In preparing the financial statements in conformity with US GAAP, management makes estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

As required by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collection is probable.

The Company offers its customers a variety of sales and incentive programs, including discounts, allowances, coupons, slotting fees, and co-op advertising; such amounts are recorded as a reduction in revenue over the period in which revenue is recognized. The Company reduced revenue in the amount of $0 and $1,335,136 for the period ended June 30, 2012 and year ended June 30, 2013, respectively, and such amounts are included in discounts in the accompanying statement of operations.

Accounts receivable represent payments due to the Company for previously recognized net sales, reduced by an allowance for doubtful accounts for balances, which are estimated to be uncollectible at June 30, 2012 and June 30, 2013, respectively. The Company grants credit terms in the normal course of business to its customers. The Company does not require collateral or other security to support credit sales. The allowance for doubtful accounts is determined based on historical experience and ongoing evaluations of the Company’s receivables and evaluations of the risks of payment. The allowance for doubtful accounts is recorded against accounts receivable balances when they are deemed uncollectible. When accounts are deemed significantly past due and uncollectible, the accounts receivable balances are written down for the amount deemed to be uncollectible. Recoveries of accounts receivable previously reserved are recorded in the consolidated statements of operation when received. At June 30, 2013, the Company’s one customer accounted for approximately 94% of outstanding accounts receivable. The Company did not have any accounts receivable for the period ended June 30, 2012.

Inventories, which consist primarily of finished goods, include items which are considered salable or usable in future periods, and are stated at the lower of cost or market value, with cost being based on standard cost which approximates actual cost on a first-in, first-out basis. Costs include direct materials, direct labor and overhead (e.g., indirect labor, rent and utilities, depreciation, purchasing, receiving, inspection and quality control), in-bound freight costs. The Company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based on its assessment of market conditions. Write-downs and write-offs are charged to cost of goods sold. In the period ended June 30, 2012 and the year ended June 30, 2013, the Company recorded $0 and $0.366 million, respectively, in write-offs.

Property and equipment as of June 30, 2013 consist of costs incurred by the Company in connection with installing display fixtures at certain key customer display rooms and retail stores. The display fixtures are being depreciated on a straight-line basis over two years, which approximates the estimated useful lives of such assets. Display fixtures maintained at customer display rooms and retail stores amounted to $866,968 at June 30, 2013. Depreciation expense amounted to $0 and $197,935 for the period ended June 30, 2012 and year ended June 30, 2013, respectively, and is included in depreciation & amortization expense in the accompanying statements of operations.

Advertising costs are expensed as incurred. Total advertising expenses amounted to $0 and $561,765 for the period ended June 30, 2012 and year ended June 30, 2013, respectively, and are included in general and administrative expenses in the accompanying statement of operations.

Selling expenses are expensed as incurred. Total selling expenses amounted to $0 and $84,338 for the period ended June 30, 2012 and the year ended June 30, 2013, respectively, and are included in general and administrative expenses in the accompanying statement of operations.

Selling commissions are expensed as incurred. Total selling commissions amounted to $0 and $236,600 for the period ended June 30, 2012 and the year ended June 30, 2013, respectively, and are included in professional fees in the accompanying statement of operations.

As of June 30, 2012 and June 30, 2013, deferred financing costs of $191,613 and $365,179, respectively, prior to accumulated amortization of $41,463 and $6,387, are presented on the accompanying balance sheet. Amortization of deferred financing costs of $41,463 and $6,387, as of June 30, 2012 and June 30, 2013, respectively, are included in depreciation and amortization expenses in the accompanying statement of operations. The remaining deferred financing costs will be fully amortized by December 20, 2014.

The Company records debt discounts in connection with raising funds through the issuance of convertible debt (see Note 5 and 6). These costs are amortized to non-cash interest expense over the life of the debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.

As of June 30, 2012 and June 30, 2013, convertible debt, net of unamortized debt discounts, was $0 and $281,716, respectively. Amortization of debt discounts of $0 and $1,201,959 is included in interest expense in the accompanying statement of operations for the period ended June 30, 2012 and the year ended June 30, 2013, respectively. The remaining debt discounts will be fully amortized by December 20, 2014.

Derivative Financial Instruments

GAAP requires derivative instruments embedded in convertible debt or equity instruments, to be bifurcated and measured at their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Black-Scholes option-pricing model. In assessing the debt instruments with characteristics of liability and equity, management determines if the convertible debt host instrument is conventional convertible debt and if there is a beneficial conversion feature. If the instrument is not considered conventional convertible debt, the Company will estimate the fair value of the embedded derivative instruments. The warrant liability is measured at fair value on a recurring basis using level 2 inputs (see Notes 5, 6 and 7).

FASB ASC Subtopic 825-10, Financial Instruments, requires disclosure of fair value information about financial instruments. The Company’s financial instruments include cash and cash equivalents, convertible debt, a factoring line of credit, short-term loans, accounts payable and other current assets and liabilities. The fair value of these instruments approximates their carrying value due to their relatively short maturities. Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. Customer concentration also subjects the Company to concentrations of credit risk. The Company maintains cash balances that at times exceed amounts insured by the Federal Deposit Insurance Corporation. Two customers accounted for approximately 44% and 24% of the Company’s net revenues for the twelve months ended June 30, 2013. Accounts receivable for one customer represented 94% of the Company’s accounts receivable as of June 30, 2013. The Company did not have any revenue during the period ended June 30, 2012. Three suppliers represented 23%, 21% and 12% of the Company’s inventory purchases as of June 30, 2013. The Company did not have any inventory as of June 30, 2012. The Company has not experienced any losses in these accounts and believes it is not exposed to any significant credit risk in this area.

As of June 30, 2012 and June 30, 2013, license acquisition costs, net of amortization, were $11,782 and $24,504, respectively on the accompanying balance sheet. Amortization of license acquisition costs of $380 and $2,662 are included in depreciation and amortization expense in the accompanying statement of operations for the period ended June 30, 2012 and the year ended June 30, 2013, respectively. Estimated future license acquisition cost amortization expense is as follows:

The Company is subject to the provisions of FASB ASC Topic 360, Property, Plant and Equipment – Impairment or Disposal of Long Lived Assets, which requires that long-lived assets and certain identifiable intangible assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future cash flows expected to be generated by the asset. In such cases, the carrying value of these assets are adjusted to their estimated fair value and assets held for sale are adjusted to their estimated fair value less selling expenses. No impairment losses of long-lived assets or intangible assets were recognized for the period ended June 30, 2012 and the year ended June 30, 2013.

The Company uses the asset and liability method of accounting for income taxes in accordance with FASB ASC Topic 740, Income Taxes. Deferred 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 tax bases and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company provides a valuation allowance against its deferred tax assets when circumstances indicate that it is no longer more likely than not that such assets will be realized.

Basic net income / (loss) per share is computed by dividing net income / (loss) by the weighted average number of common shares outstanding for the period. The Company’s potential dilutive shares, which include common stock options, common stock warrants and convertible debt have not been included in the computation of diluted net loss per share for all periods where there was a net loss as the result would be antidilutive. Such potentially dilutive shares are excluded when the effect would be to reduce net loss per share. Such potential common shares consist of the following: