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Fair Value Considerations
 3 Months Ended
Sep. 30, 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 September 30, 2020 and June 30, 2020, by level within the fair value hierarchy.

 

     

Fair Value Measurements at September 30, 2020

  

Fair Value at September 30, 2020

 

Quoted Priced in Active Markets for Identical Assets (Level 1)

 

Significant Other Observable Inputs

(Level 2)

 

Significant Unobservable Inputs (Level 3)

Recurring:            
 Contingent consideration   13,778,000    —      —      13,778,000 
 CVR liability   5,669,000    —      —      5,669,000 
   $19,447,000    —      —     $19,447,000 

 

     

Fair Value Measurements at June 30, 2020

  

Fair Value at June 30, 2020

 

Quoted Priced in Active Markets for Identical Assets (Level 1)

 

Significant Other Observable Inputs (Level 2)

 

Significant Unobservable Inputs (Level 3)

Recurring:            
 Contingent consideration   13,588,000    —      —      13,588,000 
 CVR liability  $5,572,000    —      —     $5,572,000 
   $19,160,000    —      —     $19,160,000 

 

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.

 

As of November 2, 2018, the contingent consideration, related to this Tuzistra XR, was valued at $8.8 million using a Monte Carlo simulation. As of June 30, 2020, the contingent consideration was revalued at $13.2 million using the same Monte Carlo simulation methodology, and based on current interest rates, expected sales potential, and Aytu stock trading variables. The Company reevaluates the contingent consideration on a quarterly basis for changes in the fair value recognized after the acquisition date, such as measurement period adjustments. The contingent consideration accretion expense for the three months ended September 30, 2020 and 2019 was $158,000, and $96,000, respectively. As of September 30, 2020, none of the milestones had been achieved, and therefore, no milestone payment was made.

 

The contingent consideration related to the ZolpiMist royalty payments was valued at $2.6 million using a Monte Carlo simulation, as of June 11, 2018. As of June 30, 2020, the contingent consideration was revalued at $0.2 million using the same Monte Carlo simulation methodology, and based on current interest rates, expected sales potential, and Aytu stock trading variables. The Company reevaluates the contingent consideration on a quarterly basis for changes in the fair value recognized after the acquisition date, such as measurement period adjustments. The contingent consideration accretion expense for the three months ended September 30, 2020 and 2019 was $0.1 million and $0.1 million, respectively. As of September 30, 2020, none of the milestones had been achieved, and therefore, no milestone payment was made.

 

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. The contingent consideration accretion expense for the three months ended September 30, 2020 and 2019 was $13,000, and $0, respectively. There was no material change in this valuation as of September 30, 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. As of September 30, 2020, the Company has 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. The unrealized loss for the three months ended September 30, 2020 and 2019 was $97,000, and $0, respectively.

 

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 three months ended September 30, 2020:

 

  

CVR Liability

 

Contingent Consideration

 Balance as of June 30, 2020  $5,572,000   $13,588,000 
 Transfers into Level 3   —      —   
 Transfer out of Level 3   —      —   
 Total gains, losses, amortization or accretion in period   —      —   
 Included in earnings  $97,000   $209,000 
 Included in other comprehensive income   —      —   
 Purchases, issues, sales and settlements   —      —   
 Purchases   —      —   
 Issues   —      —   
 Sales   —      —   
 Settlements   —     $(19,000)
 Balance as of September 30, 2020  $5,669,000   $13,778,000