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2. Summary of Significant Accounting Policies (Policies)
 12 Months Ended
Dec. 31, 2014
Accounting Policies [Abstract]  
Accounting Estimates

Accounting Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenue and expenses during the reported periods. The significant estimates included in the Company’s financial statements include the allowance for doubtful accounts, allowance for sales returns, inventory reserves, the estimated lives and carrying value of property and equipment, intangible assets, and goodwill, the inputs used in determining the fair value of stock-based compensation and warrant liabilities, and the allocation of the consideration in the business combinations. Our management believes the estimates utilized in preparing our consolidated financial statements are reasonable. Actual results could differ significantly from these estimates.
Restricted Cash

Restricted Cash

 

Restricted cash represents funds held by credit card processors for purposes of mitigating chargeback risk.
Revenue Recognition

Revenue Recognition

 

We recognize revenue from product sales in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) ASC 605 — Revenue Recognition. Revenue from product sales is recognized when substantially all the risks and rewards of ownership have transferred to our customers, the selling price is fixed and collection is reasonably assured. Typically, these criteria are met when our customer’s order is received and we receive acknowledgment of receipt by a third party shipper and collection is reasonably assured. Taxes assessed by governmental authorities on revenue producing transactions are excluded from revenue. Taxes collected are recorded as liabilities until their remittance.

 

The Company provides an allowance for returns based upon specific product warranty agreements, past experience and industry knowledge. All significant returns for the periods presented have been offset against gross sales. The Company also provides a reserve for warranties, which is not significant and is included in accrued expense.
Accounts Receivable and allowance for doubtful accounts

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable consists of amounts due from the sale of our power tools, cleaning, and housewares products and dietary programs, less an allowance for uncollectible accounts. The allowance for doubtful accounts is based on an evaluation of our outstanding accounts receivable, including the age of amounts due, the financial condition of our specific customers, knowledge of our industry and historical bad debt experience. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based upon management’s assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. The allowance for doubtful accounts was approximately $712,000 and $224,000 as of December 31, 2014 and December 31, 2013, respectively.
Inventories and Advances on Inventory Purchases

Inventories and Advances on Inventory Purchases

 

Inventories, which are substantially all finished goods, are stated at the lower of cost or market. Cost is determined using an average cost method. We review our inventory for excess or obsolete inventory and write-down obsolete or otherwise unmarketable inventory to its estimated net realizable value. During the year ended December 31, 2014, the Company wrote down approximately $924,000 of inventory deemed defective, obsolete or slow-moving.

 

Advances on inventory purchases represent payments made to our product suppliers in advance of delivery to the Company and are included in prepaid expenses and other current assets. It is common industry practice to require a substantial deposit against products ordered before commencement of manufacturing, particularly with off-shore suppliers. Additional advance payments may also be required upon achievement of certain agreed upon manufacturing or shipment benchmarks.

 

In-bound freight-related costs from our vendors are included as part of the net cost of merchandise inventories. Other costs associated with acquiring, storing and transporting merchandise inventories are expensed as incurred and included in cost of goods sold. The Company's inventories are acquired and carried for wholesale and retail sale and, accordingly, the carrying value is susceptible to, among other things, market trends and conditions and overall customer demand. The Company uses its best estimates of all available information to establish reasonable inventory quantities. However, these conditions may cause our inventories to become obsolete and/or excessive. The Company reviews its inventories periodically for indications that reserves are necessary to reduce the carrying values to the lower of cost or market values.

 

Shipping and handling costs are included within cost of sales.
Property and Equipment, net

Property and Equipment, net

 

We record property, equipment and leasehold improvements at historical cost less accumulated depreciation. Expenditures for maintenance and repairs are recorded to expense as incurred; additions and improvements are capitalized. We provide for depreciation using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life of the improvement or the remaining term of the lease. Major classes of depreciable assets at December 31, 2014 were equipment, furniture and fixtures and leasehold improvements with estimated useful lives of 3 years, 3 years and 10 years, respectively.

 

We review our long-lived assets, such as property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable from future undiscounted cash flows. Impairment losses are recorded for the excess, if any, of the carrying value over the fair value of the long-lived assets.
Goodwill and Intangible Assets

Goodwill and Intangible Assets

 

Goodwill is not amortized but is subject to periodic testing for impairment in accordance with ASC Topic 350 “Intangibles - Goodwill and Other”. The test for impairment is conducted annually or more frequently if events occur or circumstances change indicating that the fair value of the goodwill may be below its carrying amount.

 

The quantitative goodwill impairment test is a two-step process with step one requiring the comparison of the reporting unit's estimated fair value with the carrying amount of its net assets. If necessary, step two of the impairment test determines the amount of goodwill impairment to be recorded when the reporting unit's recorded net assets exceed its fair value. The Company estimates the fair value of the reporting unit using a market approach in combination with a discounted operating cash flow approach. Impairment is assessed by applying a fair value-based test for each unit with recorded goodwill. The estimates and judgments that most significantly affect the fair value calculations are assumptions, consisting of level three inputs, related to revenue and operating profit growth, discount rates and exit multiples.

 

The Company determined the goodwill was fully impaired at September 30, 2014. See Note 7.

 

Intangible assets include acquired customer relationships, Uniform Resource Locators (“URL”), patents, and trademarks. Intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets in accordance with ASC Topic 350 "Intangibles - Goodwill and Other”. Long-lived assets, including intangible assets with indefinite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.

 

The Company determined certain of its intangible assets were wholly or partially impaired as of September 30, 2014 and December 31, 2014. See Note 7.
Share-based payments

Share-based payments

 

The Company recognizes share-based compensation expense on share based awards under the provisions of ASC 718 Compensation - Stock Compensation. Compensation expense is measured at the grant date and is recognized ratably over the required service period, generally the vesting period.

 

Calculating share-based compensation expense requires the input of highly subjective judgment and assumptions, including estimates of expected life of the award, stock price volatility, forfeiture rates and risk-free interest rates. The assumptions used in calculating the fair value of share-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our share-based compensation expense could be materially different in the future.
Earnings (Loss) Per Share

Earnings (Loss) Per Share

 

Basic earnings (loss) per share is based on the weighted effect of all common shares issued and outstanding and is calculated by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of common shares used in the basic earnings per share calculation plus the number of common shares, if any, that would be issued assuming conversion of all potentially dilutive securities outstanding.

 

The following securities were not included in the computation of the Company’s diluted net loss per share as their effect would be anti-dilutive:

 

   Year Ended December 31, 
   2014   2013 
Stock options   2,561,994    – 
Restricted stock grants   25,174,888    – 
Warrants   63,284,020    – 
Total dilutive securities   91,020,902    – 

 
Concentrations

Concentrations

 

Credit Risk

 

Financial instruments that potentially expose us to concentrations of credit risk consist primarily of cash and trade accounts receivable. Cash is held with financial institutions in the United States and from time to time we may have balances that exceed the amount of insurance provided by the Federal Deposit Insurance Corporation on such deposits. Credit is extended to our customers, based on an evaluation of a customer’s financial condition and collateral is not required.

 

Inventory Suppliers

 

Substantially all of the Company products are manufactured by multiple non-related companies in China. Although management believes it could obtain the majority of its inventory from other manufacturers at competitive prices and with competitive payment terms, if its relationship with a primary manufacturer were terminated, there can be no assurance that the termination of such relationship would not adversely affect the Company.

 
Direct Response Advertising and Infomercial Production Costs

Direct Response Advertising and Infomercial Production Costs

 

Direct response advertising costs are expensed and classified as selling and marketing when the advertising first airs. Advertising cost expensed for the years ended December 31, 2014 and December 31, 2013 amounted to $5,252,000 and $568,000, respectively.

 

Direct response production costs consist of infomercial production costs. Such costs are deferred until the infomercial airs for the first time. These costs are classified as selling and marketing expenses when expensed.
Product Development Costs

Product Development Costs

 

Costs of research, new product development and product redesign are charged to expense as incurred.
Patent Renewal Costs

Patent Renewal Costs

 

The Company's intellectual property portfolio consists mainly of patents with respect to the technology and use of its products. Patent renewal and maintenance fees are due at various times over the life of the patent to keep patent in force. The Company expenses these costs as incurred.
Operating Leases

Operating Leases

 

The Company records rent payments from operating leases, which generally call for escalating payments over the term of the leases, on a straight-line basis over the lease term, as required in FASB ASC Topic 840 - Leases.  The difference between the rent payments and straight-line basis of such rent is recorded as deferred rent obligation and is included in accrued expenses and other current liabilities in the balance sheet.
Fair Value Measurements

Fair Value Measurements

 

FASB ASC 820 — Fair Value Measurements and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC 820 requires disclosures about the fair value of all financial instruments, whether or not recognized, for financial statement purposes. Disclosures about the fair value of financial instruments are based on pertinent information available to us on December 31, 2014 and December 31, 2013, respectively. Accordingly, the estimates presented in these financial statements are not necessarily indicative of the amounts that could be realized on disposition of the financial instruments.

 

FASB ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).

 

The three levels of the fair value hierarchy are as follows:

 

Level 1 — Quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as exchange-traded instruments and listed equities.

 

Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 includes financial instruments that are valued using models or other valuation methodologies. These models consider various assumptions, including volatility factors, current market prices and contractual prices for the underlying financial instruments. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

 

Level 3 — Unobservable inputs for the asset or liability. Financial instruments are considered Level 3 when their fair values are determined using pricing models, discounted cash flows or similar techniques and at least one significant model assumption or input is unobservable.

 

The carrying amounts reported in the condensed consolidated balance sheet for cash, accounts receivable, notes receivable, accounts payable and accrued expenses approximate their fair value based on the short-term maturity of these instruments. The fair value of notes payable are based on borrowing rates that are available to the Company for loans with similar terms, collateral and maturity. The estimated fair value of notes payable approximates the carrying value. Determination of fair value of related party payables and receivables is not practicable due to their related party nature.
Accounting Standards Updates

Accounting Standards Updates

 

In May 2014, the FASB has issued No. 2014-09, Revenues from Contracts with Customers (Topic 606). The guidance in this update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (for example, assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles-Goodwill and Other, are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this Update. Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In May 2015, the FASB has issued No. 2015-14, Revenues from Contracts with Customers (Topic 606), which deferred the effective date for annual and interim periods. This standard is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact that this ASU will have on its financial statements.

 

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Specifically, ASU 2014-15 provides a definition of the term substantial doubt and requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). It also requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans and requires an express statement and other disclosures when substantial doubt is not alleviated. The new standard will be effective for reporting periods beginning after December 15, 2016, with early adoption permitted. Management has not early adopted this standard and is currently evaluating the impact of the adoption of ASU 2014-14 on our financial statements.

 

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810) - Amendments to the Consolidation Analysis. The amendments in this update require management to reevaluate whether certain legal entities should be consolidated. Specifically, the amendments (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities, (2) eliminate the presumption that a general partner should consolidate a limited partnership, (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, and (4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this update are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the effect the adoption of this amendment will have on the Company’s financial statements.

 

In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 provides authoritative guidance related to the presentation of debt issuance costs on the balance sheet, requiring companies to present debt issuance costs as a direct deduction from the carrying value of debt. The amendments in this update are effective for public business entities in fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The new guidance must be applied retrospectively to each prior period presented. The Company is currently evaluating the effect the adoption of this amendment will have on the Company’s financial statements.

 

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. ASU 2015-11 applies to all inventory that is measured using first-in, first-out or average cost. The guidance requires an entity to measure inventory at the lower of cost or net realizable value. ASU 2015-11 is effective prospectively for fiscal years, and for interim periods within those years, beginning after December 15, 2016. Early application is permitted. The Company is currently evaluating the effect the adoption of this amendment will have on the Company’s financial statements.

 

In September 2015, the FASB issued ASU 2015-16, Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments, which requires an acquirer to recognize adjustments identified during the measurement period in the reporting period in which the adjustment amounts are determined. The adjustment must include the cumulative effect of the adjustment as if the accounting had been completed on the acquisition date. The update should be applied prospectively and becomes effective January 1, 2016. Early application is permitted. The Company is currently evaluating the effect the adoption of this amendment will have on the Company’s financial statements.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which provides guidance for the recognition, measurement, presentation and disclosure of financial assets and financial liabilities. ASU 2016-01 is effective for fiscal years, and for interim periods within those years, beginning after December 15, 2017 and, for most provisions, is effective using the cumulative-effect transition approach. Early application is permitted for certain provisions. The Company is currently evaluating the effect the adoption of this amendment will have on the Company’s financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets. The accounting guidance for lessors will remain relatively largely unchanged. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the effect the adoption of this amendment will have on the Company’s financial statements.
Principles of Consolidation

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. Also consolidated are the assets, liabilities and results of operations of Ronco as a variable interest entity effective March 6, 2014. See Note 3. All inter-company account balances and transactions have been eliminated in consolidation.
Correction of Error & Fair Value Adjustments

Correction of Error & Fair Value Adjustments

 

During the interim periods ended June 30, 2014 and September 30, 2014, the Company reported the fair value of merger consideration effectively transferred of $5,997,476 with respect to the reverse merger. However, the previously reported value of merger consideration incorrectly excluded 7,113,375 of shares issued in connection to the merger via re-pricing agreements. The fair value of these shares at the date of the merger was approximately $640,000. The exclusion of such shares resulted in an understatement of goodwill and paid-in-capital at June 30, 2014. For the three and nine months ended September 30, 2014, this error resulted in an understatement of the impairment of goodwill and as of September 30, 2014 additional paid-in-capital and accumulated deficit.

 

Subsequent to the aforementioned interim periods, the Company revised its fair value estimate of the assets and liabilities acquired in connection with the reverse merger and VIE acquisition.

 

The tables below present (1) the originally filed interim period data for impacted financial statement lines, (2) the fair value estimate adjustments, (3) the correction of error adjustments, and (4) the restated balances for impacted financial statement line items.

 

   As of June 30, 2014 
   As Originally Filed   Fair Value Adjustments*   Correction of Error   As Restated 
Accounts receivable  $1,429,041   $(16,729)  $–   $1,412,312 
Note receivable on asset sale - current   225,000    (225,000)   –    – 
Prepaid expenses and other current assets   2,337,033    (201,942)   –    2,135,091 
Total current assets   9,818,808    (443,671)   –    9,375,137 
Note receivable on asset sale - less current portion   675,000    (675,000)   –    – 
Property and equipment, net   407,803    38,450    –    446,253 
Goodwill   16,421,922    2,945,047    640,204    20,007,173 
Intangibles, net   11,427,926    (1,800,000)   –    9,627,926 
Total assets   39,834,263    64,826    640,204    40,539,293 
                     
Accounts payable   6,060,146    (253,827)   –    5,806,319 
Accrued expenses and other current liabilities   3,784,114    157,547    –    3,941,661 
Total current liabilities   33,027,808    (96,280)   –    32,931,528 
Deferred tax liability   –    189,799    –    189,799 
Total liabilities   46,315,363    93,519    –    46,408,882 
Additional paid-in capital   22,887,977    –    640,204    23,528,181 
Noncontrolling interest in Ronco Holdings, Inc.   (1,141,666)   (28,693)   –    (1,170,359)
Total stockholders' deficit   (9,181,100)   (28,693)   640,204    (8,569,589)
Total liabilities, redeemable preferred stock and stockholders' deficit  $39,834,263   $64,826   $640,204   $40,539,293 
                     
