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Summary of Significant Accounting Policies | 3 Months Ended
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Sep. 30, 2013
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 subsidiary BLB. All significant intercompany balances and transactions are eliminated in consolidation. Method of Accounting The Company maintains its accounting records on the accrual method of accounting in conformity with GAAP. As of September 30, 2013, the Company reclassified the presentation of freight-out from cost of sales and has included the expense as a selling expense under general and administrative expenses in the accompanying condensed consolidated statements of operations. Use of Estimates In preparing the financial statements in conformity with 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. Management bases its estimates on certain assumptions that it believes to be reasonable as of the reporting period, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The most subjective and intricate estimates include inventory obsolescence and fair value calculations, including derivative liabilties and stock option expense. 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. As of September 30, 2013, the Company achieved 44% of net revenues from international customers and 56% of net revenues from its domestic customers. The Company did not achieve any revenues for the three months ended September 30, 2012. 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 $282,659 and $0 for the three months ended September 30, 2013 and September 30, 2012, respectively, and such amounts are included in discounts in the accompanying condensed consolidated statement of operations. Fair Value Measurements The Company’s financial instruments are primarily composed of cash, accounts receivable, factoring line of credit, accounts payable, and its convertible notes and warrants. The fair value of cash, restricted cash, accounts receivable, factoring line of credit, accounts payable and convertible notes closely approximates their carrying value due to their short maturities. The valuation techniques utilized for the warrants and beneficial conversion feature of its convertible notes are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy: Level 1 – Quoted prices in active markets for identical assets or liabilities. Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related asset or liabilities. Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities. The Company utilizes observable market inputs (quoted market prices) when measuring fair value whenever possible. The Company’s warrants and the beneficial conversion feature for its convertible notes are categorized within Level 3 of the fair value hierarchy. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company's accounting and finance department. As of September 30, 2013, there were no transfers in or out of Level 3 from other levels. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Accounts Receivable Accounts receivable balances 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 September 30, 2013 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 operations when received. As of September 30, 2013, all of the Company’s accounts receivable were deemed to be collectible. One of the Company’s customers accounted for 76% and 94% of outstanding accounts receivable as of September 30, 2013 and June 30, 2013, respectively. Inventories 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), and 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. During the three months ended September 30, 2013 and the period ended June 30, 2013, the Company reserved $50,000 and $365,722, respectively, for write-offs. The inventory write-off as of June 30, 2013 was primarily due to the name change of its Kardashian Beauty™ brand, which forced the Company to destroy or mark for destruction finished goods and work-in-process. Total inventories as of September 30, 2013 and June 30, 2013 were $2.550 million and $1.949 million, respectively. Property and Equipment Property and equipment as of September 30, 2013 consisted 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 $710,100, net of accumulated depreciation, at September 30, 2013. Depreciation expense amounted to $108,371 and $0 for the three months ended September 30, 2013 and September 30, 2012, respectively, and is included in depreciation & amortization expense in the accompanying condensed consolidated statements of operations. Advertising Advertising costs are expensed as incurred. Total advertising expenses amounted to $34,630 and $190,582 for the three months ended September 30, 2013 and September 30, 2012, respectively, and are included in general and administrative expenses in the accompanying condensed consolidated statements of operations. Selling Expenses and Commissions Selling expenses are expensed as incurred. Total selling expenses amounted to $70,949 and $84,569 for the three months ended September 30, 2013 and 2012, respectively, and are included in general and administrative expenses in the accompanying statements of operations. As of September 30, 2013, the Company reclassified the presentation of freight-out from cost of sales and has included the expense as a selling expense under general and administrative expenses in the accompanying condensed consolidated statements of operations. Accordingly, the prior periods have been updated to reflect such reclassification. Shipping expense is included in operating expenses and amounted to $31,120 and $0 during the three months ended September 30, 2013 and September 30, 2012, respectively. Selling commissions are expensed as incurred. Total selling commissions amounted to $26,054 and $0 for the three months ended September 30, 2013 and 2012, respectively, and are included in professional fees in the accompanying condensed consolidated statements of operations. Deferred Financing Costs Deferred financing costs represent fees paid in connection with obtaining short-term loans and convertible notes (see Notes 4, 5 and 6). These fees are amortized using a method that approximates the effective interest method over the term of the related financing. As of September 30, 2013 and June 30, 2013, deferred financing costs of $359,272 and $358,792, respectively, net of accumulated amortization, are presented on the accompanying condensed consolidated balance sheets. Amortization of deferred financing costs of $61,584 and $6,387 as of September 30, 2013 and 2012, respectively, are included in interest expense in the accompanying condensed consolidated statements of operations. The remaining deferred financing costs will be fully amortized by March 1, 2015. Debt Discount 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 charged to the statement of operations. As of September 30, 2013 and June 30, 2013, convertible debt, net of unamortized debt discounts, was $955,005 and $281,716, respectively. Amortization of debt discounts of $261,273 and $0 is included in interest expense in the accompanying condensed consolidated statements of operations for the three months ended September 30, 2013 and 2012, respectively. The remaining debt discounts will be fully amortized by March 1, 2015 (see Note 5). 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, which management estimates to approximate the Binomial Lattice 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 3 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. Customer concentrations also subject the Company to concentrations of credit risk. The Company maintains cash balances that at times exceed amounts insured by the Federal Deposit Insurance Corporation. Three customers accounted for approximately 39%, 30% and 20% of the Company’s net revenues for the three months ended September 30, 2013. Accounts receivable for one customer represented 76% of the Company’s accounts receivable balance as of September 30, 2013. The Company did not have any revenue during the three months ended September 30, 2012. Four suppliers represented 38%, 13%, 9% and 9% of the Company’s inventory purchases as of September 30, 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. License Acquisition Costs License acquisition costs represent legal fees paid in connection with obtaining the Company’s license agreements (see Note 3). These fees are amortized using the straight-line method over the term of each license agreement. As of September 30, 2013 and June 30, 2013, license acquisition costs, net of amortization, were $23,833 and $24,504, respectively on the accompanying condensed consolidated balance sheets. Amortization of license acquisition costs of $671 is included in depreciation and amortization expense in the accompanying condensed consolidated statements of operations for each of the three months ended September 30, 2013 and September 30, 2012. Estimated future license acquisition cost amortization expense is as follows:
Twelve month periods ending September 30, |  |  |
2014 |  | $ | 6,697 |
2015 |  |  | 7,793 |
2016 |  |  | 7,793 |
2017 |  |  | 1,550 |
|  | $ | 23,833 |
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 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 three months ended September 30, 2013 and September 30, 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 as 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 income / (loss) per share is computed by dividing net income / (loss) by the weighted average number of shares of common stock 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 shares of common stock consist of the following:
|  | As of September 30, 2013 |
Warrants |  |  | 69,810,575 |
Stock options |  |  | 17,780,000 |
Convertible Debt |  |  | 33,764,706 |
|  |  | 121,355,281

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