NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 and 2014
Note
1 - Organization and Business of the Company
Organization
and Nature of Operations
ICTV
Brands Inc., (the “Company” or “ICTV”), formerly known as International Commercial Television, Inc., was
organized under the laws of the State of Nevada on September 25, 1998. On July 3, 2014, the Board of Directors of the Company
recommended to the shareholders that the Company’s Articles of Incorporation be amended to change the name of the Company
to ICTV Brands Inc., which was approved by the holders of a majority of the Company’s outstanding stock and became effective
on August 20, 2014.
The
Company together with its wholly-owned subsidiary, Better Blocks International Limited (“BBI”), sells various health,
wellness and beauty products as well as miscellaneous consumer products through a number of sales channels throughout the United
States and internationally. Although our companies are incorporated in Nevada and New Zealand, our operations are currently run
from the Wayne, Pennsylvania office.
The
Company develops, markets and sells products through a multi-channel distribution strategy, including direct response television,
digital marketing campaigns, live home shopping, traditional retail and e-commerce market places, and our international third
party distributor network. We offer primarily health, beauty and wellness products as well as various consumer products, including
DermaWand
TM
, a skin care device that reduces the appearance of fine lines and wrinkles, and helps improve skin tone
and texture, DermaVital
®
, a professional quality skin care line that effects superior hydration, the CoralActives
®
brand of acne treatment and skin cleansing products, Derma Brilliance
®
, a skin care resurfacing device that
helps reduce visible signs of aging, Jidue
TM
, a facial massager device which helps alleviate stress, and Good Planet
Super Solution
TM
, a multi-use cleaning agent. We acquire the rights to our products that we market primarily via licensing
agreements, acquisition and in-house development and sell both domestically and internationally. The Company is presently exploring
other devices and consumable product lines currently under licensing agreements.
The
goal of our strategy is to use the brand awareness we create in our marketing campaigns so that we can sell the products, along
with related families of products, under distinct brand names through multiple sales channels including direct response television
(“DRTV”), digital marketing channels, live home shopping, traditional retail and e-commerce marketplaces, and our
third party international distributor network.
Note
2 - Summary of significant accounting policies
Principles
of consolidation
The
accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary BBI. All significant
inter-company transactions and balances have been eliminated.
Use
of estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
(“US GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Management believes that the estimates utilized in preparing its consolidated financial
statements are reasonable and prudent. The most significant estimates used in these consolidated financial statements include
the allowance for doubtful accounts, reserves for returns, inventory reserves, valuation allowance on deferred tax assets and
share based compensation. Actual results could differ from these estimates.
Recently
Issued Accounting Pronouncements
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02 “Leases (Topic 842).”
This standard requires entities that lease assets to recognize on the balance sheet the assets and liabilities for the rights
and obligations created by those leases. The standard is effective for fiscal years and the interim periods within those fiscal
years beginning after December 15, 2018. The guidance is required to be applied by the modified retrospective transition approach.
Early adoption is permitted. The Company is currently evaluating the impact of the new guidance to the consolidated financial
statements.
ICTV
BRANDS INC. AND SUBSIDIARY
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 and 2014
Note
2 - Summary of significant accounting policies (continued)
In
July 2015, the FASB issued Accounting Standard Update (“ASU”) No. 2015-11- Inventory (Topic 330) - Simplifying the
Measurement of Inventory (“ASU 2015-11”), which provides that an entity should measure inventory within the scope
of this update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary
course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged
for inventory measured using LIFO or the retail inventory method. The amendments in this update are effective for the annual periods
beginning after December 15, 2016, and for interim periods within those fiscal years. The Company does not expect the adoption
of this standard to have a material impact on the consolidated financial statements.
In
May 2014, FASB issued new accounting guidance, Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers,
on revenue recognition. The new standard provides for a single five-step model to be applied to all revenue contracts with customers
as well as requires additional financial statement disclosures that will enable users to understand the nature, amount, timing
and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective
approach or cumulative effect adjustment approach to implement the standard. Accounting Standards Update No. 2014-09 is effective
for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early
adoption is permitted, but not before the original effective date of the standard. The Company is currently evaluating the impact
of the new guidance on our consolidated financial statements.
In
August 2014, the FASB issued ASU 2014-15 - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going
Concern. The amendments in this Update provide guidance in U.S. GAAP about 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.
The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim
periods thereafter. The Company is currently evaluating the impact of the new guidance to the consolidated financial statements.
Concentration
of credit risk
Financial
instruments, which potentially subject the Company to concentrations of credit risk, include cash and trade receivables. The Company
maintains cash in bank accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses
and believes it is not exposed to any significant risks on its cash in bank accounts.
As
of December 31, 2015, 82% of the Company’s accounts receivable were due from various individual customers to whom our products
had been sold directly via Direct Response Television. In addition, 5% of the Company’s accounts receivable was cash due
from the Company’s credit card processors as well as 6% was due from e-commerce accounts and the remaining amount from miscellaneous
accounts. Major customers are considered to be those who accounted for more than 10% of net sales. For the year ended December
31, 2015, there was no major customers. For the year ended December 31, 2014, 15% of net sales were made to our international
third party distributor Inova, located in Mexico.
