NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2018 and 2017
(Unaudited)
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 September 30, 2018, 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”).
|
|
|
●
|
ICTV Brands Canada,
Inc. incorporated under the Canada Business Corporations Act.
|
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.
On
July 12, 2018, the Company formed a wholly owned Canadian Entity under the Canada Business Corporations Act. ICTV’s Canadian
Entity is incorporated under the name of ICTV Brands Canada, Inc.
Although
our companies are incorporated in New Zealand, Nevada, Israel, United Kingdom, Hong Kong, Canada, and Brazil, our operations
are currently run from our Wayne, Pennsylvania office.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2018 and 2017
(Unaudited)
Note
1 – Organization and Business of the Company and Liquidity (continued)
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 no!no!®,
a Thermicon® hair removal device, 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.
Liquidity
and Going Concern
Our
condensed 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 $2,012,000 for the nine months ended September 30, 2018 and negative cash flows from operating activities
of approximately $347,000. In addition, we have an accumulated deficit of approximately $18,917,000 as of September 30,
2018. Additional financing will be required for the Company to successfully implement its long-term growth strategy.
To
increase profitability throughout the remainder of 2018 and 2019 and to maintain sufficient cash flow and liquidity, we continue
to optimize media expenses to increase profitable sales,and have eliminated several positions within the Company throughout the
year including our inhouse legal counsel position. We have also combined the marketing department with the operations team to
improve internal efficiencies and decrease overhead costs. We continue to analyze our processes to determine where further overhead
cost cutbacks can be made, and operations can be streamlined to further reduce expenditures.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2018 and 2017
(Unaudited)
Note
1 – Organization and Business of the Company and Liquidity (continued)
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 currently being
addressed. 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 condensed 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
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, 2017. 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 nine months ended September
30, 2018 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 Brands
UK Limited, ICTV Brands Israel Limited, ICTV Brands HK Limited and LK Technology and ICTV Brands Canada, Inc. 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 condensed
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 condensed consolidated financial
statements include the allowance for doubtful accounts, reserves for returns, inventory reserves, valuation allowance on deferred
tax assets, valuation of intangibles, and share based compensation. Actual results could differ from these estimates.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2018 and 2017
(Unaudited)
Note
2 - Summary of significant accounting policies (continued)
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 September 30, 2018, 14% 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, 53% was due from brick and mortar retailers, 9%
was due from e-commerce accounts, 15% was due from live shopping, 5% was due from duty free airline, and 4% was due from miscellaneous
customers.
Major
customers are considered to be those who accounted for more than 10% of net sales. There were no major customers for the three
and nine months ended September 30, 2018 and 2017.
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, accrued liabilities, and notes
payable approximate their fair values 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 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 the Hong Kong Dollar
(HKD), Great Britain Pound (GBP), Israeli Shekel (ILS), and Canadian Dollar (CAD).
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 Condensed Consolidated Statements of Operations and Comprehensive Loss.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2018 and 2017
(Unaudited)
Note
2 - Summary of significant accounting policies (continued)
Accounts
receivable
Accounts
receivable are recorded net of allowances for returns and doubtful accounts of approximately $869,000 and $913,000 as of September
30, 2018 and December 31, 2017, 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. In addition, an accrual is made
for contract fees deducted by the customer. The amounts of these accruals included in accounts payable and accrued liabilities
in our Condensed Consolidated Balance Sheets were approximately $103,000 and $180,000 as of September 30, 2018 and December 31,
2017, respectively.
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 $289,000 and $247,000 as of September 30, 2018 and December 31, 2017, respectively.
Included in inventory at September 30, 2018 and December 31, 2017 is approximately $55,000 and $51,000, 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 and amortization 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 and amortization
is computed using the straight-line method. Leasehold improvements are depreciated over the lesser of the 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 and amortization expense amounted to approximately $59,000 and $177,000 and $51,000
and $129,000 for the three and nine months ended September 30, 2018 and 2017, respectively.
Property
and equipment consisted of the following at:
|
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
|
Computer hardware and software
|
|
$
|
209,509
|
|
|
$
|
154,061
|
|
|
Furniture and equipment
|
|
|
908,701
|
|
|
|
907,586
|
|
|
Leasehold improvements
|
|
|
55,840
|
|
|
|
55,840
|
|
|
|
|
|
1,174,050
|
|
|
|
1,117,487
|
|
|
Accumulated depreciation
and amortization
|
|
|
(407,484
|
)
|
|
|
(230,394
|
)
|
|
Property and
equipment, net
|
|
$
|
766,566
|
|
|
$
|
887,093
|
|
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2018 and 2017
(Unaudited)
Note
2 - Summary of significant accounting policies (continued)
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 $175,000 and $525,000
and $251,000 and $692,000 for the three and nine months ended September 30, 2018 and 2017, 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 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 nine months ended September 30, 2018 and 2017.
Revenue
recognition
On
January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with
Customers,
which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts
with customers that supersedes most current revenue recognition guidance. The updated guidance, and subsequent clarifications,
collectively referred to as ASC 606, require an entity to recognize revenue when it transfers control of promised goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services.
There
was no significant impact to the statement of operations and comprehensive loss as the Company’s existing revenue policies
are in line with ASC 606.
We
recognize revenue when control of the promised goods or services is transferred to its customers in an amount that reflects the
consideration expected to be entitled to in exchange for those goods or services. Our products are sold direct to consumers through
direct response television, live home shopping, and e-commerce market places, as well as to retailers. We distribute product to
international third-party distributors who purchase the products at wholesale pricing and sell it at an agreed upon price stipulated
in the contracts. We also sell product to consumers through consignment arrangements with certain airlines and retailers in Hong
Kong who sell products to consumers through in-flight magazines, duty-free carts, or sales counters.
We
recognize revenue when performance obligations identified under the terms of the contracts with its customers are satisfied, which
generally occurs upon transfer of control in accordance with the contractual terms and conditions of the sale. The majority of
our revenue is recognized when product is shipped to the customer. Revenue is measured as the amount of consideration we receive
upon shipment. Variable consideration includes various fees charged to us for cooperative advertising, marketing development,
chargebacks, other fees and returns. The Company separately offers extended warranties that are separate performance obligations
for which the associated revenue is recognized over-time based on the extended warranty period. The revenue recognition for each
of our segments are described below.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2018 and 2017
(Unaudited)
Note
2 - Summary of significant accounting policies (continued)
Direct
to consumer
Our
direct to consumer segment includes sales of product directly to end users via infomercials produced by ICTV classified as Direct
Response Television (“DRTV”). Revenue is recognized at the point of sale time which is upon shipment to the customer.
Also included are products sold to live home shopping networks. Products sold to live home shopping networks are recognized at
a point in time which is upon shipment to the live home shopping network, often with the right to return unsold products. Revenue
related to our DermaVital® continuity program is recognized monthly upon shipment to customers.
