NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2017 and 2016
(Unaudited)
Note
1 - Organization, Business of the Company and Liquidity
Organization
and Nature of Operations
ICTV
Brands Inc. (the “Company” or “ICTV”), was organized under the laws of the State of Nevada on September
25, 1998. We currently have the following subsidiaries:
|
●
|
Better
Blocks International Limited, or (“BBI”), a New Zealand corporation;
|
|
|
|
|
●
|
Ermis
Labs, Inc., a Nevada Corporation;
|
|
|
|
|
●
|
ICTV
Brands Israel Limited., incorporated under the laws of Israel;
|
|
|
|
|
●
|
ICTV
Brands UK Limited., incorporated under the laws of the United Kingdom;
|
|
|
|
|
●
|
ICTV
Holdings, Inc., a Nevada Corporation (“ICTV Holdings”);
|
|
|
|
|
●
|
Radiancy
(HK) Limited, a private limited company limited by shares, incorporated under the laws of Hong Kong; and
|
|
|
|
|
●
|
LK
Technology Importaçăo E Exportaçăo LTDA, a private Sociedade limitada formed under the laws of Brazil.
|
Although
our companies are incorporated in New Zealand, Nevada, Israel, United Kingdom, Hong Kong and Brazil, 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, but not limited
to, DermaWand
TM
, a skin care device that reduces the appearance of fine lines and wrinkles, and helps improve skin
tone and texture, DermaVital
®
, a professional quality skin care line that effects superior hydration, the CoralActives
®
brand of acne treatment and skin cleansing products, Derma Brilliance
®
, a skin care resurfacing device that
helps reduce visible signs of aging, Jidue
TM
, a facial massager device which helps alleviate stress, and Good Planet
Super Solution
TM
, a multi-use cleaning agent. We acquire the rights to our products that we market primarily via licensing
agreements, acquisition and in-house development and sell both domestically and internationally. The Company is presently exploring
other devices and consumable product lines currently under licensing agreements.
The
goal of our strategy is to 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 marketplaces,
and international third party international 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.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2017 and 2016
(Unaudited)
Note
1 - Organization, Business of the Company and Liquidity (continued)
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 wholly owned subsidiaries,
Radiancy, Inc., a Delaware corporation, PhotoTherapeutics Ltd, 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, (collectively, the “Sellers”),
pursuant to which ICTV Holdings acquired 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, for a total purchase price of $9,500,000.
Such acquisition is referred to herein as the “PhotoMedex Acquisition.” The PhotoMedex acquisition was completed on
January 23, 2017. (See Note 3- Business and Asset Acquisitions).
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 ®.
Ermis
Labs Asset 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
Lab”), pursuant to which the Purchaser has agreed to acquire substantially all of the assets of Ermis Labs (collectively,
the “Ermis Labs Assets”), for a total purchase price of $1,982,000. Such acquisition is referred to herein
as the “Ermis Labs Asset Purchase.” (See Note 3-Business and Asset Acquisitions).
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2017 and 2016
(Unaudited)
Note
1 - Organization, Business of the Company and Liquidity (continued)
Liquidity
We
had a net loss of approximately $368,000 for the three months ended March 31, 2017 and an accumulated deficit of approximately
$10,644,000 as of March 31, 2017. Management believes that the current available resources, including cash and cash equivalents
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
Basis
of Presentation
The
unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles
for interim financial statements and within the rules of the Securities and Exchange Commission applicable to interim financial
statements and therefore do not include all disclosures that might normally be required for financial statements prepared in accordance
with generally accepted accounting principles. The accompanying unaudited condensed consolidated financial statements have been
prepared by management without audit and should be read in conjunction with our condensed consolidated financial statements, including
the notes thereto, appearing in our Annual Report on Form 10-K for the year ended December 31, 2016. In the opinion of management,
all adjustments necessary for a fair presentation of the condensed consolidated financial position, consolidated results of operations
and consolidated cash flows, for the periods indicated, have been made. The results of operations for the three months ended March
31, 2017 are not necessarily indicative of operating results that may be achieved over the course of the full year.
Principles
of consolidation
Our
accompanying condensed consolidated financial statements include the accounts of our wholly-owned subsidiaries BBI, ICTV
Holdings, Ermis Labs, Inc., ICTV Brands UK Limited, ICTV Brands Israel Limited, Radiancy (HK) Limited and LK
Technology. In October 2016, ICTV Holdings and Ermis Labs, Inc. were formed as holding companies for the asset purchase
agreements that were entered into with PhotoMedex, Inc. and Ermis Lab, Inc. (See Note 3 – Business and Asset
Acquisitions). All significant inter-company transactions and balances have been eliminated.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2017 and 2016
(Unaudited)
Note
2 - Summary of significant accounting policies (continued)
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 condensed
consolidated financial statements and accompanying notes. Management believes that the estimates utilized in preparing its condensed
consolidated financial statements are reasonable and prudent. The most significant estimates used in these condensed consolidated
financial statements include the allowance for doubtful accounts, reserves for returns, inventory reserves, allocation of purchase
price, valuation allowance on deferred tax assets and share based compensation. Actual results could differ from these estimates.
