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Fair Value Considerations
 3 Months Ended
Sep. 30, 2019
Fair Value Disclosures [Abstract]  
Fair Value Considerations

The Company’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 a Monte-Carlo methodology using estimated discounted future cash flows and periodic assessments of the probability of occurrence of potential future events. The valuation policies are determined by management, 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 the Company. Unobservable inputs are inputs that reflect the Company’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.

 

The Company’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. The Company’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 the Company’s financial liabilities that were accounted for at fair value on a recurring basis as of September 30, 2019 and June 30, 2019, by level within the fair value hierarchy.

 

           Fair Value Measurements at September 30, 2019  
   

 Fair Value at

September 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     11,000     $ -     $ -     $ 11,000  
 Contingent consideration     23,509,000     $ -     $ -     $ 23,509,000  
      23,520,000       -       -       23,520,000  

 

           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  

 

 

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 the Company’s common stock and various factors regarding the warrants, were as follows as of issuance and as of September 30, 2019:

 

   

As of

September 30,

2019

    

As of

June 30,

2019

     At Issuance  
 Warrant Derivative Liability                  
 Volatility     163.2 %     163.2 %     188.0 %
 Equivalent term (years)     2.88       3.13       5.00  
 Risk-free interest rate     1.71 %     1.71 %     1.83 %
 Dividend yield     0.00 %     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:

 

     Liability Classified Warrants  
       
 Balance as of June 30, 2019   $ 13,000  
    Change in fair value included in earnings     (2,000 )
 Balance as of September 30, 2019   $ 11,000  

  

The Company classifies its contingent consideration liability in connection with the acquisition of Natesto, Tuzistra XR and ZolpiMist within Level 3 as factors used to develop the estimated fair value are unobservable inputs that are not supported by market activity. The Company estimates 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 following table sets forth a summary of changes in the contingent consideration for the period ended September 30, 2019:

 

     Contingent Consideration  
       
 Balance as of June 30, 2019   $ 23,326,000  
     Increase due to accretion     229,000  
     Decrease due to contractual payment     (46,000 )
 Balance as of September 30, 2019   $ 23,509,000