Evolus(EOLS) - 2022 Q1 - Quarterly Report

Special Note Regarding Forward-Looking Statements This section cautions that forward-looking statements in the report are subject to risks and uncertainties, and actual results may differ materially - Forward-looking statements are identified by terms such as 'anticipate,' 'believe,' 'could,' 'estimate,' 'expect,' 'intend,' 'may,' 'plan,' 'potential,' 'predict,' 'project,' 'should,' 'will,' 'would' or their negatives[9] - Actual results may differ materially due to risks and uncertainties, many of which are difficult to predict and beyond the company's control[9][10] - Readers are cautioned not to place undue reliance on forward-looking statements, which are based on current management expectations and speak only as of the report date[11] Summary of Risk Factors This section summarizes principal risks and uncertainties that could materially affect the company's business, financial condition, and results of operations - The company is entirely dependent on the successful commercialization of its only product, Jeuveau, and failure to market it successfully could prevent sufficient revenue generation[12] - Evolus has a limited operating history and has incurred significant losses since inception, with anticipated continued losses, making future viability assessment difficult[12] - Additional financing may be required for future operations, and failure to obtain it on acceptable terms could force delays, reductions, or termination of operations[13] - Non-compliance with Medytox/Allergan settlement agreements could lead to litigation or loss of Jeuveau marketing rights, severely impacting business and going concern ability[14] - The terms of the Medytox/Allergan Settlement Agreements will reduce profitability and may affect customer discount offerings[15] - The business, financial condition, and operations have been, and may continue to be, adversely affected by the COVID-19 outbreak or similar events[15] - Reliance on the Daewoong Agreement for exclusive distribution rights to Jeuveau means any termination or loss of significant rights would materially and adversely affect commercialization[16] - Failure to successfully in-license, acquire, develop, and market additional product candidates or approved products would impair business growth[16] - Jeuveau faces significant competition, and failure to effectively compete may prevent market penetration and expansion[17] - Jeuveau may fail to achieve broad physician adoption and consumer demand necessary for commercial success[17] - Marketing of Jeuveau is limited to glabellar lines; expanding indications requires additional, expensive, and potentially ungranted regulatory approvals[18] - Third-party claims of intellectual property infringement could prevent or delay commercialization efforts and interrupt product supply[18] - Inability to maintain, obtain, or protect intellectual property rights related to Jeuveau or future products would hinder effective market competition[19] - The company may need to increase its organization size, including sales and marketing, to further market Jeuveau, potentially leading to growth management difficulties[19] - Reliance on digital technology and applications means business and operations would suffer from computer system failures or hacker breaches[19] - Extensive government regulation subjects the company to potential delays in regulatory approval, significant expenses for compliance, or penalties for non-compliance[20] PART I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (unaudited) This section presents unaudited condensed consolidated financial statements, including balance sheets, statements of operations, equity, and cash flows, with detailed explanatory notes Condensed Consolidated Balance Sheets The Condensed Consolidated Balance Sheets present the company's financial position, detailing assets, liabilities, and stockholders' equity as of March 31, 2022, and December 31, 2021 Condensed Consolidated Balance Sheet Highlights (in thousands) | Item | March 31, 2022 (Unaudited) | December 31, 2021 | |:------------------------------|:---------------------------|:------------------| | Cash and cash equivalents | $106,671 | $146,256 | | Total current assets | $142,928 | $178,799 | | Total assets | $220,662 | $257,483 | | Total current liabilities | $40,700 | $57,663 | | Total liabilities | $153,414 | $175,607 | | Total stockholders' equity | $67,248 | $81,876 | - Cash and cash equivalents decreased by $39,585 (27.1%) from December 31, 2021, to March 31, 2022[25] - Total current liabilities decreased by $16,963 (29.4%) from December 31, 2021, to March 31, 2022, primarily due to a reduction in accrued litigation settlement[25] Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income These statements detail the company's financial performance, including revenues, operating expenses, and net loss/income for the three months ended March 31, 2022, and 2021 Condensed Consolidated Statements of Operations Highlights (in thousands) | Item | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | |:------------------------------------------------------------------|:----------------------------------|:----------------------------------| | Product revenue, net | $33,226 | $12,241 | | Service revenue | $682 | $— | | Total net revenues | $33,908 | $12,241 | | Product cost of sales (excludes amortization of intangible assets)| $13,208 | $4,908 | | Settlement payment from Daewoong | $— | $(25,500) | | Selling, general and administrative | $33,442 | $20,665 | | Research and development | $468 | $841 | | Total operating expenses | $49,356 | $4,215 | | (Loss) income from operations | $(15,448) | $8,026 | | Net (loss) income | $(17,501) | $6,401 | | Net (loss) income per share, basic | $(0.31) | $0.17 | - Total net revenues increased by $21,667 (177.0%) for the three months ended March 31, 2022, compared to the same period in 2021[29] - The company reported a net loss of $17,501 thousand for Q1 2022, a significant shift from a net income of $6,401 thousand in Q1 2021, primarily due to the absence of the Daewoong settlement payment and increased operating expenses[29] Condensed Consolidated Statements of Stockholders' Equity These statements detail changes in the company's equity accounts, including common stock, additional paid-in capital, and accumulated deficit, for the periods presented Condensed Consolidated Statements of Stockholders' Equity Highlights (in thousands) | Item | Balance at December 31, 2021 | Balance at March 31, 2022 | |:--------------------------------------|:-----------------------------|:--------------------------| | Common Stock (Shares) | 55,576,988 | 56,041,364 | | Common Stock (Amount) | $1 | $1 | | Additional Paid In Capital | $504,757 | $507,733 | | Accumulated Other Comprehensive (Loss)| $— | $(103) | | Accumulated Deficit | $(422,882) | $(440,383) | | Total Stockholders' Equity | $81,876 | $67,248 | - Total stockholders' equity decreased by $14,628 (17.9%) from December 31, 2021, to March 31, 2022, primarily due to the net loss incurred during the period[33] - Common stock shares outstanding increased by 464,376 due to issuances in connection with the incentive equity plan[33] Condensed Consolidated Statements of Cash Flows These statements report cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31, 2022, and 2021 Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Item | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | |:----------------------------------------|:----------------------------------|:----------------------------------| | Net cash used in operating activities | $(38,199) | $(8,335) | | Net cash (used in) provided by investing activities | $(261) | $4,785 | | Net cash used in financing activities | $(1,022) | $(76,841) | | Change in cash and cash equivalents | $(39,585) | $(80,391) | | Cash and cash equivalents, end of period| $106,671 | $22,171 | - Net cash used in operating activities significantly increased to $38,199 thousand in Q1 2022 from $8,335 thousand in Q1 2021, primarily due to the net loss and changes in operating assets and liabilities, including a $15 million litigation settlement payment[36][231] - Cash used in investing activities was $261 thousand in Q1 2022, compared to cash provided of $4,785 thousand in Q1 2021, mainly due to no maturities of short-term investments in 2022[36][233] - Net cash used in financing activities decreased substantially to $1,022 thousand in Q1 2022 from $76,841 thousand in Q1 2021, as the prior year included a large repayment of long-term debt[36][235] Notes to Condensed Consolidated Financial Statements These notes provide detailed explanations and disclosures supporting the financial statements, covering business, accounting policies, assets, debt, leases, and settlement agreements Note 1. Description of Business This note describes Evolus, Inc.'s business, its sole product Jeuveau, and addresses liquidity and going concern considerations due to recurring losses and negative cash flows - Evolus, Inc. is a performance beauty company focused on the self-pay aesthetic market, with Jeuveau (prabotulinumtoxinA-xvfs) as its first and currently only product, approved in the U.S., Canada, and Europe[41] - The company has incurred recurring net operating losses and negative cash flows from operating activities since inception, with a net loss of $17,501 thousand and cash used in operations of $38,199 thousand for the three months ended March 31, 2022[43] - As of March 31, 2022, the company had $106,671 thousand in cash and cash equivalents and an accumulated deficit of $440,383 thousand[43] - The company believes current capital resources are sufficient for the next twelve months but may require additional capital through licensing, collaboration, grants, or other financing sources for future operations[45] Note 2. Basis of Presentation and Summary of Significant Accounting Policies This note explains the basis of financial statement preparation, principles of consolidation, use of estimates, segment reporting, and significant accounting policies for various financial items - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP and SEC interim reporting requirements, reflecting normal recurring adjustments[46] - The company operates in a single operating and reportable segment, with its CEO managing operations and reviewing financial information as such[57] - Revenue is recognized when control of promised goods or services is transferred to customers, with product revenue from U.S. sales and service revenue from Canadian distribution[80][81][83] - Product cost of sales includes inventory cost and royalties payable to Medytox and Allergan, partially offset by reimbursements from Daewoong[65] - Accrued revenue contract liabilities, primarily for volume-based rebates, consumer loyalty programs, and co-branded marketing, were $4,992 thousand as of March 31, 2022[92] - For the three months ended March 31, 2022, the company recognized $7,254 thousand of revenue related to contract liabilities from the beginning of the period[94] - In Q1 2022, the company made a $15,000 thousand cash payment to Medytox and Allergan as part of a litigation settlement, with a $5,000 thousand balance due in 2023[98] - Stock-based compensation expense for Q1 2022 was $2,959 thousand, recognized net of actual forfeitures[105][173] - The company recorded a tax benefit of $2 thousand for Q1 2022, primarily due to the impact of a valuation allowance offsetting deferred tax assets[106] Note 3. Fair Value Measurements and Short-Term Investments This note details fair value measurements of financial instruments, especially the contingent royalty obligation to Evolus Founders, using a three-tiered hierarchy and discounted cash flow method Fair Value of Contingent Royalty Obligation (in thousands) | Item | March 31, 2022 | December 31, 2021 | |:---------------------------------------------|:---------------|:------------------| | Contingent royalty obligation payable to Evolus Founders | $45,017 | $44,740 | - The fair value of the contingent royalty obligation is determined using Level 3 inputs via a discounted cash flows method, with a discount rate of 13.0% used for both Q1 2022 and Q1 2021[121][122] Reconciliation of Contingent Royalty Obligation Fair Value (in thousands) | Item | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | |:---------------------------------------------|:----------------------------------|:----------------------------------| | Fair value, beginning of period | $44,740 | $41,546 | | Payments | $(1,039) | $(529) | | Change in fair value recorded in operating expenses | $1,316 | $1,268 | | Fair value, end of period | $45,017 | $42,285 | Note 4. Goodwill and Intangible Assets This note breaks down definite-lived intangible assets and indefinite-lived goodwill, including their cost, amortization, net book value, and estimated future amortization expense Goodwill and Intangible Assets (in thousands) | Item | March 31, 2022 | December 31, 2021 | |:------------------------------------|:---------------|:------------------| | Distribution right, net | $49,747 | $50,487 | | Capitalized software, net | $285 | $138 | | Intangible assets, net | $50,032 | $50,625 | | Goodwill | $21,208 | $21,208 | | Total as of period end | $71,240 | $71,833 | - The distribution right intangible asset, related to Jeuveau, is amortized on a straight-line basis over an estimated useful life of 20 years[72] - Capitalized internal-use software costs are amortized on a straight-line basis over an estimated useful life of two years[72] Estimated Future Amortization Expense for Intangible Assets (in thousands) | Fiscal year | Amount | |:--------------------|:-------| | Remaining in 2022 | $2,345 | | 2023 | $3,080 | | 2024 | $2,987 | | 2025 | $2,955 | | 2026 | $2,955 | | Thereafter | $35,710| | Total | $50,032| Note 5. Accrued Expenses This note itemizes the components of accrued expenses, including royalties, payroll, revenue contract liabilities, and professional services Accrued Expenses (in thousands) | Item | 2022 | 2021 | |:------------------------------------------------|:--------|:--------| | Accrued royalties under Medytox/Allergan Settlement Agreements | $9,371 | $12,447 | | Accrued payroll and related benefits | $3,710 | $6,856 | | Accrued revenue contract liabilities | $4,992 | $7,934 | | Accrued professional services | $352 | $595 | | Other accrued expenses | $2,714 | $2,161 | | Total | $21,139 | $29,993 | - Total accrued expenses decreased by $8,854 (29.5%) from $29,993 thousand in 2021 to $21,139 thousand in 2022[131] - Accrued royalties under the Medytox/Allergan Settlement Agreements decreased by $3,076 (24.7%) from 2021 to 2022[131] Note 6. Term Loans This note describes the Pharmakon Term Loans, detailing tranches, interest rates, repayment schedule, covenants, and the prior Oxford Term Loan repayment - The company entered into a $125,000 thousand Pharmakon Term Loan agreement in December 2021, with the first tranche of $75,000 thousand funded on December 29, 2021[132] - A second tranche of $50,000 thousand may be drawn by December 31, 2022, but was not drawn as of March 31, 2022[132] - The Pharmakon Term Loans accrue interest at 3-month U.S. Dollar LIBOR (or 1.0% floor) plus 8.5% per annum, with principal payments commencing on the 39th-month anniversary of the first tranche funding[133] - The company was in compliance with its debt covenants as of March 31, 2022[135] Principal Amounts of Long-Term Debt Maturities (in thousands) | Fiscal year | Amount | |:--------------------|:-------| | Remainder of 2022 | $— | | 2023 | $— | | 2024 | $— | | 2025 | $25,000| | 2026 | $25,000| | Thereafter | $25,000| | Total principal payments | $75,000| | Unamortized debt discounts and issuance costs | $(3,619)| | Long term debt, net of discounts and issuance costs | $71,381| Note 7. Daewoong Convertible Note This note details the Daewoong Convertible Note, its interest terms, and its conversion into common stock in March 2021 as part of a settlement agreement - The Daewoong Convertible Note, with a principal amount of $40,000 thousand, was funded on July 30, 2020, bearing 3.0% interest[143][144] - On March 23, 2021, the outstanding principal balance of $40,779 thousand was converted into 3,136,869 shares of common stock at $13.00 per share[145] - The conversion resulted in a gain of $971 thousand, recorded in loss from extinguishment of debts, net[145] Note 8. Operating Leases This note outlines the company's operating lease for its corporate headquarters, including term, options, lease expense components, and future minimum payments - The company leases its corporate headquarters under a five-year non-cancelable operating lease expiring January 31, 2025, with an option to extend for an additional 60 months[146] Operating Lease Expense (in thousands) | Item | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | |:----------------------------------------|:----------------------------------|:----------------------------------| | Fixed operating lease expense | $269 | $265 | | Variable operating lease expense | $24 | $8 | | Total | $293 | $273 | Future Minimum Payments Under Operating Lease Agreements (in thousands) | Fiscal year | Amount | |:--------------------|:-------| | Remainder of 2022 | $953 | | 2023 | $1,320 | | 2024 | $1,377 | | 2025 | $115 | | 2026 | $— | | Total operating lease payments | $3,765 | | Less: imputed interest | $(476) | | Present value of operating lease liabilities | $3,289 | Note 9. Commitments and Contingencies This note discloses purchase commitments, Daewoong Agreement obligations, and ongoing legal proceedings including securities class action and shareholder derivative lawsuits - As of March 31, 2022, the company had commitments to purchase services and products for approximately $1,931 thousand[152] - The Daewoong Agreement includes minimum annual purchase commitments for Jeuveau to maintain license exclusivity, contingent on future events and market share[152] - The company is a defendant in a consolidated securities class action lawsuit and a nominal defendant in shareholder derivative actions, both alleging similar facts related to Jeuveau acquisition and ITC Action risks[153][155] - Management believes the complaints are without merit and intends to vigorously defend, but cannot reasonably estimate a range of loss at present[156] Note 10. Stockholders' Equity This note details preferred and common stock, shares issued for settlements and conversions, the 2017 Omnibus Incentive Plan, and stock-based compensation activity - As of March 31, 2022, the company had 56,041,364 shares of common stock issued and outstanding[162] - In February 2021, 6,762,652 shares of common stock were issued to Medytox as part of a settlement agreement[162] - In March 2021, 3,136,869 shares of common stock were issued to Daewoong upon conversion of the Daewoong Convertible Note[163] - The 2017 Omnibus Incentive Plan had 1,044,640 shares available for future issuance as of March 31, 2022[165] Stock Option Activity (Three Months Ended March 31, 2022) | Item | Stock Options | Weighted Average Exercise Price Per Share | |:--------------------------------------|:--------------|:------------------------------------------| | Outstanding, December 31, 2021 | 3,922,286 | $11.23 | | Granted | 1,382,327 | $6.04 | | Exercised | (2,925) | $4.60 | | Canceled/forfeited | (75,364) | $10.28 | | Outstanding, March 31, 2022 | 5,226,324 | $9.88 | | Exercisable, March 31, 2022 | 2,684,544 | $11.49 | Restricted Stock Unit (RSU) Activity (Three Months Ended March 31, 2022) | Item | Restricted Stock Units | Weighted Average Grant Date Fair Value Per Share | |:--------------------------------------|:-----------------------|:-------------------------------------------------| | Outstanding, December 31, 2021 | 1,926,467 | $8.06 | | Granted | 1,302,176 | $5.78 | | Vested | (461,451) | $7.86 | | Forfeited | (82,417) | $6.90 | | Outstanding, March 31, 2022 | 2,684,775 | $7.02 | Note 11. Medytox/Allergan Settlement Agreements and Daewoong Arrangement This note explains the Medytox/Allergan Settlement Agreements, detailing cash payments, royalty obligations, and stock issuance, along with the Daewoong Settlement Agreement and its amendment - Under the Medytox/Allergan Settlement Agreements (February 2021), Evolus agreed to pay $35,000 thousand in multiple payments, with $15,000 thousand paid in Q3 2021 and $15,000 thousand in Q1 2022, and a $5,000 thousand balance due in 2023[173] - Evolus also agreed to pay confidential royalties on Jeuveau sales to Allergan and Medytox (dollar amount per vial in U.S.) and to Medytox (low-double digit on net sales in ROW territories) from December 16, 2020, to September 16, 2022[173][174] - From September 17, 2022, to September 16, 2032, Evolus will pay Medytox a confidential mid-single digit royalty percentage on net sales of Jeuveau in the U.S. and ROW territories[174] - Evolus issued 6,762,652 shares of common stock to Medytox as part of the ROW Settlement Agreement[174][176] - Under the Daewoong Settlement Agreement (March 2021), Daewoong paid Evolus $25,500 thousand (received April 2021), cancelled $10,500 thousand in milestone payments, and agreed to reimburse Evolus for certain royalties paid to Medytox and Allergan[179] - The Daewoong Agreement Amendment expanded Evolus's Jeuveau distribution territory in Europe, adjusted minimum purchase requirements, and reduced the transfer price per vial[183] - As of March 31, 2022, Evolus had $4,228 thousand in reimbursement receivable from Daewoong[183] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on financial condition, results of operations, and liquidity, discussing key performance factors, settlement impacts, and macroeconomic conditions Overview This section introduces Evolus as a performance beauty company, highlighting its sole product Jeuveau, market position, and international expansion plans - Evolus is a performance beauty company focused on the self-pay aesthetic market, with Jeuveau as its first product, commercially launched in the U.S. in May 2019[186] - Jeuveau is a proprietary 900 kDa purified botulinum toxin type A formulation for temporary improvement of moderate to severe glabellar lines[186] - The company plans to launch Jeuveau in Europe in Q3 2022 and expects full TGA regulatory approval and launch in Australia in 2023[186] - A Phase II clinical trial for a higher strength dose of Jeuveau in frown lines was initiated in November 2021, with completion anticipated in H1 2023[186] Impact of Settlement Agreements This section discusses the financial implications of Medytox/Allergan and Daewoong settlement agreements, including cash payments, royalties, and their impact on cost of sales and gross profit margin - Evolus agreed to pay $35.0 million to Allergan and Medytox in multiple payments over two years, with $15.0 million paid in Q3 2021 and $15.0 million in Q1 2022, and $5.0 million due in 2023[187] - Royalty payments on Jeuveau sales are due to Allergan and Medytox (dollar amount per vial in U.S.) and Medytox (low-double digit on net sales in ROW territories) from December 16, 2020, to September 16, 2022[187][189] - From September 17, 2022, to September 16, 2032, a mid-single digit royalty percentage on net sales of Jeuveau is payable to Medytox in the U.S. and ROW territories[189] - Daewoong paid Evolus $25.5 million in April 2021, cancelled $10.5 million in milestone payments, and agreed to reimburse certain royalties paid to Medytox and Allergan[189] - Royalty payments are expected to negatively impact cost of sales and gross profit margin through September 2022, and to a lesser extent from September 2022 to September 2032[190] The Pharmakon Term Loans This section describes the $125 million Pharmakon Term Loans, detailing the first tranche funded in December 2021 and the second tranche available until December 2022 - Evolus entered into a $125.0 million Pharmakon Term Loan agreement in December 2021[191] - The first tranche of $75.0 million was funded on December 29, 2021[191] - A second tranche of $50.0 million may be drawn at the company's election no later than December 31, 2022, but was not drawn as of March 31, 2022[191] Contingent Royalties to Evolus Founders This section explains the obligation to pay low single-digit