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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 September 30, 2021
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, a 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 October 29, 2021, 55,576,988 shares of the registrant’s common stock, par value $0.00001, were outstanding.


Table of Contents
TABLE OF CONTENTS
Page
Summary of Risk Factors3
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 those made below under “Summary of Risk Factors” and in Item 1A. Risk Factors in this Quarterly Report.
You should carefully consider these risks, as well as the additional risks described in other documents we file with the SEC in the future, including subsequent Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q, which may from time to time amend, supplement or supersede the risks and uncertainties we disclose. We also operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements.
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.
Summary of Risk Factors
An investment in our securities involves various risks and you are urged to carefully consider the risks discussed under Item 1A “Risk Factors,” in this Quarterly Report on Form 10-Q prior to making an investment in our securities. If any of the risks below or in Item 1A “Risk Factors” occurs, our business could be materially and adversely affected. As more fully described in Item 1A “Risk Factors”, the principal risks and uncertainties that may affect our business, financial condition and results of operations include, but are not limited to, the following:
We currently depend entirely on the successful commercialization of our only product, Jeuveau®. If we are unable to successfully commercialize Jeuveau®, we may never generate sufficient revenue to continue our business.
We have a limited operating history and have incurred significant losses since our inception and anticipate that we will continue to incur losses for the foreseeable future. We have only one approved product, which, together with our limited operating history, makes it difficult to assess our future viability.
We may require additional financing to fund our future operations, and a failure to obtain additional capital when so needed on acceptable terms, or at all, could force us to delay, limit, or reduce the scope of our operations.
If we or our counterparties do not comply with the terms of our settlement agreements with Medytox or Allergan, we may face litigation or lose our ability to commercialize Jeuveau®, which would materially and adversely affect our ability to carry out our business and our financial condition and ability to continue as a going concern.
The terms of the Medytox/Allergan Settlement Agreements with Medytox and Allergan will reduce our profitability and may affect our pricing and the extent of any discounts we may offer to our customers.
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Table of Contents
Our business, financial condition and operations have been, and may in the future be, adversely affected by the COVID-19 outbreak or other similar outbreaks.
We rely on the license and supply agreement with Daewoong, which we refer to as the Daewoong Agreement, to provide us with exclusive rights to distribute Jeuveau® in certain territories. Any termination or loss of significant rights, including exclusivity, under the Daewoong Agreement would materially and adversely affect our development and commercialization of Jeuveau®.
Our failure to successfully in-license, acquire, develop and market additional product candidates or approved products would impair our ability to grow our business.
Jeuveau® faces, and any of our future product candidates will face, significant competition and our failure to effectively compete may prevent us from achieving significant market penetration and expansion.
Jeuveau® may fail to achieve the broad degree of physician adoption and use or consumer demand necessary for commercial success.
Our ability to market Jeuveau® is limited to use for the treatment of glabellar lines, and if we want to expand the indications for which we market Jeuveau®, we will need to obtain additional regulatory approvals, which will be expensive and may not be granted.
Third party claims of intellectual property infringement may prevent or delay our commercialization efforts and interrupt our supply of products.
If we or any of our current or future licensors, including Daewoong, are unable to maintain, obtain or protect intellectual property rights related to Jeuveau® or any of our future product candidates, we may not be able to compete effectively in our market.
We may need to increase the size of our organization, including our sales and marketing capabilities, in order to further commercialize Jeuveau® and we may experience difficulties in managing this growth.
We rely on our digital technology and applications and our business and operations would suffer in the event of computer system failures or breach by hackers.
We are subject to extensive government regulation, and we may face delays in or not obtain regulatory approval of our product candidates and our compliance with ongoing regulatory requirements may result in significant additional expense, limit or delay regulatory approval or subject us to penalties if we fail to comply.
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™, Jeuveau®, Evolux® are three 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)
September 30, 2021December 31, 2020
(unaudited)(Note 2)
ASSETS
Current assets
Cash and cash equivalents$107,796 $102,562 
Short-term investments 5,000 
Accounts receivable, net13,289 9,680 
Inventories3,816 3,354 
Prepaid expenses4,484 4,828 
Other current assets8,959 2,188 
Total current assets138,344 127,612 
Property and equipment, net1,058 1,297 
Operating lease right-of-use assets2,902 3,414 
Intangible assets, net51,468 55,297 
Goodwill21,208 21,208 
Other assets240 240 
Total assets$215,220 $209,068 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable$7,365 $9,615 
Accrued expenses23,436 9,102 
Accrued litigation settlement15,000 63,421 
Operating lease liabilities1,252 1,212 
Contingent royalty obligation payable to Evolus Founders4,300 3,446 
Promissory note payable to Evolus Founders19,950 19,068 
Term loan, net of discounts and issuance costs 74,384 
Total current liabilities71,303 180,248 
Accrued litigation settlement5,000 20,000 
Operating lease liabilities2,488 3,147 
Contingent royalty obligation payable to Evolus Founders39,000 38,100 
Convertible note 40,506 
Deferred tax liability25 25 
Total liabilities117,816 282,026 
Commitments and contingencies (Note 9)
Stockholders’ equity (deficit)
Preferred stock, $0.00001 par value; 10,000,000 shares authorized; no shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively
  
Common stock, $0.00001 par value; 100,000,000 shares authorized; 55,553,792 and 33,749,228 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively
1 1 
Additional paid-in capital502,108 303,113 
Accumulated deficit(404,705)(376,072)
Total stockholders’ equity (deficit)97,404 (72,958)
Total liabilities and stockholders’ equity
$215,220 $209,068 
See accompanying notes to financial statements.
