The Company has adopted authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) on accounting for uncertainty in income taxes. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  The guidance requires that the Company determine whether the benefits of tax positions are “more likely than not” of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, the Company recognizes the largest amount of the benefit that is more likely than not of being sustained in the financial statements. For tax positions that are not more likely than not of being sustained upon audit, the Company does not recognize any portion of the benefit in the financial statements. Additionally, the interpretation provides guidance on de-recognition, classification, interest and penalties, disclosure and transition. As of December 31, 2013 and 2012, the Company had no accruals for any uncertain income tax positions.  The Company is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress.  Management believes it is no longer subject to income tax examinations for years prior to 2009.

11

BAR CODE SPECIALTIES, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2013 AND 2012

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)

Fair Value Measurements

The FASB provides the framework for measuring fair value.  That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and lowest priority to unobservable inputs (level 3 measurements).  The three levels of the fair value hierarchy under FASB ASC 820 are described as follows:

Level 1

Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.

Level 2

Inputs to the valuation methodology include:

·

quoted prices for similar assets or liabilities in active markets;

·

quoted prices for identical or similar assets or liabilities in inactive markets;

·

inputs other than quoted prices that are observable for the asset or liability;

·

inputs that are derived principally from or corroborated by observable market data by correlation or other means.

If the asset or liability has a specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability.

Level 3

Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.  Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

Accordingly, the Company believes the carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses to be representative of their fair values based on their short term nature. Additionally, the Company believes carrying value of the line of credit and notes payable approximate the fair value of such debt based on current rates offered to the Company for debt with the same remaining maturities and similar collateral requirements.  

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BAR CODE SPECIALTIES, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2013 AND 2012

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)

Fair Value Measurements - (Continued)

Additional disclosures regarding liabilities measured at fair value on a recurring basis are as follows:

There were no transfers between Levels 1, 2 and 3 during the years ended December 31, 2013 and 2012.

Consolidation of Variable Interest Entities

The Company accounted for the consolidation of variable interest entities (VIE) under the required provisions of accounting guidance issued by the FASB.  In accordance with the accounting guidance, the Company uses a qualitative approach for identifying which enterprise should consolidate a variable interest entity, based on which enterprise has both (1) the power to direct the economically significant activities of the entity and (2) the obligation to absorb the losses of, or the right to receive the benefits from, the entity that could potentially be significant to the variable interest entity.  These considerations impact the way the Company accounts for its existing relationships and determines the consolidation of companies or entities with which the Company has a variable interest.  Determination about whether an enterprise should consolidate a variable interest entity is required to be evaluated continuously as changes to existing relationships or future transactions may result in the Company consolidation or deconsolidating its variable interest entities.

13

BAR CODE SPECIALTIES, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2013 AND 2012

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)

Consolidation of Variable Interest Entities - (Continued)

Beginning with the December 31, 2013 year-end, the Company has early adopted the provisions of ASU 2014-07, which permit the Company to elect an alternative not to apply VIE guidance to certain related party lessor entities.  This alternative accounting policy for privately held companies can be applied to common control leasing arrangements, in place of the previously required VIE guidance, if (a) the Company and the lessor entity are under common control, (b) the Company has a lease arrangement with the lessor entity, (c) substantially all of the activities between the Company and the lessor entity are related to leasing activities, and (d) if the Company explicitly guarantees or provides collateral for any obligation of the lessor entity related to the asset leased by the Company, then the principal amount of the obligation at the inception of the guarantee or collateral arrangement cannot exceed the value of the asset leased by the Company.  The Company met the criteria above with respect to its common control leasing arrangement.  

3.

LINE OF CREDIT

The Company entered into a line of credit with a bank which provides for borrowings up to $2,500,000.  The agreement expires on July 1, 2014.  Advances against the line of credit are secured by substantially all Company assets and are guaranteed by the majority stockholder.  Interest on borrowings is at LIBOR plus 2.9% at December 31, 2013.  As of December 31, 2013 and 2012, outstanding borrowings were $0 and $0, respectively.  The agreement requires the Company to maintain a minimum on a fixed charge coverage ratio, and certain other financial ratios, as defined.  At December 31, 2013 the Company was in compliance with these covenants, while for December 31, 2012, the Company was not in compliance with these covenants.

4.

LITIGATION

The Company is subject to legal proceedings that arise in the ordinary course of business.  In the opinion of management, the aggregate liability, if any, with respect to these actions will not materially affect the financial position, results of operations or cash flows of the Company.  

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BAR CODE SPECIALTIES, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2013 AND 2012

5.

INCOME TAXES

The provision (benefit) for income taxes for the years ended December 31, 2013 and 2012 is as

 follows:

The components of deferred tax assets and liabilities as of December 31, 2013 and 2012 are as follows:

The company has net operating loss carry-forwards to offset Federal and California taxable income of approximately $171,000 and $150,000, respectively as of December 31, 2013.  These carry-forwards expire in 2032.  

The effective tax rate differs from the statutory Federal tax rate of 34 percent due to state income taxes and the non-deductibility of a portion of the RFID asset impairment.

15

BAR CODE SPECIALTIES, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2013 AND 2012

6.

NOTES PAYABLE

Notes payable at December 31, consist of the following:

Future principal maturities are as follows:

7.

LEASES

The Company has both a third party capital lease relating to a company automobile and commercial real estate operating lease with the majority shareholder for the company’s primary office and warehouse location in Garden Grove, CA.  The following is a schedule of future minimum equipment rental and facility lease payments required under third party capital and related party operating leases that have initial or remaining lease terms in excess of one year as of December 31, 2013.   Future commitments under the leases are as follows:

16

BAR CODE SPECIALTIES, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2013 AND 2012

7.

LEASES - (Continued)

Rental expense paid to third parties for the years ended December 31, 2013 and 2012 was approximately $119,000 per year.

8.

DUE TO RELATED PARTIES / RELATED PARTY TRANSACTIONS

Note payable to stockholder consists of cash advances made from the Company’s majority stockholder to the Company evidenced by a note agreement.  Total interest, computed at 5.5% per annum was either paid or accrued to the stockholder by the Company. During the years ended December 31, 2013 and 2012, interest expense on this note was $122,825 and $124,165, respectively.  The stockholder note is subordinated to the line of credit and term loan agreement with the bank.

In addition, the Company is paying monthly operating lease real estate rental payments of $9,000 to its majority stockholder.  A total of $108,000 was paid to the majority stockholder during the years ended December 31, 2013 and 2012, respectively for building rent.

9.

IMPAIRMENT OF LONG-LIVED ASSET

The Company announced a plan to dispose of the RFID Division on August 29, 2013.  Accordingly, the Company evaluated the ongoing value of the developed software.  Based on this valuation, the software was determined to have a current value of $400,000 which is less than the carrying value of $530,000.  This resulted in a $130,000 write-down of the asset, which was included in the discontinued operations adjustment for 2013.  

10.

DISCONTINUED OPERATIONS

The disposal of the RFID division is consistent with the Company's long-term strategy to focus its activities in the areas of barcode scanning reselling and distribution, and to divest unrelated activities. The disposal of the RFID division is consistent with the Company's long-term strategy to focus its activities in the areas of barcode scanning reselling and distribution, and to divest unrelated activities. At December 31, 2013, the carrying amount of the assets of the RFID division are as follows:

17

BAR CODE SPECIALTIES, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2013 AND 2012

10.

DISCONTINUED OPERATIONS - (Continued)

11.

SUBSEQUENT EVENTS

In October 2014, an $800,000 non-recourse, non-interest bearing stockholder’s note receivable that was secured by a stock purchase agreement between a minority stockholder and the company was cancelled by written agreement with the company, without compensation.  The shares were returned to the company and cancelled.

18