Fair Value Measurements and Short-Term Investments

9 Months Ended

Sep. 30, 2022

Fair Value Measurements and Short-Term Investments

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 September 30, 2022
	Fair Value		Level 1		Level 2		Level 3
Liabilities
Contingent royalty obligation payable to Evolus Founders	$	45,517	$	—	$	—	$	45,517


	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

The Company did not transfer any assets or liabilities measured at fair value on a recurring basis between levels during the nine months ended September 30, 2022 and 2021.

The Company determines the fair value of the contingent royalty obligation payable to 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 at the end of the second quarter of 2029, (ii) the discount rate, and (iii) the timing of payments. During the three and nine months ended September 30, 2022 and 2021, the Company utilized a discount rate of 13.0%, reflecting the Company’s risk profile. Net revenue projections are also updated to reflect changes in the timing of expected sales.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Fair value, beginning of period	$	45,415	$	42,683	$	44,740	$	41,546
Payments	(1,114)		(783)		(3,169)		(2,295)
Change in fair value recorded in operating expenses	1,216		1,400		3,946		4,049
Fair value, end of period	$	45,517	$	43,300	$	45,517	$	43,300

Other Financial Assets and Liabilities

The Company’s financial instruments consist primarily of cash and cash equivalents, 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 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 September 30, 2022 and December 31, 2021, the fair value of long-term debt was $70,360 and $75,448, respectively. The fair value of operating lease liabilities as of September 30, 2022 and December 31, 2021 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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