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 advertising; such amounts are recorded as a reduction in revenue over the period in which revenue is recognized. The Company expensed $584,983 and $812,536 over the three and nine months ended March 31, 2013 and such amounts are included in discounts in the accompanying statement of operations.

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. 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 current quarter, the Company did not experience any inventory write-offs.

Property and equipment as of March 31, 2013 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 $876,549 at March 31, 2013. Depreciation expense amounted to $77,609 and $89,262 for the quarter and nine months ended March 31, 2013 and is included in depreciation & amortization expense in the accompanying statements of operations.

Advertising costs are expensed as incurred. Total advertising expenses amounted to $210,324 and $474,199 for the quarter and nine months ended March 31, 2013 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 $26,010 and $115,378 for the quarter and nine months ended March 31, 2013 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 $144,749 and $219,201 for the quarter and nine months ended March 31, 2013 and are included in professional fees in the accompanying statement of operations.

Deferred financing costs represent fees paid in connection with obtaining short-term loans and convertible notes (see Notes 4 and 5). These fees are amortized using a method that approximates the effective interest method over the term of the related financing.

As of March 31, 2013, deferred financing costs of $1,594,154, net of accumulated amortization of $656,623, are presented on the accompanying balance sheet. Amortization of deferred financing costs of $594,100 and $656,623 are included in depreciation and amortization expenses in the accompanying statement of operations for the three and nine months ended March 31, 2013. The remaining deferred financing costs will be fully amortized by November 28, 2013.

The Company records 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 March 31, 2013 convertible debt is presented net of unamortized debt discounts of $1,077,175. Amortization of debt discounts of $498,798 and $551,502 is included in interest expense in the accompanying statement of operations for the three and nine months ended March 31, 2013. The remaining debt discounts will be fully amortized by November 28, 2013.

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).

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 45% and 19% of the Company’s net revenues for the nine months ended March 31, 2013. Accounts receivable for the two customers represented 65% and 15% of the Company’s accounts receivable as of March 31, 2013. 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 March 31, 2013, license acquisition costs of $18,686 are presented on the accompanying balance sheet. Amortization of license acquisition costs of $657 and $2,000 are included in depreciation and amortization expense in the accompanying statement of operations for the three and nine months ended March 31, 2013. 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 quarter and nine months ended March 31, 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: