Significant Accounting Policies

6 Months Ended

Jun. 30, 2011

Significant Accounting Policies [Text Block]

Note 4 - Significant Accounting Policies

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Such estimates and assumptions impact, among others, the following: the estimated useful lives for amortizable software, debt issue costs and licensing costs, accrued expenses, derivative liabilities, vendor rebate liability, sales returns and the fair value of common stock granted in connection with various transactions. Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from its estimates. The Company intends to re-evaluate all of its accounting estimates at least quarterly and record adjustments, when necessary.

Cash and Cash Equivalents

All highly liquid investments with an original maturity of 90 days or less when purchased are considered to be cash equivalents. Cash equivalents are stated at cost, which approximates market value. The Company minimizes credit risk associated with cash and cash equivalents by periodically evaluating the credit quality of its primary financial institutions. At times, its cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation insurance limit. The Company had no uninsured balances at June 30, 2011.

Restricted Cash

Restricted cash is restricted for use for investment and public relation expenditures only in accordance with the terms of the issuance of the convertible notes payable (See Note 9).

Accounts Receivable

Accounts receivable are carried at the expected net realizable value. The allowance for doubtful accounts is based on management’s assessment of the collectability of specific customer accounts and the aging of the accounts receivable. In addition, based on historical information, management estimates the amount of returned or damaged product and customers’ advertising allowances that may be deducted from outstanding accounts receivable. If there were a deterioration of a major customer’s creditworthiness, or actual defaults or allowances were higher than historical experience, our estimates of the recoverability of amounts due to us could be overstated, which could have a negative impact on operations.

Inventories

Inventories consist of vitamins and related health and nutritional products and are carried at the lower of cost or net realizable value. Cost is based solely on the amount paid by the Company to third parties.

Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization is calculated on a straight-line basis over the estimated useful lives of the related assets, which ranges from two to five years. The costs of leasehold improvements are amortized over the lesser of the estimated useful lives of the assets or the length of the related lease. Maintenance and repairs are charged to expense as incurred, costs of major additions and betterments are capitalized. When property and equipment is sold or otherwise disposed of, the cost and related accumulated depreciation is eliminated from the accounts and any resulting gain or loss is reflected in income.

Convertible Instruments

The Company accounts for hybrid contracts such as notes that feature conversion option in accordance with Accounting Standards Codification 815 “Derivatives and Hedging Activities,” (“ASC 815”). ASC 815 requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria includes circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. Conversion options that contain variable settlement features such as provisions to adjust the conversion price upon subsequent issuance of equity or equity linked securities at exercise prices more favorable than that featured in the hybrid contract, generally result in their bifurcation from the host instrument.

The Company accounts for convertible instruments (when the Company has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance with ASC 470-20 “Debt with Conversion and Other “ (“ASC470-40”). Under ASC 470-20 discounts to convertible notes, when necessary, are recognized for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. The Company accounts for convertible instruments (when it has determined that the embedded conversion options should be bifurcated from their host instruments) in accordance with ASC 815. Under ASC 815, a portion of the proceeds received upon the issuance of the hybrid contract are allocated to the fair value of the derivative. The derivative is subsequently marked to market at each reporting date based on current fair value, with the changes in fair value reporting in results of operations.

Note Payable Conversion Feature and Other Derivative Instruments

The Company’s free standing derivatives include conversion option embedded in its convertible notes issued in April 2011. The Company evaluated the conversion option in accordance with the provisions of ASC 815 and determined that the conversion option has all of the characteristics of a derivative in its entirety that does not qualify for an exception to the derivative accounting rules. Specifically, the exercise price of the conversion option is not fixed at any time during the term of the note based on the occurrence or non-occurrence of certain events and also entitles the counterparty to an adjustment of the exercise price in the event that the Company subsequently issues equity securities or equity linked securities at prices more favorable than the exercise price of the conversion option embedded in the notes. Accordingly, the conversion option is not indexed to the Company’s own stock. The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provides a choice of net-cash settlement or settlement in the Company’s own shares (physical settlement or net-share settlement) providing that such contracts are indexed to the Company’s own stock as defined in ASC 815-40 “Contract in Entity’s Own Equity”. The Company classifies as liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the Company’s control) or (ii) gives the counter party a choice of net-settlement or settlement in shares (physical or net-share settlement). The Company assesses classification of common stock purchase warrants and other free standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required.

The Company’s free standing derivatives include warrants to purchase common stock that were issued with the Convertible Notes Payable described in Note 9. The Company evaluated the common stock purchase warrants to assess their proper classification in the balance sheets as of June 30, 2011 using the applicable classification criteria enumerated under GAAP. The potential of a dilutive adjustment to the Warrants’ exercise price and number of underlying shares of Common Stock may result in a settlement amount that does not equal the difference between the fair value of a fixed number of the Common Stock and at a fixed exercise price. Accordingly, the Warrants are not considered indexed to the Company’s own stock and, therefore, are accounted for as a derivative liability in the accompanying condensed consolidated balance sheet as of June 30, 2011.

Revenue Recognition

The Company generates revenue from the sales of its vitamin and related health and nutritional products directly to consumers through its Entrepreneurs and retail marketing network. Revenue is recognized when all of the following conditions exist: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the sales price is fixed or determinable, and (4) collectability is reasonably assured.

