ICTV BRANDS INC. AND SUBSIDIARIES
ICTV
BRANDS INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
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As Filed
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Adjustments
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|
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Restated
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CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(742,743
|
)
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|
$
|
(1,065,555
|
)
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|
$
|
(1,808,298
|
)
|
Adjustments to reconcile net loss to net increase in cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
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Depreciation
|
|
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78,263
|
|
|
|
|
|
|
|
78,263
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|
Amortization of intangible assets
|
|
|
441,565
|
|
|
|
|
|
|
|
441,565
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|
Bad debt expense
|
|
|
653,491
|
|
|
|
|
|
|
|
653,491
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|
Share based compensation
|
|
|
159,058
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|
|
|
|
|
|
|
159,058
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|
Issuance of stock for compensation
|
|
|
336,000
|
|
|
|
|
|
|
|
336,000
|
|
Change in fair value of contingent consideration
|
|
|
(48,035
|
)
|
|
|
|
|
|
|
(48,035
|
)
|
Loss on disposal of property and equipment
|
|
|
3,228
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|
|
|
|
|
|
|
3,228
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Non cash interest expense
|
|
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53,117
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|
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|
|
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53,117
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Change in assets and liabilities:
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Accounts receivable
|
|
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(3,206,920
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)
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|
|
|
|
|
|
(3,206,920
|
)
|
Other receivable
|
|
|
(837,708
|
)
|
|
|
|
|
|
|
(837,708
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)
|
Inventories
|
|
|
(507,213
|
)
|
|
|
1,065,555
|
|
|
|
558,342
|
|
Prepaid expenses and other current assets
|
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(299,219
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)
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|
|
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|
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(299,219
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)
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Accounts payable and accrued liabilities
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3,049,236
|
|
|
|
|
|
|
|
3,049,236
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|
Severance payable
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|
|
-
|
|
|
|
|
|
|
|
-
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|
Deferred revenue
|
|
|
(16,785
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)
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|
|
|
|
|
|
(16,785
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)
|
Net cash provided by (used in) operating activities
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|
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(884,665
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)
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|
|
-
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|
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(884,665
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)
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CASH FLOWS FROM INVESTING ACTIVITIES:
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Acquisition of property and equipment
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(127,128
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)
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(127,128
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)
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Cash paid for acquisition of PhotoMedex, Inc.
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(5,000,000
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)
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|
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|
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(5,000,000
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)
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Net cash used in investing activities
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(5,127,128
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)
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|
|
-
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|
|
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(5,127,128
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)
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|
|
|
|
|
|
|
|
|
|
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CASH FLOWS FROM FINANCING ACTIVITIES:
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Proceeds from issuance of common stock, net of costs
|
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6,982,930
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|
|
|
|
|
|
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6,982,930
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|
Proceeds from exercise of options
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55,559
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|
|
|
|
|
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|
55,559
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|
Payments of Deferred consideration for acquisition
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(14,583
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)
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|
|
|
|
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(14,583
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)
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Payments of DermaWand asset purchase agreement
|
|
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(150,000
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)
|
|
|
|
|
|
|
(150,000
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)
|
Net cash provided by (used in) financing activities
|
|
|
6,873,906
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|
|
|
-
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|
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6,873,906
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|
|
|
|
|
|
|
|
|
|
|
|
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Effect of exchange rates on cash and cash equivalents
|
|
|
2,031
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|
|
|
|
|
|
|
2,031
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|
|
|
|
|
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|
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|
|
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NET INCREASE IN CASH AND CASH EQUIVALENTS
|
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|
864,144
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|
|
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|
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|
864,144
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|
|
|
|
|
|
|
|
|
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CASH AND CASH EQUIVALENTS, beginning of the period
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1,390,641
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|
|
|
-
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|
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|
1,390,641
|
|
|
|
|
|
|
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|
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CASH AND CASH EQUIVALENTS, end of the period
|
|
|
2,254,785
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|
|
$
|
-
|
|
|
$
|
2,254,785
|
|
|
|
|
|
|
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SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
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Cashless exercise of options
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|
23
|
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|
$
|
-
|
|
|
$
|
23
|
|
Payments of DermaWand asset purchase agreement
|
|
|
-
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|
|
$
|
-
|
|
|
$
|
-
|
|
Contingent consideration reclass to other receivable
|
|
|
570,248
|
|
|
$
|
-
|
|
|
$
|
570,248
|
|
|
|
|
|
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Acquisition of PhotoMedex on January 23, 2017
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Fair value of assets acquired
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|
9,198,043
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|
|
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|
$
|
9,198,043
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|
Fair value of deferred consideration
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|
|
(4,198,043
|
)
|
|
|
|
|
|
|
(4,198,043
|
)
|
Cash paid for acquisition
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|
|
5,000,000
|
|
|
$
|
-
|
|
|
$
|
5,000,000
|
|
|
|
|
|
|
|
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Asset Acquisition of Ermis Labs on January 23, 2017
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Cost of assets acquired
|
|
|
1,981,822
|
|
|
|
|
|
|
$
|
1,981,822
|
|
Present value of deferred consideration
|
|
|
(1,131,822
|
)
|
|
|
|
|
|
|
(1,131,822
|
)
|
Issuance of common stock for asset purchase
|
|
|
(850,000
|
)
|
|
|
|
|
|
|
(850,000
|
)
|
Cash paid for acquisition
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Note
3
- 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 six months ended June
30, 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 4 - 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
June
30, 2017 and 2016
(Unaudited)
Note
3
- 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 4 - 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 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 4 - Business and Asset Acquisitions), we adopted this standard on January 1, 2017.
In
June 2016, the FASB issued 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.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2017 and 2016
(Unaudited)
Note
3- 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 lessees
to recognize assets and liabilities related to long-term leases on the balance sheet and expands disclosure requirements regarding
leasing arrangements. The standard is effective for reporting periods beginning after December 15, 2018 and early adoption is
permitted. The standard must be adopted on a modified retrospective basis and provides for certain practical expedients. The Company
expects to adopt this guidance in the first quarter of 2019 and we currently expect that the adoption of this guidance will likely
change the way we account for our operating leases and will likely result in recording the future benefits of those leases as
an asset and the related minimum lease payments as a liability on our consolidated balance sheets. The Company has not yet begun
to quantify the specific impacts of this guidance.
