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Fair Value Considerations

6 Months Ended

Dec. 31, 2021

Fair Value Considerations

Fair Value Considerations

11. 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 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.

Recurring Fair Value Measurements

The following table presents the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2021 and June 30, 2021, by level within the fair value hierarchy.


					Fair Value Measurements at December 31, 2021
					Quoted
					Priced in
					Active
					Markets			Significant
					for			Other			Significant
					Identical			Observable			Unobservable
		Fair Value at December 31,			Assets			Inputs			Inputs
		2021			(Level 1)			(Level 2)			(Level 3)

		(In thousands)
Assets:
Cash and cash equivalents		$	35,277		$	35,277		$	—		$	—
Total		$	35,277		$	35,277		$	—		$	—
Liabilities:
Contingent consideration		$	9,503		$	—		$	—		$	9,503
CVR liability			1,392			—			—			1,392
Total		$	10,895		$	—		$	—		$	10,895


					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)
Assets:
Cash and cash equivalents		$	49,649		$	49,649		$	—		$	—
Total		$	49,649		$	49,649		$	—		$	—
Liabilities:
Contingent consideration		$	12,057		$	—		$	—		$	12,057
CVR liability			1,395			—			—			1,395
Total		$	13,452		$	—		$	—		$	13,452

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. At the acquisition date on November 2, 2018, the contingent consideration related to Tuzistra XR, was valued at $8.8 million using a Monte Carlo simulation. As of December 31, 2021 and June 30, 2021, the contingent consideration was revalued at $8.5 million and $11.0 million, respectively, using the Scenario-Based model. During the three months ended December 31, 2021, the Company paid $3.0 million in cash upon the satisfaction of the time-based milestone. As of December 31, 2021, none of the remaining milestones had been achieved.

ZolpiMist. At the acquisition date on June 11, 2018, the contingent consideration related to the ZolpiMist royalty payments was valued at $2.6 million using a Monte Carlo simulation. As of December 31, 2021 and June 30, 2021, the contingent consideration was revalued at $0.7 million, using the Monte Carlo model. As of December 31, 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 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 estimated risk that the milestones are achieved. As of December 31, 2021 and June 30, 2021, the contingent consideration was $0.3 million.

In June 2017, Innovus entered into Exclusive License Agreement (“the UIRD 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 December 31, 2021 and June 30, 2021, was approximately $48,000 and $0.1 million, respectively.

During the three months ended December 31, 2021 and 2020, the Company recognized a net loss of $0.3 million and $2.4 million, respectively, in the consolidated statements of operations from changes in fair values of these contingent considerations. During the six months ended December 31, 2021 and 2020, the Company recognized a net loss of $0.5 million and $2.4 million, respectively in the consolidated statements of operations from changes in fair values of these contingent considerations. The total accretion expense included in the consolidated statements of operations related to these contingent considerations was approximately $22,000, and $0.3 million during the three months ended December 31, 2021 and 2020, respectively, and $0.1 million and $0.3 million during the six months ended December 31, 2021 and 2020, respectively.

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 paid the CVR holders approximately 123,820 shares of the Company’s common stock to satisfy the first $2.0 million milestone, which relates to the Innovus achievement of $24.0 million in revenues during the 2019 calendar year. On March 20, 2021, the Company paid the CVR holders approximately 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. The $1.0 million 2021 milestones, which relate to the Innovus achievement of $40.0 million in revenues during the 2021 calendar year and $1.0 million for achieving profitability were not met. As of December 31, 2021 and June 30, 2021, the CVRs were revalued at $1.4 million, using the same Monte Carlo model. During the three months ended December 31, 2021 and 2020, the Company recognized a loss of $44,000 and $0.1 million, respectively, and a loss of $0.9 million during the six months ended December 31, 2020 in the consolidated statements of operations from changes in fair values of CVRs. The net gain during the six months ended December 31, 2021 was negligible.

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, 2021:


		CVR			Contingent
		Liability			Consideration

	(In thousands)
Balance as of June 30, 2021		$	1,395		$	12,057
Included in earnings			(3)			555
Purchases, issues, sales and settlements:
Settlements			—			(3,109)
Balance as of December 31, 2021		$	1,392		$	9,503

Significant Assumptions

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


		December 31,
		2021
Tuzistra
Valuation model		Scenario-Based
Leveraged Beta		0.66
Market risk premium		6.00	%
Risk-free interest rate		1.80	%
Discount		14.30	%
Company specific discount		15.00	%


		December 31,
		2021
ZolpiMist
Valuation method		Monte Carlo
Leveraged Beta		1.08
Market risk premium		6.00	%
Risk-free interest rate		1.90	%
Discount		11.50	%
Company specific discount		15.00	%

Significant assumptions used in valuing the CVRs were as follows:


		December 31,
		2021
Contingent Value Rights
Valuation method		Monte Carlo
Leveraged Beta		0.85
Market risk premium		6.00	%
Risk-free interest rate		0.73	%
Discount		18.00	%
Company specific discount		10.00	%

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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