NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 and 2015
Note
1 – Organization and Business of the Company
Organization
and Nature of Operations
ICTV
Brands, Inc. was organized under the laws of the State of Nevada on September 25, 1998. We currently have the following wholly-owned
subsidiaries:
|
●
|
Better
Blocks International Limited, or BBI, a New Zealand corporation
|
|
|
|
|
●
|
Ermis
Lab, Inc., a Nevada Corporation
|
|
|
|
|
●
|
ICTV
Holding, Inc, a Nevada Corporation (“ICTV Holdings”)
|
Although
our companies are incorporated in Nevada and New Zealand, our operations are currently run from our Wayne, Pennsylvania office.
We
develop, market and sell 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. We are presently exploring other devices and consumable
product lines currently under licensing agreements.
The
goal of our strategy is to introduce our brands to the market through an omni-channel platform that includes, but is not limited
to direct response television (“DRTV”), digital marketing, live home shopping, traditional retail, e-commerce market
places, and international third party distributor networks. Our objective is to have our portfolio of products sold through these
channels to develop long lasting brands with strong returns on investments.
Liquidity
We
had a net loss of approximately $1 million for the year ended December 31, 2016 and an accumulated deficit of approximately
$10 million as of December 31, 2016. We anticipate net income for the next year as a result of the recent acquisition of
PhotoMedex, Inc. and Ermis Lab, Inc. which was completed in January 2017, where we acquired products its flagship product no!no!
®
,
along with the Kyrobak
®
and Cleartouch
®
brands. Management believes that the currently available
resources, including cash, cash equivalents as well as $2 million of the $7 million raised from the private placement
in February 2017 (see Note 10-Subsequent Events) which will be utilized as working capital, will provide sufficient
funds to enable us to meet our operating plan for at least the next twelve months from the date of this filing.
Note
2 - Summary of significant accounting policies
Principles
of consolidation
Our
accompanying consolidated financial statements include the accounts of our wholly-owned subsidiaries BBI, ICTV Holdings and Ermis
Lab, Inc. In October 2016, ICTV Holdings and Ermis Lab, Inc. were formed as holding companies for the asset purchase agreements
that were entered into with PhotoMedex, Inc. and Ermis Lab, Inc. (see Note 10-Subsequent Events) and did not have any activity
through December 31, 2016. 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.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 and 2015
Note
2 - Summary of significant accounting policies (continued)
Recently
Issued Accounting Pronouncements
In
January 2017, Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update
(“ASU”) 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
(“ASU
2017-01”). ASU2017-01 narrows the definition of a “business”. This standard provides guidance to assist
entities with evaluating when a set of transferred assets and activities is a business. This guidance is effective for
interim and annual reporting periods beginning after December 15, 2017. This guidance must be applied prospectively to
transactions occurring within the period of adoption. As a result of the recent PhotoMedex acquistion (See Note 10
- Subsequent Events), we will adopt this standard on January 1, 2017.
In
August 2016, FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments,(“ASU 2016-15”).
The updated accounting requirement is intended to reduce diversity in practice
in the classification of certain transactions in the statement of cash flows. Such transactions include but are not limited
to debt prepayment or debt extinguishment costs, settlement of zero coupon debt instruments, contingent consideration
payments made after a business combination and distributions received from equity method of investments. ASU 2016-15 is
required to be retrospectively applied and is effective for fiscal years and interim periods beginning after December 15,
2017, with early adaption permitted. We are currently evaluating the impact of the new guidance to the consolidated financial
statements.
In
June 2016, FASB issued Accounting Standard Update ASU No. 2016-13,
Measurement of Credit Losses on Financial Instruments
,
which sets forth the current expected credit loss model, a new forward-looking impairment model for certain financial instruments
based on expected losses rather than incurred losses. The ASU is effective for interim and annual periods beginning after December
15, 2019, and early adoption of the standard is permitted. Entities are required to adopt ASU No. 2016-13 using a modified retrospective
approach, subject to certain limited exceptions. We are currently evaluating the impact of the new guidance on our consolidated
financial statements.
In
March 2016, FASB issued Accounting Standards Update 2016-09,
Compensation – Stock Compensation (Topic 718): Improvements
to Employee Share-Based Payment Accounting
(“ASU 2016-09”) which simplifies several aspects of the accounting
for share-based payment transactions including the accounting for income taxes, forfeitures and statutory tax withholding requirements,
as well as classification in the statement of cash flows. The methods of adoption are dependent on the specific aspects of the
new guidance adopted. ASU 2016-09 will be effective for fiscal years beginning after December 15, 2016 and for interim periods
within those fiscal years. Early adoption is permitted but the Company must adopt all amendments that apply in the same period
if they choose to adopt early. We will adopt this standard on January 1, 2017, and the adoption is not expected to have a material
impact on our consolidated financial statements.
