Note 1 - Organization and Summary of Significant Accounting Policies | 6 Months Ended |
Jun. 30, 2014 |
Accounting Policies [Abstract] | ' |
Significant Accounting Policies [Text Block] | ' |
1. Organization and Summary of Significant Accounting Policies |
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These unaudited condensed consolidated financial statements and notes thereto, include the financial statements of VeriTeQ Corporation (“VC” or the "Company"), formerly known as Digital Angel Corporation, and its wholly-owned subsidiary, VeriTeQ Acquisition Corporation (“VAC”), a Florida corporation formed on December 14, 2011. VC became the legal acquirer of VAC and VAC became the accounting acquirer of VC pursuant to the terms of a share exchange agreement (the “Exchange Agreement”), as more fully discussed below. In January 2012, VAC acquired all of the outstanding stock of PositiveID Animal Health Corporation, a Florida corporation, from PositiveID Corporation (“PSID”), which at the time was a related party. In December 2012, VAC formed a subsidiary, VTQ IP Holding Corporation, a Delaware corporation. VC, VAC and VAC’s subsidiaries are referred to together as, “VeriTeQ,” “the Company,” “we,” “our,” and “us”. Our business consists of ongoing efforts to provide implantable medical device identification and radiation dose measurement technologies to the healthcare industry. |
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The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) and with the instructions to Form 10-Q and Article 8 of Regulation S-X under the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The interim financial information in this report has not been audited. In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments) considered necessary for fair financial statement presentation have been made. Results of operations reported for interim periods may not be indicative of the results for the entire year. These condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes for the year ended December 31, 2013 included in our Annual Report for Form 10-K as amended, filed with the Securities and Exchange Commission (“SEC”) on August 19, 2014. |
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Restatement and Amendment of Previously Issued Financial Statements |
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In our Original Form 10-Q filed with the SEC on August 20, 2014, the weighted average shares outstanding – basic and diluted and the resulting loss per common share attributable to common stockholders – basic and diluted, for the three and six-months ended June 30, 2014, did not correctly state the number of weighted-average shares outstanding due to a calculation error related to shares issuable under certain right to shares agreements that the Company entered into during June 2014. The effect of this error is presented below. No other qualitative or quantitative changes have been made to the financial statements. No event subsequent to August 20, 2014 is included in this Amendment. |
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Consolidated Statements of Operations Data |
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(in thousands, except per share data) |
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| | For the Three-Months | | | Correction | | | For the Three-Months | |
Ended | Ended |
June 30, | June 30, |
2014 As Previously | 2014 As Restated |
Reported | |
Net loss per common share — basic and diluted | | $ | (0.28 | ) | | $ | (0.12 | ) | | $ | (0.40 | ) |
Weighted average number of common shares outstanding – basic and diluted | | | 19,913 | | | | (6,024 | ) | | | 13,889 | |
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| | For the Six-Months Ended | | | Correction | | | For the Six-Months Ended | |
30-Jun-14 | 30-Jun-14 |
As Previously Reported | As Restated |
Net loss per common share -- basic and diluted | | $ | (0.06 | ) | | $ | (0.02 | ) | | $ | (0.08 | ) |
Weighted average number of common shares outstanding – basic and diluted | | | 14,758 | | | | (3,002 | ) | | | 11,756 | |
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During the preparation of the Company’s Form 10-Q for the period ended June 30, 2014, an error was identified for the accounting of the Company's financing transaction in November 2013 which is described below. On August 19, 2014, the Company has restated and amended its consolidated financial statements for the year ended December 31, 2013 on Form 10-K/A and on August 20, 2014, the Company amended its financial statements as of and for three months ended March 31, 2014 on Form 10-Q/A to correct for impact of this error. |
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On November 13, 2013, the Company entered into a financing transaction, as more fully discussed in Note 5 to the accompanying financial statements, which included notes in the principal amount of $1,816,667. The notes are convertible into shares of the Company’s common stock at an initial exercise price of $0.75 per share. The notes provided for the initial conversion price to be reset to lower amounts in the event the Company issues its common stock or is deemed to have issued its common stock at a price below the conversion price in effect at that time. This provision results in what is referred to as an embedded derivative and should have been bifurcated and a liability recorded at fair value upon the issuance of the notes and on December 31, 2013 and on March 31, 2014. This oversight resulted in an understatement of the derivative liability of $2.1 million and $3.1 million at March 31, 2014 and December 31, 2013, respectively. |
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Going Concern |
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The accompanying financial statements have been prepared assuming we will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. We are in the development stage, have incurred operating losses since our inception and have a working capital deficit. Our cash position is critically low, and payments critical to our survival are not being made in the ordinary course. Failure to raise capital in the coming days to fund our operations and generate positive cash flow to fund such operations will have a material adverse effect on our financial condition. These factors raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from this uncertainty. Further, the report of the independent registered public accounting firm on the Company’s December 31, 2013 financial statements included a paragraph about the existence of substantial doubt concerning the Company’s ability to continue as a going concern. |
