3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|12 Months Ended|
Jun. 30, 2014
|Summary Of Significant Accounting Policies|
|Summary of significant accounting policies||
Basis of Accounting
The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States. Significant accounting principles followed by the Company and the methods of applying those principles, which materially affect the determination of financial position, results of operations and cash flows are summarized below.
Principles of Consolidation
The consolidated financial statements include the accounts of iMedicor, Inc. and its wholly-owned subsidiaries Nuscribe, Inc. and ClariDIS Corporation (together, the Company). All significant intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company classifies highly liquid temporary investments with an original maturity of three months or less when purchased as cash equivalents. The Company maintains cash balances at various financial institutions. Balances at United States banks are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk for cash on deposit.
Concentrations of Credit Risk
The Company has historically provided financial terms to customers in accordance with what management views as industry norms. Financial terms range from immediate payment for access to the Companys software products to several months for Meaningful Use consulting. Management periodically and regularly reviews customer account activity in order to assess the adequacy of allowances for doubtful accounts, considering such factors as economic conditions and each customers payment history and creditworthiness. If the financial conditions of our customers were to deteriorate, or if they were otherwise unable to make payments in accordance with managements expectations, we might have to increase our allowance for doubtful accounts, modify their financial terms and/or pursue alternative collection methods.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are customer obligations due under normal trade terms. We maintain an allowance for doubtful accounts for estimated losses resulting from the potential inability of certain customers to make required future payments on amounts due us. Management determines the adequacy of this allowance by periodically evaluating the aging and past due nature of individual customer accounts receivable balances and considering the customers current financial situation as well as the existing industry economic conditions and other relevant factors that would be useful in assessing the risk of collectability. If the future financial condition of our customers were to deteriorate, resulting in their inability to make specific required payments, additions to the allowance for doubtful accounts may be required. In addition, if the financial condition of our customers improves and collections of amounts outstanding commence or are reasonably assured, then we may reverse previously established allowances for doubtful accounts. The Company has deemed it unnecessary to record an allowance for doubtful accounts at June 30, 2014 and 2013.
Property, Equipment and Depreciation
Property, equipment, and leasehold improvements are recorded at their historical cost. Depreciation and amortization have been determined using the straight-line method over the estimated useful lives of the assets of three years. The cost of repairs and maintenance is charged to operations in the period incurred.
Goodwill and Other Intangible Assets
The Company accounts for goodwill and other intangible assets in accordance with accounting pronouncements, which require that goodwill and intangible assets with indefinite useful lives should not be amortized, but instead be tested for impairment at least annually at the reporting unit level. If impairment exists, a write-down to fair value (normally measured by discounting estimated future cash flows) is recorded. Intangible assets with finite lives are amortized primarily on a straight-line basis over their estimated useful lives and are reviewed for impairment.
Software Development Costs
We account for software development costs, including costs to develop software products or the software component of products to be marketed to external users, as well as software programs to be used solely to meet our internal needs.
For internal use software, in accordance with ASC 350-40, Internal Use Software and ASC 985-730, Computer Software Research and Development, research phase costs should be expensed as incurred and development phase costs including direct materials and services, payroll and benefits and interest costs may be capitalized. Software development costs for internal use software are amortized on a straight-line basis over their estimated useful lives.
We have determined that technological feasibility for our products to be marketed to external users was reached before the release of those products. As a result, the development costs and related acquisition costs after the establishment of technological feasibility were capitalized as incurred. Capitalized costs for software to be marketed to external users are amortized based on current and projected future revenue for each product with an annual minimum equal to the straight-line amortization over the remaining estimated economic life of the product.
Impairment of Long-Lived Assets
Long-lived assets are 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 estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount that the carrying amount of the asset exceeds the fair value of the asset.
In conjunction with the issuance of certain debt, the Company incurred fees that were capitalized as loan costs and are being amortized over the term of the related debt using the effective interest method. Amortization of loan costs included in interest expense in the accompanying consolidated statements of operations was $609,834 and $9,345 for the years ended June 30, 2014 and 2013, respectively.
During the years ended June 30, 2014 and June 30, 2013 the Company derived revenue primarily from Meaningful Use consulting services.
In general, the Company recognizes revenue when all of the revenue recognition criteria are met, which is typically when:
Meaningful Use consulting service revenue is recognized in the period that the services are completed and the approval of the customers underlying application for Federal Meaningful Use Incentive Funds is received from the relevant taxing authority. Revenue from NextEMR services is recognized ratably over the service period.
Advertising costs are reported in general and administrative expenses and include advertising, marketing and promotional programs and are charged as expenses in the period or year in which incurred. Advertising costs for the years ended June 30, 2014 and 2013 were $16,631 and $12,737, respectively.
Accounting for Derivative Instruments
The Company accounts for derivative instruments in accordance with ASC 815, which requires additional disclosures about the
Companys objectives and strategies for using derivative instruments, how the derivative instruments and related hedged items are accounted for, and how the derivative instruments and related hedging items affect the financial statements.
The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risk. Terms of convertible debt and preferred stock instruments are reviewed to determine whether or not they contain embedded derivative instruments that are required under ASC 815 to be accounted for separately from the host contract, and recorded on the balance sheet at fair value. The fair value of derivative liabilities, if any, is required to be revalued at each reporting date, with corresponding changes in fair value recorded in current period operating results.
Freestanding warrants issued by the Company in connection with the issuance or sale of debt and equity instruments are considered to be derivative instruments. Pursuant to ASC 815, an evaluation of specifically identified conditions is made to determine whether the fair value of warrants issued is required to be classified as equity or as a derivative liability.
Fair Value of Financial Instruments
Management believes that the carrying amounts of the Companys financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value due to the short-term nature of these instruments. The carrying amount of the Companys debt also approximates fair value, based on market quote values (where applicable) or discounted cash flow analyses. (See discussion of Fair Value Measurements below).
Fair Value Measurements
The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and paragraph 820-10-35-37 of the FASB Accounting Standards Codification (Paragraph 820-10-35-37) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:
Financial assets and liabilities are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies, lattice models or similar techniques and at least one significant model assumption or input is unobservable.
The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
The Companys Level 3 financial liabilities consist of derivative financial instruments, including a warrant liability and compound embedded derivative liability, for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. See Note 12 for a discussion of how fair value for these financial instruments was determined.
Significant unobservable inputs used in the fair value measurement of the warrants include the estimated term. Significant increases in the estimated remaining period to exercise would result in a significantly higher fair value measurement. Conversely, decreases in the estimated remaining period to exercise would result in a significantly lower fair value measurement.
Significant unobservable inputs used in the fair value measurement of the compound embedded derivatives include the variable linked number of common shares, the variable interest conversion factor and the conversion price factor. The compound embedded derivatives are linked to a variable number of common shares based upon the average of the Company's closing stock price for the ten days preceding conversion. In addition, the Company has the option of paying interest in common stock at 85% of the trailing ten day average stock price. The number of linked shares will increase (decrease) as the trading market price decreases (increases). While the debt is convertible into stock based on the trailing ten day average stock price, we assumed that a market participant would not exercise the right to convert debt into shares unless the option was significantly in the money. For purposes of applying this consideration, the fair value model assumes that debt will not convert unless the conversion rate is less than or equal to 25% of the trading value of the stock. Significant increases (decreases) in the trading market price in the future would result in a significantly lower (higher) fair value measurement.
For a summary of the changes in the fair value of Level 3 financial liabilities See Note 12.
The Company follows the asset and liability approach to accounting for income taxes. Under this method, deferred tax assets and liabilities are measured based on differences between the financial reporting and tax bases of assets and liabilities measured using enacted tax rates and laws that are expected to be in effect when differences are expected to reverse. Valuation allowances are established when it is necessary to reduce deferred income tax assets to the amount, if any, expected to be realized in future years.
ASC 740, Accounting for Income taxes (ASC 740), requires that deferred tax assets be evaluated for future realization and reduced by a valuation allowance to the extent we believe a portion more likely than not will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent cumulative loss experience and expectations of future taxable income by taxing jurisdictions, the carry-forwarding periods available to us for tax reporting purposes and other relevant factors.
The Company has not recognized a liability for uncertain tax positions. A reconciliation of the beginning and ending amount of unrecognized tax benefits or penalties has not been provided since there has been no unrecognized benefit or penalty. If there were an unrecognized tax benefit or penalty, the Company would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company files U.S. Federal income tax returns and various returns in state jurisdictions. The Company's open tax years subject to examination by the Internal Revenue Service and the state Departments of Revenue generally remain open for three years from the date of filing.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.
Net Earnings (Loss) Per Share
Basic net earnings (loss) per share is computed by dividing net earnings (loss) by the weighted average number of shares of Common Stock outstanding for the period. Diluted net earnings ( loss) per share reflects the potential dilution of securities by adding other Common Stock equivalents, including stock options, shares issuable on exercise of warrants, convertible preferred stock and convertible notes in the weighted-average number of common shares outstanding for a period, if dilutive. Common stock equivalents that are anti-dilutive were excluded from the computation of diluted earnings per share.
Due to the significant number of common shares outstanding, there is no difference between basic and diluted earnings per share for the year ended June 30, 2014. As such, no reconciliation has been presented.
The Company accounts for all stock-based payments and awards under the fair value based method. Stock-based payments to non-employees are measured at the fair value of the consideration received, or the fair value of the equity instruments issued, or liabilities incurred, whichever is more reliably measurable. The fair value of stock-based payments to non-employees is periodically re-measured until the counterparty performance is complete, and any change therein is recognized over the vesting period of the award and in the same manner as if the Company had paid cash instead of paying with or using equity based instruments on an accelerated basis. The cost of the stock-based payments to non-employees that are fully vested and non-forfeitable as at the grant date is measured and recognized at that date, unless there is a contractual term for services in which case such compensation would be amortized over the contractual term.
The Company accounts for the granting of share purchase options to employees using the fair value method whereby all awards to employees are recorded at fair value on the date of the grant. Share based awards granted to employees with a performance condition are measured based on the probable outcome of that performance condition during the requisite service period. Such an award with a performance condition is accrued if it is probable that a performance condition will be achieved. Compensation costs for stock-based payments to employees that do not include performance conditions are recognized on a straight-line basis. The fair value of all share purchase options is expensed over their requisite service period with a corresponding increase to additional capital surplus. Upon exercise of share purchase options, the consideration paid by the option holder, together with the amount previously recognized in additional capital surplus, is recorded as an increase to share capital.
The Company estimates the fair value of each option award on the date of grant using a Black-Scholes option pricing model that uses the assumptions noted in the table below. The Company estimates the fair value of its common stock using the closing stock price of its common stock on the date of the agreement. The Company estimates the volatility of its common stock at the date of grant based on its historical stock prices. The Company determines the expected life based on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules and post-vesting forfeitures. The Company uses the risk-free interest rate on the implied yield currently available on U.S. Treasury issues with an equivalent remaining term approximately equal to the expected life of the award. The Company has never paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. The Company used the following assumptions for options granted during the twelve months ended June 30, 2014:
The Company estimates forfeitures when recognizing compensation expense and this estimate of forfeitures is adjusted over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures are recognized through a cumulated catch-up adjustment, which is recognized in the period of change, and also impact the amount of unamortized compensation expense to be recognized in future periods. Based upon historical experience of forfeitures, the Company estimated forfeitures at 0% for the year ended June 30, 2014. There were no options issued for the year ended June 30, 2013.
During the year ended June 30, 2013, and as further discussed at Note 4, the Company granted warrants to purchase Common Stock and preferred stock to a certain executive of the Company. For the reasons discussed at Note 12, the Company accounts for these stock-based compensation awards as liability awards. The Company measures liability awards based on the award's intrinsic value on the grant date and then re-measures at each reporting date until a date of settlement. Compensation expense is recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award. Compensation expense for each period until settlement is based on the change in value (or a portion of the change in value, depending on the percentage of the requisite service that has been rendered at the reporting date). Changes in the value of a liability that occur after the end of the requisite service period are considered compensation expense in the periods in which the changes occurs.
Certain items have been reclassified in the 2013 financial statements to conform to the 2014 presentation.
Recently Issued Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our consolidated financial position or results of operations upon adoption.
In May 2014, the FASB issued Accounting Standards Update No.2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.
The standard is effective for the Company in the first quarter of the fiscal year ending June 30, 2019, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The Company is currently evaluating the impact of the adoption of ASU 2014-09 on its consolidated financial statements and has not yet determined the method by which it will adopt the standard.
The entire disclosure for all significant accounting policies of the reporting entity.
Reference 1: http://www.xbrl.org/2003/role/presentationRef
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