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Note 9 - Fair Value Considerations | 6 Months Ended
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Dec. 31, 2020
Notes to Financial Statements |
Fair Value Disclosures [Text Block] | 9. 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 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 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, 2020 and June 30, 2020 , by level within the fair value hierarchy.
|  |  |  |  |  | Fair Value Measurements at December 31, 2020 |
|  | Fair Value at December 31, 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 |  |  | 16,280,000 |  |  |  | – |  |  |  | – |  |  |  | 16,280,000 |
CVR liability |  |  | 6,472,000 |  |  |  | – |  |  |  | – |  |  |  | 6,472,000 |
|  | $ | 22,752,000 |  |  |  | – |  |  |  | – |  |  | $ | 22,752,000 |
|  |  |  |  |  | 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 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 December 31,2020, the contingent consideration was revalued at $15.8 million using the same Monte Carlo simulation methodology, and based on current interest rates, expected sales potential, and Aytu stock trading variables. As of December 31, 2020 , 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. 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 December 31, 2020, the contingent consideration was revalued at $0.3 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. As of December 31, 2020 , none of the milestones had been achieved, and therefore, no milestone payment was made. The Company recognized approximately $0.2 million in product related 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 and six -months ended December 31, 2020 and 2019 was $15,000 , and $28,000 , respectively. There was no material change in this valuation as of December 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 470 thousand 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 paid out approximately 120 thousand 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 and six -months ended December 31, 2020 and 2019 was $0.1 million and $0.8 million, respectively. The CVR's did not exist until after December 31, 2019. 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 December 31, 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 |  | $ | 900,000 |  |  | $ | 2,735,000 |
Included in other comprehensive income |  |  | – |  |  |  | – |
Purchases, issues, sales and settlements |  |  | – |  |  |  | – |
Purchases |  |  | – |  |  |  | – |
Issues |  |  | – |  |  |  | – |
Sales |  |  | – |  |  |  | – |
Settlements |  |  | – |  |  | $ | (43,000 | )
Balance as of December 31, 2020 |  | $ | 6,472,000 |  |  | $ | 16,280,000 |
Significant Assumptions Contingent consideration. The Company estimates the fair value of the Contingent Consideration at each reporting date using management's forecast as the baseline for developing a Monte-Carlo model. The other significant assumptions used in the Monte Carlo Simulation as of December 31, 2020, were as follows:
|  | As of December 31, 2020
Contingent Consideration |  |
Credit risk assumption |  | 19.10%
Sales volatility |  | 45.00%
Credit spread |  | 4.00%
Time steps per year |  | 1
Number of iterations |  | 500
Contingent value rights. The Company estimates the fair value of the Contingent Value Rights at each reporting date using management's forecast as the baseline for developing a Monte-Carlo model. The other significant assumptions used in the Monte Carlo Simulation as of December 31, 2020 were as follows:
|  | As of December 31, 2020
Contingent Value Rights |  |
Credit risk assumption |  | 9.6%
Time steps per year |  | 30.00
Number of iterations |  | 10,000

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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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