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Summary of Significant Accounting Policies | 12 Months Ended
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Jun. 30, 2018
Accounting Policies [Abstract] |
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.

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