Summary of Significant Accounting Policies

Use of Estimates and Assumptions

The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make significant 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 revenue and expenses during reporting periods. Actual results could differ from those estimates.

The Company bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances and regularly assesses these estimates, but actual results could differ materially from these estimates. Effects of changes in estimates are recorded in the period in which they occur.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of ninety days or less to be cash equivalents. Cash equivalents are recorded at cost which approximates fair value. The Company invests cash primarily in a money market account and other investments which management believes are subject to minimal credit and market risk.

Concentrations of Credit Risk

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents in bank deposit accounts and trade receivables. The Company invests its funds in highly rated institutions and limits its investment in any individual account so that they do not exceed FDIC limits. The Company has not experienced significant losses related to cash and cash equivalents and does not believe it is exposed to any significant credit risks relating to its cash and cash equivalents.

At December 31, 2018 and 2017, two customers accounted for 45% and 66% of accounts receivable, respectively. Two customers accounted 23% of revenues for the year ended December 31, 2018 and one customer accounted for 19% of revenues, for the year ended December 31, 2017.

The Company relies on in-house assembly and four third-party manufacturers to manufacture the major portion of its current products and product components. The disruption or termination of the supply of these products or a significant increase in the cost of these products from these sources could have an adverse effect on the Company’s business, financial position, and results of operations.

Inventories

Inventories, consisting primarily of finished goods and purchased components, are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method. The Company writes down inventory to its net realizable value for excess or obsolete inventory.

Fair Value

The carrying amounts of the Company’s accounts receivable, accounts payable, and accrued expenses approximate their fair value at December 31, 2018 and 2017 due to the short-term nature of these assets and liabilities. The Company’s cash equivalents are carried at fair value determined according to the fair value hierarchy described in Note 9.

Revenue Recognition

Revenues include product sales, net of estimated returns. Revenue is measured as the amount of consideration the Company expects to receive in exchange for product transferred. Revenue is recognized when contractual performance obligations have been satisfied and control of the product has been transferred to the customer. In most cases, the Company has a single product delivery performance obligation. Accrued product returns are estimated based on historical data and evaluation of current information.

Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), is a comprehensive revenue recognition standard that superseded nearly all existing revenue recognition guidance. The Company adopted this standard effective January 1, 2018, applying the modified retrospective method. Upon adoption, the Company discontinued revenue deferral under the sell-through model and commenced recording revenue upon delivery to distributors, net of estimated returns. Generally, the new standard results in earlier recognition of revenues.

Upon adoption of ASU 2014-09, the Company recorded a decrease in accumulated deficit of $297,858 as detailed in the following table:



	As reported						After adoption
	December 31, 2017			ASU 2014-09 Impact			January 1, 2018

Accounts receivable, net	$	1,049,329		$	1,353,499		$	2,402,828
Prepaid expenses and other current assets	$	1,867,803		$	(583,491	)	$	1,284,312
Total current assets	$	9,103,374		$	770,008		$	9,873,382

Accrued product returns	$	666,375		$	1,292,181		$	1,958,556
Deferred revenue	$	820,031		$	(820,031	)	$	—
Total current liabilities	$	4,581,835		$	472,150		$	5,053,985

Accumulated deficit	$	(191,338,054	)	$	297,858		$	(191,040,196	)
Total stockholders’ equity	$	5,017,389		$	297,858		$	5,315,247

The following table summarizes the effects of adopting ASU 2014-09 on the Company's statement of operations for the year ended December 31, 2018:



	As reported		Adjustments		Amounts under prior GAAP

Revenues	$	16,090,138	$	558,161	$	16,648,299
Cost of revenues	$	8,707,082	$	419,709	$	9,126,791
Gross profit	$	7,383,056	$	138,452	$	7,521,508
Net income applicable to common stockholders	$	23,605	$	138,452	$	162,057
Net income per common share applicable to common stockholders,
Basic	$	0.003	$	0.020	$	0.023
Diluted	$	0.002	$	0.010	$	0.012

The following table summarizes the effects of adopting ASU 2014-09 on the Company's balance sheet as of December 31, 2018:



	As reported			Adjustments			Amounts under prior GAAP

Accounts receivable, net	$	1,082,957		$	(277,637	)	$	805,320
Prepaid expenses and other current assets	$	905,767		$	163,782		$	1,069,549
Total current assets	$	11,631,017		$	(113,855	)	$	11,517,162

Accrued product returns	$	1,101,658		$	(551,000	)	$	550,658
Deferred revenue	$	—		$	596,551		$	596,551
Total current liabilities	$	6,015,437		$	45,551		$	6,060,988

Accumulated deficit	$	(191,016,591	)	$	(159,406	)	$	(191,175,997	)
Total stockholders’ equity	$	6,097,811		$	(159,406	)	$	5,938,405

Adoption of the standard had no impact on total net cash provided by or used in operating, investing, or financing activities within the statements of cash flows.

Accounts Receivable

Accounts receivable are recorded net of the allowance for doubtful accounts receivable. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in its existing accounts receivable. The Company reviews the allowance for doubtful accounts and determines the allowance based on an analysis of customer past payment history, product usage activity, and recent communications with the customer. Individual customer balances which are past due and over 90 days outstanding are reviewed individually for collectability. Account balances are written-off against the allowance when the Company feels it is probable the receivable will not be recovered. The Company does not have any off-balance sheet credit exposure related to its customers. Allowance for doubtful accounts was $25,000 as of December 31, 2018 and 2017.

Income Taxes

The Company records income taxes using the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and operating loss and tax credit carryforwards. The Company’s financial statements contain certain deferred tax assets, which have arisen primarily as a result of operating losses, as well as other temporary differences between financial and tax accounting. In accordance with the provisions of the Income Taxes topic of the Codification, the Company is required to establish a valuation allowance if the likelihood of realization of the deferred tax assets is reduced based on an evaluation of objective verifiable evidence. Significant management judgment is required in determining the Company’s provision for income taxes, the Company’s deferred tax assets and liabilities and any valuation allowance recorded against those net deferred tax assets. The Company evaluates the weight of all available evidence to determine whether it is more likely than not that some portion or all of the net deferred income tax assets will not be realized.

Utilization of the NOL and research and development credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that have occurred previously or that could occur in the future, as provided by Section 382 of the Internal Revenue Code of 1986, as well as similar state provisions. Ownership changes may limit the amount of NOL and tax credit carryforwards that can be utilized to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. If the Company has experienced a change of control, utilization of its NOL or tax credits carryforwards would be subject to an annual limitation under Section 382. Any limitation may result in expiration of a portion of the NOL or research and development credit carryforwards before utilization. Subsequent ownership changes could further impact the limitation in future years. Further, until a study is completed and any limitation known, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided against the Company’s NOL carryforwards and research and development credit carryforwards and, if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the balance sheet or statement of operations if an adjustment were required.

Management performed a two-step evaluation of all tax positions, ensuring that these tax return positions meet the “more likely than not” recognition threshold and can be measured with sufficient precision to determine the benefit recognized in the financial statements. These evaluations provide management with a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements certain tax positions that the Company has taken or expects to take on income tax returns.

Research and Development

Costs incurred in research and development are expensed as incurred. Included in research and development costs are wages, benefits, product design consulting, and other operating costs such as facilities, supplies, and overhead directly related to the Company’s research and development efforts.

Collaboration income

Collaboration income is recognized within Other Income when contractual performance obligations, outside the ordinary activities of the Company, have been satisfied and control has been transferred to a collaboration partner. Collaboration income for each performance obligation is based on relative fair value of the overall transaction price. A deferred collaboration income liability is recorded when payments are received prior to satisfaction of performance obligations. The company recognized $12,255,704 of collaboration income in 2018 and recorded $1,956,522 of deferred collaboration income liability as of December 31, 2018.

Product Warranty Costs

The Company accrues estimated product warranty costs at the time of sale which are included in cost of sales in the statements of operations. The amount of the accrued warranty liability is based on historical information such as past experience, product failure rates, number of units repaired, and estimated cost of material and labor. The liabilities for product warranty costs of $129,837 and $127,361 at December 31, 2018 and 2017, respectively, are included in accrued expenses in the accompanying balance sheets.

Fixed Assets and Long-Lived Assets

Fixed assets are recorded at cost and depreciated using the straight-line method over the estimated useful life of each asset. Expenditures for repairs and maintenance are charged to expense as incurred. On disposal, the related assets and accumulated depreciation are eliminated from the accounts and any resulting gain or loss is included in the Company’s statement of operations. Leasehold improvements are amortized over the shorter of the estimated useful life of the improvement or the remaining term of the lease.

The Company periodically evaluates the recoverability of its fixed assets and other long-lived assets whenever events or changes in circumstances indicate that an event of impairment may have occurred. This periodic review may result in an adjustment of estimated depreciable lives or asset impairment. When indicators of impairment are present, the carrying values of the asset are evaluated in relation to the assets operating performance and future undiscounted cash flows of the underlying assets. If the future undiscounted cash flows are less than their book value, an impairment may exist. The impairment is measured as the difference between the book value and the fair value of the underlying asset. Fair values are based on estimates of the market prices and assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates, reflecting varying degrees of perceived risk.

Accounting for Stock-Based Compensation

Stock-based compensation cost is generally recognized ratably over the requisite service period. The Company uses the Black-Scholes option pricing model for determining the fair value of its stock options and amortizes its stock-based compensation expense using the straight-line method. The Black-Scholes model requires certain assumptions that involve judgment. Such assumptions are the expected share price volatility, expected life of options, expected annual dividend yield, and risk-free interest rate (See Note 3 — Stock-Based Compensation).

Net Income (Loss) per Common Share

Basic and dilutive net income (loss) per common share were as follows:



	Years Ended December 31,
	2018		2017
Net income (loss) applicable to common stockholders	$	23,605	$	(19,734,033	)

Weighted average number of common shares outstanding, basic	7,104,574		1,701,481
Dilutive convertible preferred stock	6,780,995		—
Weighted average number of common shares outstanding, dilutive	13,885,569		1,701,481

Net income (loss) per common share applicable to common stockholders, basic	$	0.003	$	(11.598	)
Net income (loss) per common share applicable to common stockholders, diluted	$	0.002	$	(11.598	)

The 2017 earnings per share amounts have been reformatted to conform to current year presentation.

The following potentially dilutive weighted average number of common stock equivalents were excluded from the calculation of diluted net income (loss) per common share because their effect was anti-dilutive for each of the periods presented:



	Years Ended December 31,
	2018	2017
Options	441,990	99,344
Warrants	459,375	2,742,266
Convertible preferred stock	—	5,961,679
Total	901,365	8,803,289

Advertising and Promotional Costs

Advertising and promotional costs are expensed as incurred. Advertising and promotion expense were $5,766,982 and $6,851,082, in 2018 and 2017, respectively.

Accumulated Other Comprehensive Items

For 2018 and 2017, the Company had no components of other comprehensive income or loss other than net income (loss).

Segments

The Company operates in one segment for the sale of medical equipment and consumables. Substantially all of the Company’s assets, revenues, and expenses for 2018 and 2017 were located at or derived from operations in the United States. Revenues from sales outside the United States accounted for approximately 12% and 7% of total revenues in 2018 and 2017, respectively.

Risks and Uncertainties

The Company is subject to risks common to companies in the medical device industry, including, but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, customers’ reimbursement from third-party payers, protection of proprietary technology, and compliance with regulations of the FDA and other governmental agencies.

Recently Issued or Adopted Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires that lessees recognize virtually all of their leases on the balance sheet, by recording a right-of-use asset and lease liability. The provisions of this guidance are effective for annual periods beginning after December 31, 2018, and for interim periods therein. The Company expects to adopt ASU 2016-02, using the modified retrospective method, upon its effective date of January 1, 2019. The Company anticipates the impact of adoption will be an increase to long-term assets and total liabilities of approximately $1.9 million as of January 1, 2019.