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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,
2021202020212020
Revenue:
Product revenue, net
$26,677 $16,923 $64,314 $35,225 
Service revenue 738 702 738 
Total net revenues26,677 17,661 65,016 35,963 
Operating expenses:
Product cost of sales (excludes amortization of intangible assets)11,490 4,854 27,700 11,021 
Settlement payment from Daewoong  (25,500) 
Selling, general and administrative
31,685 21,944 78,834 70,796 
Research and development
301 350 1,641 1,003 
Revaluation of contingent royalty obligation payable to Evolus Founders
1,400 (2,471)4,049 (9,922)
Depreciation and amortization
923 1,744 4,702 5,151 
Restructuring costs   2,956 
Total operating expenses
45,799 26,421 91,426 81,005 
Loss from operations(19,122)(8,760)(26,410)(45,042)
Other income (expense):
Interest income
 32 1 630 
Interest expense
(311)(2,758)(1,256)(7,680)
Loss from extinguishment of debts, net  (968) 
Loss before income taxes:(19,433)(11,486)(28,633)(52,092)
Income tax (benefit) expense (27) 227 
Net loss$(19,433)$(11,459)$(28,633)$(52,319)
Other comprehensive loss:
Unrealized loss on available-for-sale securities, net of tax (16) (3)
Comprehensive loss$(19,433)$(11,475)$(28,633)$(52,322)
Net loss per share, basic and diluted$(0.35)$(0.34)$(0.60)$(1.55)
Weighted-average shares outstanding used to compute basic and diluted net loss per share55,007,132 33,748,690 47,818,288 33,734,014 
See accompanying notes to financial statements.
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Evolus, Inc.
Condensed Statements of Stockholders’ Equity (Deficit)
(in thousands, except share data)
(Unaudited)
Series A Preferred StockCommon StockAdditional
Paid In
Capital
Accumulated
Other Comprehensive Gain (Loss)
Accumulated DeficitTotal Stockholders’ Equity (Deficit)
SharesAmountSharesAmount
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 loss
— — — — — 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 
Issuance of common stock in connection with the incentive equity plan— — 750 — — — —  
Stock-based compensation— — — — 2,967 — — 2,967 
Net loss— — — — — — (11,459)(11,459)
Other comprehensive loss— — — — — (16)(16)
Balance at September 30, 2020 $ 33,749,228 $1 $300,469 $3 $(265,378)$35,095 
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Evolus, Inc.
Condensed Statements of Stockholders’ Equity (Deficit)
(in thousands, except share data)
(Unaudited)
Series A Preferred StockCommon StockAdditional
Paid In
Capital
Accumulated
Other Comprehensive Gain (Loss)
Accumulated DeficitTotal Stockholders’ Equity (Deficit)
SharesAmountSharesAmount
Balance at December 31, 2020 $ 33,749,228 $1 $303,113 $ $(376,072)$(72,958)
Issuance of common stock in connection with litigation settlement— — 6,762,652 — 48,421 — — 48,421 
Issuance of common stock for conversion of convertible note— — 3,136,869 — 39,808 — — 39,808 
Issuance of common stock in connection with the incentive equity plan— — 88,222 — 11 — — 11 
Stock-based compensation— — — — 1,606 — — 1,606 
Net income— — — — — — 6,401 6,401 
Balance at March 31, 2021 $ 43,736,971 $1 $392,959 $ $(369,671)$23,289 
Issuance of common stock upon follow-on offering, net of issuance costs— — 10,350,000 — 92,212 — — 92,212 
Issuance of common stock under “at-the-market” (ATM) program— — 209,532 — 2,707 — — 2,707 
Issuance of common stock in connection with the incentive equity plan— — 76,289 — 644 — — 644 
Stock-based compensation— — — — 2,887 — — 2,887 
Net loss— — — — — — (15,601)(15,601)
Balance at June 30, 2021 $ 54,372,792 $1 $491,409 $ $(385,272)$106,138 
Issuance of common stock in connection with the incentive equity plan— — 456,165 —  — —  
Issuance of common stock under “at-the-market” (ATM) program— 724,835 — 8,203 — — 8,203 
Stock-based compensation— — — — 2,496 — — 2,496 
Net loss— — — — — — (19,433)(19,433)
Balance at September 30, 2021 $ 55,553,792 $1 $502,108 $ $(404,705)$97,404 
See accompanying notes to financial statements.
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Evolus, Inc.
Condensed Statements of Cash Flows
(in thousands)
(Unaudited)
Nine Months Ended
September 30,
20212020
Cash flows from operating activities
Net loss$(28,633)$(52,319)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization4,702 5,151 
Stock-based compensation6,927 7,954 
Provision for bad debts501 2,439 
Amortization of discount on short-term investments (420)
Amortization of operating lease right-of-use assets512 490 
Amortization of debt discount and issuance costs882 1,993 
Paid-in-kind interest on convertible note272 203 
Deferred income taxes 179 
Revaluation of contingent royalty obligation payable to Evolus Founders4,049 (9,922)
Loss from extinguishment of debts968  
Changes in assets and liabilities:
Accounts receivable(4,110)(3,177)
Inventories(7,161)1,536 
Prepaid expenses344 (681)
Other assets 1,296 
Accounts payable(2,312)(2,845)
Accrued expenses14,334 (6,926)
Accrued litigation settlement(15,000) 
Operating lease liabilities(619)(556)
Net cash used in operating activities(24,344)(55,605)
Cash flows from investing activities
Purchases of property and equipment (798)
Additions to capitalized software(580)(2,041)
Purchases of short-term investments (74,668)
Maturities of short-term investments5,000 70,000 
Net cash provided by (used in) investing activities4,420 (7,507)
Cash flows from financing activities
Repayment of long term debt(76,323) 
Payment of contingent royalty obligation to Evolus Founders(2,295)(1,131)
Payment for debt obligation (522)
Proceeds from issuance of convertible note 40,000 
Proceeds from follow-on offering, net of underwriters fees92,426  
Payments for offering costs(214) 
Proceeds from ATM sales of shares10,910  
Issuance of common stock in connection with incentive equity plan654  
Net cash provided by financing activities25,158 38,347 
Change in cash and cash equivalents5,234 (24,765)
Cash and cash equivalents, beginning of period102,562 109,892 
Cash and cash equivalents, end of period$107,796 $85,127 
See accompanying notes to financial statements.
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Evolus, Inc.
Condensed Statements of Cash Flows (Continued)
(in thousands)
(Unaudited)
Nine Months Ended
September 30,
20212020
Supplemental disclosure of cash flow information
Cash paid for interest
$79 $5,443 
Non-cash investing and financing information:
Conversion of convertible note to equity$39,808 $ 
Issuance of common stock in exchange for accrued litigation settlement expense$48,421 $ 
Capitalized software recorded in accounts payable and accrued expenses
$10 $81 
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 annual net operating losses. The Company has recorded net loss of $19,433 and $28,633 for the three and nine months ended September 30, 2021, respectively. The Company used cash of $24,344 from operations during the nine months ended September 30, 2021. As of September 30, 2021, the Company had $107,796 in cash and cash equivalents, $19,950 in current debt and an accumulated deficit of $404,705.
In January 2021, the Company paid Oxford Finance, LLC (“Oxford”) $76,447 to discharge in full all outstanding obligations, including accrued interest, and the Oxford Term Loan (as such term is defined in Note 6. Oxford Term Loan) was extinguished. See Note 6. Oxford Term Loan for additional information.
In February 2021, the Company entered into settlement and license agreements with Medytox, Inc. (“Medytox”) and Allergan, plc and Allergan, Inc. (collectively, “Allergan”), pursuant to which the Company (1) agreed to pay Medytox and Allergan $35,000 in multiple payments over two years, including $15,000 paid in the third quarter of 2021 and $15,000 due in the next twelve months, (2) issued Medytox 6,762,652 shares of common stock and (3) agreed to pay Medytox and Allergan certain royalties on the sale of Jeuveau®, among other terms. See Note 11. Medytox/Allergan Settlement Agreements and Daewoong Arrangement for additional information.
In March 2021, the Company and Daewoong entered into certain agreements, pursuant to which Daewoong (1) paid the Company $25,500 in April 2021 and (2) agreed to reimburse the Company certain amounts with respect to the royalties payable to Medytox and Allergan, among other terms. See Note 11. Medytox/Allergan Settlement Agreements and Daewoong Arrangement for additional information. In addition, the outstanding Daewoong Convertible Note (as such term is defined in Note 7. Daewoong Convertible Note), including accrued interest, in the amount of $40,779 was converted into 3,136,869 shares of the Company’s common stock. See Note 7. Daewoong Convertible Note for additional information.
In April 2021, the Company completed a follow-on public offering and issued 10,350,000 shares of its common stock, which included the exercise in full by the underwriters of their option to purchase an additional 1,350,000 shares of common stock, at a price to the public of $9.50 per share. The Company received net proceeds of approximately $92,426 from the offering, after deducting underwriting discounts and commissions, excluding other offering expenses.
In June, July and August 2021, the Company sold 934,367 common shares at the prevailing market prices for total net proceeds of $10,910 under the existing “at-the-market” sales agreement. Since August 2021, the Company has not sold any shares under the “at-the-market” sales agreement. See Note 10. Stockholders’ Equity for additional details.
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
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Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)
achieve a level of revenues adequate to support its cost structure, its ability to maintain regulatory approval of its product, its ability to maintain compliance with the settlement agreements 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 and cash equivalents, are sufficient to fund operations through at least the next twelve months from the date the accompanying condensed financial statements are issued based on its expected cash needs. The Company may be required to raise additional capital to fund future operations through the incurrence of debt, 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.

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 only 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, 2021 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, 2020, as filed with the SEC on March 25, 2021.
Reclassifications
Certain comparative amounts for prior year have been reclassified to conform to current year presentations. Such reclassifications did not affect net income or retained earnings.
Use of Estimates
Management is required to make certain estimates and assumptions in order to prepare financial statements in conformity with GAAP. Such estimates and assumptions affect the reported financial statements. The Company’s most significant estimates relate to net revenues, allowance for doubtful accounts, fair value measurements, goodwill and long-lived asset valuations and impairment assessments, inventory valuations, income tax valuations, stock-based compensation and royalty obligations, among others. Management bases estimates on historical experience and on assumptions that management believes are reasonable. The Company’s actual results could differ materially from those estimates.
Additionally, the full impact of the COVID-19 outbreak is unknown and cannot be reasonably estimated. However, where possible, management has made appropriate accounting estimates with respect to certain accounting matters, which include the fair value of royalty obligations, allowance for doubtful accounts, inventory valuation and impairment assessments of goodwill and other long-lived assets, based on the facts and circumstances available as of the reporting date. The Company’s future assessment of the magnitude and duration of the COVID-19 outbreak, as well as other factors, could result in material impacts to the Company’s financial statements in future reporting periods.
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Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)
Risks and Uncertainties
In 2013, Evolus and Daewoong Pharmaceutical Co. Ltd. (“Daewoong”) entered into an agreement (the “Daewoong Agreement”), pursuant to which the Company received an exclusive distribution license to Jeuveau® from Daewoong for aesthetic indications in the United States, European Union, United Kingdom, members of the European Economic Area, Switzerland, Canada, Australia, Russia, certain members of the Commonwealth of Independent States, and South Africa, as well as co-exclusive distribution rights with Daewoong in Japan. Jeuveau® is manufactured by Daewoong in a facility in South Korea. The Company also has the option to negotiate first with Daewoong to secure a distribution license for any product that Daewoong directly or indirectly develops or commercializes that is classified as an injectable botulinum toxin (other than Jeuveau®) in a territory covered by the Daewoong Agreement. The Company relies on Daewoong, its exclusive and sole supplier, to manufacture Jeuveau®. Any termination or loss of significant rights, including exclusivity, under the Daewoong Agreement would materially and adversely affect the Company’s commercialization of Jeuveau®. See Note 9. Commitments and Contingencies and Note 11. Medytox/Allergan Settlement Agreements and Daewoong Arrangement for additional information.
The Company commercially launched Jeuveau® in the United States in May 2019 and in Canada through its distribution partner in October 2019 and, as such, has a limited history of sales. If any previously granted approval is retracted or the Company is denied approval or approval is delayed by any other regulators, it may have a material adverse impact on the Company’s business and its financial statements.
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 COVID-19 outbreak and restrictions intended to slow the spread of COVID-19, including quarantines, government-mandated actions, stay-at-home orders and other restrictions, have adversely affected the Company’s business in a number of ways, which have resulted, and may continue to result, in a period of business disruption and in reduced sales and operations. In addition, any disruption and volatility in the global capital markets may increase the Company’s cost of capital and adversely affect its ability to access financing when and on terms that the Company desires. Any of these events could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.
Segment Reporting
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker. The Company has determined that it operates in a single operating and reportable segment. The Company’s chief operating decision maker is its Chief Executive Officer who manages operations and reviews the financial information as a single operating segment for purposes of allocating resources and evaluating its financial performance.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, short-term investments and accounts receivable. Substantially all of the Company’s cash is held by financial institutions that management believes are of high credit quality. Such deposits may, at times, exceed federally insured limits. To date, the Company has not experienced any losses associated with this credit risk and continues to believe that this exposure is not significant. The Company invests its excess cash, in line with its investment policy, primarily in money market funds and debt instruments of U.S. government agencies.
The Company’s accounts receivable is derived from customers located principally in the United States. Concentrations of credit risk with respect to trade receivables are limited due to the Company’s credit evaluation process. The Company does not typically require collateral from its customers. Credit losses historically have not been material. The Company continuously monitors customer payments and maintains an allowance for doubtful accounts based on its assessment of
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Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)
various factors including historical experience, age of the receivable balances, and other current economic conditions or other factors that may affect customers’ ability to pay.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with remaining maturities at purchase of three months or less that can be liquidated without prior notice or penalty. Cash and cash equivalents may include deposits, money market funds and debt securities. Amounts receivable from credit card issuers are typically converted to cash within two to four days of the original sales transaction and are considered to be cash equivalents.
Short-Term Investments
Short-term investments consist of available-for-sale U.S. Treasury securities with original maturities greater than three months and remaining maturities of less than twelve months. These investments are recorded at fair value based on quoted prices in active markets, with unrealized gains and losses reported in other comprehensive (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 based on the estimated amount payable to the Company’s supplier after accounting for any reimbursement receivable pursuant to the Daewoong Settlement Agreement (as such term is defined, and such agreement is discussed, in Note 11. Medytox/Allergan Settlement Agreements and Daewoong Arrangement), using the first-in, first-out method with prioritization of the items with the earliest expiration dates. Inventory valuation reserves are established based on a number of factors including, but not limited to, finished goods not meeting product specifications, product excess and obsolescence, or application of the lower of cost or net realizable value concepts. The determination of events requiring the establishment of inventory valuation reserves, together with the calculation of the amount of such reserves may require judgment. No material inventory valuation reserves have been recorded for the periods presented. Adverse changes in assumptions utilized in the Company’s inventory reserve calculations could result in an increase to its inventory valuation reserves.