Fair
value of financial instruments
Fair
value estimates, assumptions and methods used to estimate fair value of the Company’s financial instruments are made in
accordance with the requirements of Accounting Standards Codification (“ASC”) 825-10, “Disclosures about Fair
Value of Financial Instruments.” The Company has used available information to derive its estimates. However, because these
estimates are made as of a specific point in time, they are not necessarily indicative of amounts the Company could realize currently.
The use of different assumptions or estimating methods may have a material effect on the estimated fair value amounts. The carrying
values of financial instruments such as cash, accounts receivable, accounts payable, and accrued liabilities approximate their
fair values due to the short settlement period for these instruments.
Cash
and cash equivalents
The
Company considers all unrestricted highly liquid investments with an original maturity of three months or less to be cash equivalents.
ICTV
BRANDS INC. AND SUBSIDIARY
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 and 2014
Note
2 - Summary of significant accounting policies (continued)
Cash
held in escrow
The
Company utilized Transfirst ePayment Services’ Check Gateway platform for electronic check processing, which maintained
a reserve fund within our electronic check processing account to cover fees, charges, and expenses due to them, including those
estimated for possible customer charge backs. Effective April 28, 2015, the Company discontinued the acceptance of e-checks and
no longer uses the Check Gateway platform. At December 31, 2015 and 2014, the amount of such reserves were approximately $0 and
$48,000, respectively. The reserve was released in full on June 30, 2015. ICTV’s credit card processing vendor for VISA,
Mastercard, Discover and American Express transactions in the United States, Chase Paymentech, does not require such a reserve.
Additionally, as described further in Note 6, effective February 18, 2015, the Company terminated its Credit Facility and the
$500,000 collateral held in escrow was released.
Foreign
currency transactions
Transactions
entered into by the Company in currencies other than its local currency, are recorded in its local currency and any changes in
currency exchange rates that occur from the initiation of a transaction until settled are recorded as foreign currency gains or
losses in the Consolidated Statements of Operations.
Accounts
receivable
Accounts
receivable are recorded net of allowances for returns and doubtful accounts of approximately $119,000 and $317,000 as of December
31, 2015 and 2014, respectively. The allowances are calculated based on historical customer returns and bad debts.
In
addition to reserves for returns on accounts receivable, an accrual is made for the return of product that have been sold to customers
and had cash collections, while the customer still has the right to return the product. The amounts of these accruals included
in accounts payable and accrued liabilities in our Consolidated Balance Sheets were approximately $80,000 and $221,000 as of December
31, 2015 and 2014, respectively.
Inventories
Inventories
consist primarily of finished products held for resale, and are valued at the lower of cost (first-in, first-out method) or market.
The Company adjusts inventory for estimated obsolescence when necessary based upon demand and market conditions. The Company’s
reserve for obsolescence was approximately $123,000 and $51,000 as of December 31, 2015 and 2014, respectively. Included in inventory
at December 31, 2015 and 2014 is approximately $42,000 and $115,000, respectively, of consigned product that has been shipped
to customers under the 30-day free trial period for which the trial period has not expired and as such the customer has not accepted
the product.
Furniture
and equipment
Furniture
and equipment are carried at cost and depreciation is computed over the estimated useful lives of the individual assets ranging
from 3 to 5 years. Depreciation is computed using the straight-line method. The related cost and accumulated depreciation of assets
retired or otherwise disposed of are removed from the accounts and the resultant gain or loss is reflected in earnings. Maintenance
and repairs are expensed currently while major renewals and betterments are capitalized. Depreciation expense amounted to approximately
$8,000 and $6,000, respectively, for the years ended December 31, 2015 and 2014.
Impairment
of Long-Lived Assets
In
accordance with ASC 360-10, “Accounting for the Impairment or Disposal of Long-Lived Assets”, long-lived assets are
reviewed for impairment when circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future net cash flows estimated
by the Company to be generated by such assets. If such assets are considered to be impaired, the impairment to be recognized is
the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of by sale are
recorded as held for sale at the lower of carrying value or estimated net realizable value. No impairment losses were identified
or recorded in the fiscal years ended December 31, 2015 and 2014.
ICTV
BRANDS INC. AND SUBSIDIARY
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 and 2014
Note
2 - Summary of significant accounting policies (continued)
Revenue
recognition
For
our domestic direct response television consumer sales generated by our infomercials, product sales revenue is recognized 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. The Company’s revenues in the Statements of Operations are net
of sales taxes.
The
Company offers a 30-day risk-free trial as one of its payment options. Revenue on the 30-day risk-free trial sales is not recognized
until customer acceptance and collectability are assured which we determine to be when the trial period ends. If the risk-free
trial expires without action by the customer, product is determined to be accepted by the customer and revenue is recorded. Revenue
for items purchased without the 30-day free trial is recognized upon shipment of the product to the customer and when collectability
is assured.
Revenue
related to our DermaVital
TM
continuity program is recognized monthly upon shipment to customers. Revenue related to
international third party distributor customers is recorded at gross amounts with a corresponding charge to cost of sales upon
shipment. Included in deferred revenue – short-term are payments received prior to shipment on international sales of approximately
$221,000 and $471,000 as of December 31, 2015 and 2014, respectively.
