NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Rounded in thousands)
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. These financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto for the year ended September 30, 2013 included in the Xenonics Holdings, Inc.
(“Holdings”) Form 10-K filing. The results for the interim period are not necessarily indicative of the results for the full fiscal year.
The condensed consolidated financial statements include the accounts of Holdings and its wholly-owned subsidiary, Xenonics, Inc.
(“Xenonics”), collectively, the “Company”.
The Company’s financial statements are prepared using generally accepted accounting principles in the United States of
America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. At this time the Company has not yet received pending substantial purchase orders for its products to
cover their operating costs and liquidate outstanding notes payable which raises doubt about its ability to continue as a going concern.
The future of the Company as an operating business will depend on its ability to (1) obtain purchase orders and ship its products,
(2) collect for shipments in a timely manner, (3) continue to exercise tight cost controls to conserve cash and attain profitable operations, and (4) obtain sufficient financing as may be required to sustain its operations.
The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going
concern. If the Company is unable to obtain adequate revenues and financing, it could be forced to cease operations.
|
3.
|
RECENT ACCOUNTING PRONOUNCEMENTS
|
The Company reviews new accounting standards as issued. Although some of these accounting standards issued are effective
after the end of the Company’s previous fiscal year may be applicable to the Company, it has not identified any standards that it believes merit further discussion. The Company believes that none of the new standards will have a significant
impact on its consolidated financial statements.
|
4.
|
EARNINGS (LOSS) PER SHARE
|
Earnings (loss) per share is computed by dividing the income available to common shareholders by the weighted average number
of common shares outstanding. Diluted earnings per share is computed similarly to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential
additional common shares that were dilutive had been issued. Common share equivalents are excluded from the computation if their effect is anti-dilutive. The Company’s common share equivalents consist of stock options and warrants.
4
The diluted earnings per share did not include the dilutive effect, if any, from the potential
exercise of stock options and warrants and convertible notes payable outstanding using the treasury stock method, because the exercise prices for all of the stock options and warrants outstanding was greater than the average stock price for the
period. For the three and nine months ended June 30, 2014, the number of stock options (not including performance options) and warrants excluded was 7,437,000. For the three and nine months ended June 30, 2013, the number of stock options
and warrants excluded was 5,349,000.
|
5.
|
ACCOUNTS RECEIVABLE SOLD TO RELATED PARTY
|
The Company sells, without recourse, selected receivables to a stockholder of the Company. For the three and nine months
ended June 30, 2014 the aggregate amount of the receivables sold was $60,000. Receivables are sold at a 2% discount and the purchaser receives all cash collections.
Inventories were comprised of :
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
|
September 30,
2013
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Raw materials
|
|
$
|
1,054,000
|
|
|
$
|
920,000
|
|
|
Work in process
|
|
|
35,000
|
|
|
|
89,000
|
|
|
Finished goods
|
|
|
408,000
|
|
|
|
625,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,497,000
|
|
|
|
1,634,000
|
|
|
Less: Current portion
|
|
|
(1,017,000
|
)
|
|
|
(1,154,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
480,000
|
|
|
$
|
480,000
|
|
|
|
|
|
|
|
|
|
|
|
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of
America, 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 financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s most significant estimates relate to the valuation of inventories and its evaluation of goodwill impairment.
On July 15, 2009 the Company borrowed $525,000 under the terms of promissory notes due July 15, 2012 with interest
only payments due quarterly at an annual rate of 13%.
In connection with the notes payable transaction, the Company granted and issued
525,000 warrants with an exercise price of $0.75 and valued the warrants at $250,000 using the Black-Scholes option-pricing model and the following assumptions: the market price was $0.68, the volatility was estimated at 104%, the life of the
warrants was 5 years, the risk free rate was 2.06% and the dividend yield of 0%. The value assigned for the warrants issued in conjunction with the notes payable was recorded as debt discount and is being amortized over the three year life of the
notes. Pursuant to the terms of the promissory notes, the exercise price for the warrants was adjusted to $0.65 in April 2010 when the Company issued warrants at that lower price in connection with a stock offering. The Company recorded a valuation
adjustment in 2010 of $6,000 for this change in the exercise price. Because the debt discount had already been fully amortized, for the three and six months ended March 31, 2014 and 2013 the Company did not record any amortization for this
transaction.
On December 7, 2011 the Company and the holders of the promissory notes agreed to amend the due date to
October 15, 2012. In conjunction with the amendment, the Company amended the warrants issued with the original notes to lower the exercise price from $0.65 per share to $0.40 per share. The Company evaluated these amendments under ASC 470-50,
Debt-Modification and Extinguishment, and concluded that the amendments were not significant and were therefore treated as debt modification.
5
On March 19, 2012 the Company agreed (1) to reduce the exercise price of warrants to
purchase a total of 525,000 shares of the Company’s common stock from $0.40 to $0.285 per share and (2) to extend the expiration date of those warrants from July 15, 2014 to July 15, 2017. As a result, the Company recognized
additional compensation expense of $26,000 for the year ended September 30, 2012.
On March 19, 2012 the Company borrowed
$500,000 under the terms of a promissory note. Repayment of the promissory note is secured by a first lien security interest in all of the Company’s assets and was due no later than December 31, 2012, subject to earlier repayment upon the
Company’s receipt of purchase orders. A total of $50,000 of interest was paid on the loan.
On May 22, 2012 the Company borrowed
an additional $500,000 under the terms of a promissory note. Repayment of the promissory note was due no later than December 31, 2012, subject to earlier repayment upon the Company’s receipt of purchase orders. A total of $50,000 of
interest was prepaid on the loan and was amortized over the term of the loan.
On October 15, 2012 the Company and the holders of the
promissory notes totaling $525,000, agreed to amend the maturity dates to October 15, 2013. In conjunction with the amendment, the Company granted and issued 525,000 warrants with an exercise price of $0.285 and valued the warrants at $94,000
using the Black-Scholes option-pricing model and the following assumptions: the market price was $0.23, the volatility was estimated at 114%, the life of the warrants was 5 years, the risk free rate was 0.67% and the dividend yield of 0%. The value
assigned to the warrants issued in conjunction with the amendment of the notes payable will be recorded as a debt discount and amortized over the one year extended life of the notes. The Company evaluated amendment under ASC 470, “
Deb
t
- Modification and Extinguishment,” and concluded that the extension and additional warrants resulted in significant and consequential changes to the economic substance of the debt and thus resulted in an extinguishment of the debt. The
extinguishment of the debt had an insignificant impact on the condensed statement of operations for the period ended March 31, 2013.
On December 20, 2012 the Company and the holders of the two promissory notes totaling $1,000,000 agreed to amend the due dates to
January 15, 2013. The Company evaluated the amendment under ASC 470-50, Debt-Modification and Extinguishment, and concluded that the amendment was not significant and was therefore treated as debt modification.
On December 20, 2012 the Company borrowed $75,000 under the terms of promissory notes with interest at an annual rate of 13%. Repayment
of the promissory notes is secured by a first lien security interest in all of the Company’s assets and is due no later than January 15, 2013.
On January 23, 2013, the Company entered into an Agreement dated as of January 22, 2013 and closed the transactions contemplated by
the Agreement. Pursuant to the Agreement:
|
|
•
|
|
The maturity date of the two $500,000 loans to the Company, and secured by substantially all of the Company’s assets, was extended from January 15, 2013 to October 31, 2013 and the interest rate on each
loan was increased to 13% per annum. In conjunction with the amendment, the Company granted and issued 400,000 warrants with an exercise price of $0.14 and valued the warrants at $49,000 using the Black-Scholes option-pricing model and the
following assumptions: the market price was $0.15, the volatility was estimated at 137%, the life of the warrants was 5 years, the risk free rate was 0.76% and the dividend yield of 0%. The value assigned for the warrants issued in conjunction with
the amendment of the notes payable will be amortized over the one year extended life of the notes. The Company evaluated the amendment under ASC 470-50, Debt-Modification and Extinguishment, and concluded that the amendment was not significant and
was therefore treated as debt modification;
|
6
|
|
•
|
|
The Company repaid in full the $75,000 promissory notes, and
|
|
|
•
|
|
The Company borrowed additional funds in the aggregate principal amount of $450,000, for which repayment is secured by substantially all of the assets of the Company, and bears interest at the rate of 13% per
annum, and are repayable in full on October 31, 2013. In connection with the notes payable transaction, the Company granted and issued 450,000 warrants with an exercise price of $0.14 and valued the warrants at $55,000 using the Black-Scholes
option-pricing model and the following assumptions: the market price was $0.15, the volatility was estimated at 137%, the life of the warrants was 5 years, the risk free rate was 0.76% and the dividend yield of 0%. The value assigned to the warrants
issued in conjunction with the notes payable was recorded as debt discount and is being amortized over the nine-month life of the notes.
|
On October 31, 2013, the due dates for the principal balances for all of these loans were extended to December 15, 2014 pursuant to
an agreement between the Company and the holders of the promissory notes.
On December 10, 2013 the Company and the holders of the
unsecured promissory notes for $525,000 agreed to amend the due date to October 15, 2014. In conjunction with the amendment, the Company granted and issued 262,500 warrants with an exercise price of $0.12 and valued the warrants at $18,000
using the Black-Scholes option-pricing model with the following assumptions: the market price was $0.08, the volatility was estimated at 139%, the life of the warrants was 5 years, the risk free rate was 1.51% and the dividend yield of 0%. The value
assigned for the warrants issued in conjunction with the amendment of the notes payable will be amortized over the one year extended life of the notes. The Company evaluated amendment under ASC 470, “
Deb
t—Modification and
Extinguishment,” and concluded that the extension and additional warrants resulted in significant and consequential changes to the economic substance of the debt and thus resulted in an extinguishment of the debt.
On December 10, 2013, the Company and the holders of the secured promissory notes for $1,450,000 agreed to amend the due dates for the
principal balances for these loans to October 15, 2014 pursuant to an agreement between the Company and the holders of the promissory notes. In conjunction with the agreement, the Company modified the term and the exercise price of existing
warrants held by all of the holders of these promissory notes and granted and issued 725,000 new warrants with an exercise price of $0.12 and valued the warrants at $50,000 using the Black-Scholes option-pricing model with the following assumptions:
the market price was $0.08, the volatility was estimated at 139%, the life of the warrants was 5 years, the risk free rate was 151% and the dividend yield was 0%. The value assigned for the warrants issued in conjunction with the amendment of the
notes payable will be amortized over the one year extended life of the notes. The Company evaluated the amendment under ASC 470-50, Debt-Modification and Extinguishment, and concluded that the amendment was not significant and was therefore treated
as a debt modification.
On December 10, 2013 the Company borrowed $200,000 under the terms of promissory notes with interest at an
annual rate of 18%. Repayment of the promissory notes is secured by a first lien security interest in all of the Company’s assets and is due no later than January 31, 2014. The note holders also expected the Company would raise an
additional $200,000 from other investors in January 2014. The note holders of the additional $200,000 loans will extend the due dates for these new loans to October 15, 2014 if the Company closes the new $200,000 debt financing by
January 31, 2014 and agrees to a prepayment schedule based the Company’s cash flow. The Company did not raise the additional $200,000 by January 31, 2014. Therefore, the $200,000 borrowed on December 10, 2013 became due on
January 31, 2014.
7
On January 24, 2014 the Company borrowed $125,000 under the terms of an assignment of
purchase order with an interest at the rate of 2% per month. Repayment is due upon customer payment. On March 13, 2014 the Company borrowed $126,000 under the terms of an assignment of purchase order with an interest at the rate of
2% per month. Repayment is due upon customer payment. Both of these loans were repaid in May 2014.
On April 7, 2014 the Company
borrowed $50,000 under the terms of a promissory note with interest at an annual rate of 10% and is due no later than October 15, 2014. In conjunction with this loan, the Company granted and issued 250,000 warrants with an exercise price of
$0.12 and valued the warrants at $19,000 using the Black-Scholes option-pricing model and the following assumptions: the market price was $0.08, the volatility was estimated at 173%, the life of the warrants was 5 years, the risk free rate was 1.68%
and the dividend yield of 0%. The value assigned to the warrants issued will be recorded as a debt discount and amortized over the life of the note.
On April 18, 2014 the Company borrowed $25,000 under the terms of a promissory note with interest at an annual rate of 18% and is due no
later than October 15, 2014.
On April 21, 2014 the Company borrowed $25,000 under the terms of a promissory note with interest
at an annual rate of 18% and is due no later than October 15, 2014.
The Company issued $100,000 in convertible notes on May 22,
2014. These notes require quarterly interest payments at a rate of 13% per annum and mature on May 22, 2017. They are convertible at any time to shares of stock at $0.07 per share. The Company paid a commission of $9,000 and issued
208,330 warrants with an exercise price of $0.12 per share as further compensation to the broker dealer who raised these funds.
The
warrants issued to the broker dealer was valued using the Black Scholes valuation model, assuming an expected life of 5 years, an annual volatility factor of 161%, a risk free interest rate of 1.57%, and a dividend yield of 0%. The debt discount on
these convertible notes payable will be amortized over the life of the notes from May 22, 2014 through May 22, 2017 on a straight line basis that approximates the effective interest rate method. In addition these notes have a beneficial
conversion feature which resulted in an increase in debt discount and additional paid in capital of $57,000.
On May 27, 2014 the
Company signed and Engagement letter with Sandlapper Securities LLC for a private offer and placement of three-year Convertible Senior Secured Notes up to $1,000,000, with interest at 13% per annum and an initial conversion price of $0.07 per
share. Fees to be paid to Sandlapper include a 9% cash placement fee and five-year warrants to purchase 2.0833 shares of common stock of the Company for each dollar raised. As of June 30, 2014 the Company had received gross proceeds of
$100,000. As of August 8, 2014 the Company had received additional gross proceeds of $215,000.
On June 25, 2014 the Company
borrowed $20,000. This loan was repaid on July 10, 2014.
8
Notes Payable
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
|
September 30,
2013
|
|
|
Secured note payable maturing on December 15, 2014, bearing interest at 13% per annum
|
|
$
|
500,000
|
|
|
$
|
—
|
|
|
Secured note payable maturing on December 15, 2014, bearing interest at 13% per annum
|
|
|
450,000
|
|
|
|
—
|
|
|
Secured note payable maturing on October 15, 2014, bearing interest at 13%
|
|
|
500,000
|
|
|
|
—
|
|
|
Secured note payable maturing on October 31, 2014, bearing interest at 18% per annum, net of debt discount of $23,000 at
June 30, 2014
|
|
|
177,000
|
|
|
|
—
|
|
|
Unsecured note payable, maturing on October 15, 2014, bearing interest at 10% per annum, net of debt discount of
$10.000
|
|
|
40,000
|
|
|
|
—
|
|
|
Unsecured notes payable, maturing on October 15, 2014, bearing interest at 18% per annum
|
|
|
50,000
|
|
|
|
—
|
|
|
Unsecured note payable, maturing in July, 2014
|
|
|
20,000
|
|
|
|
—
|
|
|
Unsecured notes payable, maturing on December 15, 2014, bearing interest at 13% per annum
|
|
|
525,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term debt obligations
|
|
$
|
2,262,000
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured note payable maturing on December 15, 2014, bearing interest at 13% per annum, net of debt discount of $3,000 at
September 30, 2013
|
|
|
—
|
|
|
$
|
497,000
|
|
|
Secured note payable maturing on December 15, 2014, bearing interest at 13% per annum, net of debt discount of $5,000 at
September 30, 2013
|
|
|
—
|
|
|
|
445,000
|
|
|
Secured note payable maturing on October 15, 2014, bearing interest at 13% per annum, net of debt discount of $3,000 at
September 30, 2013
|
|
|
—
|
|
|
|
497,000
|
|
|
Secured convertible notes payable, maturing on May 22, 2017, bearing interest at 13% per annum, net of debt discount of
$57,000
|
|
|
43,000
|
|
|
|
—
|
|
|
Unsecured notes payable, maturing on December 15, 2013, bearing interest at 13% per annum, net of debt discount of $2,000 at
September 30, 2013
|
|
|
—
|
|
|
|
523,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term obligations
|
|
$
|
43,000
|
|
|
$
|
1,962,000
|
|
|
|
|
|
|
|
|
|
|
|
9
|
9.
|
STOCK BASED COMPENSATION
|
Stock Options
- US GAAP requires that compensation cost relating to share-based payment arrangements be
recognized in the financial statements. US GAAP requires measurement of compensation cost for all employee share-based awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest.
The fair value of stock options is determined using the Black-Scholes valuation model. Such fair value is recognized as expense over the service period, net of estimated forfeitures.
US GAAP requires that equity instruments issued to non-employees in exchange for services be valued at the more accurate of the fair
value of the services provided or the fair value of the equity instruments issued. For equity instruments issued that are subject to a required service period the expense associated with the equity instruments is recorded as the instruments vest or
the services are provided. The Company has granted options and warrants to non-employees and recorded the fair value of these equity instruments on the date of issuance using the Black-Scholes valuation model. The Company has granted stock to
non-employees for services and values the stock at the more reliable of the market value on the date of issuance or the value of the services provided. For grants subject to vesting or service requirements, expenses are deferred and recognized over
the more appropriate of the vesting period, or as services are provided.
In July 2003, the Company’s board of directors adopted a
stock option plan. Under the 2003 option plan, options to purchase up to 1,500,000 shares of common stock are available for employees, directors, and outside consultants.
In December 2004, the Company’s board of directors adopted a 2004 stock incentive plan. The Company may issue up to 1,500,000 shares
of common stock under the 2004 plan and no person may be granted awards during any twelve-month period that cover more than 300,000 shares of common stock.
The fair value of each option award is estimated on the date of grant using the Black-Scholes valuation model. There were 2,305,000
performance options granted during the nine months ended June 30, 2013, all of which were subject to a requirement that the Company reports Income from Operations for the fiscal year ended September 30, 2013, not including the non-cash
charge for these options. Subsequently the requirement that the Company reports Income from Operations, not including the non-cash charge for these options, was extended to the fiscal year ended September 30, 2014. There were no options granted
during the nine months ended June 30, 2014.
