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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 12 Months Ended
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Dec. 31, 2017
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 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 customers to make a prepayment prior to beginning production or shipment of their order. Customers may apply such prepayments to their outstanding invoices or pay the invoice and continue to carry forward 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 net realizable value, with cost being determined using actual average cost. The Company compares the average cost to the net realizable value and records the lower value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. 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. 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
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 or appraised values of the underlying assets. During 2016, the Company recognized an impairment charge of $456,119 associated with its Patient Safe® production equipment. The Company determined it was more cost effective to outsource this production through an overseas manufacturer, and thus the Company’s Patient Safe® production equipment was taken out of service. Minimal cash flows were expected to be generated by this equipment. Accordingly, the Company reduced the carrying value of the Patient Safe® production equipment to an estimated fair value of zero. The Company’s property, plant, and equipment primarily consist of buildings, land, assembly equipment, molding machines, molds, office equipment, furniture, and fixtures. Financial instruments The Company estimates the fair 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 fair 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 2017, 2016, and 2015:
|  | Years Ended December 31, |
|  | 2017 |  | 2016 |  | 2015 |
Number of significant customers |  | 2 |  | 1 |  | 2 |
Aggregate dollar amount of net sales to significant customers |  | $ | 14.0 million |  | $ | 9.4 million |  | $ | 13.5 million |
Percentage of net sales to significant customers |  | 40.5 | % | 31.4 | % | 45.7 | %
The Company decreased its allowance for doubtful accounts by approximately $1.6 million in 2017 due to a write-off of debit rebates. 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 90.4% of its VanishPoint® syringes in 2017 from its primary Chinese manufacturer. Purchases from this Chinese manufacturer aggregated 86.3% and 77.7% of VanishPoint® finished products in 2016 and 2015, respectively. In the event that the Company becomes unable to purchase products from its Chinese manufacturers, the Company would need to find an alternate manufacturer for its blood collection set, IV catheter, Patient Safe® syringe, 0.5mL insulin syringe, 0.5mL autodisable syringe, and 2mL, 5mL, and 10mL syringes and would increase domestic production for the 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 for which 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 in the Balance Sheets and deducted from revenues in the Statements of Operations. Accounts payable included estimated contractual allowances for $4,115,628 and $3,591,534 as of December 31, 2017 and 2016, 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. 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. Litigation proceeds Proceeds from litigation are recognized when realizable. Generally, realization is not reasonably assured and expected until proceeds are collected. Income taxes The Tax Cuts and Job Act (“the Act”) was enacted on December 22, 2017, and the U.S. federal corporate tax rate was reduced from 35% to 21%. U.S. generally accepted accounting principles require companies to account for the effects of changes in income tax rates and laws in the period the change is enacted. Financial results, including provisional amounts, have been calculated for the income tax effects of the change. The U.S. Securities and Exchange Commission issued Staff Accounting Bulletin 118 (SAB 118) allowing companies to use provisioned estimates to record the effects of the Act. SAB 118 allows companies to complete accounting for these effects no later than one year from the enactment date of the Act. 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. The Company has established a valuation allowance for its net deferred tax asset as future taxable income cannot be reasonably assured. Penalties and interest related to income tax are classified as General and administrative expense and Interest expense, respectively, 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. The calculation of diluted EPS excluded 79,441 and 783,730 shares of Common Stock underlying issued and outstanding stock options at December 31, 2017 and December 31, 2016, respectively, as their effect was antidilutive. The potential dilution, if any, is shown on the following schedule:
|  | Years Ended December 31, |
|  | 2017 |  | 2016 |  | 2015 |
Net income (loss) |  | $ | (3,736,038 | ) | $ | (3,694,907 | ) | $ | 4,314,318 |
Preferred dividend requirements |  | (704,996 | ) | (704,996 | ) | (709,351 | )
Deemed capital contribution on extinguishment of preferred stock |  | — |  | — |  | 2,305,678 |
Income (loss) applicable to common shareholders |  | $ | (4,441,034 | ) | $ | (4,399,903 | ) | $ | 5,910,645 |
Weighted average common shares outstanding |  | 31,958,121 |  | 29,354,437 |  | 27,822,593 |
Weighted average common and common equivalent shares outstanding - assuming dilution |  | 31,958,121 |  | 29,354,437 |  | 29,481,294 |
Basic earnings (loss) per share |  | $ | (0.14 | ) | $ | (0.15 | ) | $ | 0.21 |
Diluted earnings (loss) per share |  | $ | (0.14 | ) | $ | (0.15 | ) | $ | 0.20 |
The Financial Accounting Standards Board Accounting Standards Codification 260-10-S99-2, Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock, requires the gain or loss on extinguishment of equity-classified preferred stock to be included in net income per common stockholder used to calculate earnings per share (similar to the treatment of dividends paid on preferred stock). The difference between (1) the fair value of the consideration transferred to the holders of the preferred stock and (2) the carrying amount of the preferred stock (net of issuance costs) is subtracted from (or added to) net income to arrive at income available to common stockholders in the calculation of earnings per share. The Company has determined to apply this guidance to its accounting treatment of the preferred stock transaction described in Note 18. From a legal standpoint, the transaction was neither a redemption nor conversion pursuant of the terms of the Certificate of Designation, Preferences, Rights and Limitations of the Series IV Class B Convertible Preferred Stock. 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, |
|  | 2017 |  | 2016 |  | 2015 |
Cost of sales |  | $ | 272,811 |  | $ | 141,782 |  | $ | — |
Sales and marketing |  | 143,255 |  | 77,583 |  | — |
Research and development |  | 45,174 |  | 23,623 |  | — |
General and administrative |  | 210,983 |  | 144,738 |  | — |
|  | $ | 672,223 |  | $ | 387,726 |  | $ | — |
Options awarded to employees in 2016 were amortized over twelve months. The Company amortized four months’ expense for options granted in September 2016 and amortized the remainder in 2017. Non-employee Directors’ option expense was all expensed in the fourth quarter of 2016. The Company early-adopted FASB Accounting Standards Update (“ASU”) 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” for its annual period ended December 31, 2016. This ASU addresses several aspects of the accounting for share-based compensation transactions including: (a) income tax consequences when awards vest or are settled, (b) classification of awards as either equity or liabilities, (c) a policy election to account for forfeitures as they occur rather than on an estimated basis and (d) classification of excess tax impacts on the statement of cash flows. As a result of adoption, excess tax benefits in 2016 resulting from the exercise of non-qualified stock options were recognized in the income tax provision rather than in additional-paid-in capital. As there were previously no excess income tax benefits recognized in additional-paid-in capital or other material changes to the Company’s accounting for share based compensation resulting from adoption of this ASU, no cumulative effect adjustments were required. Insurance Proceeds Receipts from insurance up to the amount of any loss recognized by the Company are considered recoveries. Any such recoveries are recorded when they are received. Insurance recoveries are not recognized as a component of earnings (loss) from operations until all repairs are made. Recent pronouncements In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”. These amendments require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide a definition of restricted cash or restricted cash equivalents. The updated guidance is effective for the Company’s quarter ending March 31, 2018, with early adoption permitted. The Company does not expect ASU 2016-18 to have a material effect on its financial statements as the Company currently holds no restricted cash or restricted cash equivalents. In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Payments” (ASU 2016-15), clarifying guidance on the classification of certain cash receipts and payments in the statement of cash flows. This ASU is effective for the Company’s quarter ending March 31, 2018. The Company does not expect the adoption of ASU 2016-15 to have a material impact on its consolidated financial statements. In June 2016, the FASB issued Accounting Standards Update 2016-13, “Financial Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. Among other things, these amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. This ASU is effective for the Company’s quarter ending March 31, 2020 with early application permitted for the Company’s quarter ending March 31, 2019. The Company is currently assessing the impact that adoption of this guidance will have on its financial statements and related disclosures. In February 2016, the FASB issued ASU No. 2016-02, Leases (topic 842). Under the new ASU, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance lessor accounting is largely unchanged. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. This ASU is effective for the Company’s quarter ending March 31, 2019, with early adoption permitted. The Company is currently evaluating the impact of this standard. In May 2014, FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, which provides guidance for revenue recognition. This ASU’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects consideration to which the company expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU No. 2014-09 allows for either full retrospective or modified retrospective adoption. In July 2015, the FASB voted to delay the effective date of this ASU by one year. The ASU will now be effective commencing with the Company’s quarter ending March 31, 2018. Early adoption of this ASU is allowed no sooner than the original effective date. Management’s assessment is that the implementation of the amended guidance will not have a material impact on the Company’s balance sheet, statements of operations, changes in stockholders’ equity and cash flows, but will include expanded disclosures. The Company’s revenue is generated from sales of finished goods (disposable medical devices). Revenue from these sales will continue to be recognized when title of the products is passed to the customer. Management expects materially similar results under the amended guidance as compared to the Company’s current policies and procedures regarding revenue recognition. The Company will adopt this amended guidance on a Modified Retrospective basis in the first quarter of 2018.

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