Evolus, Inc. 10-K

Item 8. Financial Statements and Supplementary Data. Evolus, Inc. Index to Financial Statements Page Report of Independent Registered Public Accounting Firm 64 Financial Statements: Balance Sheets 65 Statements of Operations and Comprehensive Loss 66 Statements of Stockholders’ Equity (Deficit) 67 Statements of Cash Flows 68 Notes to Financial Statements 70 63 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Evolus, Inc. Opinion on the Financial Statements We have audited the accompanying balance sheets of Evolus, Inc. (the Company) as of December 31, 2020 and 2019, the related statements of operations and comprehensive loss , stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with U.S. 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 These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2017. Irvine, California March 25, 2021 64 Table of Contents Evolus, Inc. Balance Sheets (in thousands, except par value and share data) December 31, 2020 2019 ASSETS Current assets Cash and cash equivalents $ 102,562 $ 109,892 Short-term investments 5,000 19,911 Accounts receivable, net 9,680 10,661 Inventories 3,354 6,407 Prepaid expenses and other current assets 7,016 5,326 Total current assets 127,612 152,197 Property and equipment, net 1,297 902 Operating lease right-of-use assets 3,414 4,068 Intangible assets, net 55,297 59,638 Goodwill 21,208 21,208 Other assets 240 2,429 Total assets $ 209,068 $ 240,442 LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY Current Liabilities Accounts payable $ 9,615 $ 5,796 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 Contingent royalty obligation payable to Evolus Founders 38,100 41,200 Contingent promissory note payable to Evolus Founders — 17,945 Term loan, net of discounts and issuance costs — 73,508 Convertible note 40,506 — Deferred tax liability 25 — Total liabilities 282,026 160,985 Commitments and contingencies (Note 9) Stockholders’ (deficit) equity Preferred Stock, $ 0.00001 par value; 10,000,000 shares authorized; no shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively — — Common Stock, $ 0.00001 par value; 100,000,000 shares authorized; 33,749,228 and 33,562,665 shares issued and outstanding at December 31, 2020 and December 31, 2019, re spectively 1 1 Additional paid-in capital 303,113 292,509 Accumulated other comprehensive gain — 6 Accumulated deficit ( 376,072 ) ( 213,059 ) Total stockholders’ (deficit) equity ( 72,958 ) 79,457 Total liabilities and stockholders’ (deficit) equity $ 209,068 $ 240,442 See accompanying notes to financial statements. 65 Table of Contents Evolus, Inc. Statements of Operations and Comprehensive Loss (in thousands, except share and per share data) Year Ended December 31, 2020 2019 Revenue: Product revenue, net $ 55,802 $ 34,237 Service revenue 738 688 Total net revenues 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 7,027 4,132 Litigation settlement expenses 83,421 — Restructuring costs 2,956 — Total operating expenses 209,608 133,872 Loss from operations ( 153,068 ) ( 98,947 ) Other income (expense): Interest income 635 1,839 Interest expense ( 10,503 ) ( 7,953 ) Loss before income taxes ( 162,936 ) ( 105,061 ) Income tax expense (benefit) 77 ( 15,027 ) Net loss $ ( 163,013 ) $ ( 90,034 ) Other comprehensive gain: 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. 66 Table of Contents Evolus, Inc. Statements of Stockholders’ (Deficit) Equity (in thousands, except share data) 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 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 Net loss — — — — — — ( 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 in connection with the incentive equity plan — — 186,563 — — — — — Stock-based compensation — — — — 10,604 — — 10,604 Net loss — — — — — — ( 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. 67 Table of Contents Evolus, Inc. Statements of Cash Flows (in thousands) Year Ended December 31, 2020 2019 Cash flows from operating activities Net loss $ ( 163,013 ) $ ( 90,034 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 7,027 4,132 Stock-based compensation 10,584 9,518 Provision for bad debts 2,066 387 Amortization of discount on short-term investments ( 427 ) ( 1,038 ) Amortization of operating lease right-of-use assets 654 873 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 ) Prepaid expenses and other current assets ( 1,690 ) ( 1,874 ) Accounts payable 2,320 183 Accrued expenses ( 4,248 ) 9,583 Accrued settlement expenses 35,000 — Operating lease liabilities ( 734 ) ( 654 ) Other assets 1,497 ( 190 ) Net cash used in operating activities ( 57,871 ) ( 93,383 ) Cash flows from investing activities Purchases of property and equipment ( 815 ) ( 345 ) Additions to capitalized software ( 2,323 ) ( 4,222 ) Purchases of short-term investments ( 74,668 ) ( 113,867 ) Maturities of short-term investments 90,000 95,000 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 ) Proceeds from issuance of long-term debt, net of discounts — 73,906 Payments for debt issuance costs — ( 2,205 ) Payment for debt obligation ( 522 ) ( 1,044 ) Proceeds from follow-on offering, net of underwriting fees — 73,315 Payments for offering costs — ( 203 ) Issuance of common stock in connection with incentive equity plan — 2,455 Net cash provided by financing activities 38,347 133,547 Change in cash and cash equivalents ( 7,330 ) 16,730 Cash and cash equivalents, beginning of period 109,892 93,162 Cash and cash equivalents, end of period $ 102,562 $ 109,892 See accompanying notes to financial statements. 68 Table of Contents Evolus, Inc. Statements of Cash Flows (Continued) (in thousands) Year Ended December 31, 2020 2019 Supplemental disclosure of cash flow information Cash paid for interest $ 7,244 $ 5,166 Cash paid for income taxes $ 65 $ 4 Non-cash investing and financing information: Operating lease right-of-use assets obtained in exchange for operating lease liabilities $ — $ 5,566 Landlord paid tenant improvements $ — $ 781 Financed D & O insurance payment $ — $ 1,561 Capitalized software recorded in accounts payable and accrued expenses $ — $ 87 Accrued offering costs, unpaid $ — $ ( 90 ) See accompanying notes to financial statements. 69 Table of Contents Evolus, Inc. Notes to Financial Statements (in thousands, except share and per share data) Note 1. Description of Business Description of Business Evolus, Inc., (“Evolus” or the “Company”) is a performance beauty company focused on delivering products in the self-pay aesthetic market. The Company received the approval of its first product Jeuveau ® (prabotulinumtoxinA-xvfs) from the U.S. Food and Drug Administration (the “FDA”) in February 2019. The product was also approved by Health Canada in August 2018 and the European Commission (“EC”) in September 2019. Jeuveau ® is a proprietary 900 kDa purified botulinum toxin type A formulation indicated for the temporary improvement in the appearance of moderate to severe glabellar lines, also known as “frown lines,” in adults. The Company commercially launched Jeuveau ® in the United States in May 2019 and in Canada through a distribution partner in October 2019. The Company currently generates all of its net revenues from Jeuveau ® . The Company is headquartered in Newport Beach, California. 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. Liquidity and Financial Condition 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. See Note 6. 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. See Note 13. 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 70 Table of Contents Evolus, Inc. Notes to Financial Statements (in thousands, except share and per share data) 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 ). See 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. Note 2. 