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
the control of goods has transferred to the customer 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.
Retail
We
generate revenue from products sold to retailers and are payable upon satisfaction of the performance obligation. Revenue is recognized
at a point in time. Certain retailers have the right to return unsold products. We generally extend credit terms to our retail
customers based on their creditworthiness. Revenue is recorded at the time of shipment.
International
third-party distributors
We
generate revenue through the sale of products to international third-party distributors who in-turn sell the products to the consumer.
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. Revenue is recognized at a point in time when product is shipped to the customer. International
third-party distributors are required to pay a deposit before shipment. As of September 30, 2018, and December 31, 2017, we recorded
deposits for international third-party distributors of approximately $202,000 and $404,000, respectively, in deferred revenue,
current portion.
Airlines
and Hong Kong Retail
We
sell products to consumers through consignment arrangements with certain airlines and retailers in Hong Kong to sell products
to consumers through in-flight magazines, duty-free carts, or in-store counters. We control the goods shipped to the consignees
until control of the goods has transferred to the customer. Control is considered transferred to a customer upon payment for goods
of which we set the price for this activity. We act as the consignor and the principal, and accordingly, we record consignment
sales on a gross basis, once the transfer of control of goods has been passed to the customer. Goods on consignment remain in
our inventory until the product has been sold and control of the goods has transferred.
Warranty
We
sell warranties on our products for various terms. Customers are offered the option to purchase an extended warranty separate
from the product sale for 1 to 5 years. Revenue is recognized ratably over the term, with the unearned warranty included in deferred
revenue on the accompanying condensed consolidated balance sheets.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2018 and 2017
(Unaudited)
Note
2 - Summary of significant accounting policies (continued)
Variable
consideration
The
amount of consideration we receive, and revenues recognized across our multi sales channels varies with changes in sales returns
and other accommodations and incentives we offer to our customers. When we give our customers the right to return products or
provide other accommodations such as chargebacks, promotional discounts, and rebates, we estimate the expected returns and claims
based on historical rates as well as events and circumstances that indicate changes to historical rates of product returns and
claims. We adjust our estimates of revenue at the earlier of when the most likely amount of consideration we expect to receive
changes or when the amount of consideration becomes fixed.
Judgments
We
have a return policy whereby the customer can return any product received within 30 days or 60 days of receipt for a full refund.
We accrue a reserve for product returns with respect to sales of product when a right of return exists. We accrue a reserve for
product returns and customer refunds at the time of sale based on our historical experience. We also accrue for contract fees
based on historical experience of our retail customers, as well as expected fees as documented in our retail contracts. The provision
for estimated returns as of September 30, 2018 and December 31, 2017 was approximately $605,000 and $747,000, respectively, and
has been included in the allowance for returns and doubtful accounts in the accompanying condensed consolidated balance sheets.
The reserve for customer refunds and contract fees payable was approximately $103,000 at September 30, 2018 and $180,000 at December
31, 2017 and has been included in accounts payable and accrued liabilities in the accompanying condensed consolidated balance
sheets. The amount of goods to be returned to inventory was determined to be immaterial.
For
the three and nine months ended September 30, 2018 and 2017, we recorded sales returns of approximately $692,000 and $3,063,000
and $1,225,000 and $4,530,000 respectively, as a reduction of net sales.
Sales
taxes
Sales
and similar taxes that are imposed on our sales and collected from customers are excluded from net sales.
Shipping
and handling costs
Costs
for shipping and handling costs, including those activities that occur subsequent to transfer of control to the customer, are
recorded as cost of sales and expensed as incurred. We accrue costs for shipping and handling activities that occur after control
of the promised goods has transferred to the customer. Revenue from shipping and handling charges was approximately $203,000 and
$810,000 and $427,000 and $1,550,000 for the three and nine months ended September 30, 2018 and 2017, respectively.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2018 and 2017
(Unaudited)
Note
2 - Summary of significant accounting policies (continued)
Remaining
Performance Obligations
As
part of our adoption of the new revenue standard, we have elected to use a practical expedient to exclude disclosure of transaction
prices allocated to remaining performance obligations, and when we expect to recognize such revenue, for all periods prior to
the date of initial application of the standard.
As
of September 30, 2018, approximately $302,000 is expected to be recognized from remaining performance obligations for warranty
revenue. We expect to recognize revenue for these remaining performance obligations during the next five years approximately as
follows:
|
|
|
Remaining
Three Months 2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Deferred Warranty Revenue
from remaining
|
|
$
|
44,000
|
|
|
$
|
126,000
|
|
|
$
|
69,000
|
|
|
$
|
42,000
|
|
|
$
|
19,000
|
|
|
$
|
2,000
|
|
Disaggregation
of revenue
The
following table shows the Company’s revenues disaggregated by reportable segment:
|
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Direct to Consumer
|
|
$
|
4,233,444
|
|
|
$
|
5,401,048
|
|
|
$
|
13,155,589
|
|
|
$
|
17,719,533
|
|
|
International Third-Party Distributors
|
|
|
334,856
|
|
|
|
380,755
|
|
|
|
1,807,245
|
|
|
|
1,842,373
|
|
|
Retail
|
|
|
438,951
|
|
|
|
1,377,613
|
|
|
|
4,864,526
|
|
|
|
2,226,044
|
|
|
Airlines/Hong
Kong Retail
|
|
|
476,658
|
|
|
|
400,338
|
|
|
|
1,639,411
|
|
|
|
1,368,999
|
|
|
|
|
$
|
5,483,909
|
|
|
$
|
7,559,754
|
|
|
$
|
21,466,771
|
|
|
$
|
23,156,949
|
|
The
following table provides information about contract assets which includes accounts receivable, and contract liabilities which
includes deferred revenue and accrued returns and contract fees payable from contracts with customers:
|
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
|
Accounts
receivable, net of allowance for returns of $604,664 and $747,269, respectively, and doubtful accounts of $264,498 and $166,034,
respectively
|
|
$
|
2,208,095
|
|
|
$
|
3,576,376
|
|
|
Total
contract assets
|
|
$
|
2,208,095
|
|
|
$
|
3,576,376
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
504,390
|
|
|
$
|
598,378
|
|
|
Accrued returns
and contract fees payable
|
|
|
102,980
|
|
|
|
179,922
|
|
|
Total
contract liabilities
|
|
$
|
607,370
|
|
|
$
|
778,300
|
|
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2018 and 2017
(Unaudited)
Note
2 - Summary of significant accounting policies (continued)
Research
and Development
Research
and development costs are expensed as incurred and are included in selling and marketing expense in the accompanying condensed
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, and certifications for international regulations
and standards. Research and development costs approximated $57,000 and $134,000 and $146,000 and $210,000 for the three and nine
months ended September 30, 2018 and 2017, 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 condensed 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.
We incurred approximately $1,414,000 and $5,212,000 and $2,000,000 and $5,578,000 in media costs for airing of television
and print advertising, $727,000 and $2,617,000 and $1,243,000 and $3,332,000 in internet marketing costs, and $31,000 and $114,000
and $113,000 and $260,000 in productions costs for the three and nine months ended September 30, 2018 and 2017, respectively.
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 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2018 and 2017
(Unaudited)
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 September 30, 2018, 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 September 30, 2018, 3,888,335 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.
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. On January 1, 2018, we adopted the provisions of ASU 2017-09
prospectively which did not have a material impact on our condensed consolidated financial statements.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2018 and 2017
(Unaudited)
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 nine months ended September 30, 2018 and 2017:
|
|
|
Number
of Shares
|
|
|
Weighted
Average
|
|
|
|
|
Employee
|
|
|
Non-Employee
|
|
|
Totals
|
|
|
Exercise
Price
|
|
|
Balance,
January 1, 2018
|
|
|
3,993,335
|
|
|
|
-
|
|
|
|
3,993,335
|
|
|
$
|
0.27
|
|
|
Granted
during the year
|
|
|
1,555,000
|
|
|
|
-
|
|
|
|
1,555,000
|
|
|
|
0.26
|
|
|
Exercised
during the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled
during the year
|
|
|
(700,000
|
)
|
|
|
-
|
|
|
|
(700,000
|
)
|
|
|
0.33
|
|
|
Forfeited
during the year
|
|
|
(910,000
|
)
|
|
|
-
|
|
|
|
(910,000
|
)
|
|
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2018
|
|
|
3,938,335
|
|
|
|
-
|
|
|
|
3,938,335
|
|
|
$
|
0.21
|
|
|
|
|
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
|
|
|
280,000
|
|
|
|
-
|
|
|
|
280,000
|
|
|
|
0.49
|
|
|
Exercised
during the year
|
|
|
(136,667
|
)
|
|
|
-
|
|
|
|
(136,667
|
)
|
|
|
0.15
|
|
|
Forfeited
during the year
|
|
|
(93,333
|
)
|
|
|
-
|
|
|
|
(93,333
|
)
|
|
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2017
|
|
|
3,730,002
|
|
|
|
-
|
|
|
|
3,730,002
|
|
|
$
|
0.26
|
|
Of
the stock options outstanding as of September 30, 2018 under the Stock Option Plans, 3,433,335 options are currently vested
and exercisable. The weighted average exercise price of these options was $0.23. These options expire through January 2028.
The
aggregate intrinsic value for options outstanding and exercisable at September 30, 2018 and 2017 was approximately $0 and $618,000,
respectively. The aggregate intrinsic value for stock options exercised during the nine months ended September 30, 2017 was approximately
$49,000.
On
January 9, 2018, we issued options to purchase 1,050,000 shares of the Company’s common stock to six employees, at an exercise
price of $0.33 per share. Three of those employees were terminated in the second quarter of 2018, resulting in the forfeiture
of their unvested options to purchase, in the aggregate, 600,000 shares of common stock. On June 21, 2018, the remaining
three employees voluntarily surrendered their options to purchase, in the aggregate, 450,000 shares of common stock, in consideration
of a future stock grant. On June 21, 2018, we issued 400,000 shares of common stock to such remaining three employees, Kelvin
Claney, CEO, Douglas Crouthers, Interim President and VP of Sales, and Vincent Dargush, VP of Marketing and Operations, at a fair
value of $0.10 per share based on the closing of the Company’s common stock on the date of issuance, in consideration
of the surrender of previously granted options and, in each case, as a share bonus, which was immediately vested, for performance
in the second quarter of 2018. Also, on June 21, 2018, we issued 300,000 shares of common stock to Ernest P. Kollias, Jr., CFO,
at a fair value of $0.10 per share based on the closing of the Company’s common stock on the date of issuance,
also as a share bonus, in consideration for performance during the second quarter of 2018, which was immediately vested. The shares
issued on June 21, 2018 are restricted for a period of six months from issuance. 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.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2018 and 2017
(Unaudited)
Note
2 - Summary of significant accounting policies (continued)
The
Company follows the provisions of ASC Topic 718 “Compensation — Stock Compensation” which requires the measurement
and recognition of compensation expense for all share-based payment awards either modified or granted to employees and directors
based upon estimated fair values. The 600,000 options forfeited were not vested at the time of forfeiture and therefore resulted
in a reversal of previously recognized compensation expense in the amount of approximately $12,000. The result of the modification
of issuing 400,000 shares of fully-vested common stock in replacement of 450,000 options surrendered, as noted above, was to immediately
recognize the fair value of the original options granted totaling approximately $124,000 and the incremental change in fair value
of the replacement awards, which was de minimis to share based compensation expense.
On
November 30, 2017, Philip Solomon was granted 250,000 stock options.
On July 9, 2018, the Board of Directors authorized the issuance of common stock to Phillip Solomon for the replacement
of 250,000 surrendered stock options. Mr. Solomon surrendered these options in consideration of fully-vested
100,000 shares of the Company’s Common Stock. The fair value of the shares was the closing price of the Company’s
common stock on July 9, 2018, which was $0.10.
The
Company follows the provisions of ASC Topic 718 “Compensation — Stock Compensation” which requires the measurement
and recognition of compensation expense for all share-based payment awards either modified or granted to employees and directors
based upon estimated fair values. The result of the modification of issuing 100,000 shares of common stock in replacement of 250,000
options surrendered, as noted above, was to immediately recognize the fair value of the original options granted totaling approximately
$76,000 to share based compensation expense, and there was no incremental increase in fair value of the replacement awards.
For
the three and nine months ended September 30, 2018 and 2017, we recorded approximately $98,000 and $268,000, and $59,000
and $205,000, respectively, in stock compensation expense under the Stock Option Plans. At September 30, 2018, there was
approximately $7,000 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 weighted average assumptions are used in the Black-Scholes option pricing model for the nine months ended September
30, 2018 and 2017 to value the stock options granted during the period:
|
2018
|
|
2017
|
|
Risk-free
interest rate
|
|
|
2.84
|
%
|
|
Risk-free
interest rate
|
|
|
2.17
|
%
|
|
Expected
dividend yield
|
|
|
0
|
%
|
|
Expected
dividend yield
|
|
|
0
|
%
|
|
Expected
life
|
|
|
6
years
|
|
|
Expected
life
|
|
|
6
years
|
|
|
Expected
volatility
|
|
|
142.79
|
%
|
|
Expected
volatility
|
|
|
145
|
%
|
|
Weighted
average grant date fair value
|
|
$
|
0.26
|
|
|
Weighted
average grant date fair value
|
|
$
|
0.46
|
|
|
Forfeiture
rate
|
|
|
0
|
%
|
|
Forfeiture
rate
|
|
|
5
|
%
|
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2018 and 2017
(Unaudited)
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 nine months ended September 30,
2018 and 2017:
|
|
|
Number
of Shares
|
|
|
|
|
|
|
|
Employee
|
|
|
Non
- Employee
|
|
|
Totals
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2018
|
|
|
333,333
|
|
|
|
1,476,667
|
|
|
|
1,810,000
|
|
|
$
|
0.31
|
|
|
Granted
during the year
|
|
|
-
|
|
|
|
400,000
|
|
|
|
400,000
|
|
|
|
0.11
|
|
|
Exercised
during the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Expired
during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Balance,
September 30, 2018
|
|
|
333,333
|
|
|
|
1,876,667
|
|
|
|
2,210,000
|
|
|
$
|
0.26
|
|
|
|
|
Number
of Shares
|
|
|
|
|
|
|
|
Employee
|
|
|
Non
- Employee
|
|
|
Totals
|
|
|
Weighted
Average
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,
September 30, 2017
|
|
|
333,333
|
|
|
|
1,476,667
|
|
|
|
1,810,000
|
|
|
$
|
0.31
|
|
Of
the stock options currently outstanding outside of the Stock Option Plans at September 30, 2018, 1,935,000 options are currently
vested and exercisable. The weighted average exercise price of these options was $0.30. These options expire through January 2026.
The aggregate intrinsic value for options outstanding and exercisable at September 30, 2018 and 2017 was approximately $0 and
$411,000, respectively. There were no options exercised during the nine months ended September 30, 2018. The aggregate
intrinsic value for stock options exercised during the nine months ended September 30, 2017 was approximately $40,000.
For
the three and nine months ended September 30, 2018 and 2017, we recorded approximately $9,000 and $18,000, and $5,000 and $18,000,
respectively in stock compensation expense related to stock options outside of the Stock Option Plans. At September 30, 2018,
there is approximately, $9,000 of remaining unrecognized compensation cost that will be recognized over the remaining
service period of 3 years. Change in the fair value of the options issued to non-employees, as of September 30, 2018 was de
minimis.
The
following weighted average assumptions are used in the Black-Scholes option pricing model for the nine months ended September
30, 2018 and 2017 to value the stock options granted during the period:
|
2018
|
|
Risk-free
interest rate
|
|
|
2.77
|
%
|
|
Expected
dividend yield
|
|
|
0.00
|
%
|
|
Expected
life
|
|
|
3
years
|
|
|
Expected
volatility
|
|
|
143.03
|
%
|
|
Weighted
average grant date fair value
|
|
$
|
0.11
|
|
There
were no options granted for the nine months ended September 30, 2017.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2018 and 2017
(Unaudited)
Note
2 - Summary of significant accounting policies (continued)
The
following is a summary of all stock options outstanding and nonvested for the nine months ended September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
|
|
|
|
|
Employee
|
|
|
Non-
Employee
|
|
|
Totals
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2018
|
|
|
476,667
|
|
|
|
-
|
|
|
|
476,667
|
|
|
$
|
0.42
|
|
|
Granted
during the period
|
|
|
1,555,000
|
|
|
|
400,000
|
|
|
|
1,955,000
|
|
|
|
0.23
|
|
|
Vested
during the period
|
|
|
(10,000
|
)
|
|
|
(125,000
|
)
|
|
|
(135,000
|
)
|
|
|
0.11
|
|
|
Cancelled
during the period
|
|
|
(700,000
|
)
|
|
|
-
|
|
|
|
(700,000
|
)
|
|
|
0.33
|
|
|
Forfeited
during the period
|
|
|
(816,667
|
)
|
|
|
-
|
|
|
|
(816,667
|
)
|
|
|
0.36
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2018
|
|
|
5
05,000
|
|
|
|
275,000
|
|
|
|
7
80,000
|
|
|
$
|
0.14
|
|
Recently
Issued Accounting Pronouncements
In
August 2018, the Financial Accounting Standards Board (“FASB”), issued Accounting Standards Update (“ASU”),
2018-13 that eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities
to disclose certain new information and modifies some disclosure requirements. The FASB developed the amendments to Accounting
Standards Codification (“ASC”) 820 as part of its broader disclosure framework project, which aims to improve the
effectiveness of disclosures in the notes to financial statements by focusing on requirements that clearly communicate the most
important information to users of the financial statements. The new guidance is effective for all entities for fiscal years beginning
after December 15, 2019 and for interim periods within those fiscal years. An entity is permitted to early adopt either the entire
standard or only the provisions that eliminate or modify requirements. We are currently evaluating the effect of this guidance
on our disclosure.
In
June 2018, the FASB issued ASU 2018-07
Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based
Payment Accounting.
This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making
the guidance consistent with the accounting for employee share-based compensation. It is effective for annual reporting periods,
and interim periods within those years, beginning after December 15, 2018. We are currently in the process of evaluating the impact
of the adoption of ASU 2018-07 on its condensed consolidated financial statements.
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 condensed consolidated financial statements.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases
(Topic 842), which requires lessees to recognize on the balance
sheet assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition,
measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend primarily on its classification
as a finance or operating lease. However, unlike current GAAP-which requires only capital leases to be recognized on the balance
sheet-the new ASU will require both types of leases to be recognized on the balance sheet. The ASU will take effect for public
companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. This ASU can be
applied at the beginning of the earliest period presented using the modified retrospective approach, which includes certain practical
expedients that an entity may elect to apply, including an election to use certain transition relief.
In
July 2018, the FASB issued
ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic
842
): Targeted Improvements, which make improvements to Accounting Standards Codification (“ASC”) 842 and allow
entities to not restate comparative periods in transition to ASC 842 and instead report the comparative periods under ASC 840.
The Company plans to adopt this standard using the modified retrospective approach in the first quarter of fiscal 2019, coinciding
with the standard’s effective date. While the Company is still evaluating this ASU and related updates, the Company has
determined that the primary impact will be to recognize on the balance sheet material right-of-use assets and material lease obligations
for all leases with lease terms greater than 12 months.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2018 and 2017
(Unaudited)
Note
2 - Summary of significant accounting policies (continued)
Reclassifications
Certain
prior period amounts have been reclassified for consistency with the current period presentation of Retail as a reportable segment,
as well as the amortization and depreciation being combined on the Statement of Cash Flows for 2017. These reclassifications had
no effect on the reported results of operations.
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 Private Debt Facility 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, 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, whereby afterward no further
obligation remained.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2018 and 2017
(Unaudited)
Note
3 - Business and Asset Acquisitions (continued)
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.
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 both September 30, 2018 and December 31, 2017 was zero.
