Note 4 - Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with 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 financial statements and the reported amounts of revenues and expenses during each of the reporting periods. Actual results could differ from those estimates. Our significant estimates are the allowance for sales returns and doubtful accounts, the value of inventory, the valuation allowance for the deferred tax asset, the expected life of property and equipment, the net realizable value of capitalized software costs, the value of stock options and the fair value of derivative liabilities.

Cash and Cash Equivalents

We consider all highly liquid temporary cash investments with an original maturity of three months or less when purchased to be cash equivalents.

Accounts Receivable

Accounts receivable are stated at the amount we expect to collect. An allowance for doubtful accounts, sales returns and sales discounts is recorded based on a combination of historical experience and information on customer accounts. Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. We have historically experienced little, if any, uncollectible receivables and management has determined that no allowance was required at September 30, 2014 and December 31, 2013.

Revenue Recognition

Revenue consists of sales of our professional and consumer-grade 360° panoramic capture devices, accessories and professional video production services. Our 360° panoramic capture devices make use of our software and web services, which are included in the sale of the product.

Revenue is recognized when the following four basic criteria are met: (i) persuasive evidence of an arrangement exists; (ii) the fee is fixed or determinable; (iii) collection is reasonably assured; and (iv) product delivery has occurred or services have been provided. To the extent that one or more of these conditions are not met, revenue is deferred until such time as all four criteria are met. Revenue for product sales is generally recognized upon shipment of products to the customer or retailer, which constitutes delivery. Revenue for professional video production services is recognized when services have been provided and fees are billable.

Reserves for Product Returns and Exchanges

We estimate the allowance for sales returns to be 9% of gross sales of Dot, which is based upon historical results and information on specific customer accounts. For certain high volume sales, particularly for those involving new customers, we monitor store stock levels regularly and, as necessary, set aside specific reserves for any estimated returns outside of the general allowance for sales returns.

Inventory

Inventory consists of raw materials, work in process, and finished goods. Inventory values are stated at the lower of cost or market utilizing a weighted average method. We recognize that technology products such as Dot and Lucy are prone to rapid change and obsolescence. We have an allowance for obsolete inventory of $60,000 as of September 30, 2014. In the event that inventory values are adjusted below cost, we will use the adjusted inventory values to determine a revised lower-cost amount for the relevant portion of the inventory. As necessary, we will establish reserves for potential returns, offset in part by an inventory account consisting of the original cost of these expected returns.

Property and Equipment

Property and equipment consists primarily of production molds and equipment associated with production of Dot, computer equipment and furniture and fixtures, which are stated at cost.

Depreciation and amortization are provided using the straight-line method over the estimated useful lives (generally three to seven years) of the related assets.

Expenditures for maintenance and repairs, which do not extend the economic useful life of the related assets, are charged to operations as incurred. Gains or losses on disposal of property and equipment are reflected in the statement of operations in the period of disposal.

Impairment of Long-Lived Assets

We assess the recoverability of our long-lived assets, including property and equipment and intangible assets, when there are indications that the assets might be impaired. When evaluating assets for potential impairment, we compare the carrying amount of the asset to the asset's estimated undiscounted future cash flows. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Warranty Costs

We offer a standard warranty on Dot and Lucy products, which includes the repair or replacement of parts for a one-year period. We have not experienced a high rate of warranty claims and estimate that future warranty claims will be minimal. Pursuant to the agreement with Lucy's contract manufacturer, the manufacturer handles all repair and warranty claims. Other warranty returns and claims, to the extent costs are not covered by the manufacturing agreement, are expensed as they occur.

Promotional Units

Consistent with standard marketing practices in the electronics industry, we distribute a number of promotional copies of the Dot product for retailer evaluation and for in-store demonstration purposes. The expense associated with this activity is considered a selling expense and units distributed for promotional purposes are booked at cost.

Shipping and Handling

Shipping and handling costs are expensed as incurred as part of selling and marketing expenses.

Advertising and Marketing Costs

Advertising and marketing costs are expensed as incurred and are included in selling and marketing expenses.