Recently
Issued Accounting Pronouncements
In
January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”)
No. 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 acquisition and Ermis asset purchase (See Note 3 - Business and Asset Acquisitions), we adopted
this standard on January 1, 2017.
In
August 2016, the 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 adoption permitted.
As a result of the recent PhotoMedex acquisition (See Note 3 - Business and Asset Acquisitions), we adopted this standard on January
1, 2017.
In
June 2016, the 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, the 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 is effective for fiscal years beginning after December 15, 2016
and for interim periods within those fiscal years. We adopted this standard on January 1, 2017 and apply an estimated
percentage of forfeitures to our calculation.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2017 and 2016
(Unaudited)
Note
2 - Summary of significant accounting policies (continued)
In
February 2016, the 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 on the consolidated financial statements.
In
November 2015, the 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. The Company adopted ASU 2015-17 effective January 1, 2017. The adoption of this guidance did have a material
impact on our consolidated financial statements and related disclosures as there is a full valuation allowance for our net deferred
tax assets.
In
July 2015, the 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. The Company adopted ASU 2015-11 on January 1, 2017. The adoption of this guidance did not have a material
impact on our consolidated financial statements and related disclosures.
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. ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2017,
including interim periods within that reporting period. We are currently evaluating the impact of the new guidance on our consolidated
financial statements. The adoption of this guidance is not expected to have a material impact on the amount or timing of revenue
recognized on the Company’s consolidated financial statements based on current contracts with customers. The guidance will
result in expanded disclosures. The Company plans to retrospectively adopt this guidance by the first quarter of 2018.
Concentration
of credit risk
Financial
instruments, which potentially subject the Company to concentrations of credit risk, include cash and cash equivalents and trade
receivables. We maintain cash in bank accounts that, at times, may exceed federally insured limits. We have not experienced any
losses and believe we are not exposed to any significant risks on cash in bank accounts.
As
of March 31, 2017, 43% of the Company’s accounts receivable were due from various individual customers to whom our
products had been sold directly via Direct Response Television. In addition, 2% of the Company’s accounts receivable was
cash due from our credit card processors, 29% was due from live home shopping and 22% 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 three months ended March 31, 2017, there were no major customers. For the three months ended March 31, 2016,
11% of net sales were made to one international third party distributor.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2017 and 2016
(Unaudited)
Note
2- Summary of significant accounting policies (continued)
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 and cash equivalents, accounts receivable, other receivable, accounts payable, and accrued
liabilities, other payable and contingent consideration 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
entered into by the Company in currencies other than its local currency, are recorded in its local currency and any changes in
currency exchange rates that occur from the initiation of a transaction until settled are recorded as foreign currency gains or
losses in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
Functional
currency translation
The
currency of the primary economic environment in which we operate our Company is conducted in the US dollar (“$” or
“dollars”). Thus, our functional currency (other than the foreign subsidiaries mentioned below) is the dollar (which
is also the reporting currency of the subsidiary). The operations of our foreign subsidiaries are conducted in the local currency
of the subsidiary which is Hong Kong Dollar (HKD), Great Britain Pounds (GBP) and Israeli new shekel (NIS).
Assets and liabilities of our
international subsidiaries are translated on the basis of the exchange rates prevailing at the balance sheet date and
revenues and expenses are translated at the average exchange rates for the period. Net differences from currency
translation are included in other comprehensive loss on the accompanying statements of operations and
comprehensive loss.
Accounts
receivable
Accounts
receivable are recorded net of allowances for returns and doubtful accounts of approximately $271,000 at March 31, 2017 and $123,000
at December 31, 2016. The allowances are estimated 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 has 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 Condensed Consolidated Balance Sheets were approximately $276,000 and $91,000
at March 31, 2017 and December 31, 2016, respectively.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2017 and 2016
(Unaudited)
Note
2 - Summary of significant accounting policies (continued)
Other
receivable
Other
receivable is a current receivable due from PhotoMedex Acquistion related to the transition service agreement as part of the PhotoMedex
acquisition. As of March 31, 2017, the other receivable was approximately $589,000.
Inventories
Inventories
consist primarily of finished products held for resale, and are valued at the lower of cost (first-in, first-out method) or net
realizable value. We adjust inventory for estimated obsolescence when necessary based upon demand and market conditions. The Company’s
reserve for obsolescence was approximately $399,000---- and $74,000 at March 31, 2017 and December 31, 2016, respectively. Included
in inventory at March 31, 2017 and December 31, 2016 is approximately $66,000 and $67,000, 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.
