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Item 7. Management’s Discussion and Analysis

2022-03-03 compared with 2021-03-25 · 187 added, 244 removed, 144 unchanged (75% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion contains management’s discussion and analysis of our financial condition and results of operations and should be read together with the historical financial statements, the notes thereto included in Item 8 “Financial Statements and Supplementary Data” and included elsewhere in this Annual Report on Form 10-K.

The following discussion contains management’s discussion and analysis of our financial condition and results of operations and should be read together with the historical financial statements and the notes thereto included in Item 8 “Financial Statements and Supplementary Data” and included elsewhere in this Annual Report on Form 10-K.

This discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including but not limited to those described in the Item 1A “Risk Factors” section of this Annual Report on Form 10-K.

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You should carefully read “Special Note Regarding Forward-Looking Statements” and Item 1A “Risk Factors.”

We are a performance beauty company with a customer-centric approach focused on delivering breakthrough products in the self-pay aesthetic market.

We are a performance beauty company with a customer-centric approach to delivering breakthrough products in the self-pay aesthetic market.

In February 2019, we received the approval of our first product Jeuveau ® (prabotulinumtoxinA-xvfs) from the U.S.

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We began marketing Jeuveau ® in Canada in October 2019 through our distribution partner Clarion Medical Technologies, Inc., or Clarion.

In September 2019, we also received approval from the European Commission, to market the product in all 28 EU member states, Iceland, Norway and Liechtenstein.

In January 2021, we received a positive decision from the European Commission to add the 50 unit product to the existing approval obtained in September 2019.

We plan to launch Jeuveau ® in Europe in early 2022.

Impact on Our Business of Final Ruling by the U.S.

International Trade Commission and the Subsequent Settlements

On January 30, 2019, Allergan and Medytox filed a complaint against us and Daewoong Pharmaceuticals Co., Ltd., or Daewoong in the ITC alleging 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 we refer to herein as the ITC Action, is entitled In the Matter of Certain Botulinum Toxin Products.

The ITC instituted an investigation as ITC Inv.

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

We refer to the limited exclusion order and the cease and desist order collectively as the remedial orders.

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

During the presidential review period, we were permitted to continue importation and sales of Jeuveau ® subject to payment of a bond of $441 per vial.

During the Presidential Review period, we increased customer pricing significantly due to the bond amount required to keep Jeuveau ® on the market.

As a result, we generated nominal revenue from mid-December 2020 through mid-February 2021.

Effective February 18, 2021, we entered into a Settlement and License Agreement with Medytox and Allergan, which we refer to as the U.S.

In September 2019, we also received approval from the European Commission, to market the product in all 27 European Union, or EU, member states plus the United Kingdom, Iceland, Norway and Liechtenstein.

In January 2021, we received a positive decision from the European Commission to add the 50 unit product to the approval obtained in September 2019.

We plan to launch Jeuveau ® in Europe in the third quarter of 2022.

We received acceptance of our submission to the Australian Therapeutics Good Administration, or TGA, for regulatory approval of our neurotoxin product in Australia in the first quarter of 2022.

We expect to receive full TGA regulatory approval and launch the product in Australia in 2023.

In November 2021, we announced the initiation of a Phase II clinical trial designed to investigate a higher strength dose of Jeuveau ® in the frown lines.

We plan to enroll our first patient in the clinical trial in the first quarter of 2022.

Impact of Settlement Agreements

In February 2021, we settled litigation claims related to a complaint against us filed by Allergan, Inc.

and Allergan Limited (together, “Allergan”) and Medytox, Inc.

(“Medytox”) in the U.S.

International Trade Commission related to Jeuveau ® (the “ITC Action”) and certain related matters by entering into a Settlement and License Agreement with Medytox and Allergan, which we refer to as the U.S.

Settlement Agreement, and another Settlement and License Agreement with Medytox which we refer to as the ROW Settlement Agreement.

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Settlement Agreement and the ROW Settlement Agreement collectively as the Medytox/Allergan Settlement Agreements.

Under the Medytox/Allergan Settlement Agreements, we obtained (i) a license to commercialize, manufacture and to have manufactured for us certain products identified in the Medytox/Allergan Settlement Agreements, including Jeuveau ® (the “Licensed Products”), in the United States and other territories where we license Jeuveau ® , (ii) the dismissal of outstanding

litigation against us, including the ITC Action, a rescission of the related remedial orders, and the dismissal of a civil case in the Superior Court of California against us, which we refer to together with any claims (including claims brought in Korean courts) with a common nexus of fact as the Medytox/Allergan Actions, and (iii) releases of claims against us for the Medytox/Allergan Actions.

In exchange, we agreed to (i) make cash payments of $35.0 million in multiple payments over two years to Allergan and Medytox, (ii) pay to Allergan and Medytox certain royalties on the sale of Jeuveau ® , based on a certain dollar amount per vial sold of Licensed Product by or on behalf of the Company in the United States, from December 16, 2020 to September 16, 2022, (iii) from December 16, 2020 to September 16, 2022, pay to Medytox a low-double digit royalty on net sales of Jeuveau ® sold by us or on our behalf in territories we have licensed outside the United States;

(iv) from September 16, 2022 to September 16, 2032, pay to Medytox a mid-single digit royalty percentage on net sales of Jeuveau ® in the United States and all territories we have licensed outside the United States, (v) issue to Medytox of 6,762,652 shares of our common stock, par value $0.00001 per share, which we issued on February 18, 2021, and (vi) entered into a Registration Rights Agreement pursuant to which we granted certain registration rights to Medytox with respect to such shares of common stock beginning as of March 31, 2022.

In addition, under the Medytox/Allergan Settlement Agreements, we made certain representations and warranties and agreed to positive and negative covenants.

On March 23, 2021, we entered into a Confidential Settlement and Release Agreement with Daewoong Pharmaceuticals Co.

Ltd., or Daewoong, which we refer to as the Daewoong Settlement Agreement, a Convertible Promissory Note Conversion Agreement, which we refer to as the Conversion Agreement and the Third Amendment to the Supply Agreement (which amends the Daewoong Agreement), which we refer to as the Daewoong Agreement Amendment.

We refer the Daewoong Settlement Agreement, the Conversion Agreement and the Daewoong Agreement Amendment collectively as the 2021 Daewoong Arrangement.

Under the 2021 Daewoong Arrangement, (i) Daewoong agreed to (a) pay us an amount equal to $25.5 million, (b) pay certain reasonable legal fees incurred by our 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 $10.5 million in aggregate under our Daewoong Agreement, and (d) reimburse us certain amounts (calculated on a dollar amount per vials sold basis in the United States) for sales of certain products with respect to which we are required to pay Medytox and Allergan royalties pursuant to the U.S.

Under the Medytox/Allergan Settlement Agreements, we agreed to (i) make cash payments of $35.0 million in multiple payments over two years to Allergan and Medytox, of which we paid the first payment of $15.0 million in the third quarter of 2021 and $15.0 million during the first quarter of 2022, with final payment of $5.0 million due in 2023, (ii) pay to Allergan and Medytox royalties on the sale of Jeuveau ® , based on a certain dollar amount per vial sold of the Licensed Products by or on our behalf in the United States, from December 16, 2020 to September 16, 2022, (iii) from December 16, 2020 to September 16, 2022, pay Medytox a low-double digit royalty on net sales of Jeuveau ® sold by us or on our behalf in territories we have licensed outside the United States, and (iv) from September 16, 2022 to September 16, 2032, pay Medytox a mid-single digit royalty percentage on net sales of Jeuveau ® in the United States and all territories we have licensed outside the United States.

We also issued 6,762,652 shares of our common stock to Medytox.

In addition, in March 2021, we entered into a Confidential Settlement and Release Agreement and certain related agreements with Daewoong Pharmaceutical Co.

(“Daewoong”), which we refer to as the Daewoong Arrangement, under which Daewoong paid us $25.5 million in April 2021, cancelled all remaining milestone payments up to $10.5 million in aggregate under the Daewoong Arrangement and agreed to reimburse us certain amounts (calculated on a dollar amount per vials sold basis in the United States) for sales of certain products with respect to which we are required to pay Medytox and Allergan royalties pursuant to the U.S.

Settlement Agreement.

and (ii) we agreed to (y) release certain claims we 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 (z) coordinate with Daewoong on certain matters related to the Medytox/Allergan Actions.

In the Conversion Agreement, among other things, the parties agreed that (i) the principal balance of the $40.0 million aggregate principal amount convertible promissory note we issued to Daewoong on July 30, 2020, which we refer to as the Daewoong Convertible Note, and accrued and unpaid interest thereon shall be automatically converted, at the conversion price of $13.00 per share, into 3,136,869 shares of our common stock;

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

Under the Daewoong Agreement Amendment, the Daewoong Agreement was amended to:

(i) expand the territory within which we may distribute Jeuveau ® to certain countries in Europe;

(ii) reduce the period of time with respect to which we are required to deliver binding forecasts to Daewoong;

(iii) introduce certain limitations on Daewoong’s ability to convert our exclusive license for certain territories to a non-exclusive license in the event we fail 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 us from sharing certain confidential information regarding Daewoong with Medytox or its affiliates or representatives.

As a result of the royalty payments that we are required to pay under the Medytox/Allergan Settlement Agreements, after giving effect to the offset by a certain portion thereof that will be reimbursed to us under the 2021 Daewoong Arrangement, we expect that our cost of sales and gross margin will be materially negatively impacted through September 2022 and negatively impacted to a lesser extent from September 2022 to September 2032.

Daewoong License and Supply Agreement

In 2013, we and Daewoong entered into the Daewoong Agreement pursuant to which we have an exclusive distribution license to Jeuveau ® from Daewoong for aesthetic indications in the United States, EU, Great Britain, Canada, Australia, Russia, C.I.S., and South Africa, as well as co-exclusive distribution rights with Daewoong in Japan.

Under the Daewoong Agreement, we are required to make certain minimum annual purchases in order to maintain the exclusivity of the license.

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

In connection with our entry into the Daewoong Agreement,

we made an upfront payment to Daewoong of $2.5 million.

We further agreed to make milestone payments upon achievement of certain confidential development and commercial milestones, including a confidential payment to Daewoong upon each of the U.S.

Food and Drug Administration, or FDA, and the European Medicines Agency, or the EMA, approval of Jeuveau ® .

Under the Daewoong Agreement, the maximum aggregate amount of milestone payments that could be owed to Daewoong upon the satisfaction of all milestones is $13.5 million.

Upon FDA approval in February 2019 and EMA approval in September 2019, the Company paid $2.0 million and $1.0 million milestone payments, respectively.

As of December 31, 2020, Daewoong was eligible to receive remaining contingent milestone payments of up to $10.5 million, all of which were cancelled under the 2021 Daewoong Arrangement in March 2021.

Under the Daewoong Agreement, Daewoong is responsible for all costs related to the manufacturing of Jeuveau ® , including costs related to the operation and upkeep of its manufacturing facility, and we are responsible for all costs related to obtaining regulatory approval, including clinical expenses, and commercialization of Jeuveau ® .

For additional information about the Daewoong Agreement, see Item 1 “Business—Daewoong License and Supply Agreement.”

Medytox/Allergan Settlement Agreements and Daewoong Arrangement for additional details on the litigation settlement agreements.

As a result of the royalty payments that we are required to pay under the Medytox/Allergan Settlement Agreements, after giving effect to the offset of a certain portion thereof that will be reimbursed to us under the Daewoong Arrangement, we expect that our cost of sales and gross profit margin will be materially negatively impacted through September 2022 and negatively impacted to a lesser extent from September 2022 to September 2032.

The Pharmakon Term Loans

On December 14, 2021, we entered into a loan agreement with BPCR Limited Partnership, BioPharma Credit Investments V (Master) LP, and Biopharma Credit PLC (collectively, “Pharmakon”).

Pursuant to the terms of the agreement, Pharmakon agreed to make term loans to us in two tranches (“Pharmakon Term Loans”).

The first tranche of $75.0 million was funded on December 29, 2021.

The second tranche of $50.0 million may be drawn at our election no later than December 31, 2022, subject to the terms and conditions of the Pharmakon Term Loans.

As of March 3, 2022, we have not drawn the second tranche.

The Pharmakon Term Loans will mature on the sixth year anniversary of the closing date of the first tranche.

See “—Liquidity and Capital Resources—The Pharmakon Term Loans” for further information.

Daewoong Convertible Note

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On March 23, 2021, the outstanding principal balance, together with all accrued and unpaid interest thereon, in the amount of $40.8 million was converted, at the conversion price of $13.00 per share, into the right to receive 3,136,869 shares of our common stock under the Conversion Agreement.

See “—Liquidity and Capital Resources—Daewoong Convertible Note” for further information.

See “—Liquidity and Capital Resources—The Daewoong Convertible Note” for further information.

Royalties and Notes Payable to Evolus Founders

We are obligated to make the following future payments to the founders of Evolus (i) quarterly royalty payments of a low single digit percentage of net sales of Jeuveau ® and (ii) a $20.0 million promissory note that matures in November 2021.

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

The fair value of the obligations set forth in items (i) and (ii) are valued quarterly and are referred to in our financial statements as the “contingent royalty obligation.”

Impact of COVID-19 Outbreak on Our Business

A novel strain of coronavirus (COVID-19) was first identified in Wuhan, China in December 2019, and subsequently declared a pandemic by the World Health Organization.

The COVID-19 outbreak has caused economic and social disruption on an unprecedented scale.

This disruption has resulted in business closures across the United States and significant job loss due to quarantines, government-mandated actions, stay-at-home orders and other restrictions.

While it is not possible to know the full extent of these impacts as of the date this filing, we are disclosing potentially material items of which we are aware.

Health and Safety

In response to the COVID-19 outbreak, we have taken and will continue to take temporary precautionary measures intended to help minimize the risk of COVID-19 to our employees, including requiring our employees and sales professionals, to work remotely if required by their local government and maintaining social distancing during any in-person work-related meetings.

We expect to continue to implement these measures until we determine that the COVID-19 pandemic is adequately contained for purposes of our business, and we may take further actions as government authorities require or recommend or as we determine to be in the best interests of our employees, customers, business partners and third-party service providers.

Financial position and results of operations

The COVID-19 outbreak and restrictions intended to slow the spread of COVID-19 have resulted in temporary business closures for many of our customers and, starting in mid-March 2020, negatively affected our sales.

Jeuveau ® is utilized in elective procedures, the costs of which are borne by the consumer and not third-party payors.

As a result of the COVID-19 outbreak and restrictions intended to slow its spread, these elective procedures declined dramatically in March 2020 due to the temporary business closures or deferment of the elective procedures.

While the impact of the COVID-19 outbreak on the U.S.

aesthetic neurotoxin market was significant during the first half of 2020, we experienced an increase in sales starting in June 2020 that continued throughout the rest of 2020 as many states started easing restrictions on elective procedures and many of our customers re-opened their businesses.

However, due to the uncertainty of the recovery and the increase in COVID-19 infections at the end of the 2020 and early in the first quarter of 2021, new variants of COVID-19 that have emerged and the possibility of further resurgences, and the availability, distribution and efficacy of vaccines and therapeutics

for COVID-19, we cannot reasonably estimate the immediate and full impact of the COVID-19 outbreak on our ongoing business, results of operations and overall financial performance.

Furthermore, even after the current COVID-19 outbreak has subsided, we may continue to experience negative impacts to our business and financial results if customers continue to defer or avoid altogether elective procedures to administer Jeuveau ® due to the continued perceived risk of infection or concern of a resurgence of the COVID-19 outbreak as well as COVID-19’s global economic impact, including decreases in consumer discretionary spending and any economic slowdown or recession that has occurred or may occur in the future.

In light of the negative impacts of the COVID-19 outbreak, we took the following measures in April 2020 to reduce our operating expenses to conserve our cash resources:

• delaying non-essential projects and suspending discretionary spending;

• reducing our headcount by over 100 employees;

• temporarily reducing executive salaries and Board of Directors fees;

• reducing the size of our Board by two members;

• delaying the European launch of Jeuveau ® , which is now expected in early 2022.

Asset and liability valuation

As of December 31, 2020, we did not have any impairment with respect to our goodwill or long-lived assets, including intangible assets.

Because the full extent of the impact of the COVID-19 outbreak and restrictions intended to slow the spread of COVID-19 are unknown at this time, they could, under certain circumstances, cause impairment and result in a non-cash impairment charge being recorded in future periods.

Any continued adverse impact of the COVID-19 outbreak and restrictions intended to slow its spread could also cause us to make further adjustments in the future to the fair value of our contingent royalty obligation payable to Evolus Founders, which is based on Level 3 inputs using a discounted cash flows method, and these adjustments could be significant.

Such Level 3 inputs that might be further impacted by uncertainties due to the COVID-19 outbreak include projected and timing of net revenues during the payment period, which terminates in the quarter following the 10-year anniversary of the first commercial sale of Jeuveau ® in the United States, the discount rate and the timing of payments.

Other estimates used in the preparation of financial statements

Additionally, any continued adverse impact of the COVID-19 outbreak and restrictions intended to slow its spread might also impact other estimates and assumptions utilized to prepare our financial statement in conformity with GAAP.

Such significant estimates relate to net revenues, allowance for doubtful accounts, fair value measurements, inventory valuations, income tax valuations, and stock-based compensation, among others.

We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations.

We are obligated to make the following future payments to the founders of Evolus, which we refer to as the Evolus Founders:

quarterly royalty payments of a low single digit percentage of net sales of Jeuveau ® .

These obligations terminate in the quarter following the 10-year anniversary of the first commercial sale of Jeuveau ® in the United States.

The fair value of the obligations are valued quarterly and are referred to in our financial statements as the contingent royalty obligation.

In November 2021, we also paid $20.0 million to satisfy in full a promissory note that matured in November 2021.

COVID-19 Impact

The ongoing COVID-19 outbreak and restrictions intended to slow its spread resulted in temporary business closures for many of our customers starting in mid-March 2020, which negatively affected our sales during the first half of 2020.

Starting in June 2020, we experienced an increase in sales that continued throughout the rest of 2020 and into 2021 as many states started easing restrictions on elective procedures and many of our customers re-opened their businesses.

The COVID-19 pandemic has the potential to negatively impact our supply chain through reduced availability of commercial transport, which can impact our ability to distribute Jeuveau ® to our customers.

The COVID-19 pandemic and its effects continue to evolve, with developments including fluctuations in the rate of infections during 2021 and 2022 as a result of new and more contagious and/or vaccine resistant variants of the virus, which have led, and may lead in the future, to further government restrictions to combat increasing rates of infection.

We continue to monitor the evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities and may take actions based on their recommendations.

In these circumstances, there may be developments outside our control requiring us to adjust our operating plan.

As such, given the dynamic nature of this situation, we cannot reasonably estimate the full impact of COVID-19 on our financial condition, results of operations or cash flows in the future.

In addition, see Part I.

Item 1A, “Risk Factors,” included herein for updates to our risk factors regarding risks associated with the COVID-19 outbreak.

Management’s Use of Adjusted Gross Profit Margin

Adjusted gross profit and adjusted gross profit margin are not required by, nor presented in accordance with United States generally accepted accounting principles, or GAAP.

Adjusted gross profit is defined as total net revenues less product cost of sales, excluding the one-time settlement payment from Daewoong and amortization of an intangible asset.

Adjusted gross profit margin is calculated as adjusted gross profit divided by total net revenues.

Management believes that adjusted gross profit margin is an important measure for investors because management uses adjusted gross profit margin as a key performance indicator to evaluate the profitability of sales without giving effect to costs that are not core to our cost of sales, such as the settlement payment from Daewoong and the amortization of an intangible asset.

Adjusted gross profit margin should not be considered a measure of financial performance under GAAP, and the items excluded from adjusted gross profit margin should not be considered in isolation or as alternatives to financial statement data presented in the financial statements as an indicator of financial performance or liquidity.

As adjusted gross profit margin is not a measurement determined in accordance with GAAP and is therefore susceptible to varying methods of calculation, this metric, as presented, has limitations as an analytical tool and may not be comparable to other similarly titled measures of other companies.

The following are reconciliations of adjusted gross profit to gross profit, the most directly comparable to GAAP measure, and adjusted gross profit margin to gross profit margin, the most directly comparable GAAP measure:

(in millions) 2021 2020

Total net revenues $ 99.7 $ 56.5

Cost of sales:

Product cost of sales (excludes amortization of intangible assets) 43.5 18.3

Settlement payment from Daewoong (25.5) —

Amortization of distribution right intangible asset 2.9 3.0

Total cost of sales 20.9 21.3

Gross profit 78.8 35.2

Gross profit margin 79.0 % 62.4 %

Settlement payment from Daewoong (25.5) —

Amortization of distribution right intangible asset 2.9 3.0

Adjusted gross profit $ 56.2 $ 38.2

Adjusted gross profit margin 56.3 % 67.6 %

Results of Operations

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Year Ended December 31,

(in millions) 2020 2019 Change

(in millions) 2021 2020

Product revenue, net $ 99.0 $ 55.8

$ 55.8 $ 34.2 $ 21.6

Service revenue 0.7 0.7

Total net revenues 99.7 56.5

56.5 34.9 21.6

Operating expenses:

Product cost of sales (excludes amortization of intangible assets) 43.5 18.3

Settlement payment from Daewoong (25.5) —

Selling, general and administrative 112.1 98.2

98.2 113.6 (15.4)

Research and development 2.1 1.7

Revaluation of contingent royalty obligation to Evolus Founders 6.3 (2.0)

(2.0) 4.2 (6.2)

Depreciation and amortization 5.6 7.0

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Total operating expenses 144.1 209.6

209.6 133.9 75.7

Loss from operations (44.4) (153.1)

Non-operating expense, net (1.4) (9.9)

Loss from extinguishment of debts, net (1.0) —

Loss before income taxes (46.8) (163.0)

Income tax expense (benefit) 0.1 (15.0) 15.1

Income tax expense — 0.1

Net loss $ (46.8) $ (163.1)

We commercially launched Jeuveau ® and began shipping to customers in the United States in May 2019 and launched through a distribution partner in Canada in October 2019.

We record the sale of Jeuveau ® in Canada as service revenue on a net basis.

We currently operate in one reportable segment and all of our net revenues are derived from sales of Jeuveau ® .

Net revenues consist of revenues, net of adjustments primarily for customer rebates, coupon program, rewards related to the consumer loyalty program.

Net revenues consist of revenues, net of adjustments primarily for customer rebates, coupon program, rewards related to the consumer loyalty program and co-branded marketing programs.

Revenues are recognized when the control of the promised goods is transferred to the customer in an amount that reflects the consideration allocated to the related performance obligations and to which we expect to be entitled in exchange for those products or services.

Net revenues of Jeuveau ® sales increased by $21.6 million to $56.5 million for the year ended December 31, 2020 from $34.9 million for the year ended December 31, 2019, primarily due to higher sales volume in the United States as partially offset by lower net aver age selling price.

In addition, during the Presidential Review period from mid-December 2020 to mid-February 2021 of the ITC final determination, we generated nominal revenue as a result of significantly increased customer pricing due to the bond amount of $441 per 100U vial of Jeuveau ® required to keep Jeuveau ® on the market.

As a result, we generated nominal revenue from mid-December 2020 through mid-February 2021.

We anticipate that our net revenues will continue to fluctuate as we implement new marketing programs or make changes to existing programs.

Net revenues of Jeuveau ® sales increased by $43.1 million, or 76.3%, to $99.7 million for the year ended December 31, 2021 from $56.5 million for the year ended December 31, 2020, with a majority of the increase attributable to higher sales volume and the rest to a higher net average selling price of Jeuveau ® in the United States.

We anticipate our continued sales growth will depend on our ability to grow our customer base and increase purchases by our current customers.

Cost of Sales

Our cost of sales, primarily consist of the cost of inventory purchased from Daewoong, increased by $10.3 million to $18.3 million for the year ended December 31, 2020 from $8.0 million from the year ended December 31, 2019 primarily due to higher sales volume in 2020 as well as the depletion of inventory purchased at the one-time launch pricing in 2019.

As a result of the Medytox/Allergan Settlement Agreements, cost of sales for the year ended December 31, 2020 also included royalties payable to Allergan and Medytox on the sale of Jeuveau ® commencing December 16, 2020.

We anticipate that our

cost of sales will increase materially as we pay royalty payments to Allergan and Medytox pursuant to the Medytox/Allergan Settlement Agreements during the initial royalty period through September 2022 and will fluctuate as our revenues fluctuate, although a portion of these royalty payments will be reimbursed to us by Daewoong pursuant to the Daewoong Settlement Agreement.

Our gross profit, calculated as total net revenues less product cost of sales, as a percentage of net revenues decreased to 67.6% for the year ended December 31, 2020 from 77.1% for the year ended December 31, 2019, primarily due to changes in marketing programs in 2020, royalties under the Medytox/Allergan Settlement Agreements for the sales starting December 16, 2020 and the depletion of inventory purchased at the one-time launch pricing in 2019.

We anticipate that our gross profit as a percentage of net revenues will decrease materially in the future as we pay royalty payments to Al lergan and Medytox pursuant to the Medytox/Allergan Settlement Agreements during the initial royalty period through September 2022 and will flu ctuate as we implement various marketing programs that may affect the average selling price of Jeuveau ® .

A portion of these royalty payments to Allergan and Medytox will be reimbursed to us by Daewoong pursuant to the Daewoong Settlement Agreement.

Product Cost of Sales

Product cost of sales, excluding amortization of intangible assets, primarily consisted of the cost of inventory purchased from Daewoong.

In addition, during the period from December 2020 to September 2022, product cost of sales, excluding amortization of intangible assets, also included certain royalties on the sale of Jeuveau ® payable to Medytox and Allergan pursuant to the Medytox/Allergan Settlement Agreements, partially offset by reimbursement receivable from Daewoong pursuant to the Daewoong Arrangement with respect to such royalties.

Product cost of sales, excluding amortization of intangible assets, increased by $25.2 million, or 137.9%, to $43.5 million for the year ended December 31, 2021 from $18.3 million from the year ended December 31, 2020 primarily due to higher sales volume and the additional net royalties under the Medytox/Allergan Settlement Agreements, offset by payments we receive under the Daewoong Arrangement .

We anticipate that our product cost of sales will fluctuate in line with changes in revenues.

Settlement Payment from Daewoong

In the first quarter of 2021, we recorded a one-time settlement receipt of $25.5 million from Daewoong in connection with the Daewoong Settlement Agreement.

Gross Profit Margin

Our gross profit margin was 79.0% and 62.4% for the years ended December 31, 2021 and 2020, respectively.

Our adjusted gross profit margin, calculated as total net revenues less product cost of sales, excluding amortization of intangible assets and the one-time settlement payments from Daewoong, as a percentage of net revenues was 56.3% and 67.6% for the years ended December 31, 2021 and December 31, 2020, respectively.

We anticipate our gross profit margin and adjusted gross profit margin will be impacted negatively and materially through September 2022, offset by payments we receive under the Daewoong Arrangement, and to a lesser degree for ten years thereafter, by our payments under the Medytox/Allergan Settlement Agreements.

We also anticipate our gross profit margin and adjusted gross profit margin will fluctuate as we implement various marketing programs that may affect the average selling price for Jeuveau ® and as we expand internationally.

Selling, General and Administrative

Selling, general and administrative expenses decreased by $15.4 million to $98.2 million for the year ended December 31, 2020 from $113.6 million for the year ended December 31, 2019, primarily resulting from delaying non-essential projects and suspending discretionary spending to minimize the impact of COVID-19 on our business.

During the year ended December 31, 2019, we also incurred expenses under the Jeuveau ® Experience Treatment, or J.E.T., program that ended in August 2019.

Selling, general and administrative expenses may fluctuate in the future primarily due to potential changes in sales and marketing strategies and future launches internationally.

Selling, general and administrative expenses increased by $13.9 million, or 14.1%, to $112.1 million for the year ended December 31, 2021 from $98.2 million for the year ended December 31, 2020, primarily resulting from increasing our commercial activities, including direct-to-consumer marketing, partially offset by reduced personnel costs.

Selling, general and administrative expenses may fluctuate in the future primarily due to potential changes in marketing strategies and future launches internationally.

Research and Development

Research and development expenses decreased by $2.3 million to $1.7 million for the year ended December 31, 2020 from $4.0 million for the year ended December 31, 2019.

The decrease was primarily attributable to the completion of the U.S.

clinical trial activities related to Jeuveau ® and delaying non-essential projects and suspending discretionary spending to minimize the impact of COVID-19 on our business.

We expect that our overall research and development expense will increase if and when we seek to develop further product candidates and as we pursue regulatory approvals in other jurisdictions.

Research and development expenses increased by $0.3 million, or 19.9%, to $2.1 million for the year ended December 31, 2021 from $1.7 million for the year ended December 31, 2020.

The increase was primarily attributable to increased clinical activities.

We expect that our overall research and development expense will increase as we conduct the Phase II Extra Strength clinical trial in 2022 and if and when we seek to develop further product candidates and as we pursue regulatory approvals in other jurisdictions.

Revaluation of Contingent Royalty Obligation Payable to Evolus Founders

The change in the fair value of the contingent royalty obligation payable to Evolus Founders is recorded in operating expenses in each reporting period.

During the year ended December 31, 2020 and 2019, the revaluation gain of $2.0 million and charge of $4.2 million, respectively, were primarily driven by changes in management assumptions related to revenue forecasts including the impact of the COVID-19 outbreak, discount rate reflecting changes in our cost of capital, develop ments in the ITC litigation and t iming of cash flows.

During the years ended December 31, 2021 and 2020, the revaluation charge of $6.3 million and gain of $2.0 million, respectively, were primarily driven by changes in management assumptions relating to revenue forecasts, the discount rate used and the t iming of cash flows.

Depreciation and Amortization

Depreciation and amortization increased to $7.0 million for the year ended December 31, 2020 from $4.1 million for the year ended December 31, 2019.

This was primarily attributable to amortization of the distribution right asset related to Jeuveau ® over 20 years as well as amortization of the internal-use software costs over two years.

Depreciation and amortization decreased by $1.4 million, or 20.0%, to $5.6 million for the year ended December 31, 2021 from $7.0 million for the year ended December 31, 2020 due to the decrease in amortization of the distribution right asset related to Jeuveau ® over 20 years as well as amortization of the internal-use software costs.

Litigation Settlement Expenses

Pursuant to settlement agreements we entered into with Allergan and Medytox in connection with the settlement of claims relating to certain intellectual property disputes related to Jeuveau ® on February 18, 2021, we recorded a charge in operating expenses and related liability of $83.4 million in December 2020, of which $35.0 million will be paid in cash over the next two years and $48.4 million was settled with the issuance of 6,762,652 of shares of our common stock on February 18, 2021.

Pursuant to settlement agreements we entered into with Allergan and Medytox in connection with the settlement of claims relating to certain intellectual property disputes related to Jeuveau ® in February 2021, we recorded a charge in operating expenses and related liability of $83.4 million in December 2020, which consisted of $35.0 million in deferred cash payments and $48.4 million from the issuance of 6,762,652 of shares of our common stock.

Restructuring Costs

Restructuring costs primarily included $3.0 million of termination benefits for employees we separated in April 2020 to minimize the impact of COVID-19 on our business.

Restructuring costs during the year ended December 31, 2020 primarily included $3.0 million of termination benefits relating to actions we took to separate more than 100 employees to preserve liquidity and minimize the impact of COVID-19 on our business.

Non-Operating Expense, Net

Non-operating expenses, net, increased by $3.8 million to $9.9 million for the year ended December 31, 2020 from $6.1 million for the year ended December 31, 2019, primarily due to higher interest expense on the long-term debt from Oxford Finance, LLC borrowed in March 2019 and lower interest income on our short-term investments.

On January 4, 2021, we entered into a letter agreement with Oxford Finance, LLC, and paid Oxford Finance, LLC $76.4 million to discharge in full all outstanding obligations, included accrued interest.

Non-operating expenses, net, decreased by $8.5 million, or 85.9%, to $1.4 million for the year ended December 31, 2021 from $9.9 million for the year ended December 31, 2020, primarily due to lower interest expense resulting from the repayment of the long-term debt from Oxford Finance, LLC in January 2021 and the conversion of the Daewoong Convertible Note in March 2021.

Income Taxes (Benefit) Expense

Income tax expense was $0.1 million for the year ended December 31, 2020 compared to a benefit of $15.0 million for the year ended December 31, 2019.

Upon the reclassification of the indefinite-lived IPR&D intangible asset to a definite-lived distribution right intangible asset in the first quarter of 2019 upon FDA approval of Jeuveau ® , the related deferred tax liability became a source of future taxable income in the assessment of the realization of deferred tax assets, and as a result, $15.0 million of the previously existing valuation allowance was released in the year ended December 31, 2019.

Income tax expense was de minimis for the year ended December 31, 2021 compared to $0.1 million for the year ended December 31, 2020.

This was primarily attributable to the decrease in state income taxes.

Liquidity and Capital Resources

As described elsewhere in this Annual Report, we believe that our current capital resources are not sufficient to meet our obligations and fund operations through at least the next 12 months.

We will be required to raise additional capital to meet our operating, debt and settlement obligations coming due.

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

To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution.

Any debt financing, if available, may involve restrictive covenants that impact our ability to conduct business.

If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly scale back or discontinue the commercialization of Jeuveau ® , or relinquish or otherwise dispose of rights to Jeuveau ® on unfavorable terms.

Our financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

We have a limited history of generating revenue from Jeuveau ® and have never been profitable.

As of December 31, 2021, we had cash and cash equivalents of $146.3 million, positive working capital of $121.1 million and stockholders’ equity of $81.9 million.

We have a limited history of generating revenues and began shipping Jeuveau ® in May 2019.

As of December 31, 2021, we had an accumulated deficit of $422.9 million.

We incurred net losses of $46.8 million and $163.0 million in the years ended December 31, 2021 and 2020, respectively.

We used net cash of $33.4 million and $57.9 million in operating activities for the twelve months ended December 31, 2021 and 2020, respectively.

We expect to continue to incur significant expenses for the foreseeable future as we increase marketing efforts for Jeuveau ® and maintain our regulatory approvals.

As of December 31, 2020, we had cash and cash equivalents of $102.6 million and short-term investments of $5.0 million.

On January 4, 2021, we entered into an agreement with Oxford Finance LLC, or Oxford, pursuant to which the Company paid Oxford $76.4 million to pay off the Oxford Term Loan.

On February 18, 2021, we entered into settlement agreements with Medytox, Inc., or Medytox, Allergan, Inc.

and Allergan Limited, or collectively as Allergan, in connection with the ITC Action, for which we agreed to pay $15.0 million in 2021, $15.0 million in 2022 and $5.0 million in 2023 with additional terms as described below.

Additionally, we are obligated to pay the Evolus Founders the promissory note of $20.0 million in November 2021.

Our financial statements as of December 31, 2020 have been prepared under the assumption that we 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.

Our independent registered public accounting firm has issued a report that includes an explanatory paragraph expressing substantial doubt in our ability to continue as a going concern without additional capital becoming available.

Follow-On Public Offering

In November 2019, we closed a follow-on public offering and sold 5,999,550 shares of our common stock at a price of $13.00 per share, inclusive of 782,550 shares of common stock issued upon the exercise by the underwriters of their option to purchase additional shares.

The net proceeds were approximately $73.3 million after deducting underwriting discounts and commissions, excluding other offering expenses.

In April 2021, we completed a follow-on public offering and sold 10,350,000 shares of our common stock, which included the exercise in full by the underwriters of their option to purchase an additional 1,350,000 shares of our common stock at a price to the public of $9.50 per share.

We received net proceeds of approximately $92.4 million from the offering, after deducting underwriting discounts and commissions, excluding other offering expenses.

“At-the-market” Offerings of Common Stock

In March 2021, we entered into an “at-the-market” sales agreement with SVB Leerink LLC (the “Sales Agent”) pursuant to which shares of our common stock may be sold from time to time for aggregate gross proceeds of up to $75.0 million (the “ATM Program”).

The Sales Agent is entitled to compensation, at a commission rate equal to 3.0% of the gross proceeds from the sale of our common shares under the ATM Program.

For the twelve months ended December 31, 2021, we sold a total of 934,367 shares of our common stock pursuant to the ATM Program at the prevailing market prices for total net proceeds of $10.9 million and paid total commissions of $0.3 million to the Sales Agent.

The Pharmakon Term Loans

On December 14, 2021, we entered into a loan agreement with Pharmakon.

Pursuant to the terms of the agreement, Pharmakon agreed to make term loans to us in two tranches.

The first tranche of $75.0 million was funded on December 29, 2021.

The second tranche of $50.0 million may be drawn at our election no later than December 31, 2022.

We received net proceeds of approximately $68.7 million from Pharmakon, after issuance costs and debt discounts.

As of March 3, 2022, we have not drawn the second tranche.

We shall make 12 equal quarterly payments of principal on the outstanding Pharmakon Term Loans commencing in March 2025 and continuing through the maturity date.

The Pharmakon Term Loans will mature on the sixth year anniversary of the closing date of the first tranche.

The term loan bears an annual interest rate equal to the

Dollar LIBOR rate (subject to a LIBOR rate floor of 1.0%) plus 8.5%, and matures in December 2027.

The proceeds of the Pharmakon Term Loans will be used to fund the Company’s general corporate and working capital requirements.

Contingent Royalties and Promissory Note Payable to the Evolus Founders

We are obligated to make the following future payments to the founders of Evolus, which we refer to as the Evolus Founders:

quarterly royalty payments of a low single digit percentage of net sales of Jeuveau ® .

These obligations terminate in the quarter after the 10-year anniversary of the first commercial sale of Jeuveau ® in the United States.

The fair value of the obligations is valued quarterly and is referred to in our financial statements as the contingent royalty obligation.

In November 2021, we also paid $20.0 million to satisfy in full a promissory note that matured in November 2021.

As of December 31, 2021 and 2020, we recorded an aggregate balance of $44.7 million and $41.5 million, respectively, on our balance sheet for the royalty payment obligation.

The Oxford Loan and Security Agreement

On March 15, 2019, we entered into a Loan and Security Agreement, or the credit facility, with Oxford Finance, LLC, as collateral agent, or Oxford, and the lenders party thereto from time to time, pursuant to which the lender would make term loans available to us of up to $100.0 million, or the credit facility.

The credit facility provided that the term loans would be funded in two advances.

The first tranche of $75.0 million was funded on the closing date, and the second tranche of $25.0

million was not borrowed.

The first tranche of $75.0 million was funded on the closing date, and the second tranche of $25.0 million was never drawn.

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

Dollar LIBOR rate plus 7.0%.

On January 4, 2021, we entered into a letter agreement, or Payoff Letter, with Oxford, pursuant to which (i) on January 4, 2021, we paid Oxford $76.4 million, or the Payoff Amount, to discharge in full all outstanding obligations, included accrued interest, under the Loan and Security agreement, and (ii) effective upon such repayment, the Loan and Security Agreement, and all unfunded commitments thereunder, guarantees and other security interests granted to Oxford, and all other obligations of and restrictions on us under the Loan and Security Agreement, terminated.

As a condition to entering into the Payoff Letter, Oxford agreed to waive a total of approximately $4.3 million of fees comprised of (i) approximately $2.8 million of the Final Payment (as defined under the Loan and Security Agreement) and (ii) the prepayment fee of $1.5 million otherwise payable pursuant to the terms of the Loan and Security Agreement.

Contingent Promissory Note Payable to Evolus Founders

We were acquired by Strathspey Crown Holdings Group, LLC, or SCH, in 2013 and subsequently by its subsidiary, Alphaeon Corporation, or Alphaeon, by means of a stock purchase agreement, or 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, or Amended Stock Purchase Agreement, and, as a result, effective upon the closing of the our initial public offering in 2018, the Company assumed all of Alphaeon’s payment obligations under the Amended Stock Purchase Agreement.

Among the payment obligations under the Amended Stock Purchase Agreement is a $20.0 million promissory note that matures in November 2021.

Contingent Royalty Obligation Payable to the Evolus Founders

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

As of December 31, 2020 and 2019, we recorded an aggregate balance of $41.5 million and $44.7 million, respectively, on our balance sheet for the payment obligation.

We agreed to pay interest-only for the first 36 months until May 2022, followed by a 23-month amortization period.

On January 4, 2021, we entered into a letter agreement with Oxford, pursuant to which (i) we paid Oxford $76.4 million , or the Payoff Amount, to discharge in full all outstanding obligations, included accrued interest, under the Loan and Security Agreement, and (ii) effective upon such repayment, the Loan and Security Agreement, and all unfunded commitments thereunder, guarantees and other security interests granted to Oxford, and all other obligations of and restrictions on us under the Loan and Security Agreement, terminated.

As a condition to entering into the letter agreement, Oxford agreed to waive a total of approximately $4.3 million of fees comprised of (i) approximately $2.8 million of the Final Payment (as defined in Note 6.

Term Loans and (ii) the prepayment fee of $1.5 million otherwise payable pursuant to the terms of the Loan and Security Agreement.

The Daewoong Convertible Note

On July 6, 2020, we 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 $40.0 million, which we refer to as the Daewoong Convertible Note, which was funded on July 30, 2020.

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

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

As described in “—Overview—Impact on Our Business of Final Ruling by the U.S.

International Trade Commission and the Subsequent Settlements,” under the Conversion Agreement, the outstanding principal balance, together with all accrued and unpaid interest thereon, in the amount of $40.8 million was converted, at the conversion price of $13.00 per share, into 3,136,869 shares of our common stock on March 23, 2021.

Additionally, on July 6, 2020, we, Daewoong, and Oxford entered into a Subordination Agreement pursuant to which the Convertible Note would be subordinated to our obligations under the Loan and Security Agreement with Oxford and us.

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

On March 25, 2021, pursuant to the Conversion Agreement with Daewoong, the outstanding principal balance, including interest paid in kind, 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 $40.8 million was converted into 3,136,869 shares of our common stock, at the conversion price of $13.00 per share.

Litigation Settlement

On February 18, 2021, upon entering into certain agreements in connection with the settlement of claims relating to certain intellectual property disputes related to Jeuveau ® , we agreed to pay to Allergan and Medytox $35.0 million in multiple payments over two years and also issued 6,762,652 shares its common stock to Medytox.

In addition, during period from December 16, 2020 to September 16, 2022, we agreed to pay to Allergan and Medytox royalties 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.

During the period from September 17, 2022 to September 16, 2032, we agreed to pay to Medytox a mid-single digit royalty percentage on all net sales of Jeuveau ® .

On February 18, 2021, upon entering into the Medytox/Allergan Settlement Agreements, we agreed to pay to Allergan and Medytox $35.0 million in multiple payments over two years, of which we paid $15.0 million in the third quarter of 2021 and $15.0 million during the first quarter of 2022, with final payment of $5.0 million due in 2023.

We also issued 6,762,652 shares of common stock to Medytox.

In addition, during the period from December 16, 2020 to September 16, 2022, we agreed to pay to Allergan and Medytox royalties 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.

During the period from

September 17, 2022 to September 16, 2032, we agreed to pay to Medytox a mid-single digit royalty percentage on all net sales of Jeuveau ® .

The royalty payments will be made quarterly.

As described in “—Overview— Impact of Settlement Agreements ,” on March 23, 2021, upon entering the Daewoong Arrangement, Daewoong paid us $25.5 million in April 2021, cancelled all remaining milestone payments up to $10.5 million in aggregate under the Daewoong Arrangement and agreed to reimburse us certain amounts (calculated on a dollar amount per vials sold basis in the United States) for sales of certain products with respect to which we are required to pay Medytox and Allergan royalties pursuant to the U.S.

Settlement Agreement.

License and Supply Agreement

The Daewoong Agreement includes certain minimum annual purchases we are required to make in order to maintain the exclusivity of the license.

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

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

Operating Leases

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

On May 15, 2019, we 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 with an option to extend the term for an additional 60 months.

Our corporate headquarters in Newport Beach, California is under a five-year non-cancelable operating lease, which expires on January 31, 2025 with an option to extend the term for an additional 60 months.

Lease payments increase based on an annual rent escalation clause that occurs on each February 1 anniversary.

We may, under certain circumstances, terminate the lease on the 36 months 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.

We have an option to extend the term of the lease for an additional 60 months.

License and Supply Agreement

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

As of December 31, 2020, Daewoong was eligible to receive contingent milestone payments of up to $10.5 million, all of which were cancelled under the Daewoong Agreement Amendment in March 2021.

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

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

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

Current and Future Capital Requirements

We have determined that our current financial condition raises substantial doubt about our ability to continue as a going concern and, as described above, we believe that our current capital resources are not sufficient to meet our obligations and fund operations through at least the next 12 months.

Until such time, if ever, as we can generate substantial product revenue to cover our costs of operations, we expect to finance our cash needs through entering into licensing or collaboration agreements with partners, other debt or equity financings or other sources of financing.

Sufficient funds may not be available to us at all or on attractive terms when needed from these sources.

To the extent that we raise additional capital through the future sale of equity, the ownership interests of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders.

If we raise additional funds through the issuance of debt securities, these securities could contain covenants that would restrict our operations.

We may require additional capital beyond our currently anticipated amounts.

If we are unable to obtain additional funding from these or other sources when needed, we may need to significantly reduce our controllable and variable expenditures and current rate of spending through reductions in staff and delaying, scaling back, or suspend certain research and development, sales and marketing programs and other operational goals.

We have based our projections of operating capital requirements on assumptions that may prove to be incorrect and we may use all our available capital resources, which consist of cash, cash equivalents and short-term investments, sooner than we expect.

We believe that our current capital resources, which consist of cash and cash equivalents, cash generated from operations, and cash available under the Pharmakon Term Loans, as well as the public debt and equity markets, will be sufficient to satisfy both our short-term and long-term cash requirements for working capital to support our daily operations and meet commitments under our contractual obligations with third parties.

This includes our obligation to make an additional $15.0 million payment pursuant to the Medytox/Allergan Settlement Agreements in the first quarter of 2022.

We have based our projections of capital requirements on assumptions that may prove to be incorrect and we may use all our available capital resources, which consist of cash and cash equivalents, cash generated from operations, and cash available under the Pharmakon Term Loans, as well as the public debt and equity markets, sooner than we expect.

Our cash requirements depend on numerous factors, including but not limited to the impact of any potential disruptions to our supply chain resulting from the COVID-19 pandemic, inflation and other long-term commitments and contingencies.

Because of the numerous risks and uncertainties associated with research, development and commercialization of our products, we are unable to estimate the exact amount of our operating capital requirements.

Our future funding requirements will depend on many factors, including, but not limited to:

• the timing and amounts of the royalty and other payments in connection with the settlement agreements with Medytox and Allergan;

• the timing and amounts of the royalty and other payments to Evolus Founders;

• the number and characteristics of any future product candidates we develop or acquire;

Any future funding requirements will depend on many factors, including, but not limited to:

• the timing and amounts of the royalty and other payments payable in connection with the Medytox/Allergan Settlement Agreements and the reimbursement receivable from Daewoong in connection with the Daewoong Arrangement;

• the amounts of the royalty payable to the Evolus Founders;

• the number and characteristics of any future product candidates we may develop or acquire;

• the timing and costs of any ongoing or future clinical programs we may conduct;

• our ability to forecast demand for our products, scale our supply to meet that demand and manage working capital effectively;

4 unchanged sentences

• any product liability or other lawsuits related to our products;

• the cost of any current litigation, including our ongoing securities class action lawsuit and shareholder derivative lawsuit;

• the expenses needed to attract and retain skilled personnel;

• the costs associated with being a public company;

• the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patents and any other future patent litigation we may be involved in;

• the timing, receipt and amount of sales of any future approved or cleared products, if any.

• the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing intellectual property and any other future intellectual litigation we may be involved in;

• the timing, receipt and amount of sales of any future approved or cleared products.

The following table summarizes our cash flows for the periods indicated:

Year Ended December 31,

2020 2019 Change

(in millions)

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Investing activities

12.2 (23.4) 35.6

Financing activities

38.3 133.5 (95.2)

Change in cash and cash equivalents

(7.3) 16.7 $ (24.0)

Cash and cash equivalents, beginning of period

2 unchanged sentences

Operating Activities

Cash used in operating activities decreased by $35.5 million to $57.9 million for the year ended December 31, 2020 from $93.4 million for the year ended December 31, 2019.

The decrease in net cash used in operating activities reflects the decrease in net loss as adjusted for non-cash items as well as timing of receipts from customers and payments to vendors in the ordinary course of business.

For the year ended year ended December 31, 2020, operating activities used $57.9 million of cash, which primarily resulted from our net loss of $163.1 million as adjusted for certain non-cash charges including $10.6 million of stock-based compensation expense, $2.1 million of provision of allowance for doubtful accounts, $2.7 million of amortization of debt discount and issuance costs, $7.0 million of depreciation and amortization and $48.4 million of non-cash portion of accrued settlement expenses, partially offset by a gain of $2.0 million in revaluation of our contingent royalty obligation.

In addition, net operating assets and liabilities changed by $35.6 million primarily driven by $35.0 million of accrued settlement expenses and various timing of inventory purchases and payments, collections from customers and payments to vendors.

For the year ended year ended December 31, 2019, operating activities used $93.4 million of cash, which primarily resulted from our net loss of $90.1 million as adjusted for certain non-cash charges including $9.5 million of stock-based compensation expense, a charge of $4.2 million in revaluation of our contingent royalty obligation, $2.2 million of amortization of debt discount and issuance costs and $4.1 million of depreciation and amortization, partially offset by a gain of $15.1 million of deferred income tax provision.

Net operating assets and liabilities changed by $8.5 million primarily driven by the timing of inventory purchases and payments, collections from customers and payments to vendors.

For the year ended December 31, 2021, operating activities used $33.4 million of cash, which primarily resulted from our net loss of $46.8 million as adjusted for certain non-cash charges including $9.6 million of stock-based compensation expense, $0.6 million of provision of allowance for doubtful accounts, $0.9 million of amortization of debt discount and issuance costs, $5.6 million of depreciation and amortization and $6.3 million in revaluation of our contingent royalty obligation.

In addition, net operating assets and liabilities changed by $11.5 million primarily driven by $15.0 million of accrued litigation settlement expenses and various timing of inventory purchases and payments, collections from customers and payments to vendors.

For the year ended December 31, 2020, operating activities used $57.9 million of cash, which primarily resulted from our net loss of $163.1 million as adjusted for certain non-cash charges including $10.6 million of stock-based compensation expense, $2.1 million of provision of allowance for doubtful accounts, $2.7 million of amortization of debt discount and issuance costs, $7.0 million of depreciation and amortization and $48.4 million of non-cash portion of accrued settlement expenses, partially offset by a gain of $2.0 million in revaluation of our contingent royalty obligation In addition, net operating assets and liabilities changed by $35.6 million primarily driven by $35.0 million of accrued litigation settlement expenses and various timing of inventory purchases and payments, collections from customers and payments to vendors.

Investing Activities

Cash provided by investing activities was $12.2 million for the year ended December 31, 2020 compared to $23.4 million of cash used for the year ended December 31, 2019.

The change in cash provided or used in investing activities was attributable to a decrease in purchases of short-term investments and their maturities in 2020.

Cash provided by investing activities was $4.0 million for the year ended December 31, 2021 compared to $12.2 million of cash provided for the year ended December 31, 2020.

The change in cash used in investing activities was attributable to maturities of short-term investments with no new purchases during the year ended December 31, 2021.

Financing Activities

Cash provided by financing activities decreased by $95.2 million to $38.3 million for the year ended December 31, 2020 from $133.5 million for the year ended December 31, 2019.

For the year ended December 31, 2020, financing activities consisted of the proceeds of $40.0 million received from the Convertible Note in July 2020 as partially offset by royalty payments to Evolus Founders and debt obligations.

For the year ended year ended December 31, 2019, financing activities consisted of the proceeds of $71.7 million received from our Oxford credit facility net of discounts and issuance costs and $73.1 million from a follow-on equity offering, partially offset by a $9.7 million in royalty and milestone payments to Evolus Founders and a $3.0 million payment to Daewoong upon FDA approval of Jeuveau ® in February 2019.

See “ —Liquidity and Capital Resources ” for a description of our credit facility with Oxford and convertible note with Daewoong.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as defined in the rules and regulations of the SEC.

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for any other contractually narrow or limited purpose.

Contractual Obligations and Commitments

Not applicable.

Critical Accounting Policies

Cash provided by financing activities increased by $34.7 million to $73.1 million for the year ended December 31, 2021 from $38.3 million for the year ended December 31, 2020.

For the year ended December 31, 2021, cash provided by financing activities resulted from the net proceeds from our follow-on offering of $92.4 million, sales of $10.9 million of our common shares under the ATM Program, and $72.0 million net proceeds from long-term debt with Pharmakon, offset by the repayment of long-term debt with Oxford of $76.3 million and repayment of the promissory note payable to Evolus Founders of $20.0 million.

For the year ended December 31, 2020, cash provided by financing activities consisted of the $40.0 million proceeds from the Convertible Note in July 2020, partially offset by a $1.1 million in royalty and milestone payments to Evolus Founders.

See “ —Liquidity and Capital Resources ” for a description of our Pharmakon Term Loans.

Material Cash Requirements

Our material cash requirements from known contractual and other obligations primarily consist of (i) principal and interest payments related to our Pharmakon Term Loans (future interest payments on our outstanding Pharmakon Term Loans total approximately $33.5 million, with $7.2 million due within twelve months), (ii) quarterly royalty payments to the Evolus Founders of a low single digit percentage of net sales of Jeuveau ® (these obligations terminate in the quarter after the 10-year anniversary of the first commercial sale of Jeuveau ® in the United States), (iii) $15.0 million during the first quarter of 2022, and a final payment of $5.0 million due in 2023 related to the Medytox/Allergan Settlement Agreements, (iv) quarterly royalty payments to Allergan and Medytox on the sale of Jeuveau ® during the period from December 16, 2020 to September 16, 2022 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 (during the period from September 17, 2022 to September 16, 2032, we agreed to pay to Medytox a mid-single digit royalty percentage on all net sales of Jeuveau ® ) and (v) obligations under operating leases related to our office spaces.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with GAAP.

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Actual results may differ materially from these estimates under different assumptions or conditions and such differences could be material to the financial position and results of operations.

On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts and experience.

On an ongoing basis, we evaluate our estimates and assumptions in light of changes in circumstances, facts and experience.

While our significant accounting policies are more fully described in the notes to our financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies to be most critical for fully understanding and evaluating our financial condition and results of operations, as these policies relate to the more significant areas involving management’s judgments and estimates.

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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.

We currently operate in one reportable segment and all of our net revenue is derived from sales of Jeuveau ® .

We generate 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, we recognize revenue when control of Jeuveau ® is transferred to a

customer upon receipt.

We do not accept product returns except under limited circumstances such as damages in transit or ineffective product.

Any amounts related to taxes assessed by governmental authorities are excluded 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 on the condensed statements of operations and comprehensive loss.

Payment terms are short-term and customer contracts do not include significant financing components.

For product revenue, we recognize revenue when control of Jeuveau ® is transferred

to a customer upon receipt.

For service revenue, we are determined to be the agent in the distribution of Jeuveau ® in Canada and record the sale as service revenue on a net basis.

We provide customers with trade and volume discounts and prompt pay discounts that are directly reflected in the invoice price.

Revenues are recorded net of sales-related adjustments, wherever applicable, for the volume rebates, coupon programs and consumer loyalty program.

Volume rebates are contractually offered to certain customers.

Generally, the rebates payable to each customer are determined based on the contract and quarterly purchase volumes.

Through the coupon program, customers receive coupons redeemable into gift cards funded by us for the benefit of consumers.

The coupons are accounted for as variable consideration.

We estimate the coupon redemption rates based on historical data and expectations of future redemptions prior to the coupon expiration date.

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

Product revenues are recorded net of sales-related adjustments, wherever applicable, for the volume rebates, coupon program, consumer loyalty program and co-branded marketing programs.

Volume rebates are contractually offered to certain customers, and the rebates payable to each customer are determined based on the contract and quarterly purchase volumes, which are readily available.

The coupon program ended in June 2020, and all unredeemed coupons were expired.

The consumer loyalty program allows participating customers to earn rewards for qualifying treatments to their patients (i.e.

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At the time Jeuveau ® product is sold to customers, the invoice price is allocated between the product sold and the estimated material right reward, or 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 reversed and included in net revenue.

The standalone selling price of the Reward is measured based on historical sales data, estimated average selling price of Jeuveau ® at the time of redemption, expected customer and consumer participation rates in the loyalty program, and estimated number of qualifying treatments to be performed by customers.

We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to establish the liability for the Reward.

However, if the actual customer and consumer participation rates and number of qualifying treatments in any future periods materially differ from the estimates, we may be exposed to adjustments that could be material.

The portion of invoice price allocated to the Reward is initially recorded as deferred revenue, and when customers redeem the Reward and the related product is delivered, the deferred revenue is reversed and included in net revenues.

Through the co-branded marketing programs, eligible customers with a certain level of Jeuveau ® purchases receive advertising co-branded with us.

At the time Jeuveau ® is sold to customers, the invoice price is allocated between the product sold and the advertisement.

The standalone selling price of the advertisement is measured based on estimated market value of similar advertisement adjusted for the customer’s portion of the advertisement.

The portion of invoice price allocated to the advertisement is initially recorded as deferred revenue, and when the advertisement airs, the deferred revenue is recognized in net revenues at that time.

Accounts receivable are recorded at the invoiced amount and do not bear interest.

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On a recurring basis, we estimate the amounts of receivables considered uncollectible to reflect an allowance for doubtful accounts.

Litigation Settlement

On February 18, 2021, we entered into certain agreements in connection with the settlement of claims relating to certain intellectual property disputes relating to Jeuveau ® .

Pursuant the settlement agreements, we agreed to pay to Allergan and Medytox cash payments over two years and issued our common stock to Medytox.

In addition, for the period from December 16, 2020 to September 16, 2022, we agreed to pay to Allergan and Medytox a royalty on the sale of Jeuveau ® , based on a certain dollar amount per vial sold in the United States and a low-double digit royalty on net sales of Jeuveau ® sold in other territories.

For the period from September 17, 2022 to September 16, 2032, we agreed to pay to Medytox a mid-single digit royalty percentage on net sales of Jeuveau ® in the United States and other territories.

The royalty payments will be made quarterly.

Financial Statements and Supplementary Data - Note 9 Commitments and Contingencies for additional details on the settlement agreements.

We recorded the costs associated with the cash payments and the issuance of our common stock in litigation settlement expenses in the statements of operations and comprehensive loss for the year ended December 31, 2020 and related liabilities in accrued litigation settlement expenses on the balance sheet as of December 31, 2020.

A portion of the liabilities was settled with the issuance of our common stock subsequently in February 2021.

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

Contingent Royalty Obligation and Promissory Note Payable to Evolus Founders

Contingent Royalty Obligation to the Evolus Founders

We determine the fair value of the contingent royalty obligation payable to the Evolus Founders under the Amended Purchase Agreement based on significant unobservable inputs using a discounted cash flows method.

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The significant unobservable input assumptions that can significantly change the fair value includes (i) projected net revenues during the payment period, (ii) the discount rate and (iii) the timing of payments.

We also determined the fair value of the contingent promissory note payable at present value using a discount rate for similar rated debt securities and is based on an estimated date that we believe the contingent promissory note will mature.

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

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

Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in a business combination.

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Intangible Assets

Upon FDA approval of Jeuveau ® in February 2019, in process research and development (“IPR&D”) related to Jeuveau ® was evaluated as completed and reclassified to a definite-lived distribution right intangible asset, which is amortized over the period the asset is expected to contribute to our future cash flows.

Intangible assets are consisted of a definite-lived distribution right of Jeuveau ® and capitalized internal-use software.

The distribution right is amortized over the period the asset is expected to contribute to our future cash flows.

We determined the pattern of this intangible asset’s future cash flows could not be readily determined with a high level of precision.

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These costs include personnel expenses and external costs that are directly associated with the software projects.

These costs are included as intangible assets in the accompanying condensed balance sheets.

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.

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We describe the recently issued accounting pronouncements that apply to us in Item 8.

Financial Statements and Supplementary Data - Note 2 , Basis of Presentation and Summary of Significant Accounting Policies-Recent Accounting Pronouncements.

Financial Statements and Supplementary Data - Note 2.

Basis of Presentation and Summary of Significant Accounting Policies-Recent Accounting Pronouncements.

Quantitative and Qualitative Disclosure About Market Risk.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis