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Fair Value Measurements

12 Months Ended

Jun. 30, 2022

13. 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, restricted cash, accounts receivable, accounts payable, accrued liabilities, warrant derivative liability, contingent consideration liabilities, and short-term and long-term debt. The carrying amounts of certain short-term 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. 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, 2022 and 2021, by level within the fair value hierarchy:


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

	(In thousands)
Assets:
Cash and cash equivalents	$	19,360	$	19,360	$	—	$	—
Total	$	19,360	$	19,360	$	—	$	—
Liabilities:
Contingent consideration	$	396	$	—	$	—	$	396
CVR liability		578		—		—		578
Warrant		—		—		—		—
Total	$	974	$	—	$	—	$	974


			Fair Value Measurements at June 30, 2021
	Fair Value at June 30,
	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

Non-Recurring Fair Value Measurement

The following able represents Company’s financial assets and liabilities that were accounted for at fair value on a non-recurring basis as of June 30, 2022 and 2021, by level within the fair value hierarchy:


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

	(In thousands)
Non-recurring
Fixed payment arrangements	$	13,051	$	—	$	—	$	13,051
Total	$	13,051	$	—	$	—	$	13,051


			Fair Value Measurements at June 30, 2021
	Fair Value at June 30,
	2021		(Level 1)		(Level 2)		(Level 3)

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

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, 2022:


	CVR		Contingent		Fixed Payment			Warrant
	Liability		Consideration		Arrangements			Liability

	(In thousands)
Balance as of June 30, 2021	$	1,395	$	12,057	$	9,458	$	—
Included in earnings		(817)		604		1,148		(211)
Purchases, issues, sales and settlements:
Issues		—		—		7,645		590
Settlements^*		—		(12,265)		(5,200)		(379)
Balance as of June 30, 2022	$	578	$	396	$	13,051	$	—

* Including $9.1 million reversal of contingent consideration liabilities see Note 10 Other Liabilities and $0.4 million liability warrants reclassified to equity.

Level 3 Inputs

Changes in the fair value of contingent liabilities in subsequent periods are recorded as a loss (gain) in the statements of operations. Significant assumptions used in valuing the CVRs were as follows:


	June 30,
	2022		2021
Leveraged Beta	0.85		0.91
Market risk premium	6.22	%	6.00	%
Risk-free interest rate	2.86	%	0.36	%
Discount	20.50	%	13.00	%
Company specific discount	10.00	%	5.00	%

Significant assumptions used in valuing the warrants were as follows:


	January 26,
	2022
Expected volatility	56.75	%
Equivalent term (years)	5.00
Risk-free rate	1.66	%
Dividend yield	0.00	%

The fixed payment arrangements are recognized at their amortized cost basis using market appropriate discount rates and are accreted up to their ultimate face value over time. Significant assumptions used in valuing the Fixed Payment Arrangements were as follows:


	June 30,
	2022		2021
Discount rate - minimum	10.0	%	10.0	%
Discount rate - maximum	15.4	%	12.4	%

- 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.

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