Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________________
FORM 10-Q
_________________________________________________________________
(Mark One)

☒         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
or
☐        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 001-38381

_________________________________________________________________
EVOLUS, INC.
(Exact name of registrant as specified in its charter)
_________________________________________________________________

 
Delaware
 
 
 
46-1385614
 
 
(State or other jurisdiction of
incorporation or organization)
 
 
 
(I.R.S. Employer
Identification Number)
 
 
 
 
 
 
 
 
 
520 Newport Center Drive Suite 1200
Newport Beach, California
 
 
 
92660
 
 
(Address of Principal Executive Offices)
 
 
 
(Zip Code)
 
 
 
 
(949) 284-4555
 
 
 
 
 
 
(Registrant’s Telephone Number, Including Area Code)
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Class
 
Trading Symbol(s)
 
Name of each exchange on which registered
 
 
Common Stock, par value $0.00001 per share
 
EOLS
 
Nasdaq Global Market
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes      No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes     No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  No      
As of November 1, 2019, 27,425,230 shares of the registrant’s common stock, par value $0.00001, were outstanding.
 


Table of Contents


 
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
PART I - FINANCIAL INFORMATION

 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
PART II - OTHER INFORMATION

 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 

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Table of Contents

Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that involve risks and uncertainties, including statements based on our current expectations, assumptions, estimates and projections about future events, our business, financial condition, results of operations and prospects, our industry and the regulatory environment in which we operate. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative of those terms, or other comparable terms intended to identify statements about the future. Forward-looking statements include, but are not limited to, statements about:
our ability to successfully commercialize our sole product Jeuveau® including our ability to successfully market and sell Jeuveau® to our customers;
our ability to maintain regulatory approval of Jeuveau® and comply with any related restrictions, limitations and warnings in the label of Jeuveau® and any relevant regulatory requirements;
the potential market size, opportunity and growth potential for Jeuveau®;
the attractiveness of the product characteristics of Jeuveau® (including the benefits of a 900 kilodalton, or kDa, botulinum toxin type A complex) and the rate and degree of physician and patient acceptance of Jeuveau®;
the pricing of Jeuveau®, and the flexibility of our pricing and marketing strategy compared to our competitors;
the performance of our third-party licensors, suppliers, manufacturers and distributors;
our expectations regarding our future development of Jeuveau® for other indications and approval in other jurisdictions;
the accuracy of our estimates regarding the amount and timing of expenses, revenue, capital requirements and needs for additional financing;
regulatory and legislative developments in the United States, European Union, or EU, Canada and other countries;
developments and projections relating to our competitors and our industry, including competing products and procedures;
the loss of key management personnel;
our future financial performance and our ability to continue as a going concern; and
the results of current and any future legal proceedings.
The forward-looking statements included herein are not guarantees of future performance or events and are based on current expectations of our management based on available information and involve a number of risks and uncertainties, all of which are difficult or impossible to predict accurately and many of which are beyond our control. As such, our actual results may differ materially from those expressed in any forward-looking statements.  Factors that may cause or contribute to such differences include, but are not limited to, those discussed in more detail in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part I and Item 1A “Risk Factors” of Part II of this Quarterly Report on Form 10-Q. Readers should carefully review these risks, as well as the additional risks described in other documents we file from time to time with the Securities and Exchange Commission, or SEC. In light of the significant risks and uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that such results will be achieved, and readers are cautioned not to place undue reliance on such forward-looking statements. Except as required by law, we undertake no obligation to revise the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. You should read this Quarterly Report on Form 10-Q and the documents we file with the SEC, with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

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Table of Contents

Unless the context indicates otherwise, as used in this Quarterly Report on Form 10-Q, the terms “Evolus,” “company,” “we,” “us” and “our” refer to Evolus, Inc., a Delaware corporation, and our subsidiaries taken as a whole, unless otherwise noted.
EVOLUS and Jeuveau® are two of our trademarks that are used in this Quarterly Report on Form 10-Q. Jeuveau® is the trade name in the United States for our approved product with non-proprietary name, prabotulinumtoxinA-xvfs. The product has different trade names outside of the United States, but is referred to throughout this Quarterly Report on Form 10-Q as Jeuveau®. This Quarterly Report on Form 10-Q also includes trademarks, trade names and service marks that are the property of other organizations, such as BOTOX® and BOTOX® Cosmetic, which we refer to throughout this Quarterly Report on Form 10-Q as BOTOX. Solely for convenience, trademarks and trade names referred to in this Quarterly Report on Form 10-Q may appear without the ® and symbols, but those references are not intended to indicate that we will not assert, to the fullest extent under applicable law, our rights, or that the applicable owner will not assert its rights, to these trademarks and trade names. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.




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Table of Contents


PART I—FINANCIAL INFORMATION
Item 1.     Financial Statements
Evolus, Inc.
Condensed Balance Sheets
(in thousands, except share data)
 
September 30, 2019
 
December 31, 2018
 
(unaudited)
 
(Note 2)
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
39,116

 
$
93,162

Short-term investments
34,913

 

Accounts receivable, net
7,206

 

Inventories
10,043

 

Prepaid expenses and other current assets
3,906

 
1,177

Total current assets
95,184


94,339

Property and equipment, net
984

 

Operating lease right-of-use assets
4,238

 

Intangible assets, net
59,857

 
56,076

Goodwill
21,208

 
21,208

Other assets
1,195

 
221

Total assets
$
182,666


$
171,844

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable
$
6,125

 
$
1,558

Accrued expenses
14,378

 
3,718

Contingent royalty obligation payable to Evolus Founders
4,323

 

Operating lease liabilities
1,148

 

Total current liabilities
25,974


5,276

Contingent royalty obligation payable to Evolus Founders
44,572

 
50,200

Contingent promissory note payable to Evolus Founders
17,674

 
16,904

Long-term debt, net of discounts and issuance costs
73,180

 

Operating lease liabilities
4,067

 

Deferred tax liability
156

 
15,055

Deferred rent

 
25

Total liabilities
165,623


87,460

Commitments and contingencies (Note 8)


 


Stockholders’ equity
 
 
 
Preferred stock, $0.00001 par value; 10,000,000 shares authorized; no shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively

 

Common stock, $0.00001 par value; 100,000,000 shares authorized; 27,425,230 and 27,274,991 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively
1

 
1

Additional paid-in capital
215,574

 
207,408

Accumulated other comprehensive gain
19

 

Accumulated deficit
(198,551
)
 
(123,025
)
Total stockholders’ equity
17,043


84,384

Total liabilities and stockholders’ equity
$
182,666


$
171,844

See accompanying notes to financial statements.

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Table of Contents

Evolus, Inc.
Condensed Statements of Operations and Comprehensive Loss
(in thousands, except share and per share data)
(Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Net revenues
$
13,167

 
$

 
$
15,478

 
$

Cost of sales (excludes amortization of intangible assets)
3,718

 

 
4,378

 

Gross profit
9,449

 

 
11,100

 

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
30,897

 
7,209

 
83,308

 
16,924

Research and development
693

 
1,977

 
3,555

 
5,303

Revaluation of contingent royalty obligation payable to Evolus Founders
1,795

 
2,300

 
7,977

 
11,400

Depreciation and amortization
1,202

 
3

 
2,664

 
7

Total operating expenses
34,587

 
11,489

 
97,504

 
33,634

Loss from operations
(25,138
)
 
(11,489
)
 
(86,404
)
 
(33,634
)
Other income (expense):
 
 
 
 
 
 
 
Interest income
460

 

 
1,464

 

Interest expense
(2,455
)
 
(322
)
 
(5,485
)
 
(750
)
Loss before income taxes:
(27,133
)
 
(11,811
)
 
(90,425
)
 
(34,384
)
Income tax (benefit) expense
(149
)
 
19

 
(14,899
)
 
41

Net loss
$
(26,984
)
 
$
(11,830
)
 
$
(75,526
)
 
$
(34,425
)
Other comprehensive (loss) gain:
 
 
 
 
 
 
 
Unrealized (loss) gain on available-for-sale securities, net of tax
(24
)
 

 
19

 

Comprehensive loss
$
(27,008
)
 
$
(11,830
)
 
$
(75,507
)
 
$
(34,425
)
Net loss per share, basic and diluted
$
(0.98
)
 
$
(0.48
)
 
$
(2.76
)
 
$
(1.47
)
Weighted-average shares outstanding used to compute basic and diluted net loss per share
27,470,558

 
24,768,581

 
27,403,683

 
23,417,417

See accompanying notes to financial statements.

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Table of Contents
Evolus, Inc.
Condensed Statements of Stockholders’ Equity
(in thousands, except share data)
(Unaudited)

 
Series A Preferred Stock
 
Common Stock
 
Additional
Paid In
Capital
 
Accumulated
Other Comprehensive (Loss) Gain
 
Accumulated Deficit
 
Total Stockholders’ Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2017
1,250,000

 
$

 
16,527,000

 
$

 
$

 
$

 
$
(75,543
)
 
$
(75,543
)
Deemed contribution from Parent, increase of related-party receivable

 

 

 

 
1,051

 

 

 
1,051

Deemed distribution to Parent, increase of convertible note obligation

 

 

 

 
(1,387
)
 

 
(615
)
 
(2,002
)
Capital contribution from Parent, convertible note write-off

 

 

 

 
66,998

 

 

 
66,998

Capital contribution from Parent, forgiveness of related party borrowings

 

 

 

 
13,188

 

 

 
13,188

Preferred stock conversion upon initial public offering
(1,250,000
)
 

 
2,065,875

 

 

 

 

 

Issuance of common stock upon initial public offering, net of issuance costs

 

 
5,047,514

 
1

 
53,445

 

 

 
53,446

Stock-based compensation

 

 

 

 
1,006

 

 

 
1,006

Net loss and comprehensive loss

 

 

 

 

 

 
(6,162
)
 
(6,162
)
Balance at March 31, 2018

 

 
23,640,389

 
1

 
134,301

 

 
(82,320
)
 
51,982

Issuance of common stock in connection with the incentive equity plan

 

 
34,602

 

 
(238
)
 

 

 
(238
)
Stock-based compensation

 

 

 

 
2,623

 

 

 
2,623

Net loss and comprehensive loss

 

 

 

 

 

 
(16,433
)
 
(16,433
)
Balance at June 30, 2018

 

 
23,674,991

 
1

 
136,686

 

 
(98,753
)
 
37,934

Issuance of common stock upon follow-on offering, net of issuance costs

 

 
3,600,000

 

 
67,380

 

 

 
67,380

Stock-based compensation

 

 

 

 
1,482

 

 

 
1,482

Net loss and comprehensive loss

 

 

 

 

 

 
(11,830
)
 
(11,830
)
Balance at September 30, 2018

 
$

 
27,274,991

 
$
1

 
$
205,548

 
$

 
$
(110,583
)
 
$
94,966

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Table of Contents
Evolus, Inc.
Condensed Statements of Stockholders’ Equity
(in thousands, except share data)
(Unaudited)

 
Series A Preferred Stock
 
Common Stock
 
Additional
Paid In
Capital
 
Accumulated
Other Comprehensive (Loss) Gain
 
Accumulated Deficit
 
Total Stockholders’ Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2018

 
$

 
27,274,991

 
$
1

 
$
207,408

 
$

 
$
(123,025
)
 
$
84,384

Issuance of common stock in connection with the incentive equity plan

 

 
10,372

 

 
(58
)
 

 

 
(58
)
Stock-based compensation

 

 

 

 
2,015

 

 

 
2,015

Net loss

 

 

 

 

 

 
(10,975
)
 
(10,975
)
Other comprehensive loss

 

 

 

 

 
(9
)
 

 
(9
)
Balance at March 31, 2019

 

 
27,285,363

 
1

 
209,365

 
(9
)
 
(134,000
)
 
75,357

Issuance of common stock in connection with the incentive equity plan

 

 
107,641

 

 
853

 

 

 
853

Stock-based compensation

 

 

 

 
2,486

 

 

 
2,486

Net loss

 

 

 

 

 

 
(37,567
)
 
(37,567
)
Other comprehensive gain

 

 

 

 

 
52

 

 
52

Balance at June 30, 2019

 

 
27,393,004

 
1

 
212,704

 
43

 
(171,567
)
 
41,181

Issuance of common stock in connection with the incentive equity plan

 

 
32,226

 

 
314

 

 

 
314

Stock-based compensation

 

 

 

 
2,556

 

 

 
2,556

Net loss

 

 

 

 

 

 
(26,984
)
 
(26,984
)
Other comprehensive loss

 

 

 

 

 
(24
)
 

 
(24
)
Balance at September 30, 2019

 
$

 
27,425,230

 
$
1

 
$
215,574

 
$
19

 
$
(198,551
)
 
$
17,043

See accompanying notes to financial statements.

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Table of Contents

Evolus, Inc.
Condensed Statements of Cash Flows
(in thousands)
(Unaudited)
 
Nine Months Ended
September 30,
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net loss
$
(75,526
)
 
$
(34,425
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
2,664

 
7

Stock-based compensation
6,981

 
5,111

Provisions for rebate and coupon programs
6,671

 

Accretion of discount on short-term investments
(912
)
 

Amortization of operating lease right-of-use assets
702

 

Amortization of debt discount and issuance costs
1,513

 
749

Deferred income taxes
(14,899
)
 
41

Revaluation of contingent royalty obligation payable to Evolus Founders
7,977

 
11,400

Changes in assets and liabilities:
 
 
 
Inventories
(6,225
)
 

Accounts receivable, net
(7,206
)
 

Prepaid expenses and other current assets
(1,406
)
 
(739
)
Accounts payable
736

 
378

Accrued expenses
2,000

 
3,825

Operating lease liabilities
(531
)
 

Deferred rent

 
(8
)
Net cash used in operating activities
(77,461
)
 
(13,661
)
Cash flows from investing activities
 
 
 
Purchases of property and equipment
(346
)
 
(9
)
Additions to capitalized software
(3,080
)
 

Purchases of short-term investments
(98,982
)
 

Maturities of short-term investments
65,000

 

Net cash used in investing activities
(37,408
)
 
(9
)
Cash flows from financing activities
 
 
 
Payment of contingent royalty obligation to Evolus Founders
(9,282
)
 

Milestone payment for intangible assets
(2,000
)
 

Proceeds from issuance of long-term debt, net of discounts
73,906

 

Payment for debt obligation
(705
)
 

Payments for debt issuance costs
(2,205
)
 

Proceeds from initial public offering, net of underwriters fees

 
56,330

Proceeds from follow-on offering, net of underwriters fees

 
67,680

Payments for offering costs

 
(1,060
)
Related party borrowings

 
1,127

Payments on related party borrowings

 
(5,000
)
Issuance of common stock in connection with incentive equity plan
1,109

 
(239
)
Net cash provided by financing activities
60,823

 
118,838

Change in cash and cash equivalents
(54,046
)
 
105,168

Cash and cash equivalents, beginning of period
93,162

 

Cash and cash equivalents, end of period
$
39,116

 
$
105,168

See accompanying notes to financial statements.

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Table of Contents

Evolus, Inc.
Condensed Statements of Cash Flows (Continued)
(in thousands)
(Unaudited)
 
Nine Months Ended
September 30,
 
2019
 
2018
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
3,365

 
$

Cash paid for operating leases
$
716

 
$

Non-cash investing and financing information:
 
 
 
Related party receivable
$

 
$
73,690

Related party borrowings
$

 
$
(68,767
)
Note obligation
$

 
$
(140,688
)
Contingent royalty obligation payable to Evolus Founders
$

 
$
39,700

Contingent promissory note payable to Evolus Founders
$

 
$
16,042

Capital contribution from Parent, convertible note write-off
$

 
$
66,998

Capital contribution from Parent, forgiveness of related party borrowings
$

 
$
13,188

Deferred offering costs
$

 
$
(2,885
)
Accounts payable, paid by Parent
$

 
$
(163
)
Operating lease right-of-use assets obtained in exchange for operating lease liabilities
$
5,565

 
$

Landlord paid tenant improvements
$
781

 
$

Financed D & O insurance payment
$
1,561

 
$

Capitalized software recorded in accounts payable and accrued expenses
$
147

 
$

Accrued milestone payment for intangible assets
$
1,000

 
$

See accompanying notes to financial statements.

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Table of Contents
Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)



Note 1.    Description of Business and Basis of Presentation
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 approved by Health Canada in August 2018 and the European Commission (“EC”) in 31 countries 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. In May 2019, the Company commercially launched Jeuveau® in the United States and launched in Canada through a distributor in October 2019. The Company is headquartered in Newport Beach, California.
Liquidity and Financial Condition
The accompanying unaudited condensed financial statements have been prepared on a basis that assumes that the Company will continue as a going concern. Since inception, the Company has incurred recurring net operating losses. The Company has recorded net losses of $26,984 and $75,526 for the three and nine months ended September 30, 2019, respectively. Additionally, the Company used cash of $77,461 in operations during the nine months ended September 30, 2019. As of September 30, 2019, the Company had $74,029 in cash and cash equivalents and short-term investments, and an accumulated deficit of $198,551.
The Company’s ability to execute on its business strategy, meet its future liquidity requirements, and achieve profitable operations, is dependent on a number of factors, including its ability to gain market acceptance of Jeuveau® and achieve a level of revenues adequate to support its cost structure, and operate its business without infringing third party intellectual property rights.
The Company believes that its current capital resources, which consist of cash, cash equivalents, and short-term investments, are sufficient to fund operations through at least the next twelve months from the date the accompanying financial statements are issued based on the expected cash burn rate. The Company may be required to raise additional capital to fund future operations through the sale of its equity securities, the incurrence of debt to the extent allowed under existing debt arrangements, the entry into licensing or collaboration agreements with partners, 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.
Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared on a consistent basis with the annual financial statements and in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. Pursuant to these SEC rules and regulations, the Company has condensed or omitted certain financial information and disclosures normally included in annual financial statements prepared in accordance with GAAP. In the opinion of management, the interim financial statements reflect all adjustments, which include normal recurring adjustments, considered necessary for a fair statement of the interim periods. The interim results presented herein are not necessarily indicative of the results of operations to be expected for the full year ending December 31, 2019 or for any other interim period.
The accompanying unaudited condensed financial statements and related disclosures should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on March 20, 2019.


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Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)


Note 2.    Summary of Significant Accounting Policies
There have been no material changes in the Company’s significant accounting policies during the nine months ended September 30, 2019 as compared with those disclosed in the Annual Report other than the adoption of the new lease and revenue recognition accounting standards described below.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments, and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes. Actual results could materially differ from those estimates, judgments, and assumptions. Management considers many factors in selecting appropriate financial accounting policies and controls and in developing the estimates and assumptions that are used in the preparation of these financial statements. Management must apply significant judgment in this process. In addition, other factors may affect estimates, including expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative of future trends. The estimation process often may yield a range of potentially reasonable estimates of the ultimate future outcomes, and management must select an amount that falls within that range of reasonable estimates.
On an ongoing basis, the Company evaluates the most significant estimates, including those related to net revenues, allowance for doubtful accounts, fair value measurements, goodwill and long-lived asset valuations and impairment assessments, inventory valuations, income tax valuations and stock-based compensation expense, among others. Although the Company bases estimates on historical experience, knowledge of current events and actions it may undertake in the future, and on various other assumptions that are believed to be reasonable, this process may result in actual results differing materially from those estimated amounts used in the preparation of the financial statements.
Risk and Uncertainties
In 2013, Evolus and Daewoong Pharmaceuticals Co., Ltd. (“Daewoong”) entered into an agreement (the “Daewoong Agreement”), pursuant to which, the Company has an exclusive distribution license to Jeuveau® from Daewoong for aesthetic indications in the United States, European Union, Canada, Australia, Russia, 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®. The Daewoong Agreement, and Daewoong’s rights relating to Jeuveau®, are subject to litigation. See Note 8. Commitments and Contingencies for additional information regarding such litigation.
The Company commercially launched Jeuveau® in the United States in May 2019 and, as such, has a limited history of sales. Jeuveau® also requires regulatory approval from certain regulatory authorities prior to commercial sales in the related jurisdictions. 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.
The Company is subject to risks common to early stage companies in the pharmaceutical industry including, but not limited to, dependency on the clinical and commercial success of Jeuveau® and any future product candidates, ability to obtain and maintain regulatory approval of Jeuveau® and any future product candidates in the jurisdictions where approval is sought, the need for additional financing to achieve its goals, uncertainty of broad adoption of its approved products, if any, by physicians and patients, significant competition and untested manufacturing capabilities.
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.

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Table of Contents
Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)


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.
The Company places its cash and cash equivalents with high credit quality financial institutions. At times, such investments may be in excess of the Federal Deposit Insurance Corporation (“FDIC”) limit. Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits.
Short-Term Investments
Short-term investments as of September 30, 2019 consisted 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 (loss) gain in the Company’s condensed 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 condensed statements of operations and comprehensive loss using the specific-identification method. 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 using the first‑in, first‑out method. However, the Company ships products 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.
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.

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Table of Contents
Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)


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, 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 condensed 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 Update (“ASU”) No. 2016-02 as adopted on January 1, 2019, 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 condensed 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 noncancellable period of the lease and may include options to extend or terminate the lease

14

Table of Contents
Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)


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 condensed 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 September 30, 2019.
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 condensed balance sheets.
Contingent Promissory Note Payable to Evolus Founders
On February 12, 2018, the Company recognized a contingent promissory note payable at present value using a discount rate for similar rated debt securities based on an estimated date that the Company believed the contingent promissory note will mature. Discount amortization related to the contingent promissory note is recorded in interest expense in the condensed statements of operations and comprehensive loss with a corresponding increase to the non-current liabilities in the condensed balance sheets.
Long-Term Debt
The Company recorded borrowings classified as long-term debt in the accompanying condensed balance sheets. Debt issuance costs represent legal, lender and consulting costs or fees associated with debt financing. Debt discounts and issuance costs are allocated pro rata between the funded and unfunded portions of the debt and are amortized into interest expense over the term of the debt.
Revenue Recognition
The Company applies Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”), to account for revenue generated since the commercial launch of Jeuveau® in May 2019.
General
The Company currently generates all of its revenue from the sale of Jeuveau® in the United States.
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 marketing expenses in the accompanying condensed statements of operations and comprehensive loss.
Disaggregation of Revenue
The Company’s disaggregation of revenue is consistent with its operating segment as disclosed above, and all of the Company’s net sales are considered revenue from contracts with customers.
Gross-to-Net Revenue Adjustments
The Company provides customers with 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, for rebates and coupon programs. Accrued rebate and coupon balances are recorded in accrued expenses on the accompanying condensed balance sheets.
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.

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Table of Contents
Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)


Coupons - The Company implemented a program by which customers receive coupons redeemable into gift cards funded by the Company for the benefit of patients. The coupons are accounted for as variable consideration. The Company estimates the coupon redemption rates based on historical data. The coupons are accrued based on estimated redemption rates and the volume of products purchased and are recorded as a reduction to revenues on product delivery.
As of September 30, 2019, accrued volume-based rebate and coupon liability was $3,932. During the three and nine months ended September 30, 2019, provisions for accrued volume-based rebate and coupon liability were $5,740 and $6,671, respectively, which were offset by related payments of $2,739 in the three and nine months ended September 30, 2019 .
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. As payment terms are short-term, 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 September 30, 2019, all amounts included in accounts receivable, net on the accompanying condensed balance sheets are related to contracts with customers.
The Company did not have any contract assets nor unbilled receivables as of September 30, 2019. 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 under the rebate and coupon programs. The Company’s contract liabilities are included in accounts payable and accrued expenses in the condensed balance sheets.
During the three and nine months ended September 30, 2019, the Company did not recognize any revenue related to changes in transaction prices regarding its contracts with customers and did not recognize any material changes in revenue related to amounts included in contract liabilities at the beginning of the period.
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. There was no significant provision for allowance or write-off of doubtful accounts during the nine months ended September 30, 2019.
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 condensed 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.
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.

16

Table of Contents
Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)


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 condensed balance sheets and in the selling, general and administrative or research and development expenses in the condensed statements of operations and comprehensive loss.
Income Taxes
The Company applies an estimated annual effective tax rate (“ETR”) approach for calculating a tax provision or benefit for interim periods, as required under GAAP.  The Company recorded a benefit for income taxes of $149 and $14,899 for the three and nine months ended September 30, 2019, respectively, and did not record a significant tax provision or benefit for the three and nine months ended September 30, 2018. The Company’s ETR differs from the U.S. federal statutory tax rate of 21% primarily as a result of the impact of a valuation allowance on its deferred tax assets.
The Company accounts for income taxes using 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, management 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.
As of each reporting date, the Company considers evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. As of December 31, 2018, the deferred tax assets were primarily the result of U.S. net operating loss and tax credit carryforwards, and a valuation allowance of $34,500 was recorded against the gross deferred tax asset balance. Upon FDA approval of Jeuveau® in February 2019, the Company’s IPR&D intangible asset was reclassified to a definite-lived distribution right intangible asset. As a result, management determined that it was more likely than not that certain deferred tax assets became realizable due to the future reversals of the deferred tax liability associated with such intangible asset. Accordingly, the Company released $14,402 of its valuation allowance as a discrete item upon FDA approval in February 2019. For the three and nine months ended September 30, 2019, the Company released an additional $149 and $497, respectively, from its valuation allowance.
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.
In accordance with SEC Staff Accounting Bulletin No. 118, the Company’s accounting for the elements of the Tax Cuts and Jobs Act was complete as of December 31, 2018 and no adjustments were made to the original provisional estimate recorded in 2017.
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. Because the impact of the options and non-vested RSUs are anti-dilutive during periods of net loss, there was no difference between the weighted-average number of shares used to calculate basic and diluted net loss per common share for the three and nine months ended September 30, 2019 and 2018. Excluded from the dilutive net loss per share computation were 4,052,161 stock options and 182,758 non-vested RSUs for the three and nine months ended September 30, 2019 because their inclusion would have been anti-dilutive. Although these securities were anti-dilutive for these periods, they could be dilutive in future periods.

