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EX-32 - ICTV Brands Inc.ex-32.htm
EX-31.2 - ICTV Brands Inc.ex31-2.htm
EX-31.1 - ICTV Brands Inc.ex31-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017

 

Commission File Number 0-49638

 

ICTV BRANDS INC.

(Name of Registrant as Specified in Its Charter)

 

Nevada   76-0621102

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

489 Devon Park Dr., Suite 306, Wayne, PA 19087

(Address of Principal Executive Offices) (Zip Code)

 

(484) 598-2300

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered under Section 12(b) of the Exchange Act: NONE.

 

Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK, PAR VALUE, $0.001

 

Indicate by checkmark if registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [  ] No [X]

 

Indicate by checkmark if registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.

Yes [  ] No [X]

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] No [  ]

 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K. [X]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12B-2 of the Exchange Act.

 

  Large accelerated filer [  ]   Accelerated filer [  ]
  Non-accelerated filer [  ] (Do not check if a smaller reporting company) Smaller reporting company [X]

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12B-2 of the Securities Act).

Yes [  ] No [X]

 

The aggregate market value of the voting common stock held by non-affiliates on June 30, 2017 (the last business day of our most recently completed second fiscal quarter) was $7,100,474  using the closing price of $0.54 on June 30, 2017.

 

As of May 31, 2018, the registrant had issued and outstanding 52,340,700 shares of common stock.

 

Documents Incorporated by Reference: None.

 

 

 

 

 

 

ICTV BRANDS INC.

 

Index to

Annual Report on Form 10- K

For the Year Ended December 31, 2017

 

    Page
Part I    
Item 1. Description of Business 3
Item 1A. Risk Factors 13
Item 1B. Unresolved Staff Comments 22
Item 2. Description of Properties 23
Item 3. Legal Proceedings 23
Item 4. Mine Safety Disclosures 23
     
Part II    
Item 5. Market for Common Equity, Related Stockholder Matters and Issuