Fair Value Measurements

12 Months Ended

Dec. 31, 2018

The carrying amounts of cash, accounts payable, and accrued liabilities are considered to be representative of their respective fair values because of the short-term nature of those instruments.

Financial Instruments Not Recorded at Fair Value on a Recurring Basis

At December 31, 2018, the Company had a $20.0 million contingent promissory note payable under the Amended Purchase Agreement to the Evolus Founders, that will mature 2.5 years after the anniversary date of the first commercial sale of the Product in the United States. Accretion related to the contingent promissory note is recorded in interest expense in the statements of operations and comprehensive loss with a corresponding increase to the non-current liabilities in the balance sheets. The Company measures the fair value of this contingent promissory note at present value based on Level 2 inputs, using a discount rate for similar rated debt securities and is based on an estimated date that the Company believes the contingent promissory note will mature. The fair value of the contingent promissory note could be impacted by changes such as: (i) changes in the discount rate assumed, or (ii) a delay in the first commercial sale of the Product in the United States.

The Company assumed the liability concurrent with its IPO in February 2018 and therefore, did not carry a contingent promissory note payable balance at December 31, 2017. The following table (in thousands) presents the difference between the carrying balance and the fair value of the contingent promissory note payable to the Evolus founders, a related party:



	As of December 31, 2018
	Carrying Balance		Fair Value
Contingent promissory note payable to Evolus Founders, a related party	$	16,904	$	17,181

Financial Instruments Recorded at Fair Value on a Recurring Basis

The following table (in thousands) presents the major security types the Company held at December 31, 2018, that are measured at fair value on a recurring basis. The Company did not hold any major security types that required a fair value measurement on a recurring basis at December 31, 2017.



		Year Ended December 31,
	Fair Value Hierarchy	2018		2017
Contingent royalty obligation payable to Evolus Founders, a related party	Level 3	$	50,200	$	—

The Company determines the fair value of the contingent royalty obligation payable to a related party based on Level 3 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 the operating expenses in the statements of operations and comprehensive loss and in non-current liabilities in the balance sheets. The significant unobservable input assumptions that can significantly change the fair value includes (i) timing of the FDA approval of the Product, (ii) projected and timing of net revenues during the payment period, which will terminate for the quarter following the 10 year anniversary of the first commercial sale of the Product in the United States, (iii) the discount rate, and (iv) the timing of payments. During the year ended December 31, 2018, the Company utilized discount rates ranging from 18% to 25%, reflecting changes in the Company’s risk profile. Net revenue projections were also updated to reflect changes in the timing of expected regulatory approval and commercialization.

The following table (in thousands) shows a reconciliation of the beginning and ending fair value measurements of the contingent royalty obligation payable to a related party for year ended December 31, 2018:



	Year Ended December 31, 2018
Fair value, beginning of period	$	—
Assumption of the royalty obligation payable to Evolus Founders, a related party	39,700
Change in fair value recorded in operating expenses	10,500
Fair value, end of period	$	50,200

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details