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Table of Contents
Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)


Recently Adopted Accounting Pronouncements
In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule was effective on November 5, 2018 and it did not have a material impact on the Company’s financial statements upon adoption on January 1, 2019.
In July 2018, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2018-09, Codification Improvements, which clarifies certain amendments to guidance that may have been incorrectly or inconsistently applied by certain entities and includes Amendments to Subtopic 718-740, Compensation - Stock Compensation - Income Taxes. The guidance in paragraph 718-740-35-2, as amended by the amendments in ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, is unclear on whether an entity should recognize excess tax benefits (or tax deficiencies) for compensation expense that is taken on the entity’s tax return. The amendment to paragraph 718-740-35-2 in this update clarifies that an entity should recognize excess tax benefits in the period in which the amount of deduction is determined. The Company adopted the guidance on January 1, 2019, and such adoption did not have a material impact on its financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-based Payment Accounting, which amends the financial reporting for stock-based payments issued to nonemployees and also expands the scope of ASC 718, Compensation - Stock Compensation, to also include stock-based payments issued to nonemployees for goods and services. The amendment substantially aligns accounting for stock-based payments to employees and nonemployees. The Company early adopted the guidance in the quarter ended December 31, 2018. The adoption did not have a material impact on the Company’s financial statements.
In February 2016, the FASB issued ASU No. 2016-02 and its related amendments which introduced Leases (Topic 842, or “ASC 842”), a new comprehensive lease accounting model that supersedes the current lease guidance under Leases (Topic 840). The new accounting standard requires lessees to recognize ROU assets and corresponding lease liabilities for all leases with lease terms of greater than 12 months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. In July 2018, the FASB added a transition option for implementation that allows companies to continue to use the legacy guidance in ASC 840, Leases, including its disclosure requirements, in the comparative periods presented in the year of adoption. The Company adopted the guidance effective January 1, 2019. The Company elected the transition package of three practical expedients and elected the optional transition method that allows for a cumulative-effect adjustment in the period of adoption without a restatement of prior periods. Further, the Company elected a short-term lease exception policy, permitting the Company to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less) and an accounting policy to account for lease and non-lease components as a single component for certain classes of assets. As a result of the adoption, the Company adjusted its beginning balance of 2019 by recording operating lease ROU assets and liabilities through a cumulative-effect adjustment. The adoption impacted the accompanying condensed balance sheet, but did not have an impact on the condensed statements of operations and comprehensive loss.
The impact of the adoption of ASC 842 on the accompanying condensed balance sheet as of January 1, 2019 was as follows:
 
December 31, 2018
 
Adjustments Due to the Adoption of ASC 842
 
January 1, 2019
Operating lease right-of-use assets
$

 
$
1,029

 
$
1,029

Current portion of operating lease liabilities
$

 
$
916

 
$
916

Operating lease liabilities
$

 
$
138

 
$
138

Deferred rent
$
25

 
$
(25
)
 
$


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Table of Contents
Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)


Recent Accounting Pronouncements
In November 2018, the FASB issued ASU No. 2018-18, Clarifying the Interaction between Topic 808 and Topic 606, which requires transactions in collaborative arrangements to be accounted for under ASC 606, Revenue from Contracts with Customers, if the counter-party is a customer for a good or service that is a distinct unit of account. The amendments also preclude entities from presenting consideration from transactions with a collaborator that is not a customer together with revenue recognized from contracts with customers. The guidance is effective for interim and annual reporting periods during the year ending December 31, 2020. Early adoption is permitted, including in any interim period. The Company is currently evaluating the impact that the adoption of this guidance will have on its financial statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. ASU 2018-15 requires implementation costs incurred by customers in cloud computing arrangements (i.e., hosting arrangements) to be capitalized under the same premises of authoritative guidance for internal-use software, and deferred over the noncancellable term of the cloud computing arrangements plus any option renewal periods that are reasonably certain to be exercised by the customer or for which the exercise is controlled by the service provider. The guidance is effective for interim and annual reporting periods during the year ending December 31, 2020. Early adoption is permitted. The Company is in the process of determining the effects the adoption will have on its financial statements as well as whether to early adopt the new guidance.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement. The update is part of the disclosure framework project and eliminates certain disclosure requirements for fair value measurements, requires entities to disclose new information, and modifies existing disclosure requirements. Under the new guidance, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, or valuation processes for Level 3 fair value measurements. However, public companies will be required to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and related changes in unrealized gains and losses included in other comprehensive income. The guidance is effective for interim and annual reporting periods during the year ending December 31, 2020. Early adoption is permitted. The Company is currently evaluating the impact this change will have on its financial statements as well as whether to early adopt the new guidance.
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. The update is effective for the Company beginning January 1, 2020. The standard requires prospective application. Early adoption is permitted. The Company is evaluating the effect of this standard on its financial statements and related disclosures as well as whether to early adopt the new guidance.
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 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 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 2019-04 which did not change the core principle of the guidance in ASU 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. The guidance is effective for interim and annual reporting periods beginning after December 15, 2019 and interim periods within those periods, and early adoption is permitted. The guidance will be effective for the Company during the first quarter of 2020. 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

19

Table of Contents
Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)


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.
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.

Note 3.    Related Party Transactions
Services with ALPHAEON
Prior to the Company’s initial public offering (“IPO”) in February 2018, the Company had funded its operations primarily through contributions and related party borrowings from ALPHAEON Corporation (“ALPHAEON”). For the three and nine months ended September 30, 2018, $0 and $383, respectively, were included in Evolus’ selling, general and administrative expenses that were generated by transactions with ALPHAEON. After completion of the Company’s IPO on February 12, 2018, ALPHAEON did not incur any administrative or research and development expenses on the Company’s behalf. As of December 31, 2018 and September 30, 2019, there were no related party accounts receivable, payable, or debt with ALPHAEON, respectively.
Evolus Founders
Certain of the Evolus Founders from whom SCH-AEON, LLC (“SCH”) purchased its equity interests include individuals who were previously employed by the Company in operational roles, including the Company’s former Chief Operating Officer.
Payment Obligations Related to the Acquisition by ALPHAEON
The Company was acquired by SCH in 2013 and subsequently by its subsidiary, ALPHAEON Corporation, by means of a stock purchase agreement (“Stock Purchase Agreement”) pursuant to which ALPHAEON assumed certain payment obligations related to the acquisition. On December 14, 2017, the Stock Purchase Agreement was amended (“Amended Stock Purchase Agreement”), and, as a result, effective upon the closing of the Company’s IPO, the Company assumed all of ALPHAEON’s payment obligations under the Amended Stock Purchase Agreement. Refer to the notes to the financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 for details of the acquisition of the Company.
Under the Amended Stock Purchase Agreement, the payment obligations consisted of (i) a $9,200 up-front payment upon obtaining FDA approval for Jeuveau® for the treatment of glabellar lines which was paid in full during the first quarter of 2019, (ii) quarterly royalty payments of a low single digit percentage of net sales of Jeuveau®, and (iii) a $20,000 promissory note that matures in November 2021. The payment obligations set forth in (ii) above terminates in the quarter following the 10-year anniversary of the first commercial sale of Jeuveau® in the United States. Under the Amended Stock Purchase Agreement, the Company recorded the fair value of all revised payment obligations and the promissory note owed to the Evolus Founders of $55,742 (comprised of $39,700 related to the contingent royalty obligation payable and $16,042 related to the contingent promissory note) as of February 12, 2018. See Note 7, Fair Value Measurements and Short-Term Investments for more information about the Company’s accounting thereof. In addition, the outstanding related party borrowings from ALPHAEON as of February 12, 2018 were offset and reduced, on a dollar-for-dollar basis, taking into account the then-fair value of all payment obligations the Company assumed from ALPHAEON, the fair value of which, as of February 12, 2018, was $55,742.
Under the Amended Stock Purchase Agreement, Evolus paid one-time bonuses of $1,575 to certain current and former employees upon FDA approval of Jeuveau® in February 2019, including a one-time bonus of $700 paid to the Company’s Chief Medical Officer and Head of Research & Development. The payment is included in research and development expenses in the accompanying condensed statements of operations and comprehensive loss for the three and nine months ended September 30, 2019.