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. While 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 June 30, 2017, 22% of the Company’s accounts receivable were due from various individual customers to whom our products
had been sold directly via DRTV. In addition, 1% of the Company’s accounts receivable was cash due from our credit
card processors, 32% was due from live home shopping, 16% was due from brick and mortar retailers, 17% was due from e-commerce
accounts, 11% was due from duty free airline business, 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 and six months ended June 30, 2017, there were
no major customers. For the three and six months ended June 30, 2016, there were 13% and 11%, respectively, of net sales made
to one international third party distributor.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2017 and 2016
(Unaudited)
Note
3- 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 US dollar.
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 income on the accompanying Condensed Consolidated Statements of Operations and
Comprehensive Loss.
Accounts
receivable
Accounts
receivable are recorded net of allowances for returns and doubtful accounts of approximately $397,000 at June 30, 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 $792,000 and $91,000
at June 30, 2017 and December 31, 2016, respectively.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2017 and 2016
(Unaudited)
Note
3 - Summary of significant accounting policies (continued)
Other
receivable
Other receivable is a current receivable due
from the PhotoMedex Acquisition related to the transition service agreement as part of the PhotoMedex Acquisition. As of June
30, 2017, the other receivable was approximately $267,000, which is net of contingent consideration earned of approximately $570,000.
As a result of the Release Agreement described in Note 1, this other receivable was satisfied. See Notes 1 and 4 - PhotoMedex
Acquisition and Note 14 – Subsequent Events.
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 $345,000 and $74,000 at June 30, 2017 and December 31, 2016, respectively. Included
in inventory at June 30, 2017 and December 31, 2016 is approximately $51,000 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 39 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 $48,000 and $78,000 and $1,900 and $3,700 for the three and six months ended June 30, 2017 and 2016, respectively.
Property
and equipment consisted of the following at:
|
|
June
30, 2017
|
|
|
December
31, 2016
|
|
Computer hardware and software
|
|
$
|
94,878
|
|
|
$
|
33,549
|
|
Furniture and equipment
|
|
|
945,715
|
|
|
|
40,549
|
|
Leasehold improvements
|
|
|
37,744
|
|
|
|
-
|
|
|
|
$
|
1,078,337
|
|
|
$
|
74,098
|
|
Accumulated depreciation
|
|
|
(132,415
|
)
|
|
|
(58,099
|
)
|
Property and
equipment, net
|
|
$
|
945,922
|
|
|
$
|
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 $251,000 and $442,000 and
$73,000 and $145,000 for the three and six months ended June 30, 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
June
30, 2017 and 2016
(Unaudited)
Note
3 - 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 and six months ended June 30, 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 $185,000
and $142,000 as of June 30, 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
June
30, 2017 and 2016
(Unaudited)
Note
3 - 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:
|
|
June
30, 2017
|
|
|
December
31, 2016
|
|
Deferred extended warranty revenue:
|
|
|
|
|
|
|
|
|
At beginning of period
|
|
$
|
509,389
|
|
|
$
|
629,143
|
|
Revenue deferred for new warranties,
year to date
|
|
|
70,097
|
|
|
|
118,148
|
|
Revenue recognized
year to date
|
|
|
(129,932
|
)
|
|
|
(237,902
|
)
|
At end of period
|
|
$
|
449,554
|
|
|
$
|
509,389
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
216,256
|
|
|
$
|
235,015
|
|
Non-current portion
|
|
|
233,298
|
|
|
|
274,374
|
|
|
|
$
|
449,554
|
|
|
$
|
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
$496,000 and $1,124,000 and $647,000 and $1,062,000 for the three and six months ended June 30, 2017 and 2016, respectively. Shipping
and handling costs are included in cost of sales. Shipping and handling costs approximated $383,000 and $788,000 and $230,000
and $427,000 for the three and six months ended June 30, 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 $19,000 and $64,000 and $28,000 and $56,000 for the three and six months ended June 30, 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 $1,834,000 and $1,723,000 in media costs for
airing infomercials, $51,000 and $196,000 in new production costs, and $1,243,000 and $252,000 in internet marketing costs for
the three months ended June 30, 2017 and 2016, respectively and approximately $3,465,000 and $2,566,000 in media costs for airing
infomercials, $194,000 and $203,000 in new production costs, and $2,090,000 and $600,000 in internet marketing costs for the six
months ended June 30, 2017 and 2016, respectively.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2017 and 2016
(Unaudited)
Note
3 - 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 June 30, 2017, 50,000 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 June 30, 2017, 3,518,335 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
June
30, 2017 and 2016
(Unaudited)
Note
3 - 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 and six months ended June 30, 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
|
|
|
(101,667
|
)
|
|
|
-
|
|
|
|
(101,667
|
)
|
|
|
0.13
|
|
Forfeited
during the period
|
|
|
(10,000
|
)
|
|
|
-
|
|
|
|
(10,000
|
)
|
|
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2017
|
|
|
3,568,335
|
|
|
|
-
|
|
|
|
3,568,335
|
|
|
|
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, June 30, 2016
|
|
|
3,555,002
|
|
|
|
-
|
|
|
|
3,555,002
|
|
|
$
|
0.21
|
|
Of
the stock options outstanding, as of June 30, 2017 under the Stock Option Plans, 2,538,333 options are currently vested
and exercisable. The weighted average exercise price of these options was $0.23. These options expire through November 2026. The
aggregate intrinsic value for options outstanding and exercisable at June 30, 2017 and 2016 was approximately $799,000 and $180,000,
respectively. The aggregate intrinsic value for options exercised during the six months ended June 30, 2017 and 2016 was approximately
$40,000 and $31,000, respectively.
For
the three and six months ended June 30, 2017 and 2016, we recorded approximately $74,000 and $146,000 and $67,000 and $176,000,
respectively, in stock compensation expense under the Stock Option Plans. At June 30, 2017, there was approximately $256,000 of
total unrecognized compensation cost related to non-vested option grants that will be recognized over the remaining vesting period
of 3 years.
