NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
Note
1 – Organization and Business of the Company and Liquidity
Organization
and Nature of Operations
ICTV
Brands Inc. (the “Company”, “We”, or “ICTV”), was organized under the laws of the State of
Nevada on September 25, 1998. As of December 31, 2017 we have the following subsidiaries:
|
●
|
Better
Blocks International Limited, or (“BBI”), a New Zealand corporation;
|
|
|
|
|
●
|
ICTV
Brands Israel Limited., incorporated under the laws of Israel;
|
|
|
|
|
●
|
ICTV
Brands UK Limited., incorporated under the laws of the United Kingdom;
|
|
|
|
|
●
|
ICTV
Brands HK Limited, a private limited company limited by shares, incorporated under the
laws of Hong Kong (ICTV Brands HK Limited was formally known as “Radiancy HK
Limited” and was officially renamed
to
ICTV Brands HK Limited on July 31, 2017); and
|
|
|
|
|
●
|
LK
Technology Importaçăo E Exportaçăo LTDA, a private Sociedade limitada formed under the laws of Brazil
(“LK Technology”).
|
On
January 23, 2017, ICTV Holdings, Inc., a Nevada corporation and the Company’s wholly-owned subsidiary (“ICTV Holdings”)
completed the purchase of substantially all the assets of PhotoMedex, Inc., a Nevada corporation and its wholly-owned subsidiaries,
Radiancy, Inc., PhotoTherapeutics Ltd., and Radiancy (Israel) Limited, (collectively, the “PHMD Sellers”), pursuant
to an asset purchase agreement, dated October 4, 2016, by and among the Company, ICTV Holdings and the PHMD Sellers, as amended
by the first amendment thereto dated January 23, 2017.
On
November 16, 2017, the Company adopted a Plan of Merger pursuant to which, effective November 16, 2017, ICTV Holdings was merged
with and into the Company, with the Company continuing as the surviving corporation, and each share of ICTV Holdings common stock
outstanding immediately prior to the effective date was cancelled and extinguished.
On
January 23, 2017 Ermis Labs, Inc., a Nevada corporation and the Company’s wholly-owned subsidiary (“Ermis Labs”)
completed the purchase of substantially all the assets of Ermis Labs, Inc., a New Jersey corporation (“ELNJ”), pursuant
to an asset purchase agreement, dated October 4, 2016, by and among the Company, Ermis Labs, ELNJ, and LeoGroup Private Debt Facility,
L.P., a significant shareholder (related party), as amended by the first amendment thereto dated January 23, 2017.
On
November 16, 2017, the Company adopted a Plan of Merger pursuant to which, effective November 16, 2017, Ermis Labs was merged
with and into the Company, with the Company continuing as the surviving corporation, and each share of Ermis Labs common stock
outstanding immediately prior to the effective date was cancelled and extinguished.
Although
our companies are incorporated in New Zealand, Nevada, Israel, United Kingdom, Hong Kong, and Brazil, our operations are currently
run from our Wayne, Pennsylvania office.
We
develop, market and sell products through a multi-channel distribution strategy, including
direct response television, digital marketing campaigns, live home shopping, traditional
retail and e-commerce market places, and our international third-party distributor network.
We offer primarily health, beauty and wellness products as well as various consumer products,
including DermaWand®, a skin care device that reduces the appearance of fine lines
and wrinkles, and helps improve skin tone and texture, DermaVital®, a professional
quality skin care line that effects superior hydration, the CoralActives
®
brand of acne treatment and skin cleansing products, DermaBrilliance®, a skin care
resurfacing device that helps reduce visible signs of aging, and Jidue®, a facial
massager device which helps alleviate stress. We acquire the rights to our products that
we market primarily via licensing agreements, acquisition and in-house development and
sell both domestically and internationally. We are presently exploring other devices
and consumable product lines currently under licensing agreements.
The
goal of our strategy is to introduce our brands to the market through an omni-channel platform that includes, but is not limited
to direct to consumer, live home shopping, traditional retail, e-commerce market places, Hong Kong airlines, 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.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
Note
1 - Organization, Business of the Company and Liquidity (continued)
PhotoMedex
Acquisition
On
October 4, 2016, we and our wholly-owned subsidiary, ICTV Holdings, entered into an asset purchase agreement, as amended by the
First Amendment to the Asset Purchase Agreement, dated January 23, 2017 (as so amended, the “PhotoMedex Purchase Agreement”)
with PhotoMedex, Inc., a Nevada corporation (“PhotoMedex”), and its wholly owned subsidiaries, Radiancy, Inc., a Delaware
corporation, PhotoTherapeutics Ltd, a private limited company limited by shares incorporated under the laws of England and Wales,
and Radiancy Israel Limited, a private corporation incorporated under the laws of the State of Israel, (collectively with PhotoMedex,
the “PHMD Sellers” and individually, a “Seller”), pursuant to which ICTV Holdings acquired substantially
all of the assets of the PHMD Sellers, including, but not limited to, all of the equity interests of the Seller’s subsidiaries
Radiancy (HK) Limited, a private limited company incorporated under the laws of Hong Kong, and LK Technology Importaçăo
E Exportaçăo LTDA, a private Sociedade limitada formed under the laws of Brazil, for a total purchase price of $9,500,000.
Such acquisition is referred to herein as the “PhotoMedex Acquisition.” The PhotoMedex Acquisition was completed on
January 23, 2017. (See Note 3 - Business and Asset Acquisitions).
The
PhotoMedex Acquisition included the acquisition of proprietary products and services that address skin diseases and conditions
or pain reduction using home-use devices for various indications including hair removal, acne treatment, skin rejuvenation, and
lower back pain; which products are sold and distributed to traditional retail, online and infomercial outlets for home-use products
and include, without limitation, the following: (a) no!no!® Hair, (b) no!no!® Skin, (c) no!no!® Face Trainer, (d)
no!no!® Glow, (e) Made Ya Look, (f) no!no!® Smooth Skin Care, (g) Kyrobak®, and (h) ClearTouch ®.
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 commenced with net cash actually received
from and after January 23, 2017 and would continue until the total royalty paid to PhotoMedex and its subsidiaries totaled $4,500,000.
On
July 12, 2017, we and ICTV Holdings entered into a Termination and Release Agreement with the PHMD Sellers (the “Release
Agreement”). Under the terms of the 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 Release Agreement. Pursuant
to the Release Agreement, each of the Company and ICTV Holdings, on the one hand, and the PHMD Sellers 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
Release Agreement) or the transactions contemplated thereby. The Release Agreement required that the Company pay to PhotoMedex
$2,000,000 on or before July 15, 2017 (the “Payment”), 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 the PHMD Sellers, on July 12, 2017, the PHMD Sellers and ICTV
Holdings entered into a Bill of Sale and Assignment, which provides that each Seller sell, assign, transfer, convey and deliver
to ICTV Holdings, and ICTV Holdings purchase and accept from each Seller, all of the right, title and interest, legal or equitable,
of each such Seller in and to a deposit in the amount of $210,000 held by a supplier, Sigmatron International, Inc. (“Sigmatron”),
between the PHMD Sellers and Sigmatron.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
Note
1 - Organization, Business of the Company and Liquidity (continued)
On
July 15, 2017, to secure the Payment, we issued a 30-month secured promissory note (the “Note”), to LeoGroup Private
Investment Access, LLC (the “Holder”), a significant shareholder, in the principal amount of $2,000,000 with an effective
interest rate of 34% (see Note 7 – Long-term Debt). The Note provides that the Company shall make monthly principal and
interest payments of $100,000 to the Holder for 30 months beginning August 2017. 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 the Holder
to the Company or a longer period if set forth in in the notice from Holder or if agreed to by the parties, all obligations of
the Company under the Note shall be immediately due and payable, and the Holder may exercise any other remedies available at law
or in equity. The note may not be prepaid, in whole or in part, at any time and from time to time, unless expressly agreed to
in writing by the Holder.
The
change in the amount of the Company’s contingent consideration payable due to PhotoMedex, Inc. for the period up to the
date of the Release Agreement was as follows:
Balance
at January 23, 2017-initial measurement
|
|
$
|
4,198,043
|
|
Contingent
consideration earned but not paid
|
|
|
(570,248
|
)
|
Change
in fair value
|
|
|
(48,035
|
)
|
Balance
at July 12, 2017
|
|
$
|
3,579,760
|
|
The
following summarizes the amounts owed to PhotoMedex (PHMD) as of July 12, 2017 and the gain on settlement recorded during the
year ended December 31, 2017:
Contingent
consideration owed to PHMD (see above)
|
|
|
|
|
|
$
|
3,579,760
|
|
Other
payables (receivables)
|
|
|
|
|
|
|
|
|
Due
from PHMD
|
|
$
|
(837,708
|
)
|
|
|
|
|
Contingent
consideration earned but not paid
|
|
|
570,248
|
|
|
|
|
|
Other
payable amounts due to PHMD
|
|
|
446,945
|
|
|
|
179,485
|
|
Net
amount owed to PHMD
|
|
|
|
|
|
$
|
3,759,245
|
|
|
|
|
|
|
|
|
|
|
Settlement
amount
|
|
|
|
|
|
$
|
2,000,000
|
|
Assignment
of Sigmatron deposit to ICTV
|
|
|
|
|
|
|
(210,000
|
)
|
Net
settlement
|
|
|
|
|
|
|
1,790,000
|
|
|
|
|
|
|
|
|
|
|
Gain
on settlement
|
|
|
|
|
|
$
|
1,969,245
|
|
Ermis
Labs Asset Acquisition
On
October 4, 2016, we and our wholly-owned subsidiary, Ermis Labs, Inc., a Nevada corporation (“Ermis Labs”),
entered into an asset purchase agreement (the “Ermis Labs Purchase Agreement”) with LeoGroup Private Debt Facility
L.P. a Delaware limited partnership (the “LeoGroup L.P.”), a significant shareholder, and Ermis Labs, Inc., a New
Jersey corporation (“ELNJ”), pursuant to which Ermis Labs has agreed to acquire substantially all of the assets
of ELNJ (collectively, the “Ermis Labs Assets”), for a total purchase price of $1,982,000. Such acquisition
is referred to herein as the “Ermis Labs Asset Purchase” (See Note 3 - Business and Asset Acquisitions).
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
Note
1 - Organization, Business of the Company and Liquidity (continued)
Liquidity
and Going Concern
Our
consolidated financial statements have been prepared on a going concern basis, which assumes the Company will be able to realize
its assets and discharge its liabilities in the normal course of business for the foreseeable future. We had a net loss of approximately
$6,628,000 for the year ended December 31, 2017 and generated negative cash flows from operating activities of approximately $1,510,000.
In addition, we have an accumulated deficit of approximately $16,905,000 as of December 31, 2017. The net loss for the year included
an impairment loss on intangible assets of approximately $1,235,000, an inventory net realizable value adjustment of approximately
$1,323,000 associated with the Ermis Labs and PhotoMedex acquisitions, and bad debt expense of approximately $1,460,000. The net
loss also included a gain on settlement of the Photomedex contingent consideration of approximately $1,969,000, we had cash and
cash equivalents of approximately $1,258,000, and positive working capital of approximately $2,985,000 at December 31, 2017.
In
response to our continued losses and our cash flow deficiencies, we have taken measures to reduce expenses and restructure operations
in 2018, which we feel are necessary to ensure we maintain sufficient working capital and liquidity to operate the business and
invest in our future. As a first step in addressing the operating cost structure of the Company, our CEO, Kelvin Claney,
temporarily reduced his base salary by $100,000 per year. The reduction will initially be in effect from April 1 through December
31, 2018. If at December 31, 2018, it appears that it would be appropriate to extend the temporary reduction, our Chief Executive
officer has expressed a willingness to do so. The temporary reduction does not affect his base salary for purposes of calculating
any compensation that would be due him upon a termination of his employment. Our next steps were to evaluate our staffing needs.
As a result, we have also reduced staff and office space to decrease our overall overhead. We have also begun to
evaluate our media spend and started to decrease our spending and have already seen an increase in efficiency, which will be seen
in filings to come.
The
ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining
the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come
due. The Company’s ability to raise additional capital through the future issuances of debt or equity is unknown. The ability
to obtain additional financing, the successful development of the Company’s contemplated plan of operations, or its ability
to achieve profitable operations are necessary for the Company to continue operations. The ability to successfully resolve these
factors raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements
of the Company do not include any adjustments that may result from the outcome of these uncertainties.
Note
2 - Summary of significant accounting policies
Principles
of consolidation
Our
accompanying consolidated financial statements include the accounts of our wholly-owned subsidiaries BBI, ICTV Brands UK Limited,
ICTV Brands Israel Limited, ICTV Brands HK Limited and LK Technology from their initial acquisition dates. In October 2016, ICTV
Holdings and Ermis Labs, Inc. were formed as holding companies for the asset purchase agreements that were entered into with PhotoMedex,
Inc. and Ermis Lab, Inc. (See Note 3 - Business and Asset Acquisitions). On November 16, 2017, ICTV Holdings and Ermis Labs, Inc.
were merged into ICTV Brands, Inc. All significant inter-company transactions and balances have been eliminated in consolidation.
Use
of estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
(“US GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Management believes that the estimates utilized in preparing its consolidated financial
statements are reasonable and prudent. The most significant estimates used in these consolidated financial statements include
the allowance for doubtful accounts, reserves for returns, inventory reserves, allocation of purchase price, valuation allowance
on deferred tax assets, valuation of intangibles, valuation of contingent consideration, and share based compensation. Actual
results could differ from these estimates.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
Note
2 - Summary of significant accounting policies (continued)
Recently
Issued Accounting Pronouncements
In
May 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-09, which clarifies
when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. ASU 2017-09 will
reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. Under
ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if the award’s fair value,
vesting conditions and classification as an equity or liability instrument are the same immediately before and after the change.
ASU 2017-09 will be applied prospectively to awards modified on or after the adoption date. The guidance is effective for annual
periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The
Company does not expect this new guidance to have a material impact on its consolidated financial statements.
In
January 2017, Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”)
2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
(“ASU 2017-01”). ASU 2017 -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.
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 PhotoMedex acquisition (See Note 3 - Business and Asset Acquisitions), we adopted this standard on January
1, 2017.
In
June 2016, the FASB issued ASU 2016-13,
Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments
(ASU 2016-13), which requires measurement and recognition of expected credit losses for financial
assets held. The ASU is effective for interim and annual periods beginning December 15,
2019 and early adoption is permitted. Entities are required to adopt ASU 2016-13 using a
modified retrospective approach
, subject to certain limited exceptions. We
are currently evaluating the impact of our pending adoption of ASU 2016-13 on our consolidated financial statements.
In
March 2016, the FASB issued ASU No. 2016-09,
Compensation–Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting.
The ASU includes various provisions to simplify the accounting for share-based payments with the goal
of reducing the cost and complexity of accounting for share-based payments. The amendments may significantly impact net income,
earnings per share and the statement of cash flows as well as present implementation and administration challenges for companies
with significant share-based payment activities. ASU No. 2016-09 is effective for fiscal years beginning after December 15, 2016
including interim periods within those fiscal years. ASU 2016-09 was adopted effective January 1, 2017. The adoption of this standard
did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
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.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
Note
2 - Summary of significant accounting policies (continued)
In
May 2014, FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
, on revenue recognition. The new standard
provides for a single five-step model to be applied to all revenue contracts with customers as well as requires additional financial
statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows
relating to customer contracts. Companies have an option to use either a retrospective approach or cumulative effect adjustment
approach to implement the standard. ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2017,
including interim periods within that reporting period. We have performed a detail review of our revenue arrangements which consist
primarily of product sales based on the guidance in the standard. We are continuing to review performance obligations in terms
of material customer contractual arrangements to verify that revenue is recognized when performance obligations are satisfied.
Based on our review of the interpretive guidance that has been issued, we do not expect the adoption of this standard to have
a material impact on our consolidated financial statements; however, it will materially impact our disclosures. We have not completed
the implementation of changes to our processes related to revenue recognition and the control activities within them. These include
the development of new policies based on the five-step model provided in the new revenue standard, new training, ongoing contract
review requirements, and gathering of information provided for disclosures.
Concentration
of credit risk
Financial
instruments, which potentially subject us to concentrations of credit risk, include cash and trade receivables. We maintain cash
in bank accounts that, at times, may exceed federally insured limits. We have not experienced any losses and believe we are not
exposed to any significant risks on our cash in bank accounts.
As
of December 31, 2017, 18% of our accounts receivable were due from various individual customers to whom our products had been
sold directly via Direct Response Television (“DRTV”). In addition, 63% was due from brick and mortar retailers, 11%
was due from e-commerce accounts, and 8% was due from duty free airline business. Major customers are considered to be those who
accounted for more than 10% of net sales. For the fiscal years ended December 31, 2017 and December 31, 2016, there were no major
customers.
Fair
value of financial instruments
Fair
value estimates, assumptions and methods used to estimate fair value of the Company’s financial instruments are made in
accordance with the requirements of Accounting Standards Codification (“ASC”) 825-10, “Disclosures about Fair
Value of Financial Instruments.” We have used available information to derive our estimates. However, because these estimates
are made as of a specific point in time, they are not necessarily indicative of amounts we could realize currently. The use of
different assumptions or estimating methods may have a material effect on the estimated fair value amounts. The carrying values
of financial instruments such as cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate
their fair values due to the short settlement period for these instruments.
Cash
and cash equivalents
We
consider all unrestricted highly liquid investments with an original maturity of three months or less to be cash equivalents.
Foreign
currency transactions
Transactions
we entered into in currencies other than our local currency, are recorded in our local currency and any changes in currency exchange
rates that occur from the initiation of a transaction until settled are recorded as foreign currency gains or losses in the Consolidated
Statements of Operations 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 the Hong Kong Dollar
(HKD), Great Britain Pound (GBP), and Israeli New Shekel (NIS).
Assets
and liabilities of our foreign subsidiaries are translated based on 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 Consolidated Statements of Operations and Comprehensive Loss.
Accounts
receivable
Accounts
receivable are recorded net of allowances for returns and doubtful accounts of approximately $913,000 and $123,000 as of
December 31, 2017 and 2016, respectively. The allowances are calculated based on historical analysis including customer returns
and bad debts.
In
addition to allowances for returns on accounts receivable, an accrual is made for the return of product that have been sold to
customers and had cash collections, while the customer still has the right to return the product. The amounts of these accruals
included in accounts payable and accrued liabilities in our Consolidated Balance Sheets were approximately $179,000 and $91,000
as of December 31, 2017 and 2016, respectively
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
Note
2 - Summary of significant accounting policies (continued)
Inventories
Inventories
consist primarily of finished products held for resale and are valued at the lower of cost (first-in, first-out method) or net
realizable value. We adjust inventory for estimated obsolescence when necessary based upon demand and market conditions. During
the year ended December 31, 2017, we directly wrote off inventory of approximately $1,323,000 based upon an evaluation of the
Ermis Labs and PhotoMedex acquired inventory. The Company’s reserve for obsolescence was approximately $247,000 and $74,000
as of December 31, 2017 and 2016, respectively. Included in inventory at December 31, 2017 and 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 retailer distributors 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 7 years for computer hardware and software and furniture and fixtures. Depreciation is computed using the straight-line
method. Leasehold improvements have an estimated life of the lesser of estimated useful life and lease term. 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 $193,000 and $8,000 for the years ended December 31, 2017 and 2016, respectively.
Property
and equipment consisted of the following at:
|
|
December,
2017
|
|
|
December
31, 2016
|
|
Computer
hardware and software
|
|
$
|
154,061
|
|
|
$
|
33,549
|
|
Furniture
and equipment
|
|
|
907,586
|
|
|
|
40,549
|
|
Leasehold
improvements
|
|
|
55,840
|
|
|
|
-
|
|
|
|
$
|
1,117,487
|
|
|
$
|
74,098
|
|
Accumulated
depreciation
|
|
|
(230,394
|
)
|
|
|
(58,099
|
)
|
Property
and equipment, net
|
|
$
|
887,093
|
|
|
$
|
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 $942,000 and $291,000 for
the years ended December 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.
Impairment
of Long-Lived Assets
In
accordance with ASC 360-10, “Accounting for the Impairment or Disposal of Long-Lived Assets”, long-lived assets are
reviewed for impairment when circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future net undiscounted
cash flows estimated by us to be generated by such assets. If such assets are considered to be impaired, the impairment to be
recognized is the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed
of by sale are recorded as held for sale at the lower of carrying value or estimated net realizable value. During the year ended
December 31, 2017, an impairment loss of approximately $1,235,000 was recognized to write off intangible assets acquired as part
of the purchase of Ermis Labs. The impairment was triggered by management’s decision, at year end, that these products were
no longer core to our business model, and therefore impaired. There was no impairment during the year ended December
31, 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 Consolidated Statements of Operations are net of sales taxes. Revenues from product sales
are recorded net of provisions for estimated chargebacks, rebates, expected returns and cash discounts.
We
offer a 30-day risk-free trial as one of its payment options. Revenue on the 30-day risk-free trial sales is not recognized until
customer acceptance and collectability are assured which we determine to be when the trial period ends. If the risk-free trial
expires without action by the customer, product is determined to be accepted by the customer and revenue is recorded. Revenue
for items purchased without the 30-day free trial is recognized upon shipment of the product to the customer and collectability
is reasonably assured.
Revenue
related to our DermaVital® 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 $217,000
and $142,000 as of December 31, 2017 and 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 CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
Note
2 - Summary of significant accounting policies (continued)
We
sell warranties on the DermaWand® for various terms. Revenue is recognized ratably over the term, with the unearned warranty
included in deferred revenue on the accompanying consolidated balance sheets. Changes in deferred service revenue related to the
warranties is presented in the following table:
|
|
Years
ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred
extended warranty revenue:
|
|
|
|
|
|
|
|
|
At
beginning of period
|
|
$
|
509,389
|
|
|
$
|
629,143
|
|
Revenue
deferred for new warranties
|
|
|
127,997
|
|
|
|
118,148
|
|
Revenue
recognized
|
|
|
(255,499
|
)
|
|
|
(237,902
|
)
|
At
end of period
|
|
$
|
381,887
|
|
|
$
|
509,389
|
|
|
|
|
|
|
|
|
|
|
Current
portion
|
|
$
|
187,353
|
|
|
$
|
235,015
|
|
Non-current
portion
|
|
|
194,534
|
|
|
|
274,374
|
|
|
|
$
|
381,887
|
|
|
$
|
509,389
|
|
Shipping
and Handling
The
amount billed to a customer for shipping and handling is included in revenue. Shipping, handling and processing revenue approximated
$1,308,000 and $2,097,000 for the years ended December 31, 2017 and 2016, respectively. Shipping and handling costs are included
in cost of sales. Shipping and handling costs approximated $666,000 and $861,000 for the years ended December 31, 2017 and 2016,
respectively.
Research
and Development
Research
and development costs are expensed as incurred and are included in selling and marketing expense in the accompanying consolidated
statements of operations and comprehensive loss. 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 $283,000 and $111,000 for the years ended December 31, 2017 and 2016, respectively.
Advertising
Advertising
costs, consisting of media, internet marketing and production costs, are expensed as incurred and are included in selling and
marketing expense in the accompanying consolidated statements of operations and comprehensive loss. Production costs associated
with the creation of new and updated infomercials and advertising campaigns are expensed at the commencement of a campaign. Media
costs for airing our infomercials were approximately $7,787,000 and $4,965,000 for the years ended December 31, 2017 and
2016. Internet marketing costs were approximately $4,481,000 and $1,347 ,000 for the years ended December 31, 2017 and 2016.
Production costs were $334,000 and $239,000 for the years ended December 31, 2017 and 2016.
Income
taxes
In
preparing our consolidated financial statements, we make estimates of our current tax exposure and temporary differences resulting
from timing differences for reporting items for book and tax purposes. We recognize deferred taxes by the asset and liability
method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for differences
between the financial statement and tax basis of assets and liabilities at enacted statutory tax rates in effect for the years
in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income
in the period that includes the enactment date. In addition, valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized. In consideration of our accumulated losses and limited historical ability to
generate taxable income to utilize our deferred tax assets, we have estimated that we will not be able to realize any benefit
from our temporary differences and have recorded a full valuation allowance. If we sustain profitability in the future at levels
which cause management to conclude that it is more likely than not that we will realize all or a portion of the net operating
loss carry-forward, we would record the estimated net realized value of the deferred tax asset at that time and would then provide
for income taxes at a rate equal to our combined federal and state effective rates. Subsequent revisions to the estimated net
realizable value of the deferred tax asset could cause our provision for income taxes to vary significantly from period to period.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
Note
2 - Summary of significant accounting policies (continued)
Stock
options
In
June 2001, our shareholders approved our 2001 Stock Option Plan (the “Plan”). The Plan is designed for our employees,
officers and directors and is intended to advance our best interests by providing personnel who have substantial responsibility
for our management and growth with additional incentive by increasing their proprietary interest in our success, thereby encouraging
them to remain our employee. The Plan is administered by our Board of Directors and authorizes the issuance of stock options not
to exceed a total of 3,000,000 shares. The terms of any awards under the Plan are determined by the Board of Directors, provided
that no options may be granted at less than the fair market value of the stock as of the date of the grant. The Plan expired in
February 2011. As of December 31, 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. In December 2017, the 2011 Plan was amended to increase the number
of stock options that may be awarded to not exceed a total of 8,000,000 shares. The terms of any awards under the 2011 Plan are
determined by the Board of Directors, provided that no options may be granted at less than the fair market value of the stock
as of the date of the grant. Generally, the options granted vest over three years with one-third vesting on each anniversary date
of the grant. As of December 31, 2017, 3,943,335 options are outstanding under the 2011 Plan.
We
account for equity instruments issued to non-employees in accordance with the provisions of ASC Topic 505, subtopic 50,
Equity-Based
Payments to Non-Employees
based upon the fair-value of the underlying instrument. The equity instruments, consisting of stock
options granted to consultants, are valued using the Black-Scholes valuation model. The measurement of stock-based compensation
to non-employees is subject to periodic adjustments as the underlying equity instruments vest and is recognized as an expense
over the period which services are received. Nonvested stock options granted to non-employees are remeasured at each reporting
period.
We
use ASC Topic 718, “Share-Based Payments”, to account for stock-based compensation issued to employees and directors.
We recognize compensation expense in an amount equal to the grant date fair value of share-based payments such as stock options
granted to employees over the requisite vesting period of the awards using the Black-Scholes valuation model.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
Note
2 - Summary of significant accounting policies (continued)
The
following is a summary of stock options outstanding under the Plan and 2011 Plan (collectively “Stock Option Plans”)
for the years ended December 31, 2017 and 2016:
|
|
Number
of Shares
|
|
|
Weighted
Average
|
|
|
|
Employee
|
|
|
Non-
Employee
|
|
|
Totals
|
|
|
Exercise
Price
|
|
Balance,
January 1, 2017
|
|
|
3,680,002
|
|
|
|
-
|
|
|
|
3,680,002
|
|
|
$
|
0.24
|
|
Granted
during the year
|
|
|
560,000
|
|
|
|
-
|
|
|
|
560,000
|
|
|
|
0.44
|
|
Exercised
during the year
|
|
|
(153,334
|
)
|
|
|
-
|
|
|
|
(153,334
|
)
|
|
|
0.16
|
|
Forfeited
during the year
|
|
|
(93,333
|
)
|
|
|
-
|
|
|
|
(93,333
|
)
|
|
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2017
|
|
|
3,993,335
|
|
|
|
-
|
|
|
|
3,993,335
|
|
|
$
|
0.27
|
|
|
|
Number
of Shares
|
|
|
Weighted
Average
|
|
|
|
Employee
|
|
|
Non-
Employee
|
|
|
Totals
|
|
|
Exercise
Price
|
|
Balance,
January 1, 2016
|
|
|
4,036,669
|
|
|
|
-
|
|
|
|
4,036,669
|
|
|
$
|
0.21
|
|
Granted
during the year
|
|
|
725,000
|
|
|
|
-
|
|
|
|
725,000
|
|
|
|
0.34
|
|
Exercised
during the year
|
|
|
(650,000
|
)
|
|
|
-
|
|
|
|
(650,000
|
)
|
|
|
0.16
|
|
Forfeited
during the year
|
|
|
(431,667
|
)
|
|
|
-
|
|
|
|
(431,667
|
)
|
|
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2016
|
|
|
3,680,002
|
|
|
|
-
|
|
|
|
3,680,002
|
|
|
$
|
0.24
|
|
Of
the stock options outstanding as of December 31, 2017 under the Stock Option Plans, 3,516,668 options are currently vested and
exercisable. The weighted average exercise price of these options was $0.25. These options expire through November 2027.
The
aggregate intrinsic value for options outstanding and exercisable at December 31, 2017 and 2016, was approximately $478,000 and
$203,000, respectively. The aggregate intrinsic value for stock options exercised during the years ended December 31, 2017 and
2016 was approximately $53,000 and $82,000, respectively.
For
the years ended December 31, 2017 and 2016, we recorded approximately $424,000 and $363,000, respectively, in stock compensation
expense under the Stock Option Plans. At December 31, 2017, there was approximately $174,000 of total unrecognized compensation
cost related to non-vested option grants that will be recognized over the remaining vesting period of 3 years.
The
following assumptions are used in the Black-Scholes option pricing model for the years ended December 31, 2017 and 2016 to value
the stock options granted during the period:
2017
|
|
2016
|
Risk-free
interest rate
|
|
|
2.17
- 2.34
|
%
|
|
Risk-free
interest rate
|
|
|
1.58
- 2.18
|
%
|
Expected
dividend yield
|
|
|
0.00
|
|
|
Expected
dividend yield
|
|
|
0.00
|
|
Expected
life
|
|
|
6.00
years
|
|
|
Expected
life
|
|
|
6.00
years
|
|
Expected
volatility
|
|
|
143
– 145
|
%
|
|
Expected
volatility
|
|
|
152-153
|
%
|
Forfeiture
rate
|
|
|
5.0
|
%
|
|
Forfeiture
rate
|
|
|
5.0
|
%
|
Weighted
average grant date fair value
|
|
$
|
0.45
|
|
|
Weighted
average grant date fair value
|
|
$
|
0.33
|
|
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
Note
2 - Summary of significant accounting policies (continued)
The
following is a summary of stock options outstanding outside of the Stock Option Plans for the years ended December 31, 2017 and
2016:
|
|
Number
of Shares
|
|
|
Weighted
Average
|
|
|
|
Employee
|
|
|
Non
-
Employee
|
|
|
Totals
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2017
|
|
|
516,667
|
|
|
|
1,676,667
|
|
|
|
2,193,334
|
|
|
$
|
0.35
|
|
Granted
during the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
during the year
|
|
|
(183,334
|
)
|
|
|
-
|
|
|
|
(183,334
|
)
|
|
|
0.27
|
|
Expired
during the period
|
|
|
-
|
|
|
|
(200,000
|
)
|
|
|
(200,000
|
)
|
|
|
0.80
|
|
Balance,
December 31, 2017
|
|
|
333,333
|
|
|
|
1,476,667
|
|
|
|
1,810,000
|
|
|
$
|
0.31
|
|
|
|
Number
of Shares
|
|
|
Weighted
Average
|
|
|
|
Employee
|
|
|
Non
- Employee
|
|
|
Totals
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2016
|
|
|
466,667
|
|
|
|
1,976,667
|
|
|
|
2,443,334
|
|
|
$
|
0.32
|
|
Granted
during the year
|
|
|
50,000
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
0.21
|
|
Expired
during the period
|
|
|
-
|
|
|
|
(300,000
|
)
|
|
|
(300,000
|
)
|
|
$
|
0.80
|
|
Balance, December
31, 2016
|
|
|
516,667
|
|
|
|
1,676,667
|
|
|
|
2,193,334
|
|
|
$
|
0.35
|
|
Of
the stock options currently outstanding outside of the Stock Option Plans at December 31, 2017, 1,810,000 options are currently
vested and exercisable. The weighted average exercise price of these options was $0.31. These options expire through January 2026.
The aggregate intrinsic value for options outstanding and exercisable at December 31, 2017 and 2016, was approximately $218,000
and $124,000, respectively. The aggregate intrinsic value for stock options exercised during the years ended December 31, 2017
and 2016 was approximately $40,000 and $0, respectively.
For
the years ended December 31, 2017 and 2016, we recorded approximately $23,000 and $54,000, respectively in stock compensation
expense related to stock options outside of the Stock Option Plans. At December 31, 2017, there was approximately $3,000 of total
unrecognized compensation cost related to non-vested option grants that will be recognized over a remaining vesting period of
2 years.
There
were no grants for the year ended December 31, 2017.
The
following assumptions are used in the Black-Scholes option pricing model for the year ended December 31, 2016.
2016
|
Risk-free
interest rate
|
|
|
1.94
|
%
|
Expected
dividend yield
|
|
|
0.00
|
|
Expected
life
|
|
|
6.0
years
|
|
Expected
volatility
|
|
|
156
|
%
|
Forfeiture
rate
|
|
|
5.0
|
%
|
Weighted average
grant date fair value
|
|
$
|
0.21
|
|
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
Note
2 - Summary of significant accounting policies (continued)
The
following is a summary of all stock options outstanding, and nonvested for the year ended December 31, 2017:
|
|
Number
of Shares
|
|
|
Weighted
Average
|
|
|
|
Employee
|
|
|
Non-
Employee
|
|
|
Totals
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2017 – nonvested
|
|
|
1,193,335
|
|
|
|
-
|
|
|
|
1,193,335
|
|
|
$
|
0.27
|
|
Granted
|
|
|
560,000
|
|
|
|
-
|
|
|
|
560,000
|
|
|
|
0.44
|
|
Vested
|
|
|
(1,183,335
|
)
|
|
|
-
|
|
|
|
(1,183,335
|
)
|
|
|
0.29
|
|
Forfeited
|
|
|
(93,333
|
)
|
|
|
-
|
|
|
|
(93,333
|
)
|
|
|
0.32
|
|
Balance,
December 31, 2017 – nonvested
|
|
|
476,667
|
|
|
|
-
|
|
|
|
476,667
|
|
|
$
|
0.42
|
|
Note
3 - 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 PHMD Sellers, the Escrow Agent, and certain investors in the Company’s
private placement (the “Escrow Agreement”), which escrow funds were paid to the PHMD 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 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 significant shareholder), a private equity
fund that secured our obligation to make the $2,000,000 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.
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 commenced with net cash actually received from and after January 23, 2017, and would 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
and totaled $4,198,043 using the assumption of a 9.7% discount rate over 18 months. On July 12, 2017, the Company entered into
a Termination and Release Agreement with the PHMD Sellers and as of December 31, 2017, whereby no further obligation remains.
See Note 1 – PhotoMedex Acquisition for additional information.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
In
connection with the PhotoMedex Purchase Agreement, on October 4, 2016, ICTV Holdings entered into a transition services agreement
with the PHMD Sellers (the “Transition Services Agreement”), pursuant to which PHMD Sellers had 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 PHMD Sellers’
premises and warehouses, in exchange for which ICTV Holdings was to (i) pay to the PHMD Sellers the documented costs and expenses
incurred by them in connection with the provision of those services; (ii) pay to the PHMD Sellers the documented lease costs including
monthly rental and any utility charges incurred under the applicable leases; (iii) reimburse the PHMD 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 PHMD 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 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
|
|
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
changes in the fair value of the Company’s contingent consideration payable due to PhotoMedex, Inc. for the period up to
the date of the Release Agreement was as follows:
Balance
at January 23, 2017-initial measurement
|
|
$
|
4,198,043
|
|
Contingent
consideration earned but not paid
|
|
|
(570,248
|
)
|
Change
in fair value
|
|
|
(48,035
|
)
|
Balance
at July 12, 2017
|
|
$
|
3,579,760
|
|
Pursuant
to the Release Agreement, as of July 12, 2017, the contingent consideration balance to PhotoMedex totaling $3,579,760 was extinguished.
Therefore, the balance at December 31, 2017 was zero (See Note 1 - PhotoMedex Acquisition).
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
Note
3 - Business and Asset Acquisitions (continued):
The
following unaudited condensed pro forma financial information for the year ended December 31, 2017 and 2016 represent the combined
results of the Company’s operations as if the PhotoMedex Acquisition had occurred on January 1, 2016. Excluded from the
pro forma net loss and net loss per share amounts for the year ended December 31, 2017 are one-time acquisition costs of $49,312
attributable to the PhotoMedex Acquisition and the one-time settlement gain of $1,969,245. 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 year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net
sales
|
|
$
|
35,009,574
|
|
|
$
|
51,119,736
|
|
Net
loss
|
|
$
|
(7,839,414
|
)
|
|
$
|
(10,134,344
|
)
|
Net
loss per share – basic and diluted
|
|
$
|
(0.16
|
)
|
|
$
|
(0.21
|
)
|
Weighted average
number of common shares basic and diluted
|
|
|
50,229,056
|
|
|
|
48,801,918
|
|
The
results of operations for the PhotoMedex acquisition have 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 was to 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.
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 Asset Acquisition, commencing with net cash actually
received by us or our affiliates from and after January 23, 2017 and continuing until the total royalty paid to Ermis Labs totals
$1,750,000; provided, however, that we are required to pay a minimum annual royalty amount of $175,000 on or before December 31
of each year commencing with calendar year ending December 31, 2017. 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 balance of the first payment due by December
31, 2017 was paid subsequent to year end in the amount of $160,417.
The
changes in the Company’s deferred consideration payable due to Ermis Labs, Inc. during the year ended December 31, 2017
was as follows:
Balance
at January 23, 2017 – initial measurement
|
|
$
|
1,131,822
|
|
Consideration
payments
|
|
|
(14,583
|
)
|
Accretion
of interest
|
|
|
94,829
|
|
Balance
at December 31, 2017
|
|
$
|
1,212,068
|
|
|
|
|
|
|
Current
portion
|
|
$
|
241,379
|
|
Non-current
portion
|
|
|
970,689
|
|
|
|
$
|
1,212,068
|
|
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
The
Company accounted for the Ermis Labs purchase as an asset purchase. Under this method of accounting, the total purchase consideration
was allocated to the specific 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
|
|
During
the year ended December 31, 2017, it was determined that the intangible assets were impaired. Accordingly, we recognized an impairment
loss of approximately $1,235,000, the net asset value at the time of impairment. The Company made the decision to impair
the intangible assets in an effort to focus only on ICTV’s core products . In addition, the company also wrote off
Ermis Labs and PhotoMedex acquired inventory of approximately $1,323,000.
Note
4 - Commitments and contingencies
As
of December 31, 2016, we had an active lease through March 2017 related to the office space rented in Wayne, Pennsylvania. 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. In August 2017, we entered into a second amendment to expand our space which increased monthly base rent payments.
Our London office lease became month to month beginning in September 2017. We then signed a new lease on January 1, 2018, through
February 2022. The total monthly cost for our London office is approximately $2,900. In March 2017, our Hong Kong office
entered into a lease expiring in March 2018, which was then renewed until February 2022 for our current office space,
costing approximately $1,900 a month. Our Israel office lease is for a one-year term ending in April 2018, which was then
renewed until April 20, 2019 for approximately $1,900 a month. Rent expense incurred during the year ended December 31,
2017 and 2016 totaled approximately $345,000 and $55,000, respectively.
The
schedule below details the future financial obligations under the active leases.
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
Total
Obligation
|
|
Wayne
- Corporate HQ
|
|
$
|
150,794
|
|
|
$
|
152,492
|
|
|
$
|
154,190
|
|
|
$
|
155,887
|
|
|
$
|
26,028
|
|
|
$
|
639,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Israel
Office
|
|
|
28,400
|
|
|
|
7,600
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
Kingdom Office
|
|
|
34,663
|
|
|
|
34,663
|
|
|
|
34,663
|
|
|
|
34,663
|
|
|
|
5,777
|
|
|
|
144,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hong
Kong Office
|
|
|
22,275
|
|
|
|
22,275
|
|
|
|
22,275
|
|
|
|
22,275
|
|
|
|
3,713
|
|
|
|
92,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Lease Obligations
|
|
$
|
236,132
|
|
|
$
|
217,030
|
|
|
$
|
211,128
|
|
|
$
|
212,825
|
|
|
$
|
35,518
|
|
|
$
|
914,500
|
|
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
Note
4 - Commitments and contingencies (continued)
Legal
Matters
By
letter dated March 23, 2018, the Company’s Board of Directors notified Richard Ransom, President of the Company, that his
employment would be terminated for cause in 30 days unless Mr. Ransom cured the causes for termination, as presented in the letter,
within such 30-day period.
On
April 12, 2018, Mr. Ransom filed a Complaint in the Court of Common Pleas of Philadelphia County, Pennsylvania, naming as defendants
the Company and our CEO, Kelvin Claney. The Complaint alleges that on March 20, 2018, Mr. Ransom was terminated without
cause, pursuant to the terms of Mr. Ransom’s employment agreement, as a result of certain changes to the Company’s
organizational chart and management duties instituted by the Company’s Chief Executive Officer, Kelvin Claney. The
Complaint seeks to recover Mr. Ransom’s severance compensation for a termination without cause, consisting of approximately
$626,000 of base salary thorough the remaining term of his employment agreement; benefits and any performance bonus prorated through
the date of termination; immediate vesting of 150,000 stock options; and 1,000,000 shares of the Company’s common stock.
The Complaint also alleges that the Company and Mr. Claney defamed Mr. Ransom and seeks damages in an unspecified amount in excess
of $50,000.
On
April 18, 2018, the Board of Directors removed Richard Ransom as President of ICTV Brands Inc. (the “Company”) for
cause based upon breaches of Mr. Ransom’s fiduciary duties to the Company.
The
Company and Kelvin Claney deny that any of their actions constituted a termination without cause under the terms of Richard Ransom’s
employment agreement, deny that Mr. Ransom was defamed, and maintain that Mr. Ransom was terminated for cause. Termination
for cause does not give rise to payment of severance compensation under the terms of Mr. Ransom’s employment agreement.
From
time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business.
However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time
to time that may harm our business. Other than the legal proceeding described above, we are currently not aware of any such legal
proceedings or claims that we believe will have a material adverse effect on our business, financial condition, operating results
or cash flows.
Other
matters
Product
Liability Insurance
For
certain products, we were (and are) listed as an additional insured party under the product manufacturer’s insurance policy.
We purchase our own liability insurance, which expired on May 20, 2018. This policy was renewed and will expire May 20, 2019.
At present, management is not aware of any claims against us for any products sold.
Note
5 – Intangible Assets
Intangible
assets as of December 31, 2017 and 2016 consists of the following:
|
|
Useful
Life
|
|
Gross
Carrying
Cost
|
|
|
Accumulated
Amortization
|
|
|
Impairment
Loss
|
|
|
Net
Book
Value
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ermis
Labs Formulations/Trademarks
|
|
5
years
|
|
$
|
1,512,443
|
|
|
$
|
(277,281
|
)
|
|
$
|
(1,235,162
|
)
|
|
$
|
-
|
|
DermaWand®
Purchase
|
|
5
years
|
|
|
1,163,816
|
|
|
|
(581,673
|
)
|
|
|
-
|
|
|
|
582,143
|
|
PhotoMedex
Patented/Unpatented Technology
|
|
5
years
|
|
|
940,628
|
|
|
|
(172,447
|
)
|
|
|
-
|
|
|
|
768,181
|
|
PhotoMedex
Trademarks
|
|
5
years
|
|
|
1,100,000
|
|
|
|
(201,667
|
)
|
|
|
-
|
|
|
|
898,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,716,887
|
|
|
$
|
(1,233,068
|
)
|
|
$
|
(1,235,162
|
)
|
|
$
|
2,248,657
|
|
|
|
Useful
Life
|
|
Gross
Carrying
Cost
|
|
|
Accumulated
Amortization
|
|
|
Impairment
Loss
|
|
|
Net
Book
Value
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DermaWand®
Purchase
|
|
5
years
|
|
$
|
1,163,816
|
|
|
$
|
(290,952
|
)
|
|
|
-
|
|
|
$
|
872,864
|
|
Amortization
expense was approximately $651,000 and $291,000 for the years ended December 31, 2017 and 2016, respectively, of which approximately
$291,000 of amortization expense is included in cost of sales for both years ended December 31, 2017 and 2016, and approximately
$360,000 and $0 is included in general and administrative expenses for the years ended December
31, 2017 and 2016, respectively. Management evaluates the intangible assets for impairment when there is a triggering event.
During the year ended December 31, 2017, it was determined that the intangible assets associated with the Ermis Labs purchase
were impaired. Accordingly, an impairment loss of approximately 1,235,000 was recognized in 2017.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2017 and 2016
Note
5 - Intangibles, net (continued)
The
following table outlines the estimated future amortization expense related to the intangible assets held as of December 31, 2017.
2018
|
|
|
$
|
708,000
|
|
2019
|
|
|
|
690,000
|
|
2020
|
|
|
|
408,000
|
|
2021
|
|
|
|
408,000
|
|
2022
|
|
|
|
35,000
|
|
|
|
|
|
|
|
|
|
|
$
|
2,249,000
|
|
Note
6 – 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 to be paid out as follows:
$300,000 per year for calendar years 2016 through 2019, payable in uniform quarterly installments on or before the last day of
each calendar quarter. As a result, effective January 1, 2016, we are no longer obligated to make royalty payments on sales of
DermaWand®. There shall be no interest charged, and we may, in our sole discretion, at any time without permission or penalty
pre-pay some or all of the purchase price.
Under our old licensing agreement, we had been
assigned the patents, related trademarks, and exclusive commercial rights to DermaWand® based upon a $2.50 per unit fee and
maintaining annual minimum royalty requirements.
As
a result of the agreement, we recorded an offsetting asset and liability at January 1, 2016 in the amount of $1,200,000 for the
asset from the intellectual property acquired and a corresponding liability per the payment schedule. As there is no interest
charged with the purchase agreement we recorded a discount for imputed interest of approximately $37,000, calculated based on
the applicable federal rates at January 22, 2016 of 1.45%, which will be amortized over the term of the agreement using the effective
interest method. The intangible asset balance for the patent and trademark will be amortized using the straight-line method over
the four period of the agreement, which at this time is management’s best estimate of the remaining useful life.
As
of December 31, 2017, and 2016, the other liability balance was approximately $741,000 and $954,000, respectively, net of the
discount for imputed interest of approximately $9,000 and $21,000. The current portion was approximately $370,000 and $289,000
as of December 31, 2017 and 2016. For the years ended December 31, 2017 and 2016, we amortized approximately $12,000 and $15,000
of interest expense related to the discount for imputed interest.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
Note
7 – Long-term Debt to Related Party
On
July 15, 2017, the Company entered into a 30-month secured promissory note (the “Note”), to LeoGroup Private Investment
Access, LLC (the “Holder”), a significant shareholder and hence related party, in the principal amount of $2,000,000
with an effective interest rate of 34%. The Note provides that the Company shall make monthly principal and interest payments
of $100,000 to the Holder for 30 months through January 2020. 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 financial covenants of
the Company and customary events of default. The Company is currently in compliance with this note. 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 the Holder to the Company or a longer period if set forth in the notice
from Holder or if agreed to by the parties, all obligations of the Company under the Note shall be immediately due and payable,
and the Holder may exercise any other remedies available at law or in equity. The note may not be prepaid, in whole or in part,
at any time and from time to time, unless expressly agreed to in writing by the Holder. The total amount of related party interest
expense during the year ended December 31, 2017 was approximately $297,000.
The
balance of the long-term debt at December 31, 2017 is as follows:
Total
debt
|
|
$
|
1,797,049
|
|
Less:
current portion
|
|
|
(722,908
|
)
|
Long-term
debt, net
|
|
$
|
1,074,141
|
|
Maturities
of long-term debt at December 31, 2017, are as follows:
2018
|
|
$
|
722,908
|
|
2019
|
|
|
976,907
|
|
2020
|
|
|
97,234
|
|
|
|
$
|
1,797,049
|
|
Note
8 - Capital transactions
On
January 23, 2017, pursuant to the terms of the securities purchase agreement, dated October 4, 2016, between our Company and the
selling stockholders, we completed a private placement whereby the selling stockholders purchased 8,823,530 shares of common stock
at a price of $0.34 per share, for aggregate gross proceeds of $3,000,000. The issuance of the shares was exempt from registration
under Regulation D and Section 4(2) of the Securities Act of 1933.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2017 and 2016
Note
8 - Capital Transactions (continued):
On
February 1, 2017, pursuant to the terms of the securities purchase agreement, we completed a second and final private placement
whereby the selling stockholders purchased 11,764,713 shares of common stock at a price of $0.34 per share, for aggregate gross
proceeds of $4,000,000. The issuance of the shares was exempt from registration under Regulation D and Section 4(2) of the Securities
Act of 1933. We incurred approximately $17,000 of offering costs related to the private placements for the year ended December
31, 2017.
On
March 16, 2017, we issued 600,000 shares of fully vested common stock as part of a share bonus to three executive officers. The
stock price on date of issuance was $0.56 per share. The recipients of the shares of common stock are key employees of our Company,
and the issuance of the common stock is exempt from registration under Section 4(2) of the Securities Act of 1933. Total stock-based
compensation related to this transaction for the year ended December 31, 2017 was $336,000 and is included in operating expenses
in the accompanying 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 250,001 options previously issued to him, at an exercise price approximately at an average
of $0.22. The exercise resulted in an issuance of 250,001 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
July 10, 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 20,307
shares. The shares were issued as restricted stock, with a restrictive legend placed on the share certificate. The issuance of
the shares was exempt from registration under Regulation D and Section 4(2) of the Securities Act of 1933.
On
October 17, 2017, a former employee exercised 16,667 options previously issued to her, at an exercise price approximately at an
average of $0.22. The exercise resulted in an issuance of 16,667 shares. The shares were issued as restricted stock, with a restrictive
legend placed on the share certificate. The issuance of the shares was exempt from registration under Regulation D and Section
4(2) of the Securities Act of 1933.
Note
9 - Related party transactions
The
spouse and mother-in-law of 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. LeoGroup Private Debt Facility L.P. became a major shareholder as part of the Ermis
Labs Asset Acquisition described in Notes 1 and 3. On July 15, 2017 LeoGroup provided the Company the $2,000,000 30-month secured
promissory note to allow the buyout of the PhotoMedex royalty described in Note 1 and Note 7.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
Note
10 - Basic and diluted earnings (loss) per share
ASC
260, “Earnings Per Share” requires presentation of basic earnings per share and dilutive earnings per share.
The
computation of basic earnings (loss) per share is computed by dividing earnings (loss) available to common shareholders by the
weighted average number of outstanding common shares during the period. Diluted earnings per share gives effect to all dilutive
potential common shares outstanding during the period. The computation of diluted earnings per share does not assume conversion,
exercise or contingent exercise of securities that would have an anti-dilutive effect. At December 31, 2017, there were 5,803,335
stock options outstanding and 5,326,668 were vested and exercisable at an average exercise price of $0.27. The following securities
were not included in the computation of diluted net loss per share as their effect would have been anti-dilutive:
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Options
to purchase common stock
|
|
|
5,803,335
|
|
|
|
5,873,336
|
|
As
the Company was in a loss position for the years ended December 31, 2017 and 2016, all shares were anti-dilutive.
The
computations for basic and fully diluted loss per share are as follows:
For
the year ended December 31, 2017:
|
|
Loss
(Numerator)
|
|
|
Weighted
Average
Shares
(Denominator)
|
|
|
Per
Share
Amount
|
|
Basic
and diluted loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
to common shareholders
|
|
$
|
(6,628,000
|
)
|
|
|
50,229,056
|
|
|
$
|
(0.13
|
)
|
For
the year ended December 31, 2016:
|
|
Loss
(Numerator)
|
|
|
Weighted
Average
Shares
(Denominator)
|
|
|
Per
Share
Amount
|
|
Basic
and diluted loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
to common shareholders
|
|
$
|
(996,344
|
)
|
|
|
28,213,675
|
|
|
$
|
(0.04
|
)
|
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
Note
11 - Income taxes
On
December 22, 2017, new U.S. federal tax legislation, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted. The
new legislation was a significant modification of existing U.S. federal tax law and contained several provisions which impacted
the tax position of the Company in 2017 and will impact the Company’s tax position in future years. Among other things,
the 2017 Tax Act permanently lowered the federal corporate tax rate to 21% from the existing maximum rate of 35%, effective for
tax years including or commencing January 1, 2018. The Company recorded a tax expense of approximately $792,000, with a
corresponding reduction in the valuation allowance, primarily due to a remeasurement of deferred tax assets at the reduced flat
federal corporate tax rate of 21%.
The
provision for income taxes is approximately $204,000 and $0 for the years ended December 31, 2017 and 2016. The provision reflects
an estimated current tax liability associated with the earnings of our foreign subsidiaries. The effective tax rate
is 3.18% for the year ended December 31, 2017, and 0% for the year ended December 31, 2016.
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets
(liabilities) are as follows as of December 31, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
Net
operating loss
|
|
$
|
2,254,000
|
|
|
$
|
1,193,000
|
|
Accrued
returns and allowances
|
|
|
107,000
|
|
|
|
74,000
|
|
Accumulated
depreciation
|
|
|
(14,000
|
)
|
|
|
(4,000
|
)
|
Stock
options
|
|
|
240,000
|
|
|
|
381,000
|
|
Deferred
revenue
|
|
|
67,000
|
|
|
|
225,000
|
|
Other
|
|
|
174,000
|
|
|
|
371,000
|
|
Total
deferred tax assets, net
|
|
$
|
2,828,000
|
|
|
$
|
2,240,000
|
|
Valuation
allowance
|
|
|
(2,828,000
|
)
|
|
|
(2,240,000
|
)
|
Net
deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
As
of December 31, 2017, the Company had approximately $10,193,000
of
gross federal net operating losses and $1,284,000
of
gross state net operating losses available. The Company has provided a full valuation allowance on its net deferred tax assets
as the Company does not have sufficient history of federal, state, and foreign taxable income. The Company does not have
any material uncertain tax positions. The Company’s policy is to recognize interest and penalties related to uncertain
tax positions in general and administrative expenses in the Consolidated Statements of Operations and Comprehensive
Loss. The Company recorded $0 interest and penalties for the years ended December 31, 2017 and 2016.
Due
to the change in ownership provisions of the Internal Revenue Code, the availability of the Company’s net operating loss
carry forwards may be subject to annual limitation against taxable income in future periods, which could substantially limit the
eventual utilization of such carry forwards. The Company has not updated its analysis through December 31, 2017 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 of $3,239,000 available prior to the equity financing is subject to the Internal Revenue
Code Section 382 limitation.
A
reconciliation between the Company’s effective tax rate and the federal statutory rate for the years ended December 31,
2017 and 2016, is as follows:
|
|
2017
|
|
|
2016
|
|
Federal
rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
State
taxes
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Foreign
taxes
|
|
|
3.18
|
%
|
|
|
0.00
|
%
|
Effect
of permanent differences
|
|
|
(3.20
|
)%
|
|
|
(12.81
|
)%
|
Change
in valuation allowance
|
|
|
(14.60
|
)%
|
|
|
(21.19
|
)%
|
Rate
change effect
|
|
|
(16.20
|
)%
|
|
|
0.00
|
%
|
Effective
tax rate
|
|
|
3.18
|
%
|
|
|
0.00
|
%
|
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
Note
12 - Segment reporting
We
operate in the direct to consumer, international third-party distributors, and Airlines and Hong Kong Retail segments which are
engaged in selling of various consumer products primarily through direct marketing channels as well as selling our products through
our international third-party distributor, and certain airlines. 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 sales, or Airlines and Hong Kong Retail sales. Operating expenses are primarily
prorated based on the relationship between segment sales to total sales.