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Table of Contents
Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)


The Company has the right to prepay the promissory note, in whole or in part, at any time and from time to time without penalty. Upon an event of default under the promissory note, all unpaid principal becomes immediately due and payable at the option of the holder. An event of default occurs under the terms of the promissory note upon any of the following events: (i) Evolus fails to meet the obligations to make the required payments thereunder, (ii) Evolus makes an assignment for the benefit of creditors, (iii) Evolus commences any bankruptcy proceeding, or (iv) Evolus materially breaches the Amended Stock Purchase Agreement or Tax Indemnity Agreement (which is defined below) and such breach is not cured within 30 days.
In addition, upon a change-of-control of Evolus, all unpaid principal becomes immediately due and payable. Under the terms of the promissory note, a change-of-control is defined as (i) the sale of all or substantially all of Evolus’ assets, (ii) the exclusive license of Jeuveau® or the business related to Jeuveau® to a third-party (other than a sublicense under the Daewoong Agreement), or (iii) any merger, consolidation, or acquisition of Evolus, except a merger, consolidation, or acquisition of Evolus in which the holders of capital stock of Evolus immediately prior to such merger, consolidation, or acquisition hold at least 50% of the voting power of the capital stock of Evolus or the surviving entity. Notwithstanding the foregoing, the promissory note expressly provides that neither the IPO or any merger with or acquisition by ALPHAEON or any of its subsidiaries or affiliates constitutes a change-of-control.
In connection with the Amended Stock Purchase Agreement, the Company entered into a tax indemnity agreement with the Evolus Founders (“Tax Indemnity Agreement”). Pursuant to the Tax Indemnity Agreement, the Company is obligated to indemnify the Evolus Founders for any tax liability resulting from the Company’s assumption of the revised payment obligations under the Amended Stock Purchase Agreement from ALPHAEON. Such assumption of the revised payment obligations occurred upon the completion of the IPO. Under the Amended Stock Purchase Agreement, the payment obligations are contingent and thus eligible for installment sale reporting under Section 453 of the Internal Revenue Code of 1986, as amended. Under the Tax Indemnity Agreement, the Company was obligated to indemnify the Evolus Founders for any taxes or penalties required to be paid by the Evolus Founders in the event the U.S. Internal Revenue Service or other taxing authority were to determine that Company’s assumption of the revised payment obligations under the Amended Stock Purchase Agreement rendered continued installment sale reporting unavailable to the Evolus Founders. Any taxes or penalties paid by us on behalf of the Evolus Founders under the Tax Indemnity Agreement will be offset dollar-for-dollar against the promissory note and future royalties that will be payable to the Evolus Founders under the Amended Stock Purchase Agreement.
Exclusive Distribution and Supply Agreement with Clarion Medical Technologies Inc.
On November 30, 2017, the Company entered into an exclusive distribution and supply agreement (the “Distribution Agreement”), with Clarion Medical Technologies Inc. (“Clarion”). The Distribution Agreement provides terms pursuant to which the Company will exclusively supply Jeuveau® to Clarion in Canada.  Clarion was previously a wholly-owned subsidiary of ALPHAEON. However, pursuant to previous agreements among ALPHAEON, Clarion, and previous equity holders of Clarion, the previous equity holders of Clarion had the option, and exercised such option, to unwind ALPHAEON’s acquisition of Clarion. As a result, ALPHAEON owes the equity holders of Clarion an unwinding fee of $9,550 (the “Unwinding Fee”). The Distribution Agreement sets forth that a portion of the proceeds received by the Company from each unit of Jeuveau® purchased by Clarion shall be paid directly to the previous equity holders of Clarion, and will reduce, on a dollar-for-dollar basis, the amount of the Unwinding Fee ALPHAEON owes. In addition, ALPHAEON and SCH have agreed with Clarion to pay the unpaid amount of the Unwinding Fee on December 31, 2022, if demanded by the previous equity holders of Clarion. There were no sales of Jeuveau® in Canada under the Distribution Agreement in any of the periods presented in these financial statements.


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Table of Contents
Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)


Note 4. Accrued Expenses
Accrued expenses consisted of:
 
September 30,
 
December 31,
 
2019
 
2018
Accrued professional services
$
4,488

 
$
931

Accrued volume-based rebate and coupon liability
3,932

 

Accrued payroll and related benefits
3,453

 
2,577

EU milestone payment to Daewoong
1,000

 

Other accrued expenses
1,505

 
210

 
$
14,378

 
$
3,718


Note 5.    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:
 
Weighted-Average Life (Years)
 
Original Cost
 
Accumulated Amortization
 
Net Book Value
Definite-lived intangible assets
 
 
 
 
 
 
 
Distribution right
20
 
$
59,076

 
$
(1,940
)
 
$
57,136

Capitalized software
2
 
3,303

 
(582
)
 
2,721

Intangible assets, net
 
 
62,379

 
(2,522
)
 
59,857

Indefinite-lived intangible asset
 
 
 
 
 
 
 
Goodwill
*
 
21,208

 

 
21,208

Total as of September 30, 2019
 
 
$
83,587

 
$
(2,522
)
 
$
81,065

 
Weighted-Average Life (Years)
 
Original Cost
 
Accumulated Amortization
 
Net Book Value
Indefinite-lived intangible assets
 
 
 
 
 
 
 
IPR&D**
*
 
$
56,076

 
$

 
$
56,076

Goodwill
*
 
21,208

 

 
21,208

Total as of December 31, 2018
 
 
$
77,284

 
$

 
$
77,284

________________________
* Intangible assets with indefinite lives have an indeterminable average life.
** IPR&D is presented as “intangible assets, net” in the accompanying condensed balance sheets.

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Table of Contents
Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)


The following table outlines the estimated future amortization expense related to intangible assets held as of September 30, 2019 that are subject to amortization:
Fiscal year
 
Remaining in 2019
$
1,168

2020
4,674

2021
3,528

2022
2,955

2023
2,955

Thereafter
44,577

 
$
59,857

In connection with the acquisition of the Company by SCH in 2013, the Company recorded goodwill of $21,208 and IPR&D of $56,076. The IPR&D recognized 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, pursuant to the Daewoong Agreement, $13,500 in additional cash consideration is due to Daewoong based upon the Company’s successful completion of certain technical and sales milestones. Upon FDA approval of Jeuveau® on February 1, 2019, the Company paid Daewoong a $2,000 milestone payment which increased the cost basis of the IPR&D, and 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. Upon EU approval of the product on September 27, 2019, the Company accrued a $1,000 milestone payment to Daewoong which also increased the cost basis of the IPR&D. During the three and nine months ended September 30, 2019, the Company capitalized $761 and $3,303, 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. During the three and nine months ended September 30, 2019, total intangible assets amortization expense of $1,115 and $2,522 was recorded within depreciation and amortization on the accompanying condensed statements of operations and comprehensive loss, respectively.

Note 6. Oxford Term Loans
On March 15, 2019, the Company entered into a credit facility of up to $100,000 with Oxford Finance (“Oxford”). Pursuant to the terms of the credit facility, the lender extended term loans (the “Term Loans”), 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 may be drawn, at the request of the Company, no later than September 30, 2020, upon achieving specified minimum net sales milestones based on a trailing six-month basis and no event of default. As of September 30, 2019, the Company had not yet met the net sales milestone to draw the second tranche. The credit facility bears 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 on each tranche funded for the first 36 months until May 2022, which is followed by a 23-month amortization period. Notwithstanding the foregoing, if the Company maintains compliance with the specified minimum net sales covenant and meets other conditions during the initial interest-only period, upon the Company’s request, the interest-only period may be extended by an additional 12 months to a total of 48 months followed by an 11-month amortization period.
Upon the earliest to occur of the maturity date, the acceleration of the term loans, or the prepayment of the term loans, the Company is required to pay to Oxford a final payment of 5.5% of the full principal amount of the term loans funded (“Final Payment”). The Company may elect to prepay all amounts owed prior to the maturity date, provided that a prepayment fee is also paid, which shall be equal to 3.0% of the amount prepaid if the prepayment occurs on or prior to March 15, 2020, 2.0% of the amount prepaid if the prepayment occurs after March 15, 2020 and on or prior to March 15, 2021, or 1.0% of the amount prepaid if the prepayment occurs thereafter (“Prepayment Fee”). If the Term Loans are accelerated following the occurrence of an event of default, the Company is required to immediately pay to Oxford an amount equal to the sum of all outstanding principal of the term loans plus accrued and unpaid interest thereon through the prepayment date, the Final Payment, the Prepayment Fee and all other obligations that are due and payable, including payment of Oxford’s expenses and interest at the default rate with respect to any past due amounts.

