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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Dec. 31, 2012
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| Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation.
Method of Accounting
The Company maintains its accounting records on an accrual method in conformity with accounting principles generally accepted in the United States of America (“US GAAP”).
Use of Estimates
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.
Revenue Recognition
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.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.
Inventories
Inventories 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 and out-bound freight costs.
Property and Equipment
Property and equipment as of December 31, 2012 consist of costs incurred by the Company in connection with installing display fixtures at certain key customer display rooms. 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 amounted to $139,829 at December 31, 2012. Depreciation expense amounted to $11,652 for the quarter and six months ended December 31, 2012 and is included in general & administrative expenses in the accompanying statements of operations.
Advertising
Advertising costs are expensed as incurred. Total advertising expenses amounted to $73,294 and $263,875 for the quarter and six months ended December 31, 2012 and are included in general and administrative expenses in the accompanying statement of operations.
Selling Expenses and Commissions
Selling expenses and commissions are expensed as incurred. Total selling expenses and commissions amounted to $79,251 and $163,820 for the quarter and six months ended December 31, 2012 and are included in general and administrative expenses in the accompanying statement of operations.
Deferred Financing Costs
Deferred financing costs represent fees paid in connection with obtaining short-term loans and convertible notes (see Notes 4 and 6). These fees are amortized using a method that approximates the effective interest method over the term of the related financing.
As of December 31, 2012, deferred financing costs of $1,543,425, net of accumulated amortization of $62,523, are presented on the accompanying balance sheet. Amortization of deferred financing costs of $62,523 are included in general and administrative expenses in the accompanying statement of operations for the three and six months ended December 31, 2012. The remaining deferred financing costs will be fully amortized by August 21, 2013.
Debt Discount
The Company may record debt discounts in connection with raising funds through the issuance of convertible debt (see Note 5). These costs are amortized to 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 December 31, 2012 convertible debt is presented net of unamortized debt discounts of $1,301,016. Amortization of debt discounts of $52,704 is included in interest expense in the accompanying statements of operations for the three and six months ended December 31, 2012. The remaining debt discounts will be fully amortized by August 21, 2013.
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 and 6).
Financial Instruments and Concentrations of Business and Credit Risk
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. The Company maintains cash balances that at times exceed amounts insured by the Federal Deposit Insurance Corporation. The Company has not experienced any losses in these accounts and believes it is not exposed to any significant credit risk in this area.
License Acquisition Costs
License acquisition costs represent legal fees paid in connection with obtaining the Company’s licensing agreements (see Note 3). These fees are amortized using straight-line method over the term of each licensing agreement.
As of December 31, 2012, license acquisition costs of $19,341 are presented on the accompanying balance sheet. Amortization of license acquisition costs of $672 and $1,342 are included in general and administrative expenses in the accompanying statement of operations for the quarter and six months ended December 31, 2012. Estimated future license acquisition cost amortization expense is as follows:
Impairment of Long-Lived Assets
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 quarter and six months ended December 31, 2012.
Income Taxes
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.
Net Loss per Share
Basic net loss per share is computed by dividing net 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 as the result would be antidilutive. Such potentially dilutive shares are excluded when the effect would be to reduce net loss per share. Because the Company reported a net loss for the quarter and six months ended December 31, 2012, all potential common shares have been excluded from the computation of the dilutive net loss per share for the period presented because the effect would have been antidilutive. Such potential common shares consist of the following:
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