Accounting Policies

12 Months Ended

Dec. 31, 2011

Accounting Policies

Significant Accounting Policies [Text Block]

2.         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires that we make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and disclosure of contingent assets and liabilities.  Actual results could differ significantly from our estimates.

Revenue Recognition

Prior to 2011, we earned revenue in three ways, retained royalties from licensing our clients' and our own technologies to our customer licensees, product sales fees in a business model that allows us to share in the profits of distribution of finished products, and sales of inventory.  We recorded revenue when the terms of the sales arrangement were accepted by all parties, including a fee that was fixed or determinable, delivery had occurred and our customer had taken title, and collectability was reasonably assured.

Prior to 2011, the Company accounted for revenue from device sales in two ways, depending on the nature of the sale.

·Sale of inventory shipped directly from the manufacturer in Korea

The Company recorded revenue net because the manufacturer, GEOMC, was responsible for maintaining control of the inventory, shipping the device(s), had inventory credit risk and we earned a fixed amount.

·Sale of inventory located in the United States

The Company recorded gross revenue, because it was responsible for the inventory and for shipping the device(s).

Beginning in 2011, we earn revenue in two ways: retained royalties from licensing our clients' and our own technologies to our customer licensees, and sales of finished products.  We record revenue when the terms of the sales arrangement are accepted by all parties including a fee that is fixed and determinable, delivery has occurred and our customer has taken title, and collectability is reasonably assured.

In 2011 the Company has taken greater control of the sales process, worldwide.  We are the primary obligor, responsible for delivering devices as well as for training our customers in the proper use of the device.  We deal directly with customers, setting pricing and providing training; work directly with the inventor of the technology to develop specifications and any changes thereto and to select and contract with manufacturing partners; and retain significant credit risk for amounts billed to customers.  Therefore, all product sales are now recorded following a gross revenue methodology. 

Revenue from foreign sources totaled approximately $1,645,000 and $0, in 2011 and in the five-month transition period ended December 31, 2010, respectively.  Of the foreign sourced revenue received, approximately $1,159,000 in fiscal 2011 was from sources in Europe.

Retained royalties or distribution fees earned are of the following types:

Non-refundable, upfront license fee – We record our share of non-refundable, upfront license fees upon execution of a license, sublicense or distribution agreement.  Once delivery is complete, and the fee is collected, we have no continuing obligation.  No upfront fees were received during the year ended December 31, 2011 or the five months ended December 31, 2010.

Royalty or per unit fees – The royalty or per unit rate is fixed in the license or distribution agreement, with the amount earned contingent upon our customer's usage of our technology or sale of our product.  Some agreements may contain stipulated minimum monthly or annual fee payments to CTTC.  We determine the amount of revenue to record when we can estimate the amount earned for a period.  We receive payment or royalty reports on a monthly, quarterly or semi-annual basis indicating usage or sales of licensed technologies or products to determine the revenue earned in the period.  Revenue may fluctuate from one quarter to another based on receipt of reports from customers.

Royalty legal awards – We earn non-recurring revenues from royalty legal awards, principally from patent infringement actions filed on behalf of our clients and/or us.  Patent infringement litigation cases generally occur when a customer or another party ignores our patent rights, or challenges the legal standing of our clients' or our technology rights.  These cases, even if settled out of court, may take several years to complete, and the expenses may be borne by our clients, by us, or shared.  We share royalty legal awards in accordance with the agreement we have with our clients, usually after reimbursing each party for their related legal expenses.  We recognize royalty legal award revenue when our rights to litigation awards are final and unappealable and we have assurance of collecting those awards, or when we have collected litigation awards in cash from the adverse party, or by sale of our rights to another party without recourse, and we have no obligation or are very unlikely to be obligated to repay such collected amounts.  Proceeds from cases settled out of court are recorded as retained royalties. 

Legal awards in patent infringement cases usually include accrued interest through the date of payment, as determined by the court.  The court awards interest for unpaid earned income.  Interest may also be included in other settlements with customers.  Interest included in an award or settlement is generally recorded as interest income when received.

Unless otherwise specified, we record all other revenue, as earned.

Concentration of Revenues

Total revenue consists of revenue from product sales, gain on sales of rental assets, retained royalties, and other income.  In fiscal 2011,we derived approximately $3,329,000, or 97%, of  total revenue from sales of our Calmare pain therapy medical device technology.  An additional 2% of revenue derived indirectly from that technology through sales of supplies and training, rental payments and the sale of rental assets.  Of this amount, approximately $1,060,000 or 32% was received from one customer.  We continue to seek revenue from new technology licenses to mitigate the concentration of revenues, and replace revenue from expiring licenses.  We have created a business model for appropriate technologies, such as the Calmare device, that allows us to move beyond our usual royalty arrangement and share in the profits of distribution.

Expenses

We recognize expenses related to evaluating, patenting and licensing inventions, and enforcing intellectual property rights in the period incurred.

Cost of product sales includes contractual payments to inventor and manufacturer relating to our Calmare pain therapy medical device.  Expenses associated with shipping devices which are not reimbursed by customers are also included in cost of product sales.

Selling Expenses include commission expenses related to sales of inventory (Calmare devices) technologies, domestic and foreign patent legal filing, prosecution and maintenance expenses, net of reimbursements, royalty audits, and other direct costs

Personnel and consulting expenses include employee salaries and benefits, marketing and consulting expenses related to technologies and specific revenue initiatives, and other direct costs. 

General and administrative expenses include directors' fees and expenses, public company related expenses, professional services, including financing, audit and legal services, rent and other general business and operating expenses.

Fair Value of Financial Instruments

The Company believes the carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other liabilities, deferred revenue, preferred stock liability and note payable approximate fair value due to their short-term maturity.

Cash and Cash Equivalents

Cash and cash equivalents consist of demand deposits and interest earning investments with maturities of three months or less, including overnight bank deposits and money market funds.  Cash equivalents are carried at cost.

Inventory

            Inventory consists of finished product of our pain therapy device.  Inventory is stated at lower of cost (first in, first out) or market. 

Property and Equipment

Property and equipment are carried at cost less an allowance for depreciation.  Expenditures for normal maintenance and repair are charged to expense as incurred.  The costs of depreciable assets are charged to operations on a straight-line basis over their estimated useful lives, three to five years for equipment, or the terms of the related lease for leasehold improvements.  The cost and related accumulated depreciation or amortization of property and equipment are removed from the accounts upon retirement or other disposition, and any resulting gain or loss is reflected in earnings.

Impairment of Long-lived Assets

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.  If the estimated fair value is less than the carrying amount of the asset, we record an impairment loss.  If a quoted market price is available for the asset or a similar asset, we use it to determine estimated fair value.  We re-evaluate the remaining useful life of the asset and adjust the useful life accordingly.  There were no impairment indicators identified during the year ended December 31, 2011 and the five months ended December 31, 2010.

Income Taxes

Income taxes are accounted for under an asset and a liability approach that requires recognition of deferred income tax assets and liabilities for the expected future consequences of events that have been recognized in the Company's financial statements and income tax returns.  The Company provides a valuation allowance for deferred income tax assets when it is considered more likely than not that all or a portion of such deferred income tax assets will not be realized.

Net Income (Loss) Per Share

We calculate basic net income (loss) per share based on the weighted average number of common shares outstanding during the period without giving any effect to potentially dilutive securities.  Net income (loss) per share, assuming dilution, is calculated giving effect to all potentially dilutive securities outstanding during the period.

Share-Based Compensation

The Company accounts for its share-based compensation in accordance with the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") 718 – "Compensation – Stock Compensation."  Accordingly, the Company recognizes compensation expense equal to the fair value of the stock awards at the time of the grant over the requisite service period.

