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Fair Value Considerations | 6 Months Ended
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Dec. 31, 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, including those acquired or assumed on November 1, 2019 as a result of the acquisition of the Cerecor Portfolio of Pediatrics Therapeutics. 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. Recurring Fair Value Measurements The following table presents the Company’s financial liabilities that were accounted for at fair value on a recurring basis as of December 31, 2019 and June 30, 2019, by level within the fair value hierarchy.
|  |  |  |  | Fair Value Measurements at December 31, 2019 |
|  | Fair Value at December 31, 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 |  |  | 18,446,000 |  |  |  | – |  |  |  | – |  |  |  | 18,446,000 |
|  | $ | 18,457,000 |  |  |  | – |  |  |  | – |  |  | $ | 18,457,000 |
|  |  |  |  | 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 |
Derivative Warrant Liability. The warrant derivative liability was historically 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. As a result of the immaterial value of the balance as of both June 30, 2019 and September 30, 2019, coupled with continued further declines in the Company’s stock price, the Company elected to waive on adjusting the current fair value of the derivative warrant liability as any adjustment was deemed de minimus.
|  | As of December 31, 2019 |  |  | As of June 30, 2019 |
Warrant Derivative Liability |  |  |  |  |  |
Volatility |  |  | 163.2 | % |  |  | 163.2 | %
Equivalent term (years) |  |  | 2.88 |  |  |  | 3.13 |
Risk-free interest rate |  |  | 1.71 | % |  |  | 1.71 | %
Dividend yield |  |  | 0.00 | % |  |  | 0.00 | %
Contingent Consideration. 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 Company derecognized the contingent consideration liability related to Natesto as a result of the December 1, 2019 effectiveness of the Acerus Amendment, which eliminated product milestone payments underlying the contingent consideration liability. Due to the derecognition of the Natesto contingent consideration, the Company recognized a, non-operating gain of approximately $5.2 million during the three and six months ended December 31, 2019. Non-Recurring Fair Value Measurements The following table represents those asset and liabilities measured on a non-recurring basis as a result
|  |  |  | Fair Value Measurements at December 31, 2019
|  | Fair Value at December 31, 2019 |  | Quoted Priced in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs(Level 2) |  | Significant Unobservable Inputs(Level 3) |
Non-recurring |  |  |  |  |  |  |  |  |
Product technology rights | $ | 22,321,667 |  | – |  | – | $ | 22,321,667 |
Goodwill |  | 15,387,064 |  | – |  | – |  | 15,387,064 |
Fixed payment arrangements |  | 26,056,217 |  | – |  | – |  | 26,056,217 |
| $ | 63,764,948 |  | – |  | – | $ | 63,764,948 |
|  |  |  |  | Fair Value Measurements at November 1, 2019 (*) |
|  | Fair Value at November 1, 2019 (*) |  |  | Quoted Priced in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Product technology rights |  | $ | 22,700,000 |  |  |  | – |  |  |  | – |  |  | $ | 22,700,000 |
Goodwill |  |  | 15,387,064 |  |  |  | – |  |  |  | – |  |  |  | 15,387,064 |
Fixed payment arrangements |  |  | 26,457,162 |  |  |  | – |  |  |  | – |  |  |  | 26,457,162 |
|  | $ | 64,544,226 |  |  |  | – |  |  |  | – |  |  | $ | 64,544,226 |
Product technology rights. The Company recognized the product technology right intangible asset acquired as part of the November 1, 2019 acquisition of the Pediatric Portfolio. This intangible asset consists of the acquired product technology rights consisting of (i) AcipHex Sprinkle, (ii) Karbinal ® ER, (iii) Cefaclor, and (iv) Poly-vi-Flor and Tri-vi-Flor. The Company utilized a Multiple-Period Excess Earnings Method model.
|  | As of November 1, 2019 (*) |
Product technology rights |  |  |
Re-levered Beta |  |  | 1.60 |
Market risk premium |  |  | 6.00 | %
Small stock risk premium |  |  | 5.20 | %
Risk-free interest rate |  |  | 2.00 | %
Company specific discount |  |  | 25.00 | %
(*) Valuation performed as of November 1, 2019. As a non-recurring fair value measurement, there is no remeasurement at each reporting period unless indications exist that the fair value of the asset has been impaired. There were no indicators as of December 1, 2019 that the fair value of the Product technology rights was impaired. Goodwill. Goodwill represents the fair value of consideration transferred and liabilities assumed in excess of the fair value of assets acquired. Remeasurement of the fair value of goodwill only arises upon either (i) indicators that the fair value of goodwill has been impaired, or (ii) during the annual impairment test performed at June 30 of each fiscal year. There were no indicators observed or identified during and as of the period from November 1, 2019 through December 31, 2019. Fixed payment arrangements. The Company assumed obligations due to an investor including fixed and variable payments. The Company assumed fixed monthly payments equal to $0.1 million from November 2019 through January 2021 plus $15 million due in January 2021. Monthly variable payments due to the same investor are equal to 15% of net revenue generated from a subset of the Product Portfolio, subject to an aggregate monthly minimum of $0.1 million, except for January 2020, when a one-time payment of $0.2 million is due. The variable payment obligation continues until the earlier of: (i) aggregate variable payments of approximately $9.3 million have been made, or (ii) February 12, 2026. In addition, the Company assumed fixed, product minimums royalties of approximately $1.75 million per annum through February 2023.
|  | As of November 1, 2019 (≠) |
Fixed payment obligations |  |
Discount rate |  | 1.8% to 12.4% |
(≠) Valuation performed as of November 1, 2019. As a non-recurring fair value measurement, there is no remeasurement at each reporting period unless indicates that the circumstances that existed as of the November 1, 2019 measurement date indicate that the carrying value is no longer indicative of fair value. Summary of Level 3 Input Changes The following table sets forth a summary of changes to those fair value measures using Level 3 inputs for the six months ended December 31, 2019:
|  | Product Technology Rights |  |  | Goodwill |  |  | Liability Classified Warrants |  |  | Contingent Consideration |  |  | Fixed Payment Arrangements |
Balance as of June 30, 2019 |  | $ | – |  |  | $ | – |  |  | $ | 13,000 |  |  | $ | 23,326,000 |  |  | $ | – |
Transfers into Level 3 |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |
Transfer out of Level 3 |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |
Total gains, losses, amortization or accretion in period |  |  | (378,000 | ) |  |  |  |  |  |  |  |  |  |  | – |  |  |  | – |
Included in earnings |  |  | – |  |  |  | – |  |  |  | (2,000 | ) |  |  | (4,760,000 | ) |  |  | 264,000 |
Included in other comprehensive income |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  |  |
Purchases, issues, sales and settlements |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Purchases |  |  | 22,700,000 |  |  |  | 15,387,000 |  |  |  | – |  |  |  | – |  |  |  | – |
Issues |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  | 26,457,000 |
Sales |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |
Settlements |  |  | – |  |  |  | – |  |  |  | – |  |  |  | (120,000 | ) |  |  | (665,000 | )
Balance as of December 31, 2019 |  | $ | 22,322,000 |  |  | $ | 15,387,000 |  |  | $ | 11,000 |  |  | $ | 18,446,000 |  |  | $ | 26,056,000 |

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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/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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