| Summary of Significant Accounting Policies | Note 2 – Summary of Significant Accounting Policies
Principals of Consolidation These consolidated financial statements
include the accounts of Aytu and its wholly-owned subsidiary, Aytu Women’s Health. All material intercompany transactions
and balances have been eliminated. Cash, Cash Equivalents and Restricted Cash Aytu considers all highly liquid instruments purchased with
an original maturity of three months or less to be cash equivalents. Restricted cash consist primarily of a certificate of deposit
investment account. Aytu’s investment policy is to preserve principal and maintain liquidity. The Company periodically monitors
its positions with, and the credit quality of the financial institutions with which it invests. Periodically, throughout the year,
and as of June 30, 2018, Aytu has maintained balances in excess of federally insured limits. Revenue Recognition Product & Service Sales The Company recognizes revenue only when
all of the following criteria have been met:
● Persuasive evidence
of an arrangement exists,
● Delivery has occurred,
● The fee for the arrangement
is fixed or determinable, and
● Collectability is
reasonably assured. Persuasive evidence of an arrangement exists
- The Company documents all terms of an arrangement in a written contract by the customer prior to recognizing revenue. Certain
contracts allow for revenue recognition at the time of shipment and others at the time of delivery. Delivery has occurred - The Company recognizes
revenue when delivery of certain products occurs at the customers’ designated location. Device sales are typically recorded when
products are shipped to customers. Drug sales are typically recorded when the product arrives at the customer’s dock. Provisions
for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period
the related sales are recorded and are estimated at the time of sale. The fee for the arrangement is fixed or
determinable - Prior to recognizing revenue, a customer’s fee is either fixed or determinable under the terms of the written contract. Collectability is reasonably assured -
The Company determines that collectability is reasonably assured prior to recognizing revenue. Collectability is assessed on a
customer-by-customer basis based on criteria outlined by management. New customers are subject to a credit review process, which
evaluates the customer’s financial position and ultimately its ability to pay. The Company does not enter into arrangements unless
collectability is reasonably assured at the outset. Existing customers are subject to ongoing credit evaluations based on payment
history and other factors. If it is determined during the arrangement that collectability is not reasonably assured, revenue is
recognized on a cash basis. Estimated Sales Returns and Allowances Aytu records estimated reductions in revenue for potential returns
of products by customers. As a result, management must make estimates of potential future product returns and other allowances
related to current period product revenue. In making such estimates, management analyzes historical returns, current economic trends
and changes in customer demand and acceptance of our products. If management were to make different judgments or utilize different
estimates, material differences in the amount of the Company’s reported revenue could result. As of June 30, 2018, and 2017,
we accrued $17,000 and $58,000, respectively, in our estimated returns allowance. Estimates of potential returns and allowances
are trued up each quarter for the difference between estimates made in the prior quarter and actual results that become available
after the end of each reporting period. Shipping and Handling The Company’s shipping and handling costs
are included in cost of goods sold for all periods presented. Accounts Receivable Accounts receivable are recorded at
their estimated net realizable value. Aytu evaluates collectability of accounts receivable on a quarterly basis and records a valuation
allowance accordingly. As of June 30, 2018, we had an allowance for doubtful accounts of $0, and as of June 30, 2017, there had
been an allowance for doubtful accounts of $44,000. Concentration of Business Risks The following counterparties contributed
greater than 10% of the Company’s gross revenue during the year ended June 30, 2018 and 2017, respectively. The counterparties,
sometimes referred to as partners or customers, are large wholesale distributors that resell our products to retailers. As of June
30, 2018, three customers accounted for 84% of gross revenue. The revenue from these counterparties as a percentage of gross revenue
was as follows:
Year Ended June 30,
2018 2017
Customer A 32 % 34 %
Customer C 30 % 18 %
Customer B 24 % 22 % The loss of one or more of the Company’s significant partners
or collaborators could have a material adverse effect on its business, operating results or financial condition. Although the Company
is impacted by economic conditions in the biotechnology and pharmaceutical sectors, management does not believe significant credit
risk exists as of June 30, 2018. We are also subject to credit risk
from our accounts receivable related to our product sales. Historically, we have not experienced significant credit losses on our
accounts receivable and we do not expect to have write-offs or adjustments to accounts receivable which would have a material adverse
effect on our financial position, liquidity or results of operations. As of June 30, 2018, three customers accounted for 81% of
gross accounts receivable. As of June 30, 2017, three customers accounted for 60% of gross accounts receivable.
Year Ended June 30,
2018 2017
Customer C 35 % 18 %
Customer A 27 % 25 %
Customer B 19 % 17 %
Other 12 % 0 % Inventories Inventories consist of raw materials, work in process and finished
goods and are recorded at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. Aytu
periodically reviews the composition of its inventories in order to identify obsolete, slow-moving or otherwise unsaleable items.
If unsaleable items are observed and there are no alternate uses for the inventory, Aytu will record a write-down to net realizable
value in the period that the impairment is first recognized. Inventory for our abandoned products was written down during fiscal
2018. Therefore, we currently have a reserve of $0 for slow moving inventory as of June 30, 2018 and $310,000 at June 30, 2017. Inventory balances consist of the following:
June 30,
2018 2017
Raw materials $ 239,000 $ 442,000
Work in process - 442,000
Finished goods 1,100,000 738,000
Reserve - (310,000 )
$ 1,339,000 $ 1,312,000 Fixed Assets Fixed assets are recorded at cost. After being placed in service,
the fixed assets are depreciated using the straight-line method over estimated useful lives. Fixed assets consist of the following:
Estimated Useful Lives June 30,
in years 2018 2017
Manufacturing equipment 2 - 5 $ 213,000 $ 405,000
Leasehold improvements 3 112,000 111,000
Office equipment, furniture and other 2 - 5 344,000 287,000
Lab equipment 3 - 5 90,000 90,000
Less accumulated depreciation and amortization (540,000 ) (246,000 )
Fixed assets, net $ 219,000 $ 647,000 Aytu recorded the following depreciation and amortization expense
in the respective periods:
Year Ended June 30,
2018 2017
Depreciation and amortization expense $ 294,000 $ 134,000 Patents Costs of establishing patents, consisting of legal and filing
fees paid to third parties, are expensed as incurred. The cost of the Luoxis patents were $380,000 when they were acquired in connection
with the 2013 formation of Luoxis and are being amortized over the remaining U.S. patent lives of approximately 15 years, which
expires in March 2028. Patents consist of the following:
June 30,
2018 2017
Patents $ 380,000 $ 380,000
Less accumulated amortization (134,000 ) (109,000 )
Patents, net $ 246,000 $ 271,000 Aytu recorded the following amortization expense in the respective
periods:
Year Ended June 30,
2018 2017
Amortization expense $ 25,000 $ 26,000 Future amortization from the year ended June 30, 2018 is as
follows:
2019 $ 25,000
2020 25,000
2021 25,000
2022 25,000
2023 25,000
Thereafter 121,000
$ 246,000 Business Combinations The Company accounts for its business acquisitions under the
acquisition method of accounting as indicated in the Financial Accounting Standards Board’s (“FASB”) Accounting
Standards Codification (“ASC”) 805, “Business Combinations”, which requires the acquiring entity in a business
combination to recognize the fair value of all assets acquired, liabilities assumed, and any non-controlling interest in the acquired
business; and establishes the acquisition date as the fair value measurement point. Accordingly, the Company recognizes assets
acquired and liabilities assumed in business combinations, including contingent assets and liabilities and non-controlling interest
in the acquiree, based on the fair value estimates as of the date of acquisition. In accordance with ASC 805, the Company recognizes
and measures goodwill as of the acquisition date, as the excess of the fair value of the consideration paid over the fair value
of the identified net assets acquired. Goodwill The Nuelle, ProstaScint and Primsol purchase price allocations
were based upon an analysis of the fair value of the assets and liabilities acquired. The final purchase price may be adjusted
up to one year from the date of the acquisition. Identifying the fair value of the tangible and intangible assets and liabilities
acquired required the use of estimates by management, and were based upon currently available data, as noted below. The Company allocated the excess of purchase price over the
identifiable intangible and net tangible assets to goodwill. Such goodwill is not deductible for tax purposes and represents the
value placed on entering new markets and expanding market share. The Company tests its goodwill for impairment annually, or whenever
events or changes in circumstances indicate an impairment may have occurred, by comparing the carrying value to its implied fair
value. Impairment may result from, among other things, deterioration in the performance of the acquired business, adverse market
conditions, adverse changes in applicable laws or regulations and a variety of other circumstances. If the Company determines that
an impairment has occurred, it is required to record a write-down of the carrying value and charge the impairment as an operating
expense in the period the determination is made. In evaluating the recoverability of the carrying value of goodwill, the Company
must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the acquired assets.
Changes in strategy or market conditions could significantly impact those judgments in the future and require an adjustment to
the recorded balances. The goodwill was recorded as part of the acquisition of ProstaScint that occurred on May 20, 2015,
Primsol that occurred on October 5, 2015 and Nuelle that occurred on May 5, 2017. There was an impairment of $74,000 related to
the ProstaScint goodwill for the year ended June 30, 2017. There was an impairment of $238,000 related to the Fiera goodwill during
the year ended June 30, 2018. Use of Estimates The preparation of financial statements in accordance with Generally
Accepted Accounting Principles in the United States of America (“GAAP”) requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities as of the date of
the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant items subject
to such estimates and assumptions include valuation allowances, stock-based compensation, warrant valuation, purchase price allocation,
valuation of contingent consideration, sales returns and allowances, useful lives of fixed assets, collectability of accounts receivable,
and assumptions in evaluating impairment of definite and indefinite lived assets. Actual results could differ from these estimates. Income Taxes Aytu has been included in the consolidated tax returns of Ampio
for tax years ending on or before December 31, 2015. As of January 2016, due to the decrease in Ampio’s ownership percentage of
Aytu stock, Aytu will begin to file tax returns separate from Ampio. For all consolidated tax return periods, Aytu’s taxes were
computed and reported on a “separate return” basis for these financial statements. Deferred taxes are provided on an
asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and
tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are
the differences between the reported amounts of assets and liabilities and their tax bases. Deferred taxes are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will
not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date
of enactment. The amount of income taxes and related income tax positions
taken are subject to audits by federal and state tax authorities. The Company has adopted accounting guidance for uncertain tax
positions which provides that in order to recognize an uncertain tax position, the taxpayer must be more likely than not of sustaining
the position, and the measurement of the benefit is calculated as the largest amount that is more than 50% likely to be realized
upon settlement with the taxing authority. The Company believes that it has no material uncertain tax positions. The Company’s
policy is to record a liability for the difference between the benefits that are both recognized and measured pursuant to FASB
ASC 740-10. “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement 109” (ASC 740-10) and tax
position taken or expected to be taken on the tax return. Then, to the extent that the assessment of such tax positions changes,
the change in estimate is recorded in the period in which the determination is made. The Company reports tax-related interest and
penalties as a component of income tax expense. During the periods reported, management of the Company has concluded that no significant
tax position requires recognition under ASC 740-10. Stock-Based Compensation Aytu accounts for share-based payments by recognizing compensation
expense based upon the estimated fair value of the awards on the date of grant. The Company determines the estimated grant fair
value using the Black-Scholes option pricing model and recognizes compensation costs ratably over the period of service using the
graded method. Forfeitures are adjusted for as they occur. Restricted Stock The Company is recognizing compensation cost equal to the fair
value of the stock at the grant dates prorated over the vesting period of each award. Research and Development Research and development costs are expensed as incurred with
expenses recorded in the respective period. Income (Loss) Per Common Share Basic income (loss) per common share is calculated by dividing
the net income (loss) available to the common shareholders by the weighted average number of common shares outstanding during
that period. Diluted net loss per share reflects the potential of securities that could
share in the net loss of Aytu. Basic and diluted loss per share was the same in 2018 and 2017. Although there were common stock
equivalents of 1,923,199 and 18,366 shares outstanding at June 30, 2018 and 2017, respectively, consisting of stock options, unvested
restricted stock and warrants; they were not included in the calculation of the diluted net loss per share because they would
have been anti-dilutive. Fair Value of Financial Instruments and Derivative Liability The carrying amounts of financial instruments, including cash
and cash equivalents, restricted cash, accounts receivable, accounts payable, and other current assets and other liabilities approximate
their fair value due to their short maturities. The fair value of acquisition-related contingent consideration is based on estimated
discounted future cash flows and assessment of the probability of occurrence of potential future events. The fair values of marketable
securities was based on quoted market prices. Aytu accounts for liability warrants by recording the fair value
of each instrument in its entirety and recording the fair value of the warrant derivative liability. The fair value of the financial
instruments and related warrants were calculated using a lattice valuation model. We recorded a derivative expense at the inception
of the instrument reflecting the difference between the fair value and cash received. Changes in the fair value in subsequent periods
was recorded as unrealized gain or loss on fair value of debt instruments for the financial instruments and to derivative income
or expense for the warrants. The fair value of the
warrants issued to the placement agents in connection with the registered offering were valued using the lattice valuation methodology.
Changes in the fair value in subsequent periods were recorded to derivative income or expense. Adoption of Newly Issued Accounting Pronouncements In May 2017, the FASB issued ASU No. 2017-09,
“Compensation-Stock Compensation (Topic 718) Scope of Modification Accounting (ASU 2017-09).” ASU 2017-09
clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification
accounting in Topic 718. The standard is effective for interim and annual reporting periods beginning after December 15,
2017, with early adoption permitted. In the quarter ended March 31, 2018, the Company adopted this pronouncement, the impact
of which was immaterial. In January 2017, the FASB issued ASU 2017-01, “Business
Combinations (Topic 805) Clarifying the Definition of a Business.” The amendment clarifies the definition of a business,
which is fundamental in the determination of whether transactions should be accounted for as acquisitions (or disposals) of assets
or businesses. This determination is important given the diverging accounting models used for each type of transaction. The guidance
is generally expected to result in fewer transactions qualifying as business combinations. The amendment is effective prospectively
for public business entities for annual periods beginning after December 15, 2017, including interim periods within those periods.
Early adoption is permitted. As of the quarter ended June 30, 2018, the pronouncement does not apply to the Company, however, if
Aytu seeks to purchase additional assets in the future it could have an impact if that purchase is accounted for as a business
combination or an asset purchase. In January 2017, the FASB issued ASU 2017-04, “Intangibles
- Goodwill and Other (Topic 350).” The amendment simplifies the subsequent measurement of goodwill by removing the second
step of the two-step impairment test. The amendment requires an entity to perform its annual, or interim goodwill impairment test
by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount
by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the
total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment
for a reporting unit to determine if the quantitative impairment test is necessary. The amendment should be applied on a prospective
basis. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal
years. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1,
2017. The Company early adopted this standard in fiscal 2018. There was no impact on its consolidated financial statements. Recently Issued Accounting Pronouncements, Not Adopted as
of June 30, 2018 From March 2016 through
December 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-20, ASU 2016-12, ASU 2016-11,
ASU 2016-10 and ASU 2016-08. These updates all clarify aspects of the guidance in ASU 2014-09, Revenue from Contracts with Customers
(Topic 606), which represents comprehensive reform to revenue recognition principals related to customer contracts. The effective
date of these updates for the Company is July 1, 2018. Adoption of this ASU is either full retrospective to each prior period presented
or modified retrospective with a cumulative adjustment to retained earnings or accumulated deficit as of the adoption date. We finalized our assessment
of the new standard and will be adopting using the modified retrospective method as we have concluded that the impact of adopting
the new standard is not significant as it relates to historical revenues, future revenues, or accounting for incremental costs
of obtaining a contract with a customer. Going forward we will need to have disclosures de-segregating revenue to comply with this
standard. We have analyzed the five-steps
for each type of contract with our customers and concluded that: (1) The new guidance will not change our existing policy and practice
for identifying contracts with customers, nor give rise to changes to our existing policy and practice or create new concern surrounding
the collectability of our receivables from customers, (2) none of our contracts with customers contain multiple performance obligations
that are not fulfilled at the same time, and (3) the new guidance will not change our existing policy and practice regarding the
recording of variable consideration. Our financial reporting process will remain essentially unchanged. Additionally, Subtopic
340-40 requires the capitalization of all incremental costs that we incur to obtain a contract with a customer that would not have
been incurred if the contract had not been obtained, provided we expect to recover those costs. We performed an analysis and noted
that there are no material customer acquisition costs that are incremental and that are expected to be recovered at a future time.
The aforementioned
modified retrospective method of transition will not result in a cumulative adjustment as of July 1, 2018. Additionally, no other
line items in the statement of operations or the balance sheet will reflect any changes due to the adoption of the new standard.
Adoption of the standards related to revenue recognition had no material impact to cash from or used in operating, financing, or
investing on our consolidated cash flows statements. In June 2016, the FASB
issued ASU 2016-13, “Financial Instruments – Credit Losses” to require the measurement of expected credit losses
for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts.
The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected
credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.
The standard is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted
for interim and annual reporting periods beginning after December 15, 2018. The Company is currently assessing the impact that
ASU 2016-13 will have on its consolidated financial statements but does not anticipate there to be a material impact. In February 2016, the FASB issued ASU 2016-02, “Leases
(Topic 842).” The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a
lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance
or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective
for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective
transition approach is required for leases for capital and operating leases existing at, or entered into after, the beginning of
the earliest comparative period presented in the financial statements, with certain practical expedients available. In July 2018,
the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases.” The improvements in this amendment will
be effective at the same time as ASU 2016-02. Also, in July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted
Improvements.” The Board decided to provide another transition method, in addition to the existing transition method, by
allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment
to the opening balance of retained earnings in the period of adoption. The Company is currently evaluating the impact of its adoption
of these standards on its consolidated financial statements. |