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”). Use of Estimates Management is required to make certain estimates and assumptions in order to prepare financial statements in conformity with GAAP. Such estimates and assumptions affect the reported financial statements. The Company’s most significant estimates relate to net revenues, allowance for doubtful accounts, fair value measurements, goodwill and long-lived asset valuations and impairment assessments, inventory valuations, income tax valuations, stock-based compensation and royalty obligations, among others. Management bases estimates on historical experience and on assumptions that management believes are reasonable. The Company’s actual results could differ materially from those estimates. Additionally, the full impact of the COVID-19 outbreak is unknown and cannot be reasonably estimated. However, where possible, management has made appropriate accounting estimates with respect to certain accounting matters, which include the fair value of royalty obligations, allowance for doubtful accounts, inventory valuation and impairment assessments of goodwill and other long-lived assets, based on the facts and circumstances available as of the reporting date. The Company’s future assessment of the magnitude and duration of the COVID-19 outbreak, as well as other factors, could result in material impacts to the Company’s financial statements in future reporting periods. Risks and Uncertainties In 2013, Evolus and Daewoong Pharmaceuticals Co. Ltd. (“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. The Company also has the option to negotiate first with Daewoong to secure a distribution license for any product that Daewoong directly or indirectly develops or commercializes that is classified as an injectable botulinum toxin (other than Jeuveau ® ) in a territory covered by the Daewoong Agreement. The Company relies on Daewoong, its exclusive and sole supplier, to manufacture Jeuveau ® . Any termination or loss of significant rights, including exclusivity, under the Daewoong Agreement would materially and adversely affect the Company’s commercialization of Jeuveau ® . The Daewoong Agreement, and Daewoong’s rights relating to Jeuveau ® , are subject to litigation. See Note 9. 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 71 Table of Contents Evolus, Inc. Notes to Financial Statements (in thousands, except share and per share data) 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 Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker. The Company has determined that it operates in a single operating and reportable segment. The Company’s chief operating decision maker is its Chief Executive Officer who manages operations and reviews the financial information as a single operating segment for purposes of allocating resources and evaluating its financial performance. Concentration of Credit Risk Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, short-term investments and accounts receivable. Substantially all of the Company’s cash is held by financial institutions that management believes are of high credit quality. Such deposits may, at times, exceed federally insured limits. To date, the Company has not experienced any losses associated with this credit risk and continues to believe that this exposure is not significant. The Company invests its excess cash, in line with its investment policy, primarily in money market funds and debt instruments of U.S. government agencies. The Company’s accounts receivable is derived from customers located principally in the United States. Concentrations of credit risk with respect to trade receivables are limited due to the Company’s credit evaluation process. The Company does not typically require collateral from its customers. Credit losses historically have not been material. The Company continuously monitors customer payments and maintains an allowance for doubtful accounts based on its assessment of various factors including historical experience, age of the receivable balances, and other current economic conditions or other factors that may affect customers’ ability to pay. Cash and Cash Equivalents Cash and cash equivalents consist of cash and highly liquid investments with remaining maturities at purchase of three months or less that can be liquidated without prior notice or penalty. Cash and cash equivalents may include deposits, money market funds and debt securities. Amounts receivable from credit card issuers are typically converted to cash within two to four days of the original sales transaction and are considered to be cash equivalents. Short-Term Investments Short-term investments consist of available-for-sale U.S. Treasury securities with original maturities greater than three months and remaining maturities of less than twelve months. These investments are recorded at fair value based on quoted prices in active markets, with unrealized gains and losses reported in other comprehensive gain (loss) in the Company’s statements of operations and comprehensive loss. Purchase premiums and discounts are recognized in interest expense using the effective interest method over the terms of the securities. Realized gains and losses and declines in fair value that are 72 Table of Contents Evolus, Inc. 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. The Company also evaluates whether it has plans or is required to sell short-term investments before recovery of their amortized cost bases. To date, the Company has not identified any other than temporary declines in fair value of its short-term investments. Inventories Inventories consist of finished goods held for sale and distribution. Cost is determined using the first‑in, first‑out method with prioritization of the items with the earliest expiration dates. Inventory valuation reserves are established based on a number of factors including, but not limited to, finished goods not meeting product specifications, product excess and obsolescence, or application of the lower of cost or net realizable value concepts. The determination of events requiring the establishment of inventory valuation reserves, together with the calculation of the amount of such reserves may require judgment. No material inventory valuation reserves have been recorded for the periods presented. Adverse changes in assumptions utilized in the Company’s inventory reserve calculations could result in an increase to its inventory valuation reserves. Fair Value of Financial Instruments Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in an orderly transaction between market participants in a principal market on the measurement date. The fair value hierarchy defines a three-tiered valuation hierarchy for disclosure of fair value measurement is classified and disclosed by the Company in one of the three categories as follows: • Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; • Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly, or can be corroborated by observable market data for substantially the full term of the asset or liability; and • Level 3—Prices or valuation techniques that require inputs that are unobservable that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. 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. 73 Table of Contents Evolus, Inc. Notes to Financial Statements (in thousands, except share and per share data) Goodwill Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in a business combination. The Company reviews goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. The Company performs an annual qualitative assessment of its goodwill in the fourth quarter of each calendar year to determine if any events or circumstances exist, such as an adverse change in business climate or a decline in the overall industry demand, that would indicate that it would more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill. If events or circumstances do not indicate that the fair value of a reporting unit is below its carrying amount, then goodwill is not considered to be impaired and no further testing is required. If further testing is required, the Company performs a two-step process. The first step involves comparing the fair value of the Company’s reporting unit to its carrying value, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step of the test is performed by comparing the carrying value of the goodwill in the reporting unit to its implied fair value. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value. For the purpose of impairment testing, the Company has determined that it has one reporting unit. There was no impairment of goodwill for any of the periods presented. Intangible Assets Upon FDA approval of Jeuveau ® in February 2019, the in process research and development (“IPR&D”) related to Jeuveau ® was evaluated as completed and reclassified to a definite-lived distribution right intangible asset, which is amortized over the period the asset is expected to contribute to the future cash flows of the Company. The Company determined the pattern of this intangible asset’s future cash flows could not be readily determined with a high level of precision. As a result, the distribution right intangible asset is being amortized on a straight-line basis over the estimated useful life of 20 years. The Company capitalizes certain internal-use software costs associated with the development of its mobile and web-based customer platforms. These costs include personnel expenses and external costs that are directly associated with the software projects. These costs are included as intangible assets in the accompanying balance sheets. The capitalized internal-use software costs are amortized on a straight-line basis over the estimated useful life of two years upon being placed in service. The Company reviews long-term and identifiable definite-lived intangible assets or asset groups for impairment when events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset or an asset group, further impairment analysis is performed. An impairment loss is measured as the amount by which the carrying amount of the asset or asset groups exceeds the fair value for assets to be held and used or fair value less cost to sell for assets to be disposed of. The Company also reviews the useful lives of its assets periodically to determine whether events and circumstances warrant a revision to the remaining useful life. Changes in the useful life are adjusted prospectively by revising the remaining period over which the asset is amortized. There was no material impairment of long-lived assets for any periods presented . Leases In accordance with Accounting Standards Codification 842, Leases (“ASC 842”), at the inception of a contractual arrangement, the Company determines whether the contract contains a lease by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset in exchange for consideration over a period of time. If both criteria are met, upon lease commencement, the Company records a lease liability which represents the Company’s obligation to make lease payments arising from the lease, and a corresponding right-of-use (“ROU”) asset which represents the Company’s right to use an underlying asset during the lease term. Operating lease assets and liabilities are included in ROU assets, current portion of operating lease liabilities and noncurrent operating lease liabilities in the accompanying balance sheets. Operating lease ROU assets and lease liabilities are initially recognized based on the present value of the future minimum lease payments over the lease term at commencement date calculated using the Company’s incremental borrowing rate applicable to the underlying asset unless the implicit rate is readily determinable. Operating lease ROU assets also include any lease payments made at or before lease commencement and exclude any lease incentives received, if any. The Company determines the lease term as the noncancellable period of the lease and may include options to extend or terminate the lease 74 Table of Contents Evolus, Inc. Notes to Financial Statements (in thousands, except share and per share data) when it is reasonably certain that the Company will exercise such options. The Company’s leases do not contain any residual value guarantees. Leases with a term of 12 months or less are not recognized on the balance sheets. For operating leases, the Company recognized rent expense on a straight-line basis over the lease term. There were no significant finance leases as of December 31, 2020. Contingent Royalty Obligation Payable to the Evolus Founders The Company determines the fair value of the contingent royalty obligation payable at each reporting period end based on Level 3 inputs using a discounted cash flows method. Changes in the fair value of the contingent royalty obligation payable are determined at each reporting period end and recorded in operating expenses in the accompanying statements of operations and comprehensive loss and as a liability in the accompanying balance sheets. Contingent Promissory Note Payable to Evolus Founders On February 12, 2018, the Company recognized a contingent promissory note payable at present value using a discount rate for similar rated debt securities based on an estimated date that the Company believed the contingent promissory note will mature. Discount amortization related to the contingent promissory note is recorded in interest expense in the 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 (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 amortized into interest expense over the term of the debt. Revenue Recognition The Company applies Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”), to account for revenue generated since the commercial launch of Jeuveau ® in May 2019. The Company recognizes revenue when control of the promised goods or services is transferred to its customers, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for the goods or services. In order to achieve that core principle, a five-step approach is applied: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue allocated to each performance obligation when the Company satisfies the performance obligation. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account for revenue recognition. General The Company generates product revenue from the sale of Jeuveau ® in the United States and service revenue from the sale of Jeuveau ® through a distribution partner in Canada. For product revenue, the Company recognizes revenue when control of the promised goods under a contract is transferred to a customer, in an amount that reflects the consideration the Company expects to receive in exchange for those goods as specified in the customer contract. The transfer of control occurs upon receipt of the goods by the customer since that is when the customer has obtained control of the goods’ economic benefits. The Company does not provide any service-type warranties and does not accept product returns except under limited circumstances such as damages in transit or ineffective product. The Company also excludes any amounts related to taxes assessed by governmental authorities from revenue measurement. Shipping and handling costs associated with outbound product freight are accounted for as fulfillment costs and are included in selling, general and marketing expenses in the accompanying 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 75 Table of Contents Evolus, Inc. Notes to Financial Statements (in thousands, except share and per share data) customer. The indicators of which party exercises control include primary responsibility over performance obligations, inventory risk before the good or service is transferred and discretion in establishing the price. Accordingly, the Company records the sale as service revenue on a net basis. Revenue from services is recognized in the period the service is performed for the amount of consideration expected to be received. For the year ended December 31, 2020 and 2019, the Company recognized $ 738 and $ 688 of revenue related to Canada sales. Disaggregation of Revenue The Company’s disaggregation of revenue is consistent with its operating segment as disclosed above. Gross-to-Net Revenue Adjustments The Company provides customers with discounts, such as trade and volume discounts and prompt pay discounts, that are directly reflected in the invoice price. Revenues are recorded net of sales-related adjustments, wherever applicable, primarily for the volume based rebates, coupon and consumer loyalty programs. • Volume-based Rebates — Volume-based rebates are contractually offered to certain customers. The rebates payable to each customer are determined based on the contract and quarterly purchase volumes. • Coupons — The Company issued customers coupons redeemable into gift cards funded by the Company for the benefit of patients. The coupons are accounted for as variable consideration. The Company estimates the coupon redemption rates based on historical data and future expectations. The coupons are accrued based on estimated redemption rates and the volume of products purchased and are recorded as a reduction to revenues on product delivery. All issued coupons expired on June 30, 2020. • Consumer Loyalty Program — In May 2020, the Company announced the launch of a consumer loyalty program, which allows participating customers to earn rewards for qualifying treatments to their patients (i.e. consumers) using Jeuveau ® and redeem the rewards for Jeuveau ® in the future at no additional cost. The loyalty program represents a customer option that provides a material right and, accordingly, is a performance obligation. At the time Jeuveau ® product is sold to customers, the invoice price is allocated between the product sold and the estimated material right reward (“Reward”) that the customer might redeem in the future. The standalone selling price of the Reward is measured based on historical sales data, average selling price of Jeuveau ® at the time of redemption, expected customer and consumer participation rates in the loyalty program, and estimated number of qualifying treatments to be performed by customers. The portion of invoice price allocated to the Reward is initially recorded as deferred revenue. Subsequently, when customers redeem the Reward and the related product is delivered, the deferred revenue is recognized in net revenue at that time. As of 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 A contract with a customer states the terms of the sale, including the description, quantity and price of each product purchased. Amounts are recorded as accounts receivable when the Company’s right to consideration becomes unconditional. The Company does not have any significant financing components in customer contracts given the expected time between transfer of the promised products and the payment of the associated consideration is less than one year. As of 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. 76 Table of Contents Evolus, Inc. Notes to Financial Statements (in thousands, except share and per share data) 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 Accounts receivable are recorded at the invoiced amount and do not bear interest. At the time of contract inception or new customer account set-up, the Company performs a collectability assessment of the customer’s creditworthiness. The Company assesses the probability that the Company will collect the entitled consideration in exchange for the goods sold, by considering the customer’s ability and intention to pay when consideration is due. On a recurring basis, the Company estimates the amount of receivables considered uncollectable to reflect an allowance for doubtful accounts. The Company writes off accounts receivable balances when it is determined that there is no possibility of collection. As of 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 The Company expenses sales commissions when incurred as the amortization period is one year or less. These costs are recorded within selling, general and administrative expenses in the accompanying statements of operations and comprehensive loss. The Company does not adjust the amount of promised consideration for the effects of the time value of money for contracts in which the anticipated period between when the Company transfers the goods or services to the customer and when the customer pays within one year. Research and Development Expenses Research and development costs are expensed as incurred. Research and development expenses include personnel-related costs, costs associated with pre-clinical and clinical development activities, costs associated with and costs for prototype products that are manufactured prior to market approval for that prototype product, internal and external costs associated with the Company’s regulatory compliance and quality assurance functions, including the costs of outside consultants and contractors that assist in the process of submitting and maintaining regulatory filings, and overhead costs, including allocated facility related expenses. 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. 77 Table of Contents Evolus, Inc. 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 The Company recognizes stock-based compensation expense for employees, consultants and members of the Board of Directors based on the fair value at the date of grant. The Company uses the Black-Scholes option pricing model to value stock option grants. The Black-Scholes option pricing model requires the input of subjective assumptions, including the expected volatility of the Company’s common stock, expected risk-free interest rate, and the option’s expected life. The fair value of the Company’s restricted stock units (“RSUs”) is based on the fair value on the grant date of the Company’s common stock. The Company also evaluates the impact of modifications made to the original terms of equity awards when they occur. The fair value of equity awards that are expected to vest is amortized on a straight-line basis over the requisite service period. Stock-based compensation expense is recognized net of actual forfeitures when they occur, as an increase to additional paid-in capital in the balance sheets and in the selling, general and administrative or research and development expenses in the statements of operations and comprehensive loss. Advertising Costs Advertising costs are expensed as incurred and primarily include costs related to social media ads. For the years ended December 31, 2020 and 2019, the Company incurred advertising costs of $ 4,979 and $ 1,407 , respectively. Income Taxes The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are determined on the basis of differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is recorded against deferred tax assets, to reduce the net carrying value, when it is more likely than not that some portion or all of a deferred tax asset will not be realized. In making such a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, and ongoing prudent and feasible tax planning strategies in assessing the amount of the valuation allowance. When the Company establishes or reduces the valuation allowance against its deferred tax assets, its provision for income taxes will increase or decrease, respectively, in the period such determination is made. Additionally, the Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefit recognized in the financial statements for a particular tax position is based on the largest benefit that is more likely than not to be realized upon settlement. Accordingly, the Company establishes reserves for uncertain tax positions. The Company has not recognized interest or penalties in its statement of operations and comprehensive loss. The Company is required to file federal and state income tax returns in the United States and various other state jurisdictions. The preparation of these income tax returns requires the Company to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. An amount is accrued for the estimate of additional tax liability, including interest and penalties, for any uncertain tax positions taken or expected to be taken in an income tax return. The Company reviews and updates the accrual for uncertain tax positions as more definitive information becomes available. The Company’s income tax returns are based on calculations and assumptions that are subject to examination by the Internal Revenue Service and other tax authorities. 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 78 Table of Contents Evolus, Inc. 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. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. While the Company believes it has appropriate support for the positions taken on its tax returns, the Company regularly assesses the potential outcomes of examinations by tax authorities in determining the adequacy of its provision for income taxes. The Company continually assesses the likelihood and amount of potential revisions and adjusts the income tax provision, income taxes payable and deferred taxes in the period in which the facts that give rise to a revision become known . Net Loss Per Share Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period including contingently issuable shares. Diluted earnings per share 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. Recent Accounting Pronouncements Recently Adopted Pronouncements 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. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment . The update simplifies the accounting for goodwill impairment by removing step two of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will be the amount by which a reporting unit’s carrying amount, including goodwill, exceeds its fair value. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. As amended by ASU 2019-10, the updated guidance is effective for the 79 Table of Contents Evolus, Inc. 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. Early adoption is permitted. The Company is evaluating the effect of this standard on its financial statements and related disclosures as well as whether to early adopt the new guidance. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which modifies the measurement and recognition of credit losses for most financial assets and certain other instruments. The new standard requires the use of forward-looking expected credit loss models based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount, which may result in earlier recognition of credit losses under the new standard. The new guidance also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. Subsequent to the issuance of ASU 2016-13, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses . This ASU does not change the core principle of the guidance in ASU 2016-13, instead these amendments are intended to clarify and improve operability of certain topics included within the credit losses standard. The FASB also subsequently issued ASU 2019-04 which did not change the core principle of the guidance in ASU 2016-13 but clarified that expected recoveries of amounts previously written off and expected to be written off should be included in the valuation account and should not exceed amounts previously written off and expected to be written off. As amended by ASU 2019-10, the updated guidance is effective for the Company as a smaller reporting company beginning January 1, 2023. The Company is in the process of determining the effects the adoption will have on its financial statements and reviewing credit loss models to assess the impact of the adoption of the standard on the financial statements. Based on initial assessments, the Company believes that while adoption will modify the way it analyzes financial instruments, it does not expect adoption of this guidance will have a material impact to its financial statements. In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes . ASU 2019-12 eliminates certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. This ASU also includes guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. ASU 2019-12 is effective for annual and interim periods in fiscal years beginning after December 15, 2020. Early adoption is permitted. 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. Note 3. Fair Value Measurements and Short-Term Investments Short-Term Investments 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. 80 Table of Contents Evolus, Inc. Notes to Financial Statements (in thousands, except share and per share data) Assets and Liabilities Measured at Fair Value on a Recurring Basis The Company measures and reports certain financial instruments as assets and liabilities at fair value on a recurring basis. The fair value of these instruments was as follows: As of December 31, 2020 Fair Value Level 1 Level 2 Level 3 Available-for-sale debt securities U.S treasury securities $ 5,000 $ 5,000 $ — $ — Liabilities Contingent royalty obligation payable to Evolus Founders $ 41,546 $ — $ — $ 41,546 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 $ — $ — Liabilities Contingent royalty obligation payable to Evolus Founders $ 44,683 $ — $ — $ 44,683 The Company did not transfer any assets or liabilities measured at fair value on a recurring basis between levels during the year ended December 31, 2020. 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 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. The following table shows a reconciliation of the beginning and ending fair value measurements of the contingent royalty obligation payable: Year Ended December 31, 2020 2019 Fair value, beginning of period $ 44,683 $ 50,200 Payments ( 1,131 ) ( 9,677 ) Change in fair value recorded in operating expenses ( 2,007 ) 4,160 Fair value, end of period $ 41,545 $ 44,683 Other Financial Assets and Liabilities The Company’s financial instruments consist primarily of cash and cash equivalents, short-term available-for-sale debt securities, accounts receivable, accounts payable, accrued expenses, lease liabilities, and long-term debt. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates their fair value because of the short-term maturity of such instruments. The Company estimates the fair value of the contingent promissory note payable to the Evolus Founders, long-term debt and operating lease liabilities using the discounted cash flow analysis based on the interest rates for similar rated debt securities (Level 2). As of December 31, 2020, the fair value of the contingent promissory note and long-term debt was estimated to be 81 Table of Contents Evolus, Inc. Notes to Financial Statements (in thousands, except share and per share data) $ 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. Note 4. Goodwill and Intangible Assets The table below shows the weighted-average life, original cost, accumulated amortization and net book value by major intangible asset classification: As of December 31, 2020 Weighted-Average Life (Years) Original Cost Accumulated Amortization Net Book Value Definite-lived intangible assets Distribution right 20 $ 59,076 $ ( 5,650 ) $ 53,426 Capitalized software 2 6,681 ( 4,810 ) 1,871 Intangible assets, net 65,757 ( 10,460 ) 55,297 Indefinite-lived intangible asset 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. The following table outlines the estimated future amortization expense related to intangible assets held as of December 31, 2020 that are subject to amortization: Fiscal year 2021 4,673 2022 3,094 2023 2,955 2024 2,955 2025 2,955 Thereafter 38,665 $ 55,297 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 82 Table of Contents Evolus, Inc. 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. See Note 9. 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, 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. Note 5. Accrued Expenses Accrued expenses consisted of the following: Year Ended December 31, 2020 2019 Accrued payroll and related benefits $ 4,076 $ 5,229 Accrued revenue contract liabilities 3,081 1,709 Accrued professional services 895 5,794 Other accrued expenses 1,050 1,228 $ 9,102 $ 13,960 Note 6. 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 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 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. 83 Table of Contents Evolus, Inc. 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 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. Note 7. 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. 84 Table of Contents Evolus, Inc. Notes to Financial Statements (in thousands, except share and per share data) 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. See Note 9. Commitments and Contingencies for the details of the Conversion Agreement. As of December 31, 2020, the Company was in compliance with its debt covenants. Note 8. Operating Leases 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. This non-cancelable operating lease commenced on February 1, 2020 and expires on January 31, 2025. Lease payments increase based on an annual rent escalation clause that occurs each year on February 1. The Company may, under certain circumstances, terminate the lease on the 36 -month anniversary of the lease commencement date by providing a written notice 12 months prior to such anniversary and paying a termination fee equal to six months basic rent plus certain other expenses. The Company has an option to extend the term of the lease for an additional 60 months, which is not recognized as part of its ROU assets and lease liabilities. The lease with the original lessor is a modification of the existing sublease that is not accounted for as a separate contract. The Company also 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. The sublease income was not significant. Upon signing the sublease, the Company recorded an impairment charge of $ 80 to the right-of-use asset related to the original lease. The Company’s lease agreements do not contain any residual value guarantees or material restrictive covenants. The payments associated with the renewal will only be included in the measurement of the lease liability and ROU assets if the exercise of the renewal option is determined to be reasonably certain. The Company considers the timing of the renewal period and other economic factors such as the financial implications of a decision to extend or not to extend a lease in determining if the renewal option is reasonably certain to be exercised. 85 Table of Contents Evolus, Inc. 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: Year Ended December 31, 2020 2019 Fixed operating lease expense $ 1,080 $ 1,080 Variable operating lease expense 40 110 Short-term operating lease expense 168 85 $ 1,288 $ 1,275 As of December 31, 2020 2019 Weighted-average remaining lease term (years) 4.1 5.0 Weighted-average discount rate 9.4 % 9.4 % Operating lease expenses were included in the selling, general and administration expenses in the accompanying statements of operations and comprehensive loss. Operating lease right-of-use assets and related current and noncurrent operating lease liabilities are presented in the accompanying balance sheets. The following table presents the maturity of the Company’s operating lease liabilities as of December 31, 2020, future minimum payments under the operating lease agreements with non-cancelable terms as follows: Fiscal year 2021 1,212 2022 1,265 2023 1,319 2024 1,376 2025 115 Total operating lease payments 5,287 Less: imputed interest ( 928 ) Present value of operating lease liabilities $ 4,359 Note 9. Commitments and Contingencies Purchase Commitments As of December 31, 2020, the Company has entered into commitments to purchase services and products for an aggregate amount of approximately $ 2,137 . Certain minimum purchase commitments related to the purchase of Jeuveau ® are described below. License and Supply Agreement In connection with the Daewoong Agreement, the Company 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 86 Table of Contents Evolus, Inc. 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 In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because they involve claims that may be made against the Company in the future, but have not yet been made. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. No amounts were accrued as of December 31, 2020 and 2019. Medytox Litigation 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 alleged that (i) the Company has violated California Uniform Trade Secrets Act, Cal. Civ. Code § 3426 because Daewoong’s alleged knowledge of the misappropriation of certain trade secrets of Medytox is imputed to the Company as a result of the Company’s relationship with Daewoong, (ii) the Company has stolen the botulinum toxin bacterial strain of Medytox through our possession of and refusal to return the botulinum toxin bacterial strain, (iii) the Company has engaged in unlawful, unfair and fraudulent business acts and practices in violation of California Bus. & Prof. Code § 17200, including conversion of the botulinum toxin bacterial strain and misrepresentations to the public regarding the source of the botulinum toxin bacterial strain used to manufacture Jeuveau ® , and (iv) the Daewoong Agreement is invalid and in violation of Medytox’s rights (the “Medytox Litigation”). Medytox 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. ITC Case 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. No. 337-TA-1145. 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. 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 (“Restricted Period”). 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. Prior to 87 Table of Contents Evolus, Inc. Notes to Financial Statements (in thousands, except share and per share data) 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 U.S. 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 88 Table of Contents Evolus, Inc. 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 89 Table of Contents Evolus, Inc. 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 The Company, from time to time, is involved in various litigation matters or regulatory encounters arising in the ordinary course of business that could result in unasserted or asserted claims or litigation. These other matters may raise difficult and complex legal issues and are subject to many uncertainties, including, but not limited to, the facts and circumstances of each particular case or claim, the jurisdiction in which each suit or regulatory encounter is brought, and differences in applicable laws and regulations. Except as set forth above, the Company does not believe that these other matters would have a material adverse effect on its accompanying financial position, results of operations or cash flows. However, the resolution of one or more of the other matters in any reporting period could have a material adverse impact on the Company’s financial results for that period. 90 Table of Contents Evolus, Inc. Notes to Financial Statements (in thousands, except share and per share data) Note 10. Stockholders’ Equity Preferred Stock The Company has 10,000,000 authorized shares of preferred stock with a par value of $ 0.00001 per share. As of December 31, 2020, none were issued and outstanding. Common Stock The Company has 100,000,000 authorized shares of common stock with a par value of $ 0.00001 per share. As of December 31, 2020, 33,749,228 shares were issued and outstanding. 2017 Omnibus Incentive Plan and Stock-based Compensation Allocation 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. The maximum number of shares of common stock that may be issued under the Plan is 4,361,291 shares, plus an annual increase on each anniversary of November 21, 2017 equal to 4 % of the total issued and outstanding shares of the Company’s common stock as of such anniversary (or such lesser number of shares as may be determined by the Company’s board of directors). On November 21, 2020 and 2019, an additional 1,349,969 shares and 1,337,821 shares, respectively, were reserved under the evergreen provision of the Plan. As of December 31, 2020, the Company has available an aggregate of 2,049,553 shares of common stock for future issuance under the Plan. Stock-Based Award Activity and Balances Options are granted at exercise prices based on the Company’s common stock price on the date of grant. The options and RSU grants generally vest over a one -to four-year period. There have been no awards granted with performance conditions or market conditions for the periods presented. The options have a contractual term of 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. The fair value of RSU grants is determined at the grant date based on the common share price. The Company records stock-based compensation expense net of actual forfeitures when they occur. The significant assumptions used in the Black-Scholes option-pricing are as follows: • Expected Volatility. The Company has limited data regarding company‑specific historical or implied volatility of its share price. Consequently, the Company estimates its volatility based on the average historical volatility of the stock price from a set of peer companies, since our shares do not have sufficient trading history. Management considers factors such as stage of life cycle, competitors, size, market capitalization and financial leverage in the selection of similar entities. • Expected Term. The expected term represents the period of time in which the options granted are expected to be outstanding. The Company estimates the expected term of options with consideration of vesting date, contractual term, and historical experience. The expected term of “plain vanilla” options is estimated based on the midpoint between the vesting date and the end of the contractual term under the simplified method permitted by the SEC implementation guidance. The weighted‑average expected term of the Company’s options is approximately six years . • Risk‑Free Rate. The risk‑free interest rate is selected based upon the implied yields in effect at the time of the option grant on U.S. Treasury zero‑coupon issues with a term approximately equal to the expected life of the option being valued. • Dividends. The Company does not anticipate paying cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield rate of zero . 91 Table of Contents Evolus, Inc. 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, 2020 2019 Volatility 61.2 % 59.3 % Risk-free interest rate 1.4 % 2.4 % Expected life (years) 6.14 6.17 Dividend yield rate — % — % A summary of stock option activity under the Plan for the year ended December 31, 2020 and 2019, is presented below: Weighted Weighted Average Average Remaining Aggregate Stock Exercise Contractual Intrinsic Options Per Share Terms (Years) Value Outstanding, December 31, 2018 3,257,801 $ 11.99 9.26 $ 7,119 Granted 1,321,451 18.63 Exercised ( 273,734 ) 9.98 Cancelled/forfeited ( 328,117 ) 15.15 Outstanding, December 31, 2019 3,977,401 14.07 8.51 7,198 Granted 1,322,119 8.89 Exercised — 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 $ — Vested and expected to vest, December 31, 2020 4,407,498 $ 12.20 7.66 $ 50 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. 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. As of December 31, 2020, there was $ 13,232 of total unrecognized compensation cost, net of actual forfeitures, related to stock option-based compensation arrangements granted under the Plan. The cost is expected to be recognized over a weighted-average period of 2.06 years. 92 Table of Contents Evolus, Inc. Notes to Financial Statements (in thousands, except share and per share data) A summary of RSU activity under the Plan for the year ended December 31, 2020 and 2019, is presented below: Weighted Restricted Average Stock Grant Date Units Fair Value Outstanding, December 31, 2018 271,404 $ 16.53 Granted 3,000 18.33 Vested ( 25,125 ) 24.81 Forfeited ( 19,409 ) 13.71 Outstanding, December 31, 2019 229,870 15.89 Granted 1,301,439 5.88 Vested ( 186,870 ) 13.6 Forfeited ( 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. Total fair value of RSUs vested during the years ended December 31, 2020 and 2019 was $ 1,980 and $ 357 , respectively. As of December 31, 2020, there was $ 5,187 of total unrecognized compensation cost, net of actual forfeitures, related to RSU-based compensation arrangements granted under the Plan. The cost is expected to be recognized over a weighted-average period of 1.97 years. The following table summarizes stock-based compensation expense arising from the above Plan: Year Ended December 31, 2020 2019 Selling, general and administrative $ 10,408 $ 8,862 Research and development 176 656 Total stock-based compensation expense $ 10,584 $ 9,518 In addition, during the years ended December 31, 2020 and 2019, the Company capitalized $ 21 and $ 106 , respectively, of stock-based compensation expense in capitalized software. Capitalized software is a component of intangible assets and is presented in the accompanying condensed balance sheets. See Note 4 , Goodwill and Intangible Assets for capitalized software information. Note 11. Employee Benefit Plan The Company maintains a defined contribution 401(k) plan covering substantially all employees. Matching contributions totaled $ 524 and $ 479 for the years ended December 31, 2020 and 2019. 93 Table of Contents Evolus, Inc. Notes to Financial Statements (in thousands, except share and per share data) Note 12. Income Taxes The Company’s loss before income taxes was entirely generated from its U.S. operations. The current and deferred expense is as follows: Year Ended December 31, 2020 2019 Current provision: Federal $ — $ — State 52 28 Total current provision 52 28 Deferred (benefit) provision: Federal — ( 10,299 ) State 25 ( 4,756 ) 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. As of December 31, 2020, the Company has federal research and development (“R&D”) credit carryforwards of $ 1,464 , which will begin to expire in 2034. The Company also has California R&D credit carryforwards of $ 1,459 , which has an indefinite carryforward period. The NOL and the R&D credit carryforwards generated by the Company in tax years ended February 11, 2018 and prior have been included in the consolidated and unitary income tax returns of Alphaeon. After the Company left the Alphaeon consolidated and unitary income tax group on February 11, 2018, the Company files its own standalone income tax returns. Deferred tax assets in the accompanying financial statements reflect the Company's standalone tax attributes that are reportable on its own income tax returns. In general, if a company experiences a greater than 50 percentage point aggregate change in ownership of certain significant stockholders over a three-year period, utilization of its pre-change NOL carryforwards and R&D credit carryforwards is subject to an annual limitation under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and similar state laws. The annual limitation generally is determined by multiplying the value of the Company’s stock at the time of such ownership change, subject to certain adjustments, by the applicable long-term tax-exempt rate. The annual limitations may result in the expiration of NOL and R&D credit carryforwards before utilization and may be material. The Company has started but has not completed an analysis to determine whether its NOL and R&D credits generated through December 31, 2020 are likely to be limited by Section 382 and 383. The Company anticipates that an ownership change as defined under Section 382 may have occurred and that the resulting limitation would significantly reduce the Company’s ability to utilize its NOL and R&D credit carryforwards before they expire. Additionally, future ownership changes under Section 382 and 383 may also limit the Company's ability to fully utilize any remaining tax benefits. The Company’s net deferred income tax assets have been offset by a valuation allowance. Therefore, any resulting reduction to the Company’s NOL and R&D credit carryforwards once the analysis is complete will be offset by a corresponding reduction of the valuation allowance and there would be no impact on the Company’s balance sheet, statement of operations, or cash flows. The components of deferred tax assets and liabilities were as follows: 94 Table of Contents Evolus, Inc. Notes to Financial Statements (in thousands, except share and per share data) As of December 31, 2020 2019 Deferred income tax assets: Net operating losses $ 60,083 $ 42,756 Stock compensation 3,938 2,430 Other deferred assets 2,617 2,470 Accrued compensation 2,559 1,962 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: Intangible amortization ( 12,240 ) ( 12,970 ) Operating lease right-of-use assets ( 873 ) ( 1,017 ) Fixed asset depreciation ( 249 ) ( 144 ) Total deferred income tax liabilities ( 13,362 ) ( 14,131 ) Net deferred income taxes $ ( 25 ) $ — Upon FDA approval of Jeuveau ® in February 2019, the Company’s IPR&D intangible asset was reclassified to a definite-lived distribution right intangible asset. As a result, management determined that it was more likely than not that certain deferred tax assets became realizable due to the future reversals of the deferred tax liability associated with such intangible asset. Accordingly, the Company released $ 15,055 of its valuation allowance for the year ended December 31, 2019. The total valuation allowance balance did not significantly change in 2019 due to the increase related to the current year operating loss as offset by the release as discussed above. A reconciliation of the difference between the provision (benefit) for income taxes and income taxes at the statutory U.S. federal income tax rate is as follows: As of December 31, 2020 2019 Income tax at statutory rate $ ( 34,217 ) $ ( 22,063 ) State income taxes, net of Federal benefit ( 7,232 ) ( 3,905 ) California NOL write-off — 5,174 Revaluation of contingent royalty obligation ( 513 ) 1,040 Meals and entertainment 366 1,002 Change in state tax rate ( 242 ) ( 1,371 ) Officers' compensation 133 — Stock compensation 616 521 Research and development tax credit ( 147 ) ( 294 ) Promissory note - debt discount ( 145 ) 128 Other, net 117 50 Valuation allowance 41,341 4,691 Income tax provision (benefit) $ 77 $ ( 15,027 ) 95 Table of Contents Evolus, Inc. Notes to Financial Statements (in thousands, except share and per share data) A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: As of December 31, 2020 2019 Beginning balance $ 2,761 $ 2,435 Increases to current year tax positions 163 326 Ending balance $ 2,924 $ 2,761 The Company has considered the amounts and probabilities of the outcomes that can be realized upon ultimate settlement with the tax authorities and determined unrecognized tax benefits primarily related to credits should be established as noted in the summary rollforward above. The Company’s effective income tax rate would not be impacted if the unrecognized tax benefits are recognized. Additional amounts in the summary rollforward could impact the Company’s effective tax rate if it did not maintain a full valuation allowance on its net deferred tax assets. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months. The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense. There were no accrued interest and penalties associated with uncertain tax positions as of December 31, 2020 and 2019. 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. Note 13. Related Party Transactions Services with Alphaeon 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. 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. 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 96 Table of Contents Evolus, Inc. 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. See Note 3, Fair Value Measurements and Short-Term Investments for more information about the Company’s accounting thereof. Under the Amended Stock Purchase Agreement, Evolus paid one-time bonuses of $ 1,575 to certain current and former employees upon FDA approval of Jeuveau ® in February 2019, including a one-time bonus of $ 700 paid to the Company’s Chief Medical Officer and Head of Research & Development. The payment is included in research and development expenses in the accompanying statements of operations and comprehensive loss for the year ended December 31, 2019. The Company has the right to prepay the promissory note, in whole or in part, at any time and from time to time without penalty. Upon an event of default under the promissory note, all unpaid principal becomes immediately due and payable at the option of the holder. An event of default occurs under the terms of the promissory note upon any of the following events: (i) Evolus fails to meet the obligations to make the required payments thereunder, (ii) Evolus makes an assignment for the benefit of creditors, (iii) Evolus commences any bankruptcy proceeding, or (iv) Evolus materially breaches the Amended Stock Purchase Agreement or Tax Indemnity Agreement (which is defined below) and such breach is not cured within 30 days. In addition, upon a change-of-control of Evolus, all unpaid principal becomes immediately due and payable. Under the terms of the promissory note, a change-of-control is defined as (i) the sale of all or substantially all of Evolus’ assets, (ii) the exclusive license of Jeuveau ® or the business related to Jeuveau ® to a third-party (other than a sublicense under the Daewoong Agreement), or (iii) any merger, consolidation, or acquisition of Evolus, except a merger, consolidation, or acquisition of Evolus in which the holders of capital stock of Evolus immediately prior to such merger, consolidation, or acquisition hold at least 50 % of the voting power of the capital stock of Evolus or the surviving entity. Notwithstanding the foregoing, the promissory note expressly provides that neither the IPO or any merger with or acquisition by Alphaeon or any of its subsidiaries or affiliates constitutes a change-of-control. In connection with the Amended Stock Purchase Agreement, the Company entered into a tax indemnity agreement with the Evolus Founders (“Tax Indemnity Agreement”). Pursuant to the Tax Indemnity Agreement, the Company is obligated to indemnify the Evolus Founders for any tax liability resulting from the Company’s assumption of the revised payment obligations under the Amended Stock Purchase Agreement from Alphaeon. Such assumption of the revised payment obligations occurred upon the completion of the IPO. Under the Amended Stock Purchase Agreement, the payment obligations are contingent and thus eligible for installment sale reporting under Section 453 of the Internal Revenue Code of 1986, as amended. Under the Tax Indemnity Agreement, the Company was obligated to indemnify the Evolus Founders for any taxes or penalties required to be paid by the Evolus Founders in the event the U.S. Internal Revenue Service or other taxing authority were to determine that Company’s assumption of the revised payment obligations under the Amended Stock Purchase Agreement rendered continued installment sale reporting unavailable to the Evolus Founders. Any taxes or penalties paid by us on behalf of the Evolus Founders under the Tax Indemnity Agreement will be offset dollar-for-dollar against the promissory note and future royalties that will be payable to the Evolus Founders under the Amended Stock Purchase Agreement. Exclusive Distribution and Supply Agreement with Clarion Medical Technologies Inc. On November 30, 2017, the Company entered into an exclusive distribution and supply agreement (the “Distribution Agreement”), with Clarion Medical Technologies Inc. (“Clarion”). The Distribution Agreement provides terms pursuant to which the Company will exclusively supply Jeuveau ® to Clarion in Canada. Clarion was previously a wholly-owned subsidiary of Alphaeon. However, pursuant to previous agreements among Alphaeon, Clarion, and previous equity holders of Clarion, the previous equity holders of Clarion had the option, and exercised such option, to unwind Alphaeon’s acquisition 97 Table of Contents Evolus, Inc. Notes to Financial Statements (in thousands, except share and per share data) of Clarion. As a result, Alphaeon owes the equity holders of Clarion an unwinding fee of $ 9,550 (the “Unwinding Fee”). The Distribution Agreement sets forth that a portion of the proceeds received by the Company from each unit of Jeuveau ® purchased by Clarion shall be paid directly to the previous equity holders of Clarion, and will reduce, on a dollar-for-dollar basis, the amount of the Unwinding Fee Alphaeon owes. In addition, Alphaeon and SCH have agreed with Clarion to pay the unpaid amount of the Unwinding Fee on December 31, 2022, if demanded by the previous equity holders of Clarion. 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. 98 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.