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Fair Value Considerations

12 Months Ended

Jun. 30, 2021

Fair Value Considerations

Fair Value Considerations

10. Fair Value Considerations

The Company’s asset and liability classified 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 acquisition-related contingent consideration is based on a Monte Carlo models. 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 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 on a recurring basis 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. The Company has consistently applied the valuation techniques discussed below in all periods presented.

The following table presents Company’s financial liabilities that were accounted for at fair value on a recurring basis as of June 30, 2021 and 2020, by level within the fair value hierarchy:


					Fair Value Measurements at June 30, 2021
					Quoted
					Priced in
					Active
					Markets			Significant
					for			Other			Significant
					Identical			Observable			Unobservable
		Fair Value at June 30,			Assets			Inputs			Inputs
		2021			(Level 1)			(Level 2)			(Level 3)

		(In thousands)
Recurring:
Contingent consideration		$	12,057		$	—		$	—		$	12,057
CVR liability			1,395			—			—			1,395
Total		$	13,452		$	—		$	—		$	13,452


					Fair Value Measurements at June 30, 2020
					Quoted
					Priced in
					Active
					Markets			Significant
					for			Other			Significant
					Identical			Observable			Unobservable
		Fair Value at June 30,			Assets			Inputs			Inputs
		2020			(Level 1)			(Level 2)			(Level 3)

		(In thousands)
Recurring:
Contingent consideration		$	13,588		$	—		$	—		$	13,588
CVR liability			5,572			—			—			5,572
Total		$	19,160		$	—		$	—		$	19,160

Contingent Consideration. The Company classifies its contingent consideration liability in connection with the acquisition of 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.

Tuzistra XR. The contingent consideration related to Tuzistra XR was valued at $8.8 million using a Monte Carlo simulation as of November 2, 2018. As of June 30, 2021, the contingent consideration was revalued at $11.0 million using a Scenario-Based model. As of June 30, 2020, the contingent consideration was revalued at $13.2 million using the Discounted Cash Flow method. The Company’s policy is to value contingent consideration liabilities using a Monte Carlo model. However, the Monte Carlo model could not be used for the valuation of Tuzistra XR contingent consideration given management’s revenue forecast for the product; therefore, the Company used a Scenario-Based model instead. The contingent consideration accretion expense for the years ended June 30, 2021 and June 30, 2020 was $0.2 million, and $0.4 million, respectively. As of June 30, 2021, none of the milestones had been achieved, and therefore, no milestone payment was made. However, approximately $3.0 million is expected to be paid in November 2021, as this milestone will be satisfied.

ZolpiMist. 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, 2021, the contingent consideration was revalued at $0.7 million using the Monte Carlo model. As of June 30, 2020, the contingent consideration was revalued at $0.2 million using the Discounted Cash Flow method. The contingent consideration accretion expense for the years ended June 30, 2021 and June 30, 2020 was $0.1 million, and $0.2 million, respectively As of June 30, 2021, none of the milestones had been achieved, and therefore, no milestone payment was made.

On February 14, 2020, the Company recognized approximately $0.2 million in product related contingent consideration as a result of the Innovus Merger. The fair value was based on a discounted value of the future contingent

payment using a 30% discount rate based on the estimated risk that the milestones would be achieved. As of June 30, 2021 and June 30, 2020, the contingent consideration was $0.3 million and $0.2 million, respectively. The contingent consideration accretion expense for the year ended June 30, 2021 was $0.1 million and was negligible during the year ended June 30, 2020.

In June 2017, Innovus entered into Exclusive License Agreement (“the Agreement”) with University of Iowa Research Foundation (“UIRD”) for the use of patent and technology know-how. Pursuant to the agreement, Innovus will pay to UIRD a total milestone payment of $50,000 every other year beginning on July 1, 2021 for a total payment of $0.2 million. The fair value was based on a discounted value of the future contingent payment using a 26% discount rate based on the estimated risk that the milestones would be achieved The discounted value as of June 30, 2021, was approximately $0.1 million.

Contingent value rights. Contingent value rights (“CVRs”) represent contingent additional consideration of up to $16.0 million payable to satisfy future performance milestones related to the Innovus Merger. Consideration can be satisfied in up to 470,000 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 Monte Carlo model which takes into account current interest rates and expected sales potential. On March 31, 2020, the Company issued to the CVR holders 123,820 shares of the Company’s common stock to satisfy the first $2.0 million milestone, which related to the Innovus achievement of $24.0 million in revenues during the 2019 calendar year. On March 20, 2021, the Company issued to the CVR holders 103,190 shares of the Company’s common stock to satisfy one of two $1.0 million 2020 milestones, which relates to the Innovus achievement of $30.0 million in revenues during the 2020 calendar year. The $1.0 million 2020 milestone for achieving profitability was not met. As of June 30, 2021 and June 30, 2020, the CVRs were revalued at $1.4 million and $5.6 million, respectively, using the same Monte Carlo simulation methodology.

Non-Recurring Fair Value Measurement

Fixed payment arrangements. As part of the Cerecor transaction, the Company assumed obligations due to an investor including fixed and variable payments. These obligations included fixed monthly payments equal to $0.1 million from November 2019 through January 2021 plus $15.0 million due in January 2021, of which $15.0 million was paid down early in June 2020. Monthly variable payments due to the same investor are equal to 15.0% of net revenue generated from a subset of the Pediatric Portfolio, subject to an aggregate monthly minimum of $0.1 million, except for January 2020, when a one-time payment of $0.2 million was due and paid. The variable payment obligation was to continue 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 $2.1 million per annum through February 2023.

On June 21, 2021, the Company entered into a Waiver, Release and Consent pursuant to which the Company paid $2.8 million to the investor in early satisfaction of the fixed obligation. The company agreed to pay the remaining fixed obligation of $3.0 million in six equal quarterly payments of $0.5 million each over the next six quarters, beginning September 30, 2021. The Company accounted the Waiver, Release and Consent as a debt modification in accordance with ASC 470. Such a modification to the original terms required us to remeasure the related liabilities as of June 30, 2021 using discounted cash flow model. As of June 30, 2021, the fair value of the fixed payment arrangements was $9.5 million. The Company recognized a $1.3 million loss on extinguishment of the fixed obligation for the year ended June 30, 2021.

The following able represents Company’s financial liabilities that were accounted for at fair value on a non-recurring basis as of June 30, 2021 and 2020, by level within the fair value hierarchy:


					Fair Value Measurements at June 30, 2021
					Quoted
					Priced in
					Active
					Markets			Significant
					for			Other			Significant
					Identical			Observable			Unobservable
		Fair Value at June 30,			Assets			Inputs			Inputs
		2021			(Level 1)			(Level 2)			(Level 3)

		(In thousands)
Non-recurring
Fixed payment arrangements		$	9,458		$	—		$	—		$	9,458
		$	9,458		$	—		$	—		$	9,458


					Fair Value Measurements at June 30, 2020
					Quoted
					Priced in
					Active
					Markets			Significant
					for			Other			Significant
					Identical			Observable			Unobservable
		Fair Value at June 30,			Assets			Inputs			Inputs
		2020			(Level 1)			(Level 2)			(Level 3)

		(In thousands)
Non-recurring
Fixed payment arrangements		$	13,512		$	—		$	—		$	13,512
Total		$	13,512		$	—		$	—		$	13,512

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 year ended June 30, 2021:


		CVR			Contingent				Fixed Payment
		Liability			Consideration				Arrangements

	(In thousands)
Balance as of June 30, 2019		$	—		$	23,326		$	—
Included in earnings			523			(9,741)			1,452
Purchases, issues, sales and settlements:
Purchases			7,049			183			—
Issues			—			—			29,838
Settlements			(2,000)			(180)			(17,778)
Balance as of June 30, 2020			5,572			13,588			13,512
Included in earnings			(3,177)			(848)			2,795
Purchases, issues, sales and settlements:
Settlements			(1,000)			(683)			(6,849)
Balance as of June 30, 2021		$	1,395		$	12,057		$	9,458

Significant Assumptions

Significant assumptions used in valuing the contingent consideration were as follows:


		June 30,
		2021			2020
Tuzistra
Valuation model		Scenario-Based			Discounted Cash Flow
Leveraged Beta		0.68			0.36
Market risk premium		6.00	%		6.00	%
Risk-free interest rate		1.90	%		3.00	%
Discount		15.30	%		5.20	%
Company specific discount		15.00	%		15.00	%


		June 30,
		2021			2020
ZolpiMist
Valuation method		Monte Carlo			Discounted Cash Flow
Leveraged Beta		1.09			1.17
Market risk premium		6.00	%		6.00	%
Risk-free interest rate		0.70	%		3.00	%
Discount		10.30	%		5.20	%
Company specific discount		15.00	%		5.00	%

Significant assumptions used in valuing the CVRs were as follows:


		June 30,
		2021			2020
Contingent Value Rights
Valuation method		Monte Carlo			Monte Carlo
Leveraged Beta		0.91			0.88
Market risk premium		6.00	%		6.17	%
Risk-free interest rate		0.36	%		1.15	%
Discount		13.00	%		30.00	%
Company specific discount		5.00	%		20.00	%

Significant assumptions used in valuing the Fixed Payment Arrangements were as follows:


		June 30,
		2021			2020
Fixed Payment Obligations
Valuation method		Discounted Cash Flow			Discounted Cash Flow
Discount rate - minimum		10.0	%		1.8	%
Discount rate - maximum		12.4	%		12.4	%

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.

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