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 are measured at fair value on a recurring basis and 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.

The following table presents the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2022 and June 30, 2021, by level within the fair value hierarchy.

Contingent Consideration. The Company classifies its contingent consideration liabilities within Level 3 as factors used to develop the estimated fair value are unobservable inputs that are not supported by market activity.

The royalty and make-whole milestone payments related to the licensing agreements with TRIS Pharma, Inc. (“Tris”) for Tuzistra XR was being accounted for as contingent consideration and revalued at each reporting period. As a result of the discontinuation of commercializing Tuzistra (see Note 4 – Revenue Recognition), and ongoing negotiations with Tris, the Company has concluded that, as of March 31, 2022, the product milestone payments underlying the contingent consideration liability ceased to exist. As of March 31, 2022, the Company reversed the remaining contingent considerations liabilities of $8.5 million and recorded a liability of $7.6 million related to the settlement payments payable to Tris (see Note 20 – Subsequent Events) for termination of the Tuzistra licensing agreement. The amount is included in other current and noncurrent liabilities in the consolidated balance sheets, and represents the present value of future payments discounted using the Company’s borrowing rate. The Company deferred recognition of $0.9 million net gain from reversal of contingent consideration liability and the settlement payments until the termination of the original agreement and signing of the settlement agreement in May 2022, and was included in accrued liabilities in the consolidated balance sheets as of March 31, 2022.

The royalty payments related to the licensing agreements with Magna Pharmaceuticals, Inc. (“Magna”) for ZolpiMist were being accounted for as contingent consideration and revalued at each reporting period. As a result of the discontinuation of commercializing ZolpiMist, the Company has concluded that, as of March 31, 2022, the royalty-based product milestone payments underlying the contingent consideration liability ceased to exist. As of March 31, 2022, the Company reversed the remaining contingent consideration liabilities of $0.6 million and recorded the $50,000 payment

due for termination of the Manga licensing agreements in other current liability in the consolidated balance sheets. The Company recognized $0.6 million gain from reversal of contingent consideration liability and the termination payment in the consolidated statements of operations for the three and nine months ended March 31, 2022.

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 Acquisition. 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 March 31, 2022 and June 30, 2021, the contingent consideration balance was $0.3 million.

In June 2017, Innovus entered into the Exclusive License Agreement with University of Iowa Research Foundation (“UIRD”) (the “UIRD Agreement”) for the use of patent and technology know-how as defined in the agreement. Pursuant to the agreement, Innovus will pay UIRD a milestone payment of $50,000 every other year beginning on July 1, 2021 for a total payments of $0.2 million. The fair value was determined as the 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 March 31, 2022 and June 30, 2021, was approximately $0.1 million.

As a result of the reversal of contingent consideration liabilities, there was no gain or loss from the change in fair value of contingent consideration during the three months ended March 31, 2022. During the three months ended March 31, 2021, the Company recognized a net gain of $0.7 million from the changes in fair values of contingent considerations. During the nine months ended March 31, 2022 and 2021, the Company recognized a loss of $0.5 million and $1.7 million, respectively, from the changes in fair values of contingent considerations. The total accretion expense related to these contingent considerations was approximately $23,000 and $15,000 during the three months ended March 31, 2022 and 2021, respectively, and $0.1 million and $0.3 million during the nine months ended March 31, 2022 and 2021, 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 Acquisition. 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 March 31, 2022 and June 30, 2021, the CVRs were revalued at $0.7 million and $1.4 million, respectively, using the same Monte Carlo model. During the three months ended March 31, 2022 and 2021, the Company recognized a gain of $0.7 million and a loss of $0.1 million, respectively, and a gain of $0.7 million and a loss of $1.0 million during the nine months ended March 31, 2022 and 2021, respectively, in the consolidated statements of operations related to the changes in fair values of CVRs.

Warrants. On January 26, 2022, as consideration for entering into the Avenue Capital Agreement, the Company issued the Avenue Capital Warrants to the Avenue Capital Lenders to purchase shares of common stock at an exercise price equal to $1.21 per share. The Avenue Capital Warrants provided that in the event the Company were to engage in an equity offering at a price lower than $1.21 prior to June 30, 2021, the exercise price would be adjusted to the effective price of such equity offering and the number of shares of common stock to be issued under the Avenue Capital Warrants would be adjusted as set forth in the agreement. At inception and through the reclassification to equity on March 7, 2022, the Company accounted for the Avenue Capital Warrants as a liability as the number of shares was not fixed at the Issuance Date. The fair value of the Avenue Capital Warrants was $0.6 million on January 26, 2022 with hybrid approach using a combination of Black-Scholes and Monte Carlo simulation. On March 7, 2022, the Company reclassified the Avenue Capital Warrants from a liability to equity. During the three months ended March 31, 2022, the Company recognized a gain of $0.2 million in the consolidated statements of operations from changes in fair values of warrants (see Note 11 – Long-term Debt).

The following table sets forth a summary of changes to those fair value measures using Level 3 inputs for the three months ended March 31, 2022:

* Including $9.1 million reversal of contingent consideration liabilities and $0.4 million liability warrants reclassified to equity.

Significant Assumptions

Significant assumptions used in valuing CVRs were as follows:


	March 31,
	2022
Leveraged Beta	0.79
Market risk premium	6.22	%
Risk-free interest rate	2.12	%
Discount	19.50	%
Company specific discount	10.00	%

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	%