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Fair Value Considerations | 12 Months Ended
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Jun. 30, 2019
Fair Value Disclosures [Abstract] |
Fair Value Considerations | 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 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 on a recurring basis 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 June 30, 2019 and 2018, by level within the fair value hierarchy:
|  |  |  |  | Fair Value Measurements at June 30, 2019 |
|  | Fair Value at June 30, 2019 |  |  | Quoted Priced in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs(Level 2) |  |  | Significant Unobservable Inputs(Level 3) |
Recurring: |  |  |  |  |  |  |  |  |  |  |  |
Warrant derivative liability |  | $ | 13,000 |  |  | $ | - |  |  | $ | - |  |  | $ | 13,000 |
Contingent consideration |  |  | 23,326,000 |  |  |  | - |  |  |  | - |  |  |  | 23,326,000 |
|  | $ | 23,339,000 |  |  | $ | - |  |  | $ | - |  |  | $ | 23,339,000 |
|  |  |  |  | Fair Value Measurements at June 30, 2018 |
|  | Fair Value at June 30, 2018 |  |  | Quoted Priced in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs(Level 2) |  |  | Significant Unobservable Inputs(Level 3) |
Recurring: |  |  |  |  |  |  |  |  |  |  |  |
Warrant derivative liability |  | $ | 94,000 |  |  | $ | - |  |  | $ | - |  |  | $ | 94,000 |
Contingent consideration |  |  | 4,694,000 |  |  |  | - |  |  |  | - |  |  |  | 4,694,000 |
|  | $ | 4,788,000 |  |  | $ | - |  |  | $ | - |  |  | $ | 4,788,000 |
Warrant Derivative Liability. 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 June 30, 2019:
|  | As of June 30, 2019 |  |  | As of June 30, 2018 |  |  | At Issuance |
Warrant Derivative Liability |  |  |  |  |  |  |  |  |
Volatility |  |  | 163.2 | % |  |  | 173.4 | % |  |  | 188.0 | %
Equivalent term (years) |  |  | 3.13 |  |  |  | 4.13 |  |  |  | 5.00 |
Risk-free interest rate |  |  | 1.71 | % |  |  | 2.69 | % |  |  | 1.83 | %
Dividend yield |  |  | 0.00 | % |  |  | 0.00 | % |  |  | 0.00 | %
The following table sets forth a reconciliation of changes in the warrant derivative liability for the period ended June 30, 2019:
|  | Liability Classified Warrants |
Balance as of June 30, 2017 |  | $ | - |
Warrant issuances |  |  | 4,118,000 |
Warrant exercises |  |  | (40,000 | )
Change in fair value included in earnings |  |  | (3,984,000 | )
Balance as of June 30, 2018 |  | $ | 94,000 |
Change in fair value included in earnings |  |  | (81,000 | )
Balance as of June 30, 2019 |  | $ | 13,000 |
Contingent Consideration. We classify our contingent consideration liability in connection with the acquisition of Natesto, ZolpiMist, and Tuzistra XR 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 contractual payment obligations, discount rates, probabilities of payment, and expected future performance. Contingent payment amounts are discounted back to the current period using a discounted cash flow methodology. The following table sets forth a summary of changes in the contingent consideration for the period ended June 30, 2019:
|  | Contingent Consideration |
Balance as of June 30, 2016 |  | $ | 3,869,000 |
Increase due to purchase of assets |  |  | 1,927,000 |
Increase due to accretion |  |  | 306,000 |
Increase due to remeasurement |  |  | 2,256,000 |
Decrease due to impairment |  |  | (710,000 | )
Balance as of June 30, 2017 |  | $ | 7,648,000 |
Increase due to purchase of assets |  |  | 2,846,000 |
Increase due to accretion |  |  | 801,000 |
Decrease due to contractual payment |  |  | (266,000 | )
Decrease due to remeasurement |  |  | (6,335,000 | )
Balance as of June 30, 2018 |  | $ | 4,694,000 |
Increase due to purchase of assets |  |  | 8,833,000 |
Increase due to accretion |  |  | 516,000 |
Decrease due to contractual payment |  |  | (548,000 | )
Increase due to remeasurement |  |  | 9,831,000 |
Balance as of June 30, 2019 |  | $ | 23,326,000 |
The contingent consideration was valued using the Monte-Carlo valuation methodology because that model embodies all of the relevant assumptions that address the features underlying these instruments. Contingent consideration is not actively traded and therefore classified as Level 3. Significant assumptions in valuing the contingent consideration were as follows as of June 30, 2019 and as of June 30, 2018:
|  | As of June 30, 2019 |  |  | As of June 30, 2018 |
Natesto |  |  |  |  |  |
Relevered Beta |  |  | 0.83 |  |  |  | 0.99 |
Maket risk premium |  |  | 5.50 | % |  |  | 5.50 | %
Risk-free interest rate |  |  | 3.50 | % |  |  | 4.00 | %
Discount |  |  | 10.20 | % |  |  | 10.40 | %
|  | As of June 30, 2019 |  |  | As of June 30, 2018 |
ZolpiMist |  |  |  |  |  |
Relevered Beta |  |  | 1.16 |  |  |  | 1.07 |
Maket risk premium |  |  | 5.50 | % |  |  | 5.00 | %
Risk-free interest rate |  |  | 3.50 | % |  |  | 3.50 | %
Discount |  |  | 10.20 | % |  |  | 10.40 | %
|  | As of June 30, 2019 |  |  | At Issuance |
Tuzistra XR |  |  |  |  |  |
Relevered Beta |  |  | 1.19 |  |  |  | 1.49 |
Maket risk premium |  |  | 5.50 | % |  |  | 5.00 | %
Risk-free interest rate |  |  | 3.50 | % |  |  | 3.50 | %
Discount |  |  | 20.20 | % |  |  | 20.40 | %

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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/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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