quarterly royalties on Jeuveau net sales to Evolus Founders until Q2 2029, recorded as a contingent royalty obligation - Evolus is obligated to make quarterly royalty payments of a low single-digit percentage of Jeuveau net sales to its founders[192] - These royalty obligations terminate at the end of the second quarter of 2029[192] - The fair value of these obligations is valued quarterly and recorded as a contingent royalty obligation in the consolidated financial statements[192] COVID-19 and Operational Update This section addresses the ongoing impact of COVID-19 and rising inflation on consumer discretionary spending for aesthetic procedures, noting the inability to estimate future financial impacts - The COVID-19 pandemic and its evolving effects, including new variants and potential government restrictions, continue to pose risks to business operations and sales[193] - Rising inflation over the past year may impact consumer discretionary spending for aesthetic medical procedures[194] - Given the dynamic nature of these situations, the company cannot reasonably estimate the full financial impact of COVID-19 or increased inflation on its future financial condition, results of operations, or cash flows[193][194] Management's Use of Adjusted Gross Profit Margin This section defines adjusted gross profit and margin as non-GAAP measures used to evaluate sales profitability, excluding one-time payments and amortization, with a GAAP reconciliation - Adjusted gross profit is a non-GAAP measure defined as total net revenues less product cost of sales, excluding the one-time settlement payment from Daewoong in 2021 and amortization of an intangible asset[195] - Management uses adjusted gross profit margin as a key performance indicator to evaluate sales profitability without non-core costs[195] Reconciliation of Adjusted Gross Profit to GAAP Gross Profit (in millions) | Item | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | |:------------------------------------------------------------------|:----------------------------------|:----------------------------------| | Total net revenues | $33.9 | $12.2 | | Product cost of sales (excludes amortization of intangible assets)| $13.2 | $4.9 | | Settlement payment from Daewoong | $— | $(25.5) | | Amortization of distribution right intangible asset | $0.7 | $0.7 | | Total cost of sales | $13.9 | $(19.9) | | Gross profit | $20.0 | $32.1 | | Gross profit margin | 58.9% | 262.3% | | Add: Settlement payment from Daewoong | $— | $(25.5) | | Add: Amortization of distribution right intangible asset | $0.7 | $0.7 | | Adjusted gross profit | $20.7 | $7.3 | Results of Operations This section provides a detailed comparison of financial performance for Q1 2022 and 2021, covering net revenues, cost of sales, gross profit margin, and operating expenses Net Revenues This subsection discusses the significant increase in net revenues from Jeuveau sales, driven by higher volumes and average selling price in the U.S., and outlines future growth drivers - Net revenues from Jeuveau sales increased by $21.7 million, or 177.9%, to $33.9 million for the three months ended March 31, 2022, from $12.2 million in the prior year[201] - The increase was primarily due to higher sales volumes and a slightly higher average selling price of Jeuveau in the United States[201] - Future sales growth depends on the ability to grow the customer base and increase purchases by current customers in the competitive aesthetic medicine market[201] Cost of Sales This subsection explains product cost of sales components, including inventory costs and royalties under settlement agreements, noting the increase due to higher sales volume - Product cost of sales, excluding amortization of intangible assets, increased by $8.3 million, or 169.4%, to $13.2 million for Q1 2022 from $4.9 million in Q1 2021[204] - The increase was primarily due to higher sales volume[204] - Product cost of sales includes inventory costs from Daewoong and certain royalties on Jeuveau sales payable to Medytox and Allergan, partially offset by reimbursements from Daewoong[202][203] Settlement Payment from Daewoong This subsection highlights the one-time $25.5 million settlement receipt from Daewoong in Q1 2021, which impacted cost of sales - In Q1 2021, the company recorded a one-time settlement receipt of $25.5 million from Daewoong, which was included as part of cost of sales[205] Gross Profit Margin This subsection compares gross and adjusted gross profit margins, noting the impact of settlement agreements and anticipated future fluctuations from marketing and international expansion Gross Profit Margins | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | |:------------------------|:----------------------------------|:----------------------------------| | Gross profit margin | 58.9% | 262.3% | | Adjusted gross profit margin | 61.0% | 59.9% | - The significant difference in gross profit margin is due to the one-time $25.5 million settlement payment from Daewoong in Q1 2021[198] - Gross profit margin and adjusted gross profit margin are expected to be negatively impacted through September 2022 due to royalty obligations, but should increase thereafter as Allergan royalties terminate and Medytox royalties reduce[206] Selling, General and Administrative This subsection details the increase in SG&A expenses, primarily due to higher personnel costs and increased commercial activities, including direct-to-consumer marketing - Selling, general and administrative expenses increased by $12.7 million, or 61.4%, to $33.4 million for Q1 2022 from $20.7 million in Q1 2021[207] - The increase was primarily driven by higher personnel costs and increased commercial activities, including direct-to-consumer marketing[207] Research and Development This subsection reports a decrease in R&D expenses but anticipates a moderate increase due to the Phase II 'extra-strength' clinical trial and future product development - Research and development expenses decreased by $0.3 million, or 37.5%, to $0.5 million for Q1 2022 from $0.8 million in Q1 2021[208] - Overall R&D expense is expected to increase moderately due to the Phase II 'extra-strength' clinical trial in 2022 and 2023, and pursuit of regulatory approvals in other jurisdictions[208] Revaluation of Contingent Royalty Obligation Payable to Evolus Founders This subsection explains revaluation charges for the contingent royalty obligation, driven by changes in revenue forecasts, discount rates, and cash flow timing - Revaluation charges for the contingent royalty obligation payable to Evolus Founders were $1.3 million for both Q1 2022 and Q1 2021[209] - These charges were primarily driven by changes in management assumptions related to revenue forecasts, the discount rate used, and the timing of cash flows[209] Depreciation and Amortization This subsection notes a decrease in depreciation and amortization, primarily due to most internal-use software assets being fully amortized - Depreciation and amortization decreased by $1.1 million, or 55.0%, to $0.9 million for Q1 2022 from $2.0 million in Q1 2021[210] - The decrease was primarily due to the amortization of most internal-use software assets being completed[210] Non-Operating Expense, Net This subsection attributes the increase in non-operating expense to higher interest expense from the Pharmakon Term Loans - Non-operating expense, net, increased by $1.4 million, or 217.5%, to $2.0 million for Q1 2022 from $0.6 million in Q1 2021[211] - The increase was primarily due to higher interest expense for the Pharmakon Term Loans[211] Loss from Extinguishment of Debts, Net This subsection explains the net loss from extinguishment of debts, resulting from the payoff of Oxford debt partially offset by a gain from the Daewoong Convertible Note conversion - Loss from extinguishment of debts, net, includes a $1.9 million loss from the payoff of long-term debt with Oxford Finance, LLC in January 2021[212] - This loss was partially offset by a $1.0 million gain from the conversion of the Daewoong Convertible Note in March 2021[212] Income Taxes (Benefit) Expense This subsection reports minimal tax benefit and expense for the periods, primarily due to the valuation allowance offsetting deferred tax assets - There was a minimal tax benefit of $0.0 million for Q1 2022 and income tax expense of $0.0 million for Q1 2021[213] - The effective tax rate differs from the U.S. federal statutory rate primarily due to the impact of the valuation allowance offsetting deferred tax assets[106] Liquidity and Capital Resources This section discusses the company's financial position, including cash, working capital, and accumulated deficit, outlining future capital requirements, funding, and cash flow activities The Pharmakon Term Loans This subsection details the Pharmakon Term Loans, including the funded first tranche, available second tranche, interest rate, maturity, and intended use of proceeds - The first tranche of $75.0 million from the Pharmakon Term Loans was funded on December 29, 2021, with net proceeds of approximately $68.7 million[216] - A second tranche of $50.0 million may be drawn by December 31, 2022, and was not drawn as of March 31, 2022[216] - The term loan bears an annual interest rate equal to the U.S. Dollar LIBOR rate (subject to a 1.0% floor) plus 8.5% and matures in December 2027[216] Contingent Royalties to Evolus Founders This subsection reaffirms the obligation to pay quarterly royalties to Evolus Founders until Q2 2029, with a recorded balance of $45.0 million - Evolus is obligated to make quarterly royalty payments of a low single-digit percentage of Jeuveau net sales to Evolus Founders, terminating at the end of Q2 2029[217] - As of March 31, 2022, an aggregate balance of $45.0 million was recorded on the balance sheet for this future royalty payment obligation[218] Litigation Settlement This subsection summarizes financial obligations and reimbursements related to Medytox/Allergan and Daewoong settlement agreements, including cash payments, royalty rates, and the $25.5 million received - Under the Medytox/Allergan Settlement Agreements, Evolus agreed to pay $35.0 million, with $15.0 million paid in Q3 2021, $15.0 million in Q1 2022, and $5.0 million due in the next twelve months[219] - Royalty obligations include a dollar amount per vial for U.S. Jeuveau sales and a low-double digit royalty on net sales in other territories until September 16, 2022, then a mid-single digit royalty to Medytox until September 16, 2032[219] - Daewoong paid Evolus $25.5 million in April 2021 and agreed to reimburse certain royalties payable to Medytox and Allergan[219][221] License and Supply Agreement This subsection mentions minimum annual purchase commitments under the Daewoong Agreement required to maintain license exclusivity, contingent on future events and market share - The Daewoong Agreement includes minimum annual purchase commitments required to maintain license exclusivity[222] - These obligations are contingent upon future events, including governmental approvals and the company's future market share in licensed territories[222] Operating Leases This subsection describes the operating lease for the corporate headquarters, including its term, annual rent escalation, and termination options - The corporate headquarters is under a five-year non-cancelable operating lease expiring January 31, 2025, with an option to extend for an additional 60 months[223] - Lease payments increase annually based on an escalation clause[223] Current and Future Capital Requirements This subsection assesses the sufficiency of current capital resources for short-term and long-term needs, acknowledging uncertainties and factors influencing future funding requirements - Current capital resources (cash, cash equivalents, cash from operations, Pharmakon Term Loans) are believed to be sufficient for short-term and long-term cash requirements[224] - Future funding requirements are highly uncertain and depend on factors like Jeuveau revenue growth, international launches, R&D costs, manufacturing, and litigation expenses[225][226][228] - The company may need to raise additional