What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-03-25 compared with 2020-02-25 · 499 added, 384 removed, 610 unchanged (59% of the section changed)

Financial Statements and Supplementary Data.

Evolus , Inc.

Index to Financial Statements

13 unchanged sentences

generally accepted accounting principles.

The Company’s Ability to Continue as a Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.

As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations, has a working capital deficiency, and has stated that substantial doubt exists about the Company’s ability to continue as a going concern.

Management's evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 1.

The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

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Irvine, California

February 25, 2020

March 25, 2021

Balance Sheets

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Accounts receivable, net 9,680 10,661

Inventories 3,354 6,407

Prepaid expenses and other current assets 7,016 5,326

3 unchanged sentences

Intangible assets, net 55,297 59,638

LIABILITIES AND STOCKHOLDERS’ EQUITY

Goodwill 21,208 21,208

Other assets 240 2,429

Total assets $ 209,068 $ 240,442

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY

Current Liabilities

1 unchanged sentence

Accrued expenses 9,102 13,960

Accrued litigation settlement expenses 63,421 —

Operating lease liabilities 1,212 1,200

Contingent royalty obligation payable to Evolus Founders 3,446 3,483

Contingent promissory note payable to Evolus Founders 19,068 —

Term loan, net of discount and issuance costs 74,384 —

Total current liabilities 180,248 24,439

Accrued litigation settlement expenses 20,000 —

Operating lease liabilities 3,147 3,893

1 unchanged sentence

Contingent promissory note payable to Evolus Founders — 17,945

Long-term debt, net of discounts and issuance costs

Term loan, net of discounts and issuance costs — 73,508

Convertible note 40,506 —

Deferred tax liability 25 —

Deferred rent

Total liabilities 282,026 160,985

Commitments and contingencies (Note 9)

Stockholders’ equity

Stockholders’ (deficit) equity

Preferred Stock, $ 0.00001 par value;

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Accumulated deficit ( 376,072 ) ( 213,059 )

Total stockholders’ equity

Total liabilities and stockholders’ equity

Total stockholders’ (deficit) equity ( 72,958 ) 79,457

Total liabilities and stockholders’ (deficit) equity $ 209,068 $ 240,442

See accompanying notes to financial statements.

Evolus , Inc.

Statements of Operations and Comprehensive Loss

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Product revenue, net

$ 55,802 $ 34,237

Service revenue 738 688

Total net revenues

Product cost of sales (excludes amortization of intangible assets)

56,540 34,925

Operating expenses:

Product cost of sales (excludes amortization of intangible assets) 18,299 8,014

Selling, general and administrative

98,190 113,593

Research and development 1,722 3,973

Revaluation of contingent royalty obligation to Evolus Founders

( 2,007 ) 4,160

Depreciation and amortization

Litigation settlement expenses 83,421 —

Restructuring costs 2,956 —

Total operating expenses

209,608 133,872

Loss from operations ( 153,068 ) ( 98,947 )

2 unchanged sentences

Interest expense

( 10,503 ) ( 7,953 )

Loss before income taxes ( 162,936 ) ( 105,061 )

Income tax (benefit) expense

Income tax expense (benefit) 77 ( 15,027 )

Net loss $ ( 163,013 ) $ ( 90,034 )

Other comprehensive gain:

Unrealized gain on available-for-sale securities, net of tax

Unrealized (loss) gain on available-for-sale securities, net of tax ( 6 ) 6

Comprehensive loss $ ( 163,019 ) $ ( 90,028 )

Net loss per share, basic and diluted

$ ( 4.83 ) $ ( 3.19 )

Weighted-average shares outstanding used to compute basic and diluted net loss per share

33,737,838 28,237,816

See accompanying notes to financial statements.

Evolus , Inc.

Statements of Stockholders’ Equity (Deficit)

Statements of Stockholders’ (Deficit) Equity

(in thousands, except share data)

Series A Preferred Stock

Additional Paid In Capital

Other Comprehensive Gain

Accumulated Deficit

Series A Preferred Stock Common Stock Additional Paid In Capital Accumulated

Other Comprehensive Gain (Loss) Accumulated Deficit Total

Shares Amount Shares Amount

Balance at December 31, 2018 — $ — 27,274,991 $ 1 $ 207,408 $ — $ ( 123,025 ) $ 84,384

Deemed contribution from Parent, increase of related-party receivable

Deemed distribution to Parent, increase of convertible note obligation

Capital contribution from Parent, convertible note write-off

Capital contribution from Parent, forgiveness of related party borrowings

Preferred stock conversion upon initial public offering

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

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

— — 5,999,550 — 73,022 — — 73,022

Issuance of common stock in connection with the incentive equity plan

— — 288,124 — 2,455 — — 2,455

Stock-based compensation

— — — — 9,624 — — 9,624

— — — — — — ( 90,034 ) ( 90,034 )

Other comprehensive gain

— — — — — 6 — 6

Balance at December 31, 2019 — $ — 33,562,665 $ 1 $ 292,509 $ 6 $ ( 213,059 ) $ 79,457

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

Issuance of common stock in connection with the incentive equity plan

— — 186,563 — — — — —

Stock-based compensation

Other comprehensive gain

— — — — 10,604 — — 10,604

— — — — — — ( 163,013 ) ( 163,013 )

Other comprehensive loss — — — — — ( 6 ) — ( 6 )

Balance at December 31, 2020 — $ — 33,749,228 $ 1 $ 303,113 $ — $ ( 376,072 ) $ ( 72,958 )

See accompanying notes to financial statements.

Evolus , Inc.

Statements of Cash Flows

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Cash flows from operating activities

Net loss $ ( 163,013 ) $ ( 90,034 )

Adjustments to reconcile net loss to net cash used in operating activities:

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Stock-based compensation 10,584 9,518

Provisions for rebate and coupon programs

Provision for bad debts 2,066 387

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Amortization of debt discount and issuance costs 2,691 2,156

Paid-in-kind interest on convertible note 506 —

Deferred income taxes 25 ( 15,055 )

Revaluation of contingent royalty obligation to Evolus Founders ( 2,007 ) 4,160

Non-cash portion of accrued settlement expenses 48,421 —

Changes in assets and liabilities:

Inventories 4,542 ( 4,482 )

Accounts receivable ( 1,085 ) ( 11,048 )

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Accrued expenses ( 4,248 ) 9,583

Accrued settlement expenses 35,000 —

Operating lease liabilities ( 734 ) ( 654 )

Deferred rent

Other assets 1,497 ( 190 )

Net cash used in operating activities ( 57,871 ) ( 93,383 )

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Maturities of short-term investments 90,000 95,000

Net cash used in investing activities

Net cash provided by (used in) investing activities 12,194 ( 23,434 )

Cash flows from financing activities

Payment of contingent royalty obligation to Evolus Founders ( 1,131 ) ( 9,677 )

Proceeds from issuance of convertible note 40,000 —

Milestone payment for intangible assets — ( 3,000 )

2 unchanged sentences

Payment for debt obligation ( 522 ) ( 1,044 )

Proceeds from initial public offering, net of underwriting fees

Proceeds from follow-on offering, net of underwriting fees — 73,315

Payments for offering costs — ( 203 )

Related party borrowings

Payments on related party borrowings

Issuance of common stock in connection with incentive equity plan — 2,455

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See accompanying notes to financial statements.

Evolus , Inc.

Statements of Cash Flows (Continued)

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Cash paid for interest

Cash paid for operating leases

$ 7,244 $ 5,166

Cash paid for income taxes $ 65 $ 4

Non-cash investing and financing information:

Related party receivable

Related party borrowings

Note obligation

Contingent royalty obligation payable to Evolus Founders

Contingent promissory note payable to Evolus Founders

Capital contribution from Parent, convertible note write-off

Capital contribution from Parent, forgiveness of related party borrowings

Deferred offering costs

Accounts payable, paid by Parent

Operating lease right-of-use assets obtained in exchange for operating lease liabilities

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(in thousands, except share and per share data)

Organization and 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.

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The product was also approved by Health Canada in August 2018 and the European Commission (“EC”) in September 2019.

The product 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 distributor in October 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.

In January 2018, the Company’s board of directors and its then-sole stockholder approved an amendment to the Company’s amended and restated certificate of incorporation to effect a split of shares of the Company’s common stock on a 1.6527 -for-1 basis (the “Stock Split”).

The Company’s then-outstanding shares of convertible Series A preferred stock (“Series A preferred stock”), the par value of the common stock, and the authorized shares of the common stock were not adjusted as a result of the Stock Split.

All issued and outstanding shares of common stock, stock options, restricted stock units and related per share amounts in the accompanying financial statements have been retroactively adjusted to reflect this Stock Split for all periods presented.

The Stock Split was effected on January 26, 2018.

On February 12, 2018, the Company completed its initial public offering (“IPO”) and issued 5,047,514 shares of common stock, which included the exercise by the underwriters of their option to purchase 47,514 additional shares of common stock, at an offering price to the public of $12.00 per share.

The Company received net proceeds of approximately $56,330 after deducting underwriting discounts and commissions, excluding other offering costs.

In connection with the IPO, the Company’s then-outstanding shares of Series A preferred stock were automatically converted into 2,065,875 shares of common stock.

In connection with the completion of its IPO, the Company’s amended and restated certificate of incorporation was further amended and restated to provide for 100,000,000 authorized shares of common stock with a par value of $0.00001 per share and 10,000,000 authorized shares of preferred stock with a par value of $0.00001 per share.

In July 2018, the Company completed a follow-on public offering and issued 3,600,000 shares of its common stock, which included the exercise in full by the underwriters of their option to purchase an additional 600,000 shares of common stock, at a price to the public of $20.00 per share.

The Company received net proceeds of approximately $67,680 from the offering, after deducting underwriting discounts and commissions, excluding other offering expenses.

In November 2019, the Company completed a follow-on public offering and issued 5,999,550 shares of its common stock, which included the exercise in full by the underwriters of their option to purchase an additional 782,550 shares of common stock, at a price to the public of $ 13.00 per share.

The Company received net proceeds of approximately $ 73,315 from the offering, after deducting underwriting discounts and commissions, excluding other offering expenses.

As of December 31, 2019 and 2018 , ALPHAEON Corporation (“Alphaeon”), which is majority-owned by Strathspey Crown Holdings Group, LLC, formerly known as SCH-AEON, LLC, (“SCH”), owned 25.8% and 56.0% of the Company’s outstanding shares of common stock, respectively.

Related Party Transactions , for more information.

In 2019 Alphaeon changed its name to AEON Biopharma, Inc.

and contributed all of the shares it held in the Company to Alphaeon 1, LLC.

The Company continues to refer to the renamed AEON Biopharma, Inc.

as “Alphaeon” and Alphaeon 1, LLC as “Alphaeon 1, LLC.”

Liquidity and Financial Condition

The accompanying financial statements have been prepared on a basis that assumes that the Company will continue as a going concern, and do not include any adjustments that may result from the outcome of this uncertainty.

This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of the Company’s liabilities and commitments in the normal course of business and does not include any adjustments to reflect the possible future effects of the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Since inception, the Company has incurred

The Company believes that its current capital resources are not sufficient to meet its obligations and fund operations through at least the next 12 months from the date the accompanying financial statements are issued.

The Company will be required to raise additional capital to meet its operating, debt and settlement obligations coming due.

The Company cannot be certain that additional funding will be available on acceptable terms, or at all.

To the extent that the Company raises additional funds by issuing equity securities, its stockholders may experience significant dilution.

Any debt financing, if available, may involve restrictive covenants that impact the Company’s ability to conduct business.

If the Company is unable to raise additional capital when required or on acceptable terms, the Company will be required to take action to address the Company’s liquidity needs, which may include significantly scaling back or discontinuing the commercialization of Jeuveau ® , or relinquish or otherwise dispose of rights to Jeuveau ® on unfavorable terms.

These factors raise substantial doubt about the Company’s ability to continue as a going concern.

Since inception, the Company has incurred recurring net operating losses and negative cash flows from operating activities and management expects operating losses and negative cash flows to continue for at least the next 12 months.

As of December 31, 2020, the Company had $ 102,562 in cash and cash equivalents plus $ 5,000 in short-term investments and an accumulated deficit of $ 376,072 .

On January 4, 2021, the Company and Oxford Finance LLC (“Oxford”) entered into an agreement, pursuant to which the Company paid Oxford $ 76,447 to pay off the Oxford Term Loan.

Oxford Term Loan for additional information.

On February 18, 2021, the Company, Medytox, Inc.

(“Medytox”), Allergan, Inc.

and Allergan Limited (together, “Allergan”) entered into settlement agreements in connection with the International Trade Commission (“ITC”) action, for which the Company agreed to pay $ 15,000 in 2021, $ 15,000 in 2022 and $ 5,000 in 2023 with additional terms including specified royalty payments as described below and in Note 9.

Commitments and Contingencies —Legal Proceedings.

Additionally, the Company is obligated to pay the Evolus Founders the promissory note of $ 20,000 in November 2021.

Related Party Transactions for more information.

On December 16, 2020, the ITC issued its final determination in the ITC Action (as defined in Note 9.

Commitments and Contingencies) .

The final determination partially affirmed the ALJ’s ruling in the initial determination that found a violation of Section 337 of the Tariff Act of 1930 had occurred by reason of a misappropriation of certain manufacturing process trade secrets.

The ITC also reversed the ALJ’s finding that a trade secret exists with respect to a bacterial strain.

As a result, the ITC issued (1) a limited exclusion order prohibiting the importation of Jeuveau ® into the United States for a period of 21 months and (2) a cease and desist order preventing the Company from, among other things, selling, marketing, or promoting such imported Jeuveau ® in the United States for a period of 21 months (collectively, the “Remedial Orders”).

The Final Determination was subject to a 60-day presidential review period before taking effect.

During the presidential review period, the Company was permitted to continue importation and sales of Jeuveau ® subject to payment of a bond.

Effective February 18, 2021, the Company, Medytox and Allergan entered into certain agreements in connection with the settlement of certain claims relating to or arising from the Remedial Orders, the ITC Investigation, the California Litigation, the Korea Actions (as each of such terms are defined in Note 9 ) and certain other matters related thereto.

On March 23, 2021, the Company and

Notes to Financial Statements

(in thousands, except share and per share data)

recurring net operating losses, which include operating losses of $90,034 and $46,867 for the years ended December 31, 2019 and 2018 , respectively.

Additionally, the Company used $93,383 and $25,667 in cash for operations in the years ended December 31, 2019 and 2018 , respectively.

Management expects operating losses and negative cash flows to continue for at least the next 12 months.

As of December 31, 2019 , the Company had $109,892 in cash and cash equivalents plus $19,911 in short-term investments and an accumulated deficit of $213,059 .

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 and 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, ca sh equivalents and short-term investments, are sufficient to fund operations through at least the next twelve months from the date the accompanying financial statements are issued based on the expected cash burn rate.

The Company may be required to raise additional capital to fund future operations through the 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.

Summary of Significant Accounting Policies

Daewoong entered into certain agreements in connection with the ITC Action, the California Litigation, the Korea Action and the Medytox/Allergan Settlement Agreements (as each of such terms are defined in Note 9 ).

Commitments and Contingencies —Legal Proceedings for additional information.

The COVID-19 outbreak that was first detected in Wuhan, China, in December 2019, 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.

In an effort to reduce operating expenses and conserve cash resources, the Company separated approximately 100 employees, temporarily reduced executive salaries and Board of Directors fees and reduced the size of its Board of Directors by two members during the year ended December 31, 2020.

The accompanying financial statements as of December 31, 2020 have been prepared under the assumption that the Company will continue as a going concern for the next 12 months, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

The Company’s ability to continue as a going concern is dependent upon its ability to obtain additional equity or debt financing, attain further operating efficiencies, reduce expenditures, and, ultimately, to generate sufficient revenue.

The accompanying financial statements as of December 31, 2020 did not include any adjustments that might result from the outcome of this uncertainty.

Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Reclassification

Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements.

These reclassifications had no effect on the previously reported net loss.

Use of Estimates

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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 Pharmaceuticals Co.

(“Daewoong”) entered into the Daewoong Agreement, pursuant to which, the Company has the exclusive distribution license to Jeuveau ® from Daewoong for aesthetic indications in the United States, European Union, Great Britain, Canada, Australia, Russia, Commonwealth of Independent States, and South Africa, as well as co-exclusive distribution rights with Daewoong in Japan.

(“Daewoong”) entered into an agreement (“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, Great Britain, 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.

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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.

Commitments and Contingencies for additional information regarding such litigation.

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

Notes to Financial Statements

(in thousands, except share and per share data)

Agreement, and Daewoong’s rights relating to Jeuveau ® , are subject to litigation.

See Note 7 , Commitments and Contingencies for additional information regarding such litigation.

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 subject to risks common to early stage companies in the pharmaceutical industry including, but not limited to, dependency on the clinical and commercial success of Jeuveau ® and any future product candidates, ability to obtain and maintain regulatory approval of Jeuveau ® and any future product candidates in the jurisdictions where approval is sought, the need for additional financing to achieve its goals, uncertainty of broad adoption of its approved products, if any, by physicians and patients, significant competition and untested manufacturing capabilities.

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 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

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Purchase premiums and discounts are recognized in interest expense using the effective interest method over the terms of the securities.

Realized gains and losses and declines in fair value that are deemed to be other than temporary are reflected in the statements of operations and comprehensive loss using the specific-identification method.

Realized gains and losses and declines in fair value that are

Notes to Financial Statements

(in thousands, except share and per share data)

deemed to be other than temporary are reflected in the 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.

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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 any periods presented.

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.

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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.

Notes to Financial Statements

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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 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.

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.

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Changes in the useful life are adjusted prospectively by revising the remaining period over which the asset is amortized.

There was no impairment of long-lived assets for any periods presented.

In accordance with Accounting Standards Update (“ASU”) No.

2016-02 as adopted on January 1, 2019, at the inception of a contractual arrangement, the Company determines whether the contract contains a lease by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset in exchange for consideration over a period of time.

There was no material impairment of long-lived assets for any periods presented .

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.

1 unchanged sentence

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

Operating lease ROU assets also include any lease payments made at or before lease commencement and exclude any lease incentives received, if any.

The Company determines the lease term as the noncancellable period of the lease and may include options to extend or terminate the lease

Notes to Financial Statements

(in thousands, except share and per share data)

any lease payments made at or before lease commencement and exclude any lease incentives received, if any.

The Company determines the lease term as the noncancellable period of the lease and may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options.

when it is reasonably certain that the Company will exercise such options.

The Company’s leases do not contain any residual value guarantees.

2 unchanged sentences

There were no significant finance leases as of December 31, 2020.

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.

Contingent Payment Obligation Payable to the Evolus Founders

On February 12, 2018, related to the acquisition of Evolus in 2013 by SCH and Alphaeon, the Company recognized a contingent royalty obligation payable to the Evolus Founders.

See Note 11 , Related Party Transactions for more information.

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 this contingent royalty obligation are determined at each reporting period end and recorded in operating expenses in the statements of operations and comprehensive loss and as a liability in the balance sheets.

Changes in the fair value of the contingent royalty obligation payable are determined at each reporting period end and recorded in operating expenses in the accompanying statements of operations and comprehensive loss and as a liability in the accompanying balance sheets.

Contingent Promissory Note Payable to Evolus Founders

On February 12, 2018, related to the acquisition of Evolus in 2013 by SCH and Alphaeon (See Note 11 , Related Party Transactions for more information), the Company recognized a contingent promissory note payable at present value using a discount rate for similar rated debt securities based on an estimated date that the Company believed the contingent promissory note will mature.

Discount amortization related to the contingent promissory note is recorded in interest expense in the statement of operations and comprehensive loss with a corresponding increase to the non-current liabilities in the balance sheets.

On February 12, 2018, the Company recognized a contingent promissory note payable at present value using a discount rate for similar rated debt securities based on an estimated date that the Company believed the contingent promissory note will mature.

Discount amortization related to the contingent promissory note is recorded in interest expense in the accompanying statements of operations and comprehensive loss with a corresponding increase to the non-current liabilities in the accompanying balance sheets.

Long-term Debt

Long-term debt represents the debt balance with Oxford Finance (“Oxford”), net of debt issuance costs.

See Note 6, Oxford Term Loans for more information.

Long-term debt represents the debt balance with Oxford (see Note 6.

Oxford Term Loan ) and the Daewoong Convertible Note (as defined in Note 7.

Daewoong Convertible Note ) , 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.

Debt discounts and issuance costs are amortized into interest expense over the term of the debt.

Revenue Recognition

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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.

Notes to Financial Statements

(in thousands, except share and per share data)

The Company currently 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.

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.

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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 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.

Notes to Financial Statements

(in thousands, except share and per share data)

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.

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Revenue from services is recognized in the period the service is performed for the amount of consideration expected to be received.

For the year ended December 31, 2019 , the Company recognized $688 of revenue related to Canada sales.

For the year ended December 31, 2020 and 2019, the Company recognized $ 738 and $ 688 of revenue related to Canada sales.

Disaggregation of Revenue

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Gross-to-Net Revenue Adjustments

The Company provides customers with trade and volume discounts and prompt pay discounts that are reflected in the invoice price.

Revenues are recorded net of sales-related adjustments, wherever applicable, for rebates and coupon programs.

Accrued rebate and coupon balances are recorded in accrued expenses on the accompanying balance sheets.

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 purchase volumes.

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.

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The coupons are accrued based on estimated redemption rates and the volume of products purchased and are recorded as a reduction to revenues on product delivery.

As of December 31, 2019 , the accrued volume-based rebate and coupon liability was $1,709 .

For the year ended December 31, 2019 , provisions for rebate and coupon programs were $12,325 , which were offset by related payments of $10,616 .

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 December 31, 2020 and 2019, the accrued revenue contract liabilities, primarily related to volume-based rebates, coupons and consumer loyalty program, were $ 3,081 and $ 1,709 , respectively, which were recorded in the accrued expenses in the accompanying balance sheets.

For the years ended December 31, 2020 and 2019, provisions for rebate, coupon and consumer loyalty programs were $ 16,896 and $ 12,325 , respectively, which were offset by related payments, redemptions and adjustments of $ 15,524 and $ 10,616 , respectively.

Contract balances

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Amounts are recorded as accounts receivable when the Company’s right to consideration becomes unconditional.

As payment terms are short-term, the Company does not have any significant financing components in customer contracts given the expected time between transfer of the promised products and the payment of the associated consideration is less than one year.

As of December 31, 2019 , all amounts included in accounts receivable, net on the accompanying balance sheets are related to contracts with customers.

The Company did not have any contract assets nor unbilled receivables as of December 31, 2019 .

The Company does not have any significant financing components in customer contracts given the expected time between transfer of the promised products and the payment of the associated consideration is less than one year.

As of December 31, 2020 and 2019, all amounts included in accounts receivable, net on the accompanying balance sheets are related to contracts with customers.

The Company did not have any contract assets nor unbilled receivables as of December 31, 2020 or 2019.

Sales commissions are included in selling, general and administrative expenses when incurred.

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(in thousands, except share and per share data)

Contract liabilities reflect estimated amounts that the Company is obligated to pay to customers or patients under the rebate and coupon programs.

The Company’s contract liabilities are included in accounts payable and accrued expenses in the accompanying balance sheets.

During the year ended December 31, 2019 , the Company did not recognize any revenue related to changes in transaction prices regarding its contracts with customers and did not recognize any material changes in revenue related to amounts included in contract liabilities at the beginning of the period.

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 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 years ended December 31, 2020 and 2019, the Company did not recognize any revenue related to changes in transaction prices regarding its contracts with customers and did not recognize any material changes in revenue related to amounts included in contract liabilities at the beginning of the period.

Collectability

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The Company writes off accounts receivable balances when it is determined that there is no possibility of collection.

As of December 31, 2019 , allowance for doubtful accounts was $387 .

For the year ended December 31, 2019 , provision for bad debts was $387 and there were no write-offs.

As of December 31, 2020 and 2019, allowance for doubtful accounts was $ 2,118 and $ 387 , respectively.

For the years ended December 31, 2020 and 2019, provision for bad debts was $ 2,066 and $ 387 , respectively, and write-offs were $ 335 and $ 0 , respectively.

Practical Expedients

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These costs are recorded within selling, general and administrative expenses in the accompanying statements of operations and comprehensive loss.

The Company does not adjust the amount of promised consideration for the effects of the time value of money for contracts in which the anticipated period between when the Company transfers the goods or services to the customer and when the customer pays is within one year.

Research and Development Expenses

Research and development costs are expensed as incurred.

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 December 31, 2020, all separations were completed and for the year ended December 31, 2020, the Company recorded $ 2,956 of termination benefits as restructuring costs within operating expenses on the accompanying statements of operations and comprehensive loss.

Litigation Settlement

On February 18, 2021, upon entering into certain agreements in connection with the settlement of claims relating to certain intellectual property disputes relating to Jeuveau ® (See Note 9.

Commitments and Contingencies ), the Company agreed to pay to Allergan and Medytox $ 35,000 in multiple payments over two years and issued 6,762,652 shares 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 certain 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 will be made quarterly.

Notes to Financial Statements

(in thousands, except share and per share data)

The settlement agreements resulted in an $ 83,421 charge for the year ended December 31, 2020, which consisted of $ 35,000 in cash payments and $ 48,421 from the issuance of 6,762,652 shares of the Company’s common stock in February 2021 and was recorded as litigation settlement expenses in the accompanying statements of operations and comprehensive loss.

The related current liability of $ 63,421 and non-current liability of $ 20,000 were recorded in the accompanying balance sheets as of December 31, 2020.

The royalty payments are recorded as cost of sales in the accompanying statements of operations and comprehensive loss at the time the corresponding sales are recognized starting on December 16, 2020.

Stock-Based Compensation

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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 of the grant date of the Company’s common stock.

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.

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Under this method, deferred tax assets and liabilities are determined on the basis of differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

Prior to the IPO, the Company calculated its income tax amounts using a separate return methodology and presented these amounts as if it were a separate taxpayer from Alphaeon in each jurisdiction.

Subsequent to the IPO, the Company has prepared its stand-alone tax return.

Notes to Financial Statements

(in thousands, except share and per share data)

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.

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In addition, the calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations.

The Company recognizes liabilities for uncertain tax positions based on a two-step process.

The Company recognizes liabilities for uncertain tax positions

Notes to Financial Statements

(in thousands, except share and per share data)

based on a two-step process.

The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any.

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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 years ended December 31, 2019 and 2018 , excluded from the dilutive net loss per share computation were stock options of 3,977,401 and 3,257,801 , respectively, and non-vested RSUs of 179,758 and 221,292 , respectively, because their inclusion would have been anti-dilutive.

Diluted earnings per share includes the effect from potential issuance of ordinary shares, such as shares issuable pursuant to the exercise of stock options, the vesting of restricted stock units and the conversion of the Daewoong Convertible Note.

The dilutive effect of stock options and restricted stock units is computed under the treasury stock method.

The dilutive effect of the Daewoong Convertible Note is computed under the if-converted method.

Potentially dilutive securities are excluded from the computations of diluted net loss per share if their effect would be antidilutive.

For the years ended December 31, 2020 and 2019, excluded from the dilutive net loss per share computation were stock options of 4,407,498 and 3,977,401 , respectively, non-vested RSUs of 1,173,741 and 179,758 , respectively, and 3,076,923 shares and 0 shares issuable upon conversion of the Daewoong Convertible Note, respectively, because their inclusion would have been anti-dilutive.

Although these securities were anti-dilutive for these periods, they could be dilutive in future periods.

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Recently Adopted Pronouncements

In August 2018, the SEC adopted the final rule under SEC Release No.

33-10532, Disclosure Update and Simplification , amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded.

In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements.

Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate statement.

The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed.

This final rule

Notes to Financial Statements

(in thousands, except share and per share data)

was effective on November 5, 2018 and it did not have a material impact on the Company’s financial statements upon adoption on January 1, 2019.

In July 2018, the Financial Accounting Standards Board (the “FASB”) issued ASU No.

2018-09, Codification Improvements , which clarifies certain amendments to guidance that may have been incorrectly or inconsistently applied by certain entities and includes Amendments to Subtopic 718-740, Compensation - Stock Compensation - Income Taxes.

The guidance in paragraph 718-740-35-2, as amended by the amendments in ASU 2016-09, Compensation - Stock Compensation (Topic 718):

Improvements to Employee Share-Based Payment Accounting, is unclear on whether an entity should recognize excess tax benefits (or tax deficiencies) for compensation expense that is taken on the entity’s tax return.

The amendment to paragraph 718-740-35-2 in this update clarified that an entity should recognize excess tax benefits in the period in which the amount of deduction is determined.

The Company adopted the guidance on January 1, 2019, and such adoption did not have a material impact on its financial statements.

In February 2016, the FASB issued ASU No.

2016-02 and its related amendments which introduced Leases (Topic 842, or “ASC 842” ) , a new comprehensive lease accounting model that superseded the lease guidance under Leases (Topic 840) .

The new accounting standard required lessees to recognize ROU assets and corresponding lease liabilities for all leases with lease terms of greater than 12 months.

It also changed the definition of a lease and expanded the disclosure requirements of lease arrangements.

In July 2018, the FASB added a transition option for implementation that allowed companies to continue to use the legacy guidance in ASC 840, Leases , including its disclosure requirements, in the comparative periods presented in the year of adoption.

The Company adopted the guidance effective January 1, 2019.

The Company elected the transition package of three practical expedients and elected the optional transition method that allowed for a cumulative-effect adjustment in the period of adoption without a restatement of prior periods.

Further, the Company elected a short-term lease exception policy, permitting the Company to not apply the recognition requirements of this standard to short-term leases (i.e.

leases with terms of 12 months or less) and an accounting policy to account for lease and non-lease components as a single component for certain classes of assets.

As a result of the adoption, the Company adjusted its beginning balance of 2019 by recording operating lease ROU assets and liabilities through a cumulative-effect adjustment.

The adoption impacted the accompanying balance sheet, but did not have an impact on the statements of operations and comprehensive loss.

The impact of the adoption of ASC 842 on the accompanying balance sheet as of January 1, 2019 was as follows:

December 31, 2018

Adjustments Due to the Adoption of ASC 842

January 1, 2019

Operating lease right-of-use assets

Current portion of operating lease liabilities

Operating lease liabilities

Deferred rent

Recent Pronouncements Not Yet Adopted

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 No.

2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, 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

Notes to Financial Statements

(in thousands, except share and per share data)

previously written off and expected to be written off.

The guidance is effective for interim and annual reporting periods beginning after December 15, 2019 for public business entities, excluding entities eligible to be smaller reporting companies, and early adoption is permitted.

As a smaller reporting company, the guidance will be effective for the Company during the first quarter of 2023.

The Company is in the process of determining the effects adoption will have on its financial statements.

In August 2018, the FASB issued ASU No.

2018-15, Intangibles-Goodwill and Other-Internal-Use Software:

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract .

ASU 2018-15 requires implementation costs incurred by customers in cloud computing arrangements (i.e., hosting arrangements) to be capitalized under the same premises of authoritative guidance for internal-use software, and deferred over the 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 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 period, and such adoption did not have a material impact on its financial statements.

Recent Accounting Pronouncements Issued But Not Adopted

In January 2017, the FASB issued ASU No.

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The impairment charge will be limited to the amount of goodwill allocated to that reporting unit.

The update is effective for the Company beginning January 1, 2023.

As amended by ASU 2019-10, the updated guidance is effective for the

Notes to Financial Statements

(in thousands, except share and per share data)

Company as a smaller reporting company beginning January 1, 2023.

The standard requires prospective application.

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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 August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820):

Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement.

The guidance is effective for interim and annual reporting periods during the year ending December 31, 2020.

Early adoption is permitted.

The Company does not expect adoption of this guidance will have a material impact to its financial statements.

In August 2018, the FASB issued ASU No.

2018-15, Intangibles-Goodwill and Other-Internal-Use Software:

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract .

ASU 2018-15 requires implementation costs incurred by customers in cloud computing arrangements (i.e., hosting arrangements) to be capitalized under the same premises of authoritative guidance for internal-use software, and deferred over the noncancellable term of the cloud computing arrangements plus any option renewal periods that are reasonably certain to be exercised by the customer or for which the exercise is controlled by the service provider.

The guidance is effective for interim and annual reporting periods during the year ending December 31, 2020.

Early adoption is permitted.

The Company does not expect adoption of this guidance will have a material impact to its financial statements.

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments , which modifies the measurement and recognition of credit losses for most financial assets and certain other instruments.

The new 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 .

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.

In December 2019, the FASB issued ASU No.

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The Company is currently evaluating the impact this change will have on its financial statements.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the SEC did not, or are not believed by management to, have a material impact on the Company’s present or future financial position, results of operations or cash flows.

Fair Value Measurements and Short-Term Investments

Short-Term Investments

The Company did not have any short-term investments for the year ended December 31, 2018 .

As of December 31, 2019 , all of the Company’s investments had remaining maturities of less than 12 months.

The following is a summary of the Company’s short-term investments, considered available-for-sale, as of December 31, 2019 :

Gross Unrealized

As of December 31, 2020 and 2019, all of the Company’s investments had remaining maturities of less than 12 months.

The following is a summary of the Company’s short-term investments, considered available-for-sale:

As of December 31, 2020

Amortized Gross Unrealized Estimated

Cost Gains Losses Fair Value

Available-for-sale securities

U.S treasury securities $ 5,000 $ — $ — $ 5,000

As of December 31, 2019

Amortized Gross Unrealized Estimated

Cost Gains Losses Fair Value

Available-for-sale securities

U.S treasury securities $ 19,905 $ 6 $ — $ 19,911

As of December 31, 2020, no investments had been in a continuous unrealized loss position for more than 12 months, and the Company did no t record any other-than-temporary impairments on these securities.

Notes to Financial Statements

(in thousands, except share and per share data)

As of December 31, 2019 , no investments had been in a continuous unrealized loss position for more than 12 months, and the Company did no t record any other-than-temporary impairments on these securities.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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As of December 31, 2020

Fair Value Level 1 Level 2 Level 3

Available-for-sale debt securities

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As of December 31, 2019

Fair Value Level 1 Level 2 Level 3

Available-for-sale debt securities

U.S treasury securities $ 19,911 $ 19,911 $ — $ —

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 year ended December 31, 2020.

The Company determines the fair value of the contingent royalty obligation payable based on Level 3 inputs using a discounted cash flow method.

The significant unobservable input assumptions that can significantly change the fair value include (i) timing of regulatory approvals of Jeuveau ® , (ii) projected and timing of net revenues during the payment period, which terminates in the quarter following the 10 -year anniversary of the first commercial sale of Jeuveau ® in the United States, (iii) the discount rate and (iv) the timing of payments.

The Company determines the fair value of the contingent royalty obligation payable to Evolus Founders based on Level 3 inputs using a discounted cash flow method.

The significant unobservable input assumptions that can significantly change the fair value include (i) projected amount and timing of net revenues during the payment period, which terminates in the quarter following the 10 -year anniversary of the first commercial sale of Jeuveau ® in the United States, (ii) the discount rate and (iii) the timing of payments.

During the years ended December 31, 2020 and 2019, the Company utilized discount rates between 13.0 % and 20.0 %, reflecting changes in the Company’s risk profile.

Net revenue projections were also updated to reflect changes in the timing of regulatory approval and expected sales.

Net revenue projections were also updated to reflect changes in the timing of expected sales.

Significant increases (decreases) in discount rate would result in a significantly lower (higher) fair value measurement, which could impact materially the fair value reported on the balance sheet.

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Fair value, beginning of period $ 44,683 $ 50,200

Assumption of the royalty obligation payable to Evolus Founders

Payments ( 1,131 ) ( 9,677 )

Change in fair value recorded in operating expenses ( 2,007 ) 4,160

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The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates their fair value because of the short-term maturity of such instruments.

The Company estimates the fair value of contingent promissory note payable to the Evolus Founders, long-term debt and operating lease liabilities using the discounted cash flow analysis based on the interest rates for similar rated debt securities

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 December 31, 2020, the fair value of the contingent promissory note and long-term debt was estimated to be

Notes to Financial Statements

(in thousands, except share and per share data)

As of December 31, 2019 , the fair value of contingent promissory note and long-term debt was estimated to be $16,696 and $76,203 , respectively.

The fair value of operating lease liabilities at December 31, 2019 approximated their carrying value.

As of December 31, 2018 , the fair value of contingent promissory note was $17,181 .

$ 19,284 and $ 76,368 , respectively.

As of December 31, 2019, the fair value of the contingent promissory note and long-term debt was estimated to be $ 16,696 and $ 76,203 , respectively.

The fair value of operating lease liabilities as of December 31, 2020 and 2019 approximated their carrying value.

Goodwill and Intangible Assets

The table below shows the weighted-average life, original cost, accumulated amortization and net book value by major intangible asset classification:

Weighted-Average Life (Years)

Original Cost

Accumulated Amortization

Net Book Value

As of December 31, 2020

Weighted-Average Life (Years) Original Cost Accumulated Amortization Net Book Value

Definite-lived intangible assets

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Indefinite-lived intangible asset

Total as of December 31, 2019

Weighted-Average Life (Years)

Original Cost

Accumulated Amortization

Net Book Value

Indefinite-lived intangible assets

Total as of December 31, 2018

________________________

Goodwill * 21,208 — 21,208

Total $ 86,965 $ ( 10,460 ) $ 76,505

As of December 31, 2019

Weighted-Average Life (Years) Original Cost Accumulated Amortization Net Book Value

Definite-lived intangible assets

Distribution right 20 $ 59,076 $ ( 2,679 ) $ 56,397

Capitalized software 2 4,415 ( 1,174 ) 3,241

Intangible assets, net 63,491 ( 3,853 ) 59,638

Indefinite-lived intangible asset

Goodwill * 21,208 — 21,208

Total $ 84,699 $ ( 3,853 ) $ 80,846

* Intangible assets with indefinite lives have an indeterminable average life.

** IPR&D is presented as “intangible assets, net” in the accompanying balance sheets.

The following table outlines the estimated future amortization expense related to intangible assets held as of December 31, 2020 that are subject to amortization:

In connection with the acquisition of the Company by SCH in 2013, the Company recorded goodwill of $21,208 and IPR&D of $56,076 .

The IPR&D recognized represents the license and associated distribution right to develop Jeuveau ® , the initial term of which expires in September 2023 and is automatically extended for unlimited additional three -year terms provided that the Company meets certain performance requirements.

Additionally, pursuant to the Daewoong Agreement, up to $13,500 in additional cash consideration was due to Daewoong based upon the Company’s successful completion of certain technical and sales milestones.

Upon FDA approval of Jeuveau ® on February 1, 2019, the Company paid Daewoong a $2,000 milestone payment which increased the cost basis of the IPR&D, and the IPR&D project was completed and reclassified as a definite-lived distribution right intangible asset, which is amortized on a straight-line basis over the estimated useful life of 20 years .

In connection with EU approval of Jeuveau ® , the Company paid a $1,000 milestone payment to Daewoong in the fourth quarter of fiscal year 2019, which also increased the cost basis of the distribution right.

Thereafter 38,665

Distribution right represents the license and associated distribution right to develop Jeuveau ® , the initial term of which expires in September 2023 and is automatically extended for unlimited additional three-year terms provided that the Company meets certain performance requirements.

Additionally, upon FDA approval of Jeuveau ® on February 1, 2019, the IPR&D project was completed and reclassified as a definite-lived distribution right intangible asset, which is amortized on a

Notes to Financial Statements

(in thousands, except share and per share data)

straight-line basis over the estimated useful life of 20 years.

The Company paid Daewoong a $ 2,000 milestone payment, pursuant to the Daewoong Agreement, which increased the cost basis of the distribution .

In connection with EU approval of Jeuveau ® , the Company paid a $ 1,000 milestone payment to Daewoong in the fourth quarter of fiscal year 2019, which increased the cost basis of the distribution right.

Under the 2021 Daewoong Arrangement (as defined in Note 9.

), there is no additional cash consideration due to Daewoong.

Commitments and Contingencies for additional information.

For the years ended December 31, 2020 and 2019, the Company capitalized $ 2,266 and $ 4,415 , respectively, related to costs of computer software developed for internal use.

The software is amortized over a two-year period using the straight-line method.

For the years ended December 31, 2019 and 2018 , total intangible assets amortization expense of $3,853 and $0 was recorded within depreciation and amortization on the accompanying statements of operations and comprehensive loss, respectively.

For the years ended December 31, 2020 and 2019, total intangible assets amortization expense of $ 3,635 and $ 3,853 , respectively, was recorded within depreciation and amortization on the accompanying statements of operations and comprehensive loss.

Accrued Expenses

1 unchanged sentence

Year Ended December 31,

Accrued professional services

Accrued payroll and related benefits $ 4,076 $ 5,229

Accrued volume-based rebate and coupon liability

Accrued revenue contract liabilities 3,081 1,709

Accrued professional services 895 5,794

Other accrued expenses 1,050 1,228

Notes to Financial Statements

(in thousands, except share and per share data)

Oxford Term Loans

On March 15, 2019, the Company entered into a credit facility of up to $100,000 with Oxford.

Pursuant to the terms of the credit facility, the lender extended term loans (the “Term Loans”), available in two advances, to the Company.

$ 9,102 $ 13,960

Oxford Term Loan

On March 15, 2019, the Company entered into a credit facility of up to $ 100,000 with Oxford (“Loan Agreement”).

Pursuant to the terms of the Loan Agreement, the lender extended term loans (the “Oxford Term Loans”), available in two advances, to the Company.

The first tranche of $ 75,000 was funded on the closing date.

The second tranche of $25,000 may be drawn, at the request of the Company, no later than September 30, 2020, upon achieving specified minimum net sales milestones based on a trailing six -month basis and no event of default.

As of December 31, 2019 , the Company had not yet met the net sales milestone to draw the second tranche.

The second tranche of $ 25,000 could have been drawn, at the request of the Company, no later than September 30, 2020, upon achieving specified minimum net sales milestones based on a trailing six-month basis and no event of default.

The Company did not meet the net sales milestone to draw the second tranche.

The credit facility bears an annual interest rate equal to the greater of 9.5 %, or the 30-day U.S.

Dollar LIBOR rate plus 7.0 %.

The Company agreed to pay interest-only on each tranche funded for the first 36 months until May 2022, which is followed by a 23 -month amortization period.

Notwithstanding the foregoing, if the Company maintains compliance with the specified minimum net sales covenant and meets other conditions during the initial interest-only period, upon the Company’s request, the interest-only period may be extended by an additional 12 months to a total of 48 months followed by an 11 -month amortization period.

Upon the earliest to occur of the maturity date, the acceleration of the term loans, or the prepayment of the term loans, the Company is required to pay to Oxford a final payment of 5.5% of the full principal amount of the term loans funded (“Final Payment”).

The Company may elect to prepay all amounts owed prior to the maturity date, provided that a prepayment fee is also paid, which shall be equal to 3.0% of the amount prepaid if the prepayment occurs on or prior to March 15, 2020, 2.0% of the amount prepaid if the prepayment occurs after March 15, 2020 and on or prior to March 15, 2021, or 1.0% of the amount prepaid if the prepayment occurs thereafter (“Prepayment Fee”).

If the Term Loans are accelerated following the occurrence of an event of default, the Company is required to immediately pay to Oxford an amount equal to the sum of all outstanding principal of the term loans plus accrued and unpaid interest thereon through the prepayment date, the Final Payment, the Prepayment Fee and all other obligations that are due and payable, including payment of Oxford’s expenses and interest at the default rate with respect to any past due amounts.

The credit facility is secured by substantially all of the Company’s assets.

The credit facility includes affirmative and negative covenants applicable to the Company and any subsidiaries it may create in the future.

The affirmative covenants include, among others, covenants requiring the Company to maintain its legal corporate existence and governmental approvals, deliver certain financial reports, maintain insurance coverage and satisfy certain requirements regarding deposit accounts.

The negative covenants include, among others, restrictions on us transferring collateral, incurring additional indebtedness, engaging in mergers or acquisitions, paying dividends or making other distributions, making investments, creating liens, selling assets and suffering a change in control, in each case subject to certain exceptions.

The credit facility also includes events of default, the occurrence and continuation of which could cause interest to be charged at a default interest rate equal to the applicable rate plus 5.0% and Oxford, as collateral agent, with the right to exercise remedies against the Company and the collateral securing the credit facility, including foreclosure against the property securing the credit facility, including the Company’s cash.

These events of default include, among other things, any failure by the Company to pay principal or interest due under the credit facility, a breach of certain covenants under the credit facility, the Company’s insolvency, a material adverse change, the occurrence of any default under certain other indebtedness and one or more judgments against the Company, the institution of certain temporary or permanent relief in connection with pending litigation, or the breach, termination or other adverse events under the Daewoong Agreement.

The Company agreed to pay interest-only for the first 36 months until May 2022, which is 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”).

If the Oxford Term Loan was accelerated following the occurrence of an event of default, the Company was required to immediately pay to Oxford an amount equal to the sum of all outstanding principal of the Oxford Term Loan plus accrued and unpaid interest thereon through the prepayment date, the Final Payment, the Prepayment Fee and all other obligations that were due and payable, including payment of Oxford’s expenses and interest at the default rate with respect to any past due amounts.

The credit facility was secured by substantially all of the Company’s assets.

The credit facility included affirmative and negative covenants applicable to the Company and any subsidiaries it may create in the future.

The affirmative covenants included, among others, covenants requiring the Company to maintain its legal corporate existence and governmental approvals, deliver certain financial reports, maintain insurance coverage and satisfy certain requirements regarding deposit accounts.

The negative covenants included, among others, restrictions on us transferring collateral, incurring additional indebtedness, engaging in mergers or acquisitions, paying dividends or making other distributions, making investments, creating liens, selling assets and suffering a change in control, in each case subject to certain exceptions.

Notes to Financial Statements

(in thousands, except share and per share data)

The credit facility also included events of default, the occurrence and continuation of which could cause interest to be charged at a default interest rate equal to the applicable rate plus 5.0 % and Oxford, as collateral agent, with the right to exercise remedies against the Company and the collateral securing the credit facility, including foreclosure against the property securing the credit facility, including the Company’s cash.

These events of default included, among other things, any failure by the Company to pay principal or interest due under the credit facility, a breach of certain covenants under the credit facility, the Company’s insolvency, a material adverse change, the occurrence of any default under certain other indebtedness and one or more judgments against the Company, the institution of certain temporary or permanent relief in connection with pending litigation, or the breach, termination or other adverse events under the Daewoong Agreement.

As of December 31, 2020, the Company was in compliance with its debt covenants.

At the closing date, the Company incurred $1,094 and $2,205 in debt discounts and issuance costs related to the Term Loans, respectively.

Debt discounts and issuance costs related to the entire Term Loans have been allocated pro rata between the funded and unfunded portions.

Debt discounts and issuance costs allocated to the first tranche of $75,000 have been presented as a deduction to the debt balance and are amortized into interest expense using the effective interest method.

The Final Payment on the first tranche of $75,000 is $4,125 and amortized into interest expense over the life of the term loan.

As of December 31, 2019 , the borrowings outstanding under the Term Loans were classified as long-term debt in the accompanying balance sheets.

Debt discounts and issuance costs associated with the unfunded tranche are deferred as assets until the tranche is drawn and are amortized into interest expense using the straight-line method over the term of the debt.

At the closing date, the Company incurred $ 1,094 and $ 2,205 in debt discounts and issuance costs related to the Oxford Term Loan, respectively.

Debt discounts and issuance costs related to the entire Oxford Term Loan have been allocated pro rata between the funded and unfunded portions.

Debt discounts and issuance costs related to the Oxford Term Loan have been presented as a deduction to the debt balance and are amortized into interest expense using the effective interest method.

The overall effective interest rate was approximately 11.6 % as of December 31, 2020.

On January 4, 2021, the Company and Oxford entered into an agreement (“Payoff Letter”), pursuant to which (i) on January 4, 2021, the Company paid Oxford $ 76,447 to discharge in full all outstanding obligations, included 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 of December 31, 2020 and 2019, the borrowings outstanding under the Oxford Term Loan was classified as current liabilities and long-term debt, respectively, in the accompanying balance sheets.

Daewoong Convertible Note

On July 6, 2020, the Company entered into a Convertible Promissory Note Purchase Agreement with Daewoong for the purchase and sale of a Convertible Promissory Note for the principal amount of $ 40,000 (the “Daewoong Convertible Note”), which was funded on July 30, 2020.

Additionally, on July 6, 2020, the Company, Daewoong and Oxford Finance, LLC entered into a Subordination Agreement pursuant to which the Daewoong Convertible Note is subordinated to the Company’s obligations under that certain Loan and Security Agreement, dated as of March 15, 2019, by and between the Company and Oxford.

The Daewoong Convertible Note bears interest at a rate of 3.0 % payable semi-annually in arrears on June 30th and December 31st of each year and matures on July 30, 2025, subject to earlier conversion as provided below.

Interest is 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 remains outstanding and the Subordination Agreement has not been terminated.

Interest will begin to be paid in cash after the Oxford Term Loan was repaid in full and the Subordination Agreement was terminated on January 4, 2021.

During the term, the Daewoong Convertible Note is convertible at the option of Daewoong beginning 12 months from the date of issuance, subject to certain suspensions of that conversion right in the event of a final determination of the ITC Action resulting in an exclusion order with respect to Jeuveau ® as further set forth in the Daewoong Convertible Note.

The initial conversion price of the Daewoong Convertible Note is $ 13.00 per share, which is subject to adjustment for stock splits, dividends or distributions, recapitalizations, spinoffs or similar transactions.

The Daewoong Convertible Note and the shares of the Company’s common stock issuable upon conversion of the Daewoong Convertible Note have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

Starting 27 months from the date of issuance, the Company may prepay the Daewoong Convertible Note without penalty, provided the Company provides Daewoong with at least ten business days’ written notice during which Daewoong may convert all or any portion of the Daewoong Convertible Note at the conversion price.

Notes to Financial Statements

(in thousands, except share and per share data)

As of December 31, 2019 , the principal amounts of long-term debt maturities during each of the next five fiscal years are as follows:

Total principal payments

Unamortized debt discounts and issuance costs

Long term debt, net of discounts and issuance costs

Commitments and Contingencies

Further, in the event the Company is awarded any recovery pursuant to a final, non-appealable award or judgment issued by a court of competent jurisdiction over the parties, or pursuant to any settlement acceptable in the sole and absolute discretion of each of the Company and Daewoong, for any indemnification or other claim for damages by the Company under the Daewoong Agreement, the amount of Daewoong’s or its affiliate’s indemnification obligation with respect to such award, judgment or settlement shall be reduced on a dollar-for-dollar basis and will be offset by the amount of the then-outstanding principal amount of the Daewoong Convertible Note and any accrued but unpaid interest thereon.

On March 23, 2021, the outstanding principal balance including interest paid in kid that was added to the outstanding principal under the terms of the Daewoong Convertible Note, together with all accrued and unpaid interest thereon, in the amount of $ 40,779 was converted, at the conversion price of $ 13.00 per share, into 3,136,869 shares of the Company’s common stock under the Conversion Agreement.

Such shares of the Company’s common stock were exempt from registration under the Securities Act by virtue of Section 3(a)(9) or Section 4(a)(2) thereof, and no commission or other remuneration was paid in connection with conversion of the Daewoong Convertible Note and any resulting issuance of shares of the Company’s common stock.

After the conversion, shares owned by Daewoong, together with its affiliates and attribution parties, did not exceed 9.99 % of the Company’s then outstanding common shares immediately following such issuance, as required under the terms of the Daewoong Convertible Note.

Commitments and Contingencies for the details of the Conversion Agreement.

As of December 31, 2020, the Company was in compliance with its debt covenants.

Operating Leases

The Company leases office facilities under various operating lease agreements.

The Company’s corporate headquarters is located in Newport Beach, California, in a facility that it subleases under a non-cancelable operating lease for a fixed amount each month.

The sublease for this facility expired on January 20, 2020.

The Company’s corporate headquarters is located in Newport Beach, California, in a facility that it subleased until January 2020 under a non-cancelable operating lease for a fixed amount each month.

On May 15, 2019, the Company entered into a non-cancelable operating lease for the same office facility with the original lessor.

4 unchanged sentences

The lease with the original lessor is a modification of the existing sublease that is not accounted for as a separate contract.

The Company also leases an office facility in Santa Barbara, California, under a non-cancelable operating lease, the payments of which include a three percent annual rent escalation clause that occurs on each June 1 anniversary .

The lease for this facility expires on May 31, 2020 and the Company has an option to extend the term of the lease for an additional 60 months .

The Company also leased an office facility in Santa Barbara, California, under a non-cancelable operating lease, the payments of which included a three percent annual rent escalation clause that occurs on each June 1 anniversary.

The lease for this facility expired on May 31, 2020 and the Company did not extend the term of the lease.

In June 2019, the Company subleased the Santa Barbara, California facility to a third-party for a term starting on June 1, 2019 and expiring on May 31, 2020.

4 unchanged sentences

The Company considers the timing of the renewal period and other economic factors such as the financial implications of a decision to extend or not to extend a lease in determining if the renewal option is reasonably certain to be exercised.

Notes to Financial Statements

(in thousands, except share and per share data)

For the year ended December 31, 2020, the components of operating lease expense and other quantitative information were as follows:

3 unchanged sentences

Short-term operating lease expense 168 85

$ 1,288 $ 1,275

As of December 31,

1 unchanged sentence

Weighted-average discount rate 9.4 % 9.4 %

Notes to Financial Statements

(in thousands, except share and per share data)

Operating lease expenses were included in the selling, general and administration expenses in the accompanying statements of operations and comprehensive loss.

4 unchanged sentences

Present value of operating lease liabilities $ 4,359

As required by the new lease accounting standard, legacy disclosures are provided for periods prior to adoption.

Total rental expense for the year ended December 31, 2018 was $334 .

As of December 31, 2018 , annual future minimum payments under the operating lease agreements with non-cancelable terms greater than one year are as follows:

Commitments and Contingencies

Purchase Commitments

2 unchanged sentences

License and Supply Agreement

Pursuant to the Daewoong Agreement, 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.

The Product is manufactured by Daewoong in a recently constructed 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 held an option to obtain the therapeutic rights to Jeuveau ® in its licensed territories which was held in trust for Alphaeon during the fourth quarter of 2017 for a $2,500 reduction in related party borrowings.

In September 2018, Alphaeon exercised the right to obtain the therapeutic option to Jeuveau ® and remitted the option exercise price directly to Daewoong.

Notes to Financial Statements

(in thousands, except share and per share data)

In connection with the Daewoong Agreement, the Company was obligated to make milestone payments to Daewoong for certain confidential development and commercial milestones associated with Jeuveau ® .

As of December 31, 2019 , Daewoong is eligible to receive remaining contingent milestone payments of up to $10,500 .

In connection with the Daewoong Agreement, the Company was obligated to make future milestone payments to Daewoong for certain confidential development and commercial milestones associated with Jeuveau ® .

As of December 31, 2020, Daewoong is eligible to receive remaining contingent milestone payments of up to $ 10,500 , all of which were cancelled pursuant to the Daewoong Settlement Agreement on March 23, 2021 as described below.

The Daewoong Agreement also includes certain minimum annual purchases the Company is required to make in order to maintain the exclusivity of the license.

The Company may, however, meet these minimum purchase obligations by achieving certain market share in its covered territories.

These potential minimum purchase obligations are contingent upon the occurrence of future events, including receipt of governmental approvals and the Company’s future market share in various jurisdictions.

These potential minimum purchase obligations are contingent upon the

Notes to Financial Statements

(in thousands, except share and per share data)

occurrence of future events, including receipt of governmental approvals and the Company’s future market share in various jurisdictions.

Legal Proceedings

4 unchanged sentences

Medytox Litigation

The Company, Daewoong and other individuals and entities are defendants to a lawsuit brought by Medytox, Inc.

The Company, Daewoong and other individuals and entities were defendants to a lawsuit brought by Medytox, Inc.

(“Medytox”) originally instituted in the Superior Court of the State of California in June 2017.

With specific regard to the Company, Medytox alleges that (i) the Company has violated California Uniform Trade Secrets Act, Cal.

With specific regard to the Company, Medytox alleged that (i) the Company has violated California Uniform Trade Secrets Act, Cal.

Code § 3426 because Daewoong’s alleged knowledge of the misappropriation of certain trade secrets of Medytox is imputed to the Company as a result of the Company’s relationship with Daewoong, (ii) the Company has stolen the botulinum toxin bacterial strain of Medytox through our possession of and refusal to return the botulinum toxin bacterial strain, (iii) the Company has engaged in unlawful, unfair and fraudulent business acts and practices in violation of California Bus.

Code § 17200, including conversion of the botulinum toxin bacterial strain and misrepresentations to the public regarding the source of the botulinum toxin bacterial strain used to manufacture Jeuveau ® , and (iv) the Daewoong Agreement is invalid and in violation of Medytox’s rights (the “Medytox Litigation”).

Medytox seeks, among other things, (i) actual, consequential and punitive damages, (ii) a reasonable royalty, as appropriate, (iii) a declaration that the Daewoong Agreement is void and unenforceable and that Medytox is entitled to disgorgement of all property wrongfully and unjustly retained or acquired by the defendants, including unlawfully gained profits, (iv) injunctive relief prohibiting the Company from using the license under the Daewoong Agreement and distributing Jeuveau ® , and (v) attorneys’ fees and costs.

The Company believes it has meritorious defenses and intends to vigorously defend Medytox’s claims.

The Company is unable to determine the likelihood of success of Medytox’s claims against the Company, and an estimate of the possible loss or range of loss cannot be made.

While the Company is entitled to indemnity under the Daewoong Agreement, the indemnity may not be sufficient.

An adverse ruling by the Superior Court against either us or Daewoong could materially adversely affect the Company’s ability to carry out its business and which would have a material adverse effect on the Company’s business, financial position, results of operations, or cash flows and could also result in reputational harm.

On January 30, 2019, Allergan, plc and Allergan, Inc.

(collectively, “Allergan”) and Medytox filed a complaint against us and Daewoong in the U.S.

International Trade Commission (the “ITC”), containing substantially similar allegations to the Medytox Litigation, specifically that Jeuveau ® is manufactured based on misappropriated trade secrets of Medytox and therefore the importation of Jeuveau ® is an unfair act.

The ITC matter is entitled In the Matter of Certain Botulinum Toxin Products (the “ITC Complaint”).

The ITC instituted an investigation as ITC Inv.

337-TA-1145 (the “ITC Action”).

The ITC Complaint seeks (i) an investigation by the ITC pursuant to Section 337 of the Tariff Act of 1930, (ii) a hearing with the ITC on permanent relief, (iii) issuance of a limited exclusion order forbidding entry of Jeuveau ® into the United States, (iv) a cease and desist order prohibiting Daewoong and us from engaging in the importations, sale for importation, marketing, distribution, offering for sale, the sale after the importation of, or otherwise transferring Jeuveau ® within the United States, (v) a bond issued during the presidential review period, (vi) the return of Medytox’s trade secrets and other confidential information including the alleged stolen botulinum toxin bacterial strain, and (vii) exclusion and cease and desist orders.

Medytox sought, among other things, (i) actual, consequential and punitive damages, (ii) a reasonable royalty, as appropriate, (iii) a declaration that the Daewoong Agreement is void and unenforceable and that Medytox is entitled to disgorgement of all property wrongfully and unjustly retained or acquired by the defendants, including unlawfully gained profits, (iv) injunctive relief prohibiting the Company from using the license under the Daewoong Agreement and distributing Jeuveau ® , and (v) attorneys’ fees and costs.

As a result of the Medytox/Allergan Settlement Agreements as described below, on February 23, 2021, the case was dismissed.

On January 30, 2019, Allergan and Medytox filed a complaint (“ITC Complaint”) against the Company and Daewoong in the U.S.

International Trade Commission (“ ITC”), containing substantially similar allegations to the Medytox Litigation, specifically that Jeuveau ® is manufactured based on misappropriated trade secrets of Medytox and therefore the importation of Jeuveau ® is an unfair act.

The ITC matter, which is referred to herein as the ITC Action, is entitled In the Matter of Certain Botulinum Toxin Products .

On March 6, 2019, the ITC instituted an investigation as ITC Inv.

The ITC Complaint called for an investigation by the ITC Office of Unfair Import Investigations, or OUII, under Section 337 of the Tariff Act of 1930.

The ITC Complaint sought (i) an investigation pursuant to Section 337 of the Tariff Act of 1930, (ii) a hearing with the ITC on permanent relief, (iii) issuance of a limited exclusion order forbidding entry of Jeuveau ® into the United States, (iv) a cease and desist order prohibiting Daewoong and us from engaging in the importations, sale for importation, marketing, distribution, offering for sale, the sale after the importation of, or otherwise transferring Jeuveau ® within the United States, (v) a bond issued during the presidential review period, (vi) the return of Medytox’s trade secrets and other confidential information including the alleged stolen BTX Strain, and (vii) exclusion and cease and desist orders.

On December 16, 2020, the ITC issued its final determination in the ITC Action.

The final determination partially affirmed the Administrative Law Judge’s (“ALJ’s”) ruling in the initial determination that found a violation of Section 337 of the Tariff Act of 1930 had occurred by reason of a misappropriation of certain manufacturing process trade secrets.

The ITC also reversed the ALJ’s finding that a trade secret exists with respect to a bacterial strain.

The Final Determination was subject to a 60-day presidential review period before taking effect.

During the presidential review period, the Company was permitted to continue importation and sales of Jeuveau ® subject to payment of a bond of $ 441.00 for every vial distributed in the United States.

The Presidential review period ended on February 16, 2021.

Notes to Financial Statements

(in thousands, except share and per share data)

Company intends to defend itself vigorously in the proceedings.

In January 2020, the three sets of parties to the ITC Action, (i) the Complainants - Allergan and Medytox, (ii) the Respondents - the Company and Daewoong and (iii) the OUII, each submitted pre-hearing briefs to the Administrative Law Judge assigned to the ITC Action setting forth each party’s positions on the substantive issues prior to the evidentiary hearing.

From February 4-7, 2020, the Administrative Law Judge held an evidentiary hearing on the ITC Action.

An initial determination by the Administrative Law Judge is due by June 5, 2020 and the target date for the final determination by the ITC is October 6, 2020.

An adverse ruling by the ITC against either the Company or Daewoong could result in the imposition of an exclusion order which would bar imports of Jeuveau ® into the United States and a cease and desist order which would bar sales and marketing of Jeuveau ® within the United Sates either of which would materially adversely affect the Company’s ability to carry out its business and which would have a material adverse effect on the Company’s business, financial position, results of operations, or cash flows and could also result in reputational harm.

Even if the Company is successful, the ITC Action may result in reputation damage or other collateral consequences.

the expiration of the presidential review period, the Company filed an emergency motion with the United States Court of Appeals for the Federal Circuit which issued an emergency stay which suspended the execution of the remedial orders pending appeal of the ITC’s decision, briefing for which was to be due by March 5, 2021.

On February 18, 2021, the Company, Medytox and Allergan entered into certain agreements described below (the “Medytox/Allergan Settlement Agreements”) pursuant to which the Company, Allergan and Medytox agreed to rescind the Remedial Orders, dismiss the ITC Action and dismiss any appeal of the ITC Action.

On March 23, 2021, the Company and Daewoong entered into certain agreements described below (the “2021 Daewoong Arrangement”) in connection with the settlement of certain claims relating to or arising from the Remedial Orders, the ITC Action, the California Litigation, the Korea Action and certain other matters.

As of December 31, 2020, the total bond payment was $ 1,350 , which was recorded in prepaid expenses and other current assets in the accompanying balance sheets.

Pursuant to the Medytox/Allergan Settlement Agreements described below, the bond paid will be returned to the Company upon the termination of the ITC Action.

Medytox/Allergan Settlement Agreements

Settlement Agreement

Effective February 18, 2021, the Company, Allergan and Medytox entered into a Settlement and License Agreement (the “U.S.

Settlement Agreement”), pursuant to which, among other things:

(i) Allergan and Medytox agreed to file a petition with the ITC requesting that the ITC rescind the Remedial Orders with respect to the Company;

(ii) Medytox agreed to dismiss the California Litigation;

(iii) the Company, on the one hand, and Medytox and Allergan, on the other hand, agreed to mutually release certain claims they may have against one another and their respective affiliates, (iv) Allergan and Medytox granted to the Company and its agents a license to manufacture and commercialize certain products identified in the U.S.

Settlement Agreement, including Jeuveau ® (the “Licensed Products”), in the United States during the Restricted Period;

(v) the Company agreed to pay to Allergan and Medytox $ 35,000 in multiple payments over two years ;

and (vi) during the Restricted Period, the Company agreed to pay to Allergan and Medytox certain confidential royalties on the sale of Licensed Products, calculated on dollar amount per vial sold of Licensed Product by or on behalf of the Company in the United States.

ROW Settlement Agreement

Effective February 18, 2021, the Company and Medytox entered into a Settlement and License Agreement (the “ROW Settlement Agreement”), pursuant to which, among other things:

(i) the Company and Medytox agreed to mutually release certain claims they may have against one another and their respective affiliates;

(ii) Medytox granted to the Company and its agents a license to manufacture and commercialize the Licensed Products, in Canada, the European Union, Switzerland, member countries and cooperating countries of the European Economic Area, Russia, the Commonwealth of Independent States, South Africa, Australia and Japan (the “ROW Territories”) during the Restricted Period;

(iii) Medytox granted to the Company and its agents a fully paid up license to manufacture and commercialize the Licensed Products in the ROW Territories and the United States from the end of the Restricted Period (the “Medytox License Period”);

(iv) the Company and Medytox agreed to enter into the Share Issuance Agreement (as defined below) pursuant to which the Company would issue 6,762,652 shares (the “Settlement Shares”) of the Company’s common stock, par value $ 0.00001 per share, to Medytox;

(v) the Company and Medytox agreed to enter into the Registration Rights Agreement (as defined below), pursuant to which the Company would grant certain registration rights to Medytox with respect to the Settlement Shares;

(vi) during the Restricted Period, the Company agreed to pay to Medytox a confidential low-double digit royalty on net sales of the Licensed Products sold by or on behalf of the Company in the ROW Territories;

and (vii) during the Medytox License Period, the Company agreed to pay to Medytox a confidential mid-single digit royalty percentage on net sales of the Licensed Products sold by or on behalf of the Company in the United States and the ROW Territories.

Share Issuance Agreement

In connection with the execution of the ROW Settlement Agreement, the Company and Medytox also entered into a Share Issuance Agreement effective February 18, 2021 (the “Share Issuance Agreement”).

Pursuant to the Share Issuance Agreement and subject to the terms and conditions set forth therein, among other things, the Company issued to Medytox the Settlement Shares to enter into the ROW Settlement Agreement and in consideration for Medytox’s representations, warranties, and other agreements set forth in the Share Issuance Agreement.

Subject to certain exceptions, the Settlement

Notes to Financial Statements

(in thousands, except share and per share data)

Shares are subject to a lockup until February 16, 2022, after which time Medytox may dispose of up to 25 % of the Settlement Shares together with an additional 25 % each year thereafter.

All Settlement Shares may be disposed of on or after September 16, 2025.

Registration Rights Agreement

In connection with the execution of the ROW Settlement Agreement, the Company and Medytox also entered into a Registration Rights Agreement effective February 18, 2021 (the “Registration Rights Agreement”).

Pursuant to the Registration Rights Agreement, among other things, the Company agreed, after March 31, 2022, (i) to comply with certain demands by Medytox to register for sale, under the Securities Act, the Settlement Shares, and (ii) to include the Settlement Shares in certain registrations by the Company of its securities for sale under the Securities Act, to the extent requested by Medytox, in each case subject to certain customary conditions, exceptions and limitations as set forth in the Registration Rights Agreement.

In addition, Medytox’s registration rights under the Registration Rights Agreement will terminate at such time that Medytox is able to sell all of the Settlement Shares over a three-month period, or less, pursuant to an exemption to registration under the Securities Act.

2021 Daewoong Arrangement

Daewoong Settlement Agreement

On March 23, 2021, the Company and Daewoong entered into a Confidential Settlement and Release Agreement (the “Daewoong Settlement Agreement”), pursuant to which, among other things:

(i) Daewoong agreed to (a) pay to the Company an amount equal to $ 25,500 , (b) pay certain reasonable legal fees incurred by the Company’s litigation counsel in connection with its defense of the ITC Action (including any appeal of the resulting Remedial Orders), (c) cancel all remaining milestone payments up to $ 10,500 in aggregate, which otherwise are or may become due and payable by the Company pursuant to the Daewoong Agreement, and (d) reimburse the Company certain amounts (calculated on a dollar amount per vials sold basis in the United States) for sales of certain products with respect to which the Company is required to pay Medytox and Allergan royalties pursuant to the U.S.

Settlement Agreement;

and (ii) the Company agreed to (a) release, on behalf of itself and certain of its affiliates and representatives, certain claims they may have against Daewoong or certain of its affiliates and representatives related to the allegations made in or the subject matter of the Medytox/Allergan Actions, or any orders, remedies and losses resulting from the Medytox/Allergan Actions, and (b) coordinate with Daewoong on certain matters related to the Medytox/Allergan Actions.

The rights and obligations of the parties under the Daewoong Settlement Agreement are subject to the parties’ execution and delivery of certain other related agreements, including the Daewoong Agreement Amendment and the Conversion Agreement (as each of such terms are defined below).

Conversion Agreement

In connection with the execution of the Settlement Agreement, the Company and Daewoong also entered into a Convertible Promissory Note Conversion Agreement (the “Conversion Agreement”), pursuant to which, among other things, the parties agreed that (i) the Principal Balance under the Daewoong Convertible Note, together with all accrued and unpaid interest thereon, in the amount of $ 40,779 shall be automatically converted, at the conversion price of $ 13.00 per share, 3,136,869 shares of Common Stock (the “Conversion Shares”);

and (ii) the Daewoong Convertible Note shall be deemed cancelled and satisfied in full in connection with such conversion.

The Company and Daewoong agreed to the conversion and issuance of the Conversion Shares in connection with the Daewoong Settlement Agreement and in consideration for the cancellation of the Daewoong Convertible Note and the other terms set forth in the Conversion Agreement.

The Conversion Shares issued to Daewoong pursuant to the Conversion Agreement were offered and issued in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), set forth under Section 4(a)(2) of the Securities Act relating to sales by an issuer not involving any public offering and in reliance on similar exemptions under applicable state laws.

Daewoong Agreement Amendment

In connection with the execution of the Daewoong Settlement Agreement, on March 23, 2021, the Company and Daewoong also entered into the Third Amendment to the Supply Agreement (the “Daewoong Agreement Amendment”).

Pursuant to the

Notes to Financial Statements

(in thousands, except share and per share data)

Daewoong Agreement Amendment, the parties amended the Daewoong Agreement to, among other things, (i) expand the territory within which the Company may distribute Jeuveau ® to certain countries in Europe, (ii) reduce the period of time with respect to which the Company is required to deliver binding forecasts to Daewoong;

(iii) introduce certain limitations on Daewoong’s ability to convert the Company’s exclusive license for certain territories to a non-exclusive license in the event the Company fails to meet certain minimum purchase requirements for such territory;

(iv) adjust the minimum purchase requirements and reduce the transfer price per vial of Jeuveau ® applicable to various territories, (v) require that any Jeuveau ® supplied by Daewoong match certain shelf-life thresholds, and (vi) prohibit the Company from sharing certain confidential information of Daewoong with Medytox or its affiliates or representatives.

Securities Class Action Lawsuit

On October 16 and 28, 2020, two putative securities class action complaints were filed in the U.S.

District Court for the Southern District of New York by putative Evolus shareholders Armin Malakouti and Clinton Cox, respectively, naming the Company and certain of its officers as defendants.

The complaints assert violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, claiming that the defendants made false and materially misleading statements and failed to disclose material adverse facts related to the Company’s acquisition of the right to sell Jeuveau ® , the ITC Action and risks related to the ITC Action.

The complaints assert a putative class period of February 1, 2019 to July 6, 2020.

The court consolidated the actions on November 13, 2020, under the caption In re Evolus Inc.

Securities Litigation , No.

1:20-cv-08647 (PGG).

Four putative shareholders (or groups of shareholders) have since moved to be appointed lead plaintiff.

Under the court’s November 13, 2020 order, defendants need not move, answer, or otherwise respond to the complaints until 60 days after a lead plaintiff is appointed and files a consolidated, amended complaint.

Shareholder Derivative Lawsuit

On November 27, 2020 and December 2, 2020, two putative Evolus shareholders filed substantially similar shareholder derivative actions in the U.S.

District Court for the Southern District of New York against certain of the Company’s officers and directors as defendants.

The complaints alleged substantially similar facts as those in the Securities Class Action and assert claims for, among other things, breach of fiduciary duty, waste of corporate assets, unjust enrichment, and violations of Section 14(a) of the Exchange Act and for contribution under Sections 10(b) and 21(D) of the Exchange Act.

On December 29, 2020, the plaintiffs filed a joint stipulation to consolidate their actions and on February 5, 2021, the court consolidated the action.

On February 5, 2021, the court consolidated the actions under the caption In re Evolus, Inc.

Derivative Litigation , No.

1:20-cv-09986-PPG, and adjourned defendants’ time to move, answer or otherwise respond to the complains.

On March 8, 2021, the parties filed a stipulation and proposed order to stay the consolidated derivative suit pending the court’s decision on the defendants’ anticipated motion to dismiss the Securities Class Action.

It is possible that additional suits will be filed, or additional allegations will be made by stockholders, with respect to these same or similar or other matters and also naming the Company and/or its officers and directors as defendants.

The Company believes that the complaints are without merit and intends to vigorously defend against it.

However, the outcome of the legal proceeding is uncertain at this point.

Based on information available to the Company at present, management cannot reasonably estimate a range of loss and accordingly has not accrued any liability associated with this action.

Other Legal Matters

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However, the resolution of one or more of the other matters in any reporting period could have a material adverse impact on the Company’s financial results for that period.

Stockholders’ Equity (Deficit)

Convertible Series A Preferred Stock

Prior to IPO, the Company had 2,500,000 shares of Series A preferred stock authorized, of which 1,250,000 were issued and outstanding to Alphaeon.

The number of shares of common stock to which a preferred stockholder was entitled was the product obtained by multiplying the Series A preferred stock conversion rate by the number of shares of preferred stock being converted, subject to adjustments as provided in the amended and restated certificate of incorporation.

In connection with the IPO, all shares of Series A preferred stock were converted into 2,065,875 shares of common stock.

In addition, the Company also amended and restated its certificate of incorporation.

As a result, shares of Series A convertible preferred stock were canceled, with none authorized, issued or outstanding as of December 31, 2019 .

Notes to Financial Statements

(in thousands, except share and per share data)

Stockholders’ Equity

Preferred Stock

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As of December 31, 2020, 33,749,228 shares were issued and outstanding.

Equity Related Transactions

As of February 12, 2018, the Company assumed from Alphaeon the revised payment obligations under the Amended Purchase Agreement of $55,742 (comprised of $39,700 related to the contingent royalty obligation and $16,042 related to the contingent promissory note at that date).

See Note 3 , Fair Value Measurements and Short-Term Investments for more information.

Pursuant to the Amended Purchase Agreement, Alphaeon agreed to offset and reduce the amount of related party borrowings by the estimated value of the revised payment obligations on a dollar-for-dollar basis and pursuant to the services agreement (see Note 11, Related Party Transactions ).

Additionally, the Company paid $5,000 to Alphaeon in satisfaction of a portion of the outstanding related party borrowings (see Note 11 , Related Party Transactions ).

The remaining balance of

Notes to Financial Statements

(in thousands, except share and per share data)

related party borrowings of $13,188 was recharacterized as a capital contribution from Alphaeon pursuant to the services agreement.

2017 Omnibus Incentive Plan and Stock-based Compensation Allocation

On November 21, 2017, t he board of directors and the then-sole stockholder of the Company approved the Company’s 2017 Omnibus Incentive Plan (the “Plan”).

On November 21, 2017, the board of directors and the then-sole stockholder of the Company approved the Company’s 2017 Omnibus Incentive Plan (the “Plan”).

The Plan provides for the grant of incentive options to employees of the Company, and for the grant of nonstatutory options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance stock awards and other forms of stock compensation to the Company’s employees, including officers, directors, consultants and employees of the Company.

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Stock-Based Award Activity and Balances

Options are granted at exercise prices based on the Company’s grant date common share price.

The restricted stock units (“RSUs”) and options generally vest over a one -to four -year period.

There have been no awards granted with performance conditions or market conditions for the period presented.

The options generally have a contractual term of ten years .

The Black‑Scholes option pricing model has various inputs, including the grant date common share price, exercise price, risk‑free interest rate, volatility, expected life and dividend yield.

Options are granted at exercise prices based on the Company’s common stock price on the date of grant.

The options and RSU grants generally vest over a one -to four-year period.

There have been no awards granted with performance conditions or market conditions for the periods presented.

The options have a contractual term of ten years .

The fair value of options is estimated using the Black‑Scholes option pricing model, which has various inputs, including the grant date common share price, exercise price, risk‑free interest rate, volatility, expected life and dividend yield.

The change of any of these inputs could significantly impact the determination of the fair value of the Company’s options as well as significantly impact its results of operations.

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The significant assumptions used in the Black-Scholes option-pricing are as follows:

Determining Fair Value of the Underlying Common Stock.

For options awards granted after the completion of the Company’s IPO, the fair value for its underlying common stock was determined using the fair value of the grant date price as reported on the Nasdaq Global Select Market.

Since the Company’s common stock was not traded in a public stock market exchange prior to the Company’s IPO, prior to such date the Board of Directors considered numerous factors including new business and economic developments affecting the Company and independent appraisals, when appropriate, to determine the fair value of the Company’s common stock.

Independent appraisal reports were prepared using conventional valuation techniques, such as discounted cash flow analyses, from which a discount factor for lack of marketability was applied.

This determination of the fair value of the common stock was performed on a contemporaneous basis.

Prior to the Company’s initial public offering, the Board of Directors determined the Company’s common stock fair market value on as needed basis.

• Expected Volatility.

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The weighted‑average expected term of the Company’s options is approximately six years .

Notes to Financial Statements

(in thousands, except share and per share data)

• Risk‑Free Rate.

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Consequently, the Company uses an expected dividend yield rate of zero .

The weighted-averages for key assumptions used in determining the fair value of stock options granted were as follows:

Notes to Financial Statements

(in thousands, except share and per share data)

The weighted-averages for assumptions used in determining the fair value of stock options granted were as follows:

Year Ended December 31,

61.2 % 59.3 %

Risk-free interest rate

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Dividend yield rate

A summary of stock option activity under the Plan for the year ended December 31, 2019 , is presented below:

Terms (Years)

A summary of stock option activity under the Plan for the year ended December 31, 2020 and 2019, is presented below:

Weighted Average

Average Remaining Aggregate

Stock Exercise Contractual Intrinsic

Options Per Share Terms (Years) Value

Outstanding, December 31, 2018

3,257,801 $ 11.99 9.26 $ 7,119

1,321,451 18.63

( 273,734 ) 9.98

Cancelled/forfeited

( 328,117 ) 15.15

Outstanding, December 31, 2019

3,977,401 14.07 8.51 7,198

1,322,119 8.89

Cancelled/forfeited

( 892,022 ) 15.62

Outstanding, December 31, 2020 4,407,498 $ 12.20 7.66 $ 50

Exercisable, December 31, 2020 1,791,136 $ 12.25 7.06 $ —

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The aggregate intrinsic value of outstanding and exercisable options represents the excess of the fair market value of our common stock over the exercise price of underlying options as of December 31, 2020 and 2019.

The total intrinsic value of options exercised in the years ended December 31, 2019 and 2018 was $2,311 and $0 , respectively.

There were no options exercised in the year ended December 31, 2020.

The total intrinsic value of options exercised in the year ended December 31, 2019 was $ 2,311 .

During the years ended December 31, 2020 and 2019, the Company recorded expenses related to stock options of $ 7,968 and $ 8,302 , respectively.

3 unchanged sentences

(in thousands, except share and per share data)

A summary of RSUs activity under the Plan for the year ended December 31, 2019 , is presented below:

A summary of RSU activity under the Plan for the year ended December 31, 2020 and 2019, is presented below:

Restricted Average

Stock Grant Date

Units Fair Value

Outstanding, December 31, 2018

271,404 $ 16.53

( 25,125 ) 24.81

( 19,409 ) 13.71

Outstanding, December 31, 2019

229,870 15.89

1,301,439 5.88

( 186,870 ) 13.6

( 170,698 ) 7.21

Outstanding, December 31, 2020 1,173,741 $ 6.42

During the years ended December 31, 2020 and 2019, the Company recorded expenses related to restricted stock units of $ 2,615 and $ 1,216 , respectively.

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See Note 4 , Goodwill and Intangible Assets for capitalized software information.

Separation of Service with the Former President and Chief Executive Officer

In May 2018, the Company entered into a separation agreement (the “Separation Agreement”) with its then President and Chief Executive Officer.

Pursuant to the Separation Agreement, the Company modified previously granted stock options resulting in an incremental vesting of 100,424 stock options and related stock-based compensation expense of $451 .

As part of the Separation Agreement, the Company issued 34,602 shares of common stock net of tax withholding for vested restricted stock units.

An additional 50,112 shares of common stock were immediately vested and will be issued in February 2020.

Stock-based compensation expense relating to the issuance of common stock and accelerated vesting was approximately $980 and reflected in selling, general and administrative on the statements of operations and comprehensive loss for the year ended December 31, 2018.

Employee Benefit Plan

The Company maintains a defined contribution 401(k) plan covering substantially all employees.

On July 1, 2019, the Company began providing matching contributions, which totaled $479 for the year ended December 31, 2019 .

Matching contributions totaled $ 524 and $ 479 for the years ended December 31, 2020 and 2019.

Notes to Financial Statements

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Deferred (benefit) provision:

Total deferred (benefit) provision

Total (benefit) provision for income taxes

As of December 31, 2019 , the Company has federal net operating loss (“NOL”) carryforwards of $ 179,589 , which will begin to expire in 2034.

The federal NOLs generated in 2018 and in the subsequent years do not expire.

Total deferred provision (benefit) 25 ( 15,055 )

Total provision (benefit) for income taxes $ 77 $ ( 15,027 )

As of December 31, 2020, the Company has federal net operating loss (“NOL”) carryforwards of $ 246,003 , of which $ 72,579 will begin to expire in 2034.

The federal NOLs generated in 2018 and in the subsequent years in the amount of $ 173,424 have an indefinite carryforward period.

As of December 31, 2020, the Company has state NOL carryforwards of $ 149,110 , which will begin to expire in 2038.

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Operating lease liabilities 1,114 1,274

Accrued legal settlement 21,318 —

Contingent obligation - imputed interest — 199

Other, net 21 12

Valuation allowance ( 78,313 ) ( 36,972 )

Total deferred income tax assets

13,337 14,131

Deferred income tax liabilities:

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Total deferred income tax liabilities

( 13,362 ) ( 14,131 )

Net deferred income taxes

12 unchanged sentences

Change in state tax rate ( 242 ) ( 1,371 )

Officers' compensation 133 —

Stock compensation 616 521

1 unchanged sentence

Promissory note - debt discount ( 145 ) 128

Other, net 117 50

Valuation allowance 41,341 4,691

Income tax provision (benefit)

$ 77 $ ( 15,027 )

Notes to Financial Statements

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The Company’s tax returns for all years since inception are open for audit.

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, increasing the loss carryback period for certain losses to five years and increasing the ability to deduct interest expense, as well as amending certain provisions of the previously enacted Tax Cuts and Jobs Act.

The Company does not believe that the CARES Act will have a material impact on its financial position, results of operations, or cash flows.

On December 27, 2020, the United States enacted the Consolidated Appropriations Act, which extended many of the benefits of the CARES Act that were scheduled to expire.

The Company is evaluating the impact of the Consolidated Appropriations Act on its financial statements and related disclosures.

Related Party Transactions

Services with Alphaeon

Prior to the Company’s IPO in February 2018, the Company had funded its operations primarily through contributions and related party borrowings from Alphaeon.

For 2018, selling, general and administrative expenses included $383 of expenses allocated by Alphaeon.

After completion of the Company’s IPO, Alphaeon did no t incur any administrative or research and development expenses on the Company’s behalf.

In January 2018, the Company entered into a services agreement with Alphaeon, or the services agreement, which became effective upon the Company’s IPO.

The services agreement sets forth certain agreements between Alphaeon and the Company that governs the respective responsibilities and obligations between Alphaeon and the Company as it relates to the services to be performed between them .

The services agreement has a one -year term and thereafter will renew for successive one year terms unless sooner terminated by either party.

In January 2018, the Company entered into a services agreement with Alphaeon Corporation (“Alphaeon”), which is majority-owned by Strathspey Crown Holdings Group, LLC, formerly known as SCH-AEON, LLC, (“SCH”).

Such services agreement became effective upon the Company’s initial public offering (“IPO”).

In 2019 Alphaeon changed its name to AEON Biopharma, Inc.

and contributed all of the shares it held in the Company to Alphaeon 1, LLC.

The Company continues to refer to the renamed AEON Biopharma, Inc.

as “Alphaeon” and Alphaeon 1, LLC as “Alphaeon 1, LLC.” The Services Agreement has a one-year term and thereafter will renew for successive one year terms unless sooner terminated by either party.

The Company or Alphaeon may terminate the Services Agreement upon sixty days ’ notice to the other party.

In accordance with the services agreement, the Company paid Alphaeon $5,000 during the first quarter of 2018, subsequent to the IPO.

There were no significant services provided under the services agreement after the IPO.

There were no significant services provided under the Services Agreement after the Company’s IPO.

As of December 31, 2020 and 2019, Alphaeon owned 25.7 % and 25.8 % of the Company’s outstanding shares of common stock, respectively.

As of December 31, 2020 and 2019, Evolus had no related party accounts receivable or payable with Alphaeon.

Note Obligation

Pursuant to certain debt transactions entered into by Alphaeon in 2016 and 2017 and guaranty provided by the Company, as a co-obligor to these debt obligations, the Company applied the accounting guidance provided in ASC 405-40, Obligations Resulting from Joint and Several Liability Arrangements and recorded a note obligation.

During the first quarter of 2018, Alphaeon issued $800 additional convertible promissory notes, including $24 convertible promissory notes to the Company’s former President and Chief Executive Officer and former member of the board of directors.

As a result of this additional issuance, the total note obligations under all the notes increased to $140,688 ( 2.5 times the total outstanding principal amount of $56,275 ) immediately prior to the IPO.

Approximately $615 in excess of the then balance of additional paid-in capital was recorded in accumulated deficit.

In January 2018 immediately prior to its IPO, the Company recorded an increase of $1,051 in the receivable from Alphaeon with a corresponding increase in additional paid-in capital.

The related party receivable balance increased to $73,690 immediately prior to the IPO.

As of February 12, 2018, the Company was released of the $140,688 note obligation

Notes to Financial Statements

(in thousands, except share and per share data)

for all guaranty and security obligations under the guaranty agreements, and its related party receivable from Alphaeon of $73,690 was settled, resulting in a capital contribution of $66,998 .

Alphaeon’s security interest in Evolus’ assets was also terminated.

Evolus Founders

Certain of the Evolus Founders from whom SCH purchased its equity interests included individuals who were previously employed by the Company in operational roles, including the Company’s former Chief Operating Officer and consultant to the Company through December 31, 2018.

Payment Obligations Related to the Acquisition by Alphaeon

The Company was acquired by SCH in 2013 and subsequently by its subsidiary, Alphaeon Corporation, by means of a stock purchase agreement (“Stock Purchase Agreement”) pursuant to which Alphaeon assumed certain payment obligations related to the acquisition.

On December 14, 2017, the Stock Purchase Agreement was amended (“Amended Stock Purchase Agreement”), and, as a result, effective upon the closing of the Company’s IPO, the Company assumed all of Alphaeon’s payment obligations under the Amended Stock Purchase Agreement.

Under the Amended Stock Purchase Agreement, the payment obligations consisted of (i) a $9,200 up-front payment upon obtaining FDA approval for Jeuveau ® for the treatment of glabellar lines which was paid in full in 2019, (ii) quarterly royalty payments of a low single digit percentage of net sales of Jeuveau ® , and (iii) a $20,000 promissory note that matures in November 2021.

On December 14, 2017, the Stock Purchase Agreement was amended (“Amended

Notes to Financial Statements

(in thousands, except share and per share data)

Stock Purchase Agreement”), and, as a result, effective upon the closing of the Company’s IPO, the Company assumed all of Alphaeon’s payment obligations under the Amended Stock Purchase Agreement.

Under the Amended Stock Purchase Agreement, the payment obligations consisted of (i) a $ 9,200 up-front payment upon obtaining FDA approval for Jeuveau ® for the treatment of glabellar lines which was paid in full during the first quarter of 2019, (ii) quarterly royalty payments of a low single digit percentage of net sales of Jeuveau ® , and (iii) a $ 20,000 promissory note that matures in November 2021.

The payment obligations set forth in (ii) above terminates in the quarter following the 10 -year anniversary of the first commercial sale of Jeuveau ® in the United States.

Under the Amended Stock Purchase Agreement, the Company recorded the fair value of all revised payment obligations and the promissory note owed to the Evolus Founders of $55,742 (comprised of $39,700 related to the contingent royalty obligation payable and $16,042 related to the contingent promissory note) as of February 12, 2018.

Under the Amended Stock Purchase Agreement, the Company recorded the fair value of all revised payment obligations and the promissory note owed to the Evolus Founders.

See Note 3, Fair Value Measurements and Short-Term Investments for more information about the Company’s accounting thereof.

In addition, the outstanding related party borrowings from Alphaeon as of February 12, 2018 were offset and reduced, on a dollar-for-dollar basis, taking into account the then-fair value of all payment obligations the Company assumed from Alphaeon, the fair value of which, as of February 12, 2018, was $55,742 .

Under the Amended Stock Purchase Agreement, Evolus paid one-time bonuses of $ 1,575 to certain current and former employees upon FDA approval of Jeuveau ® in February 2019, including a one-time bonus of $ 700 paid to the Company’s Chief Medical Officer and Head of Research & Development.

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In connection with the Amended Stock Purchase Agreement, the Company entered into a tax indemnity agreement with the Evolus Founders (“Tax Indemnity Agreement”).

Pursuant to the Tax Indemnity Agreement, the Company is obligated to indemnify the Evolus Founders for any tax liability resulting from the Company’s assumption of the revised payment

Notes to Financial Statements

(in thousands, except share and per share data)

obligations under the Amended Stock Purchase Agreement from Alphaeon.

Pursuant to the Tax Indemnity Agreement, the Company is obligated to indemnify the Evolus Founders for any tax liability resulting from the Company’s assumption of the revised payment obligations under the Amended Stock Purchase Agreement from Alphaeon.

Such assumption of the revised payment obligations occurred upon the completion of the IPO.

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Exclusive Distribution and Supply Agreement with Clarion Medical Technologies Inc.

On November 30, 2017, the Company entered into an exclusive distribution and supply agreement (“Distribution Agreement”), with Clarion Medical Technologies Inc.

On November 30, 2017, the Company entered into an exclusive distribution and supply agreement (the “Distribution Agreement”), with Clarion Medical Technologies Inc.

The Distribution Agreement provides terms pursuant to which the Company will exclusively supply Jeuveau ® to Clarion in Canada.

Clarion was previously a wholly-owned subsidiary of Alphaeon.

However, pursuant to previous agreements among Alphaeon, Clarion, and previous equity holders of Clarion, the previous equity holders of Clarion had the option, and have exercised such option, to unwind Alphaeon’s acquisition of Clarion.

As a result, Alphaeon owes the equity holders of Clarion an unwinding fee of $9,600 (“Unwinding Fee”).

However, pursuant to previous agreements among Alphaeon, Clarion, and previous equity holders of Clarion, the previous equity holders of Clarion had the option, and exercised such option, to unwind Alphaeon’s acquisition

Notes to Financial Statements

(in thousands, except share and per share data)

As a result, Alphaeon owes the equity holders of Clarion an unwinding fee of $ 9,550 (the “Unwinding Fee”).

The Distribution Agreement sets forth that a portion of the proceeds received by the Company from each unit of Jeuveau ® purchased by Clarion shall be paid directly to the previous equity holders of Clarion, and will reduce, on a dollar-for-dollar basis, the amount of the Unwinding Fee Alphaeon owes.

In addition, Alphaeon and SCH have agreed with Clarion to pay the unpaid amount of the Unwinding Fee on December 31, 2022, if demanded by the previous equity holders of Clarion.

The service revenue related to the sale of Jeuveau ® through Clarion in 2019 was recorded based on terms that were not in the scope of the Distribution Agreement.

The service revenue related to the sale of Jeuveau ® through Clarion for the years ended December 31, 2020 and 2019 was recorded based on terms that were not in the scope of the Distribution Agreement.

On March 23, 2021, the Company, Clarion, and Daewoong entered into an addendum to the Distribution Agreement to provide for Clarion to purchase Jeuveau ® directly from Daewoong.

The Company’s obligation under the Distribution Agreement to pay to the previous equity holders of Clarion is therefore cancelled.

Instead, the Company receives a payment on per unit basis from Clarion for its purchase of Jeuveau ® from Daewoong.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data