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Item 7. Management’s Discussion and Analysis

2023-03-08 compared with 2022-03-03 · 118 added, 122 removed, 209 unchanged (53% 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 and 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 consolidated results of operations and should be read together with the historical consolidated financial statements and the notes thereto included in Item 8 “Consolidated 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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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.

We launched Jeuveau ® in Great Britain in September 2022, in Germany and Austria in February 2023, and we are finalizing plans for entering additional countries in Europe as part of a phase rollout.

In January 2023, we received approval from the Australian Therapeutics Good Administration, or TGA, for regulatory approval of our neurotoxin in Australia.

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.

We completed our patient enrollment in the clinical study evaluating the “extra-strength” dose in the second quarter of 2022.

This program provides us with the opportunity to offer the first multi-strength neurotoxin, giving customers and consumers increased treatment options.

In January 2023, we announced positive interim results from the Phase II clinical trial.

The interim data showed that the “extra-strength” formulation of Jeuveau ® appeared to be generally safe and well-tolerated and demonstrated a median duration of at least 26 weeks based on the time for patients to return to baseline after treatment.

The trial is expected to be completed in the first half of 2023, and final results will be presented in the second half of 2023.

Impact of Settlement Agreements

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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.

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

We refer to the U.S.

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

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.

We have completed all obligations to Allergan and the majority of our obligations to Medytox under the Medytox/Allergan Settlement Agreements.

These completed obligations consisted of (i) cash payments of $35.0 million in multiple payments to Allergan and Medytox, of which we paid each of the first payment of $15.0 million in the third quarter of 2021, the second payment of $15.0 million in the first quarter of 2022, and the final payment of $5.0 million in the first quarter of 2023, (ii) payment to Allergan and Medytox of certain royalties on the sale of Jeuveau ® , based on a certain dollar amount per vial sold

of Licensed Products by or on our behalf in the United States, from December 16, 2020 through September 16, 2022, (iii) payment to Medytox, from December 16, 2020 to September 16, 2022, of 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) the issuance of 6,762,652 shares of our common stock to Medytox.

Going forward, our remaining obligation will be to 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 through September 16, 2032.

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.

(“Daewoong”), which we refer to as the Daewoong Settlement Agreement, 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 Settlement Agreement and reimbursed 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.

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.

As a result of the royalty payments that we are required to pay under the Medytox Settlement Agreements, our cost of sales and gross profit margin have been negatively impacted and will continue to be negatively impacted to a marginal extent from September 2022 to September 2032.

The Pharmakon Term Loans

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

On December 5, 2022, we entered into a Second Amendment to the loan agreement to extend our option to draw down the second tranche of $50.0 million until December 31, 2023.

In exchange for the extension, we paid an amendment fee of $0.5 million to Pharmakon.

The second tranche of $50.0 million may be drawn at our election no later than December 31, 2023, subject to the terms and conditions of the Pharmakon Term Loans.

As of March 8, 2023, 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.

The Pharmakon Term Loans will mature on the six-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

On July 6, 2020, pursuant to a Convertible Promissory Note Purchase Agreement with Daewoong, we issued to Daewoong 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.

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—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, 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.

Contingent Royalties and Notes Payable to Evolus Founders

We are obligated to make quarterly future payments to the founders of Evolus, which we refer to as the Evolus Founders, of a low single digit percentage of net sales of Jeuveau ® .

These obligations terminate at the end of the second quarter of 2029.

The fair value of the obligations are valued quarterly and are referred to in our consolidated 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.

Market Trends and Uncertainties

The global economy, including the financial and credit markets, has recently experienced extreme volatility and disruptions, including the COVID-19 pandemic, increases in inflation rates, rising interest rates, severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, and uncertainty about economic stability.

We anticipate that the fiscal 2023 will continue to reflect a dynamic macroeconomic environment.

We expect elevated levels of cost inflation to continue, potentially impacting consumer discretionary spending for aesthetic medical procedures.

Markets experiencing uncertainty could have substantial high rates of inflation.

We cannot reasonably estimate the financial impact of increased inflation on our financial condition, results of operations or cash flows in the future.

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 is defined as total net revenues less product cost of sales, excluding the one-time settlement payment from Daewoong in 2021 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.

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 consolidated 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.

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Research and development 4.7 2.1

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

In-process research and development 2.0 —

Revaluation of contingent royalty obligation payable to Evolus Founders 5.8 6.3

Depreciation and amortization 3.7 5.6

Litigation settlement expenses — 83.4

Restructuring costs — 3.0

Total operating expenses 213.9 144.1

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Loss before income taxes:

(74.3) (46.8)

Income tax expense 0.1 0.0

Net loss $ (74.4) $ (46.8)

Unrealized loss, net of tax (0.3) —

Comprehensive loss $ (74.7) $ (46.8)

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 and co-branded marketing programs.

Net revenues consist of revenues, net of adjustments primarily for customer rebates, 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 $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.

Net revenues of Jeuveau ® sales increased by $48.9 million, or 49.1%, to $148.6 million for the year ended December 31, 2022 from $99.7 million for the year ended December 31, 2021, primarily due to higher sales volumes.

We anticipate our continued sales growth will depend on our ability to grow our customer base and increase purchases by our current customers in the competitive medical aesthetic market.

Cost of Sales

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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 .

Our royalty obligations to Allergan concluded on

September 16, 2022, and beginning on September 17, 2022, our royalty obligations to Medytox were reduced to a mid-single digit percentage of net revenue for ten years thereafter.

Product cost of sales, excluding amortization of intangible assets, increased by $12.4 million, or 28.4%, to $55.9 million for the year ended December 31, 2022 from $43.5 million from the year ended December 31, 2021 primarily due to higher sales volume.

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

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Our gross profit margin was 60.4% and 79.0% for the years ended December 31, 2022 and 2021, 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.

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 total net revenues was 62.4% and 56.3% for the years ended December 31, 2022 and 2021, respectively.

Our gross profit margin and adjusted gross profit margin were impacted negatively and materially through September 2022, offset by payments we receive under the Daewoong Arrangement, by our payments under the Medytox/Allergan Settlement Agreements.

Our gross profit margin and adjusted gross profit margin will continue to be negatively impacted to a lesser extent from September 2022 to September 2032 as we pay royalty obligations to Medytox at a mid-single digit percentage of net revenue.

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 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 increased by $29.8 million, or 26.6%, to $141.8 million for the year ended December 31, 2022 from $112.1 million for the year ended December 31, 2021, primarily resulting from increased personnel costs and increased commercial activities.

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

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Research and development expenses increased by $2.7 million, or 129.7%, to $4.7 million for the year ended December 31, 2022 from $2.1 million for the year ended December 31, 2021.

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.

The increase was primarily attributable to increasing our clinical operations and research and development expenses related to the Phase II “extra-strength” clinical trial.

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

In-process Research and Development

In the second quarter of 2022, we recorded an upfront payment of $2.0 million in connection with the License and Research Collaboration Agreement (the “Collaboration Agreement”) we entered into in June 2022 with a 3D printing company with biomaterial capabilities.

Basis of Presentation and Summary of Significant Accounting Policies for additional information.

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 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.

During the years ended December 31, 2022 and 2021, the revaluation charge of $5.8 million and $6.3 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 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 ® 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 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.

Depreciation and amortization decreased by $1.9 million, or 33.8%, to $3.7 million for the year ended December 31, 2022 from $5.6 million for the year ended December 31, 2021 due to the decrease in amortization of the internal-use software.

Non-Operating Expense, Net

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 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.

Non-operating expenses, net, increased by $7.6 million, or 544.2%, to $9.0 million for the year ended December 31, 2022 from $1.4 million for the year ended December 31, 2021, primarily due to higher interest expense for the Pharmakon Term Loans.

The interest on the Pharmakon Term Loans is based on a variable interest rate, which we expect will continue to result in higher interest expense in the current interest rate environment.

Loss from Extinguishment of Debts, Net

Loss from extinguishment of debts, net includes a $1.9 million loss from payoff of long-term debt with Oxford Finance, LLC in January 2021, partially offset by a $1.0 million gain from the conversion of the Daewoong Convertible Note in March 2021.

Income Taxes Expense

Income tax expense was de minimis for the year ended December 31, 2022 and 2021.

Liquidity and Capital Resources

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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.

Since inception, we have incurred recurring net operating losses and as of December 31, 2022, we had an accumulated deficit of $497.3 million.

We incurred net losses of $74.4 million and $46.8 million in the years ended December 31, 2022 and 2021, respectively.

We used net cash of $84.9 million and $33.4 million in operating activities for the twelve months ended December 31, 2022 and 2021, 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.

Follow-On Public Offering

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.

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

Impact of Inflation

The markets in which we operate are currently experiencing increased inflation.

While we do not believe that inflation has had a material impact on our business, revenues or operating results during the periods presented, a prolonged inflationary environment could increase our cash required for operations and impact our liquidity position.

The Pharmakon Term Loans

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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.

On December 5, 2022, we entered into a Second Amendment to the loan agreement to extend our option to draw down the second tranche of $50.0 million until December 31, 2023.

The second tranche of $50.0 million may be drawn at our election no later than December 31, 2023.

As of March 8, 2023, we have not drawn the second tranche.

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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

The term loan bears an annual interest rate equal to the U.S.

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.

The proceeds of the Pharmakon Term Loans are used to fund our 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.

We are obligated to make quarterly royalty payments of a low single digit percentage of net sales of Jeuveau ® to the Evolus Founders.

These obligations terminate at the end of the second quarter of 2029.

The fair value of the obligations is valued quarterly and is referred to in our consolidated 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.

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 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%.

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 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.

As of December 31, 2022 and 2021, we recorded an aggregate balance of $46.3 million and $44.7 million, respectively, on our consolidated balance sheets for the royalty payment obligation.

Daewoong Convertible Note

Litigation Settlement

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.

As described in “—Overview— Impact of Settlement Agreements ,” 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 paid in the first quarter of 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.

In addition, during the period from December 16, 2020 through 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 are 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.

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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.

We may, however, meet these minimum purchase obligations by achieving certain market share in our licensed 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.

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Current and Future Capital Requirements

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.

We believe that our current capital resources, which consist of cash and cash equivalents, future cash generated from operations, and cash available under the Pharmakon Term Loans, will be sufficient to satisfy our cash requirements for at least the next twelve months for working capital to support our daily operations and meet commitments under our contractual obligations with third parties, although we may need to access the debt and equity markets or other sources of financing to satisfy our long-term cash requirements as further discussed below.

Our cash requirements depend on numerous factors, including but not limited to the impact of any potential disruptions to our supply chain, inflation or other economic conditions, 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.

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;

In such case, we may be required to raise additional capital to fund future operations through the incurrence of debt, the entry into licensing or collaboration agreements with partners, sale of equity securities, grants or other sources of financing.

However, there can be no assurance such financing or other alternatives will be available to us on acceptable terms, or at all.

The global economy, including the financial and credit markets, has recently experienced significant volatility

and disruptions, including severely diminished liquidity and credit availability and rising interest rates.

These conditions may adversely impact our ability to raise additional capital on acceptable terms, or at all.

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

• the rate of revenue growth for Jeuveau ® in the United States and success of planned international launches;

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

• corporate development activities including the purchase, license, or other acquisition of products and services to add to our product or service offerings

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

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

• the cost of manufacturing our product or any future product candidates and any products we successfully commercialize, including costs associated with our supply chain;

• the timing and amounts of the royalty and other payments payable in connection with the Medytox Settlement Agreement;

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

• the cost of commercialization activities for Jeuveau ® or any future product candidates are approved or cleared for sale, including marketing, sales and distribution costs;

• the cost of maintaining a sales force, the productivity of that sales force, and the market acceptance of our products;

• the cost of maintaining a sales force, the productivity of that sales force, the market acceptance of our products and the actions and product introductions of our competitors;

• our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of any such agreements that we may enter into;

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

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

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Financing activities

Effect of exchange rates on cash (0.3) —

Change in cash and cash equivalents

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In addition, net operating assets and liabilities changed by $34.3 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.

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.

Investing Activities

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.

Cash used in investing activities was $2.9 million for the year ended December 31, 2022 compared to cash provided by investing activities of $4.0 million for the year ended December 31, 2021.

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 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.

Cash used in financing activities was $4.1 million for the year ended December 31, 2022, compared to $73.1 million of cash provided by financing activities for the year ended December 31, 2021.

For the year ended December 31, 2022, cash used in financing activities primarily resulted from the payment of contingent royalty obligation to Evolus Founders of $4.2 million.

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.

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 $33.8 million, with $9.3 million due within twelve months), (ii) a final payment of $5.0 million related to the Medytox/Allergan Settlement Agreements, which was paid in February 2023, (iii) 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), (iv) quarterly royalty payments to Medytox of a low-double digit royalty on net sales of Jeuveau ® sold in the United States and other Evolus territories (during the period from September 17, 2022 to September 16, 2032) 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.

The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities, revenue and expenses at the date of the financial statements as well as the expenses incurred during the reporting period.

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

The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities, revenue and expenses at the date of the consolidated financial statements as well as the expenses incurred during the reporting period.

Generally, we base our estimates on historical experience and on various other assumptions in accordance with GAAP that we believe to be reasonable under the circumstances.

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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.

While our significant accounting policies are more fully described in the notes to our consolidated 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.

Revenue Recognition

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A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account for revenue recognition.

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 generate product revenue from the sale of Jeuveau ® in the United States and Great Britain 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.

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.

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.

Product revenues are recorded net of sales-related adjustments, wherever applicable, for the volume rebates, 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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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.

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.

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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.

Changes in the fair value of this contingent royalty obligation are determined each period end and recorded in operating expenses in the statements of operations and comprehensive loss and in the current and non-current liabilities in the balance sheets.

Changes in the fair value of this contingent royalty obligation are determined each period end and recorded in operating expenses in the consolidated statements of operations and comprehensive loss and in the current and non-current liabilities in the consolidated balance sheets.

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.

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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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.

These costs are included as intangible assets in the accompanying consolidated 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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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.

We also review the useful lives of its assets periodically to determine whether events and circumstances warrant a revision to the remaining useful life.

We also review 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.

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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.

Consolidated 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.

Not applicable.

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