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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 June 30, 2020
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 ClassTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.00001 per shareEOLS
The Nasdaq Stock Market LLC
(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 August 5, 2020, 33,748,478 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. The forward-looking statements included herein are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. These risks and uncertainties, all of which are difficult or impossible to predict accurately and many of which are beyond our control, include, but are not limited to, the following:
our ability to continue to import Jeuveau® into, and sell Jeuveau® within, the United States if the U.S. International Trade Commission (“ITC”) affirms the initial determination issued by the Administrative Law Judge in a final determination and imposes a limited exclusion order preventing us from importing Jeuveau® into the United States and a cease and desist order that would prevent us from marketing and selling Jeuveau® in the United States for a period of ten years;
the potential declaration of an event of default by Oxford Finance under our credit facility in the event that ITC issues a final determination affirming the initial determination of the Administrative Law Judge and imposes a limited exclusion order preventing us from importing Jeuveau® into the United States and a cease and desist order that would prevent us from selling Jeuveau® in the United States;
the current and potential future impact of the COVID-19 pandemic and restrictions intended to slow the spread of COVID-19 on our business, including our sales, operations and supply and distribution channels, results of operations, financial position or cash flows;
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, market share 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®, the flexibility of our pricing and marketing strategy compared to our competitors and the desire and ability of our customers to pay for our elective procedures;
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 availability and customer adoption of our digital technology and our ability to avoid interruptions in the availability or performance of our technology;
the accuracy of our estimates and forecasts 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 and promotional campaigns;
3



Table of Contents
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.
These risks and uncertainties may be increased or intensified as a result of the COVID-19 pandemic and restrictions intended to slow the spread of COVID-19, including if there is a resurgence of the COVID-19 virus after the current outbreak subsides. The extent to which the COVID-19 pandemic ultimately impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted. These risks and uncertainties are 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.
The forward-looking statements included herein are based on current expectations of our management based on available information and are believed to be reasonable. 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, which speak only as of the date hereof. 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 the cautionary statements referenced above.
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.
EVOLUSand 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.



4



Table of Contents

PART I—FINANCIAL INFORMATION
Item 1.  Financial Statements
Evolus, Inc.
Condensed Balance Sheets
(in thousands, except par value and share data)
June 30, 2020December 31, 2019
(unaudited)(Note 2)
ASSETS
Current assets
Cash and cash equivalents$29,772  $109,892  
Short-term investments54,982  19,911  
Accounts receivable, net8,649  10,661  
Inventories10,343  6,407  
Prepaid expenses and other current assets4,252  5,326  
Total current assets107,998  152,197  
Property and equipment, net1,422  902  
Operating lease right-of-use assets3,738  4,068  
Intangible assets, net58,023  59,638  
Goodwill21,208  21,208  
Other assets2,155  2,429  
Total assets$194,544  $240,442  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable$10,952  $5,796  
Accrued expenses6,094  13,960  
Contingent royalty obligation payable to Evolus Founders1,234  3,483  
Operating lease liabilities1,182  1,200  
Total current liabilities19,462  24,439  
Contingent royalty obligation payable to Evolus Founders35,100  41,200  
Contingent promissory note payable to Evolus Founders18,495  17,945  
Long-term debt, net of discounts and issuance costs74,165  73,508  
Operating lease liabilities3,529  3,893  
Deferred tax liability190    
Total liabilities150,941  160,985  
Commitments and contingencies (Note 7)
Stockholders’ equity
Preferred stock, $0.00001 par value; 10,000,000 shares authorized; no shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively
    
Common stock, $0.00001 par value; 100,000,000 shares authorized; 33,748,478 and 33,562,665 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively
1  1  
Additional paid-in capital297,502  292,509  
Accumulated other comprehensive gain19  6  
Accumulated deficit(253,919) (213,059) 
Total stockholders’ equity43,603  79,457  
Total liabilities and stockholders’ equity
$194,544  $240,442  
See accompanying notes to financial statements.
5



Table of Contents
Evolus, Inc.
Condensed Statements of Operations and Comprehensive Loss
(in thousands, except share and per share data)
(Unaudited)
Three Months Ended
June 30,
Six Months Ended
June 30,
2020201920202019
Net revenues$7,806  $2,311  $18,302  $2,311  
Cost of sales (excludes amortization of intangible assets)1,948  660  6,167  660  
Gross profit5,858  1,651  12,135  1,651  
Operating expenses:
Selling, general and administrative
17,553  34,892  48,852  52,411  
Research and development
145  509  653  2,862  
Revaluation of contingent royalty obligation payable to Evolus Founders
2,433  1,269  (7,451) 6,182  
Depreciation and amortization
1,658  978  3,407  1,462  
Restructuring costs2,956    2,956    
Total operating expenses
24,745  37,648  48,417  62,917  
Loss from operations(18,887) (35,997) (36,282) (61,266) 
Other income (expense):
Interest income
224  615  598  1,004  
Interest expense
(2,464) (2,412) (4,922) (3,030) 
Loss before income taxes:(21,127) (37,794) (40,606) (63,292) 
Income tax expense (benefit)(2) (227) 254  (14,750) 
Net loss$(21,125) $(37,567) $(40,860) $(48,542) 
Other comprehensive gain (loss):
Unrealized gain (loss) on available-for-sale securities, net of tax
(206) 52  13  43  
Comprehensive loss
$(21,331) $(37,515) $(40,847) $(48,499) 
Net loss per share, basic and diluted
$(0.63) $(1.37) $(1.21) $(1.77) 
Weighted-average shares outstanding used to compute basic and diluted net loss per share
33,732,754  27,408,774  33,726,595  27,369,691  
See accompanying notes to financial statements.
6

Table of Contents
Evolus, Inc.
Condensed Statements of Stockholders’ Equity
(in thousands, except share data)
(Unaudited)
Series A Preferred StockCommon StockAdditional
Paid In
Capital
Accumulated
Other Comprehensive (Loss) Gain
Accumulated DeficitTotal Stockholders’ Equity
SharesAmountSharesAmount
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) 
Share-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  
Share-based compensation
—  —  —  —  2,486  —  —  2,486  
Net loss
—  —  —  —  —  —  (37,567) (37,567) 
Other comprehensive income
—  —  —  —  —  52  —  52  
Balance at June 30, 2019  $  27,393,004  $1  $212,704  $43  $(171,567) $41,181  

Balance at December 31, 2019  $  33,562,665  $1  $292,509  $6  $(213,059) $79,457  
Issuance of common stock in connection with the incentive equity plan
—  —  165,370  —    —  —    
Share-based compensation
—  —  —  —  2,665  —  —  2,665  
Net loss
—  —  —  —  —  —  (19,735) (19,735) 
Other comprehensive income
—  —  —  —  —  219  —  219  
Balance at March 31, 2020  $  33,728,035  $1  $295,174  $225  $(232,794) $62,606  
Issuance of common stock in connection with the incentive equity plan
—  —  20,443  —    —  —    
Share-based compensation
—  —  —  —  2,328  —  —  2,328  
Net loss
—  —  —  —  —  —  (21,125) (21,125) 
Other comprehensive loss
—  —  —  —  —  (206) —  (206) 
Balance at June 30, 2020  $  33,748,478  $1  $297,502  $19  $(253,919) $43,603  
See accompanying notes to financial statements.
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Evolus, Inc.
Condensed Statements of Cash Flows
(in thousands)
(Unaudited)
Six Months Ended
June 30,
20202019
Cash flows from operating activities
Net loss$(40,860) $(48,542) 
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization3,407  1,462  
Stock-based compensation5,002  4,455  
Provision for bad debts2,607    
Amortization of discount on short-term investments(390) (586) 
Amortization of operating lease right-of-use assets330  523  
Amortization of debt discount and issuance costs1,290  889  
Deferred income taxes190  (14,750) 
Revaluation of contingent royalty obligation payable to Evolus Founders(7,451) 6,182  
Changes in assets and liabilities:
Inventories270  (11,522) 
Accounts receivable(595) (1,410) 
Prepaid expenses and other current assets1,074  (1,997) 
Accounts payable and accrued expenses(6,575) 13,347  
Operating lease liabilities(382) (409) 
Other assets191    
Net cash used in operating activities(41,892) (52,358) 
Cash flows from investing activities
Purchases of property and equipment(677) (346) 
Additions to capitalized software(1,463) (2,441) 
Purchases of short-term investments(74,668) (94,011) 
Maturities of short-term investments40,000  25,000  
Net cash used in investing activities(36,808) (71,798) 
Cash flows from financing activities
Payment of contingent royalty obligation to Evolus Founders(898) (9,213) 
Milestone payment for intangible assets  (2,000) 
Proceeds from issuance of long-term debt, net of discounts  73,906  
Payments for debt issuance costs  (2,205) 
Payment for debt obligation(522)   
Issuance of common stock in connection with incentive equity plan  795  
Net cash (used in) provided by financing activities(1,420) 61,283  
Change in cash and cash equivalents(80,120) (62,873) 
Cash and cash equivalents, beginning of period109,892  93,162  
Cash and cash equivalents, end of period$29,772  $30,289  
See accompanying notes to financial statements.
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Evolus, Inc.
Condensed Statements of Cash Flows (Continued)
(in thousands)
(Unaudited)
Six Months Ended
June 30,
20202019
Supplemental disclosure of cash flow information
Cash paid for interest
$3,622  $1,544  
Non-cash investing and financing information:
Operating lease right-of-use assets obtained in exchange for operating lease liabilities
$  $5,566  
Capitalized software recorded in accounts payable and accrued expenses
$81  $55  
See accompanying notes to financial statements.
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Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)

Note 1. Description of Business
Description of Business
Evolus, Inc., (“Evolus” or the “Company”) is a performance beauty company focused on delivering products in the self-pay aesthetic market. The Company received the approval of its first product Jeuveau® (prabotulinumtoxinA-xvfs) from the U.S. Food and Drug Administration (the “FDA”) in February 2019. The product was also approved by Health Canada in August 2018 and the European Commission (“EC”) in September 2019. Jeuveau® is a proprietary 900 kDa purified botulinum toxin type A formulation indicated for the temporary improvement in the appearance of moderate to severe glabellar lines, also known as “frown lines,” in adults. The Company commercially launched Jeuveau® in the United States in May 2019 and in Canada through a distribution partner in October 2019. The Company currently generates all of its net revenues from Jeuveau®. The Company is headquartered in Newport Beach, California.
Liquidity and Financial Condition
The accompanying unaudited condensed financial statements have been prepared on a basis that assumes that the Company will continue as a going concern, and do not include any adjustments that may result from the outcome of this uncertainty. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of the Company’s liabilities and commitments in the normal course of business and does not include any adjustments to reflect the possible future effects of the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Since inception, the Company has incurred recurring net operating losses. The Company has recorded net losses of $21,125 and $40,860 for the three and six months ended June 30, 2020. Additionally, the Company used cash of $41,892 in operations during the six months ended June 30, 2020. As of June 30, 2020, the Company had $29,772 in cash and cash equivalents plus $54,982 in short-term investments and an accumulated deficit of $253,919. On July 6, 2020, the Company entered into a convertible promissory note purchase agreement with Daewoong Pharmaceuticals Co., Ltd. (“Daewoong”) for the principal amount of $40,000. See Note 10. Subsequent Events for additional information regarding the convertible promissory note purchase agreement with Daewoong.
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 and expand market acceptance of its product and achieve a level of revenues adequate to support its cost structure, its ability maintain regulatory approval of its product, its ability to maintain compliance with debt covenants and avoid an event of default under its credit facility, including as a result of a negative final determination in its International Trade Commission (“ITC”) action, the outcome of its ongoing litigation including the ITC action as discussed below, and its ability to operate its business and sell products 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 as well as the proceeds from the convertible promissory note purchase agreement with Daewoong, 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 and subject to the risks, commitments and contingencies set forth in these notes to the financial statements, including in connection with the ITC action. The Company may be required to raise additional capital to fund future operations through the incurrence of additional debt allowed under existing debt arrangements, the entry into licensing or collaboration agreements with partners, sale of its equity securities, grants or other sources of financing. Sufficient funds may not be available to the Company at all or on attractive terms when needed from equity or debt financings. If the Company is unable to obtain additional funding from these or other sources when needed, or to the extent needed, it may be necessary to significantly reduce its controllable and variable expenditures and current rate of spending through reductions in staff and delaying, scaling back, or suspending certain research and development, sales and marketing programs and other operational goals. These events may occur even if the Company is ultimately successful in the ITC action described below.
In July 2020, the Administrative Law Judge assigned to the ITC action to which the Company is a party issued an initial determination in which the judge found a violation of Section 337 of the Tariff Act of 1930 had occurred by reason of a misappropriation of trade secrets and recommended the entry of a limited exclusion order that would prevent us from importing Jeuveau® into the United States for a period of ten years and a cease and desist order that would prevent the Company from selling Jeuveau® in the United States for the same period of time. A final determination by the ITC is expected to be issued in November 2020, with such final determination subject to a 60-day presidential review period before
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Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)
taking effect. During the presidential review period the Company would be required to pay a bond at a rate set by the ITC for any sales during the period. The amount of the bond may make any sales unattractive during the period. The Company strongly disagrees with the initial determination by the Administrative Law Judge and intend to continue to vigorously defend ourselves in this matter. In the event that the ITC’s final determination affirms the Administrative Law Judge’s initial determination, the Company would be prevented from importing Jeuveau® into the United States and from marketing and selling Jeuveau® in the United States for a period of ten years, which would materially and adversely affect the Company’s ability to generate revenue from the Company’s sole product, Jeuveau®, to carry out its business, and to continue as a going concern. Even if the Company is successful in having the decision modified or reversed during the presidential review or in appealing any such final determination, the Company may find it difficult or be prevented from importing, marketing or selling Jeuveau® in the United States during the pendency of those events. Further, any modification of the Administrative Law Judge’s initial determination in the ITC’s final determination or any final decision following any such presidential review or other appeal may nonetheless still result in restrictions on the Company’s ability to import and market and sell Jeuveau® in the United States, which could also materially and adversely affect the Company’s ability to generate revenue from Jeuveau®, to carry out its business, and to continue as a going concern. In any such event, the Company may be required to seek protection under the bankruptcy laws or may be forced to reduce, significantly restructure or discontinue its operations entirely, any of which would have a material adverse effect on the Company’s business, financial position, results of operations, or cash flows, would cause its stock price to decline and would also result in reputational harm. Even if the Company is successful, the ITC action may result in reputational damage or other collateral consequences. In addition, it is expected that an event of default under our credit agreement with Oxford would occur after the imposition of an exclusion order and cease and desist order and Oxford would be able to declare an event of default after the exhaustion of all appeals that the Company may have or earlier. If Oxford were to declare an event of default under the credit facility and exercise its remedies, it would materially and negatively affect the Company’s business, results of operation, financial condition and could result in the Company declaring bankruptcy.See Note 7. Commitments and Contingencies —Legal Proceedings for additional information.
The ongoing COVID-19 outbreak has negatively impacted and disrupted the global economy and financial markets on an unprecedented scale, which could interfere with the Company’s ability to access financing when and on terms that the Company desires. Although there is uncertainty related to the anticipated impact of the COVID-19 outbreak on the Company’s future results, the Company believes that its business strategy, its current cash reserves and measures taken since April 2020 to reduce operating expenses position the Company to manage its business through this crisis, subject to the risks, commitments and contingencies set forth in these notes to the financial statements, including in connection with the ITC action.

Note 2. Basis of Presentation and Summary of Significant Accounting Policies
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, 2020 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, 2019, as filed with the SEC on February 25, 2020.
Use of Estimates
Management is required to make certain estimates and assumptions in order to prepare financial statements in conformity with GAAP. Such estimates and assumptions affect the reported financial statements. The Company’s most significant estimates relate to net revenues, allowance for doubtful accounts, fair value measurements, goodwill and long-lived asset
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Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)
valuations and impairment assessments, inventory valuations, income tax valuations, stock-based compensation, royalty obligations, and outcomes of legal proceedings, among others. Management bases estimates on historical experience and on assumptions that management believes are reasonable. The Company’s actual results could differ materially from those estimates.
Additionally, the full impact of the COVID-19 outbreak is unknown and cannot be reasonably estimated. However, where possible, management has made appropriate accounting estimates with respect to certain accounting matters, which include the fair value of royalty obligations, allowance for doubtful accounts, inventory valuation and impairment assessments of goodwill and other long-lived assets, based on the facts and circumstances available as of the reporting date. The Company’s future assessment of the magnitude and duration of the COVID-19 outbreak, as well as other factors, could result in material impacts to the Company’s financial statements in future reporting periods.
Risks and Uncertainties
In 2013, Evolus and Daewoong 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.
In July 2020, the Administrative Law Judge assigned to the ITC action to which the Company is a party issued an initial determination in which the judge found a violation of Section 337 of the Tariff Act of 1930 had occurred by reason of a misappropriation of trade secrets and recommended the entry of a limited exclusion order that would prevent us from importing Jeuveau® into the United States for a period of ten years and a cease and desist order that would prevent the Company from selling Jeuveau® in the United States for the same period of time. A final determination by the ITC is expected to be issued in November 2020, with such final determination subject to a 60-day presidential review period before taking effect. During the presidential review period the Company would be required to pay a bond at a rate set by the ITC for any sales during the period. The amount of the bond may make any sales unattractive during the period. The Company strongly disagrees with the initial determination by the Administrative Law Judge and intends to continue to vigorously defend itself in this matter. In the event that the ITC’s final determination affirms the Administrative Law Judge’s initial determination, the Company would be prevented from importing Jeuveau® into the United States and from marketing and selling Jeuveau® in the United States for a period of ten years, which would materially and adversely affect the Company’s ability to generate revenue from the Company’s sole product, Jeuveau®, to carry out its business, and to continue as a going concern. Even if the Company is successful in having the decision modified or reversed during the presidential review or in appealing any such final determination, the Company may find it difficult or be prevented from importing, marketing or selling Jeuveau® in the United States during the pendency of those events. Further, any modification of the Administrative Law Judge’s initial determination in the ITC’s final determination or any final decision following any such presidential review or other appeal may nonetheless still result in restrictions on the Company’s ability to import and market and sell Jeuveau® in the United States, which could also materially and adversely affect the Company’s ability to generate revenue from Jeuveau®, to carry out its business, and to continue as a going concern. In any such event, the Company may be required to seek protection under the bankruptcy laws or may be forced to reduce, significantly restructure or discontinue its operations entirely, any of which would have a material adverse effect on the Company’s business, financial position, results of operations, or cash flows, would cause its stock price to decline and would also result in reputational harm. Even if the Company is successful, the ITC action may result in reputational damage or other collateral consequences. In addition, it is expected that an event of default under our credit agreement with Oxford would occur after the imposition of an exclusion order and cease and desist order and Oxford would be able to declare an event of default after the exhaustion of all appeals that the Company may have or earlier. If Oxford were to declare an event of default under the credit facility and exercise its remedies, it would materially and negatively affect the Company’s business, results of operation, financial condition and could result in the Company declaring bankruptcy. See Note 7. Commitments and Contingencies for additional information regarding such litigation.
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Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)
The Company commercially launched Jeuveau® in the United States in May 2019 and in Canada through a distribution partner in October 2019 and, as such, has a limited history of sales. If any previously granted approval is retracted or the Company is denied approval or approval is delayed by any other regulators, it may have a material adverse impact on the Company’s business and its financial statements.
The Company is also subject to risks common to companies in the pharmaceutical industry including, but not limited to, dependency on the commercial success of Jeuveau®, the Company’s sole commercial product, significant competition within the medical aesthetics industry, its ability to maintain regulatory approval of Jeuveau®, the need for additional financing to achieve its goals, third party litigation and challenges to its intellectual property, uncertainty of broad adoption of its product by physicians and patients, its ability to in-license, acquire or develop additional product candidates and to obtain the necessary approvals for those product candidates, and the need to scale manufacturing capabilities over time.
The recent COVID-19 outbreak and restrictions intended to slow the spread of COVID-19, including quarantines, government-mandated actions, stay-at-home orders and other restrictions, have adversely affected the Company’s business in a number of ways, which have resulted, and may continue to result, in a period of business disruption and in reduced sales and operations. In addition, any disruption and volatility in the global capital markets may increase the Company’s cost of capital and adversely affect its ability to access financing when and on terms that we desire. Any of these events could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.
Segment Reporting
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker. The Company has determined that it operates in a single operating and reportable segment. The Company’s chief operating decision maker is its Chief Executive Officer who manages operations and reviews the financial information as a single operating segment for purposes of allocating resources and evaluating its financial performance.
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 most times, such investments are 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 June 30, 2020 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.
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Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)
Inventories
Inventories consist of finished goods held for sale and distribution. Cost is determined using the first-in, first-out method with prioritization of the items with the earliest expiration dates. Inventory valuation reserves are established based on a number of factors including, but not limited to, finished goods not meeting product specifications, product excess and obsolescence, or application of the lower of cost or net realizable value concepts. The determination of events requiring the establishment of inventory valuation reserves, together with the calculation of the amount of such reserves may require judgment. No material inventory valuation reserves have been recorded for the periods presented. Adverse changes in assumptions utilized in the Company’s inventory reserve calculations could result in an increase to its inventory valuation reserves.
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.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in a business combination. The Company reviews goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. The Company performs an annual qualitative assessment of its goodwill in the fourth quarter of each calendar year to determine if any events or circumstances exist, such as an adverse change in business climate or a decline in the overall industry demand, that would indicate that it would more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill. If events or circumstances do not indicate that the fair value of a reporting unit is below its carrying amount, then goodwill is not considered to be impaired and no further testing is required. If further testing is required, the Company performs a two-step process. The first step involves comparing the fair value of the Company’s reporting unit to its carrying value, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step of the test is performed by comparing the carrying value of the goodwill in the reporting unit to its implied fair value. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value. For the purpose of impairment testing, the Company has determined that it has one reporting unit. There was no impairment of goodwill for any of the periods presented.
Intangible Assets
Upon FDA approval of Jeuveau® in February 2019, the in-process research and development (“IPR&D”) related to Jeuveau® was evaluated as completed and reclassified to a definite-lived distribution right intangible asset, which is amortized over the period the asset is expected to contribute to the future cash flows of the Company. The Company determined the pattern of this intangible asset’s future cash flows could not be readily determined with a high level of precision. As a result, the distribution right intangible asset is being amortized on a straight-line basis over the estimated useful life of 20 years.
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Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)
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 Codification 842, Leases (“ASC 842”), at the inception of a contractual arrangement, the Company determines whether the contract contains a lease by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset in exchange for consideration over a period of time. If both criteria are met, upon lease commencement, the Company records a lease liability which represents the Company’s obligation to make lease payments arising from the lease, and a corresponding right-of-use (“ROU”) asset which represents the Company’s right to use an underlying asset during the lease term. Operating lease assets and liabilities are included in ROU assets, current portion of operating lease liabilities and noncurrent operating lease liabilities in the accompanying 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 noncancelable period of the lease and may include options to extend or terminate the lease 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 June 30, 2020.
Research and Development Expenses
Research and development costs are expensed as incurred. Research and development expenses include personnel-related costs including stock based compensation, costs associated with pre-clinical and clinical development activities, costs associated with and costs for prototype products that are manufactured prior to market approval for that prototype product, internal and external costs associated with the Company’s regulatory compliance and quality assurance functions, including the costs of outside consultants and contractors that assist in the process of submitting regulatory filings, and overhead costs, including allocated facility related expenses.
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 condensed 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
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Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)
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
Long-term debt represents the debt balance with Oxford Finance (“Oxford”), net of debt issuance costs. Debt issuance costs represent legal, lender and consulting costs or fees associated with debt financing. Debt discounts and issuance costs are 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.
The Company recognizes revenue when control of the promised goods or services is transferred to its customers, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for the goods or services. In order to achieve that core principle, a five-step approach is applied: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue allocated to each performance obligation when the Company satisfies the performance obligation. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account for revenue recognition.
General
The Company generates product revenue from the sale of Jeuveau® in the United States and service revenue from the sale of Jeuveau® through a distribution partner in Canada.
For product revenue, the Company recognizes revenue when control of the promised goods under a contract is transferred to a customer, in an amount that reflects the consideration the Company expects to receive in exchange for those goods as specified in the customer contract. The transfer of control occurs upon receipt of the goods by the customer since that is when the customer has obtained control of the goods’ economic benefits. The Company does not provide any service-type warranties and does not accept product returns except under limited circumstances such as damages in transit or ineffective product. The Company also excludes any amounts related to taxes assessed by governmental authorities from revenue measurement. Shipping and handling costs associated with outbound product freight are accounted for as fulfillment costs and are included in selling, general and marketing expenses in the accompanying condensed statements of operations and comprehensive loss.
For service revenue, the Company evaluated the arrangement with the distribution partner in Canada and determined that it acts as an agent in the distribution of Jeuveau® in Canada as it does not control the product before control is transferred to a customer.  The indicators of which party exercises control include primary responsibility over performance obligations, inventory risk before the good or service is transferred and discretion in establishing the price. Accordingly, the Company records the sale as service revenue on a net basis. Revenue from services is recognized in the period the service is performed for the amount of consideration expected to be received. There were no service revenues for the three and six months ended June 30, 2020 or for the three and six months ended June 30, 2019.
Disaggregation of Revenue
The Company’s disaggregation of revenue is consistent with its operating segment as disclosed above.
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Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)
Gross-to-Net Revenue Adjustments
The Company provides customers with discounts, such as trade and volume discounts and prompt pay discounts, that are directly reflected in the invoice price. Revenues are recorded net of sales-related adjustments, wherever applicable, primarily for the volume-based rebates, coupon and consumer loyalty programs.
Volume-based Rebates Volume-based rebates are contractually offered to certain customers. The rebates payable to each customer are determined based on the contract and quarterly purchase volumes.
Coupons The Company issued customers coupons redeemable into gift cards funded by the Company for the benefit of patients. The coupons are accounted for as variable consideration. The Company estimates the coupon redemption rates based on historical data and future expectations. 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. All issued coupons expired on June 30, 2020.
Consumer Loyalty Program — In May 2020, the Company announced the launch of a consumer loyalty program, which allows participating customers to earn rewards for qualifying treatments to their patients (i.e. consumers) using Jeuveau® and redeem the rewards for Jeuveau® in the future at no additional cost. The loyalty program represents a customer option that provides a material right and, accordingly, is a performance obligation. At the time Jeuveau® product is sold to customers, the invoice price is allocated between the product sold and the estimated material right reward (“Reward”) that the customer might redeem in the future. The standalone selling price of the Reward is measured based on historical sales data, average selling price of Jeuveau® at the time of redemption, expected customer and consumer participation rates in the loyalty program, and estimated number of qualifying treatments to be performed by customers. The portion of invoice price allocated to the Reward is initially recorded as deferred revenue. Subsequently, when customers redeem the Reward and the related product is delivered, the deferred revenue is recognized in net revenue at that time.
As of June 30, 2020 and December 31, 2019, the accrued volume-based rebate, coupon and reward liabilities were $799 and $1,709, respectively, which were recorded in the accrued expenses in the accompanying condensed balance sheets. The Company recorded provisions of $17 and $882 for the three months ended June 30, 2020 and 2019, respectively, and provisions of $10,229 and $882 for the six months ended June 30, 2020 and 2019, respectively. The related payments, redemptions and adjustments were $1,697 and $0 for the three months ended June 30, 2020 and 2019, respectively, and $11,139 and $0 for the six months ended June 30, 2020 and 2019, respectively.
Contract balances
A contract with a customer states the terms of the sale, including the description, quantity and price of each product purchased. Amounts are recorded as accounts receivable when the Company’s right to consideration becomes unconditional. The Company does not have any significant financing components in customer contracts given the expected time between transfer of the promised products and the payment of the associated consideration is less than one year. As of June 30, 2020 and December 31, 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 June 30, 2020 or December 31, 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 and deferred revenue associated with Reward under the consumer loyalty program. The Company’s contract liabilities are included in accounts payable and accrued expenses in the accompanying condensed balance sheets.
During the three and six months ended June 30, 2020, 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.
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Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)
Collectability
Accounts receivable are recorded at the invoiced amount and do not bear interest. At the time of contract inception or new customer account set-up, the Company performs a collectability assessment of the customer’s creditworthiness. The Company assesses the probability that the Company will collect the entitled consideration in exchange for the goods sold, by considering the customer’s ability and intention to pay when consideration is due. On a recurring basis, the Company estimates the amount of receivables considered uncollectable to reflect an allowance for doubtful accounts. The Company writes off accounts receivable balances when it is determined that there is no possibility of collection. As of June 30, 2020 and December 31, 2019, allowance for doubtful accounts was $2,823 and $387, respectively. For the three and six months ended June 30, 2020, provision for bad debts was $0 and $2,607, respectively, and write-off amount was $0 and $171, respectively. For the three and six months ended June 30, 2019, there was no provision for allowance for doubtful accounts or write-offs.
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.
Restructuring costs
In April 2020, in response to the impact of COVID-19 on its business, the Company announced plans to reduce its operating expenses and separate over 100 employees. As of June 30, 2020, all separations were completed and the Company recorded $2,956 of termination benefits as restructuring costs within operating expenses on the accompanying condensed statements of operations and comprehensive loss for the three and six months ended June 30, 2020.
Stock-Based Compensation
The Company recognizes stock-based compensation expense for employees, consultants and members of the Board of Directors based on the fair value at the date of grant.
The Company uses the Black-Scholes option pricing model to value stock option grants. The Black-Scholes option pricing model requires the input of subjective assumptions, including the expected volatility of the Company’s common stock, expected risk-free interest rate, and the option’s expected life. The fair value of the Company’s restricted stock units (“RSUs”) is based on the fair value on the grant date of the Company’s common stock. The Company also evaluates the impact of modifications made to the original terms of equity awards when they occur.
The fair value of equity awards that are expected to vest is amortized on a straight-line basis over the requisite service period. Stock-based compensation expense is recognized net of actual forfeitures when they occur, as an increase to additional paid-in capital in the 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 tax benefit of $2 and $227 for the three months ended June 30, 2020 and 2019, respectively, and a tax provision of $254 and a tax benefit of $14,750 for the six months ended June 30, 2020 and 2019, respectively. The Company’s ETR differs from the U.S. federal statutory tax rate of 21% for the three and six months ended June 30, 2020 and 2019, primarily as a result of the impact of a valuation allowance on its deferred tax assets and state minimum taxes.  The tax benefit recorded for the six months ended June 30, 2019 was primarily a result of the reduction of the valuation allowance recorded against the Company’s deferred tax assets.
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
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Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)
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.  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.
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.
On March 27, 2020, the United States enacted the Coronavirus Aid, Relief and Economic Security Act (CARES Act).  The Cares Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United States economy and fund a nationwide effort to curtail the effect of COVID-19.  While the CARES Act provides sweeping tax changes in response to the COVID-19 pandemic, some of the more significant provisions which are expected to impact the Company’s financial statements include removal of certain limitations on utilization of net operating losses, and increasing the ability to deduct interest expense, as well as amending certain provisions of the previously enacted Tax Cuts and Jobs Act. Due to the valuation allowance on the Company’s deferred tax assets, the Company estimates that the impact of the CARES Act on its financial statements to be immaterial. Management will continue to monitor changes in tax legislation and further guidance on the CARES Act as they become available in the subsequent periods.
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 periods presented. For the three and six months ended June 30, 2020 and 2019, excluded from the dilutive net loss per share computation were stock options of 4,444,368 and 3,867,254, respectively, and non-vested RSUs of 1,002,786 and 256,870, respectively, because their inclusion would have been anti-dilutive. Although these securities were anti-dilutive for these periods, they could be dilutive in future periods.
Recently Adopted Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 noncancelable 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 adopted the guidance using the prospective method on January 1, 2020, and such adoption did not have a material impact on its financial statements.
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
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Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)
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 adopted the guidance in the current interim period, and such adoption is reflected in Note 3. Fair Value Measurements and Short-Term Investments
Recent Accounting Pronouncements Issued But Not Adopted
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848). ASU 2020-04 provides optional expedients and exceptions that are intended to ease the burden of updating contracts to contain a new reference rate due to the discontinuation of the London Inter-Bank Offered Rate (“LIBOR”). The guidance is effective March 12, 2020 through December 31, 2022, with the adoption date being dependent upon the Company’s election. The Company is currently evaluating the impact of adopting this 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. As amended by ASU 2019-10, the updated guidance is effective for the Company as a smaller reporting company beginning January 1, 2023. The standard requires prospective application. Early adoption is permitted. The Company 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. As amended by ASU 2019-10, the updated guidance is effective for the Company as a smaller reporting company beginning January 1, 2023. The Company is in the process of determining the effects the adoption will have on its financial statements and reviewing credit loss models to assess the impact of the adoption of the standard on the financial statements. Based on initial assessments, the Company believes that while adoption will modify the way it analyzes financial instruments, it does not expect adoption of this guidance will have a material impact to its financial statements.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the SEC did not, or are not believed by management to, have a material impact on the Company’s present or future financial position, results of operations or cash flows.

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Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)
Note 3. Fair Value Measurements and Short-Term Investments
Short-Term Investments
As of June 30, 2020, 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 June 30, 2020
AmortizedGross UnrealizedEstimated
CostGainsLossesFair Value
Available-for-sale securities
U.S. treasury securities$54,963  $19  $  $54,982  
As of December 31, 2019
AmortizedGross UnrealizedEstimated
CostGainsLossesFair Value
Available-for-sale securities
U.S. treasury securities$19,905  $6  $  $19,911  
As of June 30, 2020, 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.
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 June 30, 2020
Fair ValueLevel 1Level 2Level 3
Available-for-sale debt securities
U.S. treasury securities$54,982  $54,982  $  $  
Liabilities
Contingent royalty obligation payable to Evolus Founders$36,334  $  $  $36,334  
As of December 31, 2019
Fair ValueLevel 1Level 2Level 3
Available-for-sale debt securities
U.S. treasury securities$19,911  $19,911  $  $  
Liabilities
Contingent royalty obligation payable to Evolus Founders$44,683  $  $  $44,683  
The Company did not transfer any assets or liabilities measured at fair value on a recurring basis between levels during the six months ended June 30, 2020 and 2019.
The Company determines the fair value of the contingent royalty obligation payable to Evolus Founders based on Level 3 inputs using a discounted cash flows method. The significant unobservable input assumptions that can significantly change the fair value include (i) projected amount and timing of net revenues during the payment period, which terminates in the quarter following the 10-year anniversary of the first commercial sale of Jeuveau® in the United States, (ii) the discount rate and (iii) the timing of payments. During the three and six months ended June 30, 2020 and 2019, the Company utilized
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Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)
discount rates between 16.0% and 17.0%, reflecting changes in the Company’s risk profile. Net revenue projections are also updated to reflect changes in the timing of 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
June 30,
Six Months Ended
June 30,
2020201920202019
Fair value, beginning of period$34,216  $45,900  $44,683  $50,200  
Payments(315)   (898) (9,213) 
Change in fair value recorded in operating expenses2,433  1,269  (7,451) 6,182  
Fair value, end of period$36,334  $47,169  $36,334  $47,169  
Other Financial Assets and Liabilities
The Company’s financial instruments consist primarily of cash and cash equivalents, short-term available-for-sale debt securities, accounts receivable, accounts payable, accrued expenses, lease liabilities, and long-term debt. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates their fair value because of the short-term maturity of such instruments.
The Company estimates the fair value of the 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 June 30, 2020, the fair value of the contingent promissory note and long-term debt was estimated to be $18,203 and $74,656, respectively. As of December 31, 2019, the fair value of contingent promissory note and long-term debt was $16,696 and $76,203, respectively. The fair value of operating lease liabilities as of June 30, 2020 and December 31, 2019 approximated their carrying value.

Note 4. Goodwill and Intangible Assets
The table below shows the weighted-average life, original cost, accumulated amortization and net book value by major intangible asset classification:
Weighted-Average Life (Years)Original CostAccumulated AmortizationNet Book Value
Definite-lived intangible assets
Distribution right20$59,076  $(4,157) $54,919  
Capitalized software25,949  (2,845) 3,104  
Intangible assets, net65,025  (7,002) 58,023  
Indefinite-lived intangible asset