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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 12 Months Ended
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Dec. 31, 2012
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Accounting estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. Cash and cash equivalents For purposes of reporting cash flows, cash and cash equivalents include unrestricted cash, money market accounts, and investments with original maturities of three months or less. Accounts receivable The Company records trade receivables when revenue is recognized. No product has been consigned to customers. The Company’s allowance for doubtful accounts is primarily determined by review of specific trade receivables. Those accounts that are doubtful of collection are included in the allowance. This provision is reviewed to determine the adequacy of the allowance for doubtful accounts. Trade receivables are charged off when there is certainty as to their being uncollectible. Trade receivables are considered delinquent when payment has not been made within contract terms. The Company requires certain distributors to make a prepayment prior to beginning production or shipment of their order. Distributors may apply such prepayments to their outstanding invoices or pay the invoice and continue to carryforward the deposit for future orders. Such amounts are included in Other accrued liabilities on the Balance Sheets and are shown in Note 6, Other Accrued Liabilities. The Company records an allowance for estimated returns as a reduction to Accounts receivable and Gross sales. Historically, returns have been immaterial. Inventories Inventories are valued at the lower of cost or market, with cost being determined using actual average cost. The Company compares the average cost to the market price and records the lower value. Management considers such factors as the amount of inventory on hand and in the distribution channel, estimated time to sell such inventory, the shelf life of inventory, and current market conditions when determining excess or obsolete inventories. A reserve is established for any excess or obsolete inventories or they may be written off. Property, plant, and equipment Property, plant, and equipment are stated at cost. Expenditures for maintenance and repairs are charged to operations as incurred. Cost includes major expenditures for improvements and replacements which extend useful lives or increase capacity and interest cost associated with significant capital additions. For the years ended December 31, 2012, 2011, and 2010, the Company capitalized interest of approximately $36,596; $57,000; and $50,000. Gains or losses from property disposals are included in income. Depreciation and amortization are calculated using the straight-line method over the following useful lives:
Production equipment |  | 3 to 13 years |
Office furniture and equipment |  | 3 to 10 years |
Buildings |  | 39 years |
Building improvements |  | 15 years |
Automobiles |  | 7 years |
Long-lived assets The Company assesses the recoverability of long-lived assets using an assessment of the estimated undiscounted future cash flows related to such assets. In the event that assets are found to be carried at amounts which are in excess of estimated gross future cash flows, the assets will be adjusted for impairment to a level commensurate with fair value determined using a discounted cash flow analysis of the underlying assets. During 2010, the Company recognized impairment charges of $365,295 on equipment designed in connection with research and development activities. The Company outsources the majority of this production through overseas manufacturers. Minimal cash flows, if any, are expected to be generated by this equipment. Accordingly, the Company reduced the carrying value of this equipment to an estimated fair value of zero. The Company’s management estimated the fair value of the equipment based on guidance established by the Fair Value Measurements and Disclosures Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). In this instance, the Company’s management determined the impairment charge by utilizing observable market data, a Level 2 input under the FASB ASC. A Level 1 input would require quoted prices, which were not available in this matter. The Company’s remaining property, plant, and equipment primarily consists of buildings, land, assembly equipment for syringes, molding machines, molds, office equipment, furniture, and fixtures. There has been no impairment charge against the assembly equipment since the Company continues to manufacture a significant portion of 1mL and 3mL syringes at the Company’s Little Elm facility which results in sufficient future cash flows to recoup the net book value of all property, plant, and equipment. Reclassifications Contractual pricing allowances are presented in Accounts payable at December 31, 2012. Such allowances were netted against distributors’ individual balances and the resulting net balances were reflected in Accounts receivable or Accounts payable, as appropriate, in prior years. Accounts receivable and Accounts payable at December 31, 2011 have each increased $158,275 to conform with the current year’s presentation. This reclassification had no effect on stockholders’ equity or results of operations. Intangible assets Intangible assets are stated at cost and consist primarily of patents, a license agreement granting exclusive rights to use patented technology, and trademarks which are amortized using the straight-line method over 17 years. Financial instruments The Company estimates the fair market value of financial instruments through the use of public market prices, quotes from financial institutions, and other available information. Judgment is required in interpreting data to develop estimates of market value and, accordingly, amounts are not necessarily indicative of the amounts that could be realized in a current market exchange. Short-term financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and other liabilities, consist primarily of instruments without extended maturities, the fair value of which, based on Management’s estimates, equals their recorded values. The fair value of long-term liabilities, based on Management’s estimates, approximates their reported values. Concentration risks The Company’s financial instruments exposed to concentrations of credit risk consist primarily of cash, cash equivalents, and accounts receivable. Cash balances, some of which exceed federally insured limits, are maintained in financial institutions; however, Management believes the institutions are of high credit quality. The majority of accounts receivable are due from companies which are well-established entities. As a consequence, Management considers any exposure from concentrations of credit risks to be limited. The following table reflects our significant customers in 2012, 2011, and 2010:
|  | Years Ended December 31, |
|  | 2012 |  | 2011 |  | 2010 |
Number of significant customers |  | 3 |  | 4 |  | 3 |
Aggregate dollar amount of net sales to significant customers |  | $13.7 million |  | $16.2 million |  | $13.9 million |
Percentage of net sales to significant customers |  | 40.6% |  | 50.6% |  | 38.6% |
Considering the current economic climate, the Company increased its allowance for doubtful accounts by approximately $107 thousand this year. The Company manufactures syringes in Little Elm, Texas as well as utilizing manufacturers in China. The Company purchases most of its product components from single suppliers, including needle adhesives and packaging materials. There are multiple sources of these materials. The Company obtained roughly 72.0% of its finished products in 2012 through Double Dove, a Chinese manufacturer. The Company obtained approximately 67.1% and 64.1% of its finished products from Double Dove in 2011 and 2010, respectively. In the event that the Company becomes unable to purchase such product from Double Dove, the Company would need to find an alternate supplier for its 0.5mL insulin syringe, its 2mL, 5mL, and 10mL syringes, and its autodisable syringe and increase domestic production for 1mL and 3mL syringes. Revenue recognition Revenue is recognized for sales when title and risk of ownership passes to the customer, generally upon shipment. Under certain contracts, revenue is recorded on the basis of sales price to distributors, less contractual pricing allowances. Contractual pricing allowances consist of: (i) rebates granted to distributors who provide tracking reports which show, among other things, the facility that purchased the products, and (ii) a provision for estimated contractual pricing allowances for products that the Company has not received tracking reports. Rebates are recorded when issued and are applied against the customer’s receivable balance. Distributors receive a rebate for the difference between the Wholesale Acquisition Cost and the appropriate contract price as reflected on a tracking report provided by the distributor to the Company. If product is sold by a distributor to an entity that has no contract, there is a standard rebate (lower than a contracted rebate) given to the distributor. One of the purposes of the rebate is to encourage distributors to submit tracking reports to the Company. The provision for contractual pricing allowances is reviewed at the end of each quarter and adjusted for changes in levels of products for which there is no tracking report. Additionally, if it becomes clear that tracking reports will not be provided by individual distributors, the provision is further adjusted. The estimated contractual allowance is included in Accounts payable and deducted from revenues in the Statements of Operations. Accounts payable included estimated contractual allowances for $3,036,564 and $2,170,764 for 2012 and 2011, respectively. The terms and conditions of contractual pricing allowances are governed by contracts between the Company and its distributors. Revenue for shipments directly to end-users is recognized when title and risk of ownership pass from the Company. Any product shipped or distributed for evaluation purposes is expensed. Certain distributors have taken rebates to which they are not entitled, such as utilizing a rebate for products not purchased directly from the Company. The Company has been in discussions with the principal customers that claimed non-contractual rebates. Major customers said they have ceased the practices resulting in claiming non-contractual rebates. Rebates can only be claimed on purchases made directly from the Company. The Company has established a reserve for the collectability of these non-contractual rebate amounts. The expense for the reserve is recorded in Operating expense, General and administrative. The reserve for such non-contractual deductions is included in the allowance for doubtful accounts. The Company’s domestic return policy is set forth in its standard Distribution Agreement. This policy provides that a customer may return incorrect shipments within 10 days following arrival at the distributor’s facility. In all such cases the distributor must obtain an authorization code from the Company and affix the code to the returned product. The Company will not accept returned goods without a returned goods authorization number. The Company may refund the customer’s money or replace the product. The Company’s domestic return policy also generally provides that a customer may return product that is overstocked. Overstocking returns are limited to two times in each 12-month period up to 1% of distributor’s total purchase of products for the prior 12-month period. All product overstocks and returns are subject to inspection and acceptance by the Company. The Company’s international distribution agreements generally do not provide for any returns. Marketing fees In prior periods, Marketing fees payable to Abbott Laboratories (“Abbott”) were included in current liabilities in the Balance Sheets. In connection with the settlement with Abbott, Marketing fees payable recorded in previous periods were not required to be paid. The reversal of this accrual is included in Litigation settlements, net on the Statements of Operations in 2010. Litigation settlements Proceeds from litigation settlements are recognized when realizable. Generally, realization is not reasonably assured and expected until proceeds are collected. Pursuant to a settlement agreement among the Company, Abbott, and Hospira, Inc. (“Hospira”), Hospira delivered $6 million to the Company in the third quarter of 2010. The Company reduced its litigation settlements by $144,000 attributable to an unpaid Abbott invoice. Abbott also waived its rights to any Series IV Class B Preferred Stock dividends. Additionally, the Company granted Hospira an exclusive one-year option to negotiate a licensing agreement for certain uses of the Patient Safe® syringe, which option expired unexercised in July 2011. The Company has received the $8.0 million option payments. The Company recognizes proceeds from litigation settlements, net of any associated royalty expense. Income taxes The Company evaluates tax positions taken or expected to be taken in a tax return for recognition in the financial statements based on whether it is “more-likely-than-not” that a tax position will be sustained based upon the technical merits of the position. Measurement of the tax position is based upon the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The Company provides for deferred income taxes through utilizing an asset and liability approach for financial accounting and reporting based on the tax effects of differences between the financial statement and tax bases of assets and liabilities, based on enacted rates expected to be in effect when such differences reverse in future periods. Deferred tax assets are periodically reviewed for realizability. Under then-existing tax law, companies were allowed to carry back taxable losses from either 2009 or 2010. The Company utilized some of its net operating loss carry forwards in 2011 and paid Alternative Minimum Tax on its taxable income. The Company has established a valuation allowance for its net deferred tax asset as future taxable income cannot be reasonably assured. Penalties and interest on uncertain tax positions are classified as income taxes in the Statements of Operations. Earnings per share The Company computes basic earnings per share (“EPS”) by dividing net earnings for the period (adjusted for any cumulative dividends for the period) by the weighted average number of common shares outstanding during the period. Diluted EPS includes the determinants of basic EPS and, in addition, reflects the dilutive effect, if any, of the common stock deliverable pursuant to stock options or common stock issuable upon the conversion of convertible preferred stock and convertible debt. The calculation of diluted EPS excluded 1,373,345 issued and outstanding stock options at December 31, 2012 as their effect was antidilutive. The potential dilution, if any, is shown on the following schedule:
|  | Years Ended December 31, |
|  | 2012 |  |  | 2011 |  | 2010 |
Net income (loss) | $ | (4,132,892 | ) | $ | 1,418,482 | $ | 2,400,694 |
Preferred dividend requirements |  | (918,108 | ) |  | (964,047 | ) | (1,370,620 | )
Effect of dilutive securities: |  |  |  |  |  |  |  |
Convertible debt interest and loan fees |  | — |  |  | (10,120 | ) | — |
Earnings (loss) available to common shareholders after assumed conversions | $ | (5,051,000 | ) | $ | 444,315 | $ | 1,030,074 |
Average common shares outstanding |  | 26,219,728 |  |  | 24,171,238 |  | 23,872,783 |
Dilutive stock equivalents from stock options |  | — |  |  | 2,101,825 |  | 2,376,091 |
Shares issuable upon conversion of convertible debt |  | — |  |  | 81,723 |  | — |
Average common and common equivalent shares outstanding - assuming dilution |  | 26,219,728 |  |  | 26,354,786 |  | 26,248,874 |
Basic earnings per share | $ | (0.19 | ) | $ | 0.02 | $ | 0.04 |
Diluted earnings per share | $ | (0.19 | ) | $ | 0.02 | $ | 0.04 |
Shipping and handling costs The Company classifies shipping and handling costs as part of Cost of sales in the Statements of Operations. Research and development costs Research and development costs are expensed as incurred. Share-based compensation The Company’s share-based payments are accounted for using the fair value method. The Company records share-based compensation expense on a straight-line basis over the requisite service period. The Company incurred the following share-based compensation costs:
|  | Years Ended December 31, |
|  | 2012 |  | 2011 |  | 2010 |
Cost of sales | $ | — | $ | — | $ | 182,892 |
Sales and marketing |  | — |  | — |  | 78,343 |
Research and development |  | — |  | — |  | 28,259 |
General and administrative |  | — |  | — |  | 1,050,806 |
| $ | — | $ | — | $ | 1,340,300 |
All stock options were fully vested at June 30, 2010; therefore, all stock option expense was fully recognized at June 30, 2010. Recent Pronouncement On October 1, 2012, the FASB issued Accounting Standards Update (“ASU”) 2012-04, Technical Corrections and Improvements. This ASU makes certain incremental improvements to U.S. GAAP, including, among other revisions, conforming amendments that identify when the use of fair value should be linked to the definition of fair value in ASC 820. The majority of the amendments in ASU 2012-04 were effective upon issuance and the more substantive amendments that are subject to transition guidance are effective for fiscal periods beginning after December 15, 2012. The adoption of this ASU did not have an impact on the Company’s financial position, results of operations, cash flows or financial statement disclosures and the Company does not expect the future adoption of the transition provisions of this ASU to have a material impact on such items.

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- Definition The entire disclosure for all significant accounting policies of the reporting entity. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section 50 -Paragraph 6 -URI http://asc.fasb.org/extlink&oid=6367646&loc=d3e18861-107790 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6367646&loc=d3e18743-107790 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6367646&loc=d3e18780-107790 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=6367646&loc=d3e18854-107790 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6367646&loc=d3e18726-107790 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher AICPA -Name Accounting Principles Board Opinion (APB) -Number 22 -Paragraph 8 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. + Details
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