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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 9 Months Ended
Mar. 31, 2013
Notes to Financial Statements  
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company, a wholly-owned subsidiary, and a subsidiary with a majority voting interest of 51.8% (48.2% is owned by non-controlling interests) as of March 31, 2013 and June 30, 2012. In the preparation of consolidated financial statements of the Company, intercompany transactions and balances are eliminated and net earnings are reduced by the portion of the net earnings of subsidiaries applicable to non-controlling interests.

 

Non-controlling Interest in a Consolidated Subsidiary

 

As of March 31, 2013, the non-controlling interest was $234,448, which represents a $418,097 decrease from $652,545 as of June 30, 2012. The decrease was due to the net loss of subsidiary of $866,702 for the nine months ended March 31, 2013, of which 48.24% was attributable to the non-controlling interests.

 

Segment Reporting

 

Accounting Standards Codification (“ASC”) Topic 280, “Segment Reporting,” requires public companies to report financial and descriptive information about their reportable operating segments.  We identify our operating segments based on how management internally evaluates separate financial information, business activities and management responsibility.  We have one reportable segment, consisting of the sale of wireless access products.

 

We generate revenues from three geographic areas, consisting of the United States, the Caribbean and South America, and Asia. The following enterprise wide disclosure is prepared on a basis consistent with the preparation of the consolidated financial statements.  The following table contains certain financial information by geographic area:

 

    Three Months Ended     Nine Months Ended  
    March 31,     March 31,  
Net sales:   2013     2012     2013     2012  
United States   $ 5,950,544     $ 2,184,064     $ 22,966,255     $ 6,619,799  
Caribbean and South America     383,024       26,774       1,129,952       78,674  
Asia     192,937       408,492       922,745       2,056,792  
Totals   $ 6,526,505     $ 2,619,330     $ 25,018,952     $ 8,755,265  

 

Long-lived assets, net:   March 31, 2013     June 30, 2012  
United States   $ 2,792,029     $ 706,065  
Asia     1,238,569       3,237,435  
Totals   $ 4,030,598     $ 3,943,500  

  

Estimates

 

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.

 

Reclassifications

 

Research and development expenses are reported separately from selling, general and administrative expenses for the three and nine months ended March 31, 2013 and 2012, as presented on the accompanying consolidated statements of operations and comprehensive income (loss). Research and development expenses were previously included in selling, general and administrative expenses and were not reported separately. These reclassifications do not affect previously reported net sales, net income (loss), earnings per share, or any portion of our consolidated balance sheets or consolidated statements of cash flow for any period presented. Non-trade receivables of $89,724 and $150,354 have been reclassified from accounts receivable to other receivables on the consolidated balance sheets as of March 31, 2013 and June 30, 2012, respectively. This reclassification does not affect previously reported consolidated statements of operations and comprehensive income (loss).

 

Fair Value of Financial Instruments

 

The carrying amounts of financial instruments such as advances, cash equivalents, accounts receivable, accounts payable and debt approximate the related fair values due to the short-term maturities of these instruments. We invest our excess cash into financial instruments which are readily convertible into cash, such as money market funds.

 

Allowance for Doubtful Accounts

 

Based upon our review of our collection history as well as the current balances associated with all significant customers and associated invoices, we do not believe an allowance for doubtful accounts was necessary as of March 31, 2013 and June 30, 2012.

 

Revenue Recognition

 

We recognize revenue in accordance with ASC 605, “Revenue Recognition,” when persuasive evidence of an arrangement exists, the price is fixed or determinable, collection is reasonably assured and delivery of products has occurred or services have been rendered. Accordingly, we recognize revenues from product sales upon shipment of the products to the customers or when the products are received by the customers in accordance with shipping or delivery terms. We provide a factory warranty for one year from the shipment, which is covered by our vendors pursuant to purchase agreements.

 

Cost of Goods Sold

 

All costs associated with our contract manufacturers, as well as distribution, fulfillment and repair services are included in our cost of goods sold. Cost of goods sold also includes amortization expense associated with capitalized product development costs associated with completed technology.

 

Capitalized Product Development Costs

 

Accounting Standards Codification (“ASC”) Topic 350, “Intangibles – Goodwill and Other” includes software that is part of a product or process to be sold to a customer and shall be accounted for under Subtopic 985-20.  Our products contain embedded software internally developed by FTI which is an integral part of these products because it allows the various components of the products to communicate with each other and the products are clearly unable to function without this coding.

 

The costs of product development that are capitalized once technological feasibility is determined (noted as Technology in progress in the Intangible Assets table) include payroll, employee benefits, and other headcount-related expenses associated with product development. We determine that technological feasibility for our products is reached after all high-risk development issues have been resolved. Once the products are available for general release to its customers, we cease capitalizing the product development costs and any additional costs, if any, are expensed. The capitalized product development costs are amortized on a product-by-product basis using the greater of straight-line amortization or the ratio of the current gross revenues to the current and anticipated future gross revenues. The amortization begins when the products are available for general release to the Company’s customers.

 

As of March 31, 2013 and June 30, 2012, capitalized product development costs in progress were $0 and $1,258,499, respectively, and these amounts are included in intangible assets in our consolidated balance sheets. During the three months ended March 31, 2013, we incurred $12,315 in capitalized product development costs, and during the nine months ended March 31, 2013, we incurred $370,945 in capitalized product development costs of which $151,167 was transferred to property and equipment. In addition, during the three months ended March 31, 2013, we transferred $909,962 to completed technology, and during the nine months ended March 31, 2013, we transferred $1,445,219 to completed technology and $33,058 to certifications & licenses following the completion of certain product development efforts. All expenses incurred before technological feasibility is reached are expensed and included in our consolidated statements of operations.

 

Research and Development Costs

 

Costs associated with research and development are expensed as incurred. Research and development costs were $621,532 and $493,419 for the three months ended March 31, 2013 and 2012, respectively, and $2,149,554 and $1,420,575 for the nine months ended March 31, 2013 and 2012, respectively.

 

Warranties

 

We provide a factory warranty for one year which is covered by our vendors and manufacturers under purchase agreements between the Company and the vendors. In general, these products are shipped directly from our vendors to our customers. As a result, we do not have warranty exposure and do not accrue any warranty expenses.

 

Shipping and Handling Costs

 

Costs associated with product shipping and handling are expensed as incurred.  Shipping and handling costs, which are included in selling, general and administrative expenses on the consolidated statement of operations and comprehensive income (loss), were $32,318 and $24,656 for the three months ended March 31, 2013 and 2012, respectively, and $204,008 and $64,844 for the nine months ended March 31, 2013 and 2012, respectively.

 

Cash and Cash Equivalents

 

For purposes of the consolidated statements of cash flow, we consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.

 

Inventories

 

Our inventories consist of finished goods and are stated at the lower of cost or market, cost being determined on a first-in, first-out basis. We assess the inventory carrying value and reduce it, if necessary, to its net realizable value based on customer orders on hand, and internal demand forecasts using management’s best estimates given information currently available. Our customer demand is highly unpredictable, and can fluctuate significantly caused by factors beyond the control of the Company. We may write down our inventory value for potential obsolescence and excess inventory.  However, as of March 31, 2013 and June 30, 2012, we believe our inventory needs no such reserves and have recorded no inventory reserves.

 

Property and Equipment

 

Property and equipment are recorded at cost. Significant additions or improvements extending useful lives of assets are capitalized. Maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives as follows:

 

Machinery 6 years
Office equipment 5 years
Molds 3 years
Vehicles 5 years
Computers and software 5 years
Furniture and fixtures 7 years
Facilities 5 years

 

Goodwill and Intangible Assets

 

Goodwill and certain intangible assets are recorded in connection with the FTI acquisition and are accounted for in accordance with ASC 805, “Business Combinations.”  Goodwill represents the excess of the purchase price over the fair value of the tangible and intangible net assets acquired.  Intangible assets are recorded at their fair value at the date of acquisition. Goodwill and other intangible assets are accounted for in accordance with ASC 350, “Goodwill and Other Intangible Assets.”  Goodwill and other intangible assets are tested for impairment at least annually and any related impairment losses are recognized in earnings when identified. Our annual impairment review performed on June 30, 2012 did not indicate any impairment.

 

The definite lived intangible assets consisted of the following as of March 31, 2013:

 

Definite Lived Intangible Assets:   Expected Life   Average Remaining Life     Gross Intangible Assets     Accumulated Amortization     Net Intangible Assets  
Complete technology   3 years     0.0 years     $ 490,000     $ 490,000     $ –  
Complete technology   3 years     0.1 years       1,517,683       1,478,251       39,432  
Complete technology   3 years     1.8 years       281,714       127,788       153,926  
Complete technology   3 years     2.3 years       361,249       120,428       240,821  
Complete technology   3 years     2.5 years       174,010       29,001       145,009  
Complete technology   3 years     2.8 years       909,962       50,553       859,409  
Supply and development agreement   8 years     4.6 years       1,121,000       490,438       630,562  
Software   5 years     2.8 years       169,798       68,776       101,022  
Patents   10 years     9.5 years       12,218       466       11,752  
Certifications & licenses   3 years     2.7 years       1,379,831       222,145       1,157,686  
Total  as of March 31, 2013               $ 6,417,465     $ 3,077,846     $ 3,339,619  

