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Fair Value Considerations
 12 Months Ended
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 %