XML 22 R12.htm IDEA: XBRL DOCUMENT v3.8.0.1
Fair Value Considerations
 9 Months Ended
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