Note 6 – Intangible Assets and Goodwill



Intangible Assets



Intangible assets acquired in the APP Acquisition included in-process research and development (“IPR&D”), developed technology consisting of PREBOOST® medicated wipes for prevention of premature ejaculation, and covenants not-to-compete. IPR&D represents incomplete research and development projects at APP as of the date of the APP Acquisition. These intangible assets are carried at cost less accumulated amortization. Intangible assets with finite lives are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. IPR&D is tested for impairment at least annually in the fourth quarter of each fiscal year until the underlying projects are completed or abandoned.  



The gross carrying amounts and net book value of intangible assets are as follows at December 31, 2018:

 



The gross carrying amounts and net book value of intangible assets are as follows at September 30, 2018:





Amortization is recorded over the projected related revenue stream for the PREBOOST® developed technology over 10 years and on a straight-line basis over seven years for the covenants not-to-compete. The amortization expense is recorded in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations. The IPR&D assets will not be amortized until the underlying development projects are completed. If and when development is complete, which generally occurs when regulatory approval to market the product is obtained, the associated IPR&D assets would be accounted for as finite-lived intangible assets and amortized over the estimated period of economic benefit. If a development project is abandoned, the associated IPR&D assets would be charged to expense.



Amortization expense was approximately $77,000 and $69,000, for the three months ended December 31, 2018 and 2017, respectively. Based on finite-lived intangible assets recorded as of December 31, 2018, the estimated future amortization expense is as follows:





Intangible assets are highly vulnerable to impairment charges, particularly newly acquired assets for recently launched products. These assets are initially measured at fair value and therefore any reduction in expectations used in the valuations could potentially lead to impairment. Some of the more common potential risks leading to impairment include competition, earlier than expected loss of exclusivity, pricing pressures, adverse regulatory changes or clinical trial results, delay or failure to obtain regulatory approval, additional development costs, inability to achieve expected synergies, higher operating costs, changes in tax laws and other macro-economic changes. The complexity in estimating the fair value of intangible assets in connection with an impairment test is similar to the initial valuation. Considering the high-risk nature of research and development and the industry’s success rate of bringing developmental compounds to market, IPR&D impairment charges are likely to occur in future periods. 



Goodwill



The carrying amount of goodwill at December 31, 2018 and September 30, 2018 was $6.9 million. There was no change in the balance during the three months ended December 31, 2018 and 2017. Goodwill represents the difference between the purchase price and the estimated fair value of the net assets acquired in the APP Acquisition.  Goodwill from the APP Acquisition principally relates to intangible assets that do not qualify for separate recognition, our expectation to develop and market new products, and the deferred tax liability generated as a result of the transaction.  Goodwill is not tax deductible for income tax purposes and was assigned to the Company’s Research and Development reporting unit, which consists of multiple drug products under clinical development for oncology and urology.



Goodwill is tested for impairment at least annually in the fourth quarter of each fiscal year or when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, by assessing qualitative factors or performing a quantitative analysis in determining whether it is more likely than not that its fair value exceeds the carrying value. Examples of qualitative factors include our share price, our financial performance compared to budgets, long-term financial plans, macroeconomic, industry and market conditions as well as the substantial excess of fair value over the carrying value of net assets from the annual impairment test previously performed.



The estimated fair value of a reporting unit is highly sensitive to changes in projections and assumptions; therefore, in some instances changes in these assumptions could potentially lead to impairment. We perform sensitivity analyses around our assumptions in order to assess the reasonableness of the assumptions and the results of our testing. Ultimately, future potential changes in these assumptions may impact the estimated fair value of a reporting unit and cause the fair value of the reporting unit to be below its carrying value. We believe that our estimates are consistent with assumptions that marketplace participants would use in their estimates of fair value; however, if actual results are not consistent with our estimates and assumptions, we may be exposed to an impairment charge that could be material.