Product cost of sales, excluding amortization of intangible assets, consisted of the inventory cost, and, for periods on or after December 16, 2020, included certain royalties on the sale of Jeuveau® payable to Medytox and Allergan pursuant to the Medytox/Allergan Settlement Agreements (as such term is defined in Note 11. Medytox/Allergan Settlement Agreements and Daewoong Arrangement), as partially offset by reimbursement receivable from Daewoong pursuant to the Daewoong Settlement Agreement with respect to such royalties. In the three and nine months ended September 30, 2021, the Company also recorded the settlement payment of $0 and $25,500, respectively, from Daewoong in connection with the Daewoong Settlement Agreement as part of cost of sales. See “—Litigation Settlement” for additional information.
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:
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Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)
Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly, or can be corroborated by observable market data for substantially the full term of the asset or liability; and
Level 3—Prices or valuation techniques that require inputs that are unobservable that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of approximately five years. Leasehold improvements are amortized over the shorter of the estimated useful lives of the improvements or the term of the related lease.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in a business combination. The Company reviews goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. The Company performs an annual qualitative assessment of its goodwill in the fourth quarter of each calendar year to determine if any events or circumstances exist, such as an adverse change in business climate or a decline in the overall industry demand, that would indicate that it would more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill. If events or circumstances do not indicate that the fair value of a reporting unit is below its carrying amount, then goodwill is not considered to be impaired and no further testing is required. If further testing is required, the Company performs a two-step process. The first step involves comparing the fair value of the Company’s reporting unit to its carrying value, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step of the test is performed by comparing the carrying value of the goodwill in the reporting unit to its implied fair value. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value. For the purpose of impairment testing, the Company has determined that it has one reporting unit. There was no impairment of goodwill for any of the periods presented.
Intangible Assets
Upon FDA approval of Jeuveau® in February 2019, the in-process research and development (“IPR&D”) related to Jeuveau® was evaluated as completed and reclassified to a definite-lived distribution right intangible asset, which is amortized over the period the asset is expected to contribute to the future cash flows of the Company. The Company determined the pattern of this intangible asset’s future cash flows could not be readily determined with a high level of precision. As a result, the distribution right intangible asset is being amortized on a straight-line basis over the estimated useful life of 20 years.
The Company capitalizes certain internal-use software costs associated with the development of its mobile and web-based customer platforms. These costs include personnel expenses and external costs that are directly associated with the software projects. These costs are included as intangible assets in the accompanying 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.
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Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)
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 September 30, 2021.
Contingent Royalty Obligation Payable to the Evolus Founders
The Company determines the fair value of the contingent royalty obligation payable at each reporting period end based on Level 3 inputs using a discounted cash flows method. Changes in the fair value of the contingent royalty obligation payable are determined at each reporting period end and recorded in operating expenses in the accompanying condensed statements of operations and comprehensive loss and as a liability in the condensed balance sheets.
Promissory Note Payable to the Evolus Founders
On February 12, 2018, the Company recognized a promissory note payable at present value using a discount rate for similar rated debt securities. Discount amortization related to the promissory note is recorded in interest expense in the condensed statements of operations and comprehensive loss with a corresponding increase to the liabilities in the condensed balance sheets.
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.
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Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)
For product revenue, the Company recognizes revenue when control of the promised goods under a contract is transferred to a customer, in an amount that reflects the consideration the Company expects to receive in exchange for those goods as specified in the customer contract. The transfer of control occurs upon receipt of the goods by the customer since that is when the customer has obtained control of the goods’ economic benefits. The Company does not provide any service-type warranties and does not accept product returns except under limited circumstances such as damages in transit or ineffective product. The Company also excludes any amounts related to taxes assessed by governmental authorities from revenue measurement. Shipping and handling costs associated with outbound product freight are accounted for as fulfillment costs and are included in selling, general and administrative expenses in the accompanying 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. The Company recognized $0 and $702, respectively, of revenues related to international sales for the three and nine months ended September 30, 2021 and $738 for the three and nine months ended September 30, 2020.
Disaggregation of Revenue
The Company’s disaggregation of revenue is consistent with its operating segment as disclosed above.
Gross-to-Net Revenue Adjustments
The Company provides customers with discounts, such as trade and volume discounts and prompt pay discounts, that are directly reflected in the invoice price. Revenues are recorded net of sales-related adjustments, wherever applicable, primarily for the volume-based rebates, 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 were accounted for as variable consideration. The Company estimates coupon redemption rates based on historical data and future expectations. The coupons were accrued based on estimated redemption rates and the volume of products purchased and were recorded as a reduction to revenues on product delivery. All issued coupons expired on June 30, 2020.
Consumer Loyalty Program — In May 2020, the Company launched a consumer loyalty program, which allows participating customers to earn rewards for qualifying treatments to their patients (i.e. consumers) using Jeuveau® and redeem the rewards for Jeuveau® in the future at no additional cost. The loyalty program represents a customer option that provides a material right and, accordingly, is a performance obligation. At the time Jeuveau® product is sold to customers, the invoice price is allocated between the product sold and the estimated material right reward (“Reward”) that the customer might redeem in the future. The standalone selling price of the Reward is measured based on historical sales data, estimated average selling price of Jeuveau® at the time of redemption, expected customer and consumer participation rates in the loyalty program, and estimated number of qualifying treatments to be performed by customers. The portion of invoice price allocated to the Reward is initially recorded as deferred revenue. Subsequently, when customers redeem the Reward and the related product is delivered, the deferred revenue is recognized in net revenue at that time.
