Annual report pursuant to Section 13 and 15(d)

2. Summary of Significant Accounting Policies

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2. Summary of Significant Accounting Policies
12 Months Ended
Sep. 30, 2015
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies

Principles of Consolidation

 

The accompanying consolidated financial statements represent the consolidated financial position and results of operations of the Company and its subsidiaries as follows:

 

    Percentage    
Company   Owned   Parent
Live Ventures, Inc.   100%   Live Ventures, Incorporated
Telco Billing, Inc.   100%   Live Ventures, Incorporated
Telco of Canada, Inc.*   100%   Telco Billing, Inc.
LiveDeal, Inc. - Santa Clara*   100%   Live Ventures, Incorporated
Local Marketing Experts, Inc.*   100%   Live Ventures, Incorporated
Velocity Marketing Concepts, Inc.   100%   Live Ventures, Incorporated
247 Marketing, Inc.*   100%   Live Ventures, Incorporated
Velocity Local, Inc.   100%   Live Ventures, Incorporated
Modern Everyday, Inc.   100%   Live Ventures, Incorporated
Modern Everyday, LLC   100%   Modern Everyday, Inc.
Super Nova, LLC   100%   Modern Everyday, Inc.
Live Goods, LLC   100%   Live Ventures, Incorporated
DealTicker, Inc.*   100%   Live Goods, LLC
Marquis Affiliated Holdings, LLC   80%   Live Ventures, Inc.
Marquis Industries, Inc.   100%   Marquis Affiliated Holdings, LLC
A-O Industries, LLC   100%   Marquis Industries, Inc.
Astro Carpet Mills, LLC   100%   Marquis Industries, Inc.
Constellation Industries, LLC   100%   Marquis Industries, Inc.
S F Commercial Properties, LLC   100%   Marquis Industries, Inc.

 

* these entities were inactive for more than a year and subsequently closed in October 2015 as approved by the Board of Directors on September 30, 2015.

 

The results of operations for Live Goods, LLC, DealTicker, Inc., Modern Everyday, Inc. and Marquis Industries, Inc. have only been included since the date of acquisition of March 7, 2014, May 5, 2014, August 24, 2014 and July 6, 2015, respectively. All intercompany transactions and balances have been eliminated in consolidation.

 

Noncontrolling Interest

 

On July 6, 2015, the Company, through MAH, acquired 80% interest in Marquis. The transaction was accounted for under the acquisition method of accounting, with the purchase price allocated based on the fair value of the individual assets acquired and liabilities assumed.

 

The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “Consolidation,” which governs the accounting for and reporting of non-controlling interests (“NCIs”) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs be treated as a separate component of equity, not as a liability, that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions rather than as step acquisitions or dilution gains or losses, and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. This standard also required changes to certain presentation and disclosure requirements.

 

The net income attributed to the NCI is separately designated in the accompanying consolidated statements of operations. Losses attributable to the NCI in a subsidiary may exceed the NCI’s interests in the subsidiary’s equity. The excess attributable to the NCI is attributed to those interests. The NCI shall continue to attribute its share of losses even if that attribution results in a deficit NCI balance.

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Significant estimates made in connection with the accompanying consolidated financial statements include the estimate of dilution and fees associated with LEC billings, the estimated reserve for doubtful accounts receivable, estimated forfeiture rates for stock-based compensation, fair values in connection with the analysis of goodwill and long-lived assets for impairment, fair value of derivative liability, current portion of note payable, valuation allowances against net deferred tax assets and estimated useful lives for intangible assets and property and equipment.

 

Financial Instruments

 

Financial instruments consist primarily of cash, cash equivalents, accounts receivable, advances to affiliates and obligations under accounts payable, accrued expenses and notes payable. The carrying amounts of cash, cash equivalents, accounts receivable, accounts payable, accrued expenses, long term loans, and notes payable approximate fair value because of the short maturity of those instruments.

 

Cash and Cash Equivalents

 

This includes all short-term highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less. At times, cash deposits may exceed FDIC-insured limits. At September 30, 2015 and 2014, the amount the Company had on deposit that exceeded the FDIC-insured limits was $2,471,259 and $7,508,924, respectively. The Company has not experienced any losses related to a concentration of cash or cash equivalents in an FDIC insured financial institution.

 

Accounts Receivable

 

The Company grants credit to customers under credit terms that it believes are customary in the industry and does not require collateral to support customer receivables. This allowance is maintained at a level which the Company believes is sufficient to cover potential credit losses and receivables are only written off to bad debt expense as uncollectible after all reasonable collection efforts have been made.

 

Pursuant to the terms of the arrangement, the Company, from time to time, shall sell to the Factor certain of its accounts receivable balances on a non-recourse basis for credit approved accounts. The Factor shall purchase the account receivable for the gross amount of the respective invoices, less factoring commissions, trade and cash discounts. The factor shall be entitled to charge the Company with a factoring commission for each account which equal to 0.75%-1% of the gross amount of the account as of the date of purchase, plus interest to be calculated at 3.25%-6% per annum. The minimum annual commission of $75,000 per contract year. The total amount of accounts receivable factored was $4,772,004 and $0 as of September 30, 2015 and 2014, respectively.

 

Factored receivables are sold without recourse with substantially all of the balance receivable from two factors. The Company performs ongoing credit evaluations of its customers' financial conditions and does not require collateral to support customer receivables. The Company establishes an allowance for claims and doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.

 

Allowance for Doubtful Accounts

 

The Company maintains an allowance for doubtful accounts, which includes allowances for accounts and factored receivables, customer refunds, dilution and fees from LEC billing aggregators and other uncollectible accounts. The allowance for doubtful accounts is based upon historical bad debt experience and periodic evaluations of the aging and collectability of the accounts receivable. This allowance is maintained at a level which the Company believes is sufficient to cover potential credit losses and receivables are only written off to bad debt expense as uncollectible after all reasonable collection efforts have been made. The Company has also purchased accounts receivable credit insurance to cover non-factored receivables which helps reduce potential losses due to doubtful accounts. At September 30, 2015 and 2014, the allowance for doubtful accounts was $1,107,707 and $1,101,258, respectively.

 

Inventories

 

Inventories are valued at the lower of the inventory’s cost (first in, first out basis) or the current market price of the inventory. Management compares the cost of inventory with its market value and an allowance is made to write down inventory to market value, if lower. At September 30, 2015 and 2014, the allowance for obsolete inventory was $402,278 and $252,569, respectively.

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation. Expenditures for repairs and maintenance are charged to expense as incurred and additions and improvements that significantly extend the lives of assets are capitalized. Upon sale or other retirement of depreciable property, the cost and accumulated depreciation are removed from the related accounts and any gain or loss is reflected in operations. Depreciation is computed on the straight-line method over the estimated useful lives of the assets ranging from three to forty years. Depreciation expense was $472,220 and $48,278 for the years ended September 30, 2015 and 2014, respectively.

 

Revenue Recognition

 

Directory Services

 

Revenue is billed and recognized monthly for services subscribed in that specific month. The Company has historically utilized outside billing companies to perform billing services through two primary channels:

 

  · direct ACH withdrawals; and

 

  · inclusion on the customer’s local telephone bill provided by their Local Exchange Carriers, or LECs.

 

For billings via ACH withdrawals, revenue is recognized when such billings are accepted. For billings via LECs, the Company recognizes revenue based on net billings accepted by the LECs. Due to the periods of time for which adjustments may be reported by the LECs and the billing companies, the Company estimates and accrues for dilution and fees reported subsequent to year-end for initial billings related to services provided for periods within the fiscal year. Such dilution and fees are reported in cost of services in the accompanying consolidated statements of operations. Customer refunds are recorded as an offset to gross revenue.

 

Revenue for billings to certain customers that are billed directly by the Company and not through the outside billing companies is recognized based on estimated future collections which is reasonably assured. The Company continuously reviews this estimate for reasonableness based on its collection experience.

 

Deals Revenue

 

The Company recognizes revenue from its sales through its strategic publishing partners of discounted goods and services offered by its merchant clients (“Deals”) when the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred; the selling price is fixed or determinable; and collectability is reasonably assured. These criteria are met when the number of customers who purchase the daily deal exceeds the predetermined threshold, where, if applicable, the Deal has been electronically delivered to the purchaser and a listing of Deals sold has been made available to the merchant. At that time, the Company's obligations to the merchant, for which it is serving as an agent, are substantially complete. The Company's remaining obligations, which are limited to remitting payment to the merchant, are inconsequential or perfunctory. The Company records as revenue an amount equal to the net amount it retains from the sale of Deals after paying an agreed upon percentage of the purchase price to the featured merchant excluding any applicable taxes. Revenue is recorded on a net basis because the Company is acting as an agent of the merchant in the transaction.

 

Deferred Revenue

 

In some instances, the Company receives payments in advance of rendering services, whereupon such revenues are deferred until the related services are rendered. There is no deferred revenue as of September 30, 2015 and 2014.

 

Product Revenue

 

The Company derives product revenue primarily from direct revenue and fulfillment partner revenue from product sales. Product revenue is recognized when the following revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or the service has been provided; (3) the selling price or fee revenue earned is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured.

 

The Company evaluates the criteria outlined in ASC Topic 605-45, Principal Agent Considerations, in determining whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. When the Company is the primary obligor in a transaction, is subject to inventory risk, has latitude in establishing prices and selecting suppliers, or has several but not all of these indicators, revenue is recorded gross. If we are not the primary obligor in the transaction and amounts earned are determined using a fixed percentage, revenue is recorded on a net basis. Currently, all direct revenue and fulfillment partner revenue is recorded on a gross basis, as the Company is the primary obligor. The Company presents revenue net of sales taxes.

 

Manufacturing Revenue

 

Revenues from the sale of carpet products, including shipping and handling amounts, are recognized when the following criteria are met: there is persuasive evidence that a sales agreement exists, delivery has occurred or services have been rendered, the price to the buyer is fixed or determinable, and collectability is reasonably assured. Delivery is not considered to have occurred until the customer takes title to the goods and assumes the risks and rewards of ownership, which is generally on the date of shipment. At the time revenue is recognized, the Company records a provision for the estimated amount of future returns based primarily on historical experience and any known trends or conditions that exist at the time revenue is recognized. Revenues are recorded net of taxes collected from customers.

 

Shipping and Handling

 

The Company classifies shipping and handling billed to customers as sales and classifies costs relating to shipping and handling as cost of revenues.

 

Advertising Costs

 

Advertising costs are charged to operations when incurred. Advertising expense totaled $177,249 and $12,974 for the years ended September 30, 2015 and 2014, respectively.

 

Legal Costs

 

The Company expenses legal costs associated with loss contingencies as they are incurred.

 

Income Taxes

 

Income taxes are accounted for using the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance would be provided for those deferred tax assets for which if it is more likely than not that the related benefit will not be realized. The Company classifies tax-related penalties and interest as a component of income tax expense for financial statement presentation. For the period from July 7, 2015 to September 30, 2015, Marquis Industries, Inc. and subsidiaries is required to file a separate income tax return, and therefore, the income generated by these subsidiaries cannot be offset against the Company’s net operating losses.

 

Stock-Based Compensation

 

The Company from time to time grants restricted stock awards and options to employees, non-employees and Company executives and directors. Such awards are valued based on the grant date fair-value of the instruments, net of estimated forfeitures. The value of each award is amortized on a straight-line basis over the vesting period.

 

Net Loss Per Share

 

Net loss per share is calculated in accordance with FASB ASC 260, “Earnings Per Share”. Under ASC 260 basic net loss per share is computed using the weighted average number of common shares outstanding during the period except that it does not include unvested restricted stock subject to cancellation. Diluted net loss per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of warrants, restricted shares and convertible preferred stock. The dilutive effect of outstanding restricted shares and warrants is reflected in diluted earnings per share by application of the treasury stock method. Convertible preferred stock is reflected on an if-converted basis.

 

Long-lived Assets

 

The Company assesses long-lived assets, including intangible assets, for impairment in accordance with the provisions of FASB ASC 360 “Property, Plant and Equipment”. A long-lived asset (or group of assets) shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The carrying amount of a long lived asset is not recoverable if it exceeds the sum of the undiscounted net cash flows expected to result from the use and eventual disposition of the asset. The amount of impairment loss, if any, is measured as the difference between the net book value of the asset and its estimated fair value. For purposes of these tests, long-lived assets must be grouped with other assets and liabilities for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The Company follows ASC Topic 350 in accounting for intangible assets, which requires impairment losses to be recorded when indicators of impairment are present and the undiscounted cash flows estimated to be generated by the assets are less than the assets’ carrying amounts. During the year ended September 30, 2015, the Company determined that based on future cash flows generated that certain of its intangible assets were impaired and took a charge to earnings of $2,543,568. There were no impairment losses recorded on intangible assets for the year ended September 30, 2014.

 

Goodwill

 

Goodwill represents the excess of purchase price over the underlying net assets of businesses acquired. Under accounting requirements, goodwill is not amortized but is subject to annual impairment tests. The Company recorded goodwill of $1,169,904 related to its acquisition of Modern Everyday, Inc. in fiscal 2014 and $800,000 related to its acquisition of Marquis Industries, Inc. in fiscal 2015. As of September 30, 2015 and 2014, the Company performed the required impairment review. During the impairment review at September 30, 2015, the Company determined that based on future cash flows generated that its goodwill was impaired and took a charge to earnings of $1,169,904.

 

Segment Reporting

 

ASC Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance.  The Company determined it has three reportable segments (See Note 17).

 

Derivative Financial Instruments

 

The Company evaluates all of its agreements to determine if such instruments have derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses a weighted average Black-Scholes-Merton option pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date. As of September 30, 2014, the Company’s only derivative financial instrument was a convertible note due to the “reset” and “dilutive issuance” clause in the note relating to the conversion price from dilutive share issuance. See Note 5. There were no derivative instruments as of September 30, 2015.

 

Fair Value Measurements

 

ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The three levels of valuation hierarchy are defined as follows:

 

· Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
     
· Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

· Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

The Company’s derivative instruments were reported at fair value using Level 2 inputs as discussed in Note 5. Also, the Company has a purchase price contingency that is discussed in Note 13.

 

The Company uses Level 2 inputs for its valuation methodology for the warrant derivative liabilities as their fair values were determined by using a probability weighted average Black-Scholes-Merton pricing model based on various assumptions. The Company’s derivative liability is adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives.

 

At September 30, 2015 and 2014, the Company identified the following liabilities that are required to be presented on the balance sheet at fair value:

 

Description   Fair Value
As of
December 31, 2015
    Fair Value Measurements at
December 31, 2015
Using Fair Value Hierarchy
 
            Level 1     Level 2     Level 3  
Derivative liability   $     $              
Contingent consideration for business combination     316,000       316,000              
Total   $ 316,000     $ 316,000              

 

 

Description   Fair Value
As of
December 31, 2014
    Fair Value Measurements at
December 31, 2014
Using Fair Value Hierarchy
 
            Level 1     Level 2     Level 3  
Derivative liability   $ 83,580     $       83,580        
Contingent consideration for business combination     251,000       251,000              
Total   $ 334,580     $ 251,000       83,580        

 

Reclassifications

 

Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. These reclassifications had no effect on the previously reported net income or stockholders’ equity.

 

Recently Issued Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09) , which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). Early adoption is not permitted. The Company is currently evaluating the impact of the pending adoption of ASU 2014-09 on its consolidated financial statements and has not yet determined the method by which it will adopt the standard beginning January 1, 2017.

 

In August, 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendment in this ASU defers the effective date of ASU No. 2014-09 for all entities for one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 31, 2016, including interim reporting periods with that reporting period.

 

In January 2015, the FASB issued Accounting Standards Update No. 2015-01, Income Statement – Extraordinary and Unusual items (Subtopic 225-20), Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (ASU 2015-01).  The amendment eliminates from U.S. GAAP the concept of extraordinary items.  This guidance is effective for the Company in the first quarter of fiscal 2017. Early adoption is permitted and allows the Company to apply the amendment prospectively or retrospectively. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 

In February, 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. ASU 2015-02 provides guidance on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). ASU 2015-02 is effective for periods beginning December 15, 2015. The adoption of ASU 2015-02 is not expected to have a material effect on the Company’s consolidated financial statements. Early adoption is permitted.

 

In September, 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805). Topic 805 requires that an acquirer retrospectively adjust provisional amounts recognized in a business combination, during the measurement period. To simplify the accounting for adjustments made to provisional amounts, the amendments in the Update require that the acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is required to also record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.  In addition an entity is required to present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal years beginning December 15, 2015. The adoption of ASU 2015-016 is not expected to have a material effect on the Company’s consolidated financial statements.

 

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future financial statements.