The Company accounts for payments made to customers in accordance with ASC 605 “Revenue Recognition” (“ASC 605”), which states that cash consideration (including a sales incentive) given by a vendor to a customer is presumed to be a reduction of the selling prices of the vendor’s products or services and, therefore, should be characterized as a reduction of revenue when recognized in the vendor’s income statement, rather than a sales and marketing expense. The Company has various agreements with customers that provide for discounts and rebates. These agreements are classified as a reduction of revenue. Certain other costs associated with customers that meet the requirements of ASC No. 605 are recorded as sales and marketing expense. Vendor considerations recorded as a reduction of sales were $382,074 and $0 for the three and six months ended June 30, 2011 and 2010, respectively.

Revenue is recognized at the time products are shipped. The Company generally requires cash or credit card payment at the point of sale for sales to Entrepreneurs. The compensation plan for the Company’s Entrepreneurs generally does not provide rebates or selling discounts to Entrepreneurs who purchase its products and services.

Product Return Policy

Refunds are allowed only to Entrepreneurs who have given voluntary termination notices, or for incorrect or defective items. In these circumstances only, the Company provides a 30-day return policy. For the products sold through the retail network, returns are allowed only for incorrect or defective items.

For products sold to customer through the retail marketing network, we guarantee customer satisfaction. Our policy requires the customer to return the unused product to the retailer from whom they originally purchased it. We pay the retailer for the returned product plus a handling cost. We review gross revenue for estimated returns. The estimated returns are based on historical and industry experience. However, the estimate for product returns does not reflect the impact of a large product recall resulting from product nonconformance or other factors as such events are not predictable nor is the related economic impact estimable. We periodically assess the adequacy of this policy and record a liability as necessary. As of June 30, 2011, no reserve was recorded as any reserve was deemed to be immaterial.

Deferred Revenue

The Company requires cash or credit card payment at the time of sale. Any payments that are received prior to shipment are recorded as deferred revenue until the specific product is shipped as described above, at which time, it is recorded as revenue.

Advertising

Advertising costs are expensed as they are incurred and are included in selling, general and administrative expenses. Advertising expense was $1,192 and $0 for the three months ended June 30, 2011 and 2010, respectively, and $1,192 and $0, respectively, for the six months ended June 30, 2011 and 2010.

Shipping and Handling Costs

The Company’s shipping and handling costs are included in revenue, with the corresponding expense in cost of sales.

Entrepreneur Incentives

Entrepreneur incentives expenses include all forms of commissions, compensation, bonuses and other incentives paid to our founder and entrepreneurs.

Selling, General and Administrative

Selling, general and administrative expenses include wages and benefits, depreciation and amortization, rents and utilities, Entrepreneur event costs, professional fees and marketing.

Share-Based Payment Arrangements

Generally, all forms of share-based payments, including stock option grants, restricted stock grants and stock appreciation rights are measured at their fair value on the awards’ grant date, based on the estimated number of awards that are ultimately expected to vest. Share-based compensation awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable. The expense resulting from share-based payments are recorded in cost of goods sold or general and administrative expense in the statement of operations, depending on the nature of the services provided.

Income Taxes

The Company accounts for income taxes in accordance with accounting guidance now codified as Financial Accounting Standards Board (“FASB”) ASC Topic 740, “ Income Taxes ,” which requires that the Company recognize deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense) results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when it is more likely than not that some or all deferred tax assets will not be realized.

Accounting guidance clarifies the accounting for uncertainties in income taxes recognized by prescribing guidance for the recognition, de-recognition and measurement in financial statements of income tax positions taken in previously filed tax returns or tax positions expected to be taken in tax returns, including a decision whether to file or not to file in a particular jurisdiction. Accounting guidance requires that any liability created for unrecognized tax benefits be disclosed. The application of accounting for income taxes may also affect the tax bases of assets and liabilities and therefore may change or create deferred tax liabilities or assets. The Company would recognize interest and penalties related to unrecognized tax benefits in income tax expense. At June 30, 2011, The Company did not record any liabilities for uncertain tax positions.

Net Loss per Share

Basic earnings per share (“EPS”) is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to all dilutive potential of shares of common stock outstanding during the period including stock options or warrants, using the treasury stock method (by using the average stock price for the period to determine the number of shares assumed to be purchased from the exercise of stock options or warrants), and convertible debt or convertible preferred stock, using the if-converted method. Diluted EPS excludes all dilutive potential of shares of common stock if their effect is anti-dilutive.

The computation of basic and diluted loss per share for the year ended June 30, 2011 excludes the following potentially dilutive securities because their inclusion would be anti-dilutive:

	For the Period Ended June 30, 2011
Convertible Debentures		172,600
Stock Warrants		9,380,753
Stock Options		3,000,000
		12,553,353

Reclassification

Prior period amounts are reclassified, when necessary, to conform to the current period presentation.

New Accounting Pronouncements

In May 2011, the FASB issued guidance related to fair value measurements and disclosures in the financial statements. This guidance conforms the wording to describe many of the requirements in U.S. GAAP to International Financial Reporting Standards to ensure the related standards are consistently applied. The guidance also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is effective during interim and annual periods beginning after December 15, 2011 and is to be applied prospectively. The adoption of this standard will not materially expand the Company’s consolidated financial statement footnote disclosures.

- Definition

The entire disclosure for all significant accounting policies of the reporting entity.

+ References+ Details

LTS Nutraceuticals, Inc. 10-Q/A