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v2.4.0.6
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
9 Months Ended
Sep. 30, 2012
Accounting Policies [Abstract]  
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation and principles of consolidation

 

The accompanying consolidated unaudited interim financial statements and related notes have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) for interim financial information, and with the rules and regulations of the United states Securities and Exchange Commission (“SEC”) to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim financial statements furnished reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. Unaudited interim results are not necessarily indicative of the results for the full year. These unaudited interim financial statements should be read in conjunction with the financial statements of the Company for the year ended December 31, 2011 and notes thereto contained in the Company’s Annual Report on Form 10-K filed with the SEC.

 

Investments for which we possess the power to direct or cause the direction of the management and policies, either through majority ownership or other means, are accounted for under the consolidation method. The consolidated financial statements include the accounts of Entia and TNS. All intercompany accounts have been eliminated for the purpose of the consolidated financial statement presentation.

 

Use of estimates

 

The preparation of consolidated financial statements in conformity with U.S. GAAP 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Cash

 

We consider all highly liquid, short-term investments with original maturities of three months or less when purchased to be cash equivalents.

 

Accounts receivable

 

Accounts receivable are recorded at the invoiced amount, net of allowance for doubtful accounts. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses based on specific identification of accounts in our existing accounts receivable. Outstanding account balances are reviewed individually for collectibility. We determine the allowance based on historical write-off experience, customer specific facts and economic conditions. Bad debt expense is included in general and administrative expenses, if any. We consider all accounts greater than 30 days old to be past due. Account balances are charged off against allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The allowance for doubtful accounts was $2,526 and $2,526 at September 30, 2012 and December 31, 2011, respectively.

 

Inventory

 

Inventory, which consists primarily of raw materials to be used in the production of our dietary supplement products, is stated at the lower of cost or market using the first-in, first-out method. We regularly review our inventory on hand and, when necessary, record a provision for excess or obsolete inventory.

 

Property and equipment

 

Property and equipment are recorded at cost. Additions and improvements that increase the value or extend the life of an asset are capitalized. Maintenance and repairs are expensed as incurred. Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the consolidated statement of operations. Depreciation is computed on a straight-line basis over the following estimated useful lives of the assets:

 

Office equipment   3 years
Production equipment   5 to 7 years
Equipment under capital lease   5 to 7 years
Leasehold improvements   Lesser of lease term or useful life of improvement

 

Patents

 

Patents, once issued or purchased, are amortized using the straight-line method over their economic remaining useful lives. All internally developed process costs incurred to the point when a patent application is to be filed are expensed as incurred and classified as research and development costs. Patent application costs, generally legal costs, are capitalized pending disposition of the individual patent application, and are subsequently either amortized based on the initial patent life granted, generally 15 to 20 years for domestic patents and 5 to 20 years for foreign patents, or expensed if the patent application is rejected. The costs of defending and maintaining patents are expensed as incurred. Upon becoming fully amortized, the related cost and accumulated amortization are removed from the accounts.

 

Impairment of long-lived assets

 

Our long-lived assets, which include property and equipment, patents and licenses of patents, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

 

We assess the recoverability of our long-lived assets by comparing the projected undiscounted net cash flows associated with the related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives.

 

Discount on convertible notes payable

 

We allocate the proceeds received from convertible notes between convertible notes payable and warrants, if applicable. The resulting discount for warrants is amortized using the effective interest method over the life of the debt instrument. After allocating a portion of the proceeds to the warrants, the effective conversion price of the convertible note payable can be determined. If the effective conversion price is lower than the market price at the date of issuance, a beneficial conversion feature is recorded as an additional discount to the convertible note payable. The beneficial conversion feature discount is amortized using the effective interest method over the life of the debt instrument. The amortization is recorded as interest expense on the consolidated statement of operations.

 

Fair value of financial instruments

 

The carrying amounts of our financial assets and liabilities, such as cash, accounts receivable and accounts payable, approximate their fair values because of the short maturity of these instruments. Due to conversion features and other terms, it is not practical to estimate the fair value of notes payable and convertible notes.