Information
with respect to our operating income (loss) by segment is as follows:
|
|
For
the year ended December 31, 2017
|
|
|
For
the year ended December 31, 2016
|
|
|
|
Direct
to
Consumer
|
|
|
International
Third-Party
Distributor
|
|
|
Airlines
and
Hong Kong
Retail
|
|
|
Totals
|
|
|
Direct
to
Consumer
|
|
|
International
Third-Party
Distributor
|
|
|
Totals
|
|
NET
SALES
|
|
$
|
26,290,827
|
|
|
$
|
3,367,718
|
|
|
$
|
1,799,520
|
|
|
$
|
31,458,065
|
|
|
$
|
12,478,174
|
|
|
$
|
4,310,562
|
|
|
$
|
16,788,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
10,237,954
|
|
|
|
1,549,151
|
|
|
|
844,234
|
|
|
|
12,631,339
|
|
|
|
2,820,869
|
|
|
|
2,177,813
|
|
|
|
4,998,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
16,052,872
|
|
|
|
1,818,568
|
|
|
|
955,286
|
|
|
|
18,826,726
|
|
|
|
9,657,305
|
|
|
|
2,132,749
|
|
|
|
11,790,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
9,862,477
|
|
|
|
325,297
|
|
|
|
98,849
|
|
|
|
10,286,623
|
|
|
|
4,008,049
|
|
|
|
250,128
|
|
|
|
4,258,177
|
|
Selling
and marketing
|
|
|
14,955,835
|
|
|
|
212,756
|
|
|
|
346,290
|
|
|
|
15,514,881
|
|
|
|
8,484,184
|
|
|
|
30,450
|
|
|
|
8,514,634
|
|
Total
operating expenses
|
|
|
24,818,312
|
|
|
|
538,053
|
|
|
|
445,139
|
|
|
|
25,801,504
|
|
|
|
12,492,233
|
|
|
|
280,578
|
|
|
|
12,772,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(loss) income
|
|
$
|
(8,765,440
|
)
|
|
$
|
1,280,515
|
|
|
$
|
510,147
|
|
|
$
|
(6,974,778
|
)
|
|
$
|
(2,834,928
|
)
|
|
$
|
1,852,171
|
|
|
$
|
(982,757
|
)
|
Selected
balance sheet information by segment is presented in the following table as of:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
Direct
to Consumer
|
|
$
|
12,831,747
|
|
|
$
|
4,454,701
|
|
International
Third-Party Distributor
|
|
|
75,854
|
|
|
|
84,713
|
|
Airline/Other
Retail
|
|
|
862,656
|
|
|
|
-
|
|
Total
Assets
|
|
$
|
13,770,257
|
|
|
$
|
4,539,414
|
|
Total
assets by geographical region are as follows:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
United
States
|
|
$
|
8,333,129
|
|
|
$
|
4,539,414
|
|
Hong
Kong
|
|
|
862,656
|
|
|
|
-
|
|
United
Kingdom
|
|
|
3,476,560
|
|
|
|
-
|
|
Israel
|
|
|
1,097,912
|
|
|
|
-
|
|
Total
Assets
|
|
$
|
13,770,257
|
|
|
$
|
4,539,414
|
|
Net
sales by geographical region are as follows:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
United
States
|
|
$
|
24,011,204
|
|
|
$
|
16,788,736
|
|
Hong
Kong
|
|
|
1,799,520
|
|
|
|
-
|
|
United
Kingdom
|
|
|
5,647,341
|
|
|
|
-
|
|
Israel
|
|
|
-
|
|
|
|
-
|
|
Total
Net Sales
|
|
$
|
31,458,065
|
|
|
$
|
16,788,736
|
|
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
Note
13 - Subsequent Events
On
March 6, 2018, the Company entered into an asset purchase agreement (the “Asset Purchase Agreement”), with Therma
Bright Inc., a British Columbia corporation (“Therma Bright”), pursuant to which Therma Bright agreed to acquire certain
assets (the “Purchased Assets”) relating to the Company’s ClearTouch nail phototherapy device (the “Nail
Product”) and no!no!® skin phototherapy device (the “Skin Product and together with the Nail Product, the “Purchased
Products”), excluding, with some exception, any liabilities relating thereto, and excluding any rights to the trademark
or name “no!no!® ” or “no!no!® skin,” (the “no!no!® Trademarks”), for a purchase
price of $2,250,000, subject to certain closing adjustments. The purchase price is to be payable in cash installments commencing
at closing, subject to certain adjustments, through December 31, 2020.
On
April 26, 2018, the Company delivered to Therma Bright written notice of termination of each of the Asset Purchase Agreement,
the Transition Services Agreement, the Patent and Trademark Pledge Agreement and the Sales Representative Agreement, in each case,
pursuant to the terms therein.
Beginning
April 15, 2018, the CEO has voluntarily agreed to a reduction in compensation of $100,000. Reduction does not affect CEO’s
base salary for calculating compensation, in the event of employment termination. As of April 18, 2018, the Office of President
has been closed and duties will be shared between CEO, CFO, VP of Operations, and VP of Sales. Due to a redundancy of duties,
ICTV’s Marketing Department has been restructured between the Operations Department and the Sales Department. Because of
this restructure, the Marketing Department has been eliminated. In-house counsel will also be eliminated as a salaried employee.
On
April 18, 2018, the Board of Directors (the “Board”) of ICTV Brands Inc. (the “Company”) terminated the
employment agreement of its president, Richard Ransom “for cause” as such term is defined in his employment agreement.
The Board terminated Mr. Ransom’s employment agreement as a result of certain breaches thereunder. The Company is
currently performing an internal investigation concerning potential additional breaches by Mr. Ransom of his fiduciary duties
to the Company and other contractual, statutory and common law violations.
On
May 1, 2018, the Board of Directors designated 210,000 shares of the Company’s preferred stock par value $0.001 per share,
as Series A Preferred Stock (the “Series A Preferred Stock”), and authorized the sale of the Series A Preferred Stock
to Kelvin Claney. On May 2, 2018, the Board of Directors of the Company filed the Certificate of Designation, Preferences, Rights
and Limitations of the Series A Preferred Stock with the Nevada Secretary of State.
The
Series A Preferred Stock has dividend rights per share equal to the dividend rights of the Company’s common stock and has
a liquidation preference in the amount of $1.92 per share. Each share of Series A Preferred Stock is entitled to 100 votes on
all matters to be voted upon by the Company’s shareholders. The Series A Preferred Stock is redeemable at the option of
the Company for a redemption price per share of $1.92, plus 8% per annum from the date of issuance until the date of redemption.
If any Series A Preferred Stock is not redeemed within three years from the date of issuance, the holder may convert the Series
A Preferred Stock into common stock at a ratio of eight shares of common stock for each share of Series A Preferred Stock. The
Series A Preferred Stock is a non-certificated security, meaning that no physical certificate is issued and the resolution of
the Board of Directors authorizing the issuance is definitive evidence of their issuance.
On
May 2, 2018, the Company and Kelvin Claney, the Company’s Chief Executive Officer, entered into a subscription agreement
pursuant to which the Company issued to Mr. Claney 210,000 shares of Series A Preferred Stock for cash consideration of $403,200,
or $1.92 per share.
Legal
Matters
By
letter dated March 23, 2018, the Company’s Board of Directors notified Richard Ransom, President of the Company, that his
employment would be terminated for cause in 30 days unless Mr. Ransom cured the causes for termination, as presented in the letter,
within such 30-day period.
On
April 12, 2018, Mr. Ransom filed a Complaint in the Court of Common Pleas of Philadelphia County, Pennsylvania, naming as defendants
the Company and our CEO, Kelvin Claney. The Complaint alleges that on March 20, 2018, Mr. Ransom was terminated without
cause, pursuant to the terms of Mr. Ransom’s employment agreement, as a result of certain changes to the Company’s
organizational chart and management duties instituted by the Company’s Chief Executive Officer, Kelvin Claney. The
Complaint seeks to recover Mr. Ransom’s severance compensation for a termination without cause, consisting of approximately
$626,000 of base salary thorough the remaining term of his employment agreement; benefits and any performance bonus prorated through
the date of termination; immediate vesting of 150,000 stock options; and 1,000,000 shares of the Company’s common stock.
The Complaint also alleges that the Company and Mr. Claney defamed Mr. Ransom and seeks damages in an unspecified amount in excess
of $50,000.
On
April 18, 2018, the Board of Directors removed Richard Ransom as President of ICTV Brands Inc. (the “Company”) for
cause based upon breaches of Mr. Ransom’s fiduciary duties to the Company.
The
Company and Kelvin Claney deny that any of their actions constituted a termination without cause under the terms of Richard Ransom’s
employment agreement, deny that Mr. Ransom was defamed, and maintain that Mr. Ransom was terminated for cause. Termination
for cause does not give rise to payment of severance compensation under the terms of Mr. Ransom’s employment agreement.
From
time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business.
However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time
to time that may harm our business. Other than the legal proceeding described above, we are currently not aware of any such legal
proceedings or claims that we believe will have a material adverse effect on our business, financial condition, operating results
or cash flows.