Summary Of Significant Accounting Policies

3 Months Ended

Mar. 31, 2012

Summary Of Significant Accounting Policies [Abstract]

Summary Of Significant Accounting Policies

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

Management is required to make estimates and assumptions during the preparation of financial statements and accompanying notes in conformity with accounting principles generally accepted in the United States of America. These estimates and assumptions affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates and assumptions.

Accounts Receivable, net

The Company has accounts receivable from hospitals and surgery centers. The Company does not believe that there is sufficient credit risk associated with those receivables to require a form of collateral from its customers. The allowance for doubtful accounts at March 31, 2012 and December 31, 2011, was $124,000 and $128,000, respectively. The allowance for doubtful accounts relates to accounts receivable not expected to be collected and is based on management's assessment of specific customer balances, the overall aging of the balances, and the financial stability of the customers.

Inventories, net

Inventories consist of raw materials, principally consumables, supplies, and disposable surgical products and finished goods consisting of assembled packs of various combinations of raw materials and disposable accessory packs purchased from third parties. Inventories are valued at the lower of cost or market, with cost being determined on the first-in, first-out method.

As of March 31, 2012 and December 31, 2011, inventory consists of the following:


	March 31, 2012			December 31, 2011
	(in 000's)
Raw materials	$	2,557		$	1,710
Finished goods		2,662			2,758

		5,219			4,468
Less: Inventory reserve		(132	)		(111	)

	$	5,087		$	4,357

Reusable Surgical Products, net

The Company's reusable surgical products, consisting principally of linens (gowns, towels, drapes), basins (stainless steel medicine cups, carafes, trays, basins), and owned surgical instruments, are stated at cost. Amortization of linens is computed on a basis similar to the units of production method. Estimated useful lives for each product are based on the estimated total number of available uses for each product. The expected total available usage for its linen products using the three principal fabrics (accounting for approximately 76% of the reusable surgical products) is 75, 100, and 125 uses, based on several factors, including the Company's actual historical experience with these products. The Company believes radio frequency identification ("RFID") technology enables it to evaluate the useful lives of linen products more efficiently. Basins are amortized on a straight-line basis over their estimated useful life, up to 20 years. Owned surgical instruments are amortized straight-line over a period of four years. Accumulated amortization as of March 31, 2012 and December 31, 2011, was approximately $17.9 million and $16.9 million, respectively.

As of March 31, 2012, and December 31, 2011, the Company had reserves for shrinkage, obsolescence, and scrap related to reusable surgical products of approximately $1.3 million at the end of each period.

Revenue Recognition

Revenues are recognized as products and services are delivered, generally daily. Packing slips signed and dated by the customer evidence delivery of product. The Company's contractual relationships with its customers are primarily evidenced by purchase orders or service agreements with terms varying from one to five years, which are generally cancelable by either party.

The Company owns substantially all of the reusable surgical products provided to customers except the surgical instruments. A third party provides most of the surgical instruments that are included in the Company's comprehensive surgical procedure-based delivery and retrieval service. The Company pays a fee to the third party for the use of the surgical instruments. In accordance with ASC Topic 605, Revenue Recognition ("ASC 605"), the Company acts as a principal in this arrangement and has reported the revenue gross for the comprehensive surgical procedure-based delivery and retrieval service. The third party agent fee charged to the Company is included in cost of revenues in the statements of operations.

Stock-Based Compensation

The Company accounts for its stock-based compensation plans in accordance with the provisions of ASC Topic 718, Share-Based Payments ("ASC 718"). Under ASC 718, all stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period. On July 1, 2011, as part of the Company's conversion to a new equity compensation administration and reporting platform, the Company converted to the Black-Scholes valuation model from a binomial (Lattice) model.

The cost for all stock-based awards granted between December 31, 2005 and June 30, 2011, represents the grant-date fair value that was estimated in accordance with the provisions of ASC 718, utilizing a binomial (Lattice) model. The cost of all stock-based awards granted subsequent to June 30, 2011, represents the grant-date fair value that is estimated in accordance with the provisions of ASC 718, utilizing the Black-Scholes valuation model. Because the Company does not accrue dividends, the fair value, when using the Black-Scholes valuation model, is essentially the same as the binomial (Lattice) model, when valuing a stock option grant. Compensation for restricted stock awards is measured at fair value on the date of grant based on the number of shares expected to vest and the quoted market price of the Company's common stock.

Stock-based compensation expense was $126,000 for the three months ended March 31, 2012, which contributed a $0.02 increase in basic and diluted loss per share. Stock-based compensation expense was $167,000, for the three months ended March 31, 2011, which contributed a $0.03 increase in basic and diluted loss per share.

The Company did not receive any proceeds from stock option exercises under any share-based payment arrangements for the three months ended March 31, 2012, because there were no exercises during that period. The proceeds from stock option exercises under all stock-based payment arrangements for the three months ended March 31, 2011 were less than $1,000. There were no stock-based compensation costs capitalized at March 31, 2012 or 2011.

Stock Compensation Plans

The 1995 Stock Option Plan

The 1995 Stock Option Plan was designed to provide employees with incentive or non-qualified options to purchase up to 700,000 shares of common stock. The options vest ratably over four to five years from the date of grant. All outstanding options vest upon a change in control of the Company. Options granted under this Plan expire no later than ten years after the date granted or sooner in the event of death, disability, retirement or termination of employment. As of March 31, 2012 and December 31, 2011, options to purchase 10,500 shares of Company stock were outstanding under this Plan. The 1995 Stock Option Plan terminated on December 21, 2005, although that termination does not adversely affect any options outstanding under the Plan.

The 1996 Non-Employee Director Plan

As amended on May 16, 2001, the Non-Employee Director Plan was designed to provide for the grant of non-qualified stock options to purchase up to 200,000 shares of common stock to members of the Board of Directors who are not employees of the Company. At the completion of the Company's initial public offering, each non-employee director was granted options to purchase 4,000 shares of common stock for each full remaining year of the director's term.

As of March 2006, the equity component of the director compensation plan was restructured, so that each non-employee director receives an annual grant of options, from the 2004 Stock Compensation Plan described below, to purchase 7,500 shares of common stock as of the date of each annual shareholder meeting. As of March 31, 2012 and December 31, 2011, options to purchase 60,000 shares of Company stock were outstanding under the 1996 Non-Employee Director Plan. The 1996 Non-Employee Director Plan terminated on July 14, 2006, although that termination does not adversely affect any options outstanding under the Plan.

The 1998 Stock Option Plan

As amended on May 16, 2001, the 1998 Stock Option Plan was designed to provide employees with incentive or non-qualified options to purchase up to 600,000 shares of common stock. The options vest ratably over four to five years from the date of the grant. All outstanding options vest upon a change in control of the Company. Options granted under this Plan expire no later than ten years after the date granted or sooner in the event of death, disability, retirement, or termination of employment. As of March 31, 2012 and December 31, 2011, options to purchase 222,000 and 242,000 shares, respectively, were outstanding under the 1998 Stock Option Plan. The 1998 Stock Option Plan terminated on February 17, 2008, although that termination does not adversely affect any options outstanding under the Plan.

The 2004 Stock Compensation Plan

The 2004 Stock Compensation Plan is designed to further the interests of the Company and its shareholders by providing incentives in the form of incentive or non-qualified stock options or restricted stock grants to key employees and non-employee directors who contribute materially to the success and profitability of the Company. Under this Plan, restricted stock grants are not considered outstanding options upon grant but are considered issued and outstanding stock. Any forfeited restricted stock awards are considered available for grant. Except for annual grants to non-employee directors described below, the equity awards typically vest ratably over five years from the date of grant. Each non-employee director of the Company receives an annual award of options to purchase 7,500 shares of common stock as of the date of the annual shareholder meeting. Under each grant agreement, the options vest ratably over a three-year period and have an exercise price equal to the fair market value of the common stock on the date of grant. All outstanding grants vest upon a change in control of the Company. Options granted under this Plan expire no later than ten years after the date granted or sooner in the event of death, disability, retirement, or termination of employment. At the Company's annual meeting of shareholders on May 24, 2007, the shareholders approved an amendment to the 2004 stock compensation plan to authorize an additional 500,000 shares under the Plan. As of March 31, 2012 and December 31, 2011, options to purchase 914,900 and 917,950 shares, respectively, were outstanding, and 7,150 and 4,100 shares, respectively, were available for grant as options or restricted stock under this Plan.

The 2009 Stock Compensation Plan

The 2009 Stock Compensation Plan is designed to further the interests of the Company and its shareholders by providing incentives in the form of incentive or non-qualified stock options or restricted stock grants to key employees and non-employee directors who contribute materially to the success and profitability of the Company. Under this Plan, restricted stock grants are not considered outstanding options upon grant but are considered issued and outstanding stock. Any forfeited restricted stock awards are considered available for grant. Except for annual grants to non-employee directors described above, the equity awards typically vest ratably over five years from the date of the grant. All outstanding grants vest upon a change in control of the Company. Options granted under this Plan expire no later than ten years after the date granted or sooner in the event of death, disability, retirement, or termination of employment. At the Company's annual meeting of shareholders on May 21, 2009, the shareholders approved the 2009 Stock Compensation Plan and authorized 600,000 shares available for grant under the Plan. As of March 31, 2012 and December 31, 2011, options to purchase 81,000 shares were outstanding and 519,000 shares were available for grant as options or restricted stock under the Plan.

In February 2008, the Company granted 25,000 shares of restricted stock and options to purchase 150,000 shares of common stock to the Company's Chief Executive Officer. The option award vested evenly over a three-year period. The 25,000 shares of restricted stock vested entirely on the third anniversary date of the date of grant or upon involuntary termination. These grants were inducement grants made outside of the Company's equity compensation plans.

The following table summarizes stock option and restricted stock grant activity from January 1, 2012 through March 31, 2012:


	Shares Available for Grant		Options Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life

Balance at December 31, 2011		523,100		1,461,450		$	3.87		6.46


Options expired *		—		(20,000	)	$	16.23
Options forfeited *		3,050		(3,050	)	$	2.63


Balance at March 31, 2012		526,150		1,438,400		$	3.70		6.30


Options exercisable at March 31, 2012		—		973,623		$	4.00		5.55

Options expired and forfeited are included in the shares available for grant, but do not include options that had expired or were forfeited during 2012 under terminated plans.

There were no options granted during the three months ended March 31, 2012. The weighted-average grant date fair value of options granted during the three months ended March 31, 2011 was $4.82. There were no options exercised in the three month period ended March 31, 2012. The total intrinsic value of options exercised in the three months ended March 31, 2011 was less than $1,200. The aggregate intrinsic value of options fully vested at March 31, 2012 was $571,000. The aggregate intrinsic value of options outstanding at March 31, 2012 and expected to vest was $1.0 million.

As of March 31, 2012, there was $497,000 of unrecognized compensation cost related to non-vested options that is expected to be recognized over a weighted average period of 2.0 years. The total fair value of options and restricted stock vested during the three months ended March 31, 2012 and 2011 was $126,000 and $167,000.

The Company consistently used a binomial model for estimating the fair value of options granted prior to July 1, 2011. As noted above, as of July 1, 2011, the Company converted to a new equity compensation administration and reporting software platform and converted to the Black-Scholes valuation model from a binomial (Lattice) model. The Company used historical data to estimate the option exercise and employee departure behavior used in the valuation models. The expected term of options granted is derived from the output of the option pricing model used and represents the period of time that options granted are expected to be outstanding. The risk-free rates are based on the U.S. Treasury stripped coupon interest in effect at the date of grant based on the expected term of the option granted.

Following are the weighted-average and range assumptions, where applicable, used for options granted during each respective period:


	Three Months Ended
	March 31, 2012	March 31, 2011
	(Binomial/Black-Scholes)

Expected dividend yield	0.0%	0.0%
Risk-free interest rate	0.48 to 1.67%	1.10 to 3.55%
Weighted-average expected volatility	98.0%	102.2%
Expected term	2.84 to 7.32 years	2.47 to 9.00 years
Respective service period	3-5 years	3-5 years

Restricted Stock Awards

In February 2011, the Company granted 17,000 shares of restricted stock to a key employee pursuant to the 2004 Stock Compensation Plan. The shares vest ratably over five years. There were no shares of restricted stock granted during the three months ended March 31, 2012.

The Company recorded $5,000 and $7,000, in compensation expense related to the restricted stock that vested during the three months ended March 31, 2012 and 2011, respectively. As of March 31, 2012 and December 31, 2011, there was $78,000 and $83,000, respectively, of total unrecognized compensation cost related to restricted stock awards granted under the 2004 Stock Compensation Plan, which is expected to be recognized over a period of 3.83 years and 4.08 years, respectively.

- Definition

The entire disclosure for all significant accounting policies of the reporting entity.

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SRI SURGICAL EXPRESS INC 10-Q