As of September 30, 2021 and December 31, 2020, the accrued revenue contract liabilities, primarily related to volume-based rebates and consumer loyalty program, were $5,751 and $3,081, respectively, which were recorded in the accrued expenses in the accompanying condensed balance sheets. For the three and nine months ended September 30, 2021, provisions for rebate and consumer loyalty programs were $3,912 and $9,355, respectively, which were offset by related payments, redemptions and adjustments of $2,695 and $6,686, respectively. For the three and nine months ended September 30, 2020, provisions for
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Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)
rebate, coupon and consumer loyalty programs were $2,378 and $12,607, respectively, which were offset by related payments, redemptions and adjustments of $806 and $11,945, 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 September 30, 2021 and December 31, 2020, 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, 2021 or December 31, 2020. Sales commissions are included in selling, general and administrative expenses when incurred.
Contract liabilities reflect estimated amounts that the Company is obligated to pay to customers or patients primarily under the rebate and coupon programs and deferred revenue associated with Rewards under the consumer loyalty program. The Company’s contract liabilities are included in accounts payable and accrued expenses in the accompanying condensed balance sheets.
During the nine months ended September 30, 2021 and 2020, the Company recognized $2,802 and $0, respectively, of revenue related to amounts included in contract liabilities at the beginning of the period and did not recognize any revenue related to changes in transaction prices regarding its contracts with customers from previous periods.
Collectability
Accounts receivable are recorded at the invoiced amount and do not bear interest. At the time of contract inception or new customer account set-up, the Company performs a collectability assessment of the customer’s creditworthiness. The Company assesses the probability that the Company will collect the entitled consideration in exchange for the goods sold, by considering the customer’s ability and intention to pay when consideration is due. On a recurring basis, the Company estimates the amount of receivables considered uncollectable to reflect an allowance for doubtful accounts. The Company writes off accounts receivable balances when it is determined that there is no possibility of collection. As of September 30, 2021 and December 31, 2020, allowance for doubtful accounts was $2,381 and $2,118, respectively. For the three and nine months ended September 30, 2021, provision for bad debts were $188 and $501, respectively, and the write-off amount was $23 and $214, respectively. For the three and nine months ended September 30, 2020, recovery of and provision for bad debts was $168 and $2,439, respectively, and the write-off amount was $0 and $171, respectively.
Practical Expedients
The Company expenses sales commissions when incurred as the amortization period is one year or less. These costs are recorded within selling, general and administrative expenses in the accompanying 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.
Research and Development Expenses
Research and development costs are expensed as incurred. Research and development expenses include personnel-related costs, costs associated with pre-clinical and clinical development activities, costs associated with and costs for prototype products that are manufactured prior to market approval for that prototype product, internal and external costs associated with the Company’s regulatory compliance and quality assurance functions, including the costs of outside consultants and contractors that assist in the process of submitting and maintaining regulatory filings, and overhead costs, including allocated facility related expenses.
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Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)
Litigation Settlement
In February 2021, upon entering into certain agreements to settle intellectual property disputes relating to Jeuveau®, the Company agreed to pay to Allergan and Medytox $35,000 in multiple payments over two years and issued 6,762,652 shares of its common stock to Medytox. In addition, for the period from December 16, 2020 to September 16, 2022, the Company agreed to pay to Allergan and Medytox a royalty on the sale of Jeuveau®, based on a certain dollar amount per vial sold in the United States and a low-double digit royalty on net sales of Jeuveau® sold in other Evolus territories. For the period from September 17, 2022 to September 16, 2032, the Company agreed to pay to Medytox a mid-single digit royalty percentage on all net sales of Jeuveau®. The royalty payments are made quarterly and recorded as product cost of sales on the accompanying condensed statements of operations and comprehensive loss in the periods the royalties are incurred.
The settlement agreements resulted in an $83,421 charge for the fourth quarter of 2020, which consisted of $35,000 in deferred cash payments and $48,421 from the issuance of 6,762,652 shares of the Company’s common stock in February 2021. In the third quarter of 2021, the Company made the first cash payment of $15,000 to Medytox and Allergan. As of September 30, 2021 and December 31, 2020, a current liability of $15,000 and $63,421, respectively, and non-current liability of $5,000 and $20,000, respectively, were recorded in the accompanying condensed balance sheets.
Separately, in March 2021, Daewoong and the Company entered into certain agreements, pursuant to which Daewoong agreed to pay the Company an amount equal to $25,500, which was recorded as a settlement payment from Daewoong and included as part of cost of sales on the accompanying condensed statements of operations and comprehensive loss for the nine months ended September 30, 2021. For the period from December 16, 2020 to September 16, 2022, Daewoong also agreed to reimburse the Company certain amounts with respect to the royalties payable to Medytox and Allergan. This reimbursement is received quarterly and recorded as an offset to the related royalties to Medytox and Allergan in the product cost of sales on the accompanying condensed statements of operations and comprehensive loss.
See Note 11. Medytox/Allergan Settlement Agreements and Daewoong Arrangement for the details of all litigation settlement agreements.
Stock-Based Compensation
The Company recognizes stock-based compensation expense for employees, consultants and members of the Board of Directors based on the fair value at the date of grant.
The Company uses the Black-Scholes option pricing model to value stock option grants. The Black-Scholes option pricing model requires the input of subjective assumptions, including the expected volatility of the Company’s common stock, expected risk-free interest rate, and the option’s expected life. The fair value of the Company’s restricted stock units (“RSUs”) is based on the fair value on the grant date of the Company’s common stock. The Company also evaluates the impact of modifications made to the original terms of equity awards when they occur.
The fair value of equity awards that are expected to vest is amortized on a straight-line basis over the requisite service period. Stock-based compensation expense is recognized net of actual forfeitures when they occur, as an increase to additional paid-in capital in the 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 $0 and $27 for the three months ended September 30, 2021 and 2020, respectively, and a tax provision of $0 and $227 for the nine months ended September 30, 2021 and 2020, respectively. The Company’s ETR differs from the U.S. federal statutory tax rate of 21% for the three and nine months ended September 30, 2021 and 2020, primarily as a result of the impact of the change of the valuation allowance to offset its 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 available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future
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Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)
taxable income, and ongoing prudent and feasible tax planning strategies in assessing the amount of the valuation allowance. When the Company establishes or reduces the valuation allowance against its deferred tax assets, its provision for income taxes will increase or decrease, respectively, in the period such determination is made.
Additionally, the Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefit recognized in the financial statements for a particular tax position is based on the largest benefit that is more likely than not to be realized upon settlement. Accordingly, the Company establishes reserves for uncertain tax positions.
The Company monitors changes to the tax laws in the states it conducts business and files corporate income tax returns. The Company does not expect that changes to state tax laws through September 30, 2021 to materially impact its financial statements.
Net Loss Per Share
Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period including contingently issuable shares. Diluted earnings per share is based on the treasury stock method and includes the effect from potential issuance of ordinary shares, such as shares issuable pursuant to the exercise of stock options and the vesting of restricted stock units. 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. Excluded from the dilutive net loss per share computation for the three and nine months ended September 30, 2021 and 2020 were stock options of 3,873,352 and 4,374,925, respectively, and non-vested RSUs of 1,771,938 and 1,110,367, 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 December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12 Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. FASB issued this update as part of its Simplification Initiative to improve areas of GAAP and reduce cost and complexity while maintaining usefulness. The main provisions remove certain exceptions including the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. In addition, the amendments simplify income tax accounting in the areas such as income based franchise taxes, eliminating the requirements to allocate consolidated current and deferred tax expense in certain instances and a requirement that an entity reflects the effect of enacted changes in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. For public companies, the standard is effective for fiscal years beginning after December 15, 2020 and interim periods therein. The Company has adopted the guidance on the effective date of January 1, 2021. There are no material impacts to the financial statements as a result of this adoption.
Recent Accounting Pronouncements Issued But Not Adopted
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
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Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)
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.

Note 3. Fair Value Measurements and Short-Term Investments
Short-Term Investments
As of September 30, 2021, the Company did not hold any short-term investments. The following is a summary of the Company’s short-term investments, considered available-for-sale, as of December 31, 2020:
AmortizedGross UnrealizedEstimated
CostGainsLossesFair Value
Available-for-sale securities
U.S. treasury securities$5,000 $ $ $5,000 
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company measures and reports certain financial instruments as assets and liabilities at fair value on a recurring basis. The fair value of these instruments was as follows:
As of September 30, 2021
Fair ValueLevel 1Level 2Level 3
Liabilities
Contingent royalty obligation payable to Evolus Founders$43,300 $ $ $43,300 
As of December 31, 2020
Fair ValueLevel 1Level 2Level 3
Available-for-sale debt securities
U.S. treasury securities$5,000 $5,000 $ $ 
Liabilities
Contingent royalty obligation payable to Evolus Founders$41,546 $ $ $41,546 
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, 2021 and 2020.
The Company determines the fair value of the contingent royalty obligation payable to the Evolus Founders based on Level 3 inputs using a discounted cash flows method. The significant unobservable input assumptions that can significantly change
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Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)
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 nine months ended September 30, 2021 and 2020, the Company utilized discount rates between 13.0% and 20.0%, reflecting changes in the Company’s risk profile. Net revenue projections are also updated to reflect changes in the timing of expected sales.
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,
2021202020212020
Fair value, beginning of period$42,683 $36,334 $41,546 $44,683 
Payments(783)(233)(2,295)(1,131)
Change in fair value recorded in operating expenses1,400 (2,471)4,049 (9,922)
Fair value, end of period$43,300 $33,630 $43,300 $33,630 
Other Financial Assets and Liabilities
The Company’s financial instruments consist primarily of cash and cash equivalents, short-term available-for-sale debt securities, accounts receivable, accounts payable, accrued expenses, lease liabilities, and long-term debt. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates their fair value because of the short-term maturity of such instruments.
The Company estimates the fair value of the promissory note payable to the Evolus Founders, long-term debt and operating lease liabilities using the discounted cash flow analysis based on the interest rates for similar rated debt securities (Level 2). As of September 30, 2021, the fair value of the promissory note was estimated to be $20,000. As of December 31, 2020, the fair value of promissory note and long-term debt was $19,284 and $76,368, respectively. The fair value of operating lease liabilities as of September 30, 2021 and December 31, 2020 and the Daewoong Convertible Note as of December 31, 2020 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 $(7,850)$51,226 
Capitalized software27,314 (7,072)242 
Intangible assets, net66,390 (14,922)51,468 
Indefinite-lived intangible asset
Goodwill*21,208 — 21,208 
Total as of September 30, 2021$87,598 $(14,922)$72,676 
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Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)
Weighted-Average Life (Years)Original CostAccumulated AmortizationNet Book Value
Definite-lived intangible assets
Distribution right20$59,076 $(5,650)$53,426 
Capitalized software26,681 (4,810)1,871 
Intangible assets, net65,757 (10,460)55,297 
Indefinite-lived intangible asset
Goodwill*21,208 — 21,208 
Total as of December 31, 2020$86,965 $(10,460)$76,505 
* Intangible assets with indefinite lives have an indeterminable average life.

The following table outlines the estimated future amortization expense related to intangible assets held as of September 30, 2021 that are subject to amortization:
Fiscal year
Remaining in 2021$844 
20223,094 
20232,955 
20242,955 
20252,955 
Thereafter38,665 
$51,468 
The Company capitalized $0 and $432 for the three months ended September 30, 2021 and 2020, respectively, and $633 and $1,966 for the nine months ended September 30, 2021 and 2020, respectively, related to costs of computer software developed for internal use. The Company recorded total intangible assets amortization expense of $843 and $1,664 for the three months ended September 30, 2021 and 2020, respectively, and $4,463 and $4,813 for the nine months ended September 30, 2021 and 2020, respectively, within depreciation and amortization on the accompanying condensed statements of operations and comprehensive loss.

Note 5. Accrued Expenses
Accrued expenses consisted of:
September 30,December 31,
20212020
Accrued royalties under the Medytox/Allergan Settlement Agreements$9,088 $ 
Accrued payroll and related benefits5,485 4,076 
Accrued revenue contract liabilities5,751 3,081 
Accrued professional services1,655 895 
Other accrued expenses1,457 1,050 
$23,436 $9,102 

Note 6. Oxford Term Loan
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Evolus, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share data)
(Unaudited)
On March 15, 2019, the Company entered into a Loan and Security Agreement with Oxford (the “Loan Agreement”), providing for a credit facility of up to $100,000. Pursuant to the terms of the credit facility, the lender extended term loans (the “Oxford Term Loan”), available in two advances, to the Company. The first tranche of $75,000 was funded on the closing date. The second tranche of $25,000 was not drawn. The credit facility bore an annual interest rate equal to the greater of 9.5%, or the 30-day U.S. Dollar LIBOR rate plus 7.0%. The Company agreed to pay interest-only for the first 36 months until May 2022, followed by a 23-month amortization period.
Upon the earliest to occur of the maturity date, the acceleration of the Oxford Term Loan, or the prepayment of the Oxford Term Loan, the Company was required to pay to Oxford a final payment of 5.5% of the full principal amount of the Oxford Term Loan funded (“Final Payment”). The Company could elect to prepay all amounts owed prior to the maturity date, provided that a prepayment fee was also paid, which would be equal to 2.0% of the amount prepaid if the prepayment occurred after March 15, 2020 and on or prior to March 15, 2021, or 1.0% of the amount prepaid if the prepayment occurred thereafter (“Prepayment Fee”).
At the closing date, the Company incurred $1,094 and $2,205 in debt discounts and issuance costs related to the Oxford Term Loan, respectively. Debt discounts and issuance costs related to the Oxford Term Loan were presented as a deduction to the debt balance and are amortized into interest expense using the effective interest method.
On January 4, 2021, the Company and Oxford entered into an agreement (“Payoff Letter”), pursuant to which (i) the Company paid Oxford $76,447 to discharge in full all outstanding obligations, including accrued interest, by and between Oxford, in its capacity as collateral agent and lender, and the Company, and (ii) effective upon such repayment, the Loan Agreement, and all unfunded commitments thereunder, guarantees and other security interests granted to Oxford in connection with the Loan Agreement and all other obligations of and restrictions on the Company under the Loan Agreement, terminated. As a condition to entering into the Payoff Letter, Oxford agreed to waive a total of $4,300 of fees comprised of (i) $2,800 of the Final Payment and (ii) the Prepayment Fee of $1,500. As a result, the Company recorded a loss of $1,939 in extinguishment of debts, net on the accompanying condensed statements of operations and comprehensive loss.

Note 7. Daewoong Convertible Note
On July 6, 2020, the Company entered into a Convertible Promissory Note Purchase Agreement with Daewoong for the principal amount of $40,000 (the “Daewoong Convertible Note”), which was funded on July 30, 2020. Additionally, on July 6, 2020, the Company, Daewoong and Oxford entered into a Subordination Agreement pursuant to which the Daewoong Convertible Note was subordinated to the Company’s obligations under the Loan Agreement.
The Daewoong Convertible Note bore interest at a rate of 3.0% payable semi-annually in arrears on June 30th and December 31st of each year and was to mature on July 30, 2025, subject to earlier conversion as provided below. Interest was initially paid in kind by adding the accrued amount thereof to the outstanding principal amount on a semi-annual basis on June 30th and December 31st of each calendar year for so long as any principal amount under the Oxford Term Loan remained outstanding and the Subordination Agreement was not terminated. Interest became payable