There
were no grants for the six months ended June 30, 2017 and 2016.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2017 and 2016
(Unaudited)
Note
3- 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 six months ended June 30, 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
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised during
the period
|
|
|
(183,334
|
)
|
|
|
-
|
|
|
|
(183,334
|
)
|
|
|
0.27
|
|
Expired
during the period
|
|
|
-
|
|
|
|
(200,000
|
)
|
|
|
(200,000
|
)
|
|
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2017
|
|
|
333,333
|
|
|
|
1,476,667
|
|
|
|
1,810,000
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
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, June 30, 2016
|
|
|
516,667
|
|
|
|
1,676,667
|
|
|
|
2,193,334
|
|
|
$
|
0.35
|
|
Of
the stock options, outstanding outside of the Stock Option Plans as of June 30, 2017, 1,751,667 options are currently vested and
exercisable. The weighted average exercise price of these options was $0.32. These options expire through January 2026. The aggregate
intrinsic value for options outstanding and exercisable at June 30, 2017 and 2016, was approximately $411,000 and $122,000 respectively.
The aggregate intrinsic value for stock options exercised during the six months ended June 30, 2017 was approximately $28,000.
There were no options exercised during the six months ended June 30, 2016.
For
the three and six months ended June 30, 2017 and 2016, we recorded approximately $5,000 and $13,000 and $14,000 and $28,000, respectively,
in stock compensation expense related to stock options outside of the Stock Option Plans. At June 30, 2017, there was approximately
$13,000 of total unrecognized compensation cost related to non-vested option grants that will be recognized over a remaining vesting
period of 3 years.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2017 and 2016
(Unaudited)
Note
3 - Summary of significant accounting policies (continued)
Stock
options (continued)
There
were no grants for the six months ended June 30, 2017. The following assumptions were used in the Black-Scholes option pricing
model for one grant issued in the six months ended June 30, 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 June 30, 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
|
|
|
(100,000
|
)
|
|
|
-
|
|
|
|
(100,000
|
)
|
|
|
0.22
|
|
Forfeited
|
|
|
(5,000
|
)
|
|
|
-
|
|
|
|
(5,000
|
)
|
|
|
0.22
|
|
Balance June 30, 2017 - nonvested
|
|
|
1,088,335
|
|
|
|
-
|
|
|
|
1,088,335
|
|
|
$
|
0.28
|
|
Note
4 - Business and Asset Acquisitions:
PhotoMedex
Acquisition
As
described in Note 1, the PhotoMedex Purchase Agreement was entered into on October 4, 2016 and was completed on January 23, 2017.
The total purchase price was $9,500,000.
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 was 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 was
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 L.P., a private equity fund that secures our obligation
to make the $2 million payment referred to in clause (ii) above. The letter of credit was 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 was paid on April
22, 2017.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2017 and 2016
(Unaudited)
Note
4- Business and Asset Acquisitions (continued):
Under the PhotoMedex Purchase Agreement, until
the July 12, 2017 Release Agreement discussed in Note 1, we were 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. There were no payments made during the three and six months ended June 30, 2017. Included in the balance
sheet at June 30, 2017 is the fair value of the contingent consideration of approximately $3,580,000 of which approximately $2,595,000
is current at June 30, 2017. See Note 1 – PhotoMedex Acquisition and Note 14 – Subsequent Events for additional
information.
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. As of July 12, 2017, pursuant to the terms of the Transition
Services Agreement and the Release Agreement, ICTV Holdings has no further obligations under the Transition Services Agreement.
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
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
June
30, 2017 and 2016
(Unaudited)
Note
4 - Business and Asset Acquisitions (continued):
The
following unaudited condensed pro forma financial information for the three and six months ended June 30, 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 and six months ended June 30, 2017 are one-time acquisition
costs of $49,312 attributable to the PhotoMedex Acquisition. The amount of sales since January 23, 2017 was approximately $8,901,000
related to the PhotoMedex Acquisition 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 June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Net sales
|
|
$
|
11,489,077
|
|
|
$
|
14,204,092
|
|
Net loss
|
|
$
|
(1,134,367
|
)
|
|
$
|
(2,508,172
|
)
|
Net loss per share – basic and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.05
|
)
|
Weighted average number of common shares basic and diluted
|
|
|
52,075,703
|
|
|
|
48,790,982
|
|
|
|
For the six months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Net sales
|
|
$
|
19,136,195
|
|
|
$
|
27,849,736
|
|
Net loss
|
|
$
|
(1,501,986
|
)
|
|
$
|
(6,424,851
|
)
|
Net loss per share – basic and diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.13
|
)
|
Weighted average number of common shares basic and diluted
|
|
|
48,093,572
|
|
|
|
48,736,649
|
|
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
As
described in Note 1, the Ermis Labs asset purchase was entered into on October 4, 2016 and was completed on January 23, 2017.
Pursuant to the agreement, 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
June
30, 2017 and 2016
(Unaudited)
Note
4 - 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 Company’s deferred consideration payable due to Ermis Labs, Inc. for the three months ended June 30, 2017
was as follows:
Balance at January 23, 2017-initial measurement
|
|
$
|
1,131,822
|
|
Consideration Payments
|
|
|
(14,583
|
)
|
Accretion of interest
|
|
|
46,879
|
|
Balance at June 30, 2017
|
|
$
|
1,164,118
|
|
|
|
|
|
|
Current portion
|
|
$
|
160,417
|
|
Non-current portion
|
|
|
1,003,701
|
|
|
|
$
|
1,164,118
|
|
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
June
30, 2017 and 2016
(Unaudited)
Note
5- 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 June 30, 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
|
|
$
|
3,579,760
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
3,579,760
|
|
Total
liabilities measured at fair value
|
|
$
|
3,579,760
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
3,579,76
0
|
|
Contingent
consideration due to PhotoMedex is a Level 3 fair value measurement. The fair value was determined using 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 4 - 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 six months ended
June 30, 2017 was as follows:
Balance at January 23, 2017-initial measurement
|
|
$
|
4,198,043
|
|
Contingent consideration earned
|
|
|
(570,248
|
)
|
Change in fair
value
|
|
|
(48,035
|
)
|
Balance at June 30, 2017
|
|
$
|
3,579,760
|
|
Pursuant to the Release Agreement, as
of July 12, 2017, the Company is no longer obligated to PhotoMedex, Inc. for the contingent consideration balance at June 30,
2017 totaling $3,579,760. (See Note 1 - PhotoMedex Acquisition and Note 14 – Subsequent Events).
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2017 and 2016
(Unaudited)
Note
6 - 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
and a one year lease starting in May 2017 through April 2018 for our Israel office. Rent expense incurred during the three and
six months ended June 30, 2017 and 2016 totaled approximately $65,000 and $142,000 and $14,000 and $27,000, respectively.
The
schedule below details the future financial obligations under the active leases.
|
|
Remaining
six months
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Thereafter
|
|
|
Total
Obligation
|
|
Wayne - Corporate HQ
|
|
$
|
58,000
|
|
|
$
|
118,000
|
|
|
$
|
119,000
|
|
|
$
|
120,000
|
|
|
$
|
122,000
|
|
|
$
|
20,000
|
|
|
$
|
557,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Israel Office
|
|
|
33,000
|
|
|
|
22,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
London Office
|
|
|
15,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Lease Obligations
|
|
$
|
106,000
|
|
|
$
|
140,000
|
|
|
$
|
119,000
|
|
|
$
|
120,000
|
|
|
$
|
122,000
|
|
|
$
|
20,000
|
|
|
$
|
627,000
|
|
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
7 - Intangibles, net
:
|
|
June
30, 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
|
|
|
(732,517
|
)
|
|
|
(290,952
|
)
|
Intangibles,
net
|
|
$
|
3,984,370
|
|
|
$
|
872,864
|
|
Amortization
expense was approximately $251,000 and $442,000 and $73,000 and $145,000 for the three and six months ended June 30, 2017 and
2016, respectively.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2017 and 2016
(Unaudited)
Note
7 - Intangibles, net (continued)
The
following table outlines the estimated future amortization expense related to the intangible assets held as of June 30, 2017.
2017 (remaining
six months)
|
|
|
501,000
|
|
2018
|
|
|
1,001,000
|
|
2019
|
|
|
1,001,000
|
|
2020
|
|
|
711,000
|
|
2021
|
|
|
711,000
|
|
Thereafter
|
|
|
59,000
|
|
|
|
|
|
|
|
|
$
|
3,984,000
|
|
Note
8 - 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 June 30, 2017, the other liability balance was approximately $810,000 including the discount for imputed interest of approximately
$15,000, of which approximately $296,000 was current. For the three and six months ended June 30, 2017, we amortized approximately
$3,000 and $6,000 of interest expense related to the discount for imputed interest. The related net intangible asset balance was
approximately $727,000 and $873,000 as of June 30, 2017 and December 31, 2016 with amortization expense of approximately
$73,000 and $145,000 being recorded in cost of sales for the three and six months ended for both June 30, 2017 and 2016.
The accumulated amortization was approximately $437,000 and $291,000 as of June 30, 2017 and December 31, 2016, respectively.
Management evaluates the intangible asset for impairment when there is a triggering event and concluded there were no such events
as of June 30, 2017.
Note
9 - 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
June
30, 2017 and 2016
(Unaudited)
Note
9- 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 six months ended June
30, 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 six months ended June 30, 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.
On
June 26, 2017, a director exercised 250,000 options previously issued to them, at an exercise price approximately at an average
of $0.22. The exercise resulted in an issuance of 250,000 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.
Note
10- Related party transactions
The
spouse and mother-in-law of one of our directors, 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
11 - 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 June 30, 2017, there were 5,378,335
stock options outstanding with 4,290,000 vested and exercisable at an average exercise price of $0.26.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2017 and 2016
(Unaudited)
Note
11 - Basic and diluted earnings per share (continued):
All
outstanding securities were anti-dilutive for the three and six months ended June 30, 2017 and 2016 as a result of a net losses
for periods. The following securities were not involved in the computation of diluted net loss per share as their effect would
have been anti-dilutive:
|
|
June
30, 2017
|
|
|
June
30, 2016
|
|
|
|
|
|
|
|
|
Options
to purchase common stock
|
|
|
5,378,335
|
|
|
|
5,748,336
|
|
The
computations for basic and fully diluted earnings per share are as follows:
|
|
Loss
|
|
|
Weighted Average
|
|
|
|
|
For the three-months ended June 30, 2017:
|
|
(Numerator)
|
|
|
Shares (Denominator)
|
|
|
Per Share Amount
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss to common shareholders (restated)
|
|
$
|
(1,440,680
|
)
|
|
|
52,075,703
|
|
|
|
(0.03
|
)
|
|
|
Loss
|
|
|
Weighted
Average
|
|
|
|
|
For the three-months
ended June 30, 2016:
|
|
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per
Share Amount
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss to common
shareholders
|
|
$
|
(601,172
|
)
|
|
|
28,202,739
|
|
|
$
|
(0.02
|
)
|
|
|
Loss
|
|
|
Weighted Average
|
|
|
|
|
For the six-months ended June 30, 2017:
|
|
(Numerator)
|
|
|
Shares (Denominator)
|
|
|
Per Share Amount
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss to common shareholders (restated)
|
|
$
|
(1,808,298
|
)
|
|
|
48,093,572
|
|
|
|
(0.04
|
)
|
|
|
Loss
|
|
|
Weighted
Average
|
|
|
|
|
For the six-months
ended June 30, 2016:
|
|
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per
Share Amount
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss to common
shareholders
|
|
$
|
(689,851
|
)
|
|
|
28,175,406
|
|
|
$
|
(0.02
|
)
|
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2017 and 2016
(Unaudited)
Note
12 - Income taxes
The provision for income taxes is $70,000
for the three and six months ended June 30, 2017 and $0 for the three and six months ended June 30, 2016. The provision reflects
an estimated current tax liability associated with earnings of a foreign subsidiary. The effective tax rate is (23%) and
(10%) for the three and six months ended June 30, 2017, and 0% for the three and six months ended June 30, 2016. 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 federal, state and foreign 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 $0
interest and penalties for the three and six months ended June 30, 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 not updated its analysis through June 30, 2017 and 2016, and 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.
Note
13 - 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
June 30, 2017 (restated)
|
|
|
|
|
|
For the three months ended
June 30, 2016
|
|
|
|
Direct to Consumer
|
|
|
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
|
|
$
|
6,166,552
|
|
|
$
|
1,040,250
|
|
|
$
|
743,274
|
|
|
$
|
7,950,076
|
|
|
$
|
3,421,711
|
|
|
$
|
1,122,381
|
|
|
$
|
-
|
|
|
$
|
4,544,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
1,909,588
|
|
|
|
488,941
|
|
|
|
393,072
|
|
|
|
2,791,601
|
|
|
|
794,963
|
|
|
|
548,106
|
|
|
|
-
|
|
|
|
1,343,069
|
|
Gross profit
|
|
|
4,256,964
|
|
|
|
551,309
|
|
|
|
350,202
|
|
|
|
5,158,475
|
|
|
|
2,626,748
|
|
|
|
574,275
|
|
|
|
-
|
|
|
|
3,201,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
2,374,877
|
|
|
|
254,683
|
|
|
|
43,711
|
|
|
|
2,673,271
|
|
|
|
958,044
|
|
|
|
123,375
|
|
|
|
-
|
|
|
|
1,081,419
|
|
Selling and marketing
|
|
|
3,753,088
|
|
|
|
14,755
|
|
|
|
86,188
|
|
|
|
3,854,031
|
|
|
|
2,674,690
|
|
|
|
42,631
|
|
|
|
-
|
|
|
|
2,717,321
|
|
Total operating expense
|
|
|
6,127,965
|
|
|
|
269,438
|
|
|
|
129,899
|
|
|
|
6,527,302
|
|
|
|
3,632,734
|
|
|
|
1066,006
|
|
|
|
-
|
|
|
|
3,798,740
|
|
Operating income (loss)
|
|
$
|
(1,871,001
|
)
|
|
$
|
281,871
|
|
|
$
|
220,303
|
|
|
$
|
(1,368,827
|
)
|
|
$
|
(1,005,986
|
)
|
|
$
|
408,269
|
|
|
$
|
-
|
|
|
$
|
(597,717
|
)
|
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2017 and 2016
(Unaudited)
|
|
For the six
months ended
June 30, 2017 (restated)
|
|
|
|
|
|
For the six months ended
June 30, 2016
|
|
|
|
Direct to
Consumer
|
|
|
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
|
|
$
|
13,107,803
|
|
|
$
|
1,520,731
|
|
|
$
|
968,661
|
|
|
$
|
15,597,195
|
|
|
$
|
5,913,566
|
|
|
$
|
2,354,170
|
|
|
|
-
|
|
|
$
|
8,267,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
3,731,775
|
|
|
|
755,735
|
|
|
|
457,671
|
|
|
|
4,945,181
|
|
|
|
1,364,317
|
|
|
|
1,175,448
|
|
|
|
-
|
|
|
|
2,539,765
|
|
Gross profit
|
|
|
9,376,028
|
|
|
|
764,996
|
|
|
|
510,990
|
|
|
|
10,652,014
|
|
|
|
4,549,249
|
|
|
|
1,178,722
|
|
|
|
-
|
|
|
|
5,727,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
4,703,309
|
|
|
|
389,898
|
|
|
|
62,334
|
|
|
|
5,155,541
|
|
|
|
1,794,840
|
|
|
|
245,897
|
|
|
|
-
|
|
|
|
2,040,737
|
|
Selling and marketing
|
|
|
7,006,522
|
|
|
|
47,938
|
|
|
|
189,515
|
|
|
|
7,243,975
|
|
|
|
4,313,136
|
|
|
|
56,712
|
|
|
|
-
|
|
|
|
4,369,848
|
|
Total operating expense
|
|
|
11,709,831
|
|
|
|
437,836
|
|
|
|
251,849
|
|
|
|
12,399,516
|
|
|
|
6,107,976
|
|
|
|
302,609
|
|
|
|
-
|
|
|
|
6,410,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
(2,333,803
|
)
|
|
$
|
327,160
|
|
|
$
|
259,141
|
|
|
$
|
(1,747,502
|
)
|
|
$
|
(1,558,727
|
)
|
|
$
|
876,113
|
|
|
|
-
|
|
|
$
|
(682,614
|
)
|
Selected
balance sheet information by segment is presented in the following table as of:
|
|
June 30,
2017
|
|
|
December 31, 2016
|
|
|
|
(restated)
|
|
|
|
|
Direct to Consumer
|
|
$
|
18,165,356
|
|
|
$
|
4,454,701
|
|
International Third Party Distributor
|
|
|
21,075
|
|
|
|
84,713
|
|
Airline/Other Retail
|
|
|
657,500
|
|
|
|
-
|
|
Total Assets
|
|
$
|
18,843,931
|
|
|
$
|
4,539,414
|
|
Note
14 – Subsequent Events
As disclosed in Notes 1 and 3 on the
PhotoMedex Acquisition, on July 12, 2017, the Company entered into a Termination and Release Agreement with the PhotoMedex Sellers
(“PHMD”), and on July 15
,
, 2017, secured the payment to satisfy the terms of the agreement with
a $2,000,000 promissory note. The following summarizes the amounts owed to PHMD as of June 30, 2017 and the expected gain on settlement
to be recorded subsequent to June 30, 2017:
Contingent Consideration
Owed to PHMD
|
|
|
|
|
|
$
|
3,579,760
|
|
Other receivable
|
|
|
|
|
|
|
|
|
Due from PHMD
|
|
$
|
(837,708
|
)
|
|
|
|
|
Contingent
Consideration Earned
|
|
|
570,248
|
|
|
|
(267,460
|
)
|
Net Amount Owed
to PHMD
|
|
|
|
|
|
$
|
3,312,300
|
|
|
|
|
|
|
|
|
|
|
Settlement Amount
|
|
|
|
|
|
$
|
2,000,000
|
|
Assignment of
Sigmatron Deposit to ICTV
|
|
|
|
|
|
|
(210,000
|
)
|
Net Settlement
|
|
|
|
|
|
|
1,790,000
|
|
|
|
|
|
|
|
|
|
|
Gain on Settlement
|
|
|
|
|
|
$
|
1,522,300
|
|
ITEM
2. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Except
for the historical information presented in this document, the matters discussed in this Form 10-Q, and specifically in the “Management’s
Discussion and Analysis or Plan of Operation”, or otherwise incorporated by reference into this document contain “forward
looking statements” (as such term is defined in the Private Securities Litigation Reform Act of 1995). These statements
can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”,
“will”, “intends”, “should”, or “anticipates” or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. The safe harbor
provisions of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as
amended, apply to forward-looking statements made by the Company. You should not place undue reliance on forward-looking statements.
Forward-looking statements involve risks and uncertainties. The actual results that the Company achieves may differ materially
from any forward-looking statements due to such risks and uncertainties. These forward-looking statements are based on current
expectations, and the Company assumes no obligation to update this information. Readers are urged to carefully review and consider
the various disclosures made by the Company in this report on Form 10-Q and in the Company’s other reports filed with the
Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect the Company’s
business.
The
following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction
with the Financial Statements and accompanying notes and the other financial information appearing elsewhere in this report.
Overview
We
develop, market and sell products through a multi-channel distribution platform. The digital marketing platform utilizes video
and display advertising on social media and programmatic advertising channels. The Company continues to advertise its consumer
products through direct response television, or DRTV, and also markets some of its products through print advertising. The distribution
side of the platform includes live home shopping, traditional retail, e-commerce marketplaces, and our international third party
distributor network. As part of the PhotoMedex business acquisition, ICTV now has expanded its platform to have a sales office
in Hong Kong, which markets and distributes our products through several Asian airlines, as well as sell our products through
several retail outlets throughout Hong Kong. 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;
|
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 continually exploring other devices and consumable product lines that would
complement our current portfolio of beauty products.
On
January 23, 2017, we 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. See Note 3 - Business and Asset Acquisitions, to our financial
statements for more information about the PhotoMedex and Ermis Labs acquisitions:
●
|
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;
|
|
|
●
|
Kyrobak®,
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 through an omni-channel platform that includes, but is not limited to, digital
marketing, direct response television (“DRTV”), print advertising, 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.
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 general 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, as we supply 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 three and six months ended June 30, 2017 with the three and six months ended
June 30, 2016.
Revenues
Our
net sales increased to approximately $7,950,000 and $15,597,000, for the three and six months ended June 30, 2017, from approximately
$4,544,000 and $8,268,000 recorded during the three and six months ended June 30, 2016. The primary driver of the increase of
sales was the result of the addition of sales from the no!no!
TM
, Kyrobak
TM
and Cleartouch
TM
products that were acquired in the PhotoMedex acquisition in January 2017 (described under “Recent Transactions” below),
which generated additional direct to consumer sales of $1,822,000 and $3,282,000, additional live home shopping sales of $738,000
and $2,671,000 and additional retail and e-commerce sales of $2,353,000 and $2,948,000, in each case, for the three and six months
ended June 30, 2017. During the three and six months ended June 30, 2017, sales relating to DermaWand
TM
for direct
response television (DRTV), including DermaVital
®
, were approximately $2,558,000 and $4,654,000, as compared to
approximately $2,814,000 and $4,903,000 during the three and six months ended June 30, 2016. Our sales related to the DermaVital
®
skin care line were approximately $305,000 and $551,000, and $328,000 and $725,000 during the three and six months ended
June 30, 2017 and 2016, respectively.
Included
in net sales are retail sales of approximately $2,075,000 and $3,103,000, for the three and six months ended June 30, 2017,
increased from approximately $156,000 and $215,000 recorded during the three and six months ended June 30, 2016. In addition,
third party e-commerce sales were approximately $1,176,000 and $2,232,000 for the three and six months ended June 30, 2017,
increased from approximately $512,000 and $878,000 during the three and six months ended June 30, 2016. The increase in
these channels relates to the expansion of retail placement for DermaWand in the North American market, both in traditional
brick and mortar and online retail. In addition, as part of the PhotoMedex asset acquisition, ICTV inherited retail placement
for no!no! hair, primarily in the United Kingdom with retail placement in outlets such as Boots, Argos, JD Williams, and
Very. We expect our retail sales to grow throughout the remainder of 2017.
During
the three and six months ended June 30, 2017, international third party sales revenue decreased to approximately $1,040,000
and $1,521,000 as compared to approximately $1,122,000 and $2,354,000 during the three and six months ended June 30,
2016. 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 in international third party distributor revenue is primarily due to a shift in focus as to how ICTV is expanding its
marketing and distribution platform internationally. With the acquisition of the PhotoMedex assets, ICTV now has a physical presence
in Europe and Asia through our London and Hong Kong offices. Plans are underway to launch direct campaigns in other European and
Asian countries, thus reducing the number of international distributors that ICTV will allow to sell our products.
Plans
are in place to begin selling the newly acquired assets through ICTV’s network of distributors. Our sales team has begun
presenting these products to the distributors and we expect sales of the new products to begin in the second half of 2017 and
build throughout 2018.
Gross
Margin
Gross margin percentage was approximately
65% and 68% for the three and six months ended June 30, 2017, compared to approximately 70% and 69% during the same three and
six months in 2016. For the three and six months ended June 30, 2017, we generated approximately $5,158,000 and $10,652,000 in
gross margin, compared to approximately $3,201,000 and $5,728,000 during the three and six months ended June 30, 2016 as a result
of the addition of the no!no!
TM
, Kyrobak
TM
and Cleartouch
TM
products acquired in January 2017.
The decrease in gross profit margin is attributed to the shift to lower margin sales via retailers from higher margin direct to
consumer sales, the expenses of integrating and maintaining two logistics operations post the PhotoMedex asset acquisition, the
amortization of a portion of the fair value adjustment assigned to the purchased inventory, and the significantly higher returns
on some of those acquired products in part driven by 60 day return policies versus 30 days for the rest of the business.
Operating
Expenses
Total
operating expenses increased to approximately $6,527,000 and $12,400,000 during the three and six months ended June 30, 2017,
from approximately $3,799,000 and $6,411,000 during the three and six months ended June 30, 2016, an increase of approximately
$2,728,000 and $5,989,000, respectively. This increase in operating expenses relates primarily to the PhotoMedex acquisition.
The largest factor is an increase in media expenditures. Media expenditures were approximately $1,834,000 and $3,465,000 and $1,723,000
and $2,566,000 for the three and six months ended June 30, 2017 and 2016, respectively. In addition to media expenditures, there
was an increase in internet marketing expense of $991,000 and $1,490,000 to $1,243,000 and $2,090,000 for the three and six months
ended June 30, 2017 from $252,000 and $600,000 during the three and six months ended June 30, 2016, as we continue to shift to
more digital marketing efforts through search engine marketing and optimization, paid social media and banner ad campaigns.
As
a result of the increase in media expenses, there were additional volume related increases. Answering service expense decreased
to approximately $133,000 and increased to approximately $380,000 during the three and six months ended June 30, 2017, from approximately
$212,000 and $357,000 during the three and six months ended June 30, 2016. Customer service expenses increased to approximately
$188,000 and $361,000 during the three and six months ended June 30, 2017, from approximately $75,000 and $173,000 during the
three and six months ended June 30, 2016. Merchant fees increased to approximately $128,000 and $241,000 during the three and
six months ended June 30, 2017, from approximately $75,000 and $134,000 during the three and six months ended June 30, 2016. Total
bad debt expenses increased to approximately $334,000 and $653,000 during the three and six months ended June 30, 2017, from approximately
$252,000 and $442,000 during the three and six months ended June 30, 2016, which is consistent with the increase in sales.
In
addition to the volume related increases, our operating expenditures increased in a number of other areas as a result of the PhotoMedex
and Ermis Labs acquisitions, which were completed in January 2017. Payroll expenses increased to approximately $704,000
and $1,438,000 during the three and six months ended June 30, 2017 from approximately $386,000 and $765,000 during the
three and six months ended June 30, 2016, as a result of additional employees from the PhotoMedex acquisition. Travel and consulting
expenses increased to approximately $95,000 and $183,000 during the three months ended June 30, 2017 and increased to approximately
$176,000 and $326,000 during the six months ended June 30, 2017, compared to approximately $24,000 and $47,000 during
the three months ended June 30, 2016, and approximately $66,000 and $130,000 during the six months ended June 30, 2016.
In addition, legal expenses increased to approximately $90,000 and $186,000 during the three and six months ended June
30, 2017 from approximately $46,000 and $60,000 for the three and six months ended June 30, 2016.
Additionally,
as all non-employee awards vested in the prior year, our total share based compensation expenses decreased approximately
$4,000 to approximately $77,000 during the three months ended June 30, 2017 from $81,000 during the three months ended June 30,
2016, and increased approximately $291,000 to $495,000 during the six months ended June 30, 2017, from approximately $204,000
during the six months ended June 30, 2016. The $291,000 increase was attributable to bonuses awarded in the second quarter.
Net
Loss
We generated a net loss of approximately $1,441,000
and $1,808,000 for the three and six months ended June 30, 2017, compared with a net loss of approximately $601,000
and $690,000 for the three and six months ended June 30, 2016.
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 the 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. These 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®.
On
January 23, 2017, we completed the PhotoMedex acquisition for an aggregate purchase price of approximately $9.2 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 to be paid in the form of
a continuing royalty described in more detail below.
Under
the PhotoMedex purchase agreement, we were 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.
On
July 12, 2017, we and ICTV Holdings entered into a Termination and Release Agreement with PhotoMedex and
its subsidiaries. Under the terms of the Termination and Release Agreement, the PhotoMedex purchase agreement is
terminated and of no further force and effect, except for certain surviving rights, obligations and covenants described in the
termination and release agreement. Pursuant to the termination and release agreement, each of the Company and ICTV Holdings, on
the one hand, and PhotoMedex and its subsidiaries on the other hand, fully release, forever discharge and covenant not to sue
any other party, from and with respect to any and all past and present claims arising out of, based upon or relating to the PhotoMedex
purchase agreement (other than the surviving covenants described in the termination and release agreement) or the transactions
contemplated thereby. The termination and release agreement required that the Company pay to PhotoMedex $2,000,000 on or before
July 15, 2017, subject to which, neither the Company nor ICTV Holdings shall have any further royalty or other payment obligations
under the PhotoMedex purchase agreement.
As
partial consideration for the releases provided by ICTV Holdings to PhotoMedex and its subsidiaries, on July 12, 2017,
ICTV Holdings and PhotoMedex and its subsidiaries entered into a bill of sale and assignment, which provides that each of PhotoMedex
and its subsidiaries sell, assign, transfer, convey and deliver to ICTV Holdings, and ICTV Holdings purchase and accept from each
of PhotoMedex and its subsidiaries, all of its right, title and interest, legal or equitable, in and to a deposit in the amount
of $210,000 held by a supplier, Sigmatron International, Inc., pursuant to an arrangement between one or more of PhotoMedex
and its subsidiaries and Sigmatron.
On
July 15, 2017, to secure the $2,000,000 payment required under the termination and release agreement, we issued a 30-month secured
promissory note to LeoGroup Private Investment Access, LLC in the principal amount of $2,000,000. The note provides that the Company
shall make monthly principal and interest payments of $100,000 to LeoGroup Private Investment Access for 30 months. The note is
secured by a first priority security interest in all the assets of Company, except the Company’s accounts receivable. The
note contains customary covenants of the Company and customary events of default. Subject to the terms and conditions of the note,
so long as any event of default, as described in the note, is continuing, without cure, for a period of five (5) business days
after written notice from LeoGroup Private Investment Access to the Company or a longer period if set forth in in the notice from
LeoGroup Private Investment Access or if agreed to by the parties, all obligations of the Company under the note shall be immediately
due and payable, and LeoGroup Private Investment Access may exercise any other remedies available at law or in equity.
Ermis
Labs Acquisition
On
October 4, 2016, we and our wholly-owned subsidiary entered into an asset purchase agreement with LeoGroup Private Debt Facility
and Ermis Labs pursuant to which we agreed to acquire substantially all of the assets of Ermis Labs.