    As of September 30, 2014 
    As Originally Filed    Fair Value Adjustments*    Correction of Error    As Restated 
Total assets  $15,741,463   $–   $–   $15,741,463 
Total current liabilities   39,956,821    –    –    39,956,821 
Deferred tax liability   –    189,799    –    189,799 
Total liabilities   53,319,458    189,799    –    53,509,257 
Additional paid-in capital   22,972,201    –    640,204    23,612,405 
Accumulative deficit   (44,164,324)   (189,799)   (640,204)   (44,994,327)
Noncontrolling interest in Ronco Holdings, Inc.   (19,139,054)   –    –    (19,139,054)
Total stockholders' deficit   (40,277,995)   (189,799)   –    (40,467,794)
Total liabilities, redeemable preferred stock and stockholders' deficit  $15,741,463   $–   $–   $15,741,463 

 

 

   Three Months Ended June 30, 2014   Six Months Ended June 30, 2014 
   As Originally Filed   Fair Value Adjustments*   Correction of Error   As Restated   As Originally Filed   Fair Value Adjustments*   Correction of Error   As Restated 
General and administrative expenses  $2,993,567   $21,265   $–   $3,014,832   $4,536,731   $28,693   $–   $4,565,424 
Loss from operations   (3,557,926)   (21,265)   –    (3,579,191)   (4,545,064)   (28,693)   –    (4,573,757)
Loss before provision for income taxes   (3,195,916)   (21,265)   –    (3,217,181)   (4,430,629)   (28,693)   –    (4,459,322)
Net loss   (3,195,916)   (21,265)   –    (3,217,181)   (4,430,629)   (28,693)   –    (4,459,322)
Net loss attributable to noncontrolling interest in Ronco Holdings, Inc.   1,016,403    21,265    –    1,037,668    1,141,666    28,693    –    1,170,359 
Net loss attributable to As Seen On TV, Inc.   (2,179,513)   –    –    (2,179,513)   (3,288,963)   –    –    (3,288,963)
Basic and diluted loss per share  $0.00   $0.00   $0.00   $0.00   $0.01   $0.00   $0.00   $0.01 

 

   Three Months Ended September 30, 2014   Nine Months Ended September 30, 2014 
   As Originally Filed   Fair Value Adjustments*   Correction of Error   As Restated   As Originally Filed   Fair Value Adjustments*   Correction of Error   As Restated 
General and administrative expenses  $3,765,144    –   $–   $3,765,144   $8,341,287   $–   $–   $8,341,287 
Impairment loss on goodwill   19,177,171    189,799    640,204    20,007,174    19,177,171    189,799    640,204    20,007,174 
Loss from operations   (25,582,972)   (189,799)   (640,204)   (26,412,975)   (32,151,012)   (189,799)   (640,204)   (32,981,015)
Loss before provision for income taxes   (31,104,303)   (189,799)   (640,204)   (31,934,306)   (35,611,748)   (189,799)   (640,204)   (36,441,751)
Net loss   (31,104,303)   (189,799)   (640,204)   (31,934,306)   (35,611,748)   (189,799)   (640,204)   (36,441,751)
Net loss attributable to noncontrolling interest in Ronco Holdings, Inc.   17,942,343    –    –    17,942,343    19,139,054    –    –    19,139,054 
Net loss attributable to As Seen On TV, Inc.   (13,161,960)   (189,799)   (640,204)   (13,991,963)   (16,472,694)   (189,799)   (640,204)   (17,302,697)
Basic and diluted loss per share  $(0.02)  $0.00   $0.00   $(0.02)  $(0.04)  $0.00   $0.00   $(0.04)

 

*Subsequent changes to the value of assets acquired in connection with the reverse merger and VIE acquisition