Property
and equipment
Property
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
$32,300 and $1,900 for the three months ended March 31, 2017 and 2016, respectively.
Property
and equipment consisted of the following at:
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
Equipment, computer hardware
and software
|
|
$
|
882,580
|
|
|
$
|
33,549
|
|
Furniture and fixtures
|
|
|
77,405
|
|
|
|
40,549
|
|
Leasehold Improvements
|
|
|
18,896
|
|
|
|
-
|
|
|
|
$
|
978,881
|
|
|
$
|
74,098
|
|
Accumulated depreciation
|
|
|
(82,904
|
)
|
|
|
(58,099
|
)
|
Property and
equipment, net
|
|
$
|
895,977
|
|
|
$
|
15,999
|
|
Intangible
assets
Definite-lived
intangibles are amortized using the straight-line method
over
their estimated useful lives ranging from four to five years. Amortization expense was approximately $191,000 and
$73,000 for the three months ended March 31, 2017 and 2016, respectively. We evaluate the recoverability of the intangible assets
periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that
may indicate the asset may be impaired.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2017 and 2016
(Unaudited)
Note
2 - Summary of significant accounting policies (continued)
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 the Company to be generated by such assets. If such assets are considered to be impaired, the impairment
to be recognized is the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed
of by sale are recorded as held for sale at the lower of carrying value or estimated net realizable value. No impairment losses
were identified or recorded for the three months ended March 31, 2017 and 2016.
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 Condensed Consolidated Statements of Operations and Comprehensive Loss 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 our 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 $527,000
and $142,000 as of March 31, 2017 and December 31, 2016, respectively.
We
have a return policy whereby the customer can return any product received within 30 or 60 days 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2017 and 2016
(Unaudited)
Note
2 - Summary of significant accounting policies (continued)
We
sell warranties on our products for various terms. Revenue is recognized ratably over the term, with the unearned warranty included
in deferred revenue on the accompanying condensed consolidated balance sheets. Changes in deferred service revenue related to
the warranties is presented in the following table:
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
Deferred extended warranty revenue:
|
|
|
|
|
|
|
|
|
At beginning of period
|
|
$
|
509,389
|
|
|
$
|
629,143
|
|
Revenue deferred for new warranties,
year to date
|
|
|
43,386
|
|
|
|
118,148
|
|
Revenue recognized
year to date
|
|
|
(64,380
|
)
|
|
|
(237,902
|
)
|
At end of period
|
|
$
|
488,395
|
|
|
$
|
509,389
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
230,325
|
|
|
$
|
235,015
|
|
Non-current portion
|
|
|
258,070
|
|
|
|
274,374
|
|
|
|
$
|
488,395
|
|
|
$
|
509,389
|
|
Shipping
and handling
The
amount billed to customers for shipping and handling is included in net sales. Shipping, handling and processing revenue approximated
$628,000 and $415,000 for the three months ended March 31, 2017 and 2016, respectively. Shipping and handling costs are included
in cost of sales. Shipping and handling costs approximated $405,000 and $197,000 for the three months ended March 31, 2017 and
2016, respectively.
Research
and development
Research
and development costs are expensed as incurred and are included in selling and marketing expense in the accompanying condensed
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 $44,000 and $29,000 for the three months ended March 31, 2017 and 2016, 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 condensed
consolidated financial statements. Production costs associated with the creation of new and updated video content and advertising
campaigns are expensed at the commencement of a campaign. We incurred approximately $1,632,000 and $844,000 in media costs for
airing of television and print advertising, $143,000 and $7,000 in new production costs, and $846,000 and $348,000 in internet
marketing costs for the three months ended March 31, 2017 and 2016, respectively.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2017 and 2016
(Unaudited)
Note
2 - Summary of significant accounting policies (continued)
Income
taxes
In
preparing our condensed 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 realizable 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.
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 March 31, 2017, 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 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 March 31, 2017, 3,523,335 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.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2017 and 2016
(Unaudited)
Note
2 - Summary of significant accounting policies (continued)
Stock
options (continued)
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.
The
following is a summary of stock options outstanding under the Plan and 2011 Plan (collectively “Stock Option Plans”)
for the three months ended March 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number
of Shares
|
|
|
Average
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
Exercise
|
|
|
|
Employee
|
|
|
Employee
|
|
|
Totals
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2017
|
|
|
3,680,002
|
|
|
|
-
|
|
|
|
3,680,002
|
|
|
$
|
0.24
|
|
Granted during the
period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised during
the period
|
|
|
(35,000
|
)
|
|
|
-
|
|
|
|
(35,000
|
)
|
|
|
0.22
|
|
Forfeited
during the period
|
|
|
(5,000
|
)
|
|
|
-
|
|
|
|
(5,000
|
)
|
|
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2017
|
|
|
3,640,002
|
|
|
|
-
|
|
|
|
3,640,002
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number
of Shares
|
|
|
Average
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
Exercise
|
|
|
|
Employee
|
|
|
Employee
|
|
|
Totals
|
|
|
Price
|
|
Balance, January 1, 2016
|
|
|
4,036,669
|
|
|
|
-
|
|
|
|
4,036,669
|
|
|
$
|
0.21
|
|
Granted during the
period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised during
the period
|
|
|
(350,000
|
)
|
|
|
-
|
|
|
|
(350,000
|
)
|
|
|
0.11
|
|
Expired
during the period
|
|
|
(131,667
|
)
|
|
|
-
|
|
|
|
(131,667
|
)
|
|
|
0.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2016
|
|
|
3,555,002
|
|
|
|
-
|
|
|
|
3,555,002
|
|
|
$
|
0.21
|
|
Of
the stock options outstanding as of March 31, 2017 under the Stock Option Plans, 2,560,000 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 March 31, 2017 and 2016 was approximately $994,000 and $29,000, respectively.
The aggregate intrinsic value for options exercised during the three months ended March 31, 2017 and 2016 was approximately $13,000
and $31,000, respectively.
For
the three months ended March 31, 2017 and 2016, we recorded approximately $75,000 and $106,000, respectively, in stock compensation
expense under the Stock Option Plans. At March 31, 2017, there was approximately $334,000 of total unrecognized compensation cost
related to non-vested option grants that will be recognized over the remaining vesting period of 3 years.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2017 and 2016
(Unaudited)
Note
2 - Summary of significant accounting policies (continued)
Stock
options (continued)
The
following is a summary of stock options outstanding outside of the Stock Option Plans for the three months ended March 31, 2017
and 2016:
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number
of Shares
|
|
|
Average
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
Exercise
|
|
|
|
Employee
|
|
|
Employee
|
|
|
Totals
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2017
|
|
|
516,667
|
|
|
|
1,676,667
|
|
|
|
2,193,334
|
|
|
$
|
0.35
|
|
Granted during the
period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2017
|
|
|
516,667
|
|
|
|
1,676,667
|
|
|
|
2,193,334
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number
of Shares
|
|
|
Average
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
Exercise
|
|
|
|
Employee
|
|
|
Employee
|
|
|
Totals
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2016
|
|
|
466,667
|
|
|
|
1,976,667
|
|
|
|
2,443,334
|
|
|
$
|
0.32
|
|
Granted during the
period
|
|
|
50,000
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
0.21
|
|
Expired
during the period
|
|
|
-
|
|
|
|
(300,000
|
)
|
|
|
(300,000
|
)
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2016
|
|
|
516,667
|
|
|
|
1,676,667
|
|
|
|
2,193,334
|
|
|
$
|
0.35
|
|
Of
the stock options outstanding outside of the Stock Option Plans as of March 31, 2017, 2,135,001 options are currently vested and
exercisable. The weighted average exercise price of these options was $0.35. These options expire through January 2026. The aggregate
intrinsic value for options outstanding and exercisable at March 31, 2017 and 2016, was approximately $585,000 and $37,000 respectively.
There were no options exercised during the three months ended March 31, 2017 and 2016.
For
the three months ended March 31, 2017 and 2016, we recorded approximately $7,000 and $15,000, respectively, in stock compensation
expense related to stock options outside of the Stock Option Plans. At March 31, 2017, there was approximately $18,000 of total
unrecognized compensation cost related to non-vested option grants that will be recognized over a remaining vesting period of
3 years. There were no grants for the three months ended March 31, 2017.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2017 and 2016
(Unaudited)
Note
2 - Summary of significant accounting policies (continued)
Stock
options (continued)
The
following assumptions were used in the Black-Scholes option pricing model for the options granted in the three months ended March
31, 2016.
2016
|
|
|
|
|
Risk-free interest rate
|
|
|
1.94
|
%
|
Expected dividend yield
|
|
|
0.00
|
|
Expected life
|
|
|
6
years
|
|
Expected volatility
|
|
|
156
|
%
|
Weighted average grant date fair value
|
|
$
|
0.21
|
|
Forfeiture rate
|
|
|
5
|
%
|
The
following is a summary of all stock options outstanding and nonvested for the three months ended March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number
of Shares
|
|
|
Average
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
Exercise
|
|
|
|
Employee
|
|
|
Employee
|
|
|
Totals
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2017 – nonvested
|
|
|
1,193,335
|
|
|
|
-
|
|
|
|
1,193,335
|
|
|
$
|
0.27
|
|
Vested
|
|
|
(50,000
|
)
|
|
|
-
|
|
|
|
(50,000
|
)
|
|
|
0.21
|
|
Forfeited
|
|
|
(5,000
|
)
|
|
|
-
|
|
|
|
(5,000
|
)
|
|
|
0.22
|
|
Balance March 31, 2017 - nonvested
|
|
|
1,138,335
|
|
|
|
-
|
|
|
|
1,138,335
|
|
|
$
|
0.28
|
|
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2017 and 2016
(Unaudited)
Note
3- Business and Asset Acquisitions:
PhotoMedex
Acquisition
On
October 4, 2016, the Company and our wholly-owned subsidiary, ICTV Holdings, entered into an asset purchase agreement (the “PhotoMedex
Purchase Agreement”) with PhotoMedex, Inc., a Nevada corporation, and its subsidiaries, Radiancy,
Inc., a Delaware corporation, PhotoTherapeutics Ltd, 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, (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 acquisition was completed on January
23, 2017.
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 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 were 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 of $4,500,000
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. The Company paid $250,000 of the purchase price payable per clause (ii) above in March
2017 and the balance of $1,750,000 which was to be paid on April 22, 2017 and is included in other payable on the accompanying
condensed consolidated balance sheet.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2017 and 2016
(Unaudited)
Note
3- Business and Asset Acquisitions (continued):
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. The fair
value of the contingent consideration was determined using the present value of expected payments as of the date of
acquisition is $4,198,043 using the assumption of 9.7% discount rate over 18 months. Payments made during the three months
ended March 31, 2017 totaled $249,507. Included in the balance sheet at March 31, 2017 is the fair value of the contingent
consideration of approximately $3,928,000 of which approximately $2,784,000 is current at March 31, 2017.
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.
The
Company accounted for the PhotoMedex Acquisition as a business combination. Under this method of accounting, the total
estimated purchase consideration was allocated to the acquired tangible and intangible assets, based on their estimated fair values
as of the acquisition date. There was no excess price above fair value for this transaction.
The
following table summarizes the consideration paid in connection with the PhotoMedex Business Acquisition on January 23, 2017:
Cash
|
|
$
|
5,000,000
|
|
Fair value
of
contingent consideration due to PhotoMedex
|
|
|
4,198,043
|
|
Total consideration
transferred
|
|
$
|
9,198,043
|
|
The
provisional allocation of the purchase price based on the fair value of the PhotoMedex
assets acquired as of January 23, 2017 is as follows:
Inventory
|
|
$
|
6,300,000
|
|
Property and equipment
|
|
|
857,415
|
|
Patented/Unpatented Technology
|
|
|
940,628
|
|
Trademarks/Tradenames
|
|
|
1,100,000
|
|
Total
assets acquired
|
|
$
|
9,198,043
|
|
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2017 and 2016
(Unaudited)
Note
3- Business and Asset Acquisitions (continued):
The
following unaudited condensed pro forma financial information for the three months ended March 31, 2017 and 2016
represent the combined results of the Company’s operations as if the PhotoMedex Acquisition had occurred on January
1, 2016. Excluded from the pro forma net loss and net loss per share amounts for the three months ended March 31, 2017 are one-time
acquisition costs of $49,312 attributable to the PhotoMedex Acquisition. The amount of sales since January 23, 2017 was
approximately $3,485,000 related to the PhotoMedex Acquistion and is included in the condensed consolidated statements
of operations and comprehensive loss. These pro forma results are not necessarily indicative of what historical performance
would have been had this business combination been effective as of the hypothetical acquisition date, nor should they be interpreted
as expectations of future results.
|
|
For
the three months ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net sales
|
|
$
|
11,165,342
|
|
|
$
|
13,645,644
|
|
Net loss
|
|
|
(124,834
|
)
|
|
|
(3,916,679
|
)
|
Net loss per share – basic
|
|
$
|
(0.00
|
)
|
|
$
|
(0.08
|
)
|
Net loss per share – diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.08
|
)
|
Weighted average number of common shares
Basic and diluted
|
|
$
|
44,067,195
|
|
|
$
|
48,736,317
|
|
The
results of operations for the PhotoMedex acquisition has been included in the consolidated financial statements from January 23,
2017, the effective date of the acquisition.
Ermis
Labs Asset Purchase
On
October 4, 2016, the Company 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 Assets”). Such asset acquisition is referred to herein as the “Ermis Labs Asset Purchase.”
On
January 23, 2017, we completed the Ermis Labs Asset Purchase and the aggregate purchase price will be paid as follows: (i) the
issuance of 2,500,000 shares of our common stock to the stockholders of Ermis Labs, which had a fair value on the date of acquisition
of $850,000 and (ii) $1,750,000 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.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2017 and 2016
(Unaudited)
Note
3- Business and Asset Acquisitions (continued):
Under
the Ermis purchase agreement, we are required to pay to Ermis Labs 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 Asset 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. The present value of the deferred consideration
of $1,750,000 was $1,131,822, based on the assumption of a discount rate of 10.7% over ten years.
The
changes in the the Company’s deferred consideration payable due to Ermis Labs, Inc for the three months ended March 31,
2017 was as follows:
Balance at January 23, 2017-initial measurement
|
|
$
|
1,131,822
|
|
Accretion of interest
|
|
|
46,879
|
|
Balance at March 31, 2017
|
|
$
|
1,178,701
|
|
Current portion
|
|
$
|
164,029
|
|
Non-current portion
|
|
|
1,014,672
|
|
|
|
$
|
1,178,701
|
|
The
Company accounted for the Ermis Labs purchases as an asset purchase. Under this method of accounting, the total estimated purchase
consideration was allocated to the acquired tangible and intangible assets based on their relative fair values.
The
following table summarizes the consideration paid in connection with the Ermis Labs Asset Acquisition on January 23, 2017:
ICTV Brands shares
|
|
$
|
850,000
|
|
Deferred consideration due to Ermis Labs
|
|
|
1,131,822
|
|
Total consideration
transferred
|
|
$
|
1,981,822
|
|
The
allocation of the purchase price based on the relative, fair value of the Ermis Labs assets acquired as of January 23,
2017 is as follows:
Inventory
|
|
$
|
469,379
|
|
Formulations
|
|
|
1,355,983
|
|
Trademark/Tradenames
|
|
|
156,460
|
|
Total assets
acquired
|
|
$
|
1,981,822
|
|
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2017 and 2016
(Unaudited)
Note
4- Fair Value Measurements
We
evaluate assets and liabilities subject to fair value measurements on a recurring and non-recurring basis to determine the appropriate
level to classify them for each reporting period. This determination requires significant judgments to be made by the Company.
The following table sets forth our liabilities that were measured at fair value as of March 31, 2017, by level within the fair
value hierarchy:
|
|
Amounts
at
|
|
|
Fair
Value Measurement
|
|
|
|
Fair
Value
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Contingent
consideration due to PhotoMedex
|
|
$
|
3,928,394
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,928,394
|
|
Total liabilities
measured at fair value
|
|
$
|
3,928,394
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,928,394
|
|
Contingent
consideration due to PhotoMedex is Level 3 fair value measurement. The fair value represents the present value of the future estimated
royalty payments to be made by us using an appropriate discount rate.
The
fair value of these Level 3 instruments involve generating various scenarios for projected revenues over a specified time period
and calculating the associated contingent considerations and discounting the average payments to present value. See Note 3 –
Business and Asset Acquisitions for further discussion of this contingent consideration liability.
The
changes in the fair value of the Company’s contingent consideration payable due to PhotoMedex, Inc for the three months
ended March 31, 2017 was as follows:
Balance at January 23, 2017-initial measurement
|
|
$
|
4,198,043
|
|
Contingent consideration paid
|
|
|
(249,507
|
)
|
Change in fair
value
|
|
|
(20,142
|
)
|
Balance at March 31, 2017
|
|
$
|
3,928,394
|
|
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2017 and 2016
(Unaudited)
Note
5- Commitments and contingencies
Leases
In
February 2017, we entered into an amendment to our current lease for a new space in our current building from March 2017 through
February 2022. We also entered into a six-month lease in February 2017 for our London office from March 2017 through August 2017.
Rent expense incurred during the three months ended March 31, 2017 and 2016 totaled approximately $82,000 and $14,000, respectively.
The
schedule below details the future financial obligations under the active leases.
|
|
Remaining
nine months
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
Total
Obligation
|
|
Wayne - Corporate HQ
|
|
$
|
87,000
|
|
|
$
|
118,000
|
|
|
$
|
119,000
|
|
|
$
|
120,000
|
|
|
$
|
122,000
|
|
|
$
|
20,000
|
|
|
$
|
586,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
London Office
|
|
|
37,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Lease Obligations
|
|
$
|
124,000
|
|
|
$
|
118,000
|
|
|
$
|
119,000
|
|
|
$
|
120,000
|
|
|
$
|
122,000
|
|
|
$
|
20,000
|
|
|
$
|
623,000
|
|
Other
matters
Product
Liability Insurance
For
certain products, we were (and are) listed as an additional insured party under the product manufacturers’ insurance policy.
We purchased our own liability insurance, which expires on April 20, 2018. We intend to renew this policy. At present, management
is not aware of any claims against the Company for any products sold.
Note
6 – Intangibles, net
:
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
Beginning of Period
|
|
$
|
1,163,816
|
|
|
$
|
-
|
|
Additions:
|
|
|
|
|
|
|
|
|
DermaWand purchase
|
|
|
-
|
|
|
|
1,163,816
|
|
Formulations
|
|
|
1,355,983
|
|
|
|
-
|
|
Trademark
|
|
|
1,256,460
|
|
|
|
-
|
|
Patented/Unpatented
Technology
|
|
|
940,628
|
|
|
|
-
|
|
Gross Amount end of Period
|
|
$
|
4,716,887
|
|
|
$
|
1,163,816
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Amortization
|
|
|
(482,125
|
)
|
|
|
(290,952
|
)
|
Intangibles,net
|
|
$
|
4,234,762
|
|
|
$
|
872,864
|
|
Amortization
expense was approximately $191,000 and $73,000 for the three months ended March 31, 2017 and 2016, respectively.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2017 and 2016
(Unaudited)
Note
6 – Intangibles, net (continued)
The
following table outlines the estimated future amortization expense related to the intangible assets held as of March 31, 2017.
2017 (remaining nine months)
|
|
|
1,128,000
|
|
2018
|
|
|
856,000
|
|
2019
|
|
|
711,000
|
|
2020
|
|
|
711,000
|
|
2021
|
|
|
711,000
|
|
Thereafter
|
|
|
118,000
|
|
|
|
|
|
|
|
|
$
|
4,235,000
|
|
Note
7 – DermaWand Purchase Agreement
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 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, the Company is no longer obligated to make royalty payments on sales of DermaWand
TM
.
There shall be no interest charged, and ICTV may, in its sole discretion, at any time without permission or penalty pre-pay some
or all of the purchase price. Under our old licensing agreement, ICTV 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 intangible asset and other 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 2016 of 1.45%, which will be amortized over the term of the agreement
using the effective interest method. The intangible 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 March 31, 2017, the other liability balance was approximately $882,000 including the discount for imputed interest of approximately
$18,000, of which approximately $289,000 was current. For the three months ended March 31, 2017, we amortized approximately $3,200
of interest expense related to the discount for imputed interest. The intangible balance was approximately $800,000 as of March
31, 2017 and 2016 with amortization of approximately $73,000 being recorded in cost of sales for the three months ended March
31, 2017. The accumulated amortization was approximately $365,000 and $292,000 as of March 31, 2017 and December 31, 2016, respectively.
Management evaluates the intangible asset for impairment when there is a triggering event and concluded there was no such
event as of March 31, 2017.
Note
8 - Capital Transactions
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. The issuance of the shares was exempt from registration
under Regulation D and Section 4(2) of the Securities Act of 1933.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2017 and 2016
(Unaudited)
Note
8- Capital Transactions (continued):
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 shares was exempt from registration under Regulation D and Section 4(2) of the Securities
Act of 1933. We incurred approximately $17,000 of offering costs related to the private placements for the three months ended
March 31, 2017.
On
March 16, 2017, we issued 600,000 shares of fully vested common stock as part of a share bonus to three executive
officers. The stock price on date of issuance was $0.56 per share. The recipients of the shares of common stock are key employees
of our company, and the issuance of the common stock is exempt from registration under Section 4(2) of the Securities Act of 1933.
Total stock based compensation related to this transaction for the three months ended March 31, 2017 was $336,000 and is
included in operating expenses in the accompanying condensed consolidated statements of operations and comprehensive loss.
On
March 31, 2017, a former employee exercised 35,000 options previously issued to her, 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
22,475 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.
Note
9 – Related party transactions
The
spouse and mother-in-law of our director, Diana Pessin, participated in the private placement on January 23, 2017 and purchased
a total of 4,411,765 shares at a price of $0.34 per share for a total purchase price of $1,500,000. Kelvin Claney, our Chief Executive
Officer, participated in the private placement and purchased a total of 500,000 shares at a price of $0.34 per share for a total
purchase price of $170,000.
Note
10 - Basic and diluted earnings 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 the 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 March 31, 2017, there were 5,833,336
stock options outstanding with 4,695,003 vested and exercisable at an average exercise price of $0.28.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2017 and 2016
(Unaudited)
Note
10 - Basic and diluted earnings per share (continued):
All
outstanding securities were anti-dilutive for the three months ended March 31, 2017 and 2016 as a result of a net loss for both
periods. The following securities were not involved in the computation of diluted net loss per share as their effect would have
been anti-dilutive:
|
|
March
31,
|
|
|
|
2017
|
|
|
2016
|
|
Options to purchase common
stock
|
|
|
5,833,336
|
|
|
|
5,748,336
|
|
The
computations for basic and fully diluted earnings per share are as follows:
For
the 3-months ended March 31, 2017:
|
|
Loss
(Numerator)
|
|
|
Weighted
Average Shares
(Denominator)
|
|
|
Per
Share
Amount
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss to common
shareholders
|
|
$
|
(367,618
|
)
|
|
|
44,067,195
|
|
|
$
|
(0.01
|
)
|
For
the 3-months ended March 31, 2016:
|
|
Loss
(Numerator)
|
|
|
Weighted
Average Shares
(Denominator)
|
|
|
Per
Share
Amount
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss to common
shareholders
|
|
$
|
(88,876
|
)
|
|
|
28,148,074
|
|
|
$
|
(0.00
|
)
|
Note
11- Income taxes
The
provision for income taxes is $0 for the three months ended March 31, 2017 and 2016. The effective tax rates 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. . The Company has provided a
full valuation allowance on its net deferred asset as the Company does not have sufficient history of taxable income. The
Company does not believe it has any material uncertain tax positions. The Company’s policy is to recognize interest and
penalties related to tax matters in general and administrative expenses in the Condensed Consolidated Statements of
Operations and Comprehensive Loss. The Company recorded zero interest and penalties for the three months ended March 31, 2017
and 2016.
Due
to the change in ownership provisions of the Internal Revenue Code, the availability of the Company’s net operating loss
carry forwards may be subject to annual limitation against taxable income in future periods, which could substantially limit the
eventual utilization of such carry forwards. The Company has updated its analysis through March 31, 2016, but has not analyzed
the potential impact of its recent equity financing on beneficial ownership and therefore no determination has been made whether
the net operating loss carry forward is subject to any Internal Revenue Code Section 382 limitation. To the extent there is a
limitation, there would be a reduction in the deferred tax asset with an offsetting reduction in the valuation allowance.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2017 and 2016
(Unaudited)
Note
12 - Segment reporting
We
operate in the Direct to Consumer segment, which is engaged in the selling of various consumer products primarily through a multi-channel
direct marketing channels, as well as through e-commerce and retail market places. In addition, we sell our products through our
international third party distributor segment and our airline and Hong Kong retail 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 sales, wholesale international third party distributor sale or airline/other retail sales. Operating expenses
are primarily prorated based on the relationship between direct to consumer sales and international third party distributor sales.
Information
with respect to our operating income (loss) by segment is as follows:
|
|
For
the three months ended
March
31, 2017
|
|
|
|
|
|
For
the three months ended
March
31, 2016
|
|
|
|
Direct
to
Customer
|
|
|
International
Third Party
Distributor
|
|
|
Airline
and
Hong
Kong
Retail
|
|
|
Totals
|
|
|
Direct
to
Consumer
|
|
|
International
Third
Party
Distributor
|
|
|
Airline
and
Hong
Kong
Retail
|
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
6,941,251
|
|
|
$
|
480,481
|
|
|
$
|
225,387
|
|
|
$
|
7,647,119
|
|
|
$
|
2,491,885
|
|
|
$
|
1,231,789
|
|
|
$
|
-
|
|
|
$
|
3,723,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
1,786,765
|
|
|
|
266,794
|
|
|
|
100,021
|
|
|
|
2,153,580
|
|
|
|
569,354
|
|
|
|
627,342
|
|
|
|
-
|
|
|
|
1,196,696
|
|
Gross
profit
|
|
|
5,154,486
|
|
|
|
213,687
|
|
|
|
125,366
|
|
|
|
5,493,539
|
|
|
|
1,922,501
|
|
|
|
604,447
|
|
|
|
-
|
|
|
|
2,526,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
2,160,012
|
|
|
|
258,931
|
|
|
|
63,326
|
|
|
|
2,482,269
|
|
|
|
836,795
|
|
|
|
122,522
|
|
|
|
-
|
|
|
|
959,317
|
|
Selling
and marketing
|
|
|
3,333,560
|
|
|
|
33,182
|
|
|
|
23,202
|
|
|
|
3,389,944
|
|
|
|
1,638,447
|
|
|
|
14,080
|
|
|
|
-
|
|
|
|
1,652,527
|
|
Total
operating expense
|
|
|
5,493,572
|
|
|
|
292,113
|
|
|
|
86,528
|
|
|
|
5,872,213
|
|
|
|
2,475,242
|
|
|
|
136,602
|
|
|
|
-
|
|
|
|
2,611,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$
|
(339,086
|
)
|
|
$
|
(78,426
|
)
|
|
$
|
38,838
|
|
|
$
|
(378,674
|
)
|
|
$
|
(552,471
|
)
|
|
$
|
467,845
|
|
|
$
|
-
|
|
|
$
|
(84,896
|
)
|
Selected
balance sheet information by segment is presented in the following table as of:
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
Direct to Consumer
|
|
$
|
20,312,867
|
|
|
$
|
4,454,701
|
|
International Third Party Distributor
|
|
|
24,100
|
|
|
|
84,713
|
|
Airline/Other
Retail
|
|
|
466,956
|
|
|
|
-
|
|
Total Assets
|
|
$
|
20,803,923
|
|
|
$
|
4,539,414
|
|