPharma Credit Investments V (Master) LP, and Biopharma Credit PLC (collectively, “Pharmakon”). The first tranche of $75,000 was funded on December 29, 2021. The second tranche of $50,000 may be drawn at the Company’s election no later than December 31, 2022, subject to the terms and conditions of the loan agreement. As of December 31, 2021, the Company has not drawn the second tranche. The Company received net proceeds of approximately $68,695 from Pharmakon, after issuance costs and debt discounts. See Note 6. Term Loans for additional information.
In January 2021, the Company and Oxford Finance LLC (“Oxford”) entered into an agreement, pursuant to which the Company paid Oxford $76,447 to pay off the Oxford Term Loan. See Note 6. Term Loans for additional information.
In February 2021, the Company, Medytox, Inc. (“Medytox”), Allergan, Inc. and Allergan Limited (together, “Allergan”) entered into settlement agreements in connection with the International Trade Commission (“ITC”) action, for which the Company agreed to pay $15,000 in 2021, $15,000 in 2022 and $5,000 in 2023 with additional terms including specified royalty payments as described below and in Note 11. Medytox/Allergan Settlement Agreements and Daewoong Arrangement.
In March 2021, the Company and Daewoong entered into certain agreements, pursuant to which Daewoong (1) paid the Company $25,500 in April 2021 and (2) agreed to reimburse the Company certain amounts with respect to the royalties payable to Medytox and Allergan, among other terms. See Note 11. Medytox/Allergan Settlement Agreements and Daewoong Arrangement for additional information. In addition, in March 2021 the outstanding Daewoong Convertible Note (as such term is defined in Note 7. Daewoong Convertible Note), including accrued interest, in the amount of $40,779 was converted into 3,136,869 shares of the Company’s common stock. See Note 7. Daewoong Convertible Note for additional information.
In April 2021, the Company completed a follow-on public offering and issued 10,350,000 shares of its common stock, which included the exercise in full by the underwriters of their option to purchase an additional 1,350,000 shares of common stock, at a price to the public of $9.50 per share. The Company received net proceeds of approximately $92,426 from the offering, after deducting underwriting discounts and commissions, excluding other offering expenses.
In June, July and August 2021, the Company sold 934,367 common shares at the prevailing market prices for total net proceeds of $10,910 under the existing “at-the-market” sales agreement. See Note 10. Stockholders’ Equity for additional details.
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Evolus, Inc.
Notes to Financial Statements
(in thousands, except share and per share data)
The Company believes that its current capital resources, which consist of cash and cash equivalents, will be sufficient to fund operations through at least the next twelve months based on its expected cash needs. The Company may be required to raise additional capital to fund future operations through entering into licensing or collaboration agreements with partners, grants or other sources of financing. Sufficient funds may not be available to the Company at all or on attractive terms when needed from equity or debt financings. If the Company is unable to obtain additional funding from these or other sources when needed, or to the extent needed, it may be necessary to significantly reduce its controllable and variable expenditures and current rate of spending through reductions in staff and delaying, scaling back, or suspending certain research and development, sales and marketing programs and other operational goals.
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Reclassifications
Certain comparative amounts for prior year have been reclassified to conform to current year presentations. Such reclassifications did not affect net income or retained earnings.
Use of Estimates
Management is required to make certain estimates and assumptions in order to prepare financial statements in conformity with GAAP. Such estimates and assumptions affect the reported financial statements. The Company’s most significant estimates relate to net revenues, allowance for doubtful accounts, fair value measurements, goodwill and long-lived asset valuations and impairment assessments, inventory valuations, income tax valuations, stock-based compensation and royalty obligations, among others. Management bases estimates on historical experience and on assumptions that management believes are reasonable. The Company’s actual results could differ materially from those estimates.
Additionally, the full impact of the COVID-19 outbreak is unknown and cannot be reasonably estimated. However, where possible, management has made appropriate accounting estimates with respect to certain accounting matters, which include the fair value of royalty obligations, allowance for doubtful accounts, inventory valuation and impairment assessments of goodwill and other long-lived assets, based on the facts and circumstances available as of the reporting date. The Company’s future assessment of the magnitude and duration of the COVID-19 outbreak, as well as other factors, could result in material impacts to the Company’s financial statements in future reporting periods.
Risks and Uncertainties
In 2013, Evolus and Daewoong Pharmaceutical Co. Ltd. (“Daewoong”) entered into an agreement (the “Daewoong Agreement”), pursuant to which the Company received an exclusive distribution license to Jeuveau® from Daewoong for aesthetic indications in the United States, European Union, United Kingdom, members of the European Economic Area, Switzerland, Canada, Australia, Russia, certain members of the Commonwealth of Independent States, and South Africa, as well as co-exclusive distribution rights with Daewoong in Japan. Jeuveau® is manufactured by Daewoong in a facility in South Korea. The Company also has the option to negotiate first with Daewoong to secure a distribution license for any product that Daewoong directly or indirectly develops or commercializes that is classified as an injectable botulinum toxin (other than Jeuveau®) in a territory covered by the Daewoong Agreement. The Company relies on Daewoong, its exclusive and sole supplier, to manufacture Jeuveau®. Any termination or loss of significant rights, including exclusivity, under the Daewoong Agreement would materially and adversely affect the Company’s commercialization of Jeuveau®. See Note 9. Commitments and Contingencies and Note 11. Medytox/Allergan Settlement Agreements and Daewoong Arrangementfor additional information.
The Company commercially launched Jeuveau® in the United States in May 2019 and in Canada through its distribution partner in October 2019 and, as such, has a limited history of sales. If any previously granted approval is retracted or the Company is denied approval or approval is delayed by any other regulators, it may have a material adverse impact on the Company’s business and its financial statements.
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Evolus, Inc.
Notes to Financial Statements
(in thousands, except share and per share data)
The Company is also subject to risks common to companies in the pharmaceutical industry including, but not limited to, dependency on the commercial success of Jeuveau®, the Company’s sole commercial product, significant competition within the medical aesthetics industry, its ability to maintain regulatory approval of Jeuveau®, third party litigation and challenges to its intellectual property, uncertainty of broad adoption of its product by physicians and patients, its ability to in-license, acquire or develop additional product candidates and to obtain the necessary approvals for those product candidates, and the need to scale manufacturing capabilities over time.
The COVID-19 outbreak and restrictions intended to slow the spread of COVID-19, including quarantines, government-mandated actions, stay-at-home orders and other restrictions, have adversely affected the Company’s business in a number of ways, which have resulted, and may continue to result, in a period of business disruption and in reduced sales and operations. In addition, any disruption and volatility in the global capital markets may increase the Company’s cost of capital and adversely affect its ability to access financing when and on terms that the Company desires. Any of these events could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.
Segment Reporting
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker. The Company has determined that it operates in a single operating and reportable segment. The Company’s chief operating decision maker is its Chief Executive Officer who manages operations and reviews the financial information as a single operating segment for purposes of allocating resources and evaluating its financial performance.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, short-term investments and accounts receivable. Substantially all of the Company’s cash is held by financial institutions that management believes are of high credit quality. Such deposits may, at times, exceed federally insured limits. To date, the Company has not experienced any losses associated with this credit risk and continues to believe that this exposure is not significant. The Company invests its excess cash, in line with its investment policy, primarily in money market funds and debt instruments of U.S. government agencies.
The Company’s accounts receivable is derived from customers located principally in the United States. Concentrations of credit risk with respect to trade receivables are limited due to the Company’s credit evaluation process. The Company does not typically require collateral from its customers. Credit losses historically have not been material. The Company continuously monitors customer payments and maintains an allowance for doubtful accounts based on its assessment of various factors including historical experience, age of the receivable balances, and other current economic conditions or other factors that may affect customers’ ability to pay.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with remaining maturities at purchase of three months or less that can be liquidated without prior notice or penalty. Cash and cash equivalents may include deposits, money market funds and debt securities. Amounts receivable from credit card issuers are typically converted to cash within two to four days of the original sales transaction and are considered to be cash equivalents.
Short-Term Investments
Short-term investments consist of available-for-sale U.S. Treasury securities with original maturities greater than three months and remaining maturities of less than twelve months. These investments are recorded at fair value based on quoted prices in active markets, with unrealized gains and losses reported in other comprehensive gain (loss) in the Company’s statements of operations and comprehensive loss. Purchase premiums and discounts are recognized in interest expense using the effective interest method over the terms of the securities. Realized gains and losses and declines in fair value that are deemed to be other than temporary are reflected in the statements of operations and comprehensive loss using the specific-identification method.
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Evolus, Inc.
Notes to Financial Statements
(in thousands, except share and per share data)
The Company periodically reviews all available-for-sale securities for other than temporary declines in fair value below the cost basis whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company also evaluates whether it has plans or is required to sell short-term investments before recovery of their amortized cost bases. To date, the Company has not identified any other than temporary declines in fair value of its short-term investments.
Inventories
Inventories consist of finished goods held for sale and distribution. Cost is determined based on the estimated amount payable to the Company’s supplier after accounting for any reimbursement receivable pursuant to the Daewoong Settlement Agreement (as such term is defined, and such agreement is discussed, in Note 11. Medytox/Allergan Settlement Agreements and Daewoong Arrangement), using the first-in, first-out method with prioritization of the items with the earliest expiration dates. Inventory valuation reserves are established based on a number of factors including, but not limited to, finished goods not meeting product specifications, product excess and obsolescence, or application of the lower of cost or net realizable value concepts. The determination of events requiring the establishment of inventory valuation reserves, together with the calculation of the amount of such reserves may require judgment. No material inventory valuation reserves have been recorded for the periods presented. Adverse changes in assumptions utilized in the Company’s inventory reserve calculations could result in an increase to its inventory valuation reserves.
Product cost of sales, excluding amortization of intangible assets, consisted of the inventory cost, and, for periods on or after December 16, 2020, included certain royalties on the sale of Jeuveau® payable to Medytox and Allergan pursuant to the Medytox/Allergan Settlement Agreements (as such term is defined in Note 11. Medytox/Allergan Settlement Agreements and Daewoong Arrangement), as partially offset by reimbursement receivable from Daewoong pursuant to the Daewoong Settlement Agreement with respect to such royalties.
Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in an orderly transaction between market participants in a principal market on the measurement date.
The fair value hierarchy defines a three-tiered valuation hierarchy for disclosure of fair value measurement is classified and disclosed by the Company in one of the three categories as follows:
•Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
•Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly, or can be corroborated by observable market data for substantially the full term of the asset or liability; and
•Level 3—Prices or valuation techniques that require inputs that are unobservable that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of approximately five years. Leasehold improvements are amortized over the shorter of the estimated useful lives of the improvements or the term of the related lease.