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We need to raise additional funds immediately and continuing until we begin to ship sufficient quantities of our products to fund our operations and we may not be able to obtain debt or equity funding at all, or if available, they may not be on favorable terms. |
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Although we had negative working capital at June 30, 2014, we are attempting to generate enough cash from: (i) capital raises; (ii) the additional issuances of promissory notes, including to related parties; (iv) business operations as we have begun to ship our products; (v) through other investing and financing sources; (vi) from our ability to continue to delay certain salary and bonus payments to senior management until funds are available; and (vii) to undertake other cash management initiatives, including working with our vendors to continue to allow us to extend payment terms in order to operate our business for the twelve months ending June 30, 2015. |
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Our goal is to achieve profitability and to generate positive cash flows from operations. Our capital requirements depend on a variety of factors, including but not limited to, the cash that will be required to grow our business operations and to service our debt. Failure to raise additional capital to fund our operations and to generate positive cash flow from such operations will have a material adverse effect on our financial condition, results of operations and cash flows. |
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Development Stage |
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The Company is in the development stage as defined by Accounting Standards Codification subtopic 915-10 Development Stage Entities ("ASC 915-10") and its success depends on its ability to obtain financing and realize its marketing efforts. To date, the Company has generated only a small amount of revenue, has incurred expenses and has sustained operating losses. Consequently, its operations are subject to all the risks inherent in the establishment of a new business enterprise. For the period from December 14, 2011 (Inception) through June 30, 2014, the Company has accumulated losses of approximately $20.8 million. |
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Share Exchange Agreement and Reverse Stock Split |
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On June 24, 2013, VAC and its stockholders entered in the Exchange Agreement with VC and the closing of the transaction (the “VeriTeQ Transaction”) took place on July 8, 2013 (the “Closing Date”). Pursuant to the terms of the Exchange Agreement, VAC exchanged all of its issued and outstanding shares of common stock for 4,107,592 shares of VC’s Series B Convertible Preferred Stock (the “Series B Preferred Stock”). On July 10, 2013, VC realized that it incorrectly issued the Series B Preferred Stock and as a result, on July 12, 2013, it exchanged the Series B Preferred Stock for 410,759 shares of its newly created Series C convertible preferred stock, par value $10.00 (the “Series C Preferred Stock”). The terms of the Series C Preferred Stock are substantially similar to the Series B Preferred Stock, including the aggregate number of shares of common stock into which the Series C Preferred Stock was convertible. Each share of Series C Preferred Stock was convertible into twenty shares of VC’s common stock, par value $0.01 per share (the “Conversion Shares”), automatically upon the effectiveness of the Reverse Stock Split (defined below) on October 18, 2013 (such transaction is sometimes referred to herein as the “Share Exchange”). |
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Under the terms of the Exchange Agreement, all outstanding stock options to purchase shares of VAC’s common stock, whether or not exercisable or vested, converted into options to acquire shares of VC’s common stock (the “Substitute Options”), and all outstanding warrants to purchase shares of VAC’s common stock converted into warrants to purchase shares of VC’s common stock (the “Converted Warrants”). As a result of the Share Exchange and the issuance of the Substitute Options and the Converted Warrants, VAC became a wholly-owned subsidiary of VC, and VAC’s shareholders owned on July 12, 2013 approximately 91% of VC’s common stock, on an as converted, fully diluted basis (including outstanding stock options and warrants). |
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Based on the terms of the transaction, VAC was the accounting acquirer and as a result VAC’s operating results became the historical operating results of the Company. In addition, VAC’s common stock has been presented as if it was converted into shares of VC’s common stock at the beginning of the periods presented herein and based on the exchange ratio under the terms of the Exchange Agreement, which was 0.19083. The exchange ratio took into consideration the Reverse Stock Split, which is more fully discussed below. |
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The Series C Preferred Stock consisted of 500,000 authorized shares, 410,759 of which were issued and outstanding through October 17, 2013. The shares of Series C Preferred Stock issued to VAC’s shareholders in connection with the Share Exchange, by their principal terms: |
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(a) | converted into a total of 8,215,184 Conversion Shares, constituting approximately 88% of the issued and outstanding shares of common stock of VC, following the Reverse Stock Split on October 18, 2013 (as more fully discussed below); | | | | | | | | | | | |
(b) | had the same voting rights as holders of VC’s common stock on an as-converted basis for any matters that are subject to stockholder vote; | | | | | | | | | | | |
(c) | were not entitled to any dividends; and | | | | | | | | | | | |
(d) | were to be treated pari passu with the common stock on liquidation, dissolution or winding up of VC. | | | | | | | | | | | |
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On July 12, 2013, VC obtained approval from a majority of its shareholders for and to effect a one for thirty (1:30) reverse stock split (the “Reverse Stock Split”). On October 18, 2013, VC filed a Certificate of Amendment to its Certificate of Incorporation with the Secretary of State of the State of Delaware to effect the Reverse Stock Split. The Reverse Stock Split became effective on October 18, 2013. The Reverse Stock Split caused the total number of shares of common stock outstanding, including the shares underlying the Series C Preferred Stock, to equal 9,302,674 shares of VC common stock based on the shares outstanding on October 18, 2013. The Reverse Stock Split did not affect the number of shares of VC’s authorized common stock, which remain at 50 million shares. |
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As a result of the Reverse Stock Split, all share information in this Quarterly Report has been restated to reflect the Reverse Stock Split as if it had occurred at the beginning of the periods presented, where appropriate. |
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In connection with the Share Exchange, Digital Angel Corporation changed its name to VeriTeQ Corporation effective October 18, 2013. |
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On July 12, 2013, pursuant to the Exchange Agreement, a majority of VC’s voting stockholders adopted resolutions by written consent approving the Digital Angel Corporation 2013 Stock Incentive Plan (the “DAC 2013 Stock Plan”), under which employees, including officers and directors, and consultants may receive awards. The Plan became effective on October 18, 2013. |
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Amended and Restated Certification of Incorporation and Adoption of 2014 Stock Incentive Plan |
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On June 18, 2014, the Company obtained approval from a majority of its stockholders to: |
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| ● | increase the number of authorized shares of the Company’s common stock from 50 million to 500 million; | | | | | | | | | | |
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| ● | reduce the par value of the Company’s preferred stock from $10.00 per share to $0.01 per share; and | | | | | | | | | | |
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| ● | adopt the Company’s 2014 Stock Incentive Plan under which 50 million shares are reserved for issuance. | | | | | | | | | | |
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The Company expects to file an Amended and Restated Certificate of Incorporation with the State of Delaware to effect the changes to its authorized shares of common stock and the par value of its preferred stock and to complete the adoption of the 2014 Stock Incentive Plan on or about August 26, 2014. |
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A portion of the increase in the authorized shares of the Company’s common stock became necessary as a result of a financing that occurred on May 30, 2014. As described in the following paragraph, that financing triggered resets in the pricing of convertible promissory notes issued by the Company on November 13, 2013, and triggered changes to the exercise price and number of shares covered by warrants issued in connection with such notes. |
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Under the terms of the May 30, 2014 financing, the Company issued promissory notes totaling $0.3 million to two investors. The promissory notes are convertible into shares of the Company’s common stock at an exercise price of $0.20 per share. As a result of the May 30, 2014 financing, certain reset provisions under the terms of existing promissory notes convertible into shares of the Company’s common stock and existing common stock warrants, which were issued on November 13, 2013, were triggered. Accordingly, the conversion price of the convertible promissory notes with an aggregate principal balance of $1,816,667 was reset to $0.20 per share from $0.75 per share of the Company’s common stock and the exercise price of the common stock warrants was changed to $0.20 per share from $2.84 per share of the Company’s common stock. In addition, the number of common stock warrants was increased from common stock warrants to acquire 2,944,444 shares of the Company’s common stock to common stock warrants to acquire 41,811,114 shares of the Company’s common stock, subject to adjustment based on the cashless provisions of the warrants. |
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On June 10, 2014, a Right to Shares Agreement was entered into with one of the holders of a promissory note and common stock warrant issued on November 13, 2013 and reset on May 30, 2014 as discussed above. The warrant holder was entitled to receive 15,199,410 warrant shares under the cashless exercise provisions of its common stock warrant but agreed to accept the lesser amount of 11,500,000 warrant shares in full satisfaction of the complete exercise of its warrant of which 495,711 shares of common stock were issued on June 13, 2014 and 474,000 shares of common stock were issued on June 27, 2014, leaving a balance remaining to be issued of 10,530,289 shares of the Company’s common stock at June 30, 2014. Subsequent to June 30, 2014 and through August 15, 2014, we have issued an additional 10,035,289 shares of the Company’s common stock under the agreement and 495,000 shares remained to be issued. The balance will be issued from time to time at the election of the holder, subject to limitations regarding the holder’s percentage of beneficial ownership, for no additional consideration. |
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On June 24, 2014, a Right to Shares Agreement was entered into with one of the holders of a promissory note and common stock warrant issued on November 13, 2013 and reset on May 30, 2014. Pursuant to the agreement, the Company and the shareholder acknowledged that the shareholder desired to (1) exchange the shareholder warrant, for a right to acquire 17,763,325 shares of common stock to be issued to the shareholder, with such right being determined based on the cashless exercise formula contained in the warrant; (2) redeem $400,000 underlying its promissory note for $400,000 in cash, and (3) convert $190,667 underlying its promissory note into 953,334 shares of common stock. Pursuant to the agreement, the shareholder has a right to receive 18,716,659 shares of common stock, and the balance of the shareholder’s remaining note that was issued on November 13, 2013 has been reduced to $190,667. The issuance of shares of the Company’s common stock will be made from time to time, subject to limitations regarding the holder’s percentage of beneficial ownership, for no additional consideration. As of June 30, 2014, we issued 150,000 shares under the June 24, 2014 Right to Shares Agreement and 18,566,659 shares of the Company common stock remained to be issued. From July 1, 2014 to August 15, 2014, we issued an additional 9,118,000 shares of the Company’s common stock under the agreement and 9,448,659 shares of the Company’s common stock remain to be issued. |
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Letter Agreement with Digital Angel Radio Communications Limited. (DARC) |
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On January 30, 2014, we and the buyers of Digital Angel Radio Communications Limited, or DARC (a former wholly-owned subsidiary operating in the United Kingdom), entered into a letter agreement under which we agreed to accept a payment of £62,000 (approximately $0.1 million) in full and final settlement of a deferred purchase price related to VC’s sale of DARC in March 2013. As a result, we recorded a loss of approximately USD $56,000 in the six-months ended June 30, 2014. The loss is included in other expense in our condensed consolidated statement of operations. All other provisions (including, without limitation, the indemnities) agreed between VC, and/or the buyers under the stock purchase agreement and any related documents remain in full force and effect. |
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Summary of Significant Accounting Policies |
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Principles of Consolidation |
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The financial statements include our accounts and the accounts of our subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. |
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Classification of Expenses |
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For comparative purposes, we have reclassified certain expenses related to the development of our products from selling, general and administrative expenses to development expenses in the historical financial statement presented herein. |
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Use of Estimates |
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The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States of America (“U.S.”) requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on the knowledge of current events and actions we may undertake in the future, they may ultimately differ from actual results. Included in these estimates are assumptions used in determining the lives of long-lived assets, in Black-Scholes-Merton (“BSM”) valuation models in estimating the fair value of stock-based compensation and warrants, promissory notes with an embedded convertible option and royalty obligations and in determining valuation allowances for intangible assets, deferred tax assets, among others. |
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Concentration of Credit Risk |
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We maintained our domestic cash in two financial institutions during the period ended June 30, 2014. Balances were insured up to Federal Deposit Insurance Corporation limits of $250,000 per institution. At times, cash balances may exceed the federally insured limits. |
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Other Current Assets |
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Other current assets consist primarily of deferred financing costs of approximately $20,000 at June 30, 2014 and prepaid insurance of approximately $28,000 and $74,000 at June 30, 2014 and December 31, 2013, respectively. No other items included in other current assets at June 30, 2014 and December 31, 2013 exceeded 5% of total current assets, respectively. |
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Inventory |
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Inventory consisted of purchased finished goods at June 30, 2014 and December 31, 2013. Inventory is valued at the lower of the value using the first-in, first-out (“FIFO”) cost method, or market. |
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Property and Equipment |
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Property and equipment, consisting primarily of computer equipment, and are stated at cost less accumulated depreciation. Depreciation expense is computed using the straight-line method over the estimated useful life of the related assets (generally three years for computer equipment and 10 years for other equipment). Depreciation expense for the three-months ended June 30, 2014 and 2013 was approximately $1 thousand and nil, respectively. Depreciation expense for the six-months ended June 30, 2014 and 2013 was approximately $1 thousand and nil, respectively. |
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Intangible Assets |
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We account for intangible assets in accordance with the Intangibles — Goodwill and Other Topic of the Codification. Intangible assets deemed to have an indefinite life, such as goodwill, are reviewed at least annually for impairment. Intangible assets with finite lives are amortized over their estimated useful lives. We do not have any intangible assets with indefinite lives. |
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We have intangible assets consisting of technology, customer relationship and trademarks, which are more fully discussed in Note 3. These intangible assets are amortized over their expected economic lives ranging from 7 to 14 years. The lives were determined based upon the expected use of the asset, the ability to extend or renew patents, trademarks and other contractual provisions associated with the asset, the stability of the industry, expected changes in and replacement value of distribution networks and other factors deemed appropriate. We continually evaluate whether events or circumstances have occurred that indicate the remaining estimated useful lives of our definite-lived intangible assets warrant revision or that the remaining balance of such assets may not be recoverable. We use an estimate of the related undiscounted cash flows over the remaining life of the asset in measuring whether the asset is recoverable. We believe that no impairment of our intangible assets existed as of June 30, 2014. |
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Revenue Recognition |
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Product revenue is recognized at the time product is shipped and title has transferred, provided that a purchase order has been received or a contract has been executed, there are no uncertainties regarding customer acceptance, the sales price is fixed and determinable and collectability is deemed probable. If uncertainties regarding customer acceptance exist, we intend to recognize the revenue when such uncertainties are resolved. There are no significant post-contract support obligations at the time of revenue recognition. Our accounting policy regarding vendor and post contract support obligations is based on the terms of the customers’ contracts and is billable upon occurrence of the post-sale support. Currently, there are no multiple element arrangements in connection with our product sales. Cost of products sold is recorded as the related revenue is recognized. We offer a warranty on our products and record a liability for product warranties at the time it is probable that a warranty liability has been incurred and the amount of loss can reasonably be estimated. To date, we have not incurred a warranty liability on products we have sold. It is our policy to approve all customer returns before issuing credit to the customer. |
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Stock-Based Compensation |
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At June 30, 2014, we had five stock-based employee compensation plans which are more fully described in Note 7 to our consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on April 15, 2014. In accordance with the Compensation – Stock Compensation Topic of the Codification, awards granted are valued at fair value and compensation cost is recognized on a straight line basis over the service period of each award. On June 18, 2014, our majority stockholders approved the 2014 Stock Incentive Plan, which is more fully discussed in Note 7. |
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Income Taxes |
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We recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes consist primarily of timing differences such as amortization of intangible assets, deferred officers' compensation and stock-based compensation. A valuation allowance is provided against net deferred tax assets where we determine realization is not currently judged to be more likely than not. We recognize and measure uncertain tax positions through a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. Accordingly, we report a liability for unrecognized tax benefits resulting from the uncertain tax positions taken or expected to be taken in a tax return and recognize interest and penalties, if any, related to uncertain tax positions in income tax expense. |
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Loss Per Common Share and Common Share Equivalent |
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Basic and diluted loss per common share has been computed by dividing the loss by the weighted average number of common shares outstanding. Since we have incurred losses attributable to common stockholders, diluted loss per common share has not been computed by giving effect to all potentially dilutive common shares that were outstanding during the period., since to do so would have been anti-dilutive. See Note 9 for the computation of basic and diluted loss per share. |
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Impact of Recently Issued Accounting Standards |
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From time to time, the Financial Accounting Standards Board (“FASB”) or other standards setting bodies will issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification (“ASC” or “Codification”) are communicated through issuance of an Accounting Standards Update (“ASU”). |
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In June 2014, the FASB issued ASU Codification Development Stage Entities (Topic 915), Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation. The amendments related to the elimination of inception-to date information and other remaining disclosure requirements of Topic 915, which should be applied retrospectively and are effective for annual reporting periods beginning after December 15, 2014 and interim periods therein. The amendments also clarify that the guidance in Topic 275, Risks and Uncertainties, is applicable to entities that have not commenced planned principal operations. The amendments regarding Topic 275 and the sufficiency-of-equity-at-risk criterion for development stage entities of Topic 810 shall be applied prospectively. The adoption of these amendments will eliminate the inception--to–date information that is currently presented in the Company’s financial statements and may result in enhanced disclosures regarding risks and uncertainties applicable to the Company’s business. |
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In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09,”Revenue from Contracts with Customers (Topic 606),” (“ASU 2014-09”). ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. ASU 2014-09 is effective for public entities for annual reporting periods beginning after December 15, 2016 and interim periods within those periods. Early adoption is not permitted. Companies may use either a full retrospective or a modified retrospective approach to adopt ASU 2014-09. The Company is currently assessing the impact that adopting this new accounting guidance will have on its consolidated financial statements and footnote disclosures. |