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Note 7 - Revenue Recognition
 9 Months Ended
Sep. 30, 2024
Notes to Financial Statements  
Revenue from Contract with Customer [Text Block]

7.

Revenue Recognition

 

The Company records revenue in accordance with ASC Topic 606 “Revenue from Contracts with Customers.” Under this guidance, revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration expected to be received in exchange for those goods or services. The Company’s principal source of revenue is product sales.

 

As long as a valid purchase order has been received and future collection of the sale amount is reasonably assured, the Company recognizes revenue from sales of its products when those products are shipped, which is when the Company’s performance obligation is satisfied. The Company’s cosmetic ingredients are shipped “Ex-Works” from the Company’s facility in Hauppauge, NY, and the risk of loss and responsibility for the shipment passes to the customer upon shipment. Sales of the Company’s non-pharmaceutical medical products are deemed final upon shipment, and there is no obligation on the part of the Company to repurchase or allow the return of these goods unless they are defective. Sales of the Company’s pharmaceutical products are final upon shipment unless (a) they are found to be defective; (b) the product is damaged in shipping; (c) the product cannot be sold because it is too close to its expiration date; or (d) the product has expired (but it is not more than one year after the expiration date). This return policy conforms to standard pharmaceutical industry practice. The Company estimates an allowance for outdated material returns based on previous years’ historical returns of its pharmaceutical products.

 

The Company’s sales, as reported, are subject to a variety of deductions, some of which are estimated. These deductions are recorded in the same period in which the revenue is recognized. Such deductions, primarily related to the sale of the Company’s pharmaceutical products, include chargebacks from the United States Department of Veterans Affairs (‘VA”), rebates in connection with the Company’s participation in Medicare programs, distribution fees, discounts, and outdated product returns. These deductions represent estimates of the related obligations and, as such, knowledge and judgment are required when estimating the impact of these revenue deductions on sales for a reporting period.

 

 

During 2024 and 2023, the Company participated in various government drug rebate programs related to the sale of Renacidin®, its most important pharmaceutical product. These programs include the Veterans Affairs Federal Supply Schedule (FSS), and the Medicare Part D Coverage Gap Discount Program (CGDP). These programs require the Company to sell its product at a discounted price. The Company’s sales, as reported, are net of these product rebates and discounts, some of which are estimated, and are recorded in the same period that the revenue is recognized.

 

In August of 2022, the Inflation Reduction Act (“IRA”) was signed into law. The IRA made significant changes to the current Medicare Part D benefit design as it relates to discounts available to enrollees from pharmaceutical manufacturers of brand name drugs. Beginning on January 1, 2025, the Centers for Medicare & Medicaid Services (“CMS”) will implement a new Medicare Part D Manufacturer Discount Program (“discount program”), which will replace the current CGDP. The new discount program eliminates the coverage gap benefit phase, introduces pharmaceutical manufacturer discounts in the initial and catastrophic coverage phases and lowers the cap on enrollee out-of-pocket costs. Under the new discount program, additional rebates are expected to be owed by pharmaceutical manufacturers due to the restructuring of the benefit periods. The overall financial impact of this new program will vary depending on the products being reimbursed but does have the potential to increase Medicare Part D rebates for drug manufacturers. At this time, the Company is unable to predict what future impact this new program will have on its financial condition; however, on January 31, 2024, the Company was notified by CMS that it qualified as a “specified small manufacturer” and will be entitled to a multi-year phase-in period during which it will pay a lower percentage discount on drugs dispensed to beneficiaries.

 

The Company does not make sales on consignment, and the collection of the proceeds of the sale of any of the Company’s products is not contingent upon the customer being able to sell the goods to a third party.

 

Any allowances for returns are taken as a reduction of sales within the same period the revenue is recognized. Such allowances are determined based on historical experience under ASC Topic 606-10-32-8. The Company has not experienced significant fluctuations between estimated allowances and actual activity. At September 30, 2024 and December 31, 2023, the Company had an allowance of $271,916 and $247,847, respectively, for possible outdated material returns, which is included in accrued expenses. There is no value associated with these outdated material returns, as these products are destroyed.

 

The Company has distribution fee contracts with certain distributors of its pharmaceutical products that entitle them to distribution and service-related fees. The Company estimates distribution fees and records distribution fees as offsets to revenue.

 

Disaggregated sales by product class are as follows:

 

    Three months ended     Nine months ended  
    September 30,     September 30,  
    2024     2023     2024     2023  

Cosmetic ingredients

   $ 1,289,587     $ 1,197,178     $ 4,585,443     $ 2,731,966  

Pharmaceutical

     1,122,007       1,196,393       3,485,994       3,927,218  

Medical lubricants

     648,519       663,947       1,633,825       1,567,363  

Industrial products (1)

     -       -       -       51,594  

Total Sales

   $ 3,060,113     $ 3,057,518     $ 9,705,262     $ 8,278,141  

(1) This product line was discontinued as of July 1, 2023.

 

 

 

 

The Company’s cosmetic ingredients are marketed worldwide by five distributors, of which U.S.-based Ashland Specialty Ingredients (“ASI”) purchases the largest volume. Approximately 20% of the Company’s total sales in the third quarter of 2024 were to customers located outside of the United States, compared with approximately 26% in the third quarter of 2023. For the nine months ended September 30, 2024, approximately 17% of the Company’s total sales were to customers located outside of the United States, compared with approximately 24% for the nine months ended September 30, 2023.

 

Disaggregated sales by geographic region are as follows:

 

    Three months ended     Nine months ended  
    September 30,     September 30,  
    2024     2023     2024     2023  

United States*

   $ 2,462,696     $ 2,247,677     $ 8,089,868     $ 6,257,453  

Other countries

     597,417       809,841       1,615,394       2,020,688  

Total Sales

   $ 3,060,113     $ 3,057,518     $ 9,705,262     $ 8,278,141  

 

* Substantially all purchases by ASI are shipped to ASI’s warehouses in the U.S. As a result, all sales to ASI are reported as U.S. sales for financial reporting purposes, even though a significant quantity of those purchases will be shipped by ASI to foreign customers. ASI has reported to the Company that approximately 74% of its sales of the Company’s products in the third quarter of 2024 were to foreign customers compared with 71% for the same period in 2023, with China representing approximately 35% of those foreign sales in the third quarter of 2024, compared with approximately 23% in the third quarter of 2023.

 

For the nine months ended September 30, 2024 approximately 81% of ASI’s sales of the Company’s products were to foreign customers, with China accounting for approximately 46% of ASI’s sales of the Company’s products, as compared with approximately 69% of ASI’s sales going to customers in other countries for the nine months ended September 30, 2023, with China accounting for approximately 27% of ASI’s sales of the Company’s products during that period.