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Evolus, Inc.
Notes to Financial Statements
(in thousands, except share and per share data)
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in a business combination. The Company reviews goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. The Company performs an annual qualitative assessment of its goodwill in the fourth quarter of each calendar year to determine if any events or circumstances exist, such as an adverse change in business climate or a decline in the overall industry demand, that would indicate that it would more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill. If events or circumstances do not indicate that the fair value of a reporting unit is below its carrying amount, then goodwill is not considered to be impaired and no further testing is required. If further testing is required, the Company performs a two-step process. The first step involves comparing the fair value of the Company’s reporting unit to its carrying value, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step of the test is performed by comparing the carrying value of the goodwill in the reporting unit to its implied fair value. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value. For the purpose of impairment testing, the Company has determined that it has one reporting unit. There was no impairment of goodwill for any of the periods presented.
Intangible Assets
Upon FDA approval of Jeuveau® in February 2019, the in process research and development (“IPR&D”) related to Jeuveau® was evaluated as completed and reclassified to a definite-lived distribution right intangible asset, which is amortized over the period the asset is expected to contribute to the future cash flows of the Company. The Company determined the pattern of this intangible asset’s future cash flows could not be readily determined with a high level of precision. As a result, the distribution right intangible asset is being amortized on a straight-line basis over the estimated useful life of 20 years.
The Company capitalizes certain internal-use software costs associated with the development of its mobile and web-based customer platforms. These costs include personnel expenses and external costs that are directly associated with the software projects. These costs are included as intangible assets in the accompanying balance sheets. The capitalized internal-use software costs are amortized on a straight-line basis over the estimated useful life of two years upon being placed in service.
The Company reviews long-term and identifiable definite-lived intangible assets or asset groups for impairment when events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset or an asset group, further impairment analysis is performed. An impairment loss is measured as the amount by which the carrying amount of the asset or asset groups exceeds the fair value for assets to be held and used or fair value less cost to sell for assets to be disposed of. The Company also reviews the useful lives of its assets periodically to determine whether events and circumstances warrant a revision to the remaining useful life. Changes in the useful life are adjusted prospectively by revising the remaining period over which the asset is amortized. There was no material impairment of long-lived assets for any periods presented.
Leases
In accordance with Accounting Standards Codification 842, Leases (“ASC 842”), at the inception of a contractual arrangement, the Company determines whether the contract contains a lease by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset in exchange for consideration over a period of time. If both criteria are met, upon lease commencement, the Company records a lease liability which represents the Company’s obligation to make lease payments arising from the lease, and a corresponding right-of-use (“ROU”) asset which represents the Company’s right to use an underlying asset during the lease term. Operating lease assets and liabilities are included in ROU assets, current portion of operating lease liabilities and noncurrent operating lease liabilities in the accompanying balance sheets.
Operating lease ROU assets and lease liabilities are initially recognized based on the present value of the future minimum lease payments over the lease term at commencement date calculated using the Company’s incremental borrowing rate applicable to the underlying asset unless the implicit rate is readily determinable. Operating lease ROU assets also include any lease payments made at or before lease commencement and exclude any lease incentives received, if any. The Company determines the lease term as the noncancelable period of the lease and may include options to extend or terminate the lease
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Notes to Financial Statements
(in thousands, except share and per share data)
when it is reasonably certain that the Company will exercise such options. The Company’s leases do not contain any residual value guarantees. Leases with a term of 12 months or less are not recognized on the balance sheets. For operating leases, the Company recognized rent expense on a straight-line basis over the lease term. There were no significant finance leases as of December 31, 2021.
Contingent Royalty Obligation Payable to the Evolus Founders
The Company determines the fair value of the contingent royalty obligation payable at each reporting period end based on Level 3 inputs using a discounted cash flows method. Changes in the fair value of the contingent royalty obligation payable are determined at each reporting period end and recorded in operating expenses in the accompanying statements of operations and comprehensive loss and as a liability in the accompanying balance sheets.
Promissory Note Payable to the Evolus Founders
On February 12, 2018, the Company recognized a promissory note payable at present value using a discount rate for similar rated debt securities. Discount amortization related to the promissory note is recorded in interest expense in the accompanying statements of operations and comprehensive loss with a corresponding increase to the liabilities in the accompanying balance sheets.
Long-term Debt
Long-term debt represents the debt balance with Pharmakon as of December 31, 2021 and Oxford as of December 31, 2020 (see Note 6. Term Loans), net of debt issuance costs. Debt issuance costs represent legal, lender and consulting costs or fees associated with debt financing. Debt discounts and issuance costs are amortized into interest expense over the term of the debt.
Revenue Recognition
The Company recognizes revenue when control of the promised goods or services is transferred to its customers, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for the goods or services. In order to achieve that core principle, a five-step approach is applied: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue allocated to each performance obligation when the Company satisfies the performance obligation. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account for revenue recognition.
General
The Company generates product revenue from the sale of Jeuveau® in the United States and service revenue from the sale of Jeuveau® through a distribution partner in Canada.
For product revenue, the Company recognizes revenue when control of the promised goods under a contract is transferred to a customer, in an amount that reflects the consideration the Company expects to receive in exchange for those goods as specified in the customer contract. The transfer of control occurs upon receipt of the goods by the customer since that is when the customer has obtained control of the goods’ economic benefits. The Company does not provide any service-type warranties and does not accept product returns except under limited circumstances such as damages in transit or ineffective product. The Company also excludes any amounts related to taxes assessed by governmental authorities from revenue measurement. Shipping and handling costs associated with outbound product freight are accounted for as fulfillment costs and are included in selling, general and administrative expenses in the accompanying statements of operations and comprehensive loss.
For service revenue, the Company evaluated the arrangement with the distribution partner in Canada and determined that it acts as an agent in the distribution of Jeuveau® in Canada as it does not control the product before control is transferred to a customer. The indicators of which party exercises control include primary responsibility over performance obligations, inventory risk before the good or service is transferred and discretion in establishing the price. Accordingly, the Company records the sale as service revenue on a net basis. Revenue from services is recognized in the period the service is performed
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Notes to Financial Statements
(in thousands, except share and per share data)
for the amount of consideration expected to be received. For the years ended December 31, 2021 and 2020, the Company recognized $702 and $738, respectively, of revenues related to international sales.
Disaggregation of Revenue
The Company’s disaggregation of revenue is consistent with its operating segment as disclosed above.
Gross-to-Net Revenue Adjustments
The Company provides customers with discounts, such as trade and volume discounts and prompt pay discounts, that are directly reflected in the invoice price. Revenues are recorded net of sales-related adjustments, wherever applicable, primarily for the volume based rebates, coupons, consumer loyalty programs and co-branded marketing programs.
•Volume-based Rebates — Volume-based rebates are contractually offered to certain customers. The rebates payable to each customer are determined based on the contract and quarterly purchase volumes.
•Coupons — The Company issued customers coupons redeemable into gift cards funded by the Company for the benefit of patients. The coupons were accounted for as variable consideration. The Company estimated coupon redemption rates based on historical data and future expectations. The coupons were accrued based on estimated redemption rates and the volume of products purchased and were recorded as a reduction to revenues on product delivery. All issued coupons expired on June 30, 2020.
•Consumer Loyalty Program — In May 2020, the Company launched a consumer loyalty program, which allows participating customers to earn rewards for qualifying treatments to their patients (i.e. consumers) using Jeuveau® and redeem the rewards for Jeuveau® in the future at no additional cost. The loyalty program represents a customer option that provides a material right and, accordingly, is a performance obligation. At the time Jeuveau® product is sold to customers, the invoice price is allocated between the product sold and the estimated material right reward (“Reward”) that the customer might redeem in the future. The standalone selling price of the Reward is measured based on historical sales data, estimated average selling price of Jeuveau® at the time of redemption, expected customer and consumer participation rates in the loyalty program, and estimated number of qualifying treatments to be performed by customers. The portion of invoice price allocated to the Reward is initially recorded as deferred revenue. Subsequently, when customers redeem the Reward and the related product is delivered, the deferred revenue is recognized in net revenues at that time.
•Co-Branded Marketing Programs — The Company offers eligible customers with a certain level of Jeuveau® purchases to receive advertising co-branded with the Company. The co-branded advertising represents a performance obligation. At the time Jeuveau® product is sold to customers, the invoice price is allocated between the product sold and the advertisement. The standalone selling price of the advertisement is measured based on the estimated market value of similar advertisement adjusted for the customer’s portion of the advertisement. The portion of invoice price allocated to the advertisement is initially recorded as deferred revenue. Subsequently, when the advertisement airs, the deferred revenue is recognized in net revenues at that time.
Contract balances
A contract with a customer states the terms of the sale, including the description, quantity and price of each product purchased. Amounts are recorded as accounts receivable when the Company’s right to consideration becomes unconditional. The Company does not have any significant financing components in customer contracts given the expected time between transfer of the promised products and the payment of the associated consideration is less than one year. As of December 31, 2021 and 2020, all amounts included in accounts receivable, net on the accompanying balance sheets are related to contracts with customers.
The Company did not have any contract assets nor unbilled receivables as of December 31, 2021 or 2020. Sales commissions are included in selling, general and administrative expenses when incurred.
Contract liabilities reflect estimated amounts that the Company is obligated to pay to customers or patients primarily under the rebate and coupon programs and deferred revenue associated with Rewards under the consumer loyalty program and co-
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Notes to Financial Statements
(in thousands, except share and per share data)
branded marketing programs. The Company’s contract liabilities are included in accounts payable and accrued expenses in the accompanying balance sheets.
As of December 31, 2021 and 2020, the accrued revenue contract liabilities, primarily related to volume-based rebates, consumer loyalty program, and co-branded media programs, were $7,934 and $3,081, respectively, which were recorded in accrued expenses in the accompanying balance sheets. For the years ended December 31, 2021 and 2020, provisions for rebate, coupon, consumer loyalty programs, and co-branded media programs were $16,139 and $16,896, respectively, which were offset by related payments, redemptions and adjustments of $11,286 and $15,524, respectively.
During the years ended December 31, 2021 and 2020, the Company recognized $2,802 and $0, respectively, of revenue related to amounts included in contract liabilities at the beginning of the period and did not recognize any revenue related to changes in transaction prices regarding its contracts with customers from previous periods.
Collectability
Accounts receivable are recorded at the invoiced amount and do not bear interest. At the time of contract inception or new customer account set-up, the Company performs a collectability assessment of the customer’s creditworthiness. The Company assesses the probability that the Company will collect the entitled consideration in exchange for the goods sold, by considering the customer’s ability and intention to pay when consideration is due. On a recurring basis, the Company estimates the amount of receivables considered uncollectable to reflect an allowance for doubtful accounts. The Company writes off accounts receivable balances when it is determined that there is no possibility of collection. As of December 31, 2021 and 2020, allowance for doubtful accounts was $2,385 and $2,118, respectively. For the years ended December 31, 2021 and 2020, provision for bad debts was $589 and $2,066, respectively, and the write-off amount was $322 and $335, respectively.
Practical Expedients
The Company expenses sales commissions when incurred as the amortization period is one year or less. These costs are recorded within selling, general and administrative expenses in the accompanying statements of operations and comprehensive loss. The Company does not adjust the amount of promised consideration for the effects of the time value of money for contracts in which the anticipated period between when the Company transfers the goods or services to the customer and when the customer pays within one year.
Research and Development Expenses
Research and development costs are expensed as incurred. Research and development expenses include personnel-related costs, costs associated with pre-clinical and clinical development activities, costs associated with and costs for prototype products that are manufactured prior to market approval for that prototype product, internal and external costs associated with the Company’s regulatory compliance and quality assurance functions, including the costs of outside consultants and contractors that assist in the process of submitting and maintaining regulatory filings, and overhead costs, including allocated facility related expenses.
Litigation Settlement
In February 2021, upon entering into certain agreements to settle intellectual property disputes relating to Jeuveau®, the Company agreed to pay to Allergan and Medytox $35,000 in multiple payments over two years, of which $15,000 was paid in the third quarter of 2021 and $15,000 was paid in the first quarter of 2022, and issued 6,762,652 shares of its common stock to Medytox. In addition, for the period from December 16, 2020 to September 16, 2022, the Company agreed to pay to Allergan and Medytox a royalty on the sale of Jeuveau®, based on a certain dollar amount per vial sold in the United States and a low-double digit royalty on net sales of Jeuveau® sold in other Evolus territories. For the period from September 17, 2022 to September 16, 2032, the Company agreed to pay to Medytox a mid-single digit royalty percentage on all net sales of Jeuveau®. The royalty payments are made quarterly and recorded as product cost of sales on the accompanying statements of operations and comprehensive loss in the periods the royalties are incurred.
The settlement agreements resulted in an $83,421 charge for the year ended December 31, 2020, which consisted of $35,000 in deferred cash payments and $48,421 from the issuance of 6,762,652 shares of the Company’s common stock in February
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Evolus, Inc.
Notes to Financial Statements
(in thousands, except share and per share data)
2021. In the year ended December 31, 2021, the Company made cash payments of $15,000 to Medytox and Allergan. As of December 31, 2021, a current liability of $15,000 and non-current liability of $5,000 were recorded in the accompanying balance sheets.
Separately, in March 2021, Daewoong and the Company entered into certain agreements, pursuant to which Daewoong agreed to pay the Company an amount equal to $25,500, which was recorded as a settlement payment from Daewoong and included as part of cost of sales on the accompanying statements of operations and comprehensive loss for the year ended December 31, 2021. For the period from December 16, 2020 to September 16, 2022, Daewoong also agreed to reimburse the Company certain amounts with respect to the royalties payable to Medytox and Allergan. This reimbursement is received quarterly and recorded as an offset to the related royalties to Medytox and Allergan in the product cost of sales on the accompanying statements of operations and comprehensive loss.
See Note 11. Medytox/Allergan Settlement Agreements and Daewoong Arrangement for the details of all litigation settlement agreements.
Stock-Based Compensation
The Company recognizes stock-based compensation expense for employees, consultants and members of the Board of Directors based on the fair value at the date of grant.
The Company uses the Black-Scholes option pricing model to value stock option grants. The Black-Scholes option pricing model requires the input of subjective assumptions, including the expected volatility of the Company’s common stock, expected risk-free interest rate, and the option’s expected life. The fair value of the Company’s restricted stock units (“RSUs”) is based on the fair value on the grant date of the Company’s common stock. The Company also evaluates the impact of modifications made to the original terms of equity awards when they occur.
The fair value of equity awards that are expected to vest is amortized on a straight-line basis over the requisite service period. Stock-based compensation expense is recognized net of actual forfeitures when they occur, as an increase to additional paid-in capital in the balance sheets and in the selling, general and administrative or research and development expenses in the statements of operations and comprehensive loss.
Advertising Costs
Advertising costs are expensed as incurred and primarily include costs related to social media ads and co-branded marketing programs. Advertising costs are included in selling, general and administrative expenses. For the years ended December 31, 2021 and 2020, the Company incurred advertising costs of $16,391 and $4,979, respectively.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are determined on the basis of differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
A valuation allowance is recorded against deferred tax assets to reduce the net carrying value when it is more likely than not that some portion or all of a deferred tax asset will not be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, and ongoing prudent and feasible tax planning strategies in assessing the amount of the valuation allowance. When the Company establishes or reduces the valuation allowance against its deferred tax assets, its provision for income taxes will increase or decrease, respectively, in the period such determination is made.
Additionally, the Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefit recognized in the financial statements for a particular tax position is based on the largest benefit that is more likely than not to be realized upon settlement. Accordingly, the Company establishes reserves for uncertain tax positions. The Company has not recognized interest or penalties in its statement of operations and comprehensive loss.
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Notes to Financial Statements
(in thousands, except share and per share data)
The Company is required to file federal and state income tax returns in the United States and various other state jurisdictions. The preparation of these income tax returns requires the Company to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. An amount is accrued for the estimate of additional tax liability, including interest and penalties, for any uncertain tax positions taken or expected to be taken in an income tax return. The Company reviews and updates the accrual for uncertain tax positions as more definitive information becomes available.
The Company’s income tax returns are based on calculations and assumptions that are subject to examination by the Internal Revenue Service and other tax authorities. In addition, the calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company recognizes liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. While the Company believes it has appropriate support for the positions taken on its tax returns, the Company regularly assesses the potential outcomes of examinations by tax authorities in determining the adequacy of its provision for income taxes. The Company continually assesses the likelihood and amount of potential revisions and adjusts the income tax provision, income taxes payable and deferred taxes in the period in which the facts that give rise to a revision become known.
The Company monitors changes to the tax laws in the states it conducts business and files corporate income tax returns. The Company does not expect that changes to state tax laws through December 31, 2021 to materially impact its financial statements.
Net Loss Per Share
Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period including contingently issuable shares. Diluted earnings per share is based on the treasury stock method and includes the effect from potential issuance of ordinary shares, such as shares issuable pursuant to the exercise of stock options and the vesting of restricted stock units. The dilutive effect of stock options and restricted stock units is computed under the treasury stock method. The dilutive effect of the Daewoong Convertible Note is computed under the if-converted method. Potentially dilutive securities are excluded from the computations of diluted net loss per share if their effect would be antidilutive.
For the years ended December 31, 2021 and 2020, excluded from the dilutive net loss per share computation were stock options of 3,922,286 and 4,407,498, respectively, non-vested RSUs of 1,926,467 and 1,173,741, respectively, and 0 shares and 3,076,923, shares issuable upon conversion of the Daewoong Convertible Note, respectively, because their inclusion would have been anti-dilutive. Although these securities were anti-dilutive for these periods, they could be dilutive in future periods.
Recent Accounting Pronouncements
Recently Adopted Pronouncements
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. FASB issued this update as part of its Simplification Initiative to improve areas of GAAP and reduce cost and complexity while maintaining usefulness. The main provisions remove certain exceptions including the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. In addition, the amendments simplify income tax accounting in the areas such as income based franchise taxes, eliminating the requirements to allocate consolidated current and deferred tax expense in certain instances and a requirement that an entity reflects the effect of enacted changes in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. For public companies, the standard is effective for fiscal years beginning after December 15, 2020 and interim periods therein. The Company has adopted the guidance on the effective date of January 1, 2021. There are no material impacts to the financial statements as a result of this adoption.
Recent Accounting Pronouncements Issued But Not Adopted
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Notes to Financial Statements
(in thousands, except share and per share data)
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The update simplifies the accounting for goodwill impairment by removing step two of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will be the amount by which a reporting unit’s carrying amount, including goodwill, exceeds its fair value. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. As amended by ASU No. 2019-10, the updated guidance is effective for the Company as a smaller reporting company beginning January 1, 2023. The standard requires prospective application. Early adoption is permitted. The Company does not expect adoption of this guidance will have a material impact on its financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which modifies the measurement and recognition of credit losses for most financial assets and certain other instruments. The new standard requires the use of forward-looking expected credit loss models based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount, which may result in earlier recognition of credit losses under the new standard. The new guidance also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. Subsequent to the issuance of ASU No. 2016-13, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. This ASU does not change the core principle of the guidance in ASU No. 2016-13, instead these amendments are intended to clarify and improve operability of certain topics included within the credit losses standard. The FASB also subsequently issued ASU No. 2019-04 which did not change the core principle of the guidance in ASU No. 2016-13 but clarified that expected recoveries of amounts previously written off and expected to be written off should be included in the valuation account and should not exceed amounts previously written off and expected to be written off. As amended by ASU No. 2019-10, the updated guidance is effective for the Company as a smaller reporting company beginning January 1, 2023. The Company is in the process of determining the effects the adoption will have on its financial statements and reviewing credit loss models to assess the impact of the adoption of the standard on the financial statements. Based on initial assessments, the Company believes that while adoption will modify the way it analyzes financial instruments, it does not expect adoption of this guidance will have a material impact to its financial statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting and in January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope (“ASU 2021-01”). Both ASU No. 2020-04 and ASU No. 2021-01 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. ASU No. 2020-04 and ASU No. 2021-01 are effective upon issuance for contract modifications and hedging relationships, and the Company is allowed to elect to apply the amendments prospectively through December 31, 2022. The Company does not expect adoption of this guidance will have a material impact on its financial statements.
In November 2021, the FASB issued ASU No. 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. This update will increase transparency of government assistance received by most business entities by requiring the disclosure of: (1) the types of transactions; (2) the accounting for the transactions; and, (3) the effect of the transactions on a business entity’s financial statements. ASU No. 2021-10 is effective for financial statements issued for annual periods beginning after December 15, 2021, with early application permitted. The Company does not expect adoption of this guidance will have a material impact on its financial statements.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the SEC did not, or are not believed by management to, have a material impact on the Company’s present or future financial position, results of operations or cash flows.