In
February 2016, FASB issued ASU No. 2016-02
Leases (Topic 842),
(“ASU 2016-02”). 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.
We are currently evaluating the impact of the new guidance to the consolidated financial statements.
In
November 2015, FASB issued ASU No. 2015-17
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
, which
simplifies current guidance and requires companies to classify all deferred tax assets and liabilities as noncurrent on the balance
sheet. ASU 2015-17 can be applied either prospectively or retrospectively and is effective for periods beginning after December
15, 2016, with early adoption permitted. We believe the effect of this guidance will not be material to its consolidated financial
statements and related disclosures.
In
July 2015, FASB issued ASU No. 2015-11
- Inventory (Topic 330) - Simplifying the Measurement of Inventory
, 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. We do not expect the adoption of this standard to have a material impact on the consolidated financial statements.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 and 2015
Note
2 - Summary of significant accounting policies (continued)
In
May 2014, FASB issued ASU 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. We are currently evaluating the impact of the new guidance on our consolidated financial
statements.
Concentration
of credit risk
Financial
instruments, which potentially subject us to concentrations of credit risk, include cash and trade receivables. We maintain cash
in bank accounts that, at times, may exceed federally insured limits. We have not experienced any losses and believes it is not
exposed to any significant risks on its cash in bank accounts.
As
of December 31, 2016, 55% of our accounts receivable were due from various individual customers to whom our products had been
sold directly via Direct Response Television. In addition, 4% of our accounts receivable was cash due from our credit card processors
as well as 25% 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 fiscal years ended December 31, 2016 and December 31, 2015,
there were no major customers.
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.” We have used available information to derive our estimates. However, because these estimates
are made as of a specific point in time, they are not necessarily indicative of amounts we 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
We
consider all unrestricted highly liquid investments with an original maturity of three months or less to be cash equivalents.
Foreign
currency transactions
Transactions
we entered into 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 $123,000 and $119,000 as of December
31, 2016 and 2015, 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 $91,000 and $80,000 as of December
31, 2016 and 2015, respectively
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 and 2015
Note
2 - Summary of significant accounting policies (continued)
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.
We adjust inventory for estimated obsolescence when necessary based upon demand and market conditions. The Company’s reserve
for obsolescence was approximately $74,000 and $123,000 as of December 31, 2016 and 2015, respectively. Included in inventory
at December 31, 2016 and 2015 is approximately $67,000 and $42,000, 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 as well as consigned products that are held at a retailer distributor for sale.
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, for each of the years ended December 31, 2016 and 2015.
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 undiscounted
cash flows estimated by us 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 years ended December 31, 2016 and 2015.
Related
party transactions
During
the year ended December 31, 2016, we had one sale of products for approximately $14,000 with an international third party
distributor affiliated with one of our Board of Director members. The pricing and terms of the sale were similar to other international
third party sales.
Revenue
recognition
We
recognize revenues from product sales when the following four criteria have been met: (i) persuasive evidence of an arrangement
exists; (ii) delivery has occurred; (iii) the selling price is fixed or determinable; and (iv) collectability is reasonably assured.
The Company’s revenues in the Consolidated Statements of Operations are net of sales taxes. Revenues from product sales
are recorded net of provisions for estimated chargebacks, rebates, expected returns and cash discounts.
We
offer 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 collectability
is reasonably assured.
Revenue
related to our DermaVital
TM
continuity program is recognized monthly upon shipment to customers. Revenue from our live
home shopping and retail customers is recorded upon sale to the final customer. Revenue related to international wholesale and
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 $142,000
and $221,000 as of December 31, 2016 and 2015, respectively.
We
have a return policy whereby the customer can return any product received within 30 of receipt for a full refund. We provide a
provision for product returns based on the experience with historical sales returns, in accordance with ASC Topic 605-15 with
respect to sales of product when a right of return exists. Returns for the periods presented have been offset against gross sales.
Such allowance for sales returns is included in accounts payable and accrued liabilities.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 and 2015
Note
2 - Summary of significant accounting policies (continued)
We
sell warranties on the DermaWand
TM
for various terms. Revenue is recognized ratably over the term, with the unearned
warranty included in deferred revenue on the accompanying consolidated balance sheets. Changes in deferred service revenue related
to the warranties is presented in the following table:
|
|
Years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred extended warranty revenue:
|
|
|
|
|
|
|
|
|
At beginning of period
|
|
$
|
629,143
|
|
|
$
|
670,075
|
|
Revenue deferred for new warranties
|
|
|
118,148
|
|
|
|
174,852
|
|
Revenue recognized
|
|
|
(237,902
|
)
|
|
|
(215,784
|
)
|
At end of period
|
|
$
|
509,389
|
|
|
$
|
629,143
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
235,015
|
|
|
$
|
223,397
|
|
Non-current portion
|
|
|
274,374
|
|
|
|
405,746
|
|
|
|
$
|
509,389
|
|
|
$
|
629,143
|
|
Shipping
and handling
The
amount billed to a customer for shipping and handling is included in revenue. Shipping, handling and processing revenue approximated
$2,097,000 and $3,134,000 for the years ended December 31, 2016 and 2015, respectively. Shipping and handling costs are included
in cost of sales. Shipping and handling costs approximated $861,000 and $1,628,000 for the years ended December 31, 2016 and 2015,
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. Research and development
costs approximated $111,000 and $115,000 for the years ended December 31, 2016 and 2015, 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. We incurred approximately $4,965,000 and $7,907,000 in media costs for airing
our infomercials, $239,000 and $323,000 in new production costs, and $1,347,000 and $906,000 in internet marketing costs for the
years ended December 31, 2016 and 2015, 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 basis 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.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 and 2015
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 our employees,
officers and directors and is intended to advance our best interests by providing personnel who have substantial responsibility
for our management and growth with additional incentive by increasing their proprietary interest in our success, thereby encouraging
them to remain our employee. The Plan is administered by our Board of Directors, 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, 2016, 116,667 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
our employees, officers, and directors, and is intended to advance our best interests by providing personnel who have substantial
responsibility for our management and growth of with additional incentive by increasing their proprietary interest in our success,
thereby encouraging them to remain our employee. The 2011 Plan is administered by our Board of Directors, and authorizes the issuance
of stock options not to exceed a total of 6,000,000 shares. The terms of any awards under the 2011 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, 2016, 3,563,335 options are outstanding under the 2011 Plan.
We
account 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.
We
use ASC Topic 718, “Share-Based Payments”, to account for stock-based compensation issued to employees and directors.
We recognize 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 SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 and 2015
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, 2016 and 2015:
|
|
Number of Shares
|
|
|
Weighted Average
|
|
|
|
Employee
|
|
|
Non-
Employee
|
|
|
Totals
|
|
|
Exercise
Price
|
|
Balance, January 1, 2016
|
|
|
4,036,669
|
|
|
|
-
|
|
|
|
4,036,669
|
|
|
$
|
0.21
|
|
Granted during the year
|
|
|
725,000
|
|
|
|
-
|
|
|
|
725,000
|
|
|
|
0.34
|
|
Exercised during the year
|
|
|
(650,000
|
)
|
|
|
-
|
|
|
|
(650,000
|
)
|
|
|
0.16
|
|
Forfeited during the year
|
|
|
(431,667
|
)
|
|
|
-
|
|
|
|
(431,667
|
)
|
|
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
|
3,680,002
|
|
|
|
-
|
|
|
|
3,680,002
|
|
|
$
|
0.24
|
|
|
|
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
|
|
Of
the stock options outstanding as of December 31, 2016 under the Stock Option Plans, 2,595,000 options are currently vested and
exercisable. The weighted average exercise price of these options was $0.22. These options expire through November 2026. The aggregate
intrinsic value for options outstanding and exercisable at December 31, 2016 and 2015, was approximately $203,000 and $60,000,
respectively. The aggregate intrinsic value for stock options exercised during the years ended December 31, 2016 and 2015 was
approximately $82,000 and $51,000, respectively.
For
the years ended December 31, 2016 and 2015, we recorded approximately $363,000 and $528,000, respectively, in stock compensation
expense under the Stock Option Plans. At December 31, 2016, there was approximately $391,000 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, 2016 and 2015 to value
the stock options granted during the period:
2016
|
|
2015
|
Risk-free
interest rate
|
1.58-2.18%
|
|
Risk-free
interest rate
|
2.05%
|
Expected
dividend yield
|
0.00
|
|
Expected
dividend yield
|
0.00
|
Expected
life
|
6.00
years
|
|
Expected
life
|
6.00
years
|
Expected
volatility
|
152-153%
|
|
Expected
volatility
|
156%
|
Forfeiture
rate
|
5.0%
|
|
Forfeiture
rate
|
5.0%
|
Weighted
average grant date fair value
|
$0.33
|
|
Weighted
average grant date fair value
|
$0.20
|
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 and 2015
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, 2016 and
2015:
|
|
Number of Shares
|
|
|
Weighted Average
|
|
|
|
Employee
|
|
|
Non- Employee
|
|
|
Totals
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2016
|
|
|
466,667
|
|
|
|
1,976,667
|
|
|
|
2,443,334
|
|
|
$
|
0.32
|
|
Granted during the year
|
|
|
50,000
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
0.21
|
|
Expired during the period
|
|
|
-
|
|
|
|
(300,000
|
)
|
|
|
(300,000
|
)
|
|
|
0.08
|
|
Balance, December 31, 2016
|
|
|
516,667
|
|
|
|
1,676,667
|
|
|
|
2,193,334
|
|
|
$
|
0.35
|
|
|
|
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
|
|
Of
the stock options currently outstanding outside of the Stock Option Plans at December 31, 2016, 2,085,001 options are currently
vested and exercisable. The weighted average exercise price of these options was $0.36. These options expire through January 2026.
The aggregate intrinsic value for options outstanding and exercisable at December 31, 2016 and 2015, was approximately $124,000
and $72,000, respectively. The aggregate intrinsic value for stock options exercised during the years ended December 31,
2016 and 2015 was approximately $0 and $2,000, respectively.
For
the years ended December 31, 2016 and 2015, we recorded approximately $54,000 and $62,000, respectively in stock compensation
expense related to stock options outside of the Stock Option Plans. At December 31, 2016, there was approximately $25,000 of total
unrecognized compensation cost related to non-vested option grants that will be recognized over a remaining vesting period of
3 years.
On
December 28, 2015, we 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, we modified the exercise price of 200,000
options issued to three of our 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 our employees or directors 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, 2016. There were no
grants for the year ended December 31, 2015.
2016
|
Risk-free
interest rate
|
1.94%
|
Expected
dividend yield
|
0.00
|
Expected
life
|
6.0
years
|
Expected
volatility
|
156%
|
Forfeiture
rate
|
5.0%
|
Weighted
average grant date fair value
|
$0.21
|
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 and 2015
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, 2016:
|
|
Number of Shares
|
|
|
Weighted Average
|
|
|
|
Employee
|
|
|
Non-
Employee
|
|
|
Totals
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2016 – nonvested
|
|
|
1,843,335
|
|
|
|
-
|
|
|
|
1,843,335
|
|
|
$
|
0.22
|
|
Granted
|
|
|
775,000
|
|
|
|
-
|
|
|
|
775,000
|
|
|
|
0.33
|
|
Vested
|
|
|
(1,125,000
|
)
|
|
|
|
|
|
|
(1,125,000
|
)
|
|
|
0.25
|
|
Forfeited
|
|
|
(300,000
|
)
|
|
|
-
|
|
|
|
(300,000
|
)
|
|
|
0.23
|
|
Balance, December 31, 2016 – nonvested
|
|
|
1,193,335
|
|
|
|
-
|
|
|
|
1,193,335
|
|
|
$
|
0.27
|
|
Note
3 - Commitments and contingencies
Leases
As
of December 31, 2016, we had had an active lease through March 2017 related to the office space rented in Wayne, Pennsylvania.
Rent expense incurred during the years ended December 31, 2016 and 2015 totaled approximately $55,000 and $56,000, respectively.
We entered into an amendment to our current lease in February 2017 for a new space in our current building from March 2017 through
February 2022. The schedule below details the future financial obligations under active lease through March 2017 and the amendment
entered into in February 2017.
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
TOTAL OBLIGATION
|
|
Wayne - Corporate HQ
|
|
$
|
106,000
|
|
|
$
|
118,000
|
|
|
$
|
119,000
|
|
|
$
|
120,000
|
|
|
$
|
122,000
|
|
|
$
|
20,000
|
|
|
$
|
605,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Lease Obligations
|
|
$
|
106,000
|
|
|
$
|
118,000
|
|
|
$
|
119,000
|
|
|
$
|
120,000
|
|
|
$
|
122,000
|
|
|
$
|
20,000
|
|
|
$
|
605,000
|
|
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 and 2015
Note
3 - Commitments and contingencies (continued)
Other
matters
Product
Liability Insurance
For
certain products, we were (and are) listed as an additional insured party under the product manufacturer’s insurance policy.
On February 20, 2007, we purchased our own liability insurance, which expires on April 20, 2017. We intend to renew this policy.
At present, management is not aware of any claims against us for any products sold.
Note
4 – Severance payable
In
September 2010 we 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, we 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 included salary and medical continuation coverage which was paid
out by April 30, 2016.
There
was $0 and $46,000 severance payable balance at December 31, 2016 and 2015, respectively.
Note
5 - Other assets and liabilities
On
January 22, 2016, we entered into a Purchase Agreement with Omega 5 Technologies, Inc. to acquire the worldwide ownership of the
DermaWand patent and all related trademarks and intellectual property for the sum of $1,200,000 to be 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 we may, in our sole discretion, at any time without permission or penalty pre-pay some
or all of the purchase price.
Under our old licensing agreement, we had been assigned the
patents, related trademarks, and exclusive commercial rights to DermaWand based upon a $2.50 per unit fee and maintaining annual
minimum royalty requirements.
As
a result of the agreement, we recorded an offsetting asset and liability at January 1, 2016 in the amount of $1,200,000 for the
asset from the intellectual property acquired and a corresponding liability per the payment schedule. As there is no interest
charged with the purchase agreement we recorded a discount for imputed interest of approximately $37,000, calculated based on
the applicable federal rates at January 22, 2016 of 1.45%, which will be amortized over the term of the agreement using the effective
interest method. The other asset balance for the patent and trademark will be amortized using the straight-line method over the
four-year period of the agreement, which at this time is management’s best estimate of the remaining useful life.
As
of December 31, 2016, the other liability balance was approximately $954,000, including the discount for imputed interest of approximately
$21,000, of which approximately $290,000 was current. For the year ended December 31, 2016, we amortized approximately $15,000
of interest expense related to the discount for imputed interest. The other asset balance was approximately $873,000 as of December
31, 2016 with amortization of approximately $291,000 being recorded in cost of sales for the year ended December 31, 2016. The
accumulated amortization was approximately $291,000 as of December 31, 2016. There was approximately $782,000 in royalty expense
for DermaWand for the year ended December 31, 2015. Management evaluates the other asset for impairment when there is a triggering
event and concluded there was no such event as of December 31, 2016.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 and 2015
Note
6 – Notes payable
On
July 2, 2014, we 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 our assets and
required us 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. We did not utilize the
Credit Facility. Effective February 18, 2015, we terminated the Credit Facility and the $500,000 collateral held in escrow was
released.
Note
7 - Capital transactions
On
January 7, 2016, we issued a total of 50,000 incentive stock options to one of our independent directors at a fair market value
exercise price of $0.21 per share. The options vest one third each year over the next three years, provided the recipient is still
a director of our company. The options may be exercised, once vested, at any time prior to 10 years from the date of grant. The
issuance of the options was exempt from registration under Section 4(2) of the Securities Act of 1933.
On
January 15, 2016, a former employee exercised 200,000 options previously issued to him, at an exercise price of $0.08 per share.
The exercise was cashless, such that the exercise price was paid in shares of our common stock, resulting in a net issuance of
128,000 shares. The shares were issued as restricted stock, with a restrictive legend placed on the share certificate. The issuance
of the shares was exempt from registration under Regulation D and Section 4(2) of the Securities Act of 1933.
On
March 4, 2016, a former employee exercised 150,000 options previously issued to him, at an exercise price of $0.15 per share.
The exercise was cashless, such that the exercise price was paid in shares of our common stock, resulting in a net issuance of
47,727 shares. The shares were issued as restricted stock, with a restrictive legend placed on the share certificate. The issuance
of the shares was exempt from registration under Regulation D and Section 4(2) of the Securities Act of 1933.
On
October 10, 2016, we issued 650,000 incentive stock options to one employee under our 2011 Stock Option Plan. The options were
issued with a fair market value exercise price of $0.34 per share. The options vest as following; (i) 200,000 shares, as of October
10, 2016, (ii ) 250,000 shares, as of one year after the date of issuance, and (iii) 200,000 shares, as of two years after the
date issuance, provided the recipient is still employed by our company at the time of vesting. The options may be exercised, once
vested, at any time prior to 10 years from the date of grant. The recipient of the options is a key employee of our company, and
the issuance of the options was exempt from registration under Section 4(2) of the Securities Act of 1933.
On
October 28, 2016, a former employee exercised 300,000 options previously issued to him, at an exercise price of $0.22 per share.
The exercise was cashless, such that the exercise price was paid in shares of our common stock, resulting in a net issuance of
140,268 shares. The shares were issued as restricted stock, with a restrictive legend placed on the share certificate. The issuance
of the shares was exempt from registration under Regulation D and Section 4(2) of the Securities Act of 1933.
On
November 30, 2016, we issued 75,000 incentive stock options to one employee under our 2011 Stock Option Plan. The options were
issued with a fair market value exercise price of $0.34 per share. The options vest over three years, provided the recipient is
still employed by our company at the time of vesting. The options may be exercised, once vested, at any time prior to 10 years
from the date of grant. The recipient of the options is a key employee of our company, and the issuance of the options was exempt
from registration under Section 4(2) of the Securities Act of 1933.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 and 2015
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, 2016, there were 5,873,336
stock options outstanding and 4,860,001 were vested and exercisable at an average exercise price of $0.28. 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,
|
|
|
|
2016
|
|
|
2015
|
|
Options to purchase common stock
|
|
|
5,873,336
|
|
|
|
6,480,003
|
|
As
the Company was in a loss position for the years ended December 31, 2016 and 2015, all shares were anti-dilutive.
The
computations for basic and fully diluted loss per share are as follows:
For the year ended December 31, 2016:
|
|
Loss (Numerator)
|
|
|
Weighted Average Shares (Denominator)
|
|
|
Per Share Amount
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss to common shareholders
|
|
$
|
(996,344
|
)
|
|
|
28,213,675
|
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 and 2015
Note
9 - Income taxes
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, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
Net operating loss
|
|
$
|
1,193,000
|
|
|
$
|
849,000
|
|
Accrued returns and allowances
|
|
|
74,000
|
|
|
|
70,000
|
|
Accumulated depreciation
|
|
|
(4,000
|
)
|
|
|
(6,000
|
)
|
Stock options
|
|
|
381,000
|
|
|
|
342,000
|
|
Deferred revenue
|
|
|
225,000
|
|
|
|
295,000
|
|
Other
|
|
|
371,000
|
|
|
|
376,000
|
|
Total deferred tax assets
|
|
$
|
2,240,000
|
|
|
$
|
1,926,000
|
|
Valuation allowance
|
|
|
(2,240,000
|
)
|
|
|
(1,926,000
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
The
provision for income tax was $0 for the years ended December 31, 2016 and 2015, respectively. The effective tax rates for 2016
and 2015 reflect provisions for current federal and state income taxes. As of December 31, 2016, the Company had approximately
$3,259,000 of gross federal net operating losses and $951,000 of gross state net operating losses available. In 2016, we completed
an IRC Section 382 study and concluded that the availability of our net operating loss carry forwards will not be subject to annual
limitations against taxable income in future periods due to change in ownership rules. We plan to update the IRC Section 382 for
ownership changes which occurred during 2017. 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 Consolidated Statements of Operations. The Company recorded zero interest and penalties for the year ended December 31, 2016
and 2015.
A
reconciliation between the Company’s effective tax rate and the federal statutory rate for the years ended December 31,
2016 and 2015, is as follows:
|
|
2016
|
|
|
2015
|
|
Federal rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
State taxes
|
|
|
0.00
|
%
|
|
|
0.68
|
%
|
Effect of permanent differences
|
|
|
(12.81
|
)%
|
|
|
(14.10
|
)%
|
Change in valuation allowance
|
|
|
(21.19
|
)%
|
|
|
(20.58
|
)%
|
Effective tax rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 and 2015
Note
10 - Segment reporting
We
operate in the DRTV Consumer segment which is in engaged in selling of various consumer products primarily through direct marketing
channels as well as selling our products through our international third party distributor segment. We evaluate performance and
allocate 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 wholesale international third party distributor sales. Operating expenses are primarily
prorated based on the relationship between DRTV consumer sales and international third party distributor sales.
Information
with respect to our operating income (loss) by segment is as follows:
|
|
For the year ended December 31, 2016
|
|
|
For the year ended December 31, 2015
|
|
|
|
DRTV Consumer
|
|
|
International Third Party Distributor
|
|
|
Totals
|
|
|
DRTV Consumer
|
|
|
International Third Party Distributor
|
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET SALES
|
|
$
|
12,478,174
|
|
|
$
|
4,310,562
|
|
|
$
|
16,788,736
|
|
|
$
|
18,779,285
|
|
|
$
|
5,316,884
|
|
|
$
|
24,096,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF SALES
|
|
|
2,820,869
|
|
|
|
2,177,813
|
|
|
|
4,998,682
|
|
|
|
4,902,720
|
|
|
|
2,772,544
|
|
|
|
7,675,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
9,657,305
|
|
|
|
2,132,749
|
|
|
|
11,790,054
|
|
|
|
13,876,565
|
|
|
|
2,544,340
|
|
|
|
16,420,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
4,008,049
|
|
|
|
250,128
|
|
|
|
4,258,177
|
|
|
|
4,724,577
|
|
|
|
656,242
|
|
|
|
5,380,819
|
|
Selling and marketing
|
|
|
8,484,184
|
|
|
|
30,450
|
|
|
|
8,514,634
|
|
|
|
12,325,620
|
|
|
|
102,694
|
|
|
|
12,428,314
|
|
Total operating expenses
|
|
|
12,492,233
|
|
|
|
280,578
|
|
|
|
12,772,811
|
|
|
|
17,050,197
|
|
|
|
758,936
|
|
|
|
17,809,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
(2,834,928
|
)
|
|
$
|
1,852,171
|
|
|
$
|
(982,757
|
)
|
|
$
|
(3,173,632
|
)
|
|
$
|
1,785,404
|
|
|
$
|
(1,388,228
|
)
|
Selected
balance sheet information by segment is presented in the following table as of December 31:
|
|
2016
|
|
|
2015
|
|
DRTV Consumer
|
|
$
|
4,454,701
|
|
|
$
|
4,242,502
|
|
International Third Party Distributor
|
|
|
84,713
|
|
|
|
37,825
|
|
Total Assets
|
|
$
|
4,539,414
|
|
|
$
|
4,280,327
|
|
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 and 2015
Note
10 – Subsequent Events
PhotoMedex
Acquisition
On
October 4, 2016, we and our wholly-owned subsidiary ICTV Holdings entered into an asset purchase agreement (the “PhotoMedex
Purchase Agreement”) with PhotoMedex, Inc., a Nevada corporation (“PhotoMedex”), and its subsidiaries, Radiancy,
Inc., a Delaware corporation (“Radiancy”), PhotoTherapeutics Ltd (“PHMD UK”), a private limited company
limited by shares incorporated under the laws of England and Wales, and Radiancy (Israel) Limited, a private corporation incorporated
under the laws of the State of Israel (“Radiancy Israel”), (collectively, the “Sellers”), pursuant
to which ICTV Holdings agreed to acquire substantially all of the assets of the Sellers, including, but not limited to, all of
the equity interests of the Seller’s subsidiaries Radiancy (HK) Limited, a private limited company incorporated
under the laws of Hong Kong, and LK Technology Importaçăo E Exportaçăo LTDA, a private Sociedade limitada
formed under the laws of Brazil (collectively, the “PhotoMedex Target Business”), for a total purchase price of $9,500,000.
Such acquisition is referred to herein as the “PhotoMedex Acquisition.” The PhotoMedex Purchase agreement was subject
to certain terms and conditions and on January 23, 2017 we completed the PhotoMedex acquisition.
The
PhotoMedex acquisition included the acquisition of proprietary products and services that address skin diseases and conditions
or pain reduction using home-use devices for various indications including hair removal, acne treatment, skin rejuvenation, and
lower back pain; which products are sold and distributed to traditional retail, online and infomercial outlets for home-use products
and include, without limitation, the following: (a) no!no! ® Hair, (b) no!no! ® Skin, (c) no!no! ® Face Trainer, (d)
no!no! ® Glow, (e) Made Ya Look, (f) no!no ®! Smooth Skin Care, (g) Kyrobak, and (h) ClearTouch ®.
The
purchase price paid by ICTV Holdings in the PhotoMedex Acquisition, for which we are also jointly and severally liable, was paid
as follows: (i) $3,000,000 of the purchase price which was raised in a private placement (described below in more detail)
was deposited on October 5, 2016 into an escrow account established by counsel to the Company and ICTV Holdings, as escrow agent
(the “Escrow Agent”), under an escrow agreement entered into on October 4, 2016 among the Company, ICTV Holdings,
the Sellers, the Escrow Agent, and certain investors in the Company’s private placement (the “Escrow Agreement”),
which escrow funds was paid to the Sellers on January 23, 2017, in accordance with the Escrow Agreement and subject to the conditions
thereof; (ii) $2,000,000 of the purchase price is to be paid by on or before the 90
th
day following January 23, 2017;
and (iii) the remainder of the purchase price is payable in the form of a continuing royalty as described in more detail below.
On October 4, 2016, as required by the PhotoMedex Purchase Agreement, we delivered to PhotoMedex a letter of credit from LeoGroup
Private Debt Facility, L.P. (“LeoGroup”), a private equity fund that secures our obligation to make the $2 million
payment referred to in clause (ii) above. The letter of credit is valid until the earlier of; (1) full payment on demand and presentation
on or before January 23, 2017, or (2) 180 days from the date of letter of credit.
Under
the PhotoMedex purchase agreement, we are required to pay to PhotoMedex and its subsidiaries a continuing monthly royalty on net
cash (invoiced amount less sales refunds, returns, rebates, allowances and similar items) actually received by us or our affiliates
from sales of the consumer products that we acquired from PhotoMedex. Such royalty payments commence with net cash actually received
from and after January 23, 2017, and continue until the total royalty paid to PhotoMedex and its subsidiaries totals $4,500,000,
calculated as follows: (i) 35% of net cash from the sale of all acquired consumer products sold through live television promotions
made through Home Shopping Network (HSN) in the United States, QVC in the European Union, and The Shopping Channel (TSC) in Canada,
less (a) deductions for sales commissions actually paid and on-air costs incurred for those amounts collected related to the sale
of the acquired consumer products made through HSN in the United States, QVC in the European Union, and The Shopping Channel (TSC)
in Canada, and (b) the cost of goods sold to generate such net cash; and (ii) 6% of net cash from the sale of all acquired consumer
products other than the foregoing sales.