The
following unaudited condensed pro forma financial information for the nine months ended September 30, 2018 and 2017 represent
the combined results of the Company’s operations as if the PhotoMedex Acquisition had occurred on January 1, 2017. Excluded
from the pro forma net loss and net loss per share amounts for the nine months ended September 30, 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 three months ended September 30,
|
|
|
For
the nine months ended September 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Net
sales
|
|
$
|
5,483,909
|
|
|
$
|
7,559,754
|
|
|
$
|
21,466,771
|
|
|
$
|
26,695,949
|
|
|
Net
loss
|
|
$
|
(1,293,637
|
)
|
|
$
|
(2,356,103
|
)
|
|
$
|
(2,012,136
|
)
|
|
$
|
(3,858,089
|
)
|
|
Net
loss per share – basic and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.08
|
)
|
|
Weighted
average number of common shares basic and diluted
|
|
|
53,132,004
|
|
|
|
52,321,826
|
|
|
|
52,633,008
|
|
|
|
49,518,478
|
|
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.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2018 and 2017
(Unaudited)
Note
3 - Business and Asset Acquisitions (continued)
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. All of the assets acquired from Ermis Labs
were determined to be impaired and written off at December 31, 2017.
The
changes in the Company’s deferred consideration payable due to Ermis Labs, Inc. during the nine months ended September 30,
2018:
|
Balance
at December 31, 2017
|
|
$
|
1,212,067
|
|
|
Consideration
payments
|
|
|
(160,414
|
)
|
|
Accretion
of interest
|
|
|
70,527
|
|
|
Balance
at September 30, 2018-related party
|
|
$
|
1,122,180
|
|
|
|
|
|
|
|
|
Current
portion
|
|
$
|
86,392
|
|
|
Non-current
portion
|
|
|
1,035,788
|
|
|
|
|
$
|
1,122,180
|
|
For
the nine months ended September 30, 2018, consideration payments represented the remaining minimum royalty for the calendar year
ended December 31, 2017. We did not incur any royalties for sales of products for both the nine months ended September 30, 2018
and 2017. Interest expense was approximately $23,500 and $71,000 for the three and nine months ended September 30, 2018, respectively,
and approximately $23,700 and $69,300 for the three months and nine months ended September 30, 2017, respectively
Note
4 - Fair Value Measurements
We
evaluate assets and liabilities subject to fair value measurements on a recurring and non-recurring basis to determine the appropriate
level to classify them for each reporting period. This determination requires significant judgments to be made by the Company.
The following table sets forth our liabilities that were measured at fair value as of September 30, 2018, by level within the
fair value hierarchy:
|
|
|
Amounts
at
|
|
|
Fair
Value Measurement
|
|
|
|
|
Fair
Value
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Note
Payable to AOR
|
|
$
|
298,719
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
298,719
|
|
|
Total
liabilities measured at fair value
|
|
$
|
298,719
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
298,719
|
|
The
note payable due to AOR, LLC is a Level 3 fair value measurement. The fair value of our liability was determined based on unobservable
inputs that are not corroborated by market date, if available, when determining fair value.
The
initial fair value of the note was determined to approximate its carry value. The change in fair value for the period ending September
30, 2018 was de minimis.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2018 and 2017
(Unaudited)
Note
4 - Fair Value Measurements (continued)
There
is no active market for the debt and the value was based on the payment terms in addition to other facts and circumstances. The
fair value of the convertible note was based on a probability-adjusted model, which entailed management estimating the probability
of (i) exercising the early payment option and (ii) paying off the note according to the original terms. Factors affecting this
estimate included the Company’s current financial position, financing plans, and operating objectives.
The
Company has evaluated the estimated fair value of financial instruments using available market information and management’s
estimates. The use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated
fair value amounts. The Company bases its estimates on historical experience and various other assumptions that it believes to
be reasonable under the circumstances. Actual results may differ from management’s estimates if these results differ from
historical experience or other assumptions do not prove to be substantially accurate, even if such assumptions are reasonable
when made.
Note
5 - Commitments and contingencies
We
entered a lease from March 2017 through February 2022 related to the office space in Wayne, Pennsylvania. In August 2017, we entered
an amendment to expand our space, which increased the monthly base payments. Effective August 1, 2018, we terminated
after one year the amendment for the additional space and reduced our payments to approximately $9,000 per month. Beginning
January 1, 2018, we signed a new lease for our UK office effective through February 2022. The total monthly cost for our UK 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, 2019 for approximately $1,900 a month. Rent expense incurred during
the three and nine months ended September 30, 2018 and 2017 totaled approximately $51,000 and $179,000 and $83,000 and $224,000
respectively.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2018 and 2017
(Unaudited)
Note
5 - Commitments and contingencies (continued)
The
schedule below details the future financial obligations under the active leases:
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wayne
- Corporate HQ
|
|
$
|
29,470
|
|
|
$
|
119,015
|
|
|
$
|
120,309
|
|
|
$
|
121,633
|
|
|
$
|
20,309
|
|
|
$
|
410,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Israel
Office
|
|
|
5,700
|
|
|
|
7,600
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UK
Office
|
|
|
8,666
|
|
|
|
34,663
|
|
|
|
34,663
|
|
|
|
34,663
|
|
|
|
5,777
|
|
|
|
118,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hong
Kong Office
|
|
|
5,569
|
|
|
|
22,275
|
|
|
|
22,275
|
|
|
|
22,275
|
|
|
|
3,713
|
|
|
|
76,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Lease Obligations
|
|
$
|
49,405
|
|
|
$
|
183,553
|
|
|
$
|
177,247
|
|
|
$
|
178,571
|
|
|
$
|
29,799
|
|
|
$
|
618,575
|
|
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 (the “Court”),
naming as defendants the Company and our CEO, Kelvin Claney. On May 3, 2018, the Company filed its Preliminary Objections
to the Complaint with the Court. On May 22, 2018, Mr. Ransom withdrew the Complaint and filed an Amended Complaint. On or about
June 11, 2018, the Company filed its Preliminary Objections to the Amended Complaint. Thereafter, the Court denied the Company’s
Preliminary Objections. The Amended 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
Amended 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 Amended 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 October 29, 2018, the Company filed its Answer to the Amended Complaint denying the allegations
therein and made certain Counterclaims against Mr. Ransom. The Counterclaims allege that Mr. Ransom was terminated for Cause
and seeks a Declaratory Judgment requesting same. The Counterclaims also allege that Mr. Ransom breached his fiduciary duty
to the Company and misappropriated and/or converted assets of the Company for his own personal benefit. As a result, the
Company seeks damages from Mr. Ransom in an unspecified amount in excess of $50,000.
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
.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2018 and 2017
(Unaudited)
Note
5 - Commitments and contingencies (continued)
Other
matters
Product
Liability Insurance
For
certain products, we were (and are) listed as an additional insured party under the product manufacturer’s insurance policy.
We purchase our own liability insurance which will expire May 20, 2019. At present, management is not aware of any claims against
us for any products sold.
Note
6 – Intangible Assets
Intangible
assets as of September 30, 2018 and December 31, 2017 consists of the following:
|
|
|
Useful
Life
|
|
|
Gross
Carrying
Cost
|
|
|
Accumulated
Amortization
|
|
|
Impairment
Loss
|
|
|
Net
Book
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DermaWand®
Purchase
|
|
5
years
|
|
|
$
|
1,163,816
|
|
|
$
|
(800,725
|
)
|
|
$
|
-
|
|
|
$
|
363,091
|
|
|
PhotoMedex
Patented/Unpatented Technology
|
|
5
years
|
|
|
|
940,628
|
|
|
|
(313,540
|
)
|
|
|
-
|
|
|
|
627,088
|
|
|
PhotoMedex
Trademarks
|
|
5
years
|
|
|
|
1,100,000
|
|
|
|
(366,667
|
)
|
|
|
-
|
|
|
|
733,333
|
|
|
Total
|
|
|
|
|
$
|
3,204,444
|
|
|
$
|
(1,480,932
|
)
|
|
$
|
-
|
|
|
$
|
1,723,512
|
|
|
|
|
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
|
)
|
|
|
-
|
|
|
|
893,333
|
|
|
Total
|
|
|
|
|
$
|
4,716,887
|
|
|
$
|
(1,233,068
|
)
|
|
$
|
(1,235,162
|
)
|
|
$
|
2,248,657
|
|
Amortization
expense was approximately $175,000 and $525,000 and $251,000 and $692,000 for the three and nine months ended September
30, 2018 and 2017, respectively, of which approximately $73,000 and $219,000 of amortization expense is included
in cost of sales for the three and nine months ended September 30, 2018 and $73,000 and $218,000 for the three and nine
months ended September 30, 2017, and approximately $102,000 and $306,000 is included in general and administrative expenses
for the three and nine months ended September 30, 2018, and $178,000 and $474,000 is included in general and administrative
expenses for the three and nine months ended September 30, 2017, respectively. Management evaluates the intangible assets for
impairment when there is a triggering event.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2018 and 2017
(Unaudited)
Note
6 – Intangible Assets (continued)
The
following table outlines the estimated future amortization expense related to the intangible assets held as of September 30, 2018:
|
2018
(remaining three months)
|
|
$
|
175,000
|
|
|
2019
|
|
|
699,000
|
|
|
2020
|
|
|
408,000
|
|
|
2021
|
|
|
408,000
|
|
|
2022
|
|
|
34,000
|
|
|
Total
|
|
$
|
1,724,000
|
|
Note
7 – DermaWand® Purchase Agreement
On
January 22, 2016, we entered into a Purchase Agreement with Omega 5 Technologies, Inc. to acquire the worldwide ownership of the
DermaWand® patent and all related trademarks and intellectual property for the sum of $1,200,000 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 September 30, 2018, the liability balance was approximately $522,000 net of the discount for imputed interest of approximately
$3,000 and is classified as other liabilities on the condense consolidated balance sheets. For the three and nine months
ended September 30, 2018 and 2017, we amortized approximately $1,000 and $5,000 and $3,000 and $9,000, respectively, of
interest expense related to the discount for imputed interest.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2018 and 2017
(Unaudited)
Note
8 – Long-term Debt to Related Party
On
July 15, 2017, the Company entered 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 three and nine months ended September 30, 2018 was approximately $116,000 and $392,000. There was interest
expense of approximately $140,000 for both the three and nine months ended September 30, 2017.
The
balance of the long-term debt as of September 30, 2018 and December 31, 2017 was as follows:
|
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
|
Total
Debt
|
|
$
|
1,289,240
|
|
|
$
|
1,797,049
|
|
|
Less:
current portion
|
|
$
|
(916,145
|
)
|
|
$
|
(722,908
|
)
|
|
Long-term
debt, net
|
|
$
|
373,095
|
|
|
$
|
1,074,141
|
|
Maturities
of long-term debt at September 30, 2018, are as follows:
|
December
31,
|
|
|
|
|
2018
(remaining three months)
|
|
$
|
215,100
|
|
|
2019
|
|
|
976,906
|
|
|
2020
|
|
|
97,234
|
|
|
|
|
$
|
1,289,240
|
|
Note
9 – Notes Payable
Note
Payable to Amazon
On
June 22, 2018, ICTV signed a formal 12-month loan agreement with Amazon Lending. The loan was given in the amount of $145,000
and carries an annual interest rate of 9.69%. For both the three and nine months ended September 30, 2018, interest expense was
approximately $3,000. The loan is paid in twelve equal payments of principal and interest of approximately $13,000. These
payments will be automatically deducted from any sales that ICTV generates from Amazon.com. If the sales generated do not sufficiently
cover the amount of the monthly payment due, Amazon.com is authorized to charge the Company’s credit card on file. There
is no early payoff fee for this loan agreement. In the event of a default by the Company, Amazon Lending has a second lien on
any and all assets that are at Amazon warehousing facilities, subordinate to the LeoGroup Private Investment Access, LLC Note
(see Note 8). The current balance of the loan is approximately $135,000 as of September 30, 2018.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2018 and 2017
(Unaudited)
Note
9 – Notes Payable (continued)
Note
Payable to related party
On
July 6, 2018, the Company issued a promissory note to Stephen Jarvis, a member of the Board of Directors, for a 60-day
interest free loan of $100,000 from Mr. Jarvis. This loan is to be repaid to the lender within 60 days of receipt. If the loan
is not paid within 30 days of the due date, it will be considered in default and the note will bear an 18% interest rate until
paid. Effective September 4, 2018, the loan was modified and extended all terms and conditions to be due 180 days from issuance.
Note
Payable to AOR at fair value
On
September 20, 2018, AOR Direct, LLC , a media vendor, and the Company entered into an agreement to convert approximately
$299,000 of outstanding payables into a loan with a partial convertible feature. The loan carries a 16% interest rate per
annum. The loan is payable in eighteen monthly installments of approximately $19,000, due on the last day of each month,
beginning on October 31, 2018. The loan carries an option to prepay $200,000 on or before December 31, 2018. If the Company makes
this $200,000 prepayment, the Lender, AOR Direct, LLC, will issue $50,000 of debt forgiveness after which the Lender will allow
the Company to convert the remaining, which would approximate $49,000 of debt to common stock, at the closing price of the stock
on the day of the signing of the agreement which was $0.08. We have elected to account for the loan using the fair value method
which requires the Company to record changes in the fair value as a component of other income and expenses, as outlined in Note
4 Fair Value Measurements. The fair value of the note was estimated at face value of approximately $299,000.
Note
10 - Related party transactions
LeoGroup
Private Debt Facility L.P. (“LeoGroup”) became a major shareholder as part of the Ermis Labs Asset Acquisition described
in Notes 1 and 3. During the nine months ended September 30, 2018, approximately $160,000 of payments were made to LeoGroup
Private Access, LLC in connection with the deferred consideration for the Ermis Labs Asset Acquisition.
On
July 15, 2017, LeoGroup Private Access, LLC provided the Company with the $2,000,000 30-month secured promissory note to
allow the buyout of the PhotoMedex royalty described in Notes 1 and 7. During the three and nine months ended September 30, 2018,
$300,000 and $900,000 of payments, respectively, were made on the loan of which approximately $116,000 and $392,000, respectively,
were interest expense. For the three and nine months ended September 30, 2017, interest expense of approximately $140,000 was
recorded.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2018 and 2017
(Unaudited)
Note
10 - Related party transactions (continued)
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, par value $0.001 per share (the
“Series A Preferred Stock”), for cash consideration of $403,200, or $1.92 per share described in Note 11.
Note
11 –Series A Preferred Stock
On
May 1, 2018, the Board of Directors designated 210,000 shares of the Company’s Series A Preferred Stock and authorized the
sale of the Series A Preferred Stock to Kelvin Claney, the Company’s Chief Executive Officer. 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.
On
May 2, 2018, the Company and Kelvin Claney 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. Issuance costs were de minimis.
The redemption value as of September 30, 2018 was approximately $417,000.
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2018 and 2017
(Unaudited)
Note
11 –Series A Preferred Stock (continued)
The
Company evaluated the Series A Preferred Stock issuance for liability or equity classification in accordance with the provisions
of ASC 480, “Distinguishing Liabilities from Equity”, and determined that equity treatment was appropriate because
the Series A Preferred did not meet the definition of the liability instruments defined thereunder for convertible instruments.
Specifically, the Series A Preferred are not mandatorily redeemable and do not embody an obligation to buy back the shares outside
of the Company’s control in a manner that could require the transfer of assets. Additionally, the Company determined that
the Series A Preferred would be recorded as permanent equity, not temporary equity, based on the guidance of ASC 480 given that
there is no scenario where the holders of equally and more subordinated equity of the entity would not be entitled to also receive
the same form of consideration upon the occurrence of the event that gives rise to the redemption.
Note
12 - Basic and diluted earnings (loss) per share
Basic
earnings (loss) per share is computed by dividing earnings (loss) available to common stockholders by the weighted-average number
of common shares outstanding during the period. Diluted earnings per share gives effect to all dilutive potential common shares
outstanding during the period and is computed by dividing the earnings attributable to common stockholders by the weighted-average
number of common equivalent shares outstanding for the period, including any dilutive effect from outstanding stock options and
convertible preferred stock. Diluted net income per share does not assume conversion, exercise or contingent exercise of securities
that would have an anti-dilutive effect.
The
Company follows the two-class method when computing earnings (loss) per share in periods when issued shares that meet the definition
of participating securities are outstanding. The two-class method determines earnings (loss) per share for each class of common
and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings.
The Company’s Series A Preferred Stock participates in any dividends declared by the Company on its common stock and are
therefore considered to be participating securities. The two-class method requires income available to common stockholders for
the period to be allocated between common and participating securities based upon their respective rights to receive dividends
as if all income for the period had been distributed. Accordingly, in periods in which the Company reports a net loss attributable
to common stockholders when participating securities are outstanding, losses are not allocated to the participating securities
because they have no contractual obligation to share in the losses of the Company. For purposes of calculating diluted earnings
per share attributable to common shareholders, stock options and convertible preferred stock are considered common stock equivalents.
As
described above, the Company computes basic and diluted loss per share using a methodology that gives effect to the impact of
outstanding participating securities (the “two-class method”). As the three and nine months ended September 30, 2018
and 2017 resulted in net losses, there is no income allocation required under the two-class method or dilution attributed to weighted-average
shares outstanding in the calculation of diluted loss per share.
Of
the outstanding stock options, 5,068,335 were vested and exercisable at an average exercise price of $0.26. The following
common stock equivalents, presented on an as converted basis, were excluded from the calculation of net loss per share for the
periods presented, due to their anti-dilutive effect:
|
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Outstanding
stock options
|
|
|
6,148,335
|
|
|
|
5,540,002
|
|
|
|
6,148,335
|
|
|
|
5,540,002
|
|
|
Convertible
preferred stock
|
|
|
1,680,000
|
|
|
|
-
|
|
|
|
1,680,000
|
|
|
|
-
|
|
|
Convertible
loan payable-AOR
|
|
|
601,463
|
|
|
|
-
|
|
|
|
601,463
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,429,798
|
|
|
|
5,540,002
|
|
|
|
8,429,798
|
|
|
|
5,540,002
|
|
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2018 and 2017
(Unaudited)
Note
13 - Income taxes
The
provision for income taxes is approximately $31,000 and $149,000 for the three and nine months ended September 30, 2018 and $112,000
and $182,000 for the three and nine months ended September 30, 2017. The effective tax rate for the three and nine months ended
September 30, 2018 was approximately (3%) and (8%), respectively. The effective tax rate is (40%) and (9%), respectively for the
three and nine months ended September 30, 2017. The provision reflects an estimated current tax liability associated with the
earnings of our foreign subsidiaries.
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 Internal Revenue Code Section 382 analysis through
September 30, 2018 and has not analyzed the potential impact of its recent equity financing on beneficial ownership. Therefore,
no determination has been made whether the net operating loss carry forward of approximately $3,239,000 available prior to the
equity financing is subject to the Internal Revenue Code Section 382 limitation.
Note
14 - Segment reporting
We
operate in the direct to consumer, retail, 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, retail, 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 three months ended
|
|
|
For
the three months ended
|
|
|
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
|
|
|
Direct
to Consumer
|
|
|
Retail
|
|
|
International
Third-Party Distributor
|
|
|
Airlines
and Hong Kong Retail
|
|
|
Totals
|
|
|
Direct
to Consumer
|
|
|
Retail
|
|
|
International
Third-Party Distributor
|
|
|
Airlines
and Hong Kong Retail
|
|
|
Totals
|
|
|
Net
sales
|
|
$
|
4,233,444
|
|
|
$
|
438,951
|
|
|
$
|
334,856
|
|
|
$
|
476,658
|
|
|
$
|
5,483,909
|
|
|
$
|
5,401,048
|
|
|
$
|
1,377,613
|
|
|
$
|
380,755
|
|
|
$
|
400,338
|
|
|
$
|
7,559,754
|
|
|
Cost
of sales
|
|
|
1,398,603
|
|
|
|
149,244
|
|
|
|
167,429
|
|
|
|
240,877
|
|
|
|
1,956,153
|
|
|
|
2,486,303
|
|
|
|
196,891
|
|
|
|
199,835
|
|
|
|
166,960
|
|
|
|
3,049,989
|
|
|
Gross
profit
|
|
|
2,834,841
|
|
|
|
289,707
|
|
|
|
167,426
|
|
|
|
235,782
|
|
|
|
3,527,756
|
|
|
|
2,914,745
|
|
|
|
1,180,722
|
|
|
|
180,920
|
|
|
|
233,378
|
|
|
|
4,509,765
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
1,196,182
|
|
|
|
339,933
|
|
|
|
107,618
|
|
|
|
36,605
|
|
|
|
1,680,338
|
|
|
|
2,282,856
|
|
|
|
101,753
|
|
|
|
67,252
|
|
|
|
36,515
|
|
|
|
2,488,376
|
|
|
Selling
and marketing
|
|
|
2,186,624
|
|
|
|
591,170
|
|
|
|
26,969
|
|
|
|
111,609
|
|
|
|
2,916,372
|
|
|
|
3,749,376
|
|
|
|
173,270
|
|
|
|
22,925
|
|
|
|
156,775
|
|
|
|
4,102,346
|
|
|
Total
operating expense
|
|
|
3,382,806
|
|
|
|
931,103
|
|
|
|
134,587
|
|
|
|
148,214
|
|
|
|
4,596,710
|
|
|
|
6,032,232
|
|
|
|
275,023
|
|
|
|
90,177
|
|
|
|
193,290
|
|
|
|
6,590,722
|
|
|
Operating
income (loss)
|
|
$
|
(547,965
|
)
|
|
$
|
(641,396
|
)
|
|
$
|
32,839
|
|
|
$
|
87,568
|
|
|
$
|
(1,068,954
|
)
|
|
$
|
(3,117,487
|
)
|
|
$
|
905,699
|
|
|
$
|
90,743
|
|
|
$
|
40,088
|
|
|
$
|
(2,080,957
|
)
|
ICTV
BRANDS INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2018 and 2017
(Unaudited)
Note
14 - Segment reporting (continued)
|
|
|
For
the nine months ended
|
|
|
For
the nine months ended
|
|
|
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
|
|
|
Direct
to Consumer
|
|
|
Retail
|
|
|
International
Third-Party Distributor
|
|
|
Airlines
and Hong Kong Retail
|
|
|
Totals
|
|
|
Direct
to Consumer
|
|
|
Retail
|
|
|
International
Third-Party Distributor
|
|
|
Airlines
and Hong Kong Retail
|
|
|
Totals
|
|
|
Net
sales
|
|
$
|
13,155,589
|
|
|
$
|
4,864,526
|
|
|
$
|
1,807,245
|
|
|
$
|
1,639,411
|
|
|
$
|
21,466,771
|
|
|
$
|
17,719,533
|
|
|
$
|
2,226,044
|
|
|
$
|
1,842,373
|
|
|
$
|
1,368,999
|
|
|
$
|
23,156,949
|
|
|
Cost
of sales
|
|
|
3,080,931
|
|
|
|
1,653,939
|
|
|
|
903,623
|
|
|
|
942,316
|
|
|
|
6,580,809
|
|
|
|
5,763,446
|
|
|
|
756,855
|
|
|
|
850,238
|
|
|
|
624,631
|
|
|
|
7,995,170
|
|
|
Gross
profit
|
|
|
10,074,658
|
|
|
|
3,210,587
|
|
|
|
903,622
|
|
|
|
697,095
|
|
|
|
14,885,963
|
|
|
|
11,956,088
|
|
|
|
1,469,189
|
|
|
|
992,135
|
|
|
|
744,368
|
|
|
|
15,161,779
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
3,971,728
|
|
|
|
1,347,362
|
|
|
|
500,565
|
|
|
|
126,146
|
|
|
|
5,945,801
|
|
|
|
6,916,906
|
|
|
|
382,196
|
|
|
|
245,966
|
|
|
|
98,849
|
|
|
|
7,643,917
|
|
|
Selling
and marketing
|
|
|
7,437,301
|
|
|
|
2,325,711
|
|
|
|
43,525
|
|
|
|
456,643
|
|
|
|
10,263,180
|
|
|
|
10,357,739
|
|
|
|
567,316
|
|
|
|
74,976
|
|
|
|
346,290
|
|
|
|
11,346,321
|
|
|
Total
operating expense
|
|
|
11,409,029
|
|
|
|
4,146,483
|
|
|
|
544,090
|
|
|
|
582,789
|
|
|
|
16,208,981
|
|
|
|
17,274,645
|
|
|
|
949,512
|
|
|
|
320,942
|
|
|
|
445,139
|
|
|
|
18,990,238
|
|
|
Operating
income (loss)
|
|
$
|
(1,334,371
|
)
|
|
$
|
(462,487
|
)
|
|
$
|
359,532
|
|
|
$
|
114,306
|
|
|
$
|
(1,323,019
|
)
|
|
$
|
(5,318,557
|
)
|
|
$
|
519,677
|
|
|
$
|
671,193
|
|
|
$
|
299,229
|
|
|
$
|
(3,828,459
|
)
|
Selected
balance sheet information by segment is presented in the following table as of:
Total
assets by segment as of:
|
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
|
Direct
to Consumer
|
|
$
|
10,154,035
|
|
|
$
|
11,135,146
|
|
|
Retail
|
|
|
647,221
|
|
|
|
1,696,601
|
|
|
International
Third-Party Distributors
|
|
|
239,019
|
|
|
|
75,854
|
|
|
Airlines
and Hong Kong Retail
|
|
|
630,098
|
|
|
|
862,656
|
|
|
Total
Assets
|
|
$
|
11,670,373
|
|
|
$
|
13,770,257
|
|
Total
assets by geographical region as of:
|
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
|
United
States and Canada
|
|
$
|
6,729,405
|
|
|
$
|
8,333,129
|
|
|
Hong
Kong
|
|
|
630,098
|
|
|
|
862,656
|
|
|
United
Kingdom
|
|
|
3,464,844
|
|
|
|
3,476,560
|
|
|
Israel
|
|
|
846,026
|
|
|
|
1,097,912
|
|
|
Total
Assets
|
|
$
|
11,670,373
|
|
|
$
|
13,770,257
|
|
Net
sales by geographical region for the three months ended:
|
|
|
September
30, 2018
|
|
|
September
30, 2017
|
|
|
United
States and Canada
|
|
$
|
3,279,152
|
|
|
$
|
5,385,244
|
|
|
Hong
Kong
|
|
|
476,659
|
|
|
|
400,338
|
|
|
United
Kingdom
|
|
|
1,728,098
|
|
|
|
1,774,172
|
|
|
Israel
|
|
|
-
|
|
|
|
-
|
|
|
Total
Net Sales
|
|
$
|
5,483,909
|
|
|
$
|
7,559,754
|
|
Net
sales by geographical region for the nine months ended:
|
|
|
September
30, 2018
|
|
|
September
30, 2017
|
|
|
United
States and Canada
|
|
$
|
13,501,456
|
|
|
$
|
18,498,764
|
|
|
Hong
Kong
|
|
|
1,639,411
|
|
|
|
1,368,999
|
|
|
United
Kingdom
|
|
|
6,325,904
|
|
|
|
3,289,186
|
|
|
Israel
|
|
|
-
|
|
|
|
-
|
|
|
Total
Net Sales
|
|
$
|
21,466,771
|
|
|
$
|
23,156,949
|
|