Summary of Significant Accounting Policies (Policies)

12 Months Ended

Mar. 31, 2014

Summary of Significant Accounting Policies

Use of Estimates in the Preparation of Financial Statements

Use of Estimates in the Preparation of Financial Statements.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities as well as disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expense during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and Cash Equivalents.  For purposes of reporting cash flows, we consider all cash and highly liquid investments with an original maturity of three months or less to be cash equivalents.

Fair Value of Financial Instruments

Fair Value of Financial Instruments.  Our financial instruments consist of cash and cash equivalents and short-term trade receivables and payables. The carrying values of cash and cash equivalents, short-term receivables and payables approximate their fair value due to their short maturities.

Concentration of Credit Risk

Concentration of Credit Risk. Financial instruments, which potentially subject us to concentrations of credit risk, consist of cash and cash equivalents, accounts receivable and accounts payable. The carrying value of all financial instruments approximates fair value. The amount of cash on deposit with financial institutions occasionally exceeds the $250,000 federally insured limit at March 31, 2014. However, we believe that cash on deposit that exceeds $250,000 in the financial institutions is financially sound and the risk of loss is minimal.

We have no significant off-balance sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. We maintain the majority of our cash balances with one financial institution in the form of demand deposits.

Accounts receivable are typically unsecured and are derived from transactions with and from entities in the healthcare industry primarily located in the United States. Accordingly, we may be exposed to credit risk generally associated with the healthcare industry. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We charge interest on past due accounts on a case-by-case basis.

A summary of the activity in our allowance for doubtful accounts is as follows:

Years Ended	March 31, 2014			March 31, 2013
Balance, beginning of year	$	9,000		$	15,500
Provision for estimated losses	4,042			(6,500		)
Write-off of uncollectible accounts	(5,042		)	—
Balance, end of year	$	8,000		$	9,000

The net accounts receivable balance at March 31, 2014 of $863,220 included no more than 5% from any one customer. The net accounts receivable balance at March 31, 2013 of $985,770 included no more than 6% from any one customer.

Warranty Accrual

Warranty Accrual.  We provide for the estimated cost of product warranties at the time sales are recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is based upon historical experience and is also affected by product failure rates and material usage incurred in correcting a product failure. Should actual product failure rates or material usage costs differ from our estimates, revisions to the estimated warranty liability would be required. A summary of our warranty claims activity, included in other accrued liabilities, is as follows:

Years Ended	March 31, 2014			March 31, 2013
Balance, beginning of year	$	55,000		$	65,000
Provision for estimated warranty claims	(20,000		)	4,000
Claims made	—			(14,000		)
Balance, end of year	$	35,000		$	55,000

Inventories

Inventories.  Inventories are stated at the lower of cost (first-in, first-out basis) or market. We reduce inventory for estimated obsolete or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. At March 31, 2014 and 2013, inventory consisted of the following:

	March 31, 2014			March 31, 2013
Raw materials	$	1,498,867		$	1,843,357
Finished goods	1,285,361			1,136,945
Total gross inventories	2,784,228			2,980,302
Less reserve for obsolescence	(560,000		)	(51,000		)
Total net inventories	$	2,224,228		$	2,929,302

A summary of the activity in our inventory reserve for obsolescence is as follows:

Years Ended	March 31, 2014			March 31, 2013
Balance, beginning of year	$	51,000		$	117,000
Provision for estimated obsolescence	106,528			47,280
Provision for impairment	456,501			—
Write-off of obsolete inventory	(54,029		)	(113,280		)
Balance, end of year	$	560,000		$	51,000

Property and Equipment

Property and Equipment.  Property and equipment are stated at cost, with depreciation computed over the estimated useful lives of the assets, generally three to seven years. We use the straight-line method of depreciation for property and equipment. Leasehold improvements are depreciated over the shorter of the remaining lease term or the estimated useful life of the asset. Maintenance and repairs are expensed as incurred and major additions, replacements and improvements are capitalized. Equipment-in-progress is primarily manufacturing equipment for product that will be produced internally. Depreciation expense for the years ended March 31, 2014 and 2013 was $473,867 and $296,641, respectively.

Long-Lived Assets

Long-Lived Assets.  Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A long-lived asset is considered impaired when estimated future cash flows related to the asset, undiscounted and without interest, are insufficient to recover the carrying amount of the asset. If deemed impaired, the long-lived asset is reduced to its estimated fair value. Long-lived assets to be disposed of are reported at the lower of their carrying amount or estimated fair value less cost to sell. See Note 10.

Patents

Patents.  The costs of applying for patents are capitalized and amortized on a straight-line basis over the lesser of the patent’s economic or legal life (20 years from the date of application in the United States). Capitalized costs are expensed if patents are not issued. We review the carrying value of our patents periodically to determine whether the patents have continuing value and such reviews could result in the conclusion that the recorded amounts have been impaired. A summary of our patents at March 31, 2014 and 2013 is as follows:

	March 31, 2014			March 31, 2013
Patents issued	$	367,217		$	243,721
Accumulated amortization	(215,969		)	(190,770		)
Patents issued, net of accumulated amortization	151,248			52,951
Patent applications	97,723			184,655
Total net patents and patent applications	$	248,971		$	237,606

The expected annual amortization expense related to patents and patent applications as of March 31, 2014, for the next five fiscal years, is as follows:

Fiscal Year	Amount
2015	$	20,934
2016	20,242
2017	20,011
2018	20,011
2019 and following	167,773
Total	$	248,971

Other Accrued Liabilities

Other Accrued Liabilities.  At March 31, 2014 and 2013, other accrued liabilities consisted of the following:

	March 31, 2014		March 31, 2013
Warranty	$	35,000	$	55,000
Sales commissions	38,065		29,492
Lease normalization	6,310		36,610
Sales and use tax	18,108		37,460
Marketing fees	10,560		10,279
Legal and audit fees	45,439		31,426
Payroll taxes	23,554		25,932
Medical device tax	8,425		63,808
Employment agreement	120,000		123,980
Trade shows	50,000		—
Miscellaneous	53,088		32,184
Total other accrued liabilities	$	408,549	$	446,171

Income Taxes

Income Taxes.  We account for income taxes under the provisions of ASC Topic 740, “Accounting for Income Taxes” (“ASC 740”). ASC 740 requires recognition of deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets and liabilities. ASC 740 also requires recognition of deferred tax assets for the expected future tax effects of all deductible temporary differences, loss carryforwards and tax credit carryforwards. Deferred tax assets are then reduced, if deemed necessary, by a valuation allowance for the amount of any tax benefits which, more likely than not based on current circumstances, are not expected to be realized. Should we achieve sufficient, sustained income in the future, we may conclude that some or all of the valuation allowance should be reversed (Note 5).

ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.

The cumulative effect of adopting ASC 740 on April 1, 2007 has been recorded net in deferred tax assets, which resulted in no ASC 740 liability on the balance sheet. The total amount of unrecognized tax benefits as of the date of adoption was zero. There are open statutes of limitations for taxing authorities in federal and state jurisdictions to audit the Company’s tax returns from fiscal year ended March 31, 1999 through the current period. Our policy is to account for income tax related interest and penalties in income tax expense in the statement of operations. There have been no income tax related interest or penalties assessed or recorded. Because the Company has provided a full valuation allowance on all of its deferred tax assets, the adoption of ASC 740 had no impact on our effective tax rate.

Sales Recognition

Sales Recognition.  Sales from product sales are recorded when we ship the product and title has passed to the customer, provided that we have evidence of a customer arrangement and can conclude that collection is probable. Our shipping policy is FOB Shipping Point. We recognize revenue from sales to stocking distributors when there is no right of return, other than for normal warranty claims. We have no ongoing obligations related to product sales, except for normal warranty. Revenue from engineering services performed is recognized when invoices are sent to customers.

Sales Taxes

Sales Taxes.  We collect sales tax from customers and remit the entire amount to each respective state. We recognize revenue from product sales net of sale taxes.

Research and Development Expenses

Research and Development Expenses.  We expense research and development costs for products and processes as incurred.

Advertising Costs

Advertising Costs.  We expense advertising costs as incurred. Advertising expense for the years ended March 31, 2014 and 2013 was minimal.

Medical Device Tax

Medical Device Tax.  In March 2010, the Patient Protection and Affordable Care Act was enacted in the United States. This legislation includes a provision that imposes a 2.3% excise tax on the sale of certain medical devices by a manufacturer, producer or importer of such devices in the United States starting after December 31, 2012. We expense the medical device tax in Other Expense.

Stock-Based Compensation

Stock-Based Compensation.  Stock-based compensation is presented in accordance with the guidance of ASC Topic 718, “Compensation — Stock Compensation” (“ASC 718”). Under the provisions of ASC 718, companies are required to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our statement of operations.

ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the accompanying statement of operations.

Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Stock-based compensation expense recognized in our statement of operations for fiscal years 2014 and 2013 included compensation expense for share-based payment awards granted prior to, but not yet vested as of March 31, 2014, based on the grant date fair value. Compensation expense for all share-based payment is recognized using the straight-line, single-option method. As stock-based compensation expense recognized in the accompanying statement of operations for fiscal years 2014 and 2013 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

We used the Black-Scholes option-pricing model (“Black-Scholes model”) to determine fair value. Our determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. Although the fair value of employee stock options is determined in accordance with ASC 718 using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

Stock-based compensation expense recognized under ASC 718 for fiscal years 2014 and 2013 was $64,518 and $60,353, respectively, which consisted of stock-based compensation expense related to director and employee stock options.

Stock-based compensation expense related to employee stock options under ASC 718 for fiscal years 2014 and 2013 was allocated as follows:

Years Ended	March 31, 2014		March 31, 2013
Cost of sales	$	1,381	$	2,740
Sales and marketing	10,420		2,841
General and administrative	44,854		43,617
Research and development	7,863		11,155
Stock-based compensation expense	$	64,518	60,353

Segment Reporting

Segment Reporting.  We have concluded that we have one operating segment.

Basic and Diluted Income per Common Share

Basic and Diluted Income per Common Share.  Net income per share is calculated in accordance with ASC Topic 260, “Earnings Per Share” (“ASC 260”). Under the provisions of ASC 260, basic net income per common share is computed by dividing net income for the period by the weighted average number of common shares outstanding for the period. Diluted net income per common share is computed by dividing the net income for the period by the weighted average number of common and potential common shares outstanding during the period if the effect of the potential common shares is dilutive. Because we had a loss in fiscal years 2014 and 2013, the shares used in the calculation of dilutive potential common shares exclude options to purchase shares. Therefore, basic net loss per common share equals dilutive net loss per common share:

The following table presents the calculation of basic and diluted net income (loss) per share:

Years Ended	March 31, 2014			March 31, 2013
Net loss	$	(1,781,678	)	$	(615,673	)
Weighted-average shares — basic	8,921,669			8,199,621
Effect of dilutive potential common shares	—			—
Weighted-average shares — diluted	8,921,669			8,199,621
Net loss per share — basic and diluted	$	(0.20	)	$	(0.08	)
Antidilutive employee stock options	531,000			547,000

Recent Accounting Pronouncements

Recent Accounting Pronouncements.  We have reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoption of any such pronouncements may be expected to cause a material impact on our financial condition or the results of our operations.