AYTU BIOPHARMA, INC Fair Value Disclosure

Note 12 - Fair Value Measurements

 

The Company determines 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 the Company 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, fixed payment arrangements, and current and non-current 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. Current and non-current debt are reported at their amortized costs on the Company’s consolidated balance sheets. The remaining financial instruments are reported on the Company’s 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, 2025, and 2024, by level within the fair value hierarchy:

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		Fair Value at				Fair Value Measurements at June 30, 2025
		June 30, 2025				(Level 1)				(Level 2)				(Level 3)
		(in thousands)
Liabilities:
Derivative warrant liabilities		$	26,334			$	—			$	—			$	26,334
Total		$	26,334			$	—			$	—			$	26,334

 

		Fair Value at				Fair Value Measurements at June 30, 2024
		June 30, 2024				(Level 1)				(Level 2)				(Level 3)
		(in thousands)
Liabilities:
Derivative warrant liabilities		$	12,745			$	—			$	—			$	12,745
Total		$	12,745			$	—			$	—			$	12,745

 

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, 2025, and 2024, were fixed payment arrangements 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. See Note 9 - Other Liabilities for further information on fixed payment arrangements.

 

Based on the Company’s impairment analyses for fiscal 2025 and 2024, the Company recorded an impairment charge of $8.3 million on intangible assets for the year ended June 30, 2025, and the Company did not record an impairment charge on intangible assets during the year ended  June 30, 2024. Valuation of intangible assets involves significant Level 3 inputs in estimating their fair values. These input assumptions included revenue growth rates, forecasted earnings before interest, taxes, depreciation, and amortization margins, and the selection of a discount rate. These assumptions may be affected by expectations about future market or economic conditions. See Note 2 - Summary of Significant Accounting Policies and Note 7 - Intangible Assets, for further discussion of the Company’s 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 periods presented:

 

		Derivative
		Warrant Liabilities
		(in thousands)
Balance as of June 30, 2023		$	6,403
Issued (1)			5,148
Settlements (1)			(2,810	)
Included in earnings			4,004
Balance as of June 30, 2024			12,745
Issued (2)			12,349
Settlements (3)			(463	)
Included in earnings			1,703
Balance as of June 30, 2025		$	26,334

 

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(1)	Primarily relates to warrants to purchase 2,173,912 common shares issued with the Company’s June 2023 equity financing that were exercised in June 2024. The warrants were converted into 367,478 shares of common stock (“Settlements”) and 1,806,434 prefunded warrants to purchase shares of common stock with an exercise price of $0.0001 per share (“Issued”). See Note 14 - Stockholders’ Equity and Note 16 - Warrants for further detail.
(2)	Relates to the June 2025 issuance of 8,233,332 prefunded warrants at a public offering price of $1.4999 to purchase 8,233,332 shares of the Company’s common stock at an exercise price of $0.0001 per share (see Note 14 - Stockholders’ Equity and Note 16 - Warrants for further detail).
(3)	Relates to the exercise of 176,000 prefunded warrants during the first quarter of fiscal 2025, which were liability classified and exercised at a price of $0.0001 per share.

 

Level 3 Inputs

 

Significant assumptions as of June 30, 2025, used in valuing the derivative warrant liabilities, marked to market, were as follows:

 

		June 2023 Tranche A Warrants				Warrants Other (1)
		Monte Carlo & Black-Scholes				Black-Scholes
Aytu closing stock price		$	2.18			$	2.18
Equivalent term (years)			2.9				1.6 - 2.2
Expected volatility			85.8	%			75.4% - 78.1%
Risk-free rate			3.7	%			3.7	%
Dividend yield			0	%			0	%

 

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(1)	Includes all liability classified warrants and prefunded warrants except the June 2023 Tranche A Warrants (see Note 16 - Warrants for further information).