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Fair Value Measurements

12 Months Ended

Jun. 30, 2023

Fair Value Disclosures [Abstract]

Fair Value Measurements

12. Fair Value Measurements

We determine the fair value of financial and non-financial assets using the fair value hierarchy, which establishes three levels of inputs that may be used to measure fair value 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 financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, derivative warrant liabilities, contingent consideration liabilities, fixed payment arrangements, and short-term and long-term debt. The carrying amounts of certain short-term financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to their short maturities. Short-term and long-term debt are reported at their amortized costs on our consolidated balance sheets. The remaining financial instruments are reported on our consolidated balance sheets at amounts that approximate current fair values. 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. There were no transfers between Level 1, Level 2 and Level 3 in the periods presented.

Recurring Fair Value Measurement

The following table presents the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2023 and 2022, by level within the fair value hierarchy:


					Fair Value Measurements at June 30, 2023
		Fair Value at June 30,
		2023			(Level 1)			(Level 2)			(Level 3)

		(In thousands)
Liabilities:
Derivative warrant liabilities		$	6,403		$	—		$	—		$	6,403
Total		$	6,403		$	—		$	—		$	6,403


					Fair Value Measurements at June 30, 2022
		Fair Value at June 30,
		2022			(Level 1)			(Level 2)			(Level 3)

		(In thousands)
Liabilities:
Contingent consideration		$	396		$	—		$	—		$	396
CVR liability			578			—			—			578
Derivative warrant liabilities			1,796			—			—			1,796
Total		$	2,770		$	—		$	—		$	2,770

Cash and cash equivalents in the consolidated balance sheets include bank deposits and money market funds, and reflect their fair value at Level 1 in the fair value hierarchy.

Non-Recurring Fair Value Measurement

The Company’s financial assets and liabilities that were accounted for at fair value on a non-recurring basis during the years ended June 30, 2023 and 2022, were fixed payment arrangements, goodwill and intangible assets.

Fixed payment arrangements are recognized at their amortized cost basis using market appropriate discount rates and are accreted up to their notional face value over time. Significant assumptions used in valuing the fixed payment arrangements were discount rates from 10.0% to 15.4%, and are classified as Level 3 inputs in the fair value hierarchy. In May 2022, the Company recognized a fixed payment arrangement liability of $7.6 million relating to the termination of the License, Development, Manufacturing and Supply Agreement with Tris. See Note 9 – Other Liabilities for further information on fixed payment arrangements.

Based on the Company’s impairment analyses for fiscal years 2023 and 2022, the Company recorded an impairment charge of $5.6 million on intangible assets during the year ended June 30, 2023; and an impairment charge of $7.1 million on intangible assets and $65.8 million on goodwill for the year ended June 30, 2022. Valuation of goodwill and intangible assets involves significant Level 3 inputs in estimating their fair values. These input assumptions included revenue growth rates, forecasted EBITDA margins, and the selection of a discount rate. These assumptions may be affected by expectations about future market or economic conditions. See Note 7 - Goodwill and Other Intangible Assets and Note 2 - Summary of Significant Accounting Policies, for further discussion on the fair value measurement of goodwill and other intangible assets.

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, 2023:


		CVR			Contingent				Warrant
		Liability			Consideration				Liability

		(In thousands)
Balance as of June 30, 2022		$	578		$	396		$	1,796
Included in earnings			(578)			(391)			(6,391)
Purchases, issues, sales and settlements:
Issues			—			—			10,998
Settlements			—			(5)			—
Balance as of June 30, 2023		$	—		$	—		$	6,403

Level 3 Inputs

Changes in the fair value of contingent liabilities in subsequent periods are recorded as a gain or loss in the consolidated statements of operations.

Significant assumptions used in valuing the CVRs were as follows:


		June 30,
		2023			2022
Leveraged Beta		0.84			0.85
Market risk premium		6.35	%		6.22	%
Risk-free interest rate		5.47	%		2.86	%
Discount		22.00	%		20.50	%
Company specific discount		10.00	%		10.00	%

Significant assumptions used in valuing the derivative warrant liabilities at issuance date were as follows:


		August 9,
		2022
Expected volatility		89.89	%
Equivalent term (years)		4.11
Risk-free rate		3.09	%
Dividend yield		0.00	%


		June 8,
		2023
Expected volatility		83.26	%
Equivalent term (years)		5.01
Risk-free rate		3.87	%
Dividend yield		0.00	%

Significant assumptions used in valuing the derivative warrant liabilities, marked to market, were as follows:


		June 30,
		2023
Expected volatility		83.42	%
Equivalent term (years)		3.59-4.95
Risk-free rate		4.13-4.40	%
Dividend yield		0.00	%

Expected volatility was based primarily on historical volatility. The Company chose to use a two-year lookback on historical volatility to avoid the effects of COVID-19 and the Innovus acquisition. The Company believes this method produced an estimate that was representative of the Company’s expectations of future volatility over the expected term of these warrants, and will not differ materially. If expected volatility by the active market is higher than estimated, the derivative may result in a greater fair value. The expected life was based on the remaining contractual term of the warrants. The risk-free rate was based on the U.S. Treasury rate that corresponded to the expected term of the warrants.

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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