Capitalized Software Development Costs

During 2013, we incurred costs for the development of software associated with launching Dot for the Android mobile operating system and will also serve as the basis for our forthcoming professional-grade camera Jo. These costs are capitalized from the point in time that technological feasibility has been established, as evidenced by a detailed working program design or a working model, through the point in time that the product is available for general release to customers.

Capitalized software development costs are amortized on a straight-line basis over the estimated economic lives of the products (no longer than three years), which approximate the estimated revenue stream, beginning with the general release to customers. Research and development costs incurred prior to establishing technological feasibility and costs incurred subsequent to general product release to customers are expensed as incurred.

At the end of each financial reporting period, we compare the unamortized capitalized costs of a computer software product to the net realizable value of that product. The amount by which the unamortized capitalized costs of a computer software product exceeds the net realizable value of that asset is written off as an impairment charge.

Research and Development Costs

Software development costs for our proprietary Dot, Lucy and Jo camera systems that do not meet the criteria for capitalization, as well as research and development costs associated with the Jo hardware and Dot lens and bracket, are expensed as incurred.

Income Taxes

We account for income taxes under the provisions of Accounting Standards Codification ("ASC") 740 - Income Taxes. ASC 740 requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and tax basis of assets and liabilities and the expected future tax benefit to be derived from tax loss and tax credit carry-forwards. ASC 740 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets.

Stock-Based Compensation

We report stock-based compensation under ASC 718, “Compensation - Stock Compensation”. ASC 718 requires all share-based payments to employees, including grants of stock options to employees and directors and warrants to consultants, to be recognized in the financial statements based on their fair values over the requisite service periods. The fair value of stock options to employees and directors are determined using the Black-Scholes model and compensation costs are recognized ratably over the requisite service period.

We account for stock option and warrant grants issued to non-employees for goods and services using the guidance of ASC 718 and ASC 505, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in conjunction with Selling Goods or Services,” whereby the fair value of such option and warrant grants are determined using the Black-Scholes model at the earlier of the date at which the non-employee's performance is completed or a performance commitment is reached.

Earnings Per Share

Basic earnings per common share amounts are presented based on our consolidated earnings and then calculated on a per share basis using our weighted average number of common shares outstanding. Diluted earnings per share amounts are based on the weighted average number of common shares outstanding, plus the incremental shares that would have been outstanding upon the assumed exercise or conversion of all potentially dilutive stock options, warrants and convertible stock, subject to anti-dilution limitations. All such potentially dilutive instruments were excluded from the calculation of diluted loss per share because we had net losses for all periods presented and therefore equivalent shares would have an anti-dilutive effect.

Fair Value of Financial Instruments

GAAP requires disclosing the fair value of financial instruments to the extent practicable for financial instruments that are recognized or unrecognized in the balance sheet. The fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement.

In assessing the fair value of financial instruments, we use a variety of methods and assumptions, which are based on estimates of market conditions and risks existing at the time. For certain instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, it was estimated that the carrying amount approximated fair value because of the short maturities of these instruments. All debt is based on current rates at which we could borrow funds with similar remaining maturities and approximates fair value.

GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use on unobservable inputs by requiring that the most observable inputs be used when available.

Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is described below:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

The following table represents the fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis:

September 30, 2014	Level 1		Level 2		Level 3		Total

Derivative liability	$	-	$	688,500	$	-	$	688,500

Liabilities measured at fair value on a recurring basis using observable inputs (Level 2):

	Derivative
	Liability
December 31, 2013	$	-
Derivative expense included in financial advisory fees		722,500
March 31, 2014		722,500
Derivative income included in financial advisory fees		(17,000	)
June 30, 2014		705,500
Change in fair value of derivative liability included in interest expense		(17,000)
September 30, 2014	$	688,500

We used the following key inputs and assumptions; the trading market value is based on the purchase price of $0.28 per share of our common stock in the private placements on December 31, 2013, June 18, 2014 and August 27, 2014 due to the limited trading in our common stock, the exercise price of the warrants of $0.32, the expected volatility of 80% is based on an analysis of historical volatility of a group of comparable publicly traded companies over a period equal to the expected life of the options, the expected term is based on the remaining term per the agreement and the risk-free rate is based on the rate of U.S. treasury securities with the same term.