capital through debt, equity, licensing agreements, or other financing if current resources are depleted sooner than expected[225] Cash Flows This subsection summarizes cash flows from operating, investing, and financing activities for Q1 2022 and 2021, detailing primary drivers of changes in cash and cash equivalents Summary of Cash Flows (in millions) | Item | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | |:----------------------------------------|:----------------------------------|:----------------------------------| | Net cash (used in) provided by: | | | | Operating activities | $(38.2) | $(8.3) | | Investing activities | $(0.3) | $4.8 | | Financing activities | $(1.0) | $(76.8) | | Effect of exchange rates on cash | $(0.1) | $— | | Change in cash and cash equivalents | $(39.6) | $(80.4) | | Cash and cash equivalents, end of period| $106.7 | $22.2 | - Operating activities used $38.2 million in Q1 2022, primarily due to a net loss of $17.5 million and a $15.0 million litigation settlement payment[231] - Investing activities used $0.3 million in Q1 2022, compared to $4.8 million provided in Q1 2021, due to no short-term investment maturities in 2022[233] - Financing activities used $1.0 million in Q1 2022, significantly less than $76.8 million in Q1 2021, which included a large long-term debt repayment[235] Material Cash Requirements This subsection states no material changes occurred to future obligations under debt, royalties, settlement payments, operating leases, and purchase commitments since the prior annual report - No material changes occurred to future obligations related to debt, interest, royalty payments to Evolus Founders, the $5.0 million settlement payment, royalties to Allergan and Medytox, operating leases, and purchase obligations, as reported in the 2021 Annual Report on Form 10-K[236] Critical Accounting Policies and Estimates This subsection reaffirms no material changes to critical accounting policies and estimates discussed in the 2021 Annual Report on Form 10-K - There have been no material changes to the critical accounting policies and estimates as discussed in the Annual Report on Form 10-K for the year ended December 31, 2021[238] Recently Issued and Adopted Accounting Pronouncements This subsection refers to Note 2 for details on recently issued and adopted accounting pronouncements - Details on recently issued and adopted accounting pronouncements are described in Note 2. Summary of Significant Accounting Policies[239] Item 3. Quantitative and Qualitative Disclosures About Market Risk This item states no material quantitative or qualitative disclosures about market risk are required for the reporting period - This item is not applicable for the current reporting period[241] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective as of March 31, 2022, with no material changes in internal control over financial reporting during the quarter - As of March 31, 2022, management, with the participation of the CEO and CFO, concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level[243] - No changes in internal control over financial reporting were identified during Q1 2022 that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[245] PART II - OTHER INFORMATION Item 1. Legal Proceedings This item refers to Note 9, 'Commitments and Contingencies,' for information regarding legal proceedings, including securities class action and shareholder derivative lawsuits - Information regarding legal proceedings is provided in Note 9. Commitments and Contingencies[248] Item 1A. Risk Factors This section details comprehensive risks and uncertainties that could materially affect the company's business, financial condition, results of operations, revenue, and future prospects Risks Related to Our Business and Strategy This subsection outlines risks related to the company's business and strategy, including Jeuveau dependence, limited operating history, financing needs, settlement compliance, COVID-19 impact, and competition - The company's business depends entirely on the successful commercialization of its sole product, Jeuveau, and failure to market it successfully could prevent sufficient revenue generation[252] - Evolus has a limited operating history and has incurred significant losses since inception, with an accumulated deficit of $440.4 million as of March 31, 2022, and expects to continue incurring losses[253][255] - Additional financing may be required for future operations, and failure to obtain it on acceptable terms could force delays, reductions, or termination of operations, potentially leading to loss of license exclusivity under the Daewoong Agreement[256] - Non-compliance with Medytox/Allergan settlement agreements could lead to litigation or loss of Jeuveau marketing rights, severely impacting business and going concern ability[258][259] - The COVID-19 pandemic and rising inflation have adversely affected, and may continue to affect, consumer discretionary spending for elective aesthetic procedures, impacting Jeuveau sales[261][266][267] - Jeuveau faces significant competition from larger, more experienced companies with greater financial resources, brand recognition, and product portfolios, which could prevent market penetration[269] - Failure to achieve broad physician adoption and consumer demand for Jeuveau or future product candidates would adversely affect operating results and financial condition[273] - The company's ability to market Jeuveau is limited to glabellar lines; expanding indications requires additional, expensive, and potentially ungranted regulatory approvals[275] - Reliance on digital technology and applications means business and operations would suffer in the event of computer system failures or hacker breaches, impacting order processing and reputation[276] - The company's international operations expose it to risks such as differing demand, management challenges, compliance with varied laws, and geopolitical tensions like the Russia-Ukraine conflict[296][297][298] - Failure to attract and retain senior management and key scientific