The
Company has a return policy whereby the customer can return any product received within 30 days of receipt for a full refund excluding
shipping and handling. However, historically the Company has accepted returns past 30 days of receipt. The Company provides an
allowance for returns based upon past experience. Returns for the years presented have been offset against gross sales.
The
Company sells warranties on the DermaWand
TM
for one-year, three-year, four -year and lifetime terms. One-year, three-year
and four-year warranties are recognized ratably over the term. Lifetime warranties are recognized over the estimated term of 5
years. Any unearned warranty is included in deferred revenue on the accompanying consolidated balance sheets. Changes in the Company’s
deferred service revenue related to the warranties is presented in the following table:
|
|
Years ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Deferred extended warranty revenue:
|
|
|
|
|
|
|
|
|
At beginning of period
|
|
$
|
670,075
|
|
|
$
|
510,630
|
|
Revenue deferred for new warranties
|
|
|
174,852
|
|
|
|
331,260
|
|
Revenue recognized
|
|
|
(215,784
|
)
|
|
|
(171,815
|
)
|
At end of period
|
|
$
|
629,143
|
|
|
$
|
670,075
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
223,397
|
|
|
$
|
189,382
|
|
Non-current portion
|
|
|
405,746
|
|
|
|
480,693
|
|
|
|
$
|
629,143
|
|
|
$
|
670,075
|
|
ICTV
BRANDS INC. AND SUBSIDIARY
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 and 2014
Note
2 - Summary of significant accounting policies (continued)
Shipping
and handling
The
amount billed to a customer for shipping and handling is included in revenue. Shipping, handling and processing revenue approximated
$3,134,000 and $4,492,000 for the years ended December 31, 2015 and 2014, respectively. Shipping and handling costs are included
in cost of sales. Shipping and handling costs approximated $1,628,000 and $2,348,000 for the years ended December 31, 2015 and
2014, respectively.
Research
and development
Research
and development costs are expensed as incurred and are included in selling and marketing expense in the accompanying consolidated
financial statements. Research and development costs primarily consist of efforts to discover and develop new products, including
clinical trials, product safety testing, certifications for international regulations and standards, etc. Product testing and
development costs approximated $115,000 and $528,000 for the years ended December 31, 2015 and 2014, respectively.
Media
and production costs
Media
and internet marketing costs are expensed as incurred and are included in selling and marketing expense in the accompanying consolidated
financial statements. Production costs associated with the creation of new and updated infomercials and advertising campaigns
are expensed at the commencement of a campaign. The Company incurred approximately $7,907,000 and $10,731,000 in media
costs for airing its infomercials, $323,000 and $831,000 in new production costs, and $906,000 and $601,000 in internet marketing
costs for the years ended December 31, 2015 and 2014, respectively.
Income
taxes
In
preparing our consolidated financial statements, we make estimates of our current tax exposure and temporary differences resulting
from timing differences for reporting items for book and tax purposes. We recognize deferred taxes by the asset and liability
method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for differences
between the financial statement and tax bases of assets and liabilities at enacted statutory tax rates in effect for the years
in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income
in the period that includes the enactment date. In addition, valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized. In consideration of our accumulated losses and limited historical ability to
generate taxable income to utilize our deferred tax assets, we have estimated that we will not be able to realize any benefit
from our temporary differences and have recorded a full valuation allowance. If we sustain profitability in the future at levels
which cause management to conclude that it is more likely than not that we will realize all or a portion of the net operating
loss carry-forward, we would record the estimated net realized value of the deferred tax asset at that time and would then provide
for income taxes at a rate equal to our combined federal and state effective rates. Subsequent revisions to the estimated net
realizable value of the deferred tax asset could cause our provision for income taxes to vary significantly from period to period.
The
Company’s policy is to recognize interest and penalties related to tax matters in general and administrative expenses in
the Consolidated Statements of Operations.
ICTV
BRANDS INC. AND SUBSIDIARY
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 and 2014
Note
2 - Summary of significant accounting policies (continued)
Stock
options
In
June 2001, our shareholders approved our 2001 Stock Option Plan (the “Plan”). The Plan is designed for selected employees,
officers and directors of the Company and its subsidiary, and is intended to advance the best interests of the Company by providing
personnel who have substantial responsibility for the management and growth of the Company and its subsidiary with additional
incentive by increasing their proprietary interest in the success of the Company, thereby encouraging them to remain in the employ
of the Company or its subsidiary. The Plan is administered by the Board of Directors of the Company, and authorizes the issuance
of stock options not to exceed a total of 3,000,000 shares. The terms of any awards under the Plan are determined by the Board
of Directors, provided that no options may be granted at less than the fair market value of the stock as of the date of the grant.
The Plan expired in February 2011. As of December 31, 2015, 316,667 options are outstanding under the Plan.