On
January 23, 2017, we completed the Ermis Labs asset purchase for an aggregate purchase price of approximately $1,982,000, 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
January 23, 2017, which was $0.34 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 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, on April 14, 2017, we filed a
registration statement covering the resale of the common stock sold to the investors in the private placement, subject to customary
underwriter cutbacks. On June 12, 2017, we filed an amendment to the registration statement, which was declared effective by the
Securities and Exchange Commission on June 15, 2017.
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 June 30, 2017, we had approximately $2,255,000
in cash and cash equivalents compared to approximately $1,390,000 at December 31, 2016. Cash flow used in operating activities
was approximately $885,000 during the six months ended June 30, 2017 compared to cash flow provided by operating activities of
approximately $307,000 during the same period in 2016. The fluctuation was primarily a result of an increase of approximately
$3,200,000 in accounts receivable, an increase in other receivables of $838,000 related to the transition services agreement,
an increase in prepaids and other current assets of approximately $299,000, and a decrease in inventory of $558,000, offset by
an increase of approximately $3,049,000 in accounts payable and accrued expenses.
Cash
flow used by investing activities was approximately $5,127,000 during the six months ended June 30, 2017 compared to no investing
activities during the same period in 2016. During 2017, we paid $5,000,000 in the PhotoMedex acquisition, which was completed
in January 2017, and we had capital expenditures of approximately $127,000
Cash
flow provided by financing activities was approximately $6,874,000 during the six months ended June 30, 2017 compared to cash
used in financing activities of approximately $150,000 during the same period in 2016. Included in 2017 financing activities,
was the issuance of 20,588,243 shares of common stock for proceeds of approximately $6,983,000, net of issuance costs. In addition, there was an exercise of stock options for proceeds of approximately of $56,000. We
also had $150,000 net cash used in financing activities as a result of the pay-down of the DermaWand
TM
asset purchase
agreement during both the six months ended June 30, 2017 and 2016.
As discussed in Note 6 in the Notes to the
Condensed Consolidated Financial Statements, on January 22, 2016, we entered into a Purchase Agreement with Omega 5 Technologies,
Inc. to acquire the worldwide ownership of the DermaWand
TM
patent and all related trademarks and intellectual property
for the sum of $1,200,000 payable with annual payments of $300,000 per year for calendar years 2016 through 2019. As of June 30,
2017, we had a debt obligation of approximately $810,000 related to this purchase agreement compared to $954,000 as of December
31, 2016. We believe that this agreement will provide additional liquidity with a lower royalty cost per unit sold of over the
coming years.
We had working capital of approximately $5,767,000
at June 30, 2017, compared to $1,340,000 at December 31, 2016. Based on our current rate of cash outflows and cash on hand,
management believes that its 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
There
have been no changes to our critical accounting policies and estimates in the three months ended June 30, 2017. The Securities
and Exchange Commission defines “critical accounting policies” as those that require application of management’s
most difficult, subjective or complex judgments, often as a result 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 under “Critical
Accounting Policies” in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
included in Item 7, as well as in our consolidated financial statements and footnotes thereto for the year ended December 31,
2016, as filed with the Securities and Exchange Commission with our Annual Report form 10-K filed on March 23, 2017.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable.
ITEM
4. CONTROLS AND PROCEDURES
The
Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in
the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time frames specified in the
SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including
its Chief Executive Officer, President, and its Chief Financial Officer, to allow timely decisions regarding required disclosure
based closely on the definition of “disclosure controls and procedures” in Rule 13a-15(e) and 15d-15(e).
Management
recognizes that there are inherent limitations in the effectiveness of any system of internal control, and accordingly, even effective
internal control can provide only reasonable assurance with respect to financial statement preparation and may not prevent or
detect material misstatements. In addition, effective internal control at a point in time may become ineffective in future periods
because of changes in conditions or due to deterioration in the degree of compliance with our established policies and procedures.
We carried out an evaluation as of June 30,
2017, under the supervision and with the participation of our management, including our Chief Executive Officer, President, and
Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to
Exchange Act Rules 13a-15(b) and 15d-15(b). Based upon that evaluation, our Chief Executive Officer, President, and Chief Financial
Officer concluded that due to the material weakness in inventory accounting, our disclosure controls and procedures were not
effective.
A “material weakness” is defined
as a significant deficiency or combination of significant deficiencies that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented or detected. A “significant deficiency”
is defined as a control deficiency, or combination of control deficiencies, that adversely affects the Company’s ability
to initiate, authorize, record, process, or report external financial information reliably in accordance with generally accepted
accounting principles such that there is more than a remote likelihood that a misstatement of the Company’s annual or interim
financial statements that is more than inconsequential will not be prevented or detected.
Management identified the following material
weakness in the Company’s internal control over financial reporting as of June 30, 2017:
As of June 30, 2017, there was an internal
control material weakness surrounding the Company’s inventory accounts. The Company did not maintain accurate records of
specific quantities of inventory acquired in the PhotoMedex transaction not yet transferred as of June 30, 2017. Inventory acquired
from PhotoMedex was accounted for by using a manual Excel spreadsheet, which did not properly account for inventory transferred
to our primary warehouse and distribution center during the quarter ended June 30, 2017, resulting in quantities being recorded
twice, overstating the consolidated inventory balance. Additionally, there were insufficient physical counts and insufficient
compensating detective controls in place to identify the error. These factors resulted in a material misstatement of the interim
financial statements.
Planned Remediation of Material Weakness
To remediate the Company’s material
weakness surrounding its inventory accounts, we intend to fully implement the new accounting software that went live on October
1, 2017, which will eliminate the manual process controls currently in place that allowed the error to occur in the
second quarter 2017. This new software, once fully implemented, will allow real time tracking of inventory balances, greatly
increasing controls around the balances on hand at any given time. We will then be able to reconcile our inventory to the
third party warehouse reports on a regular basis. In the interim time period, we intend to reconcile third party warehouse reports
to our manual Excel inventory spreadsheet. We moved substantially all USA PhotoMedex finished devices inventory to our
primary warehouse and distribution center during the third quarter 2017, reducing the likelihood and/or material impact
of this error reoccurring. As the error was discovered after closing of the third quarter 2017 books and records, we are unable
to begin to implement any changes to the internal control framework to remediate this material weakness until the fourth quarter
2017.
Off-Balance
Sheet Arrangements
We
do not have any off-balance sheet arrangements.