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Notes to Financial Statements
(in thousands, except share and per share data)
Note 3. Fair Value Measurements and Short-Term Investments
Short-Term Investments
As of December 31, 2021, the Company did not hold any short-term investments. As of December 31, 2020, all of the Company’s investments had remaining maturities of less than 12 months. The following is a summary of the Company’s short-term investments, considered available-for-sale, as of December 31, 2020:
Amortized Gross Unrealized Estimated
Cost Gains Losses Fair Value
Available-for-sale securities
U.S treasury securities $ 5,000 $ — $ — $ 5,000
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company measures and reports certain financial instruments as assets and liabilities at fair value on a recurring basis. The fair value of these instruments was as follows:
Fair Value Level 1 Level 2 Level 3
Liabilities
Fair Value Level 1 Level 2 Level 3
Available-for-sale debt securities
U.S treasury securities $ 5,000 $ 5,000 $ — $ —
Liabilities
The Company did not transfer any assets or liabilities measured at fair value on a recurring basis between levels during the year ended December 31, 2021.
The Company determines the fair value of the contingent royalty obligation payable to the Evolus Founders based on Level 3 inputs using a discounted cash flows method. The significant unobservable input assumptions that can significantly change the fair value include (i) projected amount and timing of net revenues during the payment period, which terminates in the quarter following the 10-year anniversary of the first commercial sale of Jeuveau® in the United States, (ii) the discount rate and (iii) the timing of payments. During the years ended December 31, 2021 and 2020, the Company utilized discount rates between 13.0% and 20.0%, reflecting changes in the Company’s risk profile. Net revenue projections are also updated to reflect changes in the timing of expected sales. Significant increases (decreases) in the discount rate would result in a significantly lower (higher) fair value measurement, which could materially impact the fair value reported on the balance sheet.
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Notes to Financial Statements
(in thousands, except share and per share data)
The following table shows a reconciliation of the beginning and ending fair value measurements of the contingent royalty obligation payable:
Year Ended December 31,
Change in fair value recorded in operating expenses 6,290 (2,007)
Other Financial Assets and Liabilities
The Company’s financial instruments consist primarily of cash and cash equivalents, short-term available-for-sale debt securities, accounts receivable, accounts payable, accrued expenses, lease liabilities, and long-term debt. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates their fair value because of the short-term maturity of such instruments.
The Company estimates the fair value of the promissory note payable to the Evolus Founders, long-term debt and operating lease liabilities using the discounted cash flow analysis based on the interest rates for similar rated debt securities (Level 2). As of December 31, 2021, the fair value of the long-term debt was $75,448. As of December 31, 2020, the fair value of the contingent promissory note and long-term debt was estimated to be $19,284 and $76,368, respectively. The fair value of operating lease liabilities as of December 31, 2021 and 2020 approximated their carrying value.
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Notes to Financial Statements
(in thousands, except share and per share data)
Note 4. Goodwill and Intangible Assets
The table below shows the weighted-average life, original cost, accumulated amortization and net book value by major intangible asset classification:
Definite-lived intangible assets
Indefinite-lived intangible asset
Definite-lived intangible assets
Indefinite-lived intangible asset
* Intangible assets with indefinite lives have an indeterminable average life.
The following table outlines the estimated future amortization expense related to intangible assets held as of December 31, 2021 that are subject to amortization:
Fiscal year
Distribution right represents the license and associated distribution right to develop Jeuveau®, the initial term of which expires in September 2023 and is automatically extended for unlimited additional three-year terms provided that the Company meets certain performance requirements. Additionally, upon FDA approval of Jeuveau® on February 1, 2019, the IPR&D project was completed and reclassified as a definite-lived distribution right intangible asset, which is amortized on a straight-line basis over the estimated useful life of 20 years. The Company paid Daewoong a $2,000 milestone payment, pursuant to the Daewoong Agreement, which increased the cost basis of the distribution. In connection with EU approval of Jeuveau®, the Company paid a $1,000 milestone payment to Daewoong in the fourth quarter of fiscal year 2019, which increased the cost basis of the distribution right. Under the Daewoong Arrangement (as defined in Note 11.), there is no additional cash consideration due to Daewoong. See Note 11. Medytox/Allergan Settlement Agreements and Daewoong Arrangement for additional information.
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Notes to Financial Statements
(in thousands, except share and per share data)
For the years ended December 31, 2021 and 2020, the Company capitalized $633 and $2,266, respectively, related to costs of computer software developed for internal use. The software is amortized over a two-year period using the straight-line method. For the years ended December 31, 2021 and 2020, total intangible assets amortization expense of $5,305 and $3,635, respectively, was recorded within depreciation and amortization on the accompanying statements of operations and comprehensive loss.
Note 5. Accrued Expenses
Accrued expenses consisted of:
Year Ended December 31,
Accrued royalties under the Medytox/Allergan Settlement Agreements $ 12,447 $ —
Accrued payroll and related benefits 6,856 4,076
Accrued revenue contract liabilities 7,934 3,081
Accrued professional services 595 895
Note 6. Term Loans
Pharmakon Term Loans
On December 14, 2021, the Company entered into a loan agreement with Pharmakon. Pursuant to the terms of the agreement, Pharmakon agreed to make term loans to the Company in two tranches (“Pharmakon Term Loans”). The first tranche of $75,000 was funded on December 29, 2021. The second tranche of $50,000 may be drawn at the Company’s election no later than December 31, 2022. As of December 31, 2021, the Company has not drawn the second tranche. The Pharmakon Term Loans will mature on the sixth year anniversary of the closing date of the first tranche (“Maturity Date”).
The Pharmakon Term Loans accrue interest at a per annum rate equal to the 3-month U.S. Dollar LIBOR rate (subject to a LIBOR rate floor of 1.0%) plus 8.5% per annum; provided that, upon a public statement or publication of information in certain circumstances that LIBOR has ceased or will cease to be provided or be representative or the occurrence of an early opt-in determination by the collateral agent, the Pharmakon Term Loans will be amended to provide for an alternative to the 3-month U.S. Dollar LIBOR rate established by the lenders holding a majority of the outstanding Pharmakon Term Loans, giving due consideration to the selection or recommendation of a replacement rate or mechanism for determining such rate by any applicable governmental authority or the then-prevailing market conventions. The Company agreed to make 12 equal quarterly payments of principal on the outstanding Pharmakon Term Loans commencing on or immediately following the 39th-month anniversary of the funding date of the first tranche continuing through the Maturity Date.
The Company may elect to prepay all amounts, not less than $20,000, owed prior to the Maturity Date. Prepayments of the first tranche prior to the second anniversary of the closing date of the first tranche and prepayments of the second tranche prior to the second anniversary of the date on which the second tranche is drawn by the Company will be accompanied by a make whole amount equal to the sum of all interest that would have accrued through such second anniversary. Prepayments of the Pharmakon Term Loans will also be accompanied by a prepayment premium equal to the principal amount so prepaid multiplied by 3.0% if made prior to the third anniversary of the closing date of the first tranche, 2.0% if made on or after the third anniversary of the closing date of the first tranche but prior to the fourth anniversary of the closing date of the first tranche, and 1.0% if made on or after the fourth anniversary of the closing date of the first tranche but prior to the Maturity Date. If the Pharmakon Term Loans are accelerated following the occurrence of an event of default, including a material adverse change, the Company is required to immediately pay Pharmakon an amount equal to the sum of all outstanding principal, unpaid interest, and applicable make whole and prepayment premiums.
The Pharmakon Term Loans are secured by substantially all of the Company’s assets. The Pharmakon Term Loans contain customary affirmative and restrictive covenants and representations and warranties. The affirmative covenants include,
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Notes to Financial Statements
(in thousands, except share and per share data)
among others, certain information delivery requirements, obligations to maintain certain insurance, and certain notice requirements. The restrictive covenants include, among others, incurring certain additional indebtedness, consummating certain change in control transactions, or incurring any non- permitted lien or other encumbrance on the Company’s assets, without Pharmakon’s prior written consent. The Pharmakon Term Loans do not contain covenants requiring the Company to maintain a minimum cash threshold or minimum revenues or earnings. As of December 31, 2021, the Company was in compliance with its debt covenants.
At the closing date of the first tranche, the Company incurred $3,042 and $3,263 in debt discounts and issuance costs related to the Pharmakon Term Loans, respectively. Debt discounts and issuance costs related to the entire Pharmakon Term Loans have been allocated pro rata between the funded and unfunded portions. Debt discounts and issuance costs allocated to the first tranche of $75,000 have been presented as a deduction to the debt balance and are amortized into interest expense using the effective interest method. As of December 31, 2021, the borrowings outstanding under the Pharmakon Term Loans were classified as long-term debt in the accompanying balance sheets. Debt discounts and issuance costs associated with the unfunded tranche are deferred as assets until the tranche is drawn and are amortized into interest expense using the straight-line method over the term of the debt. The overall effective interest rate was approximately 10.89% as of December 31, 2021.
As of December 31, 2021, the principal amounts of long-term debt maturities for each of the next five fiscal years are as follows:
Fiscal year
Total principal payments 75,000
Unamortized debt discounts and issuance costs (3,778)
Long term debt, net of discounts and issuance costs $ 71,222
Oxford Term Loans
On March 15, 2019, the Company entered into a Loan and Security Agreement with Oxford (the “Loan Agreement”), providing for a credit facility of up to $100,000. Pursuant to the terms of the credit facility, the lender extended term loans (the “Oxford Term Loan”), available in two advances, to the Company. The first tranche of $75,000 was funded on the closing date. The second tranche of $25,000 was not drawn. The credit facility bore an annual interest rate equal to the greater of 9.5%, or the 30-day U.S. Dollar LIBOR rate plus 7.0%. The Company agreed to pay interest-only for the first 36 months until May 2022, followed by a 23 months amortization period.
At the closing date, the Company incurred $1,094 and $2,205 in debt discounts and issuance costs related to the Oxford Term Loan, respectively. Debt discounts and issuance costs related to the entire Oxford Term Loan have been allocated pro rata between the funded and unfunded portions. Debt discounts and issuance costs related to the Oxford Term Loan have been presented as a deduction to the debt balance and are amortized into interest expense using the effective interest method. The overall effective interest rate was approximately 11.6% as of December 31, 2020.
Upon the earliest to occur of the maturity date, the acceleration of the Oxford Term Loan, or the prepayment of the Oxford Term Loan, the Company was required to pay to Oxford a final payment of 5.5% of the full principal amount of the Oxford Term Loan funded (“Final Payment”). The Company could elect to prepay all amounts owed prior to the maturity date, provided that a prepayment fee was also paid, which would be equal to 2.0% of the amount prepaid if the prepayment occurred after March 15, 2020 and on or prior to March 15, 2021, or 1.0% of the amount prepaid if the prepayment occurred thereafter (“Prepayment Fee”).
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