personnel could hinder the successful marketing and sale of Jeuveau or future products[299] - The strategy of focusing exclusively on the self-pay healthcare market may limit sales growth or profitability, as it restricts the ability to offer reimbursed products or therapeutic indications[301][302] Risks Related to Our Relationship with Daewoong This subsection describes risks from reliance on Daewoong for Jeuveau distribution and manufacturing, including agreement termination, supply disruptions, and demand forecasting challenges - Evolus relies on the Daewoong Agreement for exclusive distribution rights to Jeuveau in certain territories; any termination or loss of exclusivity would materially and adversely affect commercialization[313] - Failure to achieve minimum annual purchase targets for Jeuveau under the Daewoong Agreement could result in the conversion of the exclusive license to a non-exclusive license[315] - Sole reliance on Daewoong for Jeuveau manufacturing means any production or other problems with Daewoong could adversely affect Evolus, including regulatory non-compliance or facility damage[316][318][321] - Inaccurate forecasts of Jeuveau demand could lead to delays in shipments, increased inventory costs, or inadequate inventory, negatively affecting financial performance[322] Risks Related to Intellectual Property This subsection covers intellectual property risks, including third-party infringement claims, ability to protect IP rights (trademarks, trade secrets, patents), and potential for costly litigation - Third-party claims of intellectual property infringement may prevent or delay commercialization efforts and interrupt product supply, leading to substantial litigation expenses or damages[323][326] - Inability to maintain, obtain, or protect intellectual property rights related to Jeuveau or future product candidates, including trademarks, trade secrets, and in-licensed patents, could hinder effective market competition[327][328][340] - Involvement in lawsuits to protect or enforce intellectual property rights, whether by Evolus or its licensors, could be expensive, time-consuming, and divert management attention[330][331] - Protecting intellectual property rights globally is challenging due to varying laws and enforcement, potentially allowing competitors to use technologies in countries without strong protection[337] - Failure to protect the confidentiality of trade secrets, including unpatented know-how, would harm the business and competitive position[341] Risks Related to Government Regulation This subsection addresses extensive government regulations affecting the business, including challenges in obtaining and maintaining approvals, compliance with healthcare fraud laws, and legislative reform impacts - The business and products are subject to extensive, complex, costly, and evolving government regulation by federal and state authorities in the U.S., EU, Canada, and other countries[351][352] - Delays in obtaining or failure to obtain regulatory approval for future product candidates would harm commercial prospects and materially impair revenue generation[354][357] - Ongoing regulatory obligations and continued review may result in significant additional expense, limit or delay regulatory approval, and subject the company to penalties for non-compliance[361][362] - Failure to obtain regulatory approvals in foreign jurisdictions for Jeuveau or future product candidates would prevent marketing products outside the United States[363] - Future products may cause or contribute to adverse medical events requiring regulatory reporting; failure to report could lead to sanctions[364][365] - The company may be subject to healthcare fraud and abuse laws (e.g., Anti-Kickback Statute, False Claims Act); violations could result in fines, penalties, or exclusion from federal programs[365][366][367] - Legislative or regulatory healthcare reforms could make it more difficult and costly to obtain regulatory clearance/approval and to produce, market, and distribute products[370][371] Risks Related to Our Relationship with Alphaeon and Alphaeon 1, LLC This subsection discusses potential conflicts of interest from directors' ownership and positions with Alphaeon entities, and the limited liability of AEON and its directors/officers to the company - Certain directors' ownership of debt and equity securities in AEON Biopharma, Inc. and Alphaeon 1, LLC, and their positions with these entities, may create actual or potential conflicts of interest[373][374] - These conflicts could arise in decisions regarding corporate opportunities, financial statements, indebtedness, financing efforts, business combinations, and management stock ownership[375] - The company's certificate of incorporation limits AEON's liability for breach of fiduciary duty and allows AEON to engage in similar business activities, potentially diverting corporate opportunities[378][379] Risks Related to Our Common Stock This subsection highlights risks associated with common stock, including significant control by major stockholders, potential securities litigation, stock price volatility, future sales, and anti-takeover provisions - Medytox (13.3%), Alphaeon 1, LLC (10.8%), and Daewoong (5.6%) each own a significant portion of the company's common stock as of March 31, 2022, potentially exerting significant control over corporate actions[384][385] - Securities class action and derivative lawsuits have been filed against the company and certain officers/directors, which could result in substantial costs and divert management attention[386][387] - The trading price of the common stock has been volatile, influenced by factors such as financial estimates, public announcements, regulatory actions, litigation, and overall market conditions[388][389] - Future sales of common stock by the company, Medytox, Alphaeon 1, LLC, Daewoong, or others, or the perception of such sales, could depress the market price[394][395] - Anti-takeover provisions in the certificate of incorporation, bylaws, and Delaware law could discourage a takeover, potent