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Fair Value Considerations | 9 Months Ended
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Mar. 31, 2018
Fair Value Considerations [Abstract] |
Fair Value Considerations | Note 5 – Fair Value Considerations Aytu’s financial instruments include cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities, warrant derivative liability, and contingent consideration. The carrying amounts of financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued liabilities approximate their fair value due to their short maturities. The fair value of the warrant derivative liability was valued using the lattice valuation methodology. The fair value of acquisition-related contingent consideration is based on estimated discounted future cash flows and periodic assessments of the probability of occurrence of potential future events. The valuation policies are determined by the Chief Financial Officer and the Company’s Board of Directors is informed of any policy change. Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of Aytu. Unobservable inputs are inputs that reflect Aytu’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on reliability of the inputs as follows:
Level 1: | Inputs that reflect unadjusted quoted prices in active markets that are accessible to Aytu for identical assets or liabilities;
Level 2: | Inputs that include quoted prices for similar assets and liabilities in active or inactive markets or that are observable for the asset or liability either directly or indirectly; and
Level 3: | Unobservable inputs that are supported by little or no market activity.
Aytu’s assets and liabilities which are measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. Aytu’s policy is to recognize transfers in and/or out of fair value hierarchy as of the date in which the event or change in circumstances caused the transfer. Aytu has consistently applied the valuation techniques discussed below in all periods presented. The following table presents Aytu’s financial liabilities that were accounted for at fair value on a recurring basis as of March 31, 2018 and June 30, 2017, by level within the fair value hierarchy.
|  | Fair Value Measurements Using |
|  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
March 31, 2018 |  |  |  |  |  |  |  |  |  |  |  |
LIABILITIES |  |  |  |  |  |  |  |  |  |  |  |
Warrant derivative liability |  | $ | - |  |  | $ | - |  |  | $ | 120,000 |  |  | $ | 120,000 |
Contingent consideration |  | $ | - |  |  | $ | - |  |  | $ | 6,192,000 |  |  | $ | 6,192,000 |
June 30, 2017 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
LIABILITIES |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Warrant derivative liability |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |
Contingent consideration |  | $ | - |  |  | $ | - |  |  | $ | 7,648,000 |  |  | $ | 7,648,000 |
The warrant derivative liability was valued using the lattice valuation methodology because that model embodies the relevant assumptions that address the features underlying these instruments. The warrants related to the warrant derivative liability are not actively traded and are, therefore, classified as Level 3 liabilities. Significant assumptions in valuing the warrant derivative liability, based on estimates of the value of Aytu common stock and various factors regarding the warrants, were as follows as of issuance and as of March 31, 2018:
|  | March 31, 2018 |  |  | At Issuance |
Warrants: |  |  |  |  |  |
Volatility |  |  | 179.0 | % |  |  | 188.0 | %
Equivalent term (years) |  |  | 4.38 |  |  |  | 5.00 |
Risk-free interest rate |  |  | 2.55 | % |  |  | 1.83 | %
Dividend yield |  |  | 0.00 | % |  |  | 0.00 | %
The following table sets forth a reconciliation of changes in the fair value of the derivative financial liabilities classified as Level 3 in the fair value hierarchy:
|  | Derivative Instruments |
Balance as of June 30, 2017 |  | $ | - |
Warrant issuances |  |  | 4,118,000 |
Reclassification of warrant liability to equity upon exercise |  |  | (40,000 | )
Change in fair value included in earnings |  |  | (3,958,000 | )
Balance as of March 31, 2018 |  | $ | 120,000 |
We classify our contingent consideration liability in connection with the acquisition of ProstaScint, Natesto and the merger with Nuelle within Level 3 as factors used to develop the estimated fair value are unobservable inputs that are not supported by market activity. We estimate the fair value of our contingent consideration liability based on projected payment dates, discount rates, probabilities of payment, and projected revenues. Projected contingent payment amounts are discounted back to the current period using a discounted cash flow methodology. The contingent consideration related to the AWH assets was prepaid up to the first $1.0 million in net revenue. Since we will not be able to manufacture more product (see Note 1), we are confident that our revenue for this product will not exceed $1.0 million and therefore, we have adjusted the remaining contingent consideration balance to zero. This adjustment is reflected in other gain on the Consolidated Statement of Operations. We also reduced the contingent consideration for ProstaScint by $25,000 to reflect our updated revenue projections during the period ended March 31, 2018. The following table sets forth a summary of changes in the contingent consideration for the period ended March 31, 2018:
|  | Contingent Consideration |
Balance as of June 30, 2017 |  | $ | 7,648,000 |
Increase due to accretion |  |  | 591,000 |
Decrease due to contractual payment |  |  | (268,000 | )
Decrease due to remeasurement |  |  | (1,779,000 | )
Balance as of March 31, 2018 |  | $ | 6,192,000

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- 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 Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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