RISK
FACTORS
An
investment in our common stock involves a high degree of risk. You should carefully read and consider all of the risks described
below, together with all of the other information contained or referred to in this prospectus, before making an investment decision
with respect to our common stock or our company. If any of the following events occur, our financial condition, business and results
of operations (including cash flows) may be materially adversely affected. In that event, the market price of our common stock
could decline, and you could lose all or part of your investment.
If
the response rates to our infomercials are lower than we predict, we may not achieve the customer base necessary to become or
remain profitable, and the value of your investment may decrease.
Our
revenue projections assume that a certain percentage of viewers who see our infomercials will purchase our products. If a lower
percentage of these viewers purchase our products than we project, we will not achieve the customer base necessary to become or
remain profitable, and the value of your investment may decrease.
If
our infomercials are not successful, we will not be able to recoup significant advance expenditures spent on production and media
times, and our business plan may fail.
Our
business involves several risks inherent in operating a direct response television business. The production of infomercials and
purchase of media time for television involves significant advance expenditures. A short-form infomercial generally costs around
$35,000-$50,000 to produce, while production costs for a long-form infomercial are generally around $150,000-$200,000. We are
dependent on the success of the infomercials we produce and the public’s continued acceptance of infomercials in general.
If our infomercials do not generate consumer support and create brand awareness and we cannot recover the initial money we spend
on production and media time, we will not be able to recoup the advance expenditures and may go out of business if new products
and additional capital are not available.
If
we do not continue to source new products, our ability to compete will be undermined, and we may be unable to implement our business
plan.
Our
ability to compete in the direct marketing industry and to expand into the traditional retail environment depends on our ability
to develop or acquire new innovative products under brands and to complement these products with related families of products
under those brands. If we do not source new products as our existing products mature through their product life cycles, or if
we do not develop related families of products under our brands, we will not be able to implement our business plan, and the value
of your investment may decrease.
A
significant portion of our DrmaWand
TM
sales depend on search engines and other online sources to attract visitors to
our websites, and if we are unable to attract these visitors and convert them into customers in a cost-effective manner, our business
and financial results may be harmed.
With
a significant portion of our DermaWand
TM
sales being derived from e-commerce sites, our sales depend on our ability
to attract online consumers to our websites and convert them into customers in a cost-effective manner, which depends, in part,
on website design, search engines and other online sources for our website traffic. If our television media does not drive a sufficient
amount of visits to our websites, if one or more of our competitors outbids us for specific search terms or utilizes search terms
which are similar to those purchased by us, or if one or more of the website development companies or other online sources on
which we rely for purchased listings, modifies or terminates its relationship with us, our expenses could rise, we could lose
customers, traffic to our websites could decrease and our web sales and financial results could be negatively impacted.
We
generate a significant portion of our direct response television revenue through long form infomercials, and the reduction in
availability of such advertising or loss of advertising outlets could seriously harm our business.
We
generate a significant portion of DermaWand
TM
sales using long form 30-minute infomercials. If we cannot purchase an
adequate amount of advertising time, deliver our advertising in an appropriate and effective manner, and/or reach an acceptable
rate of return on our advertising spend, we will continue to receive lower levels of sales leads and ultimately customers, and
will generate less revenue, which could have a material impact on our business and our revenues.
We
may not be able to effectively integrate the business that we acquired from PhotoMedex and its affiliates or additional businesses
that we may acquire in the future.
Our
ability to realize the anticipated benefits of the PhotoMedex acquisition will depend on our ability to integrate that business
with our own. The combination of two independent businesses is a complex, costly and time-consuming process and there can be no
assurance that we will be able to successfully integrate the PhotoMedex business into our business, or if such integration is
successfully accomplished, that such integration will not be costlier or take longer than presently contemplated. Integration
of the PhotoMedex acquisition may include various risks and uncertainties, including the factors discussed in the paragraph below.
If we cannot successfully integrate and manage the PhotoMedex business within a reasonable time, we may not be able to realize
the potential and anticipated benefits of the such acquisition, which could have a material adverse effect on our share price,
business, cash flows, results of operations and financial position. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Recent Transactions” for more information about the PhotoMedex acquisition.
We
may also consider other strategic transactions, including acquisitions that we believe will complement, strengthen and enhance
growth in our consumer products direct marketing business. We evaluate opportunities on a preliminary basis from time to time,
but these transactions may not advance beyond the preliminary stages or be completed. Such acquisitions are subject to various
risks and uncertainties, including:
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The
inability to integrate effectively the operations, products, technologies and personnel of the acquired companies (some of
which are in diverse geographic regions) and achieve expected synergies;
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The
potential disruption of existing business and diversion of management’s attention from day-to-day operations;
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The
inability to maintain uniform standards, controls, procedures and policies;
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The
need or obligation to divest portions of the acquired companies;
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The
potential impairment of relationships with customers;
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The
potential failure to identify material problems and liabilities during due diligence review of acquisition targets;
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The
potential failure to obtain sufficient indemnification rights to fully offset possible liabilities associated with acquired
businesses; and
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The
challenges associated with operating in new geographic regions.
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addition, we cannot make assurances that the integration and consolidation of newly acquired businesses will achieve any anticipated
cost savings and operating synergies.
We
depend on key management and employees, the loss of whom may prevent us from implementing our business plan, limit our profitability
and decrease the value of your stock.
We
are dependent on the talent and resources of our key executives and employees. The success of our business depends on Kelvin Claney,
our Chief Executive Officer and a member of our Board of Directors, and Richard Ransom, our President. Both Mr. Claney and Mr.
Ransom have extensive experience in the direct response industry, and their services are critical to our success. The market for
persons with experience in the direct response television industry is very competitive, and there can be no guarantee that we
will be able to retain their services. The loss of either Mr. Claney or Mr. Ransom may prevent us from implementing our business
plan, which may limit our profitability and decrease the value of your stock.
If
we cannot protect our intellectual property rights, our operating results will suffer, and you could ultimately lose your investment.
We
seek to protect our proprietary rights to our products through a combination of patents, trademarks, copyrights and design registrations.
Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain
and use information that we consider proprietary. Litigation may be necessary to enforce our intellectual property rights and
to determine the validity and scope of the proprietary rights of others. Any litigation could result in substantial costs and
diversion of management and other resources with no assurance of success and could seriously harm our business and operating results.
Investors could lose their entire investment.
The
markets for our products are intensely competitive and we may not be able to compete effectively against the larger, more well-established
companies that dominate this market or emerging, and small, innovative companies that may seek to obtain or increase their share
of the market.
The
markets for our products are intensely competitive and many of our competitors are much larger and have substantially more financial
and human resources than we do. Many have long histories and strong reputations within the industry and a relatively small number
of companies dominate these markets.
We
compete directly with branded, premium retail products. In addition, due to regulatory restrictions concerning claims about the
efficacy of personal care products, we may have difficulty differentiating our products from other competitive products, and competing
products entering the personal care market could harm our revenue.
Smaller
or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large
and established companies. Our commercial opportunity will be reduced or eliminated if we are unsuccessful in convincing physician
and patient customers and consumers to use our products or if our competitors develop and commercialize products that are safer
and more effective than any products that we may develop.
The
international third party distributor segment is exposed to business and macro-economic risks, which could cause results of our
operations to suffer.
Expanding
into new international markets and bringing new brands to our international distributor network is a major element of our growth
strategy. Factors such as compliance with foreign laws regarding manufacture, importation and registration of our products, currency
fluctuations including the impact of the strengthening of the U.S. dollar, competition from entrenched local companies, and product
integration issues may have an adverse impact on our financial condition.
The
international nature of our business exposes us to certain business risks that could limit the effectiveness of our growth strategy
and cause our results of operations to suffer.
Continued
expansion into international markets is an element of our growth strategy. Introducing and marketing our services internationally,
developing direct and indirect international sales and support channels and managing foreign personnel and operations will require
significant management attention and financial resources. We face several risks associated with expanding our business internationally
that could negatively impact our results of operations, including:
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management,
communication and integration problems resulting from cultural differences and geographic dispersion;
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compliance
with foreign laws, including laws regarding importation and registration of products;
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compliance
with foreign regulatory requirements and the ability to establish additional regulatory clearances necessary to expand distribution
of our products in countries outside of the United States;
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competition
from companies with international operations, including large international competitors and entrenched local companies;
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difficulties
in protecting intellectual property rights in international jurisdictions;
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political
and economic instability in some international markets;
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sufficiency
of qualified labor pools in various international markets;
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currency
fluctuations and exchange rates; and
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potentially
adverse tax consequences or an inability to realize tax benefits.
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We
may not succeed in our efforts to expand our international presence as a result of the factors described above or other factors
that may have an adverse impact on our overall financial condition and results of operations.
We
may encounter difficulties in quality testing and the manufacturing of our products in commercial quantities, which could adversely
impact the rate at which we grow.
There
can be no guarantee that our quality assurance testing programs will be adequate to detect all defects, either ones in individual
products or ones that could affect numerous shipments, which might interfere with customer satisfaction, reduce sales opportunities,
or affect gross margins. In the future, we may need to replace certain of our product’s components and provide remediation
in response to the discovery of defects or bugs in such products that we have shipped. There can be no assurance that such a remediation,
depending on the product involved, would not have a material impact. An inability to cure a product defect could result in the
failure of a product line, temporary or permanent withdrawal from a product or market, damage to our reputation, inventory costs
or product reengineering expenses, any of which could have a material impact on our revenue, margins and net income.
Further,
we may encounter difficulties manufacturing our line of products because we have limited experience manufacturing such products
in significant commercial quantities. Thus, we will, in order to increase its manufacturing output significantly, have to attract
and retain qualified employees for such assembly and testing operations.
Some
of the components necessary for the assembly of our products are currently provided to us by third-party suppliers. While alternative
suppliers exist and could be identified, the disruption or termination of the supply of components could cause a significant increase
in the costs of these components, which could affect our operating results. Our dependence on a limited number of third-party
suppliers and the challenges we may face in obtaining adequate supplies involve several risks, including limited control over
pricing, availability, quality and delivery schedules. A disruption or termination in the supply of components could also result
in our inability to meet demand for its products, which could harm our ability to generate revenues, lead to customer dissatisfaction
and damage its reputation. Furthermore, if we are required to change the manufacturer of a key component of our products, we may
be required to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and with
all applicable regulations and guidelines including Quality Systems Regulations, or QSR requirements and performance standards.
Failure to do so could result in the FDA taking legal or regulatory enforcement action against us and/or our products (e.g. recalls,
fines, penalties, injunctions, seizures, prosecution or other adverse actions). The delays associated with the verification of
a new manufacturer could delay our ability to manufacture our products.
If
we fail to manage and protect our network security and underlying data effectively our businesses could be disrupted which could
harm our operating results.
Our
possession and use of personal information presents risks and expenses that could harm our business. Unauthorized disclosure or
manipulation of such data, whether through breach of our network security or otherwise, could expose us to costly litigation,
damage our reputation and possibly result in a lower revenue stream and the loss of some of our customers.
Maintaining
our network security is of critical importance because the online e-commerce systems store proprietary and confidential customer
data such as names, addresses, other personal information and credit card numbers. We use commercially available encryption technology
to transmit personal information when taking orders. However, third parties may be able to circumvent these security and business
measures by developing and deploying viruses, worms and other malicious software programs that are designed to attack or attempt
to infiltrate our systems and networks. In addition, employee error, malfeasance or other errors in the storage, use or transmission
of personal information could result in a breach of customer or employee privacy. We employ contractors and temporary and part-time
employees who may have access to the personal information of customers and employees. It is possible such individuals could circumvent
its controls, which could result in a breach of customer privacy.
Possession
and use of personal information in conducting our business subject us to legislative and regulatory burdens that could require
notification of data breach, restrict our use of personal information and hinder its ability to acquire new customers or market
to existing customers. We have incurred, and will continue to incur, expenses to comply with privacy and security standards and
protocols imposed by law, regulation, industry standards or contractual obligations.
If
third parties improperly obtain and use the personal information of our customers, we may be required to expend significant resources
to resolve these problems. A major breach of our network security and systems could have serious negative consequences for our
businesses, including possible fines, penalties and damages, reduced customer demand for our products and services, harm to its
reputation and brand and loss of our ability to accept and process customer credit card orders.
We
are exposed to risks associated with credit card and payment fraud and with credit card processing, which could cause us to lose
revenue.
A
significant part of our sales is processed through credit cards or automated payment systems to pay for our products and services.
We have suffered losses, and may continue to suffer losses, because of orders placed with fraudulent credit cards or other fraudulent
payment data. For example, under current credit card practices, we may be liable for fraudulent credit card transactions if we
do not obtain a cardholder’s signature, a frequent practice in internet sales. We employ technology solutions to help us
detect fraudulent transactions. However, the failure to detect or control payment fraud could cause us to lose sales and revenue.
Any
significant interruptions in the operations of our third-party call centers could cause us to lose sales and disrupt our ability
to process orders and deliver our solutions in a timely manner.
We
rely on third-party call centers to sell our products, respond to customer service and technical support requests and process
orders. Any significant interruption in the operation of these facilities, including an interruption caused by our failure to
successfully expand or upgrade our systems or to manage these expansions or upgrades, could reduce our ability to receive and
process orders and provide products and services, which could result in lost and cancelled sales and damage to our brand and reputation.
As
we grow, we will need more capacity from those existing call centers, or we will need to identify and contract with new call centers.
We may not be able to continue to locate and contract for call center capacity on favorable terms, or at all. Additionally, the
rates those call centers charge us may increase, or those call centers may not continue to provide service at the current levels.
If
our third-party call center operators do not convert inquiries into sales at expected rates, our ability to generate revenue could
be impaired. Training and retaining qualified call center operators is challenging, and if we do not adequately train our third
party call center operators, they will not convert inquiries into sales at an acceptable rate.
Our
marketing campaigns and advertising may be attacked as false and misleading, and our media spending might not result in increased
net sales or generate the levels of product and brand name awareness that we desire. We might not be able to increase our net
sales at the same rate as we increase our advertising and marketing expenditures.
Our
future growth and profitability will depend in part on the effectiveness and efficiency of our marketing campaigns and media spending,
including its ability to:
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create
greater awareness of our products and brand name;
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determine
the appropriate creative message and media mix for future expenditures; and
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effectively
manage advertising costs, including creative and media costs, to maintain acceptable costs in relation to sales levels and
operating margins.
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Our
consumer product’s portfolio of infomercials advertising, and other forms of media may not result in increased sales or
generate desired levels of product and brand name awareness, and may be attacked as false and misleading. We may not be able to
increase our net sales at the same rate as we increase our advertising expenditures or may be required to defend against inaccurate
claims of false advertising.
We
periodically update the content of our infomercials and revise our product offerings. If customers are not as receptive to new
infomercial content or product offerings, our sales through our infomercial sales channel will decline. In addition, if there
is a marked increase in the price that we pay for our media time, the cost-effectiveness of our infomercials will decrease. If
our infomercials are broadcast during times when viewership is low, this could also result in a decrease of the cost-effectiveness
of such broadcasts, which could cause our results of operations to suffer. Also, to the extent we have committed in advance for
broadcast time for our infomercials, we would have fewer resources available for potentially more effective distribution channels.
A
higher than anticipated level of product returns may adversely affect our business and our customers may misuse certain of our
products, and product and other damages imposed on us may exceed our insurance coverage, or we may be subject to claims that are
not covered by insurance.
We
offer consumers who purchase our consumer products directly from us an unconditional full 30-days or 60-days money-back guarantee,
depending on the product returned. Retailers and home shopping channels are also permitted to return the consumer products, subject
to certain limitations. We establish revenue reserves for product returns based on historical experience, estimated channel inventory
levels and other factors. If product returns exceed estimates, the excess would offset reported revenue, which could negatively
affect our financial results. Product returns and the potential need to remedy defects or provide replacement products or parts
for items shipped in volume could result in substantial costs, the requirement to conduct an FDA recall and/or submit an FDA-required
report of a correction/removal and have a material adverse effect on our business and results of operations.
We
may be subject to product liability claims from time to time.
Several
our products are highly complex and some are used to treat delicate skin conditions on and near a patient’s face. In addition,
the clinical testing, manufacturing, marketing and use of certain of our products and procedures may also expose us to product
liability, FDA regulatory and/or legal actions, or other claims.
We
presently maintain liability insurance with coverage limits of at least $1,000,000 per occurrence, which we believe is an adequate
level of product liability insurance, but product liability insurance is expensive and we might not be able to obtain product
liability insurance in the future on acceptable terms or in sufficient amounts to protect us, if at all. A successful claim brought
against us in excess of our insurance coverage could have a material adverse effect on our business, results of operations and
financial condition. In addition, continuing insurance coverage may also not be available at an acceptable cost, if at all. Therefore,
we may not be able to obtain insurance coverage that will be adequate to satisfy a liability that may arise. Regardless of merit
or eventual outcome, product liability claims may result in decreased demand for a product, injury to our reputation, withdrawal
of clinical trial volunteers and loss of revenues. Thus, regardless of whether we are insured, a product liability claim or product
recall may result in losses that could result in the FDA taking legal or regulatory enforcement action us and or our products
including recall, and could have a material adverse effect upon our business, financial condition and results of operations.
Our
costs could substantially increase if we experience a significant number of warranty claims.
We
provide 12-month product warranties, and offer longer warranty available for purchase, against technical defects. Our product
warranty requires us to repair defective parts of our products, and if necessary, replace defective components. Historically,
we have received a limited number of warranty claims for these products. The costs associated with such warranty claims have historically
been relatively low. Thus, we generally do not accrue a significant liability contingency for potential warranty claims.
If
we experience an increase in warranty claims, or if our repair and replacement costs associated with such warranty claims increases
significantly, we will begin to incur liabilities for potential warranty claims after the sale of our products at levels that
we have not previously incurred or anticipated. In addition, an increase in the frequency of our warranty claims or amount of
warranty costs may harm our reputation and could have a material adverse effect on our financial condition and results of operations.
We
may be subject to litigation that will be costly to defend or pursue and uncertain in its outcome.
Our
business may bring us into conflict with its licensees, licensors, or others with whom we have contractual or other business relationships,
or with our competitors or others whose interests differ from us. If we are unable to resolve those conflicts on terms that are
satisfactory to all parties, we may become involved in litigation brought by or against us. Such litigation is likely to be expensive
and may require a significant amount of management’s time and attention, at the expense of other aspects of our business.
The outcome of litigation is always uncertain, and in some cases, could include judgments against us that require us to pay damages,
enjoin us from certain activities, or otherwise affect our legal or contractual rights, which could have a significant adverse
effect on our business. In addition, while we maintain insurance for certain risks, the amount of our insurance coverage may not
be adequate to cover the total amount of all insured claims and liabilities. It also is not possible to obtain insurance against
all potential risks and liabilities. We cannot predict what the outcome will be in any ongoing or threatened litigations, and
any adverse results in any such litigations may also materially and negatively impact our business, the market price of its common
stock, cash flow, prospects, revenues, profitability or capital expenditures, or have other material adverse effects on its business,
reputation, results of operations, financial condition or liquidity.
Our
failure to obtain and maintain FDA clearances or approvals on a timely basis, or at all, would prevent us from commercially distributing
and marketing current or upgraded products in the United States, which could severely harm our business.
Our
products are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental authorities.
The process of obtaining regulatory clearances or approvals to market a medical device can be costly and time consuming, and we
may not be able to obtain these clearances or approvals on a timely basis, if at all. The FDA permits commercial distribution
of a new medical device only after the device has received clearance under Section 510(k) of the Federal Food, Drug and Cosmetic
Act, or is the subject of an approved premarket approval application, or PMA, unless the device is specifically exempt from those
requirements. Should the FDA require, or a change in current regulations occur, that our products be FDA-cleared for marketing
and sale in the U.S. we may be required to incur significant expense and engage in a time-consuming process seeking such approvals.
If we were unable to obtain the required FDA approvals for these products or as necessary to make certain claims about the efficacy
of the products, our sales of these products in the U.S. could be materially adversely affected.
The
FDA clears marketing of lower-risk medical devices through the 510(k) process if the manufacturer demonstrates that the new product
is substantially equivalent to other 510(k)- cleared products. High risk devices deemed to pose the greatest risk, such as life-sustaining,
life-supporting, or implantable devices, or devices not deemed substantially equivalent to a previously cleared device, require
the pre-market approval (PMA). The PMA process is costlier, and lengthier, than the 510(k) clearance process. A PMA application
must be supported by extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing and
labeling data, to demonstrate to the FDA’s satisfaction the safety and efficacy of the device for its intended use.
Our
failure to comply with U.S. federal, state and foreign governmental regulations could lead to the issuance of warning letters
or untitled letters, the imposition of injunctions, suspensions or loss of regulatory clearance or approvals, product recalls,
or corrective action, termination of distribution, product seizures or civil penalties. In the most extreme cases, criminal sanctions
or closure of the manufacturing facility are possible.
If
we fail to manage our growth effectively, our businesses could be disrupted which could harm our operating results.
We
have experienced, and may in the future experience, growth in our business, both organically and through the acquisition of businesses
and products. We expect to make significant investments to enable our future growth through, among other things, new product innovation
and clinical trials for new applications and products.
Such
growth may place a strain on our management and operations. Our ability to manage this growth will depend upon, among other factors,
our ability to broaden our management team; our ability to attract, hire, train, motivate and retain skilled employees; and the
ability of our officers and key employees to continue to implement and improve our operational, financial and other systems, to
manage multiple, concurrent customer relationships and different products and to respond to increasing compliance requirements.
Our future success is heavily dependent upon achieving such growth and acceptance of our products. Any failure to effectively
manage future growth could have a material adverse effect on our business, results of operations and financial condition.
We
may need to raise additional funds to pursue our growth strategy or continue our operations, and we may be unable to raise capital
when needed.
From
time to time, we may seek additional equity or debt financing to provide for the capital expenditures required to finance working
capital requirements, continue our expansion, to increase liquidity, develop new products and services or make acquisitions or
other investments. In addition, if our business plans change, general economic, financial or political conditions in our markets
change, or other circumstances arise that have a material effect on its cash flow, the anticipated cash needs of our business
as well as our conclusions as to the adequacy of our available sources of capital could change significantly. Any of these events
or circumstances could result in significant additional funding needs, requiring us to raise additional capital, and we cannot
predict the timing or amount of any such capital requirements now. If financing is not available on satisfactory terms, or at
all, we may be unable to expand our business or to develop new business at the rate desired and its results of operations may
suffer.
Our
issuance of additional shares may have the effect of diluting the interest of stockholders
.
Any
additional issuances by us of common stock from our authorized but unissued shares may have the effect of diluting the percentage
interest of existing stockholders. Out of our 100,000,000 authorized common shares, 47,946,275 shares, or 48%, remain unissued
at March 31, 2017. We have 5,833,336 stock options outstanding as of March 31, 2017. The board of directors has the power to issue
such shares without stockholder approval. None of our 20,000,000 authorized preferred shares are issued. We may issue additional
common shares or preferred shares in the future to raise capital to fund our business operations and growth objectives.
The
board of directors’ authority to set rights and preferences of preferred stock may prevent a change in control by stockholders
of common stock.
Preferred
shares may be issued in series from time to time with such designation, rights, preferences and limitations as our board of directors
determines by resolution and without stockholder approval. This is an anti-takeover measure. The board of directors has exclusive
discretion to issue preferred stock with rights that may trump those of common stock. The board of directors could use an issuance
of preferred stock with dilutive or voting preferences to delay, defer or prevent common stockholders from initiating a change
in control of our company or reduce the rights of common stockholders to the net assets upon dissolution. Preferred stock issuances
may also discourage takeover attempts that may offer premiums to holders of our common stock.
Concentration
of ownership of management and directors may reduce the control by other stockholders over ICTV.
Our
executive officers and directors own or exercise full or partial control over 26% of our outstanding common stock. Thus, other
investors in our common stock may not have much influence on corporate decision-making. In addition, the concentration of control
over our common stock in the executive officers and directors could prevent a change in control of our company.
Our
board of directors is staggered, which makes it more difficult for a stockholder to acquire control of our company.
Our
articles of incorporation and bylaws provide that our board of directors be divided into three classes, with one class being elected
each year by the stockholders. This generally makes it more difficult for stockholders to replace a majority of directors and
obtain control of the board.
Stockholders
do not have the authority to call a special meeting, which discourages takeover attempts.
Our
articles of incorporation permit only our board of directors to call a special meeting of the stockholders, thereby limiting the
ability of stockholders to effect a change in control of our company.
We
do not anticipate paying dividends to common stockholders in the foreseeable future, which makes investment in our stock speculative
or risky.
We
have not paid dividends on our common stock and do not anticipate paying dividends on our common stock in the foreseeable future.
The board of directors has sole authority to declare dividends payable to our stockholders. The fact that we have not and do not
plan to pay dividends indicates that we must use all our funds generated by operations for reinvestment in our operating activities.
Investors also must evaluate an investment in our company solely on the basis of anticipated capital gains.
Limited
liability of our executive officers and directors may discourage stockholders from bringing a lawsuit against them.
Our
articles of incorporation and bylaws contain provisions that limit the liability of directors for monetary damages and provide
for indemnification of officers and directors. These provisions may discourage stockholders from bringing a lawsuit against officers
and directors for breaches of fiduciary duty and may also reduce the likelihood of derivative litigation against officers and
directors even though such action, if successful, might otherwise have benefited the stockholders. In addition, a stockholder’s
investment in our company may be adversely affected to the extent that costs of settlement and damage awards against officers
or directors are paid by us under the indemnification provisions of the articles of incorporation and bylaws. The impact on a
stockholder’s investment in terms of the cost of defending a lawsuit may deter the stockholder from suing one of our officers
or directors. We have been advised that the Securities and Exchange Commission takes the position that this provision does not
affect the liability of any director under applicable federal and state securities laws.
Our
pro forma financial information may not be representative of our future performance.
In
preparing the pro forma financial information included in this prospectus, we have adjusted our historical financial information
based upon currently available information and upon assumptions that our management believes are reasonable in order to reflect,
on a pro forma basis, the impact of the acquisition of assets from PhotoMedex and its affiliates as described elsewhere in this
prospectus. The estimates and assumptions used in the calculation of the pro forma financial information in this prospectus may
be materially different from our actual experience. Accordingly, the pro forma financial information included in this prospectus
does not purport to indicate the results that would have been achieved had the acquisition of such assets been completed on the
assumed date or for the periods presented, or which may be realized in the future, nor does the pro forma financial information
give effect to any events other than those discussed in our unaudited pro forma financial statements and related notes. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Recent Transactions” for more information
about the PhotoMedex acquisition.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following discussion should be read in conjunction with the consolidated financial statements contained elsewhere in this prospectus.
Certain statements contained in this report may constitute forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Because such statements include risks and uncertainties, actual results may differ materially from
those expressed or implied by such forward-looking statements.
Overview
We
develop, market and sell products through a multi-channel distribution strategy, including direct response television, or DRTV,
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;
|
|
|
|
|
●
|
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 the 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.
We
recently acquired several new brands, related intellectual property, inventory and other assets and have begun (or, will shortly
begin) marketing and selling the following new products:
|
●
|
no!no!®
Hair, a home use hair removal device;
|
|
|
|
|
●
|
no!no!®
Skin, a home use device that uses light and heat to calm inflammation and kill bacteria in pores to treat acne;
|
|
|
|
|
●
|
no!no!®
Face Trainer, a home use mask that supports a series of facial exercises;
|
|
|
|
|
●
|
no!no!®
Glow, a home use device that uses light and heat energy to treat skin;
|
|
|
|
|
●
|
Made
Ya Look, a heated eyelash curler;
|
|
|
|
|
●
|
no!no!®
Smooth Skin Care, an array of skin care products developed to work with the devices to improve the treated skin;
|
|
|
|
|
●
|
Kryobak®,
a home use device for the treatment of non-specific lower back pain;
|
|
|
|
|
●
|
ClearTouch®,
a home use device for the safe and efficient treatment of nail fungus; and
|
|
|
|
|
●
|
Ermis
Labs acne treatment cleansing bars.
|
Our
strategy is to introduce our brands to the market via an omni-channel platform that includes but is not limited to DRTV, digital
marketing, live home shopping, traditional retail, e-commerce market places, and international thirds 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.
Fluctuations
in our revenue are driven by changes in our product mix. Revenues may vary substantially from period-to-period depending on our
product line-up. A product that generates revenue in one quarter may not necessarily generate revenues in each quarter of a fiscal
year for a variety of reasons, including, seasonal factors, number of infomercials run, the product’s stage in its life-cycle,
the public’s general acceptance of the marketing campaign and other outside factors, such as the general state of the economy.
Just
as fluctuations in our revenues are driven by changes in our product mix, our gross margins from period to period depend on our
product mix. Our gross margins vary according to whether the products we are selling are primarily our own products or third-
party products. As a rule, the gross margins for our own products are considerably higher based on proportionately smaller cost
of sales. For third-party products, our general experience is that our gross margins are lower, because we record as cost of sales
the proportionately higher cost of acquiring the product from the manufacturer. Within each category (i.e., our own products versus
third-party products), gross margins still tend to vary based on factors such as market price sensitivity and cost of production.
Many
of our expenses for our own products are incurred up-front. Some of our up-front expenditures include infomercial production costs,
which are expensed at the start of a campaign and purchases of media time. If our infomercials are successful, these up-front
expenditures produce revenue as consumers purchase the products aired on the infomercials. We do not incur infomercial production
costs and media time for our international sales to third party distributors, because we merely act as the distributor for pre-produced
infomercials. It is the responsibility of the international infomercial operators to whom we sell the third-party products to
take the pre-produced infomercial, adapt it to their local standards and pay for media time.
Results
of Operations
The
following discussion compares operations for the fiscal year ended December 31, 2016, with the fiscal year ended December 31,
2015.
Revenues
Our
net sales decreased to approximately $16,789,000 during the year ended December 31, 2016 from approximately $24,096,000 during
the year ended December 31, 2015. Net sales relating to DermaWand
TM
for DRTV, including DermaVital®, were approximately
$9,224,000 in 2016 as compared to approximately $16,271,000 in the prior year. The primary driver of the decline in sales was
generated by our decrease in media related expenditures, as we reduced the amount of airings of the DermaWand
TM
infomercial
and allocated additional resources to other products in our pipeline. We reduced our total media spend to approximately $4,965,000
during the year ended December 31, 2016 from approximately $7,907,000 during the year ended December 31, 2015. Further, as a result
of the reduced media spend, sales related to the DermaVital® skin care line were approximately $1,430,000 and $2,720,000 during
2016 and 2015, respectively.
Included
in net sales is retail sales of $474,000 during the year ended December 31, 2016 compared to $69,000 of retail sales during the
year ended December 31 2015. We expect our retail sales to grow throughout 2017. During 2016, we had $32,000 in revenue generated
sales from live televised home shopping compared to $393,000 for the year ended December 31, 2015.
During
the year ended December 31, 2016, international third party distributor sales revenue for the DermaWand
TM
decreased
to approximately $4,311,000 from approximately $5,317,000 during the year ended December 31, 2015. Our international third party
distributor revenue is impacted by timing of shipments at period end, currency fluctuations and the appreciation of the U.S. dollar,
as well as scheduling considerations with our distributors’ end customers. The decrease is primarily due to a decline in
sales from our third party distributor customer located in France, Novellia. Sales from our French distributor Novellia decreased
to approximately $876,000 for the year ended December 31, 2016 compared to approximately $1,488,000 for the year ended December
31, 2015. In addition, sales from the Latino Media Services (LMS) group comprised of distributors from Chile, Argentina, Peru,
Colombia, El Salvador, and Ecuador decreased to approximately $1,186,000 in 2016 compared to approximately $1,298,000 in the prior
year. Offsetting the decrease in sales from Novellia and the Latino Media Services (LMS) group, was an increase of sales from
Inova to $1,248,000 in 2016 from $1,019,000 in the prior year. We are continuing to work on a new model and marketing campaign
for DermaWand
TM
as well as diversifying our international product portfolio in order to grow this segment in the future.
Gross
Margin
Gross
margin percentage was 70% in 2016, compared to 68% in 2015. In 2016, we generated approximately $11,790,000 in gross profit, compared
to approximately $16,421,000 in 2015. The gross margin percentage for domestic DRTV consumer revenue was approximately 77% and
74% compared to approximately 49% and 48% for international third party distributor sales in 2016 and 2015, respectively. The
increases in gross margin percentage is mainly attributable to a royalty agreement with the developer of DermaWand
TM
,
which decreased the amount of royalties as a percentage of sales. Amortization of the Dermawand
TM
intangible asset
amounted to approximately $291,000 recorded in cost of sales for the year ended December 31, 2016, compared to approximately $782,000
in royalty expense for DermaWand
TM
for the year ended December 31, 2015.
Operating
Expenses
Total
operating expenses decreased to approximately $12,773,000 during the year ended December 31, 2016, compared to approximately $17,809,000
in the prior year. This decrease in operating expenses is due to a few key factors. The largest factor is a decrease in media
expenditures. Media expenditures were approximately $4,965,000 and $7,907,000 in the years ended December 31, 2016 and 2015, respectively.
Partially offsetting the decrease in media expenditures was an increase in internet marketing expense as we shifted to more digital
marketing efforts through search engine marketing and optimization, paid social media and banner ad campaigns. Internet marketing
expenditures were approximately $1,347,000 and $906,000 during the years ended December 31, 2016 and 2015, respectively.
As
a result of the decrease in media expenses, there were additional volume related decreases. Answering service expenses were approximately
$663,000 and $1,060,000 during the years ended December 31, 2016 and 2015, respectively. Customer service expenses were approximately
$339,000 and $850,000 during the years ended December 31, 2016 and 2015, respectively. Merchant fees decreased to approximately
$274,000 in the year ended December 31, 2016, compared to approximately $470,000 during the year ended December 31, 2015. Total
bad debt expenses decreased to approximately $921,000 during the year ended December 31, 2016 from approximately $1,372,000 in
the prior year, which is consistent with the decrease in sales.
In
addition to the volume related decreases, we reduced our operating expenditures in a number of other areas. Production expenses
were approximately $239,000 and $323,000 during the years ended December 31, 2016 and 2015, respectively, because of the timing
of campaign launches. In 2015, we brought in-house several responsibilities previously outsourced to third party consultants,
resulting in consulting fees decreasing to $305,000 from $392,000 during the years ended December 31, 2016 and 2015, respectively.
Furthermore, as we completed several clinical trials and production initiatives in the prior year, our research and development
and travel expenditures decreased to approximately $111,000 and $104,000 during the year ended December 31, 2016, from approximately
$115,000 and $253,000 in the prior year, respectively. Additionally, as all non-employee awards vested in the prior year, our
total share based compensation expenses decreased to approximately $417,000 during the year ended December 31, 2016, from approximately
$612,000 during the year ended December 31, 2015.
Net
Loss
We
generated a net loss of approximately $996,000 for the year ended December 31, 2016, compared with a net loss of $1,388,000 for
the year ended December 31, 2015. The decrease can be attributed to the decrease in net sales, more than offset by the overall
decreases in operating expenses discussed above.
Recent
Transactions
PhotoMedex
Acquisition
On
October 4, 2016, we and our wholly-owned subsidiary ICTV Holdings entered into an asset purchase agreement with PhotoMedex and
its subsidiaries pursuant to which ICTV Holdings agreed to acquire substantially all of the assets of PhotoMedex and its subsidiaries,
including, but not limited to, all of the equity interests in its Hong Kong and Brazilian subsidiaries.
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) Kryobak®, and (h) ClearTouch®.
On
January 23, 2017 we completed the PhotoMedex acquisition for an aggregate purchase price of $9.5 million, payable as follows:
(i) $3 million of the purchase price was paid from an escrow fund pursuant to an escrow agreement, entered into on October 4,
2016 with certain investors in our private placement; (ii) $2 million of the purchase price is to be paid 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
described in more detail below.
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.
Ermis
Labs Acquisition
On
October 4, 2016, we entered into an asset purchase agreement with LeoGroup Private Debt Facility and Ermis Lab pursuant to which
we agreed to acquire substantially all of the assets of Ermis Labs.
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 of the purchase price was paid on January 23, 2017 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 is 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 us or our 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 with certain accredited investors pursuant to which we could
issue in one or more offerings up to 20,588,243 shares of our common stock, at a price of $0.34 per share, for an aggregate maximum
amount of up to $7 million.
On
January 23, 2017, pursuant to the terms of the securities purchase agreement, we completed the sale of 8,823,530 shares of common
stock at a price of $0.34 per share, for aggregate gross proceeds of $3,000,000. Thereafter, on February 1, 2017, we completed
a second and final closing whereby we sold 11,764,713 shares of common stock at a price of $0.34 per share, for aggregate gross
proceeds of $4,000,000.
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
.
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.
Liquidity
and Capital Resources
At
December 31, 2016, we had approximately $1,391,000 in cash and cash equivalents compared to approximately $1,334,000 at December
31, 2015. Cash flow provided by operating activities was approximately $283,000 during the year ended December 31, 2016 compared
to cash flow used by operating activities of approximately $1,515,000 during the same period in 2015. The fluctuation was primarily
a result of a decrease in inventory of approximately $706,000, a decrease in prepaid expenses and other assets of approximately
$163,000 as well as a increase of approximately $83,000 in accounts payable, accrued expenses and severance payable offset by
a net loss of approximately $996,000, an increase in accounts receivable, net of bad debt expense, of approximately $205,000.
We had $225,000 in net cash used in financing activities as a result of the pay-down of the DermaWand® asset purchase agreement
during the year ended December 31, 2016, compared to net cash proceeds of $1,704,000 for the same period in 2015. Included in
2015, was the issuance of 3,333,334 shares of common stock for proceeds of $1,000,000 and the exercise of $500,000 in stock options.
As
discussed in Note 5 in the Notes to the Consolidated Financial Statements contained elsewhere in this prospectus, 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 $1,200,000, payable with annual payments of $300,000 per year
for the calendar years 2016 through 2019. As of December 31, 2016, we had a debt obligation of approximately $954,000 related
to this purchase agreement compared to no debt obligations as of December 31, 2015. We believe that this agreement will provide
additional liquidity with a lower royalty cost per unit sold over the coming years.
We
had working capital of approximately $1,340,000 at December 31, 2016, compared to $2,253,000 at December 31, 2015. Based on our
current rate of cash outflows and cash on hand, management believes that our current cash will be sufficient to meet the anticipated
cash needs for working capital for at least the next twelve months.
Critical
Accounting Policies and Estimates
The
Securities and Exchange Commission, or SEC, defines “critical accounting policies” as those that require application
of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect
of matters that are inherently uncertain and may change in subsequent periods. Our significant accounting policies are described
in Note 2 in the Notes to the Consolidated Financial Statements. Not all of these significant accounting policies require management
to make difficult, subjective or complex judgments or estimates. However, the following policies could be deemed to be critical
within the SEC definition.
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 majority of our receivables are from our direct to consumer DRTV customers. Accounts receivable
are reduced by an allowance for amounts that may become uncollectible in the future. From time to time, our customers dispute
the amounts due to us, and, in other cases, our customers experience financial difficulties and cannot pay on a timely basis.
In certain instances, these factors ultimately result in uncollectible accounts. The determination of the appropriate reserve
needed for uncollectible accounts involves significant judgment. Such factors include changes in the financial condition of our
customers as a result of industry, economic or customer-specific factors. A change in the factors used to evaluate collectability
could result in a significant change in the allowance needed. We calculate our allowances based on historical customer returns
and bad debt activity. We complete a validation process on our reserve estimates by performing a retrospective review on an ongoing
basis.
In
addition to reserves for returns on accounts receivable, an accrual is made for the returns of product that have been sold to
customer 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.
Inventories
Inventories
consist primarily of products held for resale, and are valued at the lower of cost (first-in, first-out method) or market. Reserves
for slow-moving, excess and obsolete inventories, reduce the historical carrying value of our inventories, and are provided based
on historical experience and product demand. Management evaluates the adequacy of these reserves periodically based on forecasted
sales and market trends. Included in inventory at December 31, 2016 and 2015 is approximately $67,000 and $42,000 of consigned
product, respectively, 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.
Revenue
recognition
For
our 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. Our revenues in the Consolidated Statement of Operations are net of sales taxes.
We
offer a 30-day risk-free trial as one of our payment options. Revenue on the 30-day risk-free trial 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 risk-free trial is recognized upon shipment of the product to the customer and 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.
We
have 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 we have accepted returns past 30 days of receipt. For Cleartouch®, Kyrobak®
and no!no!®, our products newly acquired in the PhotoMedex acquisition, we currently have a return policy whereby the customer
can return any product received within 60 days for a full refund, excluding shipping and handling. We provide an allowance for
returns based upon past experience. All significant returns for the years presented have been offset against gross sales.
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.
Our
policy is to recognize interest and penalties related to tax matters in general and administrative expenses in the Consolidated
Statements of Operations.
Off-Balance
Sheet Arrangements
We
do not have any off-balance sheet arrangements.
OUR
BUSINESS
Overview
We
develop, market and sell products through a multi-channel distribution strategy, including direct response television, or DRTV,
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;
|
|
|
|
|
●
|
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 the 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.
We
recently acquired several new brands, related intellectual property, inventory and other assets and have begun (or, will shortly
begin) marketing and selling the following new products:
|
●
|
no!no!®
Hair, a home use hair removal device;
|
|
|
|
|
●
|
no!no!®
Skin, a home use device that uses light and heat to calm inflammation and kill bacteria in pores to treat acne;
|
|
|
|
|
●
|
no!no!®
Face Trainer, a home use mask that supports a series of facial exercises;
|
|
|
|
|
●
|
no!no!®
Glow, a home use device that uses light and heat energy to treat skin;
|
|
|
|
|
●
|
Made
Ya Look, a heated eyelash curler;
|
|
|
|
|
●
|
no!no!®
Smooth Skin Care, an array of skin care products developed to work with the devices to improve the treated skin;
|
|
|
|
|
●
|
Kryobak®,
a home use device for the treatment of non-specific lower back pain;
|
|
|
|
|
●
|
ClearTouch,
a home use device for the safe and efficient treatment of nail fungus; and
|
|
|
|
|
●
|
Ermis
Labs acne treatment cleansing bars.
|
Our
Background and Corporate History
We
were formerly known as International Commercial Television, Inc. and were organized under the laws of the State of Nevada on September
25, 1998. On July 3, 2014, we changed our name to ICTV Brands Inc.
We
currently have the following wholly-owned subsidiaries:
|
●
|
Better
Blocks International Limited, or BBI, a New Zealand corporation
|
|
|
|
|
●
|
Ermis
Labs, Inc., a Nevada corporation
|
|
|
|
|
●
|
ICTV
Holdings, Inc., a Nevada corporation
|
|
|
|
|
●
|
Radiancy
(HK) Limited, a private limited company limited by shares, incorporated under the laws of Hong Kong
|
|
|
|
|
●
|
LK
Technology Importaçăo E Exportaçăo LTDA, a private Sociedade limitada formed under the laws of Brazil.
|
Although
our companies are incorporated in Nevada, New Zealand, Hong Kong and Brazil, our operations are currently run from our Wayne,
Pennsylvania office.
Our Growth Strategy
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, 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.
We
continually seek to develop, acquire or obtain the license to consumer products that can be distributed and marketed profitably
through a distribution network. Success depends, in part, on our ability to market products that appeal to consumers and that
can be easily associated with a brand. In order to succeed, we need to identify new products to supplement and possibly replace
the existing product lines as they mature through product life cycles.
We
put forth extensive effort to research and develop new products that are unique and that will be suitable for direct response
marketing. The development of new product ideas stems from a variety of sources, including inventors, trade shows, strategic alliances
with manufacturing and consumer product companies, industry conferences, and the continuous review of new developments within
targeted brand and product categories. In addition, we receive unsolicited new product proposals from independent parties.
We
also internally generate ideas for new products that we wish to develop. If we have an idea for a product, we will present prototype
specifications to one of our manufacturers to develop a prototype, and we will then evaluate the feasibility of selling the product
through direct marketing initiatives.
When
we evaluate a product for its suitability for direct sale, its uniqueness, ability to be demonstrated and consumer’s perception
of value are considered. Part of the selection criteria for new products are as follows:
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Products
must be unique, demonstrable, have mass-market appeal and generally be unavailable elsewhere in the marketplace. Benefits
must be capable of being demonstrated visually, preferably with support from customer testimonials;
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|
Must
support a sufficient media cost per order allowable while still representing good perceived value to the consumer;
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Must
have a unique “hook” to be able to catch the attention of the consumer - the bigger the problem solved by the
product, the greater the sales potential;
|
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Easily
and effectively promoted through sustained direct sale channels, specifically digital;
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Supports
a margin sufficiently high enough to maintain profitability when sold through conventional retailers;
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Has
high volume sales potential, to ensure live home shopping and retailer/e-commerce interest;
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Exhibits
potential for “back-end” sales either through live home shopping, traditional retail or continuity programs; and
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Should
have the capability to be marketed internationally through wholesale distributor network.
|
Brand
Portfolio
The
following is a list of brands in the ICTV portfolio through ownership or licensing agreement.
DermaWand
TM
Since
1998, we owned the exclusive rights to sell the DermaWand
TM
, an at-home skin care device that reduces fine lines and
wrinkles and improves overall skin appearance. Backed by clinically proven results that have been published in accredited journals,
millions have been sold around the world. Targeting the older female demographic, DermaWand
TM
uses radio frequency
technology, the same technology used in medspas and doctor’s offices but at a lower amplitude. The combination of thermal
energy, instant stimulation and oxygenation show visible improvement in the skin including reduced fine lines and wrinkles, toned
and tightened skin and reduced pore size.
In
January 2016, we acquired the worldwide ownership of the DermaWand
TM
patent and all related trademarks. The price consumers
pay for DermaWand
TM
varies from country to country, however, it generally ranges from $90-$150 while sales to third
party distributors are made at a wholesale price. The DermaWand
TM
is sold and marketed with DermaVital
TM
skin care products, which are offered with various continuity programs. We recognized approximately $9,224,000 and $16,271,000
of revenue related to the DermaWand
TM
infomercial, including DermaVital
TM
sales, during 2016 and 2015, respectively.
We plan to release the next generation DermaWand
TM
model in 2017, which is currently being developed.
DermaVital
®
DermaVital
®
is a brand of cosmetics with a wide variety of skin care products that complement the DermaWand
TM
. The product
line consists of several moisturizers that allow water to penetrate the skin’s surface, thus re-hydrating the deeper layers.
In addition to moisturizers, the DermaVital
®
line has facial cleansers, microdermabrasion treatments, eye cream,
lip cream, and hand cream.
DermaVital
®
has been offered to DermaWand
TM
buyers through Canada and U.S direct response television (“DRTV”)
and digital distribution channels through an auto shipment program. Customers that enrolled can cancel at any time. We recognized
approximately $1,430,000 and $2,720,000 of DermaVital
®
revenue during 2016 and 2015, respectively.
no!no!
®
On
January 23, 2017, we acquired the no!no!
®
brand, which includes an array of hair removal and skin care devices
with proven technology that is portable, can be used at home and targets a broad demographic that includes anyone with unwanted
hair.
The
no!no!
®
hair removal products treat and remove the hair by using Thermicon
®
technology, which was
developed on the basic principle of sending heat signals to the hair. When used consistently over time, Thermicon
®
can
reduce the regrowth of hair. Additionally, unlike other hair removing technologies, no!no!
®
Thermicon
®
works on all hair color and skin tones. The no!no!
®
hair removal line includes a few options that vary in
size and power including the Micro, Pro, Ultra, and yet to be released is the no!no!
®
Pivot, the most powerful
and agile version to date, complete with a pivoting head to target hard to reach curves and 2 additional intensity levels.
Also
under the no!no!
®
brand, is the no!no!
®
Skin device which uses light and heat, the same technology
available in dermatologist’s offices, to calm inflammation and kill bacteria in the pore to fight acne. With two ten-second
treatments in the morning and evening up to 81% of consumers saw clearance of acne within 24 hours. no!no!
®
has
a FDA 510(k) clearance with the U.S. Food and Drug administration (FDA).
In
addition to the devices, the no!no!
®
brand includes an array of consumable skin care products under the name no!no!
®
Smooth, which are developed to work with the devices to improve the treated skin.
Kyrobak
®
On
January 23, 2017, we acquired Kyrobak
®
which was developed to relieve back pain, using continuous passive motion
(CPM) to increase mobility and improve wellness from the comfort of your home. CPM technology is a standard treatment in sports
health and rehabilitation clinics around the world. Kyrobak
®
is designed to move your spine in the same range of
motion you would experience when walking at a steady pace. CPM technology brings motion to your spine allowing the vertebrae to
open up and decompress. The key demographics for this brand are older men and women.
Cleartouch
®
On
January 23, 2017, we acquired ClearTouch
®
which provides FDA cleared technology resulting in a no mess option to
help with nail fungus. This product is safe, clean and is backed by customer testimonials that have seen impressive results with
only two treatments a day that last only 10 seconds each by emitting heat and light to the affected area. Sized no larger than
a cell phone and weighing only 3.4 ounces, ClearTouch
®
can be easily stowed for travel and targets men and women
who suffer from nail fungus.
Ermis
Labs Medicated Bars
On
January 23, 2017, we acquired Ermis Labs Medicated Bars, which provides affordable, reliable relief for some of the toughest conditions
including acne, psoriasis, dandruff, dermatitis and fungus resulting in a broad target audience. Every bar is dermatologist recommended
and formulated with Sea Whip Coral Extract, – a natural, renewable resource found in the Caribbean proven to help reduce
inflammation, irritation and redness. They are also enriched with Vitamin A to keep skin cells healthy, Vitamin E to protect skin
cells from free radicals and Shea Butter to moisturize and heal skin.
CoralActives
®
In
March 2014, we entered into a licensing agreement with Ermis Labs, in which we obtained the exclusive worldwide rights to manufacture
and distribute their line of CoralActives
®
acne treatment and skin cleansing products. In January 2017, we acquired
the CoralActives
®
brand from Ermis Labs. This product line consists of a retinol exfoliating cleanser, penetrating
acne serum gel, moisturizer, cleansing bar and motorized cleansing brush and targets younger men and women. The entire line is
formulated with Sea Whip Coral Extract, a renewable resource found in the Caribbean that carries natural anti-inflammatory properties.
This key ingredient allows for a higher Benzoyl Peroxide concentration, resulting in an acne treatment more powerful and gentler
than the competition. We had sales of approximately $53,000 and $51,000 for the years ended December 31, 2016 and 2015, respectively.
Derma
Brilliance
TM
In
April 2013, we entered into a licensing agreement with DermaNew, Inc., in which we obtained the exclusive worldwide rights to
manufacture and distribute Derma Brilliance
TM
, a patented anti-aging, exfoliating and resurfacing system that targets
middle aged to older women. The DermaBrilliance
TM
Sonic Exfoliation System cleanses, exfoliates and massages your skin
for a smooth, luminous more youthful appearance. Clinically proven to visibly reduce the signs of aging by removing dull, dry,
skin and debris to bring new, fresh skin to the surface for a radiant, glowing look. The DermaBrilliance
TM
System combines
a revolutionary random orbit skin care device, operating at 5,000 oscillations, with the Jewel Resurfacing Cream. This patented
formula is infused with 1 full carat of micronized diamond and over 100 carats of micronized garnets for a luxury spa treatment
at home. The DermaBrilliance
TM
product line also includes an array of skin care products including moisturizers, cleansers
and replacement heads. We had sales of approximately $368,000 and $237,000 in the years ended December 31, 2016 and 2015, respectively.
Elastin-rp
®
In
July 2013, we acquired the exclusive worldwide rights to Elastin-rp
®
through a licensing agreement with BioActive
Skin Technologies. Elastin-rp
®
is a branded system of cosmetic formulations designed to help improve the elasticity
of the skin, thereby diminishing the appearance of fine lines and wrinkles. Targeting older women, Elastin-rp
®
addresses the anti-aging market and is delivered using a unique body heat-activated system which enables the BioLastin Complex
to penetrate quickly to help stimulate your skin’s natural ability to replenish elastin and collagen. We had sales of approximately
$35,000 and $117,000 in the years ended December 31, 2016 and 2015, respectively.
Wrinkle
Filler
In
June 2016, we began purchasing and marketing and selling, Skineance Wrinkle Filler from the dirstributor, Intersourcing Inc.,
a Belgium corporation on a non-exclusive basis. Wrinkle Filler is a remarkable serum that will visually make your lines and wrinkles
disappear within seconds. Targeting older women, Wrinkle Filler is effective on crow’s feet, forehead wrinkles, lion’s
brow, lip/laugh lines and under eye wrinkles, this anti-wrinkle silicone gel also moisturizes giving the appearance of healthy,
youthful skin. We sell Wrinkle Filler in the U.S., Canada, and United Kingdom (“U.K.”) markets. We had sales of approximately
$27,000 for the year ended December 31, 2016.
Juvion
In
November 2013, we acquired exclusive worldwide licenses to two unique facial beauty devices that we had brand under the trademark
Juvion. The Juvion product line features a Face Wand, Eye Wand, serum and beauty masks and targets older women. The Juvion Face
Wand and Eye Wand use three types of energy to gently, yet effectively reduce fine lines and wrinkles. Using Electroporation (Galvanic
Wave Energy), Radio Frequency (RF) and Electric Muscle Stimulation (EMS), this multi anti-wrinkle technology stimulates blood
circulation to increase the composition of collagen and elastin. Combined with the Juvion Serum which undergoes a patented encapsulation
ion-charged treatment process, conducts the electrical currents to penetrate deeply into the skin. We had sales of approximately
$10,000 and $0 for the year December 31, 2016 and 2015, respectively.
Jidue
TM
In
July 2014, we entered into an exclusive marketing agreement with Audy Global Enterprises Inc., in which we obtained the exclusive
worldwide license to market and distribute the Jidue
TM
Facial Massager Mask. Jidue
TM
Facial Massager gently
massages your temples and the skin around your eyes to help improve both your quality of sleep and under eye appearance targeting
middle aged and older men and women. Using ancient acupressure principles, 18 uniquely positioned pulsating nodes to stimulate
the 4 key pressure points around the eye to increase facial blood circulation and lymph flow. Jidue
TM
is clinically
proven to help relieve eye puffiness, dark circles and facial tension. Jidue
TM
helps relieve stress to fall asleep
fast and sleep soundly through the night. We had sales of approximately $380,000 and $201,000 for the year December 31, 2016 and
2015, respectively. In 2016, we incurred production costs for a new infomercial of approximately $117,000 compared to $32,000
in the year ended December 31, 2015.
Dr.
Ho’s PerfectBack
TM
Rest
In
August 2016, we entered into an exclusive marketing and distribution agreement to sell the Dr. Ho’s PerfectBack
TM
Rest in the United States. The Dr. Ho’s PerfectBack
TM
Rest transforms any chair at home, in the office or in
the car into an ergonomic seating experience. Dr. Michael Ho, Doctor of Chiropractic and Acupuncture, engineered this back support
system with 16 pressure point massagers to soothe achy muscles. Targeting middle aged and older men and women, the PerfectBack
TM
Rest attaches quickly and easily to any chair to support the spine’s natural curve to promote healthy posture. It
can also be used on the floor as a spinal bridge for stretching and to support your back during abdominal exercises. We had sales
of approximately $20,000 for the year December 31, 2016.
Good
Planet Super Solution
TM
Good
Planet Super Solution
TM
is a safe solvent that cleans, shines, seals and protects any hard surface, inside or outside.
This German formulated, non-toxic, environmentally friendly solution contains no petroleum distillates, aromatics or solvents
as a base. Targeting middle aged and older men and women, Good Planet Super Solution
TM
can be used on cars, trucks,
boats, jet ski’s, stainless steel appliances, marble, wood laminate, ceramic/glass countertops, tile, glass/mirrors, shower
screens chrome and any non-porous hard surface. We had sales of approximately $13,000 and $234,000 for the year ended December
31, 2016 and 2015, respectively, primarily from our international distributors.
Other
Products
We
continue to seek new products and have plans to market a number of additional products within its distribution network in 2017,
including an at-home pedicure device, the Ultimate Pedi by Dermawand, the Point Perfect Sprinkler, which has twelve adjustable
heads that allow you to quickly and easily water your whole yard, and an exercise device, Spin Force.
ICTV
Brands Strategic Approach
As
consumer trends and viewership habits evolve, a successful marketer needs to be adaptive and adjust to the marketplace. To meet
this demand, we employ an omni-channel approach to test, launch and develop our brands. This strategy has become key to a brand’s
success and allows marketers to meet consumers’ wants and needs no matter their demographic, habits or buying preferences.
As
we expand the brands and their distribution channels, the marketing efforts to support them are selected based on the type of
product, the key demographic, competitive trends and historical performance across similar products/brands. As each brand differs
so does the formulaic approach to the media mix, however we employ one or many of the following to profitably support our company.
●
|
Digital
Advertising
– The online world changes daily and with the advancements of targeted advertising based on behavioral
habits and demographic, we have shifted our key testing approach from television to digital initiatives. This helps minimize
the marketing waste, which leads to smaller but more efficient testing budgets to more pragmatically determine the next steps
for a brand. This strategic approach is applied to the launch of new products, sustaining mature products and re-establishing
dormant products with the ultimate goal of driving consumers to the brand’s direct site and converting the visitor into
a sale.
|
The
digital space offers a variety of marketing opportunities that are used to test, expand and grow the brands; however we focus
on the following elements of digital marketing;
|
o
|
Paid
Search
– Advertising within the sponsored listings of a search engine or partner site by bidding certain keywords
allows us to hit the consumer when they are searching for a term related to a brand.
|
|
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o
|
Email
Marketing
– Utilizing email lists, typically built from past customers, drives sales that start directly from the
consumer’s inbox and allows us to customize a message and exclusive offer with direct delivery.
|
|
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|
|
o
|
Programmatic
– Automated bidding on online inventory based on previous buyer’s data allows for cost efficient expansion
that adjusts automatically for unsurpassed efficiencies.
|
|
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|
|
o
|
Social
Media
– With consistent increase in consumer’s social media intake and the demographic details available about
the consumer, utilizing the top tiered social media platforms (i.e. Facebook, YouTube) allows us to deliver targeted creative
in environments consumers trust to educate, communicate and interact with about the brands.
|
|
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|
o
|
Remarketing
– Following and offering creative to those that have already visited a brand’s site is a necessary layer to
our digital advertising approach as it allows to build frequency and convert the visitor to a future sales.
|
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|
|
o
|
Text,
Display & Video
– We use a combination of carefully constructed text, imagery and video across a variety of
digital initiatives to educate and drive the consumer to act in a way that results in a sale.
|
●
|
Direct
Response Television (DRTV)
– Reaching a mass audience with a television creative that elicits an action is one of
the original pillars of direct response marketing. With the advancements of DVR and online streaming alongside the massive
advancements in digital advertising, DRTV has lost some of its market share to other methods. However, DRTV remains a significant
source to drive large sale volumes for us. A variety of factors affect what goes into a brand’s DRTV media mix including
the product category, target audience, offer/price point, and competitive behavior. We evaluate these elements for each brand
to determine if DRTV is the right fit for the product. If a brand is the right fit for DRTV a strategic plan is developed
around the following elements;
|
|
o
|
Length
– Different lengths of creative are employed depending campaign’s goal. For brands with a direct sale focus,
longer lengths (longform), including infomericals and 5-minute creatives are used. We more often employ this type of length
as it provides ample time to educate the consumer to a point of direct purchase for a product with a higher price point, more
typical of the ICTV portfolio. Shorter lengths (shortform), including any creative shorter than 2 minutes, are typically employed
for brands with lower price points or for branding and drive to retail initiatives. ICTV utilizes these lengths however more
sparingly.
|
|
|
|
|
o
|
Geography
– DRTV media is offered on a national level and local level. As we typically do not have any geographic restrictions
and can deliver our products nationwide, all media options are viable. Our DRTV strategic approach involves a combination
of national and local media.
|
|
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|
|
o
|
Media
Type/Station
– With thousands of channels and television programs to choose from, we select the appropriate media
type (such as national cable, local broadcast, syndication, and network) and station combination based on the target demographic,
cost structure, historical performance, competitive presence and available time.
|
●
|
Continuity
Program
– One of the key factors in selecting brands for our portfolio is the presence of consumables that could
be packaged for a continuity program, in which the items are automatically charged and shipped to the consumer based on a
predetermined usage schedule. This continuous automatic flow of sale allows us to invest more into converting the initial
sale with the expectation of future revenue without additional investment.
|
|
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●
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Cross
Selling
– Our portfolio consists of a myriad of products that provide solutions to different consumer problems.
However, the brands target demographics largely overlap creating an opportunity to cross sell. We build strong order flows
that take the consumer through a variety of upsells and downsells across brands to build the final sale’s total. Whether
on the initial inbound sales call, outbound sales call, inbound customer service call or online via the order flows at the
direct sites and through email blasts across customer lists, cross selling is an essential part of our strategy that is employed
across every brand in the portfolio.
|
|
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●
|
Retail/E-Commerce
Sales
- To capitalize on the brand and product awareness created through the direct sale media support, we move logically
to the traditional retail stores and online ecommerce retailers transitioning from the direct response audience to the retail
audience. Brand marketers must invest significantly in marketing costs to introduce a new brand. However we leverage the direct
sale media and the product/brand awareness incurred to cost efficiently enter and support the retail environment.
|
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Live
Home Shopping
– Our portfolio of demonstrable products makes them ideal for live home shopping opportunities. Live
home shopping networks such as QVC, the Home Shopping Network (HSN) and The Shopping Channel Canada (TSC), have a very large
and loyal consumer base providing the brands an opportunity to demonstrate the product live, offer an exclusive deal and grow
brand awareness profitably.
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International
Third Party Distributors
– We distribute product by either selling direct in a country or partnering with a third
party distributor who purchases the products at wholesale pricing and sells it at an agreed upon region/country exclusively.
Partnering with these distributors allows us to quickly and cost efficiently enter a market and tailor the brand by region
without the cost and risk of setting up a direct selling platform. We work with these distributors to geographically expand
the brands in their portfolio as well as add new brands to their portfolio by licensing products from their portfolios to
sell in the regions where we have direct sale capabilities.
|
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Print
– Direct mail, inserts and print media are employed to extend a brand’s message, target specific geographic
locations, increase brand awareness and/or drive direct sale. This type of media tends to resonate with an older demographic
which overlaps into many of the products in our portfolio.
|
Regardless
of the marketing initiatives, we utilize a flexible methodology to drive a brand from testing to profitable rollout. This methodology
is based on a platform of continuous testing, evaluating, retesting and expansion, moving forward only with those initiatives
that provide a profitable return. As the marketplace changes, this approach allows us to identify any shifts and adjust to meet
the new standards. ICTV continuously looks for new media outlets, creative approaches and 3
rd
party vendors to cautiously
test to keep the brands growing and profitable.
Customer
Service
We
seek to provide our customers with quality customer service. We generally offer an unconditional 30-day money back return policy
to purchasers of our products. For our products newly acquired on January 23, 2017, Cleartouch
®
, Kyroback
®
and
no!no!
®
we currently offer 60-day money back return policy to purchasers of our products.
Our policy is to investigate the cause of returns if returns begin to undermine our expectations for a product’s profitability.
Competition
We
compete directly with several established companies that generate sales from infomercials and direct response television, as well
as small independent direct response television producers. Products like ours may be sold in department stores, pharmacies, general
merchandise stores, magazines, newspapers, direct mail advertising, catalogs, and over the internet. Many of our major competitors,
which include Telebrands Corp. and Guthy-Renker Corp., have substantially greater financial, marketing and other resources than
do we.
We
expect that we will face additional competition from new market entrants and current competitors as they expand their direct marketing
business models. The barriers to entry in the infomercial industry are low, but there are many difficult hurdles for young entrants
to overcome for success in the long-term. To be competitive, we believe we must respond promptly and effectively to the challenges
of technological change, evolving standards and our competitors’ innovations. We must also source successful products, create
brand awareness and utilize good sales pitches for our products. We believe that although we have a limited operating history,
we are strategically positioned to compete because of our management’s experience and strong relationships in the industry.
In addition, we feel that associating our products with brands and focusing on the traditional retail environment, as we intend
to do, will give us a competitive advantage over traditional infomercial companies who fail to capitalize on the consumer awareness
they create through their infomercials.
Intellectual
Property
Our
success is dependent, in part, upon our proprietary rights to our primary products. The following consists of a description of
our intellectual property rights.
Trademarks
We
have several registered trademarks for DermaWand
TM
, DermaVital®, Jidue
TM
, Good Planet Super Solution
TM
,
Derma Brilliance
TM
, and CoralActives® throughout the world. In addition, under our current licensing agreements
for all products, all related trademarks are assigned to us. Further, all registered trademarks for the family of no! no!®,
Kyrobak®, Thermicon® and Ermis Labs® have been assigned to us.
Patents
We
own the worldwide patent and all related trademarks for DermaWand
TM
and CoralActives® as is necessary to manufacture,
market and distribute DermaWand
TM
and CoralActives®. In addition, under our current licensing agreements for all
products, all related patents are assigned to us. Further, all registered patents for the family of no! no!
®
, Kyrobak®,
Thermicon® and Ermis Labs® patents have been assigned to us.
Copyrights
We
have copyright registrations for all versions of our infomercials.
There
can be no assurance that our current or future intellectual property rights, if any, will not be challenged, invalidated or circumvented,
or that any rights granted under our intellectual property will provide competitive advantages to us. In addition, there can be
no assurance that claims allowed on any future patents will be sufficiently broad to protect our products. The laws of some foreign
countries may not protect our proprietary rights to the same extent as do the laws of the United States. We intend to enforce
our proprietary rights using licensing agreements and, when necessary, litigation. Although we believe the protection afforded
by our patents, trademarks, copyrights and registered designs has value, rapidly changing technology and industry standards make
our future success depend primarily on the innovative skills, expertise, and management abilities of our team rather than on patent
and trademark protection.
Royalty
Agreements
In
April 2000, we assumed from R.J.M. Ventures Limited and Better Blocks International Limited, through the share and option purchase
agreement we signed with The Better Blocks Trust, the obligation to pay royalties on the sales of the DermaWand
TM
.
Under a marketing and royalty agreement with the developer of DermaWand
TM
, we were obligated to pay them a royalty
at a fixed rate per unit sold. Under a purchase agreement that we entered into on January 22, 2016 with Omega 5 Technologies,
Inc., we acquired the DermaWand
TM
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. No interest was charged, and we may, in our sole discretion, at any time without permission or penalty,
pre-pay some or all of the purchase price. Thus, effective January 1, 2017, we are no longer obligated to make royalty payments
on sales of DermaWand
TM
.
In
April 2013, we entered into a licensing agreement with DermaNew, in which we obtained the exclusive worldwide rights to manufacture
and distribute Derma Brilliance
TM
, a patented anti-aging, resurfacing and skin polishing system. The agreement contains
royalties based on a percentage of net sales.
In
July 2013, we acquired the exclusive worldwide rights to Elastin-rp® via a licensing agreement with BioActive Skin Technologies.
Elastin-rp® is a branded system of cosmetic formulations designed to help improve the elasticity of the skin, thereby diminishing
the appearance of fine lines and wrinkles. The agreement contains royalties based on a percentage of net sales.
In
March 2014, we entered into a licensing agreement with Ermis Labs, in which we obtained the exclusive worldwide rights to manufacture
and distribute their line of CoralActives® acne treatment and skin cleansing products. In January 2017, we acquired the assets
of Ermis Labs, which included all the intellectual property associated with the CoralActives® acne treatment system of products,
as well as five unique formulas for medicated cleansing bars that treat such conditions as acne, psoriasis, dermatitis, dandruff
and fungus. 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, continuing until the total royalty paid to Ermis Labs totals $1,750,000.
In
July 2014, we entered into an exclusive marketing agreement with Audy Global Enterprises Inc., in which we obtained the exclusive
worldwide license to market and distribute the Jidue
TM
Facial Massager Mask and associated products, provided that
the license does not include the right to manufacture the product. The agreement contains royalties based on a percentage of net
sales.
In
January 2017, we completed the PhotoMedex and Ermis Labs acquisitions of proprietary products and services that address skin diseases
and conditions or pain reduction using home-use devices for various indications, the CoralActives® brand and related intellectual
property, as well as five unique formulas for medicated cleansing bars that treat such conditions as acne, psoriasis, dermatitis,
dandruff, and fungus. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations –
Recent Transactions” for more information regarding these acquisitions.
In
connection with the PhotoMedex acquisition, 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 Ermis acquisition, 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 us or our 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.
Governmental
Regulation
We
are subject to regulation by a variety of federal, state and local agencies, including the Federal Trade Commission, the Federal
Communications Commission, the Consumer Product Safety Commission, Health Canada, the Canadian Standards Association and the Food
and Drug Administration under the FDC Act. The government regulations to which we are subject vary depending on the types of products
we manufacture and market. As we begin to market a broader variety of products and services, we may become subject to regulation
by additional agencies.
We
are also subject to the Federal Mail/Telephone Order Rule. Under the Mail/Telephone Order Rule, it is an unfair or deceptive act
or practice for a seller to solicit any order for the sale of merchandise to be ordered by the buyer through the mail or by telephone
unless, at the time of the solicitation, the seller has a reasonable basis to expect that it will be able to ship the ordered
merchandise to the buyer within 30 days after the seller’s receipt of a properly completed order from the buyer. If the
buyer uses credit to pay for the merchandise, the period within which the seller must ship the merchandise to the buyer is extended
to 50 days. Under the Mail/Telephone Order Rule, the seller, among other things, must provide the buyer with any revised shipping
date. If the seller is unable to fulfill an order within 30 or 50 days, as the case may be, then the seller must provide the buyer
an option either to consent to a delay in shipping or to cancel their order and receive a prompt refund.
There
can be no assurance that new laws, rules, regulations or policies that may have an adverse effect on our operations will not be
enacted or promulgated at a future date.
Employees
As
of December 31, 2016, we employed a total of eleven employees. We consider our labor relations to be good. None of our employees
are covered by a collective bargaining agreement.
Research
and Development
Our
research and development costs have consisted of efforts to discover and develop new products and the testing and development
of direct-response advertising related to these products. During the years ended December 31, 2016 and 2015, we spent a total
of $111,000 and $115,000, respectively, on research and development.
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.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of Directors and Stockholders
PhotoMedex,
Inc.
|
Fahn
Kanne & Co.
Head
Office
32
Hamasger Street
Tel-Aviv
6721118, ISRAEL
PO
Box 36172, 6136101
T
+972 3 7106666
F
+972 3 7106660
www.gtfk.co.il
|
We
have audited the accompanying consolidated balance sheets of PhotoMedex, Inc. (a Nevada corporation) and Subsidiaries (the “Company”)
as of December 31, 2016 and 2015, and the related consolidated statements of comprehensive loss, changes in equity (deficit) and
cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of PhotoMedex, Inc. and Subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows
for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
As discussed in Note 1 to the financial statements, as of December 31, 2016, the Company had an accumulated deficit of $115,635
and shareholders’ deficit of $1,408. Also, during the most recent periods the Company has incurred losses and negative cash flows
from continuing operations and was forced to sell certain assets and business units to obtain additional liquidity resources to
support its operations. In addition, as discussed in Note 18 to the consolidated financial statements, on January 23, 2017, the
Company completed the sale of its consumer products division which represented the sale of substantially all of the remaining
operations and assets of the Company. These conditions, along with other matters as set forth in Note 1, raise substantial doubt
about the Company’s ability to continue as a going concern.
Management’s plans in regards
to these matters are also described in Note
1. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/
FAHN KANNE & CO. GRANT THORNTON ISRAEL
Tel-Aviv,
Israel
March
31, 2017
PHOTOMEDEX,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share and per share amounts)
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,335
|
|
|
$
|
3,302
|
|
Restricted
cash
|
|
|
342
|
|
|
|
724
|
|
Accounts
receivable, net of allowance for doubtful accounts of $1,192 and $14,959 respectively
|
|
|
4,125
|
|
|
|
8,469
|
|
Inventories,
net
|
|
|
-
|
|
|
|
11,735
|
|
Deferred
tax asset, net
|
|
|
-
|
|
|
|
470
|
|
Prepaid
expenses and other current assets
|
|
|
3,253
|
|
|
|
2,795
|
|
Assets
held for sale
|
|
|
8,362
|
|
|
|
-
|
|
Total
current assets
|
|
|
18,417
|
|
|
|
27,495
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
77
|
|
|
|
1,306
|
|
Patents
and licensed technologies, net
|
|
|
-
|
|
|
|
1,613
|
|
Other
intangible assets, net
|
|
|
-
|
|
|
|
241
|
|
Goodwill,
net
|
|
|
-
|
|
|
|
3,581
|
|
Other
assets, net
|
|
|
7
|
|
|
|
138
|
|
Total
assets
|
|
$
|
18,501
|
|
|
$
|
34,374
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Current
portion of notes payable
|
|
$
|
-
|
|
|
$
|
490
|
|
Accounts
payable
|
|
|
6,648
|
|
|
|
7,216
|
|
Accrued
compensation and related expenses
|
|
|
4,029
|
|
|
|
2,917
|
|
Other
accrued liabilities
|
|
|
8,091
|
|
|
|
8,565
|
|
Deferred
revenues
|
|
|
1,141
|
|
|
|
1,847
|
|
Total
current liabilities
|
|
|
19,909
|
|
|
|
21,035
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
Deferred
revenues, net of current portion
|
|
|
-
|
|
|
|
642
|
|
Total
liabilities
|
|
|
19,909
|
|
|
|
21,677
|
|
|
|
|
|
|
|
|
|
|
Commitment
and contingencies (Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity (deficit):
|
|
|
|
|
|
|
|
|
Preferred
Stock, $.01 par value, 5,000,000 shares authorized; 0 shares issued and outstanding at December 31, 2016 and 2015
|
|
|
-
|
|
|
|
-
|
|
Common
Stock, $.01 par value, 50,000,000 shares authorized; 4,361,094 and 4,398,344 shares issued and outstanding, respectively
|
|
|
221
|
|
|
|
221
|
|
Additional
paid-in capital
|
|
|
118,585
|
|
|
|
116,616
|
|
Accumulated
deficit
|
|
|
(115,635
|
)
|
|
|
(102,371
|
)
|
Accumulated
other comprehensive loss
|
|
|
(4,579
|
)
|
|
|
(1,769
|
)
|
Total
stockholders’ equity (deficit)
|
|
|
(1,408
|
)
|
|
|
12,697
|
|
Total
liabilities and stockholders’ equity (deficit)
|
|
$
|
18,501
|
|
|
$
|
34,374
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE LOSS
(In
thousands, except share and per share amounts)
|
|
For
the Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Revenues:
|
|
$
|
38,397
|
|
|
$
|
75,890
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
8,086
|
|
|
|
18,425
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
30,311
|
|
|
|
57,465
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Engineering
and product development
|
|
|
1,249
|
|
|
|
1,313
|
|
Selling
and marketing
|
|
|
21,729
|
|
|
|
57,412
|
|
General
and administrative
|
|
|
13,233
|
|
|
|
17,484
|
|
Impairment
|
|
|
3,518
|
|
|
|
21,481
|
|
Loss
on sale of assets
|
|
|
2,574
|
|
|
|
-
|
|
|
|
|
42,303
|
|
|
|
97,690
|
|
Loss
from continuing operations before interest and other financing expense, net
|
|
|
(11,992
|
)
|
|
|
(40,225
|
)
|
|
|
|
|
|
|
|
|
|
Interest
and other financing expense, net
|
|
|
(385
|
)
|
|
|
(1,402
|
)
|
Loss
from continuing operations before income taxes
|
|
|
(12,377
|
)
|
|
|
(41,627
|
)
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
|
762
|
|
|
|
(1,794
|
)
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(13,139
|
)
|
|
|
(39,833
|
)
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations, net of taxes
|
|
|
(125
|
)
|
|
|
(4,131
|
)
|
Gain
on sale of discontinued operations, net of taxes
|
|
|
-
|
|
|
|
9,410
|
|
|
|
|
|
|
|
|
|
|
Loss
|
|
$
|
(13,264
|
)
|
|
$
|
(34,554
|
)
|
|
|
|
|
|
|
|
|
|
Basic
net loss per share:
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
(3.15
|
)
|
|
$
|
(9.84
|
)
|
Discontinued
operations
|
|
|
(0.03
|
)
|
|
|
1.30
|
|
|
|
$
|
(3.18
|
)
|
|
$
|
(8.54
|
)
|
Diluted
net loss per share:
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
(3.15
|
)
|
|
$
|
(9.84
|
)
|
Discontinued
operations
|
|
|
(0.03
|
)
|
|
|
1.30
|
|
|
|
$
|
(3.18
|
)
|
|
$
|
(8.54
|
)
|
Shares
used in computing net loss per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,171,549
|
|
|
|
4,049,518
|
|
Diluted
|
|
|
4,171,549
|
|
|
|
4,049,518
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive loss:
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
$
|
(2,810
|
)
|
|
$
|
(1,256
|
)
|
Comprehensive
loss
|
|
$
|
(16,074
|
)
|
|
$
|
(35,810
|
)
|
The
accompanying notes are an integral part of these consolidated financial statements.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
(In
thousands, except share and per share amounts)
|
|
Common
Stock
|
|
|
Additional
Paid-In
|
|
|
Accumulated
|
|
|
Accumulated
Other
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Loss
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
DECEMBER 31, 2014
|
|
|
4,075,249
|
|
|
|
204
|
|
|
|
110,391
|
|
|
|
(67,817
|
)
|
|
|
(513
|
)
|
|
|
42,265
|
|
Stock-based
compensation related to stock options and restricted stock
|
|
|
-
|
|
|
|
-
|
|
|
|
6,309
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,309
|
|
Restricted
stock issued
|
|
|
323,095
|
|
|
|
17
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17
|
|
Registration
costs
|
|
|
-
|
|
|
|
-
|
|
|
|
(84
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(84
|
)
|
Other
comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,256
|
)
|
|
|
(1,256
|
)
|
Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(34,554
|
)
|
|
|
-
|
|
|
|
(34,554
|
)
|
BALANCE,
DECEMBER 31, 2015
|
|
|
4,398,344
|
|
|
$
|
221
|
|
|
$
|
116,616
|
|
|
$
|
(102,371
|
)
|
|
$
|
(1,769
|
)
|
|
$
|
12,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation related to stock options and restricted stock
|
|
|
-
|
|
|
|
-
|
|
|
|
1,969
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,969
|
|
Restricted
stock canceled
|
|
|
(37,250
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Other
comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
(2,810
|
)
|
|
|
(2,810
|
)
|
Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(13,264
|
)
|
|
|
-
|
|
|
|
(13,264
|
)
|
BALANCE,
DECEMBER 31, 2016
|
|
|
4,361,094
|
|
|
$
|
221
|
|
|
$
|
118,585
|
|
|
$
|
(115,635
|
)
|
|
$
|
(4,579
|
)
|
|
$
|
(1,408
|
)
|
The
accompanying notes are an integral part of these consolidated financial statements.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
For
the Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
Loss
|
|
$
|
(13,264
|
)
|
|
$
|
(34,554
|
)
|
Adjustments
to reconcile loss to net cash provided by (used in) operating activities related to continuing operations:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
559
|
|
|
|
1,973
|
|
Impairment
of goodwill and intangible assets
|
|
|
3,518
|
|
|
|
21,481
|
|
Provision
for doubtful accounts
|
|
|
457
|
|
|
|
1,533
|
|
Deferred
income taxes
|
|
|
470
|
|
|
|
865
|
|
Stock-based
compensation
|
|
|
1,969
|
|
|
|
2,280
|
|
Loss
on disposal of property and equipment
|
|
|
213
|
|
|
|
-
|
|
Loss
on sale assets
|
|
|
2,574
|
|
|
|
515
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
2,943
|
|
|
|
7,460
|
|
Inventories
|
|
|
1,444
|
|
|
|
4,707
|
|
Prepaid
expenses and other assets
|
|
|
(256
|
)
|
|
|
6,195
|
|
Accounts
payable
|
|
|
(144
|
)
|
|
|
(3,376
|
)
|
Accrued
compensation and related expenses
|
|
|
1,118
|
|
|
|
708
|
|
Other
accrued liabilities
|
|
|
69
|
|
|
|
(4,045
|
)
|
Deferred
revenues
|
|
|
(1,312
|
)
|
|
|
(2,969
|
)
|
Adjustments
related to continuing operations
|
|
|
13,622
|
|
|
|
37,327
|
|
Adjustment
related to discontinued operations
|
|
|
-
|
|
|
|
(9,235
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
358
|
|
|
|
(6,462
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Decrease
in restricted cash
|
|
|
382
|
|
|
|
-
|
|
Purchases
of property and equipment
|
|
|
(94
|
)
|
|
|
(321
|
)
|
Proceeds
from short-term deposit
|
|
|
-
|
|
|
|
87
|
|
Proceeds
on sale of property and equipment
|
|
|
110
|
|
|
|
-
|
|
Proceeds
on sale of assets
|
|
|
1,750
|
|
|
|
1,210
|
|
Net
cash provided by investing activities – continuing operations
|
|
|
2,148
|
|
|
|
976
|
|
Net
cash provided by investing activities – discontinued operations
|
|
|
-
|
|
|
|
76,153
|
|
Net
cash provided by investing activities
|
|
|
2,148
|
|
|
|
77,129
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
For
the Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Registration
costs
|
|
|
-
|
|
|
|
(84
|
)
|
Proceeds
from note payable
|
|
|
5,460
|
|
|
|
-
|
|
Repayment
of debt
|
|
|
-
|
|
|
|
(76,500
|
)
|
Payments
on notes payable
|
|
|
(6,144
|
)
|
|
|
(914
|
)
|
Net
cash used in financing activities – continuing operations
|
|
|
(684
|
)
|
|
|
(77,498
|
)
|
Net
cash used in financing activities – discontinued operations
|
|
|
-
|
|
|
|
(92
|
)
|
Net
cash used in financing activities
|
|
|
(684
|
)
|
|
|
(77,590
|
)
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
(2,789
|
)
|
|
|
(124
|
)
|
Net
decrease in cash and cash equivalents
|
|
|
(967
|
)
|
|
|
(7,047
|
)
|
Cash
and cash equivalents, beginning of year
|
|
|
3,302
|
|
|
|
10,349
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of year
|
|
$
|
2,335
|
|
|
$
|
3,302
|
|
|
|
|
|
|
|
|
|
|
Supplemental
information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
203
|
|
|
$
|
85
|
|
Cash
paid for interest
|
|
$
|
281
|
|
|
$
|
1,594
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
Note
1
The
Company and Summary of Significant Accounting Policies:
The
Company:
Background
PhotoMedex,
Inc. (and its subsidiaries) (the “Company”) was a Global Skin Health company providing integrated disease management and aesthetic
solutions to dermatologists, professional aestheticians and consumers. The Company provided proprietary products and services
that address skin diseases and conditions including psoriasis, acne, actinic keratosis (a precursor to certain types of skin cancer),
photo damage and unwanted hair.
Starting
in August 2014, the Company began to restructure its operations and redirect its efforts in a manner that management expected
would result in improved results of operations and address certain defaults in its commercial bank loan covenants. As part of
such redirected efforts, management continues its comprehensive efforts to minimize the Company’s operational costs and capital
expenditures. During this time the Company has also sold off certain business units and product lines to support this restructuring
and has agreed to sell its Consumer product division (See Note 18 - Subsequent Event).
The
Company did not present the consumer products segment as a discontinued operation, since the consumer products represent the entire
remaining operations of the Company and accordingly, following such transaction, the Company will have only minimal operations
and assets, with no continuing operations.
On
September 7, 2016 the Company’s Board of Directors approved a reverse split in a ratio of 1-for-five. The 2016 reverse split
was implemented on September 23, 2016 (the “2016 Reverse Split”). The amount of authorized Common Stock as well as the par
value for the Common Stock were not effected. Any fractional shares resulting from the 2016 Reverse Split were rounded up
to the nearest whole share.
Liquidity
and Going Concern
As
of December 31, 2016, the Company had an accumulated deficit of $115,635 and shareholders’ deficit of $1,408. To date, the Company
has dedicated most of its financial resources to sales and marketing, general and administrative expenses and research and development.
Cash
and cash equivalents as of December 31, 2016 were $2,677, including restricted cash of $342. The Company has historically financed
its activities with cash from operations, the private placement of equity and debt securities, borrowings under lines of credit
and, in the most recent periods with sales of certain assets and business units. . The Company will be required to obtain additional
liquidity resources in order to support its operations. The Company is addressing its liquidity needs by selling certain of its
product lines to a third party (see NOTE 18 Subsequent Events). There are no assurances, however, that the Company will be able
to collect all remaining amounts due from sale of these assets and product lines or, in the alternative, obtain an adequate level
of financial resources required for the short and long-term support of its operations if the remaining amounts due from the sale
of assets and product lines remain uncollected or not paid when due. In light of the Company’s recent operating losses and negative
cash flows and the uncertainty of collecting amounts due from the sales of its product lines, there is no assurance that the Company
will be able to continue as a going concern.
These
conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments to reflect the possible future effects on recoverability and classification of liabilities
that may result from the outcome of this uncertainty.
On
January 6, 2016, PhotoMedex, Inc. received an advance of $4 million, less a $40 financing fee (the “January 2016 Advance”), from
CC Funding, a division of Credit Cash NJ, LLC, (the “Lender”), pursuant to a Credit Card Receivables Advance Agreement (the “Advance
Agreement”), dated December 21, 2015. The Company’s domestic subsidiaries, Radiancy, Inc.; PTECH; and Lumiere, Inc., were also
parties to the Advance Agreement (collectively with the Company, the “Borrowers”). Each Advance was secured by security interest
in defined collateral representing substantially all the assets of the Company. Concurrent with the funding of the loan agreement,
the Company established a $500 cash reserve account in favor of the lender to be used to make loan payments in the event that
weekly remittances, net of sales return credits and other bank charges or offsets, were insufficient to cover the weekly repayment
amount due the lender.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
Subject
to the terms and conditions of the Advance Agreement, the Lender was to make periodic advances to the Company (collectively with
the January 2016 Advance and the April 2016 Advance described below, the “Advances”). The proceeds were used for general corporate
purposes.
All
outstanding Advances were repaid through the Company’s existing and future credit card receivables and other rights to payment
arising out of our acceptance or other use of any credit or charge card (collectively, “Credit Card Receivables”) generated by
activities based in the United States.
On
April 29, 2016, the Company received an advance of $1 million, less a $10 financing fee (the “April 2016 Advance”), from the Lender
pursuant to the Advance Agreement.
On
June 17, 2016, the Company received an advance of $550, less a $50 financing fee (the “June 2016 Advance”), from the Lender pursuant
to the Advance Agreement.
The
above described advances were paid in full on July 29, 2016 and the security interest in the defined collateral was released from
lien.
As
of December 31, 2016 the restricted cash account includes $253 from the Neova Escrow Agreement (see Acquisitions and Dispositions
below). Restricted cash also includes $89 reflecting certain commitments connected to our leased office facilities in Israel.
Additionally, during 2016 the Company gained access to previously restricted cash amounts of $724 that were held in escrow as
of the one year anniversary of the sale of the XTRAC and VTRAC business on June 22, 2015, from which $125 was paid to MELA Science,
the purchaser of that business which amount was reflected within the loss from discontinued operations.
On
August 30, 2016, the Company entered into an Asset Purchase Agreement for the sale of its Neova product line. The sale was completed
on September 15, 2016 resulting in immediate cash proceeds to the Company of $1.5 million and the Company recorded a loss of $1,731
from the transaction during the year ended December 31, 2016.
On
October 4, 2016, the Company entered into an Asset Purchase Agreement for the sale of its Consumer Division for $9.5 million,
including $5 million in cash plus a $4.5 million royalty agreement. (See Note 18 Subsequent Event and Acquisitions and Dispositions).
On January 23, 2017, the Company entered into a First Amendment (the “First APA Amendment”) to the Asset Purchase Agreement which
revised the definition of Business Assets and Assumed Liabilities, provided for the establishment of employee benefit plans by
the Purchaser and substituted a new Disclosure Letter for the one delivered concurrently with the signing of the original Asset
Purchase Agreement. The amendment also extended the term of the Letter of Credit issued in connection with the Asset Purchase
Agreement to 100 days after the Closing Date. The Company also entered into a First Amendment (the “First TSA Amendment”)
to the Transition Services Agreement between the Company and its subsidiaries and the Purchaser of the Consumer Products division,
pursuant to which the Company and its subsidiaries will provide the Purchaser with certain accounting, benefit, payroll, regulatory,
IT support and other services for periods ranging from approximately three months to up to one year following the Closing Date,
during which time the Purchaser will arrange to transition the services it receives to its own personnel. The First TSA
Amendment revised references in the Transition Services Agreement from “Effective Date” to “Closing Date”, and clarified specifications
regarding the lease for certain premises in Israel by and between Radiancy Israel and the landlord for those premises. This
transaction was completed on January 23, 2017. See background paragraph above.
Assets
held for sale related to the Consumer Division consisted of the following as of December 31, 2016:
Inventory
|
|
$
|
7,336
|
|
Property
and equipment
|
|
|
911
|
|
Other
assets
|
|
|
115
|
|
Assets
held for sale as of December 31, 2016
|
|
$
|
8,362
|
|
The
Company has classified the assets of the Consumer Division as assets held for sale as of December 31, 2016.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
Summary
of Significant Accounting Policies:
Accounting
Principles
The
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America (“US GAAP”). Certain reclassifications from the prior year presentation have been made to conform to the current
year presentation. These reclassifications did not have material impact on the Company’s equity, net assets, results of operations
or cash flows.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and the wholly and majority owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Held
for Sale Classification and Discontinued Operations
A
disposal group is reported as held for sale when management has approved or received approval to sell and is committed to a formal
plan, the disposal group is available for immediate sale, the business is being actively marketed, the sale is anticipated to
occur during the next 12 months and certain other specified criteria are met. A disposal group classified as held for sale is
recorded at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying value of the business
exceeds its estimated fair value less cost to sell, a loss is recognized. However, when a disposal group meets the held for sale
criteria, the Company first evaluates whether the carrying amounts of the assets not covered by ASC 360-10 included in the disposal
group (such as goodwill) are required to be adjusted in accordance with other applicable GAAP before measuring the disposal group
at fair value less cost to sell.
Assets
and liabilities related to a disposal group classified as held for sale are segregated in the consolidated balance sheet in the
period in which the disposal group is classified as held for sale.
Until
December 31, 2014, in accordance with previous US GAAP, operations of a disposal group were reported as discontinued operations
if the disposal group is classified as held for sale, the operations and cash flows of the business have been or will be eliminated
from the ongoing operations as a result of a disposal transaction and when the Company will not have any significant continuing
involvement in the operations of the disposal group after the disposal transaction. See below regarding change to the criteria
for reporting discontinued operations.
Commencing
January 1, 2015 (the effective date of the ASU 2014-08), only disposal of a component of an entity or a group of components of
an entity that represents a strategic shift that has or will have a major effect on an entity’s operations and financial results
shall be reported as discontinued operations. The revised guidance did not change the criteria required to qualify for held for
sale presentation. The revised guidance includes several new disclosures and among others, requires to reclassify the assets and
liabilities of discontinued operations to separate line items in the balance sheets for all periods presented (including comparatives).
The
results of discontinued operations are reported in discontinued operations in the consolidated statement of comprehensive loss
for current and prior periods commencing in the period in which the business meets the criteria of a discontinued operation, and
include any gain or loss recognized on closing or adjustment of the carrying amount to fair value less cost to sell. Depreciation
is not recorded on assets of a business while it is classified as held for sale. (See also
Note
2,
Discontinued Operations
).
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United
States (“US GAAP”) requires management to make estimates and assumptions that affect amounts reported of assets and liabilities
at the date of the financial statements and the reported amount of revenues and expenses during the reporting periods. Actual
results could differ from those estimates and be based on events different from those assumptions. As part of these financial
statements, the more significant estimates include (1) revenue recognition, including provision for sales return and valuation
allowances of accounts receivable; (2) valuation allowance of deferred tax assets and uncertainty in tax positions; and (3) stock
based compensation and (4) impairment of long lived assets and intangibles (5) evaluation of going concern; (6) contingencies.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
Functional
Currency
The
currency of the primary economic environment in which the operations of the Company, its U.S. subsidiaries and Radiancy Ltd.,
its subsidiary in Israel, are conducted is the US dollar (“$” or “dollars”). Thus, the functional currency of the Company and
its subsidiaries (other than the foreign subsidiaries mentioned below) is the dollar (which is also the reporting currency of
the Group). The operations of the other foreign subsidiaries are each conducted in the local currency of the subsidiary. These
currencies include: Great Britain Pounds (GBP) and Hong Kong Dollar (HKD). Substantially all of the Group’s revenues are derived
in dollars or in other currencies linked to the dollar. Purchases of most materials and components are carried out in, or linked
to the dollar.
Balances
denominated in, or linked to, foreign currencies are stated on the basis of the exchange rates prevailing at the balance sheet
date. For foreign currency transactions included in the statement of comprehensive income (loss), the exchange rates applicable
to the relevant transaction dates are used. Transaction gains or losses arising from changes in the exchange rates used in the
translation of such balances are carried to financing income or expenses.
Assets
and liabilities of foreign subsidiaries, whose functional currency is the local currency, are translated from its respective functional
currency to U.S. dollars at the balance sheet date exchange rates. Income and expense items are translated at the average
rates of exchange prevailing during the year. Translation adjustments are reflected in the consolidated balance sheets as a component
of accumulated other comprehensive income or loss.
Fair
Value Measurements
The
Company measures and discloses fair value in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification 820,
Fair Value Measurements and Disclosures
(“ASC Topic 820”). ASC Topic 820 defines fair value, establishes
a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements.
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement
that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis
for considering such assumptions there exists a three-tier fair-value hierarchy, which prioritizes the inputs used in measuring
fair value as follows:
|
●
|
Level
1 - unadjusted quoted prices are available in active markets for identical assets or liabilities that the Company has the
ability to access as of the measurement date.
|
|
●
|
Level
2 – pricing inputs are other than quoted prices in active markets that are directly observable for the asset or liability
or indirectly observable through corroboration with observable market data.
|
|
|
|
|
●
|
Level
3 – pricing inputs are unobservable for the non-financial asset or liability and only used when there is little, if any, market
activity for the non-financial asset or liability at the measurement date. The inputs into the determination of fair value
require significant management judgment or estimation. Fair value is determined using comparable market transactions and other
valuation methodologies, adjusted as appropriate for liquidity, credit, market and/or other risk factors.
|
This
hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when
determining fair value.
The
fair value of cash and cash equivalents are based on its demand value, which is equal to its carrying value. Additionally, the
carrying value of all other monetary assets and liabilities is estimated to be equal to their fair value due to the short-term
nature of these instruments.
Derivative
financial instruments are measured at fair value, on a recurring basis. The fair value of derivatives generally reflects the estimated
amounts that the Group would receive or pay to terminate the contracts at the reporting dates, based on the prevailing currency
prices and the relevant interest rates. As of December 31, 2016 and 2015 there are no such instruments.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
In
addition to items that are measured at fair value on a recurring basis, there are also assets and liabilities that are measured
at fair value on a nonrecurring basis. Assets and liabilities that are measured at fair value on a nonrecurring basis include
certain long-lived assets including goodwill and intangibles. These fair value measurements reside within Level 3 of the fair
value hierarchy.
Cash
and Cash Equivalents
The
Company invests its excess cash in highly liquid short-term investments. The Company considers short-term investments that are
purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consisted of cash
and money market accounts at December 31, 2016 and 2015.
Short-term
Deposits
Short-term
deposits are deposits with original maturities of more than three months but less than one year. Short-term deposits are presented
at their costs including accrued interest.
Accounts
Receivable and Allowance for Doubtful Accounts
The
majority of the Company’s accounts receivable are due from consumers, distributors (domestic and international), physicians and
other entities in the medical field. Accounts receivable are most often due within 30 to 90 days and are stated at amounts due
from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered
past due. Allowance for doubtful accounts were determined by considering a number of factors, including the length of time trade
accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to
the Company and available information about their credit risk, and the condition of the general economy and the industry as a
whole. The Company writes off accounts receivable when they are considered uncollectible, and payments subsequently received on
such receivables are credited to the allowance for doubtful accounts. The Company did not recognize interest accruing on accounts
receivable past due.
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined to be purchased cost for raw materials and the production cost (materials,
labor and indirect manufacturing cost, including sub-contracted work components) for work-in-process and finished goods. For the
Company’s consumer and LHE products, cost was determined on the weighted-average method. For the pre-merged PhotoMedex’s products,
cost was determined on the first-in, first-out method.
Reserves
for slow moving and obsolete inventories were provided based on historical experience and product demand. Management evaluates
the adequacy of these reserves periodically based on forecasted sales and market trend.
Property,
Equipment and Depreciation
Property
and equipment are recorded at cost, net of accumulated depreciation. Depreciation is calculated on a straight-line basis over
the estimated useful lives of the assets, primarily three to seven years for computer hardware and software, furniture and fixtures,
and machinery and equipment. Leasehold improvements are amortized over the lesser of the useful lives or lease terms. Expenditures
for major renewals and betterments to property and equipment are capitalized, while expenditures for maintenance and repairs are
charged as an expense as incurred. Upon retirement or disposition, the applicable property amounts are deducted from the accounts
and any gain or loss is recorded in the consolidated statements of comprehensive (loss) income. Useful lives are determined based
upon an estimate of either physical or economic obsolescence or both.
Management
evaluated the realizability of property and equipment based on estimates of undiscounted future cash flows over the remaining
useful life of the asset. If the amount of such estimated undiscounted future cash flows is less than the net book value of the
asset, the asset is written down to fair value. (See
Impairment of Long-Lived Assets and Intangibles
).
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
Patent
Costs and Licensed Technologies
Costs
incurred to obtain or defend patents and licensed technologies were capitalized and amortized over the shorter of the remaining
estimated useful lives or eight to 12 years. Core and product technology was also recorded in connection with the reverse acquisition
on December 13, 2011 and was being amortized on a straight-line basis over ten years for core technology and five years for product
technology. (See
Note 6
,
Patent and Licensed Technologies
).
Management
evaluated the recoverability of intangible assets based on estimates of undiscounted future cash flows over the remaining useful
life of the asset. If the amount of such estimated undiscounted future cash flows is less than the net book value of the asset,
the asset is written down to fair value. During the years ended December 31, 2015 and 2016, the Company recorded an impairment
of patents and licensed technologies in the amount of $1,424 and $1,261, respectively. (See
Impairment of Long-Lived Assets
and Intangibles
).
Other
Intangible Assets
Other
intangible assets were recorded in connection with the reverse acquisition on December 13, 2011. The assets which were determined
to have definite useful lives were amortized on a straight-line basis over ten years. Such assets primarily include customer relationships
and trademarks. (See
Note 7
,
Goodwill and Other Intangible Assets)
.
Management
evaluates the recoverability of such other intangible assets based on estimates of undiscounted future cash flows over the remaining
useful life of the asset. If the amount of such estimated undiscounted future cash flows is less than the net book value of the
asset, the asset is written down to fair value. As of December 31, 2015 the Company recognized and recorded an impairment of Physician
Recurring segment intangibles for its trademark, tradename, customer relationships in the amount of $3,527. In connection with
the transactions with ICTV, as of December 31, 2016 the Company recorded an impairment of the entire remaining balance of Consumer
segment other intangible assets in the amount of $1,261. (See
Impairment of Long-Lived Assets and Intangibles
).
Accounting
for the Impairment of Goodwill
The
Company evaluates the carrying value of goodwill annually at the end of the calendar year and also between annual evaluations
if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit to which goodwill
was allocated to below its carrying amount. Such circumstances could include, but are not limited to: (1) a significant adverse
change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator.
Goodwill impairment evaluation is performed subsequent to Impairment evaluation of long-lived assets and intangibles (see Notes
6 and 7). Goodwill impairment testing involves a two-step process. Step 1 compares the fair value of the Group’s reporting units
to which goodwill was allocated to their carrying values. If the fair value of the reporting unit exceeds its carrying value,
no further analysis is necessary. The reporting unit fair value is based upon consideration of various valuation methodologies,
including guideline transaction multiples, multiples of current earnings, and projected future cash flows discounted at rates
commensurate with the risk involved. If the carrying amount of the reporting unit exceeds its fair value, Step 2 must be completed
to quantify the amount of impairment. Step 2 calculates the implied fair value of goodwill by deducting the fair value of all
tangible and intangible assets, excluding goodwill, of the reporting unit, from the fair value of the reporting unit as determined
in Step 1. The implied fair value of goodwill determined in this step is compared to the carrying value of goodwill. If the implied
fair value of goodwill is less than the carrying value of goodwill, an impairment loss, equal to the difference, is recognized.
See Note 2, regarding the impairment of goodwill which was allocated to the XTRAC division classified as assets held for sale
in 2015. Furthermore, during the fourth quarter of 2015, we recorded goodwill asset impairment charges of $16,530, as we determined
that a portion of the value of our goodwill was impaired in connection with our annual impairment test. A number of factors contributed
to decreased earnings projection including, competition from consumer device companies claiming similar product functionality,
our inability to attract sufficient financial resources to quickly increase our advertisement to overcome the market confusion
created by competitors, the inability to effectively expand operations into foreign markets and quickly ramp product launches
of new and innovative products in the second half of 2015 after satisfying on June 23, 2015 the bank covenant defaults of our
senior credit facility, and a continuing challenging media environment to purchase cost effective advertisement in the USA, our
largest product distribution market. The fair value of Goodwill associated with the operating and reporting units was estimated
using a combination of Income and Market Approach methodologies to valuation. The Income method of valuation explicitly recognizes
the current value of future economic benefits developed by discounting future net cash flows to their present value at a rate
the reflects both the current return requirements of the market and the risks inherent in the market. The Market approach measures
the value of an asset through the analysis of recent sales or offerings of comparable property. Our business was organized into
three operating and reporting units which were defined as Consumer, Physician Recurring, and Professional Equipment. Upon completion
of our annual goodwill impairment analysis as of December 31, 2015 the Company recorded an impairment of Consumer segment goodwill
in the amount of $15,654 and an impairment of Physician Recurring segment goodwill of $876. Upon completion of our goodwill impairment
analysis in connection with the transaction with ICTV Brands, as of December 31, 2016 the Company recorded an impairment of the
entire remaining balance of goodwill (allocated to consumer segment) in the amount of $2,257. Such determination was based on
the market approach.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
Accrued
Warranty Costs
The
Company offered a standard warranty on product sales generally for a one to two-year period. The Company provided for the expected
cost of estimated future warranty claims on the date the product is sold. Total accrued warranty was included in other accrued
liabilities on the balance sheet. The activity in the warranty accrual during the years ended December 31, 2016 and 2015 is summarized
as follows:
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
Accrual
at beginning of year
|
|
$
|
330
|
|
|
$
|
529
|
|
Additions
charged to warranty expense
|
|
|
56
|
|
|
|
130
|
|
Expiring
warranties
|
|
|
(293
|
)
|
|
|
(329
|
)
|
Claims
satisfied
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
93
|
|
|
|
330
|
|
Less:
current portion
|
|
|
(93
|
)
|
|
|
(330
|
)
|
Long
term accrued warranty
|
|
$
|
0
|
|
|
$
|
0
|
|
For
extended warranty on the consumer products, see
Revenue Recognition
below.
Revenue
Recognition
The
Company recognizes revenues from the product sales when the following four criteria have been met: (i) the product has been delivered
and the Company has no significant remaining obligations; (ii) persuasive evidence of an arrangement exists; (iii) the price to
the buyer is fixed or determinable; and (iv) collection is reasonably assured. Revenues from product sales are recorded net of
provisions for estimated chargebacks, rebates, expected returns and cash discounts.
The
Company ships most of its products FOB shipping point, although from time to time certain customers, for example governmental
customers, will be granted FOB destination terms. Among the factors the Company takes into account when determining the proper
time at which to recognize revenue are (i) when title to the goods transfers and (ii) when the risk of loss transfers. Shipments
to distributors or physicians that do not fully satisfy the collection criteria are recognized when invoiced amounts are fully
paid or fully assured and included in deferred revenues until that time.
For
revenue arrangements with multiple deliverables within a single, contractually binding arrangements (usually sales of products
with separately priced extended warranty), each element of the contract is accounted for as a separate unit of accounting when
it provides the customer value on a stand-alone basis and there is objective evidence of the fair value of the related unit.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
With
respect to sales arrangements under which the buyer has a right to return the related product, revenue is recognized only if all
the following conditions are met: the price is fixed or determinable at the date of sale; the buyer has paid, or is obligated
to pay and the obligation is not contingent on resale of the product; the buyer’s obligation would not be changed in the event
of theft or physical destruction or damage of the product; the buyer has economic substance; the Company does not have significant
obligations for future performance to directly bring about resale of the product by the buyer; and the amount of future returns
can be reasonably estimated.
The
Company provides 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. Reported revenues are shown net of the returns provision.
Such allowance for sales returns is included in
Other Accrued Liabilities
. (See
Note 9
).
Deferred
revenue includes amounts received with respect to extended warranty maintenance, repairs and other billable services and amounts
not yet recognized as revenues. Revenues with respect to such activities are deferred and recognized on a straight-line basis
over the duration of the warranty period, the service period or when service is provided, as applicable to each service.
Shipping
and Handling Costs
Shipping
and handling fees billed to customers are reflected as revenues while the related shipping and handling costs are included in
selling and marketing expense. To date, shipping and handling costs have not been material.
Advertising
Costs
Advertising
costs are charged to expenses as incurred. Advertising expenses amounted to approximately $12 and $33 for the years ended December
31, 2016 and 2015, respectively.
Derivatives
The
Company applies the provisions of Accounting Standards Codification (“ASC”) Topic 815,
Derivatives and Hedging
. In accordance
with ASC Topic 815, all the derivative financial instruments are recognized as either financial assets or financial liabilities
on the balance sheet at fair value. The accounting for changes in the fair value of a derivative financial instrument depends
on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship.
For derivative financial instruments that are designated and qualify as hedging instruments, a company must designate the hedging
instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign
operation.
From
time to time the Company carries out transactions involving foreign exchange derivative financial instruments (mainly forward
exchange contracts) which are expected to be paid with respect to forecasted expenses of the Israeli subsidiary (Radiancy) denominated
in Israeli local currency (NIS) which is different than its functional currency. However, during 2016 and 2015, such activity
was limited.
Such
derivatives were not designated as hedging instruments, and accordingly they were recognized in the balance sheet at their fair
value, with changes in the fair value carried to the Statement of Comprehensive (Loss) Income and included in interest and other
financing income (expenses), net.
At
December 31, 2016, the balance of such derivative instruments amounted to approximately $0 in liabilities and approximately $0
were recognized as financing loss in the Statement of Comprehensive (Loss) Income during the year ended that date. At December
31, 2015, the balance of such derivative instruments amounted to approximately $0 in assets and approximately $171 were recognized
as financing income in the Statement of Comprehensive (Loss) Income during the year ended that date.
Income
Taxes
The
Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities
are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using
enacted tax rates and laws that are expected to be in effect when the differences reverse. Any resulting net deferred tax assets
are evaluated for recoverability and, accordingly, a valuation allowance is provided when it is more likely than not that all
or some portion of the deferred tax asset will not be realized.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
The
Company or its subsidiaries may incur additional tax liabilities in the event of an intercompany dividend distribution or a deemed
dividend distribution under the U.S. income tax law and regulations. Prior to 2014, it was the Company’s policy not to cause a
distribution of dividends which would generate an additional tax liability to the Company. During 2014 and 2015, the Company’s
affiliates borrowed funds from the subsidiary in Israel. These borrowings resulted in a large deemed distribution taxable in the
U.S. Furthermore, management can no longer represent that the earnings of its non U.S. subsidiaries will remain permanently invested
outside the U.S. Therefore, beginning in 2014, the Company has provided deferred taxes on the undistributed earnings of its non
U.S. subsidiaries. Taxes, which would apply in the event of disposal of investments in subsidiaries, have not been taken into
account in computing the deferred taxes, as it is the Company’s policy to hold these investments, not to dispose of them.
The
Company accounts for uncertain tax positions in accordance with an amendment to ASC Topic 740-10,
Income Taxes
(
Accounting
for Uncertainty in Income Taxes),
which clarified the accounting for uncertainty in tax positions. This amendment provides
that the tax effects from an uncertain tax position can be recognized in the financial statements only if the position is “more-likely-than-not”
to be sustained were it to be challenged by a taxing authority. The assessment of the tax position is based solely on the technical
merits of the position, without regard the likelihood that the tax position may be challenged. If an uncertain tax position meets
the “more-likely-than-not” threshold, the largest amount of tax benefit that is more than 50% likely to be recognized upon ultimate
settlement with the taxing authority is recorded.
In
the years ended December 31, 2015 and 2016, the Company determined that the liability for unrecognized tax benefits could suitably
be extinguished by application of net operating loss carryforwards and carrybacks, with any residual impact arising as a liability
in 2015 and 2016 that has been duly provided for.
Concentrations
of credit risk
Financial
instruments which subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, derivative
(assets), accounts receivable and restricted deposits. The carrying amounts of these instruments approximate fair value due to
their short-term nature. The Company deposits cash and cash equivalents and short term deposits in major financial institutions
in the US, UK, Brazil and in Israel. The Company performs periodic evaluations of the relative credit standing of these institutions.
The Company is of the opinion that the credit risk in respect of these balances is immaterial. In addition, the Company performs
an ongoing credit evaluation and establishes an allowance for doubtful accounts based upon factors surrounding the credit risk
of customers (see also
Accounts receivable
above).
Most
of the Company’s sales are generated in North America and Asia Pacific, to a large number of customers. Management periodically
evaluates the collectability of the trade receivables to determine the amounts that are doubtful of collection and determine a
proper allowance for doubtful accounts. Accordingly, the Company’s trade receivables do not represent a substantial concentration
of credit risk.
Contingencies
The
Company and its subsidiaries are involved in certain legal proceedings that arise from time to time in the ordinary course of
its business. Except for income tax contingencies, the Company records accruals for contingencies to the extent that the management
concludes that the occurrence is probable and that the related amounts of loss can be reasonably estimated. Legal expenses associated
with the contingency are expensed as incurred.
Earnings
(Loss) Per Share
The
Company computes earnings (net loss) per share in accordance with ASC Topic. 260,
Earnings per share.
Basic earnings (loss)
per share are computed by dividing net income or loss by the weighted-average number of common shares outstanding during the period,
net of the weighted average number of treasury shares (if any). Diluted earnings (loss) per common share are computed similar
to basic earnings per share, except that the denominator is increased to include the number of additional potential common shares
that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.
Potential common shares are excluded from the computation for a period in which a net loss is reported or if their effect is anti-dilutive.
The Company’s potential common shares consist of stock options, warrants and restricted stock awards issued under the Company’s
stock incentive plans and their potential dilutive effect is considered using the treasury method.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
Basic
and diluted loss per common share was calculated using the following weighted average shares outstanding for the years ended December
31, 2016 and 2015:
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
Weighted
average number of common and common equivalent shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
number of common shares outstanding
|
|
|
4,171,549
|
|
|
|
4,049,518
|
|
Dilutive
effect of stock options and warrants
|
|
|
-
|
|
|
|
-
|
|
Diluted
number of common and common stock equivalent shares outstanding
|
|
|
4,171,549
|
|
|
|
4,049,518
|
|
Diluted
earnings (loss) per share for each of the years ended December 31, 2016 and 2015 exclude the impact of common stock options, warrants
and unvested restricted stock totaling 327,900, and 473,210 shares, respectively, as the effect of their inclusion would be anti-dilutive.
This table has been updated to reflect the one for five reverse stock split effected September 23, 2016.
Impairment
of Long-Lived Assets and Intangibles
Long-lived
assets, such as property and equipment, and definite-lived intangibles subject to amortization, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset (or group of assets) may not be recoverable.
Impairment test is applied at the lowest level where there are identifiable independent cash flows, which may involve a group
of assets
.
Recoverability
of assets to be held and used (or group of assets) is measured by a comparison of the carrying amount of an asset to the undiscounted
cash flows expected to be generated by the asset. If an asset is determined to be impaired, an impairment charge is recognized
in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are separately
presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.
The assets and liabilities of a disposed group classified as discontinued operations are presented separately in the appropriate
asset and liability sections of the balance sheet.
Indefinite-life
intangible assets are tested for impairment, on an annual basis or more often, when triggering events indicate that it is more
likely than not that the asset is impaired, by comparing the fair value of the asset with its carrying amount. If the carrying
amount of the intangible asset exceeds its fair value, an impairment loss is recognized in the amount of that excess. Subsequent
reversal of a previously recognized impairment loss is prohibited.
Pursuant
to ASC 360 the Company tested the long-lived assets and determined that changes in circumstances indicated that its carrying value
may not be recoverable. The carrying amount of the assets is considered recoverable if it exceeds the sum of undiscounted cash
flows expected from the use or eventual disposition of the asset. As of December 2015 and in connection with its annual budgeting
process, the Company determined its acquired intangible assets indicated that the cash flows related to the acquired assets were
substantially riskier and subject to shortfalls in revenues and profits relative to original expectations. The Company’s internal
operating forecast has been revised downward in terms of revenue growth and profitability for the foreseeable future. The analysis
entailed comparing the carrying amount of the long-lived assets as of December 31, 2015 with the sum of their respective projected
undiscounted cash flows. For the long lived assets where carrying amount exceeded the projected undiscounted cash flows, the Company
recognized and recorded an impairment of Physician Recurring segment intangibles for its trademark, tradename, and customer relationships
in the amount of $3,527 and licensed technology in the amount of $1,424 based on the amounts the carrying amounts exceeded the
fair value. Upon completion of our goodwill impairment analysis in connection with the pending transaction with ICTV Brands, as
of December 31, 2016 the Company recorded an impairment of the entire remaining balance of Consumer segment goodwill in the amount
of $2,257.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
In
connection with the pending transaction with ICTV Brands, as of December 31, 2016, the Company recorded an impairment of the Consumer
segment intangibles for its entire remaining Licensed Technology balance in the amount of $1,261.
Stock-Based
Compensation
The
Company accounts for stock-based compensation in accordance with ASC Topic 718,
Compensation – Stock Compensation
. Under
the fair value recognition provision, of this statement, share-based compensation cost is measured at the grant date based on
the fair value of the award that is ultimately expected to vest and is recognized as operating expense over the applicable vesting
period of the stock award using the graded vesting method.
Treasury
Stock and Repurchase of Common Stock
Shares
held by the Company are presented as a reduction of equity, at their cost to the Company as treasury stock, until such shares
are retired and removed from the account.
Recently
Issued Accounting Standards
In
May 2014, The FASB issued Accounting Standard Update 2014-09
, Revenue from Contracts with Customers (Topic 606)
(“ASU 2014-09”).
ASU
2014-09 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes
most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 also requires entities to disclose
sufficient information, both quantitative and qualitative, to enable users of financial statements to understand the nature, amount,
timing, and uncertainty of revenue and cash flows arising from contracts with customers.
An
entity should apply the amendments in this ASU using one of the following two methods: 1. Retrospectively to each prior reporting
period presented with a possibility to elect certain practical expedients, or, 2. Retrospectively with the cumulative effect of
initially applying ASU 2014-09 recognized at the date of initial application. If an entity elects the latter transition method,
it also should provide certain additional disclosures.
For
a public entity, the amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2017, including
interim periods within that reporting period (the first quarter of fiscal year 2018 for the Company). Early application is not
permitted. The Company is in the process of assessing the impact, if any, of ASU 2014-09 on its consolidated financial statements.
In
August 2014, the FASB issued Accounting Standards Update 2014-15,
Presentation of Financial Statements—Going Concern (Subtopic
205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
(“ASU 2014-15”). ASU 2014-15
provide guidance on management’s responsibility in evaluating whether there are conditions or events, considered in the aggregate,
that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the
financial statements are issued (or within one year after the date that the financial statements are available to be issued when
applicable). ASU 2014-15 also provide guidance related to the required disclosures as a result of management evaluation.
The
amendments in ASU 2014-15 are effective for the annual period ending after December 15, 2016, and for annual periods and interim
periods thereafter. Early application is permitted.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
In
July, 2015, The FASB issued Accounting Standards Update No. 2015-11
, Simplifying the Measurement of Inventory (Topic 330)
(“ASU
2015-11”). ASU 2015-11 outlines that inventory within the scope of its guidance be measured at the lower of cost and net realizable
value. Inventory measured using last-in, first-out (LIFO) are not impacted by the new guidance. Prior to the issuance of ASU 2015-11,
inventory was measured at the lower of cost or market (where market was defined as replacement cost, with a ceiling of net realizable
value and floor of net realizable value less a normal profit margin). For a public entity, the amendments in ASU 2015-11 are effective,
in a prospective manner, for annual reporting periods beginning after December 15, 2016, including interim periods within that
reporting period (the first quarter of fiscal year 2017 for the Company). Early adoption is permitted as of the beginning of an
interim or annual reporting period. The Company is in the process of assessing the impact, if any, of ASU 2015-11 on its consolidated
financial statements.
In
February, 2016, the FASB issued its new lease accounting guidance in Accounting Standards Update (ASU) No. 2016-02, Leases (Topic
842). Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term
leases) at the commencement date: 1. A lease liability, which is a lessee’s obligation to make lease payments arising from a lease,
measured on a discounted basis; and, 2. A right-of-use asset, which is an asset that represents the lessee’s right to use, or
control the use of, a specified asset for the lease term
.
Under
the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor
accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new lease guidance simplified
the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities.
Lessees will no longer be provided with a source of off-balance sheet financing. Public business entities should apply the amendments
in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e.,
January 1, 2019, for a calendar year Company). Early application is permitted for all public business entities upon issuance.
Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified
retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period
presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases
that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition
approach
.
The Company is in the process of assessing the impact, if any, of ASU 2016-02 on
its consolidated financial statements.
In
November 2015, the FASB has issued Accounting Standards Update (ASU) No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification
of Deferred Taxes, which changes how deferred taxes are classified on organizations’ balance sheet. The ASU eliminates the current
requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance
sheet. Instead, all deferred tax assets and liabilities will be required to be classified as noncurrent
.
The
amendments apply to all organizations that present a classified balance sheet. For public companies, the amendments are effective
for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual
periods (i.e., in the first quarter of 2017 for calendar year-end companies).Early adoption is permitted for all entities as of
the beginning of an interim or annual reporting period
.
The guidance may be applied either
prospectively, for all deferred tax assets and liabilities, or retrospectively (i.e., by reclassifying the comparative balance
sheet). If applied prospectively, entities are required to include a statement that prior periods were not retrospectively adjusted.
If applied retrospectively, entities are also required to include quantitative information about the effects of the change on
prior periods. The Company does not believe this ASU will have a significant impact on its consolidated financial statements.
Note
2
Discontinued
Operations:
On
June 22, 2015, the Company closed on the asset sale of the XTRAC and VTRAC business for $42.5 million in cash. The Company realized
net proceeds of approximately $41 million. The sale was effective June 22, 2015. The domestic revenues from this business have
historically been reported in our Physician Recurring business segment. Internationally, we sold our XTRAC-Velocity and VTRAC
equipment to distributors which sales have been historically reported in our Professional Equipment segment. As this business
was a substantial business unit of the Company, and as such the sale brought a strategic shift in focus of management. The Company
accordingly classified this former business as discontinued operations with ASC Topic 360.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
The
Company recognized a gain of $9,410, net of tax of $5,447, on the sale of the discontinued operations in the year ended December
31, 2015, which represents the difference between the adjusted net purchase price and the carrying value of the disposal group.
Revenues
from the XTRAC and VTRAC business, reported as discontinued operations, for the year ended December 31, 2015 were $14,669. Loss
from the XTRAC and VTRAC business, reported as discontinued operations, for the year ended December 31, 2015 was $5,042, which
includes interest expense of $2,289 and stock compensation of $1,684 related to the contractual acceleration of vesting of awards
then outstanding to employees from the XTRAC and VTRAC business, included as the result of acceleration of vesting periods, due
to the sale..
On
February 2, 2015, the Company closed on a sale transaction of 100% of the shares of LCA for $40 million in cash. Excluding estimated
working capital adjustments and direct expenses (professional fees to third parties), PhotoMedex realized net proceeds of approximately
$36.5 million. The sale was effective January 31, 2015. No income tax benefit was recognized by the Company from the loss on the
sale of discontinued operations.
For
the year ended December 31, 2015 a loss of $1,708 was recorded with respect to the operations of LCA (up to the completion of
its sale), which included an amount of $2,345 of stock compensation expense related to the contractual acceleration of vesting
of awards then outstanding to employees of LCA, as the result of acceleration of vesting periods, due to the sale.
Note
3
Acquisitions:
None
Note
4
Inventories,
net:
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
Raw
materials and work-in-process
|
|
$
|
1,968
|
|
|
$
|
4,236
|
|
Finished
goods
|
|
|
5,368
|
|
|
|
7,499
|
|
Total
inventories
|
|
$
|
7,336
|
|
|
$
|
11,735
|
|
Less
Assets held for sale
|
|
|
(7,336)
|
|
|
|
-
|
|
Total
inventory
|
|
$
|
-
|
|
|
$
|
11,735
|
|
Work-in-process
is immaterial given the typically short manufacturing cycle, and therefore is disclosed in conjunction with raw materials (see
Note 2 regarding inventory balance classified as part of the assets held for sale as of December 31, 2016). During January 2017,
all of the inventory was sold to ICTV. See Note 18.
Note
5
Property
and Equipment, net:
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
Lasers-in-service
|
|
$
|
-
|
|
|
$
|
-
|
|
Equipment,
computer hardware and software
|
|
|
5,005
|
|
|
|
5,147
|
|
Furniture
and fixtures
|
|
|
433
|
|
|
|
424
|
|
Leasehold
improvements
|
|
|
438
|
|
|
|
443
|
|
|
|
|
5,876
|
|
|
|
6,014
|
|
Accumulated
depreciation and amortization
|
|
|
(4,888
|
)
|
|
|
(4,708
|
)
|
Total
property and equipment, net
|
|
$
|
988
|
|
|
$
|
1,306
|
|
Less
Assets held for sale
|
|
|
(988)
|
|
|
|
-
|
|
Total
property and equipment, net
|
|
$
|
-
|
|
|
$
|
1,306
|
|
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
Related
depreciation and amortization expense was $292 in 2016, $427 in 2015. (See Note 1 regarding property and equipment as part of
assets held for sale as of December 31, 2016.)
During
January 2017, the consumer division property and equipment was sold to ICTV. See Note 18.
Note
6
Patents
and Licensed Technologies, net:
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
Gross
Amount beginning of period
|
|
$
|
3,376
|
|
|
$
|
7,027
|
|
Additions(disposals)
|
|
|
(177
|
)
|
|
|
(177
|
)
|
Translation
differences
|
|
|
36
|
|
|
|
30
|
|
Gross
Amount end of period
|
|
|
3,235
|
|
|
|
6,880
|
|
|
|
|
|
|
|
|
|
|
Accumulated
amortization
|
|
|
(1,974
|
)
|
|
|
(3,843
|
)
|
Impairment
(See Note 7 below)
|
|
|
(1,261
|
)
|
|
|
(1,424
|
)
|
|
|
|
|
|
|
|
|
|
Net
Book Value
|
|
$
|
-
|
|
|
$
|
1,613
|
|
Related
amortization expense was $230 and $769 for the years ended December 31, 2016 and 2015, respectively.
Note
7
Goodwill
and Other Intangible Assets:
As
part of the purchase price allocation for the reverse acquisition, the Company recorded goodwill in the amount of $24,005 and
definite-lived intangibles in the amount of $12,000. Goodwill reflects the value or premium of the acquisition price in excess
of the fair values assigned to specific tangible and intangible assets. Goodwill has an indefinite useful life and therefore is
not amortized as an expense, but is reviewed annually for impairment of its fair value to the Company. Activity in goodwill during
the year ended December 31, 2016 follows:
Balance
at January 1, 2016
|
|
$
|
3,581
|
|
Disposal
on sale of assets
|
|
|
(1,039
|
)
|
Impairment
of goodwill
|
|
|
(2,257
|
)
|
Translation
differences
|
|
|
(285
|
)
|
Balance
at December 31, 2016
|
|
$
|
0
|
|
During
the fourth quarter of 2015, we recorded goodwill and other intangible asset impairment charges of $21,481, as we determined that
a portion of the value of our goodwill and other intangible assets was impaired in connection with our annual impairment test.
A number of factors contributed to decreased earnings projection including, competition from consumer device companies claiming
similar product functionality, our inability to attract sufficient financial resources to quickly increase our advertisement to
overcome the market confusion created by competitors, the inability to effectively expand operations into foreign markets and
quickly ramp new and innovative product launches in the second half of the year after satisfying the bank covenant defaults of
our senior credit facility on June 23, 2015, and a continuing challenging media environment to purchase cost effective advertisement
in the USA, our largest product distribution market. The fair value of Goodwill associated with the operating and reporting units
were estimated using a combination of Income and Market Approach methodologies to valuation. The Income method of valuation explicitly
recognizes the current value of future economic benefits developed by discounting future net cash flows to their present value
at a rate the reflects both the current return requirements of the market and the risks inherent in the market. The Market approach
measures the value of an asset through the analysis of recent sales or offerings of comparable property.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
Our
business was organized into three operating and reporting units which are defined as Consumer, Physician Recurring, and Professional
Equipment. Upon completion of our annual goodwill impairment analysis as of December 31, 2015 the Company recorded an impairment
of Consumer segment goodwill in the amount of $15,654 and an impairment of Physician Recurring segment goodwill of $876.
During
the third quarter of 2016, we recorded goodwill and other intangible asset impairment charges of $3,518, as we determined that
a portion of the value of our goodwill and other intangible assets was impaired in connection with the pending transaction with
ICTV Brands, Inc. See Note 18, Subsequent Event for more information. The Company recorded an impairment of the entire remaining
balance of Consumer segment goodwill in the amount of $2,257 and recorded the impairment of the Consumer segment of the intangibles
for its licensed technology in the amount of $1,261. The Company derecognized an amount of $1,039 of goodwill related to the Physician
Recurring segment in connection with the asset sale of the Neova product line.
In
addition, pursuant to ASC 360 the Company tested the long-lived assets and determined that changes in circumstances indicated
that its carrying value may not be recoverable. The carrying amount of the assets is considered recoverable if it exceeds the
sum of undiscounted cash flows expected from the use or eventual disposition of the asset. As of December 2015 and in connection
with its annual budgeting process, the Company determined its acquired intangible assets indicated that the cash flows related
to the acquired assets were substantially riskier and subject to shortfalls in revenues and profits relative to original expectations.
The Company’s internal operating forecast has been revised downward in terms of revenue growth and profitability for the foreseeable
future. The analysis entailed comparing the carrying amount of the long-lived assets as of December 31, 2015 with the sum of their
respective projected undiscounted cash flows. The Company recognized and recorded an impairment of Physician Recurring segment
intangibles for its trademark, tradename, and customer relationships in the amount of $3,527 and licensed technology in the amount
of $1,424. Also in connection with the pending transaction with ICTV Brands, as of December 31, 2016, and based on the expected
price of such transaction which management believed represents market approach fair value estimate, the Company recorded an impairment
of the Consumer segment intangibles for its Licensed Technology in the amount of $1,261.
The
goodwill was allocated among the reportable segments as of December 31, 2016 and 2015 in accordance with the provisions of ASC
Topic 350-20 Intangibles-Goodwill and consisted of the following:
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
|
|
Consumer
segment
|
|
$
|
0
|
|
|
$
|
3,519
|
|
Physician
Recurring segment
|
|
|
0
|
|
|
|
62
|
|
Total
goodwill
|
|
$
|
0
|
|
|
$
|
3,581
|
|
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
Set
forth below is a detailed listing of other definite-lived intangible assets:
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
|
Trademarks
|
|
|
Customer
Relationships
|
|
|
Total
|
|
|
Trademarks
|
|
|
Customer
Relationships
|
|
|
Total
|
|
Gross
Amount beginning of period
|
|
$
|
405
|
|
|
$
|
-
|
|
|
$
|
405
|
|
|
$
|
3,925
|
|
|
$
|
4,356
|
|
|
$
|
8,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
differences
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(32
|
)
|
|
|
(67
|
)
|
|
|
(99
|
)
|
Gross
Amount end of period
|
|
|
405
|
|
|
|
-
|
|
|
|
405
|
|
|
|
3,893
|
|
|
|
4,289
|
|
|
|
8,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposal
|
|
|
(221
|
)
|
|
|
-
|
|
|
|
(221
|
)
|
|
|
(531
|
)
|
|
|
(587
|
)
|
|
|
(1,118
|
)
|
Accumulated
amortization
|
|
|
(184
|
)
|
|
|
-
|
|
|
|
(184
|
)
|
|
|
(1,358
|
)
|
|
|
(1,938
|
)
|
|
|
(3,296
|
)
|
Impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,763
|
)
|
|
|
(1,764
|
)
|
|
|
(3,527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Book Value
|
|
$
|
-
|
|
|
$
|
0
|
|
|
$
|
-
|
|
|
$
|
241
|
|
|
$
|
0
|
|
|
$
|
241
|
|
Related
amortization expense was $37 and $777 for the years ended December 31, 2016 and 2015. Customer Relationships embody the value
to the Company of relationships that Pre-merged PhotoMedex had formed with its customers. Tradename includes the names and various
other trademarks associated with Pre-merged PhotoMedex products.
Note
8
Accrued
Compensation and related expenses:
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
Accrued
payroll and related taxes
|
|
$
|
262
|
|
|
$
|
403
|
|
Accrued
vacation
|
|
|
66
|
|
|
|
94
|
|
Accrued
commissions and bonuses
|
|
|
3,701
|
|
|
|
2,420
|
|
Total
accrued compensation and related expense
|
|
$
|
4,029
|
|
|
$
|
2,917
|
|
Note
9
Other
Accrued Liabilities:
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
Accrued
warranty, current, see
Note 1
|
|
$
|
93
|
|
|
$
|
330
|
|
Accrued taxes,
including liability for unrecognized tax benefit, see
Note 13
|
|
|
1,606
|
|
|
|
1,135
|
|
Accrued
sales return (1)
|
|
|
1,975
|
|
|
|
4,179
|
|
Other
accrued liabilities
|
|
|
4,417
|
|
|
|
2,921
|
|
Total
other accrued liabilities
|
|
$
|
8,091
|
|
|
$
|
8,565
|
|
|
(1)
|
The
activity in the sales returns liability account was as follows:
|
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$
|
4,179
|
|
|
$
|
7,651
|
|
Additions
that reduce net sales
|
|
|
8,427
|
|
|
|
18,905
|
|
Deductions
from reserves
|
|
|
(10,631
|
)
|
|
|
(22,377
|
)
|
Balance
at end of year
|
|
$
|
1,975
|
|
|
$
|
4,179
|
|
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
Note
10
Long-term
Debt:
On
January 6, 2016, PhotoMedex, Inc. received an advance of $4 million, less a $40 financing fee (the “January 2016 Advance”), from
CC Funding, a division of Credit Cash NJ, LLC, (the “Lender”), pursuant to a Credit Card Receivables Advance Agreement (the “Advance
Agreement”), dated December 21, 2015. The Company’s domestic subsidiaries, Radiancy, Inc.; PTECH; and Lumiere,
Inc., were also parties to the Advance Agreement (collectively with the Company, the “Borrowers”). Each Advance was secured by
security interest in defined collateral representing substantially all the assets of the Company. Concurrent with the funding
of the loan agreement, the Company established a $500 cash reserve account in favor of the lender to be used to make loan payments
in the event that weekly remittances, net of sales return credits and other bank charges or offsets, were insufficient to cover
the weekly repayment amount due the lender. The advance was paid in full on July 29, 2016 and the security interest in the defined
collateral was released from lien.
Subject
to the terms and conditions of the Advance Agreement, the Lender was to make periodic advances to the Company (collectively with
the January 2016 Advance and the April 2016 Advance described below, the “Advances”). The proceeds can be used for general corporate
purposes.
All
outstanding Advances were required to be repaid through the Company’s existing and future credit card receivables and other rights
to payment arising out of our acceptance or other use of any credit or charge card (collectively, “Credit Card Receivables”) generated
by activities based in the United States.
On
April 29, 2016 the Company received an additional advance of $1 million, less a $10 financing fee (the “April 2016 Advance”),
from the Lender pursuant to the Advance Agreement
On
June 17, 2016, the Company received an advance of $550, less a $50 financing fee (the “June 2016 Advance”), from the Lender pursuant
to the Advance Agreement.
The
advances were paid in full on July 29, 2016 and the security interest in the defined collateral was released from lien.
Note
11
Commitments
and Contingencies:
Leases
The
Company has entered into various non-cancelable operating lease agreements for real property. These arrangements expire at various
dates through 2017. Rent expense was $550 and $761 for the years ended December 31, 2016 and 2015 respectively. The future annual
minimum payments under these leases, relating to our continuing operations are as follows:
Year
Ending December 31,
|
|
|
|
2017
|
|
|
243
|
|
2018
|
|
|
15
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
808
|
|
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
As
a result of the sale of the Consumer Products division to ICTV Brands, the Company no longer has a need for certain of its leased
properties, including the facilitates located in the United Kingdom and in Israel. In connection with the Transition Services
Agreement entered into between the Company and ICTV, the Company will maintain certain of its leased properties for a specified
period of time to allow ICTV to transition its operations to its own facilities. Leases that will expire during that transition
period will not be renewed. At the end of that period, the Company intends to seek the termination of these leases, and is in
the process of taking steps to effect those terminations. On March 16, 2016, the Company provided notice to the landlord of its
United Kingdom facility that it was invoking the right to terminate that lease early, on the fifth anniversary of the lease, or
on March 24, 2018.
Litigation
During
the year ended December 31, 2013, Radiancy, Inc., a wholly-owned subsidiary of PhotoMedex, commenced legal action against Viatek
Consumer Products Group, Inc., over Viatek’s Pearl and Samba hair removal products which Radiancy believes infringe the intellectual
property covering its no!no! hair removal devices. The first suit, which was filed in the United States Federal Court, Southern
District of New York, includes claims against Viatek for patent infringement, trademark and trade dress infringement, and false
and misleading advertising. A second suit against Viatek was filed in Canada, where the Pearl is offered on that country’s The
Shopping Channel, alleging trademark and trade dress infringement, and false and misleading advertising. Viatek’s response contains
a variety of counterclaims and affirmative defenses against both Radiancy and its parent company PhotoMedex, including, among
other counts, claims regarding the invalidity of Radiancy’s patents and antitrust allegations regarding Radiancy’s conduct.
Radiancy,
and PhotoMedex, had moved to dismiss PhotoMedex from the case, and to dismiss the counterclaims and affirmative defenses asserted
by Viatek. On March 28, 2014, the Court granted the Company’s motion and dismissed PhotoMedex from the lawsuit. The Court also
dismissed certain counterclaims and affirmative defenses asserted by Viatek, including Viatek’s counterclaims against Radiancy
for antitrust, unfair competition, and tortuous interference with business relationships and Viatek’s affirmative defenses of
unclean hands and inequitable conduct before the U.S. Patent and Trademark Office in procuring its patent. Radiancy had also moved
for sanctions against Viatek for failure to provide meaningful and timely responses to Radiancy’s discovery requests; on April
1, 2014, the Court granted that motion. Viatek appealed both the sanctions ruling and the dismissal of Viatek’s counterclaims
and defenses from the case, as well as PhotoMedex dismissal as a plaintiff; the Court has denied those appeals. The Court has
appointed a Special Master to oversee discovery. A Markman hearing on the patents at issue was held on March 2, 2015. Viatek has
requested an opportunity to supplement its patent invalidity contentions in the US case; Radiancy opposes that request. Radiancy
has been granted permission by the US Court to supplement its earlier sanctions motion to include the legal fees and costs associated
with preparing and prosecuting that motion; to date, Viatek has paid $83 in sanctions to Radiancy.
On
October 4, 2016, PhotoMedex, Inc., Radiancy, Inc. and Viatek Consumer Products, Inc. entered into General Releases under which
the parties and the former and present corporations in which they were or are shareholders; each and every one of their corporations;
and such corporations’ predecessors, former and present subsidiaries, parent entities, affiliates, divisions, licensees, receivers,
distributors, successors and assigns, and the present, former and future officers, directors, employees and shareholders of the
foregoing entities, and their heirs, executors, administrators, attorneys, associates, agents, successors, assigns, and anyone
affiliated with or acting on behalf of any of them, from all actions, claims, liabilities, causes of action, suits, debts, dues,
sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances,
trespasses, damages, judgments, extents, executions, claims, and demands whatsoever, in law, admiralty or equity, that a party
or its affiliate ever had, now has or hereafter can, shall or may have, from the beginning of the world to the day of the date
of the General Release including, but not limited to, the claims and counterclaims in the United States and Canadian litigation,
as well as all claims and rights of Viatek arising out of or related to the Letter of Intent, dated August 5, 2016, between Photomedex,
Radiancy and Viatek entitled Proposal to Acquire Certain Assets of Radiancy, Inc. As a result of these General Releases, both
the United States and the Canadian litigation were dismissed without costs effective October 11, 2016.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
On
April 25, 2014, a putative class action lawsuit was filed in the United States District Court for the District of Columbia against
the Company’s subsidiary, Radiancy, Inc. and Dolev Rafaeli, Radiancy’s President. The suit was filed by Jan Mouzon and twelve
other customers residing in ten different states who purchased Radiancy’s no!no! Hair products. It alleges various violations
of state business and consumer protection codes including false and misleading advertising, unfair trade practices, and breach
of express and implied warranties. The complaint seeks certification of the putative class, or, alternatively, certification as
subclasses of plaintiffs residing in those specific states. The complaint also seeks an unspecified amount of monetary damages,
pre-and post-judgment interest and attorneys’ fees, expert witness fees and other costs. Dr. Rafaeli was served with the Complaint
on May 5, 2014; to date, Radiancy, has not been served. A mediation was scheduled in this matter for November 24, 2014, but no
settlement was reached. On March 30, 2015, the Court dismissed this action in its entirety for failure to state a claim. The Court
specifically dismissed with prejudice the claims pursuant to New York General Business Law §349-50 and the implied warranty of
fitness for a particular purpose; the other counts against Radiancy were dismissed without prejudice. The Court also granted Dr.
Rafaeli’s motion to dismiss the actions against him for lack of personal jurisdiction over him by the Court. The Court denied
the plaintiffs request for jurisdictional discovery with respect to Dr. Rafaeli and plaintiffs request to amend the complaint.
Radiancy and its officers intend to continue to vigorously defend themselves against any attempts to continue this lawsuit.
On
July 17, 2014, plaintiffs’ attorneys refiled their putative class action lawsuit in the United States District Court for the District
of Columbia against only the Company’s subsidiary, Radiancy, Inc. The claims of the suit are virtually identical to the claims
originally considered, and dismissed without prejudice, by the same Court. A companion suit was filed in the United States District
Court for the Southern District of New York, raising the same claims on behalf of plaintiffs from New York and West Virginia against
Radiancy and its President, Dr. Dolev Rafaeli. That New York case was removed to the D.C. Court and the cases were consolidated
into one action. The Company filed a Motion to Dismiss the complaint against Dr. Rafaeli and Radiancy; on August 1, 2016, the
D.C. Court granted the dismissal of the case against Dr. Rafaeli, with prejudice, and decided to allow the action against Radiancy
to proceed. The Company intends to defend itself vigorously against this suit. At this time, the amount of any loss, or range
of loss, cannot be reasonably estimated as the case has only been initiated and no discovery has been conducted to determine the
validity of any claim or claims made by plaintiffs. Therefore, the Company has not recorded any reserve or contingent liability
related to these particular legal matters. However, in the future, as the cases progress, the Company may be required to record
a contingent liability or reserve for these matters.
On
June 30, 2014, the Company’s subsidiary, Radiancy, Inc., was served with a class action lawsuit filed in the Superior Court in
the State of California, County of Kern. The suit was filed by April Cantley, who purchased Radiancy’s no!no! hair products. It
alleges various violations of state business and consumer protection codes including false and misleading advertising, breach
of express and implied warranties and breach of the California Legal Remedies Act. The complaint seeks certification of the class,
which consists of customers in the State of California who purchased the no!no! hair devices. The complaint also seeks an unspecified
amount of monetary damages, pre-and post-judgment interest and attorneys’ fees, expert witness fees and other costs. Radiancy
has filed an Answer to this Complaint; the case is now in the discovery phase. On October 30, 2015, Radiancy filed to remove this
action to the United States District Court for the Southern District of California; as a result of that filing, all discovery
in this case has now been stayed. That removal was granted, and the Company has now filed to remove this case to the U.S. District
Court for the District of Columbia, the district with jurisdiction over Jan Mouzon v. Radiancy, Inc. and Dolev Rafaeli, President.
The suit was filed by Jan Mouzon and twelve other customers residing in ten different states, including California, who purchased
Radiancy’s no!no! hair products and alleges various violations of state business and consumer protection codes including false
and misleading advertising, unfair trade practices, and breach of express and implied warranties. The complaint seeks certification
of the putative class, or, alternatively, certification as subclasses of plaintiffs residing in those specific states. The Company’s
Motion to Remove the Cantley case had been stayed pending resolution of the Mouzon litigation; now that the Court in Mouzon has
issued its opinion regarding the Company’s Motion to Dismiss, the California Court has granted the Company’s Motion to Remove
the Cantley case to the Federal Court for the District of Columbia. Radiancy and its officers intend to vigorously defend themselves
against this lawsuit. Discovery has now commenced in this action. At this time, the amount of any loss, or range of loss, cannot
be reasonably estimated as the case has only been initiated and no discovery has been conducted to determine the validity of any
claim or claims made by plaintiffs. Therefore, the Company has not recorded any reserve or contingent liability related to these
particular legal matters. However, in the future, as the cases progress, the Company may be required to record a contingent liability
or reserve for these matters.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
On
February 19, 2016, the Company and its subsidiaries entered into Agreements and Plans of Merger and Reorganization with DS Healthcare
Group, Inc. and its subsidiaries (“DSKX”), under which DSKX would acquire the Company’s subsidiaries Radiancy, Inc. and PhotoMedex
Technology, Inc. in exchange for shares of stock in DSKX as well as cash payments and notes for future cash payments. Subsequent
to the signing of those Agreements, on March 23, 2016, DSKX filed a Current Report on Form 8-K (the “DSKX March 23 Form 8-K”)
with the SEC reporting its audit committee, after discussion with its independent registered public accounting firm, concluded
that the unaudited condensed consolidated financial statements of DSKX for the two fiscal quarters ended June 30, 2015 and September
30, 2015 should no longer be relied upon because of certain errors in such financial statements. Also, DSKX reported that its
audit committee, consisting of all members of its board of directors other than Daniel Khesin (at the time DSKX’s President and
Chairman of the Board and a member of its board of directors), had engaged independent counsel to conduct an investigation regarding
certain transactions involving Mr. Khesin and other individuals; the committee’s investigation had begun earlier in February.
The board also reported that it had terminated the employment of Mr. Khesin as DSKX’s president and as an employee of DSKX, and
also terminated Mr. Khesin’s employment agreement, dated December 16, 2013, for cause.
The
Company was not advised of this investigation during its negotiations with DSKX or after signing the Merger Agreements until the
evening of March 21, 2016. On April 12, 2016, the Company sent a Reservation of Rights letter to DSKX. The Notice states that,
based upon the disclosures set forth in DSKX’s Current Report on Form 8-K filed on March 23, 2016 and subsequent press releases
and filings by DSKX with the United States Securities and Exchange Commission (collectively, the “DSKX Public Disclosure”), DSKX
is in material breach of various representations, warranties, covenants and agreements set forth in the Agreements; had failed
to provide to the Company the information contained in the DSKX Public Disclosures during the discussions relating to the negotiation
and execution of the Agreements; and continues to be in material breach under the Agreements. As a result, the conditions precedent
to the closing of these transactions as set forth in the Agreements may not be able to occur. The Notice also declares that the
Company reserves all its rights and remedies under the Agreements, including, without limitation, the right to terminate the Agreements
and collect a termination fee from DSKX of $3.0 million. The Notice further asserts that the Company regards certain provisions
of the Agreements to have been waived by DSKX and to no longer be in effect, including the non-solicitation and no-shop provisions,
negative covenants, and termination events, as applicable solely to the PHMD Group, as well as the payment of any termination
fee by PHMD to DSKX. Finally, the Notice provided that the Company has the right to terminate the Agreements to pursue, consider
and enter into any acquisition proposal or other transaction without the payment of fees and expenses to DSKX.
On
May 27, 2016, the Company and its subsidiaries Radiancy, Inc., an indirectly wholly-owned subsidiary of the Company (“Radiancy”),
and Photomedex Technology, Inc., a wholly-owned subsidiary of the Company (“P-Tech”), terminated: (a) the Agreement and Plan of
Merger and Reorganization, dated as of February 19, 2016 (the “Radiancy Merger Agreement”), among the Company, Radiancy, DS Healthcare
Group, Inc. (“DSKX”) and PHMD Consumer Acquisition Corp., a wholly-owned subsidiary of DSKX (“Merger Sub A”), and (b) the Agreement
and Plan of Merger and Reorganization, dated as of February 19, 2016 (the “P-Tech Merger Agreement” and together with the Radiancy
Merger Agreement, the “Merger Agreements”), among the Company, P-Tech, DSKX, and PHMD Professional Acquisition Corp., a wholly-owned
subsidiary of DSKX (“Merger Sub B”). Pursuant to the Merger Agreements, Radiancy was to merge with Merger Sub A, with Radiancy
as the surviving corporation in such merger, P-Tech was to merge with Merger Sub B, with P-Tech as the surviving corporation in
such merger, and DSKX was to become the holding company for Radiancy and P-Tech.
Given
the material breaches identified in the Company’s notice to DSKX, and other disclosures and communications by DSKX, in connection
with the Company’s termination of the Merger Agreements and pursuant to their terms, the Company is seeking to recover a termination
fee of $3.0 million, an expense reimbursement of up to $750,000 and its liabilities and damages suffered as a result of DSKX’s
failures and breaches in connection with each of the Merger Agreements. On May 27, 2016, the Company, Radiancy and P-Tech filed
a complaint in the U.S. District Court for the Southern District of New York alleging breaches of the Merger Agreements by DSKX
and seeking the damages described in the foregoing sentence. On August 1, 2016, DSKX filed its answer to the complaint, denying
the allegations stated in the complaint and alleging its own counterclaims including, among others, the Company’s alleged failure
to disclose the Mouzon and Cantley cases filed against Radiancy.
At
this time, the amount of any loss, or range of loss, cannot be reasonably estimated as the case has only been initiated and no
discovery has been conducted to determine the validity of any claim or claims made by plaintiffs. Therefore, the Company has not
recorded any reserve or contingent liability related to these particular legal matters. However, in the future, as the cases progress,
the Company may be required to record a contingent liability or reserve for these matters. For additional information regarding
these matters, see the Pending Transactions disclosures in the Company’s Form 10-K for the year ending December 31, 2015, and
the Company’s Form 10-Q for the period ending March 31, 2016.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
During
2016, Linda Andrews, an alleged user of the no!no! Hair device, filed a product liability claim against the Company, its subsidiary
Radiancy, Inc., and Dr. Dolev Rafaeli, in the United States District Court for the Middle District of Florida, Orlando Division,
alleging that use of the device had caused a relapse of and complication to a pre-existing medical condition resulting from her
treatment for cancer. The complaint alleges, among other claims, that Radiancy failed to provide adequate warnings regarding
the operation of the device. The Company and Dr. Rafaeli have filed a motion to dismiss the claims against them; Radiancy
filed an answer to the Complaint. Ms. Doe then sought leave to amend her complaint to clarify the claims; the Company, Radiancy
and Dr. Rafaeli have filed appropriate responses and renewed the motion to dismiss the claims against the Company and Dr. Rafaeli.
Those motions are now pending before the Court. The company otherwise has denied the allegations of a defect and intends
to defend itself vigorously against this suit. At this time, the amount of any loss, or range of loss, cannot be reasonably estimated
as the case has only been initiated and discovery has not been fully conducted to determine the validity of any claim or claims
made by plaintiffs. Therefore, the Company has not recorded any reserve or contingent liability related to these particular legal
matters. However, in the future, as the cases progress, the Company may be required to record a contingent liability or reserve
for these matters.
Employment
Agreements
The
Company has severance agreements with certain key executives and employees that create certain liabilities in the event of their
termination of employment by the company without cause, or following a change in control of the Company. The aggregate commitment
under these executive severance agreements, should all covered executives and employees be terminated other than for cause, was
approximately $5,058 as of December 31, 2016, based on 2016 salary levels.
Note
12
Stockholders’
Equity:
Preferred
Stock
The
Company has authorized preferred stock consisting of 5,000,000 shares with a $.01 par value, which shall be designated as blank
check preferred. The Board of Directors may authorize the issuance from time to time of one or more classes of preferred stock
with one or more series within any class thereof, with such voting powers, full or limited, or without voting powers and with
such designations, preferences and relative, participating, optional or special rights and qualifications, limitations or restrictions
thereon as shall be set forth in the resolution or resolutions adopted by the Board of Directors providing for the issuance of
such preferred shares. At December 31, 2016 and 2015, no shares of preferred stock were issued or outstanding.
Common
Stock Options
The
Company has a Non-Employee Director Stock Option Plan. This plan has authorized 74,000 shares; of which 2,135 shares had been
issued or were reserved for issuance as awards of shares of common stock, and 12,079 shares were reserved for outstanding stock
options. The number of shares available for future issuance pursuant to this plan is 71,364.
In
addition, the Company has a 2005 Equity Compensation Plan (“2005 Equity Plan”). The 2005 Equity Plan has authorized 1,200,000
shares, of which 519,078 shares had been issued or were reserved for issuance as awards of shares of common stock, and 133,649
shares were reserved for outstanding options. The number of shares available for future issuance pursuant to this plan is 547,273.
A
summary of option transactions for all of the Company’s equity plans during the years ended December 31, 2016 and 2015 follows:
|
|
Number
of Stock
Options
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding
at December 31, 2014
|
|
|
231,941
|
|
|
|
81.15
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired/cancelled
|
|
|
(81,803
|
)
|
|
|
74.27
|
|
Outstanding
at December 31, 2015
|
|
|
150,138
|
|
|
$
|
67.99
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired/cancelled
|
|
|
(15,988
|
)
|
|
|
82.26
|
|
Outstanding
at December 31, 2016
|
|
|
134,150
|
|
|
$
|
85.22
|
|
Exercisable
at December 31, 2016
|
|
|
109,066
|
|
|
$
|
84.40
|
|
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
The
outstanding and exercisable options at December 31, 2016, have a range of exercise prices and associated weighted remaining contractual
life and weighted average exercise price, as follows:
Options
Range
of Exercise
Prices
|
|
Outstanding
Number of
Shares
|
|
|
Weighted
Average
Remaining
Contractual Life
(years)
|
|
|
Weighted
Average
Exercise Price
|
|
|
Exercisable
Number of
Shares
|
|
|
Exercisable
Weighted Avg.
Exercise Price
|
|
$0 -
$37.50
|
|
|
2,168
|
|
|
|
2.54
|
|
|
$
|
30.78
|
|
|
|
2,168
|
|
|
$
|
30.78
|
|
$37.51
- $75.00
|
|
|
57,145
|
|
|
|
5.56
|
|
|
$
|
71.32
|
|
|
|
47,746
|
|
|
$
|
71.12
|
|
$75.01-$112.50
|
|
|
74,640
|
|
|
|
5.38
|
|
|
$
|
97.05
|
|
|
|
58,841
|
|
|
$
|
96.25
|
|
$112.51
- up
|
|
|
197
|
|
|
|
0.01
|
|
|
$
|
234.06
|
|
|
|
311
|
|
|
$
|
256.15
|
|
Total
|
|
|
134,150
|
|
|
|
|
|
|
$
|
85.22
|
|
|
|
109,066
|
|
|
$
|
84.40
|
|
The
outstanding options will expire, as follows:
Year
Ending
|
|
Number
of Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
197
|
|
|
$
|
234.06
|
|
|
|
$233.10
- $239.40
|
|
2018
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
2019
|
|
|
1,954
|
|
|
$
|
32.01
|
|
|
|
$31.20
- $44.40
|
|
2020
|
|
|
534
|
|
|
$
|
32.81
|
|
|
|
$28.50
- $40.00
|
|
2021
and later
|
|
|
131,465
|
|
|
$
|
86.00
|
|
|
|
$70.00
- $100.00
|
|
|
|
|
134,150
|
|
|
$
|
85.22
|
|
|
|
$28.50
- $239.40
|
|
As
the share price as of December 31, 2016 was $2.20, the aggregate intrinsic value for options outstanding and exercisable was nil.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
The
Company uses the Black-Scholes option-pricing model to estimate fair value of grants of stock options. There were no grants of
stock options in 2016 and 2015.The Company calculates expected volatility for a share-based grant based on historic daily stock
price observations of its common stock. For estimating the expected term of share-based grants the Company has adopted the simplified
method. The Company has used historical data to estimate expected employee behaviors related to option exercises and forfeitures
and included these expected forfeitures as a part of the estimate of expense as of the grant date.
With
respect to grants of options, the risk-free rate of interest is based on the U.S. zero-coupon US Government bond rates appropriate
for the expected term of the grant or award.
The
Company has nonvested restricted stock, as follows:
|
|
Share
|
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
Nonvested
at December 31, 2014
|
|
|
167,040
|
|
|
$
|
21.60
|
|
Granted
|
|
|
299,000
|
|
|
|
9.25
|
|
Vested/cancelled
|
|
|
(207,468
|
)
|
|
|
17.75
|
|
Nonvested
at December 31, 2015
|
|
|
258,572
|
|
|
$
|
10.55
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested/cancelled
|
|
|
(129,361
|
)
|
|
|
10.04
|
|
Nonvested
at December 31, 2016
|
|
|
129,250
|
|
|
$
|
11.07
|
|
On
February 26, 2015, the Company issued 299,000 restricted stock units to a number of employees. The restricted shares have a purchase
price of $0.01 per share and vest, and cease to be subject to the Company’s right of repurchase, over a four-year period. The
Company determined the fair value of the awards to be the fair value of the Company’s common stock units on the date of issuance
less the value paid for the award. The aggregate fair value of these restricted stock issued was $2,766.
On
October 29, 2015, the Company issued 1,000 shares of common stock to a non-employee director for an aggregate fair value of $75.
Total
stock-based compensation expense was as $1,969 and $6,309 for the years ended December 31, 2016 and 2015.
At
December 31, 2016, there was $1,704 of total unrecognized compensation cost related to non-vested stock awards that based on their
original vesting terms was expected to be recognized over a weighted-average period of 1.86 years. Following the completion of
the transaction described in Note 18, such compensation will be accelerated.
Common
Stock Warrants
As
a result of the cash raise on December 12, 2014, the Company issued separately detachable warrants to the shareholders participating
in the raise at 0.50 per share acquired. The warrants have the following principal terms: (i) a warrant exercise price of $2.25
per share of common stock, (ii) an exercise period of December 12, 2015 through December 12, 2017. The underlying warrants were
registered via registration statement. The adjusted warrant exercise price after the reverse stock split is $11.25 per share of
common stock.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
A
summary of warrant transactions for the years ended December 31, 2016and 2015 follows:
|
|
Number
of Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding
at December 31, 2014
|
|
|
70,950
|
|
|
|
18.05
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired/cancelled
|
|
|
6,450
|
|
|
|
85.95
|
|
Outstanding
at December 31, 2015
|
|
|
64,500
|
|
|
|
11.25
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired/cancelled
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at December 31, 2016
|
|
|
64,500
|
|
|
$
|
11.25
|
|
At
December 31, 2016, all outstanding warrants are exercisable. As the share price as of December 31, 2016 was $2.20, the aggregate
intrinsic value for warrants outstanding and exercisable was nil.
If
not previously exercised, the outstanding warrants will expire as follows:
Year
Ending December 31,
|
|
Number
of Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
64,500
|
|
|
|
11.25
|
|
|
|
|
64,500
|
|
|
$
|
11.25
|
|
Note
13
Income
Taxes:
Income
taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations
in the period that includes the enactment date.
A
valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of
deferred tax liabilities during the period in which the related temporary difference becomes deductible. The benefit of tax positions
taken or expected to be taken in the Company’s income tax returns are recognized in the consolidated financial statements if such
positions are more likely than not of being sustained.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
For
the years ended December 31, 2016, and 2015, the following table summarizes the components of income before income taxes from
continuing operations and the provision for income taxes:
|
|
Year
Ended December 31
,
|
|
|
|
2016
|
|
|
2015
|
|
Income
(loss) before income tax:
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
(14,578
|
)
|
|
$
|
(29,667
|
)
|
Israel
|
|
|
1,942
|
|
|
|
1,839
|
|
UK
|
|
|
180
|
|
|
|
(13,161
|
)
|
Other
Foreign
|
|
|
79
|
|
|
|
(638
|
)
|
Income
(loss) before income taxes
|
|
$
|
(12,377
|
)
|
|
$
|
(41,627
|
)
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit):
|
|
|
|
|
|
|
|
|
United
States - Federal tax:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
-
|
|
|
$
|
(3,220
|
)
|
Deferred
|
|
|
-
|
|
|
|
272
|
|
|
|
|
|
|
|
|
|
|
United
States - State tax:
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
9
|
|
Deferred:
|
|
|
-
|
|
|
|
(105
|
)
|
|
|
|
|
|
|
|
|
|
Israel:
|
|
|
|
|
|
|
|
|
Current
|
|
|
241
|
|
|
|
552
|
|
Deferred
|
|
|
464
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
UK:
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
-
|
|
|
|
700
|
|
|
|
|
|
|
|
|
|
|
Other
foreign:
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
-
|
|
Deferred:
|
|
|
-
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
$
|
705
|
|
|
$
|
(1,794
|
)
|
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
For
the years ended December 31, 2016 and 2015, the following table reconciles the federal statutory income tax rate to the effective
income tax rate:
|
|
Year
Ended December 31
,
|
|
|
|
2016
|
|
|
2015
|
|
Federal
Tax rate
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
Federal
tax expense (benefit) at 34%
|
|
$
|
(4,208
|
)
|
|
$
|
(14,154
|
)
|
State
and local income tax, net of Federal benefit
|
|
|
(476
|
)
|
|
|
(421
|
)
|
Foreign
rate differential
|
|
|
(173
|
)
|
|
|
(454
|
)
|
Increase
in taxes from permanent differences instock-based compensation
|
|
|
508
|
|
|
|
489
|
|
Increase
in taxes from permanent difference in Intangible asset impairment
|
|
|
-
|
|
|
|
3,779
|
|
US
taxation of foreign earnings – Subpart F
|
|
|
-
|
|
|
|
7,610
|
|
Return
to provision and other adjustments
|
|
|
-
|
|
|
|
269
|
|
Impact
of deferred tax adjustments
|
|
|
-
|
|
|
|
2,852
|
|
Foreign
tax credits
|
|
|
-
|
|
|
|
(5,079
|
)
|
Tax
on foreign exchange
|
|
|
-
|
|
|
|
-
|
|
Tax
on undistributed earnings
|
|
|
-
|
|
|
|
(2,816
|
)
|
Change
in valuation allowance
|
|
|
5,036
|
|
|
|
5,893
|
|
Other,
net
|
|
|
18
|
|
|
|
238
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
$
|
705
|
|
|
$
|
(1,794
|
)
|
As
of December 31, 2016, the Company had approximately $78 million of Federal net operating loss carryforwards in the United States.
Other tax attributes in the United States and their approximate amounts include: State NOLs - $45.4 million; foreign tax credits
- $12.1 million which will begin to expire in 2024; and, AMT tax credits – $0.1 million that do not expire. A 100% valuation allowance
has been recorded against these tax attributes and the net deferred tax assets of the U.S. group of companies. The net deferred
tax assets – liabilities of the U.S. companies is reduced to zero (0). Based on current operating conditions and the availability
of projected future sources of taxable income, the Company determined that it was not more likely than not that the net deferred
tax assets of the U.S. companies would be realized in the future. The Federal NOLs expire generally from 2022 to 2030. The State
NOLs expire generally from 2017 to 2034.
After
conversion to U.S. dollars, Photo Therapeutics Limited had approximately $9.5 million of net operating loss carryforwards in the
U.K. A 100% valuation allowance has been applied against these loss carryforwards. Additionally, NOLs have been recorded in Brazil,
Colombia, India, and Korea. The Brazilian NOL is approximately $1.8 million. The NOLs of the other companies are less than $0.3
million. All these NOLs have a 100% valuation allowance recorded.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
The
following table summarizes the components of deferred income tax assets and (liabilities):
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Loss
carryforwards
|
|
$
|
30,770
|
|
|
$
|
22,640
|
|
AMT
credits
|
|
|
112
|
|
|
|
112
|
|
Foreign
tax credits
|
|
|
12,308
|
|
|
|
12,308
|
|
Accrued
employment expenses
|
|
|
2,652
|
|
|
|
2,290
|
|
Amortization
and write-offs
|
|
|
1,299
|
|
|
|
1,282
|
|
Capitalized
R&D costs
|
|
|
1,342
|
|
|
|
1,951
|
|
Deferred
revenues
|
|
|
6,263
|
|
|
|
6,262
|
|
Depreciation
|
|
|
1,224
|
|
|
|
1,216
|
|
Doubtful
accounts
|
|
|
225
|
|
|
|
4,838
|
|
Inventory
reserves
|
|
|
459
|
|
|
|
413
|
|
Tax
on undistributed earnings
|
|
|
(517
|
)
|
|
|
(517
|
)
|
Other
accruals and reserves
|
|
|
602
|
|
|
|
642
|
|
Return
allowances
|
|
|
456
|
|
|
|
1,928
|
|
|
|
|
|
|
|
|
|
|
Gross
deferred tax asset
|
|
|
57,195
|
|
|
|
55,365
|
|
|
|
|
|
|
|
|
|
|
Less:
valuation allowance
|
|
|
(57,195
|
)
|
|
|
(54,901
|
)
|
|
|
|
|
|
|
|
|
|
Net
deferred tax asset
|
|
$
|
-
|
|
|
$
|
464
|
|
|
|
|
|
|
|
|
|
|
Among
current assets
|
|
$
|
-
|
|
|
$
|
470
|
|
Among
other non-current liabilities
|
|
|
-
|
|
|
|
(6
|
)
|
PhotoMedex
files corporate income tax returns in the United States, both in the Federal jurisdiction and in various State jurisdictions.
The Company is subject to Federal income tax examination for calendar years 2013 through 2016 and is also generally subject to
various State income tax examinations for calendar years 2013 through 2016. Photo Therapeutics Limited files in the United Kingdom.
Radiancy (Israel) Limited files in Israel. The Israeli subsidiary is subject to tax examination for calendar years 2012 through
2016.
The
Israeli subsidiary is entitled to reduced tax rates regarding income that is subject to tax pursuant to the “approved enterprise”
until end of year 2012 and “preferred enterprise” from year 2013. Other income is subject to the regular corporate income tax
rate. For the year 2015 and 2016 all income in Israel was taxed at the regular corporate income tax rate.
Change
in Israel rates
. Effective for tax periods beginning 1 January 2014, the standard corporate income tax rate was increased
from 25% to 26.5%. On January 4, 2016, the plenary Knesset passed the Law for Amendment of the Income Tax Ordinance No. 216 which
provides, inter alia, for a reduction of the Companies Tax rate commencing from 2016 and thereafter by the rate of 1.5% such that
the rate will be 25%.
Change
in U.K. rates.
In addition, effective for tax periods beginning on April 1, 2014, the United Kingdom tax rate was reduced
from 23% to 21%. A further enacted decrease in the tax rate to 20% took effect on April 1, 2015. The rate is scheduled to further
reduce to 19% effective April 1, 2017. These changes in rate will affect the tax provision with regard to the tax attributes of
Photo Therapeutics Limited, the United Kingdom subsidiary.
Unrecognized
Tax Benefits.
The Company is subject to income taxation in the U.S., Israel, the U.K., Brazil, Colombia, Hong Kong, India
and The Republic of Korea. Unrecognized tax benefits reflect the difference between positions taken or expected to be taken on
income tax returns and the amounts recognized in the financial statements. Resolution of the related tax positions through negotiations
with the relevant tax authorities or through litigation could take years to complete. It is difficult predict the timing of resolution
for tax positions since such timing is not entirely within the control of the Company. It is reasonably possible that the total
amount of unrecognized tax benefits could increase in the next 12 months. Additionally, a decrease in the amount of $375 is expected
with the lapse of a statute of limitations.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
The
increase during 2015 relates to a decision in 2015 to file certain income tax returns for 2014 based on functional currency rather
than local currency. Since the 2014 tax provision was calculated based on filing tax returns in local currency, the increase in
unrecognized tax benefits reported below was materially offset by a reduction in the 2014 amount reported as taxes payable. The
tax differential was reported in 2015 tax expense.
The
Company and its subsidiaries file income tax returns in all of the countries listed above.
In
2012, Management conducted an analysis of the facts and law surrounding the then existing income tax uncertainties, and found
that such liability as may have arisen was of a much lesser magnitude and is able to be extinguished by loss carryforwards and
carrybacks,
Reconciliation
of the beginning and ending amount of unrecognized tax benefits is as follows:
Balance
December 31, 2013
|
|
|
644
|
|
Additions/
Settlements due 2014
|
|
|
-
|
|
Balance
at December 31, 2014
|
|
|
644
|
|
Additions
/ Settlements due 2015
|
|
|
1,277
|
|
Balance
at December 31, 2015
|
|
|
1,921
|
|
Additions
/ Settlements due 2016
|
|
|
-
|
|
Balance
at December 31, 2016
|
|
$
|
1,921
|
|
Note
14
Significant
Customer Concentration:
No
single customer accounted for more than 10% of total company revenues for the years ended December 31, 2016 and 2015.
Note
15
Business
Segment and Geographic Data:
The
Company has been reorganized its business into three operating segments to better align its organization based upon the Company’s
management structure, products and services offered, markets served and types of customers, as follows: The Consumer segment (sold
to ICTV on January 23, 2017) derives its revenues from the design, development, manufacturing and selling of long-term hair reduction
and acne consumer products. The Physician Recurring segment derives its revenues from the XTRAC (sold to MELA Sciences on June
22, 2015) procedures performed by dermatologists, the sales of skincare products (sold to Pharma Cosmetics on September 15, 2016),
the sales of surgical disposables and accessories to hospitals and surgery centers (sold to Dalian JiKang Medical Systems September
1, 2015) and on the repair, maintenance and replacement parts on various products. The Professional segment generates revenues
from the sale of equipment, such as lasers, medical and esthetic light and heat based products and LED products. Management reviews
financial information presented on an operating segment basis for the purposes of making certain operating decisions and assessing
financial performance.
Unallocated
operating expenses include costs that are not specific to a particular segment but are general to the group; included are expenses
incurred for administrative and accounting staff, general liability and other insurance, professional fees and other similar corporate
expenses. Interest and other financing income (expense), net is also not allocated to the operating segments. Unallocated assets
include cash and cash equivalents, prepaid expenses and deposits.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
The
following tables reflect results of operations from the continuing operations of our business segments for the periods indicated
below:
Year
ended December 31, 2016
|
|
CONSUMER
|
|
|
PHYSICIAN
RECURRING
|
|
|
PROFESSIONAL
|
|
|
TOTAL
|
|
Revenues
|
|
$
|
34,331
|
|
|
$
|
3,302
|
|
|
$
|
764
|
|
|
$
|
38,397
|
|
Costs
of revenues
|
|
|
5,862
|
|
|
|
1,847
|
|
|
|
377
|
|
|
|
8,086
|
|
Gross
profit
|
|
|
28,469
|
|
|
|
1,455
|
|
|
|
387
|
|
|
|
30,311
|
|
Gross
profit %
|
|
|
82.9
|
%
|
|
|
44.1
|
%
|
|
|
50.7
|
%
|
|
|
78.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated
operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering
and product development
|
|
|
1,045
|
|
|
|
204
|
|
|
|
-
|
|
|
|
1,249
|
|
Selling
and marketing expenses
|
|
|
19,426
|
|
|
|
2,270
|
|
|
|
33
|
|
|
|
21,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
|
|
|
3,518
|
|
|
|
-
|
|
|
|
|
|
|
|
3,518
|
|
Loss
on sale of assets
|
|
|
|
|
|
|
2,574
|
|
|
|
|
|
|
|
2,574
|
|
Unallocated
operating expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,233
|
|
|
|
|
23,989
|
|
|
|
5,048
|
|
|
|
33
|
|
|
|
42,303
|
|
Income
(loss) from continuing operations
|
|
|
4,480
|
|
|
|
(3,593
|
)
|
|
|
354
|
|
|
|
(11,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other financing expense, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations before taxes
|
|
$
|
4,480
|
|
|
$
|
(3,593
|
)
|
|
$
|
354
|
|
|
$
|
(12,377
|
)
|
Year
ended December 31, 2015
|
|
CONSUMER
|
|
|
PHYSICIAN
RECURRING
|
|
|
PROFESSIONAL
|
|
|
TOTAL
|
|
Revenues
|
|
$
|
67,569
|
|
|
$
|
5,918
|
|
|
$
|
2,403
|
|
|
$
|
75,890
|
|
Costs
of revenues
|
|
|
14,733
|
|
|
|
2,271
|
|
|
|
1,421
|
|
|
|
18,425
|
|
Gross
profit
|
|
|
52,836
|
|
|
|
3,647
|
|
|
|
982
|
|
|
|
57,465
|
|
Gross
profit %
|
|
|
78.2
|
%
|
|
|
61.6
|
%
|
|
|
40.9
|
%
|
|
|
75.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated
operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering
and product development
|
|
|
1,192
|
|
|
|
105
|
|
|
|
16
|
|
|
|
1,313
|
|
Selling
and marketing expenses
|
|
|
53,184
|
|
|
|
3,955
|
|
|
|
273
|
|
|
|
57,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
|
|
|
15,654
|
|
|
|
5,827
|
|
|
|
-
|
|
|
|
21,481
|
|
Unallocated
operating expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,484
|
|
|
|
|
70,030
|
|
|
|
9,887
|
|
|
|
289
|
|
|
|
97,690
|
|
Income
(loss) from continuing operations
|
|
|
(17,194
|
)
|
|
|
(6,240
|
)
|
|
|
693
|
|
|
|
(40,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and
other financing expense, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) before taxes
|
|
$
|
(17,194
|
)
|
|
$
|
(6,240
|
)
|
|
$
|
693
|
|
|
$
|
(41,627
|
)
|
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
For
the years ended December 31, 2016 and 2015, net revenues by geographic area (determined by ship to locations) were as follows:
|
|
Year
Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
North
America
1
|
|
$
|
22,007
|
|
|
$
|
51,092
|
|
Asia
Pacific
2
|
|
|
3,837
|
|
|
|
3,988
|
|
Europe
(including Israel)
|
|
|
12,522
|
|
|
|
20,544
|
|
South
America
|
|
|
31
|
|
|
|
266
|
|
|
|
$
|
38,397
|
|
|
$
|
75,890
|
|
|
|
|
|
|
|
|
|
|
1
United States
|
|
$
|
17,839
|
|
|
$
|
45,105
|
|
1
Canada
|
|
$
|
1,698
|
|
|
$
|
5,353
|
|
2
Japan
|
|
$
|
1,060
|
|
|
$
|
387
|
|
For
the years ended December 31, 2016 and 2015, long-lived assets by geographic area were as follows:
|
|
Year
Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
North
America
|
|
$
|
71
|
|
|
$
|
169
|
|
Asia
Pacific
|
|
|
17
|
|
|
|
41
|
|
Europe
(including Israel)
|
|
|
900
|
|
|
|
1,096
|
|
|
|
$
|
988
|
|
|
$
|
1,306
|
|
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
Note
18
Subsequent
Events
:
Sale
of consumer products line
On
October 4, 2016, the Company and its subsidiaries Radiancy, Inc., a Delaware corporation (“Radiancy US”), Photo Therapeutics Ltd.,
a private limited company incorporated under the laws of England and Wales (“PHMD UK”), and Radiancy (Israel) Limited, an Israel
corporation (“Radiancy Israel” and, together with the Company, Radiancy, and PHMD UK, “PHMD”) entered into an Asset Purchase Agreement
(the “Asset Purchase Agreement”) with ICTV Brands, Inc., a Nevada corporation (“ICTV Parent”), and its subsidiary ICTV Holdings,
Inc. a Nevada corporation (the “Purchaser” and together with together with ICTV Parent, “ICTV”) pursuant to which ICTV will acquire
PHMD’s consumer products division, including its no!no!® hair and skin products and the Kyrobak back pain management products
(all such consumer products, the “Consumer Products”) and the shares of capital stock of Radiancy (HK) Limited, a private limited
company incorporated under the laws of Hong Kong (the “Hong Kong Foreign Subsidiary”), and LK Technology Importaçăo E Exportaçăo
LTDA, a private Sociedade limitada formed under the laws of Brazil (the “Brazilian Foreign Subsidiary” and together with the Hong
Kong Foreign Subsidiary, the “Foreign Subsidiaries”) (collectively, the “Transferred Business”) from PHMD, for a total purchase
price of up to $9.5 million (the “Purchase Price”) including $3 million in cash at closing, $2 million of cash 90 days after closing
collateralized by a letter of credit, and up to a $4.5 million royalty on ICTV’s future sales of the product line.
The
Purchase Price will be paid as follows:
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●
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ICTV
placed Three Million Dollars ($3,000) in immediately available funds in an escrow
account in ICTV’s counsel’s IOLTA Trust Account to be held by ICTV’s counsel as escrow
agent under an escrow agreement among PHMD, ICTV and certain investors in ICTV Parent’s
securities (the “Escrow Agreement”). These funds will be paid to PHMD on the Closing
Date of this transaction.
|
|
●
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On
or before the ninetieth (90th) day following the Closing Date of this transaction, ICTV
will pay PHMD Two Million Dollars ($2,000) in immediately available funds.
|
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●
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The
remaining amount of up to Four Million Five Hundred Thousand Dollars ($4,500) will be
paid by ICTV to PHMD under a continuing royalty on net cash (invoiced amount less sales
refunds, returns, rebates, allowances and similar items) actually received by ICTV or
its Affiliates from sales of the Consumer Products commencing with net cash actually
received by the Purchaser or its Affiliates from and after the Closing Date of this transaction
and continuing until the total royalty paid to PHMD reaches that amount. Royalty payments
will be made on a monthly basis in arrears within thirty days of each month end. PHMD
will receive thirty five percent (35%) of net cash actually received by ICTV through
Consumer Products sold through live television promotions less certain deductions and
six percent (6%) of all other sales of Consumer Products.
|
As
part of this Transaction, ICTV will also acquire from PHMD all of the shares of capital stock of the Foreign Subsidiaries.
The
Asset Purchase Agreement provides that ICTV will make offers of employment to certain employees of the Transferred Business and
that PHMD will not solicit such employees (or any other employees of ICTV) for employment or other services for a period of five
years and that PHMD will not compete with ICTV with respect to the Transferred Business for a period of five years. It also
contains customary representations, warranties and covenants by the Company, each of its subsidiaries and ICTV, as well customary
indemnification provisions among the parties.
In
connection with the sale of the Transferred Business, on October 4, 2016, the parties entered into an Escrow Agreement and a Transition
Services Agreement.
Under
the Escrow Agreement, ICTV deposited $3,000 of the Purchase Price into an escrow account which will be released to PHMD upon
closing.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
Under
the Transition Services Agreement, PHMD will continue to provide certain accounting, benefit, payroll, regulatory, IT support
and other services to ICTV for periods ranging from approximately three to up to nine months following the Closing. During those
periods, ICTV will arrange to transition the services it receives to its own personnel. In consideration for such services,
ICTV will pay to PHMD the documented costs and expenses incurred by PHMD in connection with the provision of those services and
the documented lease costs including monthly rental and any utility charges incurred under the applicable leases and will reimburse
PHMD for the documented costs and expenses incurred for the continued storage of inventory and raw materials at warehouse locations,
and for services for fulfilling and shipping orders for such inventory and the payroll, employment-related taxes, benefit costs
and out of pocket expenses paid to or on behalf of employees. ICTV shall also have the right to continue occupying certain portions
of the Orangeburg, New York facility of PHMD’s Radiancy, Inc. subsidiary for a period of time.
On
January 23, 2017, (the “Closing Date”), the Company and its subsidiaries completed the disposition of the Transferred Business
to ICTV. On that date, pursuant to the terms of the Asset Purchase Agreement as amended, ICTV acquired all of the assets related
to and associated with the Transferred Business, including but not limited to intellectual property, product inventory, accounts
receivable and payable, and other tangible and intangible assets connected with the conduct of that Transferred Business. In exchange
for these assets, the Company received on the Closing Date an initial net payment from ICTV of $3.0 million.
Following
the impairment of the consumer segment’s goodwill and intangible asset during the three months period ended September 30, 2016,
as discussed above, the company is not expected to record significant gain or loss from the transaction contemplated under the
Asset Purchase Agreement.
On
January 23, 2017, PhotoMedex, Inc. (the “Company”) (Nasdaq and TASE: PHMD) and its subsidiaries Radiancy, Inc., (“Radiancy”),
PhotoTherapeutics Ltd. (“PHMD UK”), and Radiancy (Israel) Limited, (“Radiancy Israel” and, together with the Company, Radiancy,
and PHMD UK, the “Sellers” and each, a “Seller”) entered into a First Amendment (the “First APA Amendment”) to the Asset Purchase
Agreement (the “Asset Purchase Agreement”) between the Company and its subsidiaries, and ICTV Brands Inc. (“Parent”) and ICTV
Holdings, Inc. (“Purchaser” and together with Parent, the Company, Radiancy, PHMD UK and Radiancy Israel, the “Parties” or singularly
a “Party”) under which Purchaser agreed to acquire the consumer products division of PhotoMedex and its subsidiaries (the “Acquisition”),
which includes, among other products, the no!no!® Hair and Skin and the Kyrobak pain management products (the “Transferred Business”).
This transaction was previously reported on a Current Report filed on Form 8-K on October 5, 2016 and in a Definitive Proxy on
Schedule 14A on December 16, 2016.
The
First APA Amendment revised the definition of Business Assets and Assumed Liabilities in the Asset Purchase Agreement, as set
forth in the attached exhibit. It also modified the first sentence of Section 5.5(b) of the Asset Purchase Agreement to provide
that the Parent, Purchaser, or an affiliate would take the necessary steps to establish and implement “employee benefit plans”
within the meaning of Section 3(3) of ERISA and a 401(k) plan intended to be qualified under Section 401(a) of the Code (collectively,
“Applicable Plans”) in which employees of the consumer products division who are hired by Purchaser shall be eligible to participate
from and after the date of establishment. These steps are to be taken as soon as reasonably practicable after the Closing Date
(defined below) of the Transaction, or a later date agreed to by the Parties or permitted under the Transition Services Agreement
(defined below), but no later than 60 days after the Closing Date. The First APA Amendment also replaced the initial Disclosure
Letter delivered by the Sellers to Purchaser concurrently with the execution of the Asset Purchase Agreement in its entirety with
an amended Disclosure Letter.
Finally,
the First APA Amendment modified the Letter of Credit issued in connection with the Asset Purchase Agreement. Under the Asset
Purchase Agreement, the Purchaser agreed to pay to the Company $2.0 million on or before the ninetieth (90th) day following the
Closing Date. This amount is guaranteed by an original letter of credit for the benefit of the Company made by a third party;
however, under its original terms, the Letter of Credit was valid until the earlier of 180 days after the letter of credit was
issued, or April 4, 2017, or until full payment upon demand and presentation on or January 3, 2017. Accordingly, the parties agreed
to extend the term of the Letter of Credit to 100 days after the Closing Date.
Also
on January 23, 2017, the Company and its subsidiaries entered into a First Amendment (the “First TSA Amendment”) to the Transition
Services Agreement (the “Transition Services Agreement”) between the Company and its subsidiaries and Parent and Purchaser, pursuant
to which the Company and its subsidiaries will provide the Purchaser with certain accounting, benefit, payroll, regulatory, IT
support and other services for periods ranging from approximately three to up to one year following the Closing Date. During that
time the Purchaser will arrange to transition the services it receives to its own personnel. The First TSA Amendment revised references
in the Transition Services Agreement from “Effective Date” to “Closing Date”, and amended the fifth recital in its entirety to
clarify specifications regarding the lease for certain premises in Israel by and between Radiancy Israel and the landlord for
those premises.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
Acquisition
of First Capital Real Estate Development Business
On
March 31, 2017, PhotoMedex, Inc. (the “
Company
”) and its newly-formed subsidiary FC Global Realty Operating Partnership,
LLC, a Delaware limited liability company (“
Acquiror
”) entered into an Interest Contribution Agreement (the “Agreement”)
with First Capital Real Estate Operating Partnership, L.P., a Delaware limited partnership (“
Contributor
”), and First Capital
Real Estate Trust Incorporated, a Maryland corporation, the “
Contributor Parent
” and, together with Contributor, the “
Contributor
Parties
”), under which the Contributor may contribute certain real estate assets to the Company’s subsidiary in a series of
three installments no later than December 31, 2017. In exchange, the Contributor will receive shares of the Company’s Common Stock
and newly designated Series A Convertible Preferred Stock as described below.
First
Contribution
In
the first contribution installment, which has an initial closing on or before May 17, 2017, the Contributor will transfer $10
million of assets to the Company, comprising four vacant land sites set for development into gas stations located in northern
California, and a single family residential development located in Los Lunas, New Mexico. Contributor Parent currently has a 6%
interest in the entity which owns the residential development, and expects to acquire an additional 11.9% interest prior to the
initial closing date. The proposed gas station sites are located in Atwater and Merced, California and have an appraised value
of $2.6 million. The residential development in New Mexico consists of 251, non-contiguous, single family residential lots and
a 10,000 square foot club house. 37 lots have been finished, and the remaining 214 are platted and engineered lots. The appraised
value of this property is approximately $7.4 million.
In
return, the Company will issue to Contributor a number of duly authorized, fully paid and non-assessable shares of the Company’s
Common Stock and Series A Convertible Preferred Stock, determined by dividing the $10 million value of that contribution by a
specified per share value, which will represent a 7.5% premium above the volume-weighted average price (“
VWAP
”) of all
on-exchange transactions in the Company’s shares executed on NASDAQ during the forty-three (43) NASDAQ trading days prior to the
NASDAQ trading day immediately prior to the public announcement of the transaction by the Company and Contributor Parent, as reported
by Bloomberg L.P. (the “
Per Share Value
”). Contributor shall receive a number of shares equal to up to 19.9% of the issued
and outstanding Common Stock of the Company immediately prior to the initial closing. The balance of the shares shall be paid
in the Company’s newly designated Series A Convertible Preferred Stock.
Also
at this initial closing, the Acquiror shall assume the liabilities associated with these initial contributed properties. On or
before this initial closing, certain named officers and/or directors of the Company – Dr. Dolev Rafaeli, Dennis McGrath, and Dr.
Yoav Ben-Dror – will resign from their positions as officers and/or directors of the Company. In addition, certain members of
the Company’s board of directors will resign, or the board will be expanded, so that the board will ultimately consist of seven
(7) persons as set forth under “Special Meeting of Stockholders” below.
Second
Contribution
Contributor
Parent is also required to contribute two additional property interests valued at $20 million if certain conditions as set forth
in the Agreement are satisfied by December 31, 2017. This second installment is mandatory.
Contributor
Parent must contribute to the Acquiror its 100% ownership interest in a private hotel that is currently undergoing renovations
to convert to a Wyndham Garden Hotel. This 265 room full service hotel is located in Amarillo, Texas and has an appraised value
of approximately $16 million. Before contributing the property to the Acquiror, Contributor Parent must resolve a lawsuit concerning
ownership of the property. Only when Contributor Parent has confirmed that it is the full and undisputed owner of the property
may it contribute that interest to the Acquiror.
In
addition, Contributor Parent must contribute to the Acquiror its interest in Dutchman’s Bay and Serenity Bay (referred to as the
“
Antigua Resort Developments
”), two planned full service resort hotel developments located in Antigua and Barbuda in which
Contributor Parent owns a 75% interest in coordination with the Antigua government. Serenity Bay is a planned five star resort
comprised of five contiguous parcels (28.33 acres) zoned for hotel and residential use that are planned for 246 units and 80 one,
two and three bedroom condo units. Dutchman’s Bay, is a planned four star condo hotel with 180 guestrooms, 102 two bedroom condos,
and 14 three bedroom villas. For the property in Antigua, Contributor Parent must obtain an amendment to its agreement with the
government to extend the time for development of these properties and confirm that all development conditions in the original
agreement with the government have been either satisfied or waived.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
In
exchange for each of these properties, the Company will issue to Contributor a number of duly authorized, fully paid and non-assessable
shares of the Company’s Common Stock or Series A Convertible Preferred Stock, determined by dividing the $20 million value of
that contribution by the Per Share Value. The shares shall be comprised entirely of shares of Common Stock if the issuance has
been approved by the Company’s stockholders prior to the issuance thereof and shall be comprised entirely of shares of Series
A Convertible Preferred Stock if such approval has not yet been obtained.
Optional
Contribution
Contributor
Parent has the option to contribute either or both of two additional property interests valued at $66,5 million if certain conditions
as set forth in the Agreement are satisfied by December 31, 2017. This third installment is optional in Contributor Parent’s sole
discretion.
The
Contributor Parent may contribute to the Acquiror its interest in a resort development project on an island just south of Hilton
Head, South Carolina (“
Melrose
”). Contributor Parent currently has the property under a Letter of Intent and expects to
close on the property by December 31, 2017. Melrose is valued by Contributor Parent at $22.5 million, based upon a senior lending
position that Contributor Parent holds under the Letter of Intent on this property.
Contributor
Parent also may contribute to the Acquiror a golf and surf club development project on the Baja Peninsula in Mexico (“
Punta
Brava
”). Contributor Parent also has this property under a Letter of Intent and expects to close by December 31, 2017. Punta
Brava is valued by Contributor Parent at $44 million based on Contributor Parent’s commitment of $5 million upon closing on this
property, plus a commitment for an additional $5 million and a second commitment of $34 million for construction of the project.
In
exchange for each of these properties, the Company will issue to Contributor a number of duly authorized, fully paid and non-assessable
shares of the Company’s Common Stock or Series A Convertible Preferred Stock, determined by dividing $86,450,000 (130% of the
value of that contribution) by the Per Share Value. The shares shall be comprised entirely of shares of Common Stock if the issuance
has been approved by the Company’s stockholders prior to the issuance thereof and shall be comprised entirely of shares of Series
A Convertible Preferred Stock if such approval has not yet been obtained. In addition, the Company will issued to Contributor
a five (5) year warrant (the “
Warrant
”) to purchase up to 25,000,000 shares of the Company’s Common Stock at an exercise
price of $3.00 per share that shall vest with respect to the number of underlying shares upon the achievement of the milestone
specified Agreement. The number of warrant shares and the exercise price will be equitably adjusted in the event of a stock split,
stock combination, recapitalization or similar transaction.
General
Conditions
In
each case, the Company’s board of directors will determine whether or not the pre-contribution conditions have been satisfied
before accepting the property interests and issuing shares of the Company’s stock to Contributor Parent.
The
Agreement is subject to the usual pre- and post-closing representations, warranties and covenants, and restricts the Company’s
conduct to the conduct to that in the ordinary course of business between the signing and December 31, 2017.
Under
the Agreement, amounts due to Dr. Dolev Rafaeli and Dennis McGrath under their employment agreements, as well as amounts due to
Dr. Yoav Ben-Dror for his services as a board member and officer of the Company’s foreign subsidiaries, will be converted to convertible
secured notes (the “
Payout Notes
”) after approval from the Company’s stockholders. The Payout Notes will be due one year
after the stockholder approval and carry a ten percent (10%) interest rate. The principal will convert to shares of the Company’s
Common Stock at the lower of (i) the Per Share Value or (ii) the VWAP with respect to on-exchange transactions in the Company’s
Common Stock executed on the NASDAQ during the thirty (30) trading days prior to the maturity date as reported by Bloomberg L.P.;
provided, however, that the value of the Company’s Common Stock shall in no event be less than $1.75 per share. The Payout Notes
will be secured by a security interest in all assets of the Company; provided, however, that such security interest will be subordinated
to any (i) claims or liens to the holders of any debt (including mortgage debt) being assumed by the Company as a result of the
transaction contemplated by the Agreement, and (ii) all post-closing indebtedness incurred by the Company or its subsidiaries.
The holders of the Payout Notes will have demand registration rights which requiring the filing of a re-sale registration statement
on appropriate form that registers for re-sale the shares of Common Stock underlying the Payout Notes within thirty (30) days
of issuance with best efforts to cause the same to become effective within one-hundred twenty (120) days of issuance.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
Special
Meeting of Stockholders
As
promptly as possible following the initial closing, the Company is required file a proxy statement and hold a special meeting
of its stockholders to authorize and approve the following matters:
● an
increase the number of authorized shares of common stock, $.01 par value per share, of the Company from fifty million (50,000,00)
shares to five hundred million (500,000,000) shares and increase the number of authorized shares of preferred stock, $.01 par
value per share, of the Company from five million (5,000,000) shares to fifty million (50,000,000) shares;
●
the
issuance to the Contributor or its designee or designees the Company’s shares in exchange for the contributed assets, and
the issuance of the Warrant and, upon exercise of the Warrant, the underlying shares of the Company’s Common Stock in exchange
for the contribution of the optional property interests, if any are made;
● the
amendment and restatement of the Articles of Incorporation of the Company;
● the
amendment and restatement the Bylaws of the Company;
● the
approval of the issuance of the Payout Notes and the issuance of the Company’s Common Stock upon conversion thereof; and
● the
election a new Board of Directors to consist of seven (7) persons of whom (i) three (3) shall be designated by the Company, (ii)
three (3) shall be designated by Contributor Parent; and (iii) one (1) (the “
Nonaffiliated Director
”) shall be selected
by the other six (6) directors; provided, however, that at least four (4) of the members of the Board of Directors as so designated
shall be independent directors as provided by the rules of NASDAQ (each an “
Independent Director
”). Of the board designees
of the parties, one (1) of the Company’s designees shall be an Independent Director, two (2) of the Contributor Parent’s designees
shall be Independent Directors and the Nonaffiliated Director shall be an Independent Director. The compensation committee, nominations
and corporate governance committee and audit committee of the Company shall each consist of the Company’s designee who is an Independent
Director, one of Contributor Parent’s designees who is an Independent Director and the Nonaffiliated Director.
Board
members, officers and certain insiders of the Company are subject to a voting agreement under which they are obligated to vote
in favor of the proposals at the stockholder meeting.
Registration
Rights
Promptly
following the execution of the Agreement, the Company is required prepare and file with the Securities and Exchange Commission
two registration statements on Form S-3 (or such other form available for this purpose) (the “
Registration Statements
”)
to register (a) the primary offering by the Company (i) to the holders of the Payout Notes the Common Stock underlying the Payout
Notes, and (ii) to the unaffiliated shareholders of Contributor Parent the Common Stock distributed to such unaffiliated shareholders
as a dividend by Contributor Parent and (b) the secondary offering (i) by the Contributor Parties of all the shares of the Company’s
Common Stock (including, without limitation, the shares of Common Stock underlying the Warrant) retained by the Contributor Parties,
(ii) by Maxim Group LLC of the shares received by it as compensation for services rendered to Contributor Parent, and (ii) by
certain affiliates of the Contributor Parent who receive shares from Contributor Parent.
Termination
Fee
Finally,
the transaction is subject to a termination provision under which, in the event of a material breach of the terms of the transaction,
the breaching company must pay all out-of-pocket expenses of the non-breaching company incurred up to the date of termination
of the transaction.
20,588,243
Shares of Common Stock
ICTV
BRANDS INC.
PROSPECTUS
April
14, 2017
Dealer
Prospectus Delivery Obligation
Until
, 2017,
all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver
a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.