Quarterly report pursuant to Section 13 or 15(d)

3. Summary of Significant Accounting Policies (Policies)

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3. Summary of Significant Accounting Policies (Policies)
 3 Months Ended
Jun. 30, 2020
Accounting Policies [Abstract]  
Use of Estimates

Use of Estimates

 

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Significant estimates and assumptions include reserves and write-downs related to receivables and inventories, the recoverability of long-lived assets, the valuation allowance relating to the Company’s deferred tax assets, valuation of equity and derivative instruments, fair value allocation of assets sold to Invekra, Petagon, Microsafe and the estimated amortization periods of upfront product licensing fees received from customers. Periodically, the Company evaluates and adjusts estimates accordingly.
Net Income per Share

Net Income per Share

 

The Company computes basic net income per share by dividing net income per share available to common stockholders by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable.

 

    Three Months Ended  
    June 30,  
    2020     2019  
Numerator:            
Income (loss) from continuing operations   $ (709,000 )   $ 674,000  
Income from discontinued operations     949,000       41,000  
Net income   $ 240,000     $ 715,000  
                 
Denominator:                
Weighted-average number of common shares outstanding: basic     1,839,000       1,316,000  
Common stock to be issued upon vesting of restricted stock units     4,000       3,000  
Conversion of Series C     –       17,000  
Weighted-average number of common shares outstanding: diluted     1,843,000       1,336,000  
                 
Income (loss) per share from continuing operations basic   $ (0.39 )   $ 0.51  
Income per share from discontinued operations basic     0.52       0.03  
Net income per share: basic   $ 0.13     $ 0.54  
                 
Income (loss) per share from continuing operations diluted   $ (0.38 )   $ 0.51  
Income per share from discontinued operations diluted     0.51       0.03  
Net income per share: diluted   $ 0.13     $ 0.54  

 

The computation of basic income per share for the three months ended June 30, 2020 and 2019 excludes the potentially dilutive securities summarized in the table below because their inclusion would be anti-dilutive.

 

    June 30,  
    2020     2019  
Common stock to be issued upon vesting of restricted stock units     5,000       –  
Common stock to be issued upon exercise of options     252,000       155,000  
Common stock to be issued upon exercise of warrants     169,000       446,000  
Common stock to be issued upon exercise of common stock units (1)     46,000       46,000  
      472,000       647,000  

 

(1) Consists of 30,668 restricted stock units and warrants to purchase 15,332 shares of common stock

 
Revenue Recognition

Revenue Recognition

 

Revenue is recognized when the entity transfers promised goods or services to the customer, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under the agreement, the Company performs the following steps: (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) recognition of revenue when (or as) the Company satisfies each performance obligation. The Company only applies the five-step model to contracts when it is probable that it will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.

 

The Company derives the majority of its revenue from sales of its products to a customer base including hospitals, medical centers, doctors, pharmacies, distributors and wholesalers. The Company sells products directly to end users and to distributors. The Company also has entered into agreements to license its technology and products. The Company also provides regulatory compliance testing and quality assurance services to medical device and pharmaceutical companies.

 

The Company considers customer purchase orders, which in some cases are governed by master sales agreements, to be the contracts with a customer. For each contract, the Company considers the promise to transfer products, each of which are distinct, to be the identified performance obligations. In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which it expects to be entitled.

 

For all of its sales to non-consignment distribution channels, revenue is recognized when control of the product is transferred to the customer (i.e. when our performance obligation is satisfied), which typically occurs when title passes to the customer upon shipment but could occur when the customer receives the product based on the terms of the agreement with the customer.  For product sales to its value-added resellers, non-stocking distributors and end-user customers, the Company grants return privileges to its customers and the Company has a long history with its customers and is able to estimate the amount of product that will be returned.  Sales incentives and other programs that the Company may make available to these customers are considered to be a form of variable consideration and the Company maintains estimated accruals and allowances using the expected value method.

 

The Company has entered into consignment arrangements in which goods are left in the possession of another party to sell. As products are sold from the customer to third parties, the Company recognizes revenue based on a variable percentage of a fixed price.  Revenue recognized varies based on if a patient is covered by insurance or is not covered by insurance. In addition, the Company may incur a revenue deduction related to the use of the Company’s rebate program.

 

Sales to stocking distributors are made under terms with fixed pricing and limited rights of return (known as “stock rotation”) of the Company’s products held in their inventory. Revenue from sales to distributors is recognized upon the transfer of control to the distributor.

 

The Company assessed the promised goods and services in the technical support to Invekra for a ten-year period as being a distinct service that Invekra can benefit from on its own and is separately identifiable from any other promises within the contract. Given that the distinct service is not substantially the same as other goods and services within the Invekra contract, the Company accounted for the distinct service as a performance obligation.

 

Revenue from testing contracts is recognized as tests are completed and a final report is sent to the customer.
Disaggregation of Revenue

Disaggregation of Revenue

 

The following table presents the Company’s disaggregated revenues by revenue source:

 

    Three Months Ended June 30,  
Product   2020     2019  
Human Care   $ 5,377,000     $ 4,072,000  
Animal Care     377,000       423,000  
Other     13,000       –  
Total   $ 5,767,000     $ 4,495,000  

 
Accounts Receivable

Accounts Receivable

 

Trade accounts receivable are recorded net of allowances for cash discounts for prompt payment, doubtful accounts, and sales returns. Estimates for cash discounts and sales returns are based on analysis of contractual terms and historical trends.

 

The Company’s policy is to reserve for uncollectible accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company periodically reviews its accounts receivable to determine whether an allowance for doubtful accounts is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Other factors that the Company considers include its existing contractual obligations, historical payment patterns of its customers and individual customer circumstances, an analysis of days sales outstanding by customer and geographic region, and a review of the local economic environment and its potential impact on government funding and reimbursement practices. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The allowance for doubtful accounts represents probable credit losses of $1,525,000 and $1,028,000 at June 30, 2020 and March 31, 2020, respectively. Additionally, at June 30, 2020 and March 31, 2020 the Company has allowances of $1,673,000 and $1,230,000, respectively, related to potential discounts, returns, distributor fees and rebates. The allowances are included in Accounts Receivable, net in the accompanying condensed consolidated balance sheets.
Inventories

Inventories

 

Inventories are stated at the lower of cost, cost being determined on a standard cost basis (which approximates actual cost on a first-in, first-out basis), or net realizable value.

 

Due to changing market conditions, estimated future requirements, age of the inventories on hand and production of new products, the Company regularly reviews inventory quantities on hand and records a provision to write down excess and obsolete inventory to its estimated net realizable value. The Company recorded a provision to reduce the carrying amounts of inventories to their net realizable value in the amount of $631,000 and $600,000 at June 30, 2020 and March 31, 2020, respectively, which is included in cost of product revenues on the Company’s accompanying condensed consolidated statements of comprehensive income (loss).
Subsequent Events

Subsequent Events

 

Management has evaluated subsequent events or transactions occurring through the date the condensed consolidated financial statements were issued. (See Note 13)
Recent Accounting Standards

Recent Accounting Standards

 

Accounting standards that have been issued or proposed by the FASB, the SEC or other standard setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.