Fair Value Measurements and Short-Term Investments

12 Months Ended

Dec. 31, 2021

Fair Value Measurements and Short-Term Investments

Short-Term Investments

As of December 31, 2021, the Company did not hold any short-term investments. As of December 31, 2020, all of the Company’s investments had remaining maturities of less than 12 months. The following is a summary of the Company’s short-term investments, considered available-for-sale, as of December 31, 2020:


	As of December 31, 2020
	Amortized		Gross Unrealized				Estimated
	Cost		Gains		Losses		Fair Value
Available-for-sale securities
U.S treasury securities	$	5,000	$	—	$	—	$	5,000

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company measures and reports certain financial instruments as assets and liabilities at fair value on a recurring basis. The fair value of these instruments was as follows:


	As of December 31, 2021
	Fair Value		Level 1		Level 2		Level 3


Liabilities
Contingent royalty obligation payable to Evolus Founders	$	44,740	$	—	$	—	$	44,740


	As of December 31, 2020
	Fair Value		Level 1		Level 2		Level 3
Available-for-sale debt securities
U.S treasury securities	$	5,000	$	5,000	$	—	$	—
Liabilities
Contingent royalty obligation payable to Evolus Founders	$	41,546	$	—	$	—	$	41,546

The Company did not transfer any assets or liabilities measured at fair value on a recurring basis between levels during the year ended December 31, 2021.

The Company determines the fair value of the contingent royalty obligation payable to the Evolus Founders based on Level 3 inputs using a discounted cash flows method. The significant unobservable input assumptions that can significantly change the fair value include (i) projected amount and timing of net revenues during the payment period, which terminates in the quarter following the 10-year anniversary of the first commercial sale of Jeuveau® in the United States, (ii) the discount rate and (iii) the timing of payments. During the years ended December 31, 2021 and 2020, the Company utilized discount rates between 13.0% and 20.0%, reflecting changes in the Company’s risk profile. Net revenue projections are also updated to reflect changes in the timing of expected sales. 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.

The following table shows a reconciliation of the beginning and ending fair value measurements of the contingent royalty obligation payable:


	Year Ended December 31,
	2021		2020
Fair value, beginning of period	$	41,546	$	44,683
Payments	(3,097)		(1,130)
Change in fair value recorded in operating expenses	6,290		(2,007)
Fair value, end of period	$	44,740	$	41,546

Other Financial Assets and Liabilities

The Company’s financial instruments consist primarily of cash and cash equivalents, short-term available-for-sale debt securities, accounts receivable, accounts payable, accrued expenses, lease liabilities, and long-term debt. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates their fair value because of the short-term maturity of such instruments.

The Company estimates the fair value of the promissory note payable to the Evolus Founders, long-term debt and operating lease liabilities using the discounted cash flow analysis based on the interest rates for similar rated debt securities (Level 2). As of December 31, 2021, the fair value of the long-term debt was $75,448. As of December 31, 2020, the fair value of the contingent promissory note and long-term debt was estimated to be $19,284 and $76,368, respectively. The fair value of operating lease liabilities as of December 31, 2021 and 2020 approximated their carrying value.

- 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.

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