Our accounting for share-based compensation has resulted in our recognizing non-cash compensation expense related to stock options granted to employees, which is included in personnel and consulting expenses, and stock options granted to our directors, which is included in general and administrative expenses.

Fiscal Year

Our fiscal year ends December 31, and our first, second, third and fourth quarters end March 31, June 30, September 30 and December 31, respectively.  Prior to December 2010, our fiscal year ended July 31, with our first, second, third and fourth quarters end October 31, January 31, April 30 and July 31, respectively.  To accomplish the change to our fiscal year, we had a transition period from August 1, 2010 to December 31, 2010.

Recent Accounting Pronouncements

Fair Value Disclosures.  In January 2010, the FASB issued an accounting standards update that requires new disclosures for transfers in and out of Levels 1 and 2 fair value measurements, and roll forward of activity in Level 3 fair value measurements.  The new disclosures are effective for reporting periods beginning after December 15, 2009, except for the roll forward of activity in Level 3 fair value measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2010.  Upon adoption, this standard did not have a material impact on the financial statements.

No other new accounting pronouncements issued or effective during the fiscal year has had or is expected to have a material impact on the consolidated financial statements.

3.         INCOME TAXES

In current and prior years, we generated significant federal and state income and alternative minimum tax losses, and these net operating losses ("NOLs") were carried forward for income tax purposes to be used against future taxable income. 

A reconciliation of our effective income tax rate compared to the U.S. federal statutory rate is as follows:

	Year ended December 31, 2011	Five months ended December 31, 2010
Provision (benefit) at U.S. federal statutory rate	(34.0)%	(34.0)%
State provision (benefit), net of U.S. federal tax	(4.9)	(4.9)
Permanent differences	0.1	0.1
Expiration of capital loss carryforwards	-	-
Other items	(1.9)	0.9
Deferred tax valuation allowance	(40.7)	37.9
Effective income tax rate	0.0%	0.0%

Net deferred tax assets consist of the following:

	Year ended December 31, 2011	Five months ended December 31, 2010
Net federal and state operating loss carryforwards	$   13,603,574	$   12,201,203
Impairment of investments	524,388	529,203
Other, net	523,473	454,793
Deferred tax assets	14,651,435	13,185,199
Valuation allowance	(14,651,435)	(13,185,199)
Net deferred tax assets	$                   -	$                   -

At December 31, 2011, we had aggregate federal net operating loss carryforwards of approximately $33,599,000, which expire at various times through 2031.  A majority of our federal NOLs can be used to reduce taxable income used in calculating our alternative minimum tax liability.  We also have state net operating loss carryforwards of approximately $28,455,000 that expire through fiscal year 2031.

Approximately $4,053,000 of our NOL carryforward remaining at December 31, 2011 was derived from income tax deductions related to the exercise of stock options.  The tax effect of these deductions will be credited against capital in excess of par value at the time they are utilized for book purposes, and not credited to income.  We will never receive a benefit for these NOLs in our statement of operations.

Changes in the valuation allowance were as follows:

	Year ended December 31, 2011	Five months ended December 31, 2010
Balance, beginning of year	$     13,185,199	$       12,387,300
Change in temporary differences	68,680	(21,960)
Change in net operating and capital losses	1,397,556	819,859
Balance, end of year	$     14,651,435	$       13,185,199

Our ability to derive future tax benefits from the net deferred tax assets is uncertain and therefore we continue to provide a full valuation allowance against the assets, reducing the carrying value to zero.  We will reverse the valuation allowance if future financial results are sufficient to support a carrying value for the deferred tax assets.

At December 31, 2011 and December 31, 2010, we had no uncertain tax positions. 

We include interest and penalties on the underpayment of income taxes in income tax expense. 

We file income tax returns in the United States and Connecticut.  The Internal Revenue Service has completed audits for the periods through the fiscal year ended July 31, 2005.  Our open tax years for review are fiscal years ending July 31, 2009 through year ended December 31, 2011.  The Company's returns filed with Connecticut are subject to audit as determined by the statute of limitations.