Expected volatility is determined based on historical volatility. Expected life is
determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards and vesting schedules. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time
of grant. Share-based compensation expense recognized is based on the options ultimately expected to vest. US GAAP requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimated. Forfeitures were estimated based on the Company’s historical experiences.
10
A summary of the Company’s stock option activity as of June 30, 2014, and changes
during the nine months then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Contractual
Term (Years)
|
|
|
Aggregate
Intrinsic Value *
|
|
|
Outstanding at October 1, 2013
|
|
|
2,305,000
|
|
|
$
|
0.18
|
|
|
|
4.39
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
Forfeited, Expired or Cancelled
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2014
|
|
|
2,305,000
|
|
|
$
|
0.18
|
|
|
|
3.64
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2014
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
The aggregate intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. The market value of our stock was $0.11 at June 30, 2014.
|
There were 2,305,000 non-vested stock options as of June 30, 2014.
There was no compensation expense related to outstanding options for the three and nine months ended June 30, 2014 and 2013.
Stock warrants –
The Company recognizes the value of stock warrants issued based upon an option-pricing model at their fair
value as an expense over the period in which the grants vest from the measurement date, which is the date when the number of warrants, their exercise price and other terms became certain.
At June 30, 2014 and 2013, 7,437,000 and 6,199,000 warrants were outstanding and 7,437,000 and 6,199,000 warrants were vested,
respectively. The totals do not include the 208,330 warrants due to be issued to Sandlapper Securities LLC for the $100,000 of money raised as of June 30, 2014.
There was no compensation expense related to outstanding warrants for the three and nine months ended June 30, 2014 and 2013.
The Company made a comprehensive review of its portfolio of uncertain tax positions in accordance with recognition standards
established for certain tax positions. In this regard, an uncertain tax position represents the Company’s expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been
reflected in measuring income tax expense for financial reporting purposes. As of June 30, 2014 and September 30, 2013, the Company does not have a liability for unrecognized tax benefits. The Company concluded that at this time
there are no uncertain tax positions. As of June 30, 2014, the Company does not expect any material changes to unrecognized tax positions within the next twelve months.
The Company recognizes the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future
tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax
returns. Fluctuations in the actual outcome of these future tax consequences could materially impact our financial position or our results of operations. For the nine months ended June 30, 2014, deferred income tax assets and the
corresponding valuation allowance increased by $579,000.
The Company’s 2014 provision for income taxes primarily relates to state
taxes. The difference between the Company’s 2014 effective rate and statutory rate is primarily due to the use of federal net operating losses to offset taxable income. The difference between the Company’s 2013 effective rate and
statutory rate is primarily due to the utilization of net operating losses.
11
|
11.
|
FAIR VALUE OF FINANCIAL INSTRUMENTS
|
The Company’s cash and cash equivalents are measured at fair value in the Company’s condensed consolidated
financial statements and are valued using unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs under ASC 820). The carrying amount of our accounts receivable and accounts payable reported in the
consolidated balance sheets approximates fair value because of the short maturity of those instruments. The fair value of the notes payable and convertible notes payable are approximate fair value based on current rates offered to the Company for
similar debt of the same remaining maturities.
|
12.
|
COMMITMENTS AND CONTINGENCIES
|
The Company is occasionally subject to legal proceedings and claims that arise in the ordinary course of business. It is
impossible to predict with any certainty the outcome of pending disputes, and management cannot predict whether any liability arising from pending claims and litigation will be material in relation to the Company’s consolidated financial
position or results of operations.
The $375,000 recorded as goodwill represents the excess of the purchase price over the recorded minority interest of the
Xenonics common stock repurchased as of December 10, 2009. The Company does not amortize goodwill. Instead, the Company evaluates goodwill annually in the fourth quarter and whenever events or changes in circumstances indicate that it is more
likely than not that an impairment loss has been incurred. As of June 30, 2014, the Company determined that no such impairment indicators exist.
Subsequent to year end, the Company received $50,000 in exchange for the exclusive distribution rights to sell the
Company’s products for a three year period in Saudi Arabia. The Company will record the balance as deferred revenue and amortize it over the life of the agreement.
Management evaluated all other activity through the date that the consolidated financial statements were issued, and concluded that the only
subsequent events that occurred that would require recognition in the condensed consolidated financial statements or disclosure in the notes to the condensed consolidated financial statements were the additional proceeds received since June 30,
2014 from the private placement of the Convertible Senior Secured Notes described in Note 8 above. .
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