In
December 2011, our shareholders approved our 2011 Stock Option Plan (the “2011 Plan”). The 2011 Plan is designed for
selected employees, officers, and directors of the Company and its subsidiary, and is intended to advance the best interests of
the Company by providing personnel who have substantial responsibility for the management and growth of the Company and its subsidiary
with additional incentive by increasing their proprietary interest in the success of the Company, thereby encouraging them to
remain in the employ of the Company or its subsidiary. The 2011 Plan is administered by the Board of Directors of the Company,
and authorizes the issuance of stock options not to exceed a total of 3,000,000 shares. On April 21, 2014, the Company’s
Board of Directors adopted a resolution to increase the number of common shares which may be granted to 6,000,000 shares. On June
19, 2014, the increase in the number of shares that may be granted under the 2011 Plan was approved by a majority of the Company’s
shareholders. The terms of any awards under the Plan are determined by the Board of Directors, provided that no options may be
granted at less than the fair market value of the stock as of the date of the grant. Generally, the options granted vest over
three years with one-third vesting on each anniversary date of the grant. As of December 31, 2015, 3,720,002 options are outstanding
under the 2011 Plan.
The
Company accounts for equity instruments issued to non-employees in accordance with the provisions of ASC Topic 505, subtopic 50,
Equity-Based Payments to Non-Employees
based upon the fair-value of the underlying instrument. The equity instruments,
consisting of stock options granted to consultants, are valued using the Black-Scholes valuation model. The measurement of stock-based
compensation to non-employees is subject to periodic adjustments as the underlying equity instruments vest and is recognized as
an expense over the period which services are received. Nonvested stock options granted to non-employees are remeasured at each
reporting period until performance is complete.
The
Company uses ASC Topic 718, “Share-Based Payments”, to account for stock-based compensation issued to employees and
directors. The Company recognizes compensation expense in an amount equal to the grant date fair value of share-based payments
such as stock options granted to employees over the requisite vesting period of the awards.
ICTV
BRANDS INC. AND SUBSIDIARY
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 and 2014
Note
2 - Summary of significant accounting policies (continued)
The
following is a summary of stock options outstanding under the Plan and 2011 Plan (collectively “Stock Option Plans”)
for the years ended December 31, 2015 and 2014:
|
|
Number of Shares
|
|
|
Weighted
Average
|
|
|
|
Employee
|
|
|
Non-
Employee
|
|
|
Totals
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2015
|
|
|
4,220,002
|
|
|
|
350,000
|
|
|
|
4,570,002
|
|
|
$
|
0.40
|
|
Granted during the year
|
|
|
300,000
|
|
|
|
-
|
|
|
|
300,000
|
|
|
|
0.21
|
|
Exercised during the year
|
|
|
(335,000
|
)
|
|
|
(350,000
|
)
|
|
|
(685,000
|
)
|
|
|
0.14
|
|
Forfeited during the year
|
|
|
(148,333
|
)
|
|
|
-
|
|
|
|
(148,333
|
)
|
|
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015
|
|
|
4,036,669
|
|
|
|
-
|
|
|
|
4,036,669
|
|
|
$
|
0.21
|
|
|
|
Number of Shares
|
|
|
Weighted
Average
|
|
|
|
Employee
|
|
|
Non-
Employee
|
|
|
Totals
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2014
|
|
|
3,125,002
|
|
|
|
350,000
|
|
|
|
3,475,002
|
|
|
$
|
0.24
|
|
Granted during the year
|
|
|
1,670,000
|
|
|
|
-
|
|
|
|
1,670,000
|
|
|
|
0.69
|
|
Exercised during the year
|
|
|
(374,999
|
)
|
|
|
-
|
|
|
|
(374,999
|
)
|
|
|
0.15
|
|
Forfeited during the year
|
|
|
(200,001
|
)
|
|
|
-
|
|
|
|
(200,001
|
)
|
|
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2014
|
|
|
4,220,002
|
|
|
|
350,000
|
|
|
|
4,570,002
|
|
|
$
|
0.40
|
|
Of
the stock options outstanding as of December 31, 2015 under the Stock Option Plans, 2,351,668 options are currently vested and
exercisable. The weighted average exercise price of these options was $0.20. These options expire through December 2025. The aggregate
intrinsic value for options outstanding and exercisable at December 31, 2015 and 2014, was approximately $60,000 and $774,000,
respectively. The aggregate intrinsic value for stock options exercised during the year ended December 31, 2015 and 2014 was approximately
$51,000 and $205,000, respectively.
For
the years ended December 31, 2015 and 2014, the Company recorded approximately $528,000 and $376,000 respectively in stock compensation
expense under the Stock Option Plans. At December 31, 2015, there was approximately $705,000 of total unrecognized compensation
cost related to non-vested option grants that will be recognized over the remaining vesting period of 3 years.
The
following assumptions are used in the Black-Scholes option pricing model for the years ended December 31, 2015 and 2014 to value
the stock options granted during the period:
2015
|
|
2014
|
Risk-free interest rate
|
|
|
2.05%
|
|
|
Risk-free interest rate
|
|
|
1.90% - 2.30%
|
|
Expected dividend yield
|
|
|
0.00
|
|
|
Expected dividend yield
|
|
|
0.00
|
|
Expected life
|
|
|
6.00 years
|
|
|
Expected life
|
|
|
6.00 years
|
|
Expected volatility
|
|
|
156%
|
|
|
Expected volatility
|
|
|
181% - 340%
|
|
Forfeiture rate
|
|
|
5.0%
|
|
|
Forfeiture rate
|
|
|
5.0%
|
|
Weighted average grant date fair value
|
|
|
$0.20
|
|
|
Weighted average grant date fair value
|
|
|
$0.72
|
|
ICTV
BRANDS INC. AND SUBSIDIARY
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 and 2014
Note
2 - Summary of significant accounting policies (continued)
The
following is a summary of stock options outstanding outside of the Stock Option Plans for the years ended December 31, 2015 and
2014:
|
|
Number of Shares
|
|
|
Weighted
Average
|
|
|
|
Employee
|
|
|
Non-
Employee
|
|
|
Totals
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2015
|
|
|
466,667
|
|
|
|
2,016,667
|
|
|
|
2,483,334
|
|
|
$
|
0.36
|
|
Exercised during the year
|
|
|
-
|
|
|
|
(40,000
|
)
|
|
|
(40,000
|
)
|
|
|
0.15
|
|
Balance, December 31, 2015
|
|
|
466,667
|
|
|
|
1,976,667
|
|
|
|
2,443,334
|
|
|
$
|
0.32
|
|
|
|
Number of Shares
|
|
|
Weighted
Average
|
|
|
|
Employee
|
|
|
Non-
Employee
|
|
|
Totals
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2014
|
|
|
291,667
|
|
|
|
1,590,000
|
|
|
|
1,881,667
|
|
|
$
|
0.23
|
|
Granted during the year
|
|
|
175,000
|
|
|
|
560,000
|
|
|
|
735,000
|
|
|
|
0.64
|
|
Exercised during the year
|
|
|
-
|
|
|
|
(133,333
|
)
|
|
|
(133,333
|
)
|
|
|
0.15
|
|
Balance, December 31, 2014
|
|
|
466,667
|
|
|
|
2,016,667
|
|
|
|
2,483,334
|
|
|
$
|
0.36
|
|
Of
the stock options currently outstanding outside of the Stock Option Plans at December 31, 2015, 2,285,000 options are currently
vested and exercisable. The weighted average exercise price of these options was $0.33. These options expire through December
2024. The aggregate intrinsic value for options outstanding and exercisable at December 31, 2015 and 2014, was approximately $72,000
and $817,000, respectively. The aggregate intrinsic value for stock options exercised during the year ended December 31, 2015
and 2014 was approximately $2,000 and $73,000, respectively.
For
the years ended December 31, 2015 and 2014, the Company recorded approximately $62,000 and $770,000, respectively in stock compensation
expense related to stock options outside of the Stock Option Plans. At December 31, 2015, there was approximately $70,000 of total
unrecognized compensation cost related to non-vested option grants that will be recognized over a remaining vesting period of
2 years.
On
December 28, 2015, the Company modified the exercise price of 1,630,000 options issued to nine employees and 500,000 options to
one employee under our 2011 Stock Option Plan. The options were issued with a fair market value exercise price of $0.21 per share
for the nine employees and $0.24 for the remaining employee. Additionally, on December 28, 2015, the Company modified the exercise
price of 200,000 options issued to three of its independent directors at a fair market value exercise price of $0.21 per share.
The vesting period remained the same, provided the recipients are still employees or directors of the Company at the time of vesting.
The accounting impact from the modification was immaterial and the expense remained the same.
The
following assumptions are used in the Black-Scholes option pricing model for the years ended December 31, 2014. There were no
grants for the year ended December 31, 2015.
2014
|
Risk-free interest rate
|
|
|
1.01% – 2.73%
|
|
Expected dividend yield
|
|
|
0.00
|
|
Expected life
|
|
|
2.50 – 10.00 years
|
|
Expected volatility
|
|
|
181% - 341%
|
|
Weighted average grant date fair value
|
|
|
$0.76
|
|
ICTV
BRANDS INC. AND SUBSIDIARY
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 and 2014
Note
2 - Summary of significant accounting policies (continued)
The
following is a summary of all stock options outstanding, and nonvested for the year ended December 31, 2015:
|
|
Number of Shares
|
|
|
Weighted Average
|
|
|
|
Employee
|
|
|
Non- Employee
|
|
|
Totals
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2015 – nonvested
|
|
|
3,262,779
|
|
|
|
100,000
|
|
|
|
3,362,779
|
|
|
$
|
0.51
|
|
Granted
|
|
|
300,000
|
|
|
|
-
|
|
|
|
300,000
|
|
|
|
0.21
|
|
Vested
|
|
|
(1,571,111
|
)
|
|
|
(100,000
|
)
|
|
|
(1,671,111
|
)
|
|
|
0.26
|
|
Forfeited
|
|
|
(148,333
|
)
|
|
|
-
|
|
|
|
(148,333
|
)
|
|
|
0.39
|
|
Balance, December 31, 2015 – nonvested
|
|
|
1,843,335
|
|
|
|
-
|
|
|
|
1,843,335
|
|
|
$
|
0.22
|
|
Note
3 - Commitments and contingencies
Leases
As
of December 31, 2015, the Company had an active lease related to the office space rented in Wayne, Pennsylvania. Rent expense
incurred during 2015 and 2014 totaled approximately $56,000 and $54,000, respectively. During the year ended December 31, 2015,
the Company amended the lease through March 2017. The schedule below details the future financial obligations under the lease.
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
TOTAL OBLIGATION
|
|
Wayne - Corporate HQ
|
|
$
|
53,300
|
|
|
$
|
13,300
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
66,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Lease Obligations
|
|
$
|
53,300
|
|
|
$
|
13,300
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
66,600
|
|
DermaWand
TM
During
2007, the Company entered into an exclusive license agreement with Omega 5 Technologies, Inc. (“Omega”) wherein ICTV
was assigned all of the trademarks and all of the patents and pending patents relating to the DermaWand
TM
and was granted
exclusive license with respect to the commercial rights to the DermaWand
TM
. This agreement was amended and superseded
on July 28, 2010. The geographical scope of the license granted is the entire world consisting of the United States of America
and all of the rest of the world. The license remained exclusive to ICTV provided ICTV paid Omega a minimum annual payment of
$250,000 in the initial 18 month term of the agreement and in each succeeding one-year period. If in any calendar year the payments
made by the Company to Omega exceed the annual minimum of $250,000, then the amount in excess of the annual minimum or “rollover
amount” would be credited towards the Company’s annual minimum for the immediately following calendar year only. If
the Company failed to meet the minimum requirements as outlined in the agreement, it would be forced to assign the trademarks
and patents back to Omega. After the initial term, the exclusive license granted renewed automatically for a three year period,
and thereafter automatically at three-year intervals. The Company met the minimum requirements in each of the years ended December
31, 2015 and 2014. The amount of royalty expense incurred for sales of the DermaWand
TM
included in cost of sales in
the accompanying Consolidated Statements of Operations were approximately $782,000 and $1,159,000 for the years ended December
31, 2015 and 2014, respectively.
On
January 22, 2016, we entered into a Purchase Agreement with Omega to acquire the worldwide ownership of the DermaWand patent and
all related trademarks for the sum of $1,200,000 paid out as follows: $300,000 per year for calendar years 2016 through 2019,
payable in uniform quarterly installments on or before the last day of each calendar quarter. As a result, effective January 1,
2016, we are no longer obligated to make royalty payments on sales of DermaWand
TM
. There shall be no interest charged,
and ICTV may, in its sole discretion, at any time without permission or penalty pre-pay some or all of the purchase price.
ICTV
BRANDS INC. AND SUBSIDIARY
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 and 2014
Note
3 - Commitments and contingencies (continued)
Other
matters
Product
Liability Insurance
For
certain products, the Company was (and is) listed as an additional insured party under the product manufacturers’ insurance
policy. On February 20, 2007, the Company purchased its own liability insurance, which expires on April 20, 2016. The Company
intends to renew this policy. At present, management is not aware of any claims against the Company for any products sold.
Note
4 - Severance payable
In
September 2010 the Company entered into a severance agreement with a former consultant. Under the severance agreement, the consultant
was to be paid $270,000 over a 27 month period in increments of $10,000 per month beginning in September 2010 and continuing through
November 2012. In April 2011, the Company amended the aforementioned severance agreement to monthly payments of $3,400 per month
through March 2016.
In
December 2015, we recorded an additional severance reserve of $40,000 for expected termination benefits provided to three former
employees after employment due to restructuring. These benefits include salary and medical continuation coverage and will be paid
out by April 30, 2016.
The
severance payable balance at December 31, 2015 and 2014 is approximately $46,000 and $47,000, respectively, all of which is current
as of December 31, 2015.
Note
5 - Related party transactions
The
Company had a note payable to the Better Blocks Trust, a major shareholder, in the amount of $590,723. Prior to April 1, 2012,
this loan was interest-free and had no specific terms of repayment. On April 1, 2012, the note payable was modified with new terms
to include interest at the rate of four and three quarters percent (4.75%) per annum. Interest payments of approximately $7,000
were paid during 2014.
On
April 1, 2012, when the note was modified, a conversion option was added that stated that all or any part of this note may be
converted into shares of common stock of the Company at any time, and from time to time, prior to payment, at a conversion price
of $0.50 per share. Conversion is at the option of lender. Any amount not converted will continue to be payable in accordance
with the terms of the note. The Company considered this a modification of debt that was not substantive, thus no gain or loss
was recorded upon modification. The principal balance of this note was due and payable in three equal payments on each of April
1, 2015, April 1, 2016, and April 1, 2017. This note was able to be prepaid in whole or in part at any time without penalty, and
any prepayment shall be applied against the next principal payment due. Principal payments of approximately $119,000 were made
during the years ended December 31, 2014.
During
2014, the shareholder sold $275,000 of the note to accredited investors, who converted the notes into 550,000 shares of the Company’s
stock at the contractual conversion price of $.50 per share. The remainder of the note was paid in full in 2014. At December 31,
2015 and 2014, there was no balance outstanding.
ICTV
BRANDS INC. AND SUBSIDIARY
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 and 2014
Note
6 - Notes payable
On
July 2, 2014, the Company entered into a $500,000, one-year Credit Facility with JPMorgan Chase Bank, N.A. Interest on the Credit
Facility was calculated using the Adjusted One Month LIBOR Rate plus 2.50%. The facility was collateralized by a lien on the Company’s
assets and required the Company to maintain prescribed levels of liquidity and EBITDA. Effective November 7, 2014, the Credit
Facility was amended to remove the EBITDA covenant and hold $500,000 as cash collateral for the amount of the line of credit.
The Company did not utilize the Credit Facility. Effective February 18, 2015, the Company terminated the Credit Facility and the
$500,000 collateral held in escrow was released.
Note
7 - Capital transactions
On
August 15, 2012, the Company entered into a three year corporate public relations agreement with a consultant. As part of the
agreement, the consultant received a monthly consulting fee of $4,000, a commission of $7.50 for each DermaWand
TM
sold
on Amazon.com, and 125,000 warrants with an exercise price of $0.30 that expired 36 months from the date of the agreement. In
addition, the Consultant had an additional 125,000 warrants from a prior agreement with an exercise price of $0.30, which were
exercised during 2013. On June 3, 2015, the 125,000 warrants with an exercise price of $0.30 were exercised. For each of the years
ended December 31, 2015 and 2014, the Company recorded $21,000 and $36,000 of stock based compensation expense for these grants.
As of December 31, 2015 and 2014, there was $0 and $16,000 of unrecognized compensation costs included in prepaid expenses related
to these warrant grants.
On
October 27, 2015, the Board authorized the issuance of up to 3,333,334 shares of common stock to be purchased at $0.30 per share
to accredited investors. A total of 3,333,334 shares were purchased through October 30, 2015 for gross proceeds of $1,000,000.
No underwriting discounts or commissions were paid. As part of the offering, we agreed to register their shares for resale. The
offering will be used for funding opportunities we have for the promotion and sale of our DermaWand
TM
, CoralActives
®
,
Derma Brilliance
®
, and Jidue
®
line of products. The purchasers are accredited investors, as that
term is defined in Regulation D promulgated by the Securities and Exchange Commission, and the shares were issued with restrictive
legends. The issuance of the shares was exempt from registration under Section 4(2) of the Securities Act of 1933, and Rule 5.06(b)
of Regulation D. The Company’s S-1 registration statement registering the shares was declared effective on January 21, 2016.
ICTV
BRANDS INC. AND SUBSIDIARY
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 and 2014
Note
8 - Basic and diluted earnings (loss) per share
ASC
260, “Earnings Per Share” requires presentation of basic earnings per share and dilutive earnings per share.
The
computation of basic earnings (loss) per share is computed by dividing earnings (loss) available to common shareholders by the
weighted average number of outstanding common shares during the period. Diluted earnings per share gives effect to all dilutive
potential common shares outstanding during the period. The computation of diluted earnings per share does not assume conversion,
exercise or contingent exercise of securities that would have an anti-dilutive effect. At December 31, 2015, there were no warrants
outstanding and exercisable and there were 6,480,003 stock options outstanding and 4,636,668 were vested and exercisable at an
average exercise price of $0.27. The following securities were not included in the computation of diluted net loss per share as
their effect would have been anti-dilutive:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Options to purchase common stock
|
|
|
6,480,003
|
|
|
|
7,053,336
|
|
Warrants to purchase common stock
|
|
|
-
|
|
|
|
460,000
|
|
As
the Company was in a loss position for the years ended December 31, 2015 and 2014, all shares were anti-dilutive.
The
computations for basic and fully diluted loss per share are as follows:
For the year ended December 31, 2015:
|
|
Loss
(Numerator)
|
|
|
Weighted Average
Shares (Denominator)
|
|
|
Per Share Amount
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss to common shareholders
|
|
$
|
(1,387,571
|
)
|
|
|
24,979,067
|
|
|
$
|
(0.06
|
)
|
For the year ended December 31, 2014:
|
|
Loss
(Numerator)
|
|
|
Weighted Average
Shares (Denominator)
|
|
|
Per Share Amount
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss to common shareholders
|
|
$
|
(2,284,243
|
)
|
|
|
23,087,106
|
|
|
$
|
(0.10
|
)
|
ICTV
BRANDS INC. AND SUBSIDIARY
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 and 2014
Note
9 - Income taxes
The
(benefit) provision for income tax for the years ended December 31, 2015 and 2014 consist of the following:
Current
|
|
2015
|
|
|
2014
|
|
Federal
|
|
$
|
-
|
|
|
$
|
(2,000
|
)
|
State
|
|
|
-
|
|
|
|
(18,753
|
)
|
Total
|
|
$
|
-
|
|
|
$
|
(20,753
|
)
|
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets
(liabilities) are as follows as of December 31, 2015 and 2014:
|
|
2015
|
|
|
2014
|
|
Net operating loss
|
|
$
|
849,000
|
|
|
$
|
483,000
|
|
Accrued returns and allowances
|
|
|
70,000
|
|
|
|
206,000
|
|
Accumulated depreciation
|
|
|
(6,000
|
)
|
|
|
(7,000
|
)
|
Stock options
|
|
|
342,000
|
|
|
|
329,000
|
|
Deferred revenue
|
|
|
295,000
|
|
|
|
438,000
|
|
Other
|
|
|
376,000
|
|
|
|
391,000
|
|
Total deferred tax assets
|
|
$
|
1,926,000
|
|
|
$
|
1,840,000
|
|
Valuation allowance
|
|
|
(1,926,000
|
)
|
|
|
(1,840,000
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
The
provision (benefit) for income tax is $0 and $(20,753) for the years ended December 31, 2015 and 2014, respectively, or 0% and
0.90%, respectively, of pre-tax income. The effective tax rates for 2015 and 2014 reflect provisions for current federal and state
income taxes. As of December 31, 2015, the Company had approximately $2,431,000 of gross federal net operating losses and $695,000
of gross state net operating losses available. In the prior year, the Company completed an IRC Section 382 study and concluded
that the availability of the Company’s net operating loss carry forwards will not be subject to annual limitations against
taxable income in future periods due to change in ownership rules. The Company plans to update the IRC Section 382 for ownership
changes which occurred during 2015. To the extent that there is a limitation, there would be a reduction in the deferred tax asset
with an offsetting reduction in the valuation allowance. The Company has provided a full valuation allowance on its net deferred
asset as the Company does not have sufficient history of taxable income. The Company does not believe it has any material uncertain
tax positions.
The
Company’s policy is to recognize interest and penalties related to tax matters in general and administrative expenses in
the Condensed Consolidated Statements of Operations. The Company recorded zero interest and penalties for the year ended December
31, 2015 and 2014.
A
reconciliation between the Company’s effective tax rate and the federal statutory rate for the years ended December 31,
2015 and 2014, is as follows:
|
|
2015
|
|
|
2014
|
|
Federal rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
State tax rate
|
|
|
0.68
|
%
|
|
|
0.76
|
%
|
Effect of permanent differences
|
|
|
(14.10
|
)%
|
|
|
(7.07
|
)%
|
Change in valuation allowance
|
|
|
(20.58
|
)%
|
|
|
(26.79
|
)%
|
Effective tax rate
|
|
|
0.00
|
%
|
|
|
(1.25
|
)%
|
ICTV
BRANDS INC. AND SUBSIDIARY
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 and 2014
Note
10 - Segment reporting
The
Company operates in one industry segment and is engaged in the selling of various consumer products primarily through direct marketing
infomercials and televised home shopping. The Company evaluates performance and allocates resources based on several factors,
of which the primary financial measure is operating income (loss) by the end customer, either direct to consumer DRTV sales or
international third party distributor sales. Operating expenses are primarily prorated based on the relationship between DRTV
consumer sales and international third party distributor sales. Domestic sales are DRTV sales sold directly to the consumer by
the Company.
Information
with respect to the Company’s operating income (loss) by segment is as follows:
|
|
For the year ended December 31, 2015
|
|
|
For the year ended December 31, 2014
|
|
|
|
DRTV Consumer
|
|
|
International Third Party Distributor
|
|
|
Totals
|
|
|
DRTV Consumer
|
|
|
International Third Party Distributor
|
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET SALES
|
|
$
|
18,779,285
|
|
|
$
|
5,316,884
|
|
|
$
|
24,096,169
|
|
|
$
|
25,130,725
|
|
|
$
|
7,191,587
|
|
|
$
|
32,322,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF SALES
|
|
|
4,902,720
|
|
|
|
2,772,544
|
|
|
|
7,675,264
|
|
|
|
5,839,570
|
|
|
|
3,976,018
|
|
|
|
9,815,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
13,876,565
|
|
|
|
2,544,340
|
|
|
|
16,420,905
|
|
|
|
19,291,155
|
|
|
|
3,215,569
|
|
|
|
22,506,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
4,724,577
|
|
|
|
656,242
|
|
|
|
5,380,819
|
|
|
|
7,264,182
|
|
|
|
454,310
|
|
|
|
7,718,492
|
|
Selling and marketing
|
|
|
12,325,620
|
|
|
|
102,694
|
|
|
|
12,428,314
|
|
|
|
16,826,228
|
|
|
|
259,897
|
|
|
|
17,086,125
|
|
Total operating expenses
|
|
|
17,050,197
|
|
|
|
758,936
|
|
|
|
17,809,133
|
|
|
|
24,090,410
|
|
|
|
714,207
|
|
|
|
24,804,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
(3,173,632
|
)
|
|
$
|
1,785,404
|
|
|
$
|
(1,388,228
|
)
|
|
$
|
(4,799,255
|
)
|
|
$
|
2,501,362
|
|
|
$
|
(2,297,893
|
)
|
Selected
balance sheet information by segment is presented in the following table as of December 31:
|
|
2015
|
|
|
2014
|
|
DRTV Consumer
|
|
$
|
4,242,502
|
|
|
$
|
5,180,013
|
|
International Third Party Distributor
|
|
|
37,825
|
|
|
|
52,621
|
|
Total Assets
|
|
$
|
4,280,327
|
|
|
$
|
5,232,634
|
|