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Table of Contents
Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)


The credit facility is secured by substantially all of the Company’s assets. The credit facility includes affirmative and negative covenants applicable to the Company and any subsidiaries it may create in the future. The affirmative covenants include, among others, covenants requiring the Company to maintain its legal corporate existence and governmental approvals, deliver certain financial reports, maintain insurance coverage and satisfy certain requirements regarding deposit accounts. The negative covenants include, among others, restrictions on us transferring collateral, incurring additional indebtedness, engaging in mergers or acquisitions, paying dividends or making other distributions, making investments, creating liens, selling assets and suffering a change in control, in each case subject to certain exceptions.
The credit facility also includes events of default, the occurrence and continuation of which could cause interest to be charged at a default interest rate equal to the applicable rate plus 5.0% and Oxford, as collateral agent, with the right to exercise remedies against the Company and the collateral securing the credit facility, including foreclosure against the property securing the credit facility, including the Company’s cash. These events of default include, among other things, any failure by the Company to pay principal or interest due under the credit facility, a breach of certain covenants under the credit facility, the Company’s insolvency, a material adverse change, the occurrence of any default under certain other indebtedness and one or more judgments against the Company, the institution of certain temporary or permanent relief in connection with pending litigation, or the breach, termination or other adverse events under the Daewoong Agreement. As of September 30, 2019, the Company was in compliance with its debt covenants.
At the closing date, the Company incurred $1,094 and $2,205 in debt discounts and issuance costs related to the Term Loans, respectively. Debt discounts and issuance costs related to the entire 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 September 30, 2019, the borrowings outstanding under the Term Loans were classified as long-term debt in the accompanying condensed 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 11.6% as of September 30, 2019.
As of September 30, 2019, the principal amounts of long-term debt maturities during each of the next five fiscal years, and the Final Payment in 2024 which is amortized into interest expense over the life of the Term Loans are as follows:
Fiscal year
Principal
 
Final Payment
 
Total
2022
$
26,087

 
$

 
$
26,087

2023
39,130

 

 
39,130

2024
9,783

 
4,125

 
13,908

 
$
75,000

 
$
4,125

 
$
79,125


Note 7. Fair Value Measurements and Short-Term Investments
Short-Term Investments
The Company did not have any short-term investments for the year ended December 31, 2018. As of September 30, 2019, all of the Company’s investments had remaining maturities less than 12 months. The following is a summary of the Company’s short-term investments, considered available-for-sale, as of September 30, 2019:
 
Amortized
 
Gross Unrealized
 
Estimated
 
Cost
 
Gains
 
Losses
 
Fair Value
Available-for-sale securities
 
 
 
 
 
 
 
U.S treasury securities
$
34,894

 
$
19

 
$

 
$
34,913

As of September 30, 2019, no investments had been in a continuous unrealized loss position for more than 12 months, and the Company did not record any other-than-temporary impairments on these securities.

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Table of Contents
Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)


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:
 
As of September 30, 2019
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Available-for-sale debt securities
 
 
 
 
 
 
 
U.S treasury securities
$
34,913

 
$
34,913

 
$

 
$

Liabilities
 
 
 
 
 
 
 
Contingent royalty obligation payable to Evolus Founders
$
48,895

 
$

 
$

 
$
48,895

 
As of December 31, 2018
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Liabilities
 
 
 
 
 
 
 
Contingent royalty obligation payable to Evolus Founders
$
50,200

 
$

 
$

 
$
50,200

The Company did not transfer any assets or liabilities measured at fair value on a recurring basis between levels during the nine months ended September 30, 2019.
The Company determines the fair value of the contingent royalty obligation payable 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) timing of regulatory approvals of Jeuveau®, (ii) projected 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, (iii) the discount rate and (iv) the timing of payments. During the three and nine months ended September 30, 2019 and 2018, the Company utilized discount rates between 16.0% and 25.0%, reflecting changes in the Company’s risk profile. Net revenue projections are also updated to reflect changes in the timing of regulatory approval and expected sales.
The following table shows a reconciliation of the beginning and ending fair value measurements of the contingent royalty obligation payable:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Fair value, beginning of period
$
47,169

 
$
48,800

 
$
50,200

 
$
39,700

Payments
(69
)
 

 
(9,282
)
 

Change in fair value recorded in operating expenses
1,795

 
2,300

 
7,977

 
11,400

Fair value, end of period
$
48,895

 
$
51,100

 
$
48,895

 
$
51,100

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 contingent 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 September 30, 2019, the fair value of contingent promissory note and long-term debt was estimated to be

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Table of Contents
Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)


$16,072 and $74,947, respectively. The fair value of operating lease liabilities at September 30, 2019 approximated their carrying value. As of December 31, 2018, the fair value of contingent promissory note was $17,181.

Note 8.    Commitments and Contingencies
Operating Leases
The Company leases office facilities under various operating lease agreements. The Company’s corporate headquarters is located in Newport Beach, California, in a facility that it subleases under a non-cancelable operating lease for a fixed amount each month. The sublease for this facility expires on January 20, 2020. On May 15, 2019, the Company entered into a non-cancelable operating lease for the same office facility with the original lessor. This non-cancelable operating lease will commence on February 1, 2020 and expire on January 31, 2025. Lease payments increase based on an annual rent escalation clause that occurs each year on February 1. The Company may, under certain circumstances, terminate the lease on the 36 month 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. The Company has an option to extend the term of the lease for an additional 60 months, which is not recognized as part of its ROU assets and lease liabilities. The lease with the original lessor is a modification of the existing sublease that is not accounted for as a separate contract.
The Company also leases an office facility in Santa Barbara, California, under a non-cancelable operating lease, the payments of which include a three percent annual rent escalation clause that occurs on each June 1 anniversary. The lease for this facility expires on May 31, 2020 and the Company has an option to extend the term of the lease for an additional 60 months. In June 2019, the Company subleased the Santa Barbara, California facility to a third-party for a term starting on June 1, 2019 and expiring on May 31, 2020. The sublease income was not significant. Upon signing the sublease, the Company recorded an impairment charge of $80 to the right-of-use asset related to the original lease.
The Company’s lease agreements do not contain any residual value guarantees or material restrictive covenants. The payments associated with the renewal will only be included in the measurement of the lease liability and ROU assets if the exercise of the renewal option is determined to be reasonably certain. The Company considers the timing of the renewal period and other economic factors such as the financial implications of a decision to extend or not to extend a lease in determining if the renewal option is reasonably certain to be exercised.  
For the three and nine months ended September 30, 2019, the components of operating lease expense and other quantitative information were as follows:
 
Three Months Ended
September 30, 2019
 
Nine Months Ended
September 30, 2019
Fixed operating lease expense
$
297

 
$
798

Variable operating lease expense
31

 
92

Short-term operating lease expense
24

 
73

 
$
352

 
$
963

 
 
 
 
 
As of September 30, 2019
Weighted-average remaining lease term (years)
5.2
Weighted-average discount rate
9.4%
Operating lease expenses were included in the selling, general and administration expenses in the accompanying condensed statements of operations and comprehensive loss. Operating lease right-of-use assets and related current and noncurrent operating lease liabilities are presented in the accompanying condensed balance sheets.

26

Table of Contents
Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)


The following table presents the maturity of the Company’s operating lease liabilities as of September 30, 2019, future minimum payments under the operating lease agreements with non-cancelable terms as follows:
Fiscal year
 
Remainder of 2019
$
239

2020
1,201

2021
1,205

2022
1,258

2023
1,312

Thereafter
1,484

Total operating lease payments
6,699

Less: imputed interest
(1,484
)
Present value of operating lease liabilities
$
5,215

As required by the new lease accounting standard, legacy disclosures are provided for periods prior to adoption.
As of December 31, 2018, annual future minimum payments under the operating lease agreements with non-cancelable terms greater than one year are as follows:
Fiscal year
 
2019
$
890

2020
139

2021

 
$
1,029

Purchase Commitments
As of September 30, 2019, the Company has entered into commitments to purchase services and products for an aggregate amount of approximately $6,651. Certain minimum purchase commitments related to the purchase of Jeuveau® are described below.
License and Supply Agreement
In connection with the Daewoong Agreement, the Company is obligated to make future milestone payments to Daewoong for certain confidential development and commercial milestones associated with Jeuveau®. As of September 30, 2019, Daewoong is eligible to receive contingent milestone payments of up to approximately $11,500, including the $1,000 milestone payment accrued upon EC approval of the product in September 2019.
The Daewoong Agreement also includes certain minimum annual purchases the Company is required to make in order to maintain the exclusivity of the license. The Company may, however, meet these minimum purchase obligations by achieving certain market share in its covered territories. These potential minimum purchase obligations were contingent upon the occurrence of future events, including receipt of governmental approvals and the Company’s future market share in various jurisdictions.
Legal Proceedings
In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because they involve claims that may be made against the Company in the future, but have not yet been made. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. No amounts were accrued as of September 30, 2019 and December 31, 2018.

