Note 6 - Revenue Recognition

6 Months Ended

Jun. 30, 2022

Notes to Financial Statements

Revenue from Contract with Customer [Text Block]

6.        Revenue Recognition

The Company records revenue in accordance with ASC Topic 606 “Revenue from Contracts with Customers.” Under this guidance, revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration expected to be received in exchange for those goods or services. The Company’s principal source of revenue is product sales.

The Company’s sales, as reported, are subject to a variety of deductions, some of which are estimated. These deductions are recorded in the same period that the revenues are recognized. Such deductions, primarily related to the sale of the Company’s pharmaceutical products, include chargebacks from the United States Department of Veterans Affairs (‘VA”), rebates in connection with the Company’s participation in Medicare programs, distribution fees, discounts, and outdated product returns. These deductions represent estimates of the related obligations and, as such, knowledge and judgment are required when estimating the impact of these revenue deductions on sales for a reporting period.

During 2022 and 2021, the Company participated in various government drug rebate programs related to the sale of Renacidin®, its most important pharmaceutical product. These programs include the Veterans Affairs Federal Supply Schedule (FSS), and the Medicare Part D Coverage Gap Discount Program (CGDP). These programs require the Company to sell its product at a discounted price. The Company’s sales, as reported, are net of these product rebates and discounts, some of which are estimated and are recorded in the same period that the revenue is recognized.

The Company recognizes revenue from sales of its cosmetic ingredients, medical, and industrial products when those products are shipped, as long as a valid purchase order has been received and future collection of the sale amount is reasonably assured. These products are shipped “Ex-Works” from the Company’s facility in Hauppauge, NY, and it is at this time that risk of loss and responsibility for the shipment passes to the customer and the Company’s performance obligation is satisfied. Sales of these products are deemed final, and there is no obligation on the part of the Company to repurchase or allow the return of these goods unless they are defective.

The Company’s pharmaceutical products are shipped via common carrier upon receipt of a valid purchase order, with, in most cases, the Company paying the shipping costs. Sales of pharmaceutical products are final, and revenue is recognized at the time of shipment, which is when the risk of loss and responsibility for the shipment passes to the customer, and the performance obligation of the Company is satisfied. Pharmaceutical products are returnable only at the discretion of the Company unless (a) they are found to be defective; (b) the product is damaged in shipping; or (c) the product is outdated (but not more than one year after its expiration date, which is a return policy which conforms to standard pharmaceutical industry practice). The Company estimates an allowance for outdated material returns based on prior year historical returns of its pharmaceutical products.

The Company does not make sales on consignment, and the collection of the proceeds of the sale of any of the Company’s products is not contingent upon the customer being able to sell the goods to a third party.

Any allowances for returns are taken as a reduction of sales within the same period the revenue is recognized. Such allowances are determined based on historical experience under ASC Topic 606-10-32-8. The Company has not experienced significant fluctuations between estimated allowances and actual activity.

The timing between recognition of revenue for product sales and the receipt of payment is not significant. The Company’s standard credit terms, which vary depending on the customer, range between 30 and 60 days. The Company uses its judgment on a case-by-case basis to determine its ability to collect outstanding receivables and provides allowances for any receivables for which collection has become doubtful. As of June 30, 2022 and December 31, 2021, the allowance for doubtful accounts receivable was $28,398 and $20,252, respectively. Prompt-pay discounts are offered to some customers; however, due to the uncertainty of the customers taking the discounts, the discounts are recorded when they are taken.

The Company has distribution fee contracts with certain distributors of its pharmaceutical products that entitles them to distribution and service-related fees. The Company records distribution fees and estimates distribution fees as offsets to revenue.

Disaggregated sales by product class are as follows:

	Three months ended					Six months ended
	June 30,					June 30,
	2022			2021		2022		2021
Cosmetic ingredients	$	1,393,963	$	1,855,776	$	3,471,878	$	3,486,372
Pharmaceuticals		1,238,384		1,149,179		2,463,597		2,292,487
Medical products		962,080		620,748		1,519,875		1,236,774
Industrial products		31,750		32,275		63,185		73,213
Total Net Sales	$	3,626,177	$	3,657,978	$	7,518,535	$	7,088,846

The Company’s cosmetic ingredients are marketed worldwide by five marketing partners, of which U.S.-based Ashland Specialty Ingredients (“ASI”) purchases the largest volume. Approximately 35% of the Company’s total sales in the second quarter of 2022 were to customers located outside of the United States, compared with approximately 24% in the second quarter of 2021. For the six months ended June 30, 2022, approximately 28% of the Company’s total sales were to customers located outside of the United States, compared with approximately 23% for the six months ended June 30, 2021.

Disaggregated sales by geographic region are as follows:

	Three months ended				Six months ended
	June 30,				June 30,
	2022		2021		2022		2021
United States*	$	2,353,952	$	2,773,242	$	5,433,846	$	5,444,629
Other countries		1,272,225		884,736		2,084,689		1,644,217
Total Sales	$	3,626,177	$	3,657,978	$	7,518,535	$	7,088,846

* Since substantially all purchases by ASI are shipped to ASI’s warehouses in the U.S., all sales to ASI are reported as U.S. sales for financial reporting purposes, even though a significant quantity of those purchases will be shipped by ASI to foreign customers. ASI has reported to the Company that approximately 75% of its sales of the Company’s products in the second quarter of 2022 were to foreign customers, with China representing approximately 46%. For the same time period in 2021, approximately 72% of ASI’s sales of the Company’s products were to foreign customers, with China representing approximately 43%.

For the six months ended June 30, 2022 approximately 73% of ASI’s sales of the Company’s products were to customers in other countries, with China accounting for approximately 43% of ASI’s sales of the Company’s products, as compared with approximately 69% of ASI’s sales going to customers in other countries for the six months ended June 30, 2021, with China accounting for approximately 40% of ASI’s sales of the Company’s products during that period.