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Fair Value Considerations | 9 Months Ended
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Mar. 31, 2020
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 Pediatric Portfolio. 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 March 31, 2020 and June 30, 2019, by level within the fair value hierarchy.
|  |  |  |  | Fair Value Measurements at March 31, 2020 |
|  | Fair Value at March 31, 2020 |  |  | 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 |  |  | 18,754,000 |  |  |  | – |  |  |  | – |  |  |  | 18,754,000 |
CVR liability |  |  | 5,219,000 |  |  |  | – |  |  |  | – |  |  |  | 5,219,000 |
|  | $ | 23,984,000 |  |  |  | – |  |  |  | – |  |  | $ | 23,984,000 |
|  |  |  |  | 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 |
CVR liability |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |
|  | $ | 23,339,000 |  |  |  | – |  |  |  | – |  |  | $ | 23,339,000 |
Warrant Derivative 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 March 31, 2020, 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 March 31, 2020 |  |  | 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, ZolpiMist and Innovus, 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 nine months ended March 31, 2020. The Company recognized approximately $0.2 million in contingent consideration as a result of the February 14, 2020 Innovus Merger. The fair value was based on a discounted value of the future contingent payment using a 30% discount rate based on the estimates risk that the milestones are achieved. There was no material change in this valuation as of March 31, 2020. Contingent value rights. Contingent value rights (“CVRs”) represent contingent additional consideration of up to $16 million payable to satisfy future performance milestones related to the Innovus Merger. Consideration can be satisfied in up to 4.7 million shares of the Company’s common stock, or cash either upon the option of the Company or in the event there are insufficient shares available to satisfy such obligations. The fair value of the contingent value rights was based on a model in which each individual payout was deemed either (a) more likely than not to be paid out or (b) less likely than not to be paid out. From there, each obligation was then discounted at a 30% discount rate to reflect the overall risk to the contingent future payouts pursuant to the CVRs. This value is then remeasured both for future expected payout at well as the increase fair value due to the time value of money. On of March 31, 2020, the Company paid out 1.2 million shares of the Company’s common stock to satisfy the first $2 million milestone, which relates to the Innovus achievement of $24 million in revenues during the 2019 calendar year. Non-Recurring Fair Value Measurements The following table represents those asset and liabilities measured on a non-recurring basis for the nine months ended March 31, 2020 as a result of the (i) November 1, 2019 acquisition of the Pediatrics Portfolio and (ii) the February 14, 2020 Innovus Merger.
|  | Fair Value at Measurement Date |  |  | Quoted Priced in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Non-recurring |  |  |  |  |  |  |  |  |  |  |  |
Pediatric Portfolio (November 1, 2019) |  |  |  |  |  |  |  |  |  |  |  |
Product technology rights |  | $ | 22,700,000 |  |  |  | – |  |  |  | – |  |  |  | 22,700,000 |
Goodwill |  |  | 15,687,064 |  |  |  | – |  |  |  | – |  |  |  | 15,687,064 |
Fixed payment arrangements |  |  | 26,457,162 |  |  |  | – |  |  |  | – |  |  |  | 26,457,162 |
Innovus Merger (February 14, 2020) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Customer lists |  |  | 390,000 |  |  |  | – |  |  |  | – |  |  |  | 390,000 |
Product distribution rights (trademarks and patents) |  |  | 11,354,000 |  |  |  | – |  |  |  | – |  |  |  | 11,354,000 |
Right-to-use asset |  |  | 675,980 |  |  |  |  |  |  |  |  |  |  |  | 675,980 |
Goodwill |  |  | 8,374,269 |  |  |  | – |  |  |  | – |  |  |  | 8,374,269 |
Notes payable |  |  | 3,056,361 |  |  |  | – |  |  |  | – |  |  |  | 3,056,361 |
|  | $ | 88,694,836 |  |  |  | – |  |  |  | – |  |  | $ | 88,694,836 |
Acquisition of the Pediatric Portfolio 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 March 31, 2020 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 March 31, 2020. 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. Innovus Merger Customer lists. The Company recognized the fair value of the rental of the customer lists that existed as of the Valuation Date to be $364,232. The Company utilized an income method approach through a discounted cash flow model. Through an iterative process, the Company added the value to the tax amortization benefits associated with the customer lists to arrive at an overall fair value for the customer lists of $390,000. Trademarks and patents. The Company recognized the fair value of trademarks, patents or a combination of both for 18 distinct products that the Company markets, distributes and sells. An Income Approach known as the Relief-From-Royalty Method was utilized to value the product distribution rights associated with each of the 18 products associated with trademarks and patents. A royalty rate of 15% was used based on upon a range of observable royalties between the range of 7.5% and 34.5%.
|  | As of February 14, 2020 |
Trademarks and patents |  |  |
Re-levered Beta |  |  | 0.84 | %
Market risk premium |  |  | 6.17 | %
Small stock risk premium |  |  | 4.99 | %
Risk-free interest rate |  |  | 1.89 | %
Company specific discount |  |  | 20.00 | %
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 February 14, 2020 through March 31, 2020. Innovus Notes Payable. The Innovus Notes Payable represent twelve financial obligations assumed as part of the Innovus Merger. These notes are comprised of ten uncollateralized obligations with a face value of approximately $3.6 million and two notes secured by inventory held fulfillment centers with Amazon, Inc. and a face value of approximately $0.4 million (the “Innovus Notes”). The Innovus Notes were revalued using the estimated cost of capital at the valuation date for a total estimated fair value of approximately $3.1 million. The ten unsecured Innovus Notes consist of ten separate loans with implied effective interest rates ranging between 14.1% and 73.4%. The weighted average interest rate for these notes was 39.5%, while the weighted average interest rate for the most recent loan (January 9, 2020) was 41.4%. All ten of the notes are unsecured, and as of the valuation date there was significant risk associated with their repayment. Accordingly, the Company has revalued the notes using an effective rate of 40% and concluded that the fair value at the February 14, 2020 Innovus Merger date was approximately $2.7 million. The secured Innovus Notes due to Amazon had had maturities of less than one year and stated rates of 17.2% and 14.7% respectively. Due to the fact that the most recent loan had a stated rate of 14.7% and that the weighted average rate for these two loans was 15.6%, the Company has estimated the current value of the loans using an effective rate of 15% and concluded that the fair value of the secured Innovus Notes totaled approximately $0.4 million. 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 nine months ended March 31, 2020:
|  | Product Technology Rights |  |  | Innovus Assets |  |  | Goodwill |  |  | Liability Classified Warrants |  |  | CVR Liability |  |  | 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 |  |  | (946,000 | ) |  |  | (221,000 | ) |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |
Included in earnings |  |  | – |  |  |  | – |  |  |  | – |  |  |  | (2,000 | ) |  |  | 170,000 |  |  |  | (4,576,000 | ) |  |  | 647,000 |
Included in other comprehensive income |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  |  |  |  |  | – |  |  |  |  |
Purchases, issues, sales and settlements |  |  |  |  |  |  | – |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Purchases |  |  | 22,700,000 |  |  |  | 11,744,000 |  |  |  | 24,061,000 |  |  |  | – |  |  |  | 7,049,000 |  |  |  | 183,000 |  |  |  | – |
Issues |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  | 26,457,000 |
Sales |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |
Settlements |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  | (2,000,000 | ) |  |  | (179,000 | ) |  |  | (1,547,000 | )
Balance as of March 31, 2020 |  | $ | 21,754,000 |  |  | $ | 11,523,000 |  |  | $ | 24,061,000 |  |  | $ | 11,000 |  |  | $ | 5,219,000 |  |  | $ | 18,754,000 |  |  | $ | 25,557,000 |

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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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