 

Fair value measurements

 

We measure fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. We utilize a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1   Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
     
Level 2   Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
     
Level 3   Unobservable inputs where there is little or no market data, which require the reporting entity to develop its own assumptions.

 

We do not have any assets or liabilities measured at fair value on a recurring or a non-recurring basis. Consequently, we did not have any fair value adjustments for assets and liabilities measured at fair value at September 30, 2012 or December 31, 2011, nor any gains or losses reported in the consolidated statement of operations that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date for the periods ended September 30, 2012 and December 31, 2011.

 

Revenue recognition

 

We recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been performed, (iii) amounts are fixed or determinable and (iv) collectibility of amounts is reasonably assured.

 

Revenues from the sale of products, including shipping and handling fees but excluding statutory taxes collected from customers, as applicable, are recognized when shipment has occurred. We sell our products directly to customers. Persuasive evidence of an arrangement is demonstrated via order and invoice, product delivery is evidenced by a bill of lading from the third party carrier and title transfers upon shipment, the sales price to the customer is fixed upon acceptance of the order and there is no separate sales rebate, discount, or volume incentive.

 

Shipping and handling costs

 

Amounts charged to customers for shipping products are included in revenues and the related costs are classified in cost of goods sold as incurred.

 

Advertising and promotion costs

 

Costs associated with the advertising and promotion of our products are expensed as incurred.

 

Equity instruments issued to parties other than employees for acquiring goods or services

 

We account for all transactions in which goods or services are the consideration received for the issuance of equity instruments based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur. Currently such transactions are primarily awards of warrants to purchase common stock.

 

The fair value of each warrant award is estimated on the date of grant using a Black-Scholes option-pricing valuation model.

 

The assumptions used to determine the fair value of our warrants are as follows:

 

The expected life of warrants issued represents the period of time the warrants are expected to be outstanding.
 
The expected volatility is generally based on the historical volatility of comparable companies’ stock over the contractual life of the warrant.
 
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the contractual life of the warrant.
 
The expected dividend yield is based on our current dividend yield as the best estimate of projected dividend yield for periods within the contractual life of the warrant.

 

Income taxes

 

We recognize 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 tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in our consolidated statements of income in the period that includes the enactment date.

 

We 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 our consolidated financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Should they occur, our policy is to classify interest and penalties related to tax positions as income tax expense.

 

Net loss per common share

 

Basic and diluted net loss per share has been computed by dividing our net loss by the weighted average number of common shares issued and outstanding. Convertible preferred stock, options and warrants to purchase our common stock as well as debt which are convertible into common stock are anti-dilutive and therefore are not included in the determination of the diluted net loss per share for three months ending September 30, 2012 and 2011 and the nine months ending September 30, 2012 and 2011. The following table presents a reconciliation of basic loss per share and excluded dilutive securities:

 

      For the Three Months Ended September 30,   For the Nine Months Ended September 30,
      2012   2011   2012   2011
 Numerator:                
 Net loss applicable to common shareholders $    (280,769)   $   (200,793)   $    (996,002)   $   (1,094,903)
 Denominator:                
 Weighted-average common shares outstanding      7,209,206        6,197,676         7,190,229           6,149,050 
 Basic and diluted net loss per share $          (0.04)   $         (0.03)   $          (0.14)   $            (0.18)
 Common stock warrants      2,758,266        1,689,747         2,464,471           1,689,747 
 Series A convertible preferred stock         889,000           415,000            843,000              415,000 
 Stock options           658,240                       -            591,179                          - 
 Convertible debt including interest         400,025           537,865            395,624              537,865 
 Excluded dilutive securities      4,705,531        2,642,612         4,294,274           2,642,612 

 

 

Reclassifications 

 

Certain reclassifications have been made to prior period financial statements and footnotes in order to conform to the current period's presentation.

 

Segments

 

We have determined that we operate in one segment for financial reporting purposes.

 

Recently issued accounting pronouncements

 

Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.