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Table of Contents
Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)


Medytox Litigation
The Company, Daewoong and other individuals and entities are defendants to a lawsuit brought by Medytox, Inc. (“Medytox”) originally instituted in the Superior Court of the State of California in June 2017. With specific regard to the Company, Medytox alleges that (i) the Company has violated California Uniform Trade Secrets Act, Cal. Civ. Code § 3426 because Daewoong’s alleged knowledge of the misappropriation of certain trade secrets of Medytox is imputed to the Company as a result of the Company’s relationship with Daewoong, (ii) the Company has stolen the botulinum toxin bacterial strain of Medytox through our possession of and refusal to return the botulinum toxin bacterial strain, (iii) the Company has engaged in unlawful, unfair and fraudulent business acts and practices in violation of California Bus. & Prof. Code § 17200, including conversion of the botulinum toxin bacterial strain and misrepresentations to the public regarding the source of the botulinum toxin bacterial strain used to manufacture Jeuveau®, and (iv) the Daewoong Agreement is invalid and in violation of Medytox’s rights (the “Medytox Litigation”). Medytox seeks, among other things, (i) actual, consequential and punitive damages, (ii) a reasonable royalty, as appropriate, (iii) a declaration that the Daewoong Agreement is void and unenforceable and that Medytox is entitled to disgorgement of all property wrongfully and unjustly retained or acquired by the defendants, including unlawfully gained profits, (iv) injunctive relief prohibiting the Company from using the license under the Daewoong Agreement and distributing Jeuveau®, and (v) attorneys’ fees and costs. The Company believes it has meritorious defenses and intends to vigorously defend Medytox’s claims. Given the early stage in the Medytox Litigation, the Company is unable to determine the likelihood of success of Medytox’s claims against the Company, and an estimate of the possible loss or range of loss cannot be made. While the Company is entitled to indemnity under the Daewoong Agreement, the indemnity may not be sufficient. An adverse ruling by the Superior Court against either us or Daewoong could materially adversely affect the Company’s ability to carry out its business and which would have a material adverse effect on the Company’s business, financial position, results of operations, or cash flows and could also result in reputational harm.
ITC Case
On January 30, 2019, Allergan, plc and Allergan, Inc. (collectively, “Allergan”) and Medytox filed a complaint against us and Daewoong in the U.S. International Trade Commission (the “ITC”), containing substantially similar allegations to the Medytox Litigation, specifically that Jeuveau® is manufactured based on misappropriated trade secrets of Medytox and therefore the importation of Jeuveau® is an unfair act. The ITC matter is entitled In the Matter of Certain Botulinum Toxin Products (the “ITC Complaint”). The ITC instituted an investigation as ITC Inv. No. 337-TA-1145. The ITC complaint seeks (i) an investigation by the ITC pursuant to Section 337 of the Tariff Act of 1930, (ii) a hearing with the ITC on permanent relief, (iii) issuance of a limited exclusion order forbidding entry of Jeuveau® into the United States, (iv) a cease and desist order prohibiting Daewoong and us from engaging in the importations, sale for importation, marketing, distribution, offering for sale, the sale after the importation of, or otherwise transferring Jeuveau® within the United States, (v) a bond issued during the presidential review period, (vi) the return of Medytox’s trade secrets and other confidential information including the alleged stolen botulinum toxin bacterial strain, and (vii) exclusion and cease and desist orders. The Company intends to defend itself vigorously in the proceedings. The ITC has set a target date for final determination of this matter for October 2020. An adverse ruling by the ITC against either us or Daewoong could result in the imposition of an exclusion order which would bar imports of Jeuveau® into the United States and a cease and desist order which would bar sales and marketing of Jeuveau® within the United Sates either of which would materially adversely affect the Company’s ability to carry out its business and which would have a material adverse effect on the Company’s business, financial position, results of operations, or cash flows and could also result in reputational harm.
Other Legal Matters
The Company, from time to time, is involved in various litigation matters or regulatory encounters arising in the ordinary course of business that could result in unasserted or asserted claims or litigation. These other matters may raise difficult and complex legal issues and are subject to many uncertainties, including, but not limited to, the facts and circumstances of each particular case or claim, the jurisdiction in which each suit or regulatory encounter is brought, and differences in applicable laws and regulations. Except as set forth above, the Company does not believe that these other matters would have a material adverse effect on its accompanying financial position, results of operations or cash flows. However, the resolution of one or more of the other matters in any reporting period could have a material adverse impact on the Company’s financial results for that period.


28

Table of Contents
Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)


Note 9.    Stockholders’ Equity
Preferred Stock
The Company has 10,000,000 authorized shares of preferred stock with a par value of $0.00001 per share. As of September 30, 2019, none were issued and outstanding.
Common Stock
The Company has 100,000,000 authorized shares of common stock with a par value of $0.00001 per share. As of September 30, 2019, 27,425,230 shares were issued and outstanding.
2017 Omnibus Incentive Plan and Stock-based Compensation Allocation
The Company’s 2017 Omnibus Incentive Plan (the “Plan”) provides for the grant of incentive options to employees of the Company, and for the grant of nonstatutory options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance stock awards and other forms of stock compensation to the Company’s employees, including officers, directors, consultants and employees of the Company. The maximum number of shares of common stock that may be issued under the Plan is 4,361,291 shares, plus an annual increase on each anniversary of November 21 equal to 4% of the total issued and outstanding shares of the Company’s common stock as of such anniversary (or such lesser number of shares as may be determined by the Company’s board of directors). On November 21, 2018, an additional 1,091,000 were reserved under the evergreen provision of the Plan. As of September 30, 2019, the Company has available an aggregate of 971,684 shares of common stock for future issuance under the Plan.
Stock-Based Award Activity and Balances
Options are granted at exercise prices based on the Company’s common stock price on the date of grant. The options and RSU grants generally vest over a one- to four-year period. There have been no awards granted with performance conditions or market conditions for the periods presented. The options have a contractual term of 10 years. The fair value of options is estimated using the Black‑Scholes option pricing model, which has various inputs, including the grant date common share price, exercise price, risk‑free interest rate, volatility, expected life and dividend yield. The change of any of these inputs could significantly impact the determination of the fair value of the Company’s options as well as significantly impact its results of operations. The fair value of RSU grants is determined at the grant date based on the common share price. The Company records stock‑based compensation expense net of actual forfeitures when they occur.
The weighted-averages for key assumptions used in determining the fair value of stock options granted were as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Volatility
59.5%
 
59.0%
 
59.3%
 
57.7%
Risk-free interest rate
1.75%
 
2.87%
 
2.49%
 
2.64%
Expected life (years)
5.96
 
6.25
 
6.16
 
6.23
Dividend yield rate
—%
 
—%
 
—%
 
—%

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Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)


A summary of stock option activity under the Plan for the nine months ended September 30, 2019, is presented below:
 
 
 
 
 
Weighted
 
 
 
 
 
Weighted
 
Average
 
 
 
 
 
Average
 
Remaining
 
Aggregate
 
Stock
 
Exercise
 
Contractual
 
Intrinsic
 
Options
 
Per Share
 
Terms (Years)
 
Value
Outstanding, December 31, 2018
3,257,801

 
$
11.99

 
9.26
 
$
7,119

Granted
1,202,981

 
19.16

 
 
 


Exercised
(138,849
)
 
9.98

 
 
 


Canceled/forfeited
(269,772
)
 
14.07

 
 
 


Outstanding, September 30, 2019
4,052,161

 
$
14.05

 
8.53
 
$
14,830

Exercisable, September 30, 2019
833,730

 
$
11.83

 
7.30
 
$
4,301

The intrinsic values of outstanding and exercisable options were determined by multiplying the number of shares by the difference in exercise price of the options and the fair value of the common stock as of December 31, 2018 and the first trading day preceding September 30, 2019.
A summary of RSU activity under the Plan for the nine months ended September 30, 2019, is presented below:
 
 
 
Weighted
 
 
 
Average
 
Restricted
 
Grant Date
 
Stock
 
Fair Value
 
Units
 
Per Share
Outstanding, December 31, 2018
271,404

 
$
16.53

Granted
3,000

 
18.33

Vested
(22,125
)
 
25.69

Forfeited
(19,409
)
 
13.71

Outstanding, September 30, 2019
232,870

 
$
15.92

The following table summarizes stock-based compensation expense arising from the above Plan:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Selling, general and administrative
$
2,417

 
$
1,160

 
$
6,443

 
$
4,083

Research and development
109

 
322

 
538

 
1,028

 
$
2,526

 
$
1,482

 
$
6,981

 
$
5,111

In addition, during the three and nine months ended September 30, 2019, the Company capitalized $30 and $76, respectively, of stock-based compensation expense in capitalized software. Capitalized software is a component of intangible assets and is presented in the accompanying condensed balance sheets. See Note 5, Goodwill and Intangible Assets for capitalized software information.


30


Item 2.    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 unaudited condensed financial statements and related notes include in Part I, Item 1 of this Quarterly Report on Form 10-Q and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018 and other documents previously filed with the SEC. 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 Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q. 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” of Part II of this Quarterly Report on Form 10-Q.
Overview
We are a performance beauty company with a customer-centric approach focused on 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 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 physicians 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 May 2019, as part of our commercial launch, we introduced the Jeuveau® Experience Treatment, or J.E.T., an exclusive program for aesthetic providers and consumers to be the first to experience Jeuveau®. J.E.T. offered aesthetic providers the opportunity to receive multiple shipments of Jeuveau® and ended in August 2019. The program was made available through our technology platform, “Evolus Practice,” which allows providers to open a new account, order Jeuveau®, pay invoices and engage with our customer experience team and medical affairs representatives. We did not recognize net revenues from shipments made through the J.E.T. program. We generate net revenues from aesthetic practices that purchase products directly from us after completion or outside of the J.E.T. program.
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 28 EU member states, Iceland, Norway and Liechtenstein. We plan to launch Jeuveau® in Europe in 2020.
We have a limited history of generating revenue from Jeuveau® and have never been profitable. As of September 30, 2019, we had an accumulated deficit of $198.6 million. We recorded net revenues of $13.2 million and $15.5 million for the three and nine months ended September 30, 2019, respectively. We recorded net losses of $27.0 million and $75.5 million for the three and nine months ended September 30, 2019, respectively. We recorded net losses of $11.8 million and $34.4 million for the three and nine months ended September 30, 2018, 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.
Daewoong License and Supply Agreement
In 2013, we entered into the Daewoong Agreement, pursuant to which we have an exclusive distribution license to Jeuveau® from Daewoong Pharmaceuticals Co., Ltd., or Daewoong, for aesthetic indications in the United States, EU, Canada, Australia, Russia, C.I.S., and South Africa, as well as co-exclusive distribution rights with Daewoong in Japan. Under the Daewoong Agreement, we are required to make certain minimum annual purchases upon commercialization in order to maintain the exclusivity of the license. These potential minimum purchase obligations are contingent upon the occurrence of

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future events, including receipt of governmental approvals and our future market share in various jurisdictions. In connection with our entry into the Daewoong Agreement, we made an upfront payment to Daewoong of $2.5 million. Upon the FDA approval of Jeuveau® in February 2019, we paid Daewoong a $2.0 million milestone payment. Under the Daewoong Agreement, as of September 30, 2019, the maximum remaining aggregate amount of future milestone payments that could be owed to Daewoong upon the satisfaction of all milestones is $11.5 million, including the $1.0 million milestone payment accrued upon approval in the European Union in September 2019. Daewoong is responsible for all costs related to the manufacturing of Jeuveau®, including costs related to the operation and upkeep of its manufacturing facility, and we are responsible for all costs related to obtaining and maintaining regulatory approvals, including clinical expenses, and commercialization expenses.
Royalties and Notes Payable to Evolus Founders
We are obligated to make the following future payments to the founders of Evolus (i) quarterly royalty payments of a low single digit percentage of net sales of Jeuveau® and (ii) a $20.0 million promissory note that will mature in November 2021. The obligations set forth in (i) above will terminate in the quarter following the 10-year anniversary of the first commercial sale of Jeuveau® in the United States. As these revised payment obligations are not perpetual, we do not have the right to terminate any future payments for a one-time lump sum payment. In the second quarter of 2019, the Evolus Founders ceased to be related parties and the respective captions on the condensed financial statements were updated to reflect this change.
Our Relationship with ALPHAEON Corporation
Prior to our initial public offering, or IPO, in February 2018, we were wholly owned by ALPHAEON Corporation. In January 2018, we entered into a services agreement with ALPHAEON, or the services agreement, which became effective in connection with our IPO. The services agreement sets forth certain terms between ALPHAEON and us that govern the respective responsibilities and obligations between ALPHAEON and us, as it relates to the services to be performed between us. The fees charged for any services rendered pursuant to the services agreement are the actual cost incurred by ALPHAEON or us, as the case may be, in providing the services for the relevant period.
As of September 30, 2019, ALPHAEON owned approximately 31.6% of our outstanding shares of common stock. As a result, we are no longer considered a controlled company within the meaning of the Nasdaq Marketplace Rules.
Components of Results of Operations
Net Revenues
We currently operate in one reportable segment and all of our net revenues are derived from sales of Jeuveau® to customers in the U.S. self-pay aesthetic market, net of customer rebates and coupons. We began shipping Jeuveau® in May 2019. Revenues are recognized when the control of the promised goods is transferred to the customer in an amount that reflects the consideration to which we expect to be entitled in exchange for those products or services. Because the purpose of our J.E.T. program was to give customers experience with our product, we did not generate any net revenues from shipments related to the J.E.T. program which ended in August 2019.
Cost of sales
Cost of sales primarily reflects the aggregate costs to purchase Jeuveau® from Daewoong. We anticipate our cost of sales will increase as Jeuveau® sales increases. Our gross margin may also fluctuate in the future as we implement various marketing programs that may affect the average selling price of Jeuveau®.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses primarily consist of expenses related to personnel, marketing programs, physician engagement, digital platform, conferences, travel, and professional services. Personnel-related expenses include salaries, sales commissions, bonuses, fringe benefits, and stock-based compensation for our employees in administrative, commercial and other operating functions. Professional services primarily include accounting, auditing, legal, and various consulting services. Selling, general and administrative expenses may fluctuate in the future primarily due to potential changes in marketing strategies, and performance-based personnel-related expenses, such as commissions and bonuses.

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Research and Development Expenses
Since our inception, we have focused on developing Jeuveau®. We expense our research and development costs as we incur them. Our research and development expenses primarily consist of research personnel-related expenses, including salaries, fringe benefits, and stock-based compensation; costs of conducting clinical studies, including fees paid to clinical study sites and vendors, costs of acquiring and evaluating clinical study data, and fees paid to clinical consultants related to the execution of clinical trials; other outside consulting services; and the costs of materials, supplies and travel.
Expenses related to clinical studies are based on estimates of patient enrollment and related expenses at clinical investigator sites as well as estimates for the services received and efforts expended pursuant to contracts with clinical research organizations that we may use to conduct and manage our clinical studies on our behalf.
We expect our overall research and development expenses to increase if and when we seek to develop future product candidates and pursue regulatory approvals in other jurisdictions.
Revaluation of Contingent Royalty Obligation to Evolus Founders
The fair value of the contingent royalty obligation payable to Evolus Founders is primarily driven by assumptions related to revenue forecasts, discount rate, and timing of cash flows.
Depreciation and amortization
Depreciation and amortization expenses primarily consist of the amortization of the distribution right that was reclassified from IPR&D asset upon FDA approval of Jeuveau® in February 2019 as well as the amortization of internal-use software that was placed in service upon launching Jeuveau® in May 2019.
Non-Operating Income (Expense), Net
Non-operating income (expense), net primarily consists of interest income derived from our short-term investments and interest expense incurred for our debt facilities.
Income Taxes (Benefit) Expense
Our tax provision is comprised of U.S. and state income taxes. We currently have a full valuation allowance against our net deferred tax assets. We have provided for the tax effects of uncertain tax positions in our tax provision.

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Results of Operations
Comparison of the Three Months Ended September 30, 2019 and 2018
The following table summarizes our results of operations for the periods indicated:
 
Three Months Ended
September 30,
 
 
(in millions)
2019
 
2018
 
Change
Net revenues
$
13.2

 
$

 
$
13.2

Cost of sales (excludes amortization of intangible assets)
3.7

 

 
3.7

Gross profit
9.4

 

 
9.4

As a percentage of net revenues
71.8
%

%
 
 
Operating expenses:
 
 
 
 
 
Selling, general and administrative
30.9

 
7.2

 
23.7

Research and development
0.7

 
2.0

 
(1.3
)
Revaluation of contingent royalty obligation payable to Evolus Founders
1.8

 
2.3

 
(0.5
)
Depreciation and amortization
1.2

 

 
1.2

Total operating expenses
34.6

 
11.5

 
23.1

Loss from operations
(25.1
)
 
(11.5
)
 
(13.6
)
Non operating income (expense), net
(2.0
)
 
(0.3
)
 
(1.7
)
Loss before income taxes:
(27.1
)
 
(11.8
)
 
(15.3
)
Income tax (benefit) expense
(0.1
)