 

The definite lived intangible assets consisted of the following as of June 30, 2012:

 

Definite Lived Intangible Assets:   Expected Life   Average Remaining Life     Gross Intangible Assets     Accumulated Amortization     Net Intangible Assets  
Complete technology   3 years     0.3 years     $ 490,000     $ 449,167     $ 40,833  
Complete technology   3 years     0.8 years       1,517,683       1,098,830       418,853  
Complete technology   3 years     2.5 years       281,714       46,952       234,762  
Supply and development agreement   8 years     5.3 years       1,121,000       385,344       735,656  
Technology in progress   Not Applicable     –       1,258,499       –       1,258,499  
Software   5 years     3.3 years       163,607       44,033       119,574  
Patents   10 years     9.7 years       11,944       289       11,655  
Certifications & licenses   3 years     2.9 years       701,622       5,942       695,680  
Total  as of June 30, 2012               $ 5,546,069     $ 2,030,557     $ 3,515,512  

  

Amortization expense recognized during the three months ended March 31, 2013 and 2012 was $388,546 and $235,863, respectively, and during the nine months ended March 31, 2013 and 2012 was $1,047,289 and $657,503, respectively.

 

Long-lived Assets

 

In accordance with ASC 360, “Property, Plant, and Equipment,” we review for impairment of long-lived assets and certain identifiable intangibles whenever events or circumstances indicate that the carrying amount of assets may not be recoverable.  We consider the carrying value of assets may not be recoverable based upon our review of the following events or changes in circumstances: the asset’s ability to continue to generate income from operations and positive cash flow in future periods; loss of legal ownership or title to the assets; significant changes in our strategic business objectives and utilization of the asset; or significant negative industry or economic trends.  An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset are less than its carrying amount.

 

We tested the long-lived assets for impairment as of June 30, 2012 by comparing the discounted cash flows of the assets to their carrying values and concluded that, as of this date, no impairment existed.  As of March 31, 2013, we are not aware of any events or changes in circumstances that would indicate that the long-lived assets are impaired.

 

Income Taxes

 

We follow ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

Based on the assessment, management believes that the Company is more likely than not to fully realize our deferred tax assets. As such, no valuation allowance has been established for the Company’s deferred tax assets. However, the Company may need to establish a valuation allowance should it incur taxable losses in the future.

 

We adopted ASC 740-10-25 on January 1, 2007, which provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax position. We must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. We did not recognize any additional liabilities for uncertain tax positions as a result of the implementation of ASC 740-10-25.

 

As of March 31, 2013, we have no material unrecognized tax benefits. We recorded an income tax provision of $68,880 and $228,000 for the three and nine months ended March 31, 2013, respectively.

 

Concentrations of Credit Risk

 

We extend credit to our customers and perform ongoing credit evaluations of such customers. We evaluate our accounts receivable on a regular basis for collectability and provide for an allowance for potential credit losses as deemed necessary.  No reserve was required or recorded for any of the periods presented.

 

Substantially all of our revenues are derived from sales of wireless data products.  Any significant decline in market acceptance of our products or in the financial condition of our existing customers could impair our ability to operate effectively.

 

A significant portion of our revenue is derived from a small number of customers. For the nine months ended March 31, 2013, sales to our three largest customers accounted for 43%, 26%, and 18% of our consolidated net sales and 26%, 0%, and 64% of our accounts receivable balance as of March 31, 2013. In the same period in 2012, sales to our four largest customers accounted for 32%, 17%, 16% and 10% of our consolidated net sales and 74%, 0%, 0% and 0% of our accounts receivable balance as of March 31, 2012. No other customers accounted for more than ten percent of total net sales for the nine months ended March 31, 2013 and 2012.

 

For the nine months ended March 31, 2013, we purchased the majority of our wireless data products from one major manufacturing company located in Asia. If this manufacturing company were to experience delays, capacity constraints or quality control problems, product shipments to our customers could be delayed, or our customers could consequently elect to cancel the underlying product purchase order, which would negatively impact the Company's revenue.  For the nine months ended March 31, 2013, we purchased wireless data products from this supplier in the amount of $14,613,843, or 86% of total purchases, and had related accounts payable of $2,702,840 as of March 31, 2013. For the nine months ended March 31, 2012, we purchased wireless data products from two suppliers in the amount of $4,870,524, or 90% of total purchases, and had related accounts payable of $1,255,322 as of March 31, 2012.

 

We maintain our cash accounts with established commercial banks.  Such cash deposits exceed the Federal Deposit Insurance Corporation insured limit of $250,000 for each account.  However, the Company does not anticipate any losses on excess deposits.