Summary of Significant Accounting Policies

Basis of Presentation. The Company’s consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”).

Prior Period Reclassification. Certain prior year amounts in the consolidated balance sheets, statements of earnings and statements of cashflows have been reclassified to conform to the current year presentation, including a reclassification made in the presentation of FDA fees for commercialized product. This was previously included in general and administrative expenses and now is recorded as a component of cost of sales on the consolidated statements of earnings. These reclassifications did not affect operating earnings or other consolidated financial statements for the years ended June 30, 2021 and 2020.

Accounts Receivable

Accounts Receivable. Accounts receivables are reported on the consolidated balance sheets at outstanding amounts due from customers, less an allowance for doubtful accounts, discounts and pricing chargebacks. The Company extends credit without requiring collateral and typically does not charge interest on past due accounts but reserves the right to do so. As of June 30, 2021, reserve for discounts and chargebacks were $1.1 million and $1.0 million, respectively, and were $0.3 million and negligible amount as of June 30, 2020.

The Company writes off uncollectible receivables when the likelihood of collection is remote. The Company evaluates the collectability of accounts receivable on a quarterly basis. An allowance, when needed, is based upon various factors, including: the financial condition and payment history of customers; an overall review of collections experience on other accounts; and, economic factors or events expected to affect future collections experience. Allowance for doubtful accounts was $1.0 million and $0.4 million as of June 30, 2021 and 2020, respectively.

Going Concern Determination

Going Concern Determination. The Company periodically performs an evaluation for going concern accounting if the Company has experienced negative financial trends. The evaluation should be based on relevant

conditions and events that are known and reasonably knowable within one year after the date that the financial statements are issued. Recurring operating losses or year over year negative cash flows from operating activities are considered negative trends.

Leases

Leases. At the inception of an arrangement, the Company determines if an arrangement is, or contains, a lease based on the unique facts and circumstances present in such arrangement. Lease classification, recognition and measurement are then determined at the lease commencement date. For arrangements that contain a lease, the Company will (i) identify lease and non-lease components, (ii) determine the consideration in the contract, (iii) determine whether the lease is an operating or financing lease, and (iv) recognize lease right-of-use (“ROU”) assets and liabilities. Lease liabilities and their corresponding ROU assets are recorded based on the present value of lease payments over the expected lease term. When determining the lease term, the Company includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company uses the implicit interest rate when readily determinable and uses the Company’s incremental borrowing rate when the implicit rate is not readily determinable based upon the information available at the lease commencement date in determining the present value of the lease payments.

Fixed lease payments are recognized over the expected term of the lease using the effective interest method. Variable lease expenses that are not considered fixed, or in substance fixed, are expensed as incurred. Fixed and variable lease expense on operating leases are recognized within cost of goods sold and operating expenses in the Company’s consolidated statements of operations. ROU asset amortization and interest costs on financing leases are recorded within cost of goods sold and interest expense, respectively, in the Company’s consolidated statements of operations. The Company has elected the short-term lease exemption and recognizes a short-term lease expense over lease terms of 12 months or less.

Operating leases are included in operating lease ROU assets, current portion of operating lease liabilities and operating lease liabilities in the Company’s consolidated balance sheets. Financing leases are included in property and equipment, net, current portion of long-term debt and long-term debt, net of current portion in the Company’s consolidated balance sheets.

Revenue Recognition

Revenue Recognition. The Company generates revenue from product sales through its prescription pharmaceutical products segment (“Aytu BioPharma Segment”) and its consumer healthcare products segment (“Aytu Consumer Health Segment”). The Company recognizes revenue when all of the following criteria are satisfied: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) as each performance obligation is individually satisfied.

Aytu BioPharma Segment

Net product sales consist of sales of prescription pharmaceutical products under the Rx Portfolio, principally to a limited number of wholesale distributors and pharmacies in the United States. International sales are made primarily to specialty distributors, as well as to hospitals, laboratories, and clinics, some of which are government owned or supported (collectively, its “Customers”). Products are generally shipped “free-on-board” destination when shipped domestically within the United States, and “free-on-board” shipping point when shipped internationally consistent with the contractual terms.

The Company makes estimates of the net sales price, including estimates of variable consideration (e.g., savings offers, prompt payment discounts, product returns, wholesaler (distributor) fees, wholesaler chargebacks and estimated rebates) to be incurred on the respective product sales, and recognizes the estimated amount as revenue when control of the product is transferred to its customers (e.g., upon delivery). Variable consideration is determined using either an expected value or a most likely amount method. The estimate of variable consideration is also subject to a constraint such that some or all of the estimated amount of variable consideration will only be included in the transaction price to the extent that it is probable that a significant reversal of revenue (in the context of the contract) will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Estimating variable consideration and the related constraint requires the use of significant management judgment and other market data. The Company provides for prompt payment discounts, wholesaler fees and wholesaler chargebacks based on customer contractual stipulations. The Company analyzes recent product return history to determine a reliable return rate. Additionally, management analyzes historical savings offers and rebate payments based on patient prescriptions and information obtained from third party providers to determine these respective variable considerations.

Savings offers

The Company offers savings programs for its patients covered under commercial payor plans in which the cost of a prescription to such patients is discounted. The amount of redeemed savings offers is recorded based on information from third-party providers against the estimated discount recorded as accrued expenses. The estimated discount is recorded as a gross to net sales adjustment at the time revenue is recognized. Historical trends of estimated savings offers will be regularly monitored, which may result in adjustments to such estimates in the future.

Prompt payment discounts

Prompt payment discounts are based on standard programs with wholesalers and are recorded as a discount allowance against accounts receivable and as a gross to net sales adjustment at the time revenue is recognized.

Wholesale distribution fees

Wholesale distribution fees are based on definitive contractual agreements for the management of the Company’s products by wholesalers and are recorded as accrued expenses and as a gross to net sales adjustment at the time revenue is recognized.

Rebates

The Rx Portfolio products are subject to commercial managed care and government managed Medicare and Medicaid programs whereby discounts and rebates are provided to participating managed care organizations and federal and/or state governments. Calculations related to rebate accruals are estimated based on information from third-party providers. Estimated rebates are recorded as accrued expenses and as a gross to net sales adjustments at the time revenue is recognized. Historical trends of estimated rebates will be regularly monitored, which may result in adjustments to such estimates in the future.

Returns

Wholesalers’ contractual return rights are limited to defective product, product that was shipped in error, product ordered by customer in error, product returned due to overstock, product returned due to dating or product returned due to recall or other changes in regulatory guidelines. The return policy for expired product allows the wholesaler to return such product starting six months prior to expiry date to twelve months post expiry date. Estimated returns are recorded as accrued expenses and as a gross to net sales adjustments at the time revenue is recognized. The Company analyzed return data available from sales since inception date to determine a reliable return rate.

Wholesaler chargeback

The Rx Portfolio products are subject to certain programs with wholesalers whereby pricing on products is discounted below wholesaler list price to participating entities. These entities purchase products through wholesalers at the discounted price, and the wholesalers charge the difference between their acquisition cost and the discounted price back to the Company. Estimated chargebacks are recorded as a discount allowance against accounts receivable and as a gross to net sales adjustment at the time revenue is recognized based on information provided by third parties.

Aytu Consumer Health Segment

The Aytu Consumer Health Portfolio generates its revenue from sales of various consumer health products through direct-to-consumer marketing channels utilizing the Company's proprietary Beyond Human marketing and sales platform and on e-commerce platforms. Revenue is generally recognized ”free-on-board” shipping point, as those are the agreed-upon contractual terms. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction that are collected by the Company from a customer are excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of sales.

Credit Risk and Customer Concentrations

Credit Risk and Customer Concentrations. Financial instruments that potentially subject the Company to credit risk concentrations consist of cash, cash equivalents and accounts receivable. The counterparties are various corporations, governmental institutions and financial institutions of high credit standing.

The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company periodically monitors the credit quality of the financial institutions with which it invests. Management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.

The Company’s customers, sometimes referred to as partners or customers, are primarily large wholesale distributors that resell the Company’s products to retailers. As such, the loss of one or more of these large customers could have a material adverse effect on the Company’s business, operating results or financial condition.

The Company is also subject to credit risk from accounts receivable related to product sales. Historically, the Company has not experienced significant credit losses on its accounts receivable and does not expect to have write-offs or adjustments to accounts receivable which would have a material adverse effect on the Company’s financial position, liquidity or results of operations. The following table presents certain customers that contributed more than 10% of gross revenue and accounts receivable:


	Percentage of gross revenue				Percentage of accounts receivable

	June 30,
	2021		2020		2021		2020
Customer A	25	%	16	%	35	%	19	%
Customer B	15	%	16	%	29	%	16	%
Customer C	14	%	14	%	22	%	14	%
Customer D	—	%	—	%	—	%	12	%

Stock-Based Compensation

Stock-Based Compensation. The Company accounts for stock-based payments by recognizing compensation expense based upon the estimated fair value of the awards on the date of grant over the period of service. Stock option grants are valued on the grant date using the Black-Scholes option pricing model and compensation costs are recognized ratably over the period of service using the graded method. Restricted stock and restricted stock unit grants are valued based on the estimated grant date fair value of the Company’s common stock and recognized ratable over the requisite service period. Forfeitures are adjusted for as they occur.

Intangible assets and Goodwill

Intangible Assets and Goodwill. The Company records intangible assets based on fair value on the date of acquisition. Intangible assets include licensed asset, product technology rights, developed technology right, distribution rights, commercial technology, tradename, trademarks and customer lists and in-process research and development ("IPR&D"). The finite-lived intangible assets are recorded at cost and amortized on a straight-line basis over the estimated lives of the assets. The indefinite-lived intangible assets are not subject to amortization.

Goodwill is recorded as the difference between the fair value of the purchase consideration and the fair value of the net identifiable tangible and intangible assets acquired. Goodwill and other intangible assets are reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable. Useful lives of finite-lived intangible assets by each asset category is summarized below:


		Estimated
		Useful Lives
		in years
Licensed asset		7
Product technology rights		10 - 17
Developed technology		17
Product distribution rights		5 - 10
Commercial technology		2
Tradename		1
Customer list		1.5

Advertising Costs

Advertising Costs. Advertising costs consist of the direct marketing activities related to the Aytu Consumer Health segment. The Company expenses all advertising costs as incurred. The Company incurred $15.2 million and $4.7 million for the years ended June 30, 2021 and 2020, respectively.

Debt issuance costs, discounts (premium)

Debt issuance costs, discounts (premium). Debt issuance costs reflect fees paid to lenders as compensation for services beyond their role as a creditor, and third parties whose costs are directly related to issuing debt and that otherwise would not be incurred. Amounts paid to the lender as a reduction in the proceeds received are considered a component of the discount on the issuance and not an issuance cost. Debt issuance costs, discounts (premium) related to term loans are reported as a direct deduction (increase) to the outstanding debt and amortized over the term of the debt using the effective interest method as an addition (reduction) to interest expense. Debt issuance costs related to a line of credit facility are accounted for in accordance with ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, in which the Company elects to defer and present debt issuance costs as an asset and are recorded at cost and subsequently amortized over the term of the line of credit as additional interest expense.

As of the Neos merger date of March 19, 2021, the Company recorded a $0.8 million premium on the Deerfield debt (see Note 18) with a balance remaining of $0.6 million as of June 30, 2021.

Paragraph IV litigation costs

Paragraph IV litigation costs. Legal costs incurred by the Company in the enforcement of the Company’s intellectual property rights are charged to expense.

Net Loss Per Common Share

Net 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. For all periods presented, there is no difference in the number of shares used to compute basic and diluted shares outstanding due to the Company’s net loss position. Restricted stock is considered legally issued and outstanding on the grant date, while RSUs are not considered legally issued and outstanding until the RSUs vest. Once the RSUs vest, equivalent common shares will be issued or issuable to the grantee and therefore the RSUs are not considered for inclusion in total common shares issued and outstanding until vested.

The following table sets-forth securities that could be potentially dilutive, but as of the years ended June 30, 2021 and 2020 are anti-dilutive, and therefore are excluded from the calculation of diluted earnings per share.


		June 30,
		2021	2020
Warrants to purchase common stock - liability classified	(Note 14)	24,105	24,105
Warrant to purchase common stock - equity classified	(Note 14)	1,254,952	2,288,454
Employee stock options	(Note 13)	109,588	76,594
Employee unvested restricted stock	(Note 13)	1,955,426	418,606
Employee unvested restricted stock units	(Note 13)	78,318	—
		3,422,389	2,807,759