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

Inputs that reflect unadjusted quoted prices in active markets that are accessible to Aytu for identical assets or liabilities;

Level

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

Unobservable inputs that are supported by little or

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

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,

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,

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

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

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

Input Changes

The following table sets forth a summary of changes to those fair value measures using Level

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