In
connection with the PhotoMedex Purchase Agreement, on October 4, 2016, ICTV Holdings entered into a transition services agreement
with the Sellers (the “Transition Services Agreement”), pursuant to which Sellers have agreed to make available to
ICTV Holdings certain services on a transitional basis and allow ICTV Holdings to occupy and use a portion of the Sellers’
premises and warehouses, in exchange for which ICTV Holdings shall (i) pay to the Sellers the documented costs and expenses incurred
by them in connection with the provision of those services; (ii) pay to the Sellers the documented lease costs including monthly
rental and any utility charges incurred under the applicable leases; (iii) reimburse the Sellers for the documented costs and
expenses incurred by them for the continued storage of inventory and raw materials at warehouse locations, and for services for
fulfilling and shipping orders for such inventory; and (iv) reimburse the Sellers for the payroll, employment-related taxes, benefit
costs and out of pocket expenses paid to or on behalf of employees.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 and 2015
Note
10 – Subsequent Events (continued)
Ermis
Labs Acquisition
On
October 4, 2016, we and our newly formed wholly-owned subsidiary, Ermis Labs, Inc., a Nevada corporation (the “Purchaser”),
entered into an asset purchase agreement (the “Ermis Labs Purchase Agreement”) with LeoGroup Private Debt Facility
L.P. a Delaware limited partnership (the “Shareholder”)and Ermis Labs, Inc., a New Jersey corporation (“Ermis
Labs”), pursuant to which the Purchaser has agreed to acquire substantially all of the assets of Ermis Labs (collectively,
the “Ermis Labs Target Business”), for a total purchase price of $2,150,000. Such acquisition is referred to herein
as the “Ermis Labs Acquisition.”
On
January 23, 2017, we completed the Ermis Labs acquisition for an aggregate purchase price of $2,150,000, paid as follows: (i)
$400,000 through the issuance of 2,500,000 shares of our common stock to the stockholders of Ermis Labs, the value of which was
based on the closing price of our common stock on the OTCQX on October 4, 2016, which was $0.16 per share; and (ii) the remainder
of the purchase price will be payable in the form of a continuing royalty as described in more detail below. The issuance of the
common stock was made in reliance upon an exemption from the registration requirements of the Securities Act provided under Section
4(a)(2) of the Securities Act.
Under
the Ermis purchase agreement we are required to pay to Ermis Labs a continuing monthly royalty of 5% of net cash (invoiced amount
less sales refunds, returns, rebates, allowances and similar items) actually received by us or our affiliates from sales of the
over-the-counter medicated skin care products acquired in the Ermis Labs Acquisition, commencing with net cash actually received
by the Purchaser or its affiliates from and after January 23, 2017 and continuing until the total royalty paid to Ermis Labs totals
$1,750,000; provided, however, that we are required to pay a minimum annual royalty amount of $175,000 on or before December 31
of each year commencing with calendar year ending December 31, 2017.
Private
Placement
On
October 4, 2016, we entered into a securities purchase agreement (the “Securities Purchase Agreement”) with certain
accredited investors (the “Investors”), including two investors who are family members to one of our board members,
pursuant to which the Investors have agreed to purchase 8,823,530 shares of Common Stock at a price of $0.34 per share, for aggregate
gross proceeds of $3,000,000 (the “Private Placement”), of which $1,670,000 was from the related party investors
previously mentioned. Pursuant to the Securities Purchase Agreement, we may complete one or more subsequent closings on or prior
to February 1, 2017 for up to maximum aggregate gross proceeds of $7,000,000. The issuance of the Common Stock pursuant to the
Securities Purchase Agreement is being made in reliance upon an exemption from registration provided under Section 4(a)(2) of
the Securities Act.
On
January 23, 2017, we also entered into a registration rights agreement with the investors in connection with the completion of
the private placement. Subject to the terms and conditions of the registration rights agreement, we will file and maintain a registration
statement covering the resale of the common stock sold to the investors in the private placement, subject to customary underwriter
cutbacks
On
January 23, 2017, pursuant to the terms of the securities purchase agreement, dated October 4, 2016, between our company and the
selling stockholders, we completed a private placement whereby the selling stockholders purchased 8,823,530 shares of common stock
at a price of $0.34 per share, for aggregate gross proceeds of $3,000,000.
On
February 1, 2017, pursuant to the terms of the securities purchase agreement, we completed a second and final private placement
whereby the selling stockholders purchased 11,764,713 shares of common stock at a price of $0.34 per share, for aggregate gross
proceeds of $4,000,000.
The
issuance of the common stock pursuant to the securities purchase agreement was made in reliance upon an exemption from the registration
requirements of the Securities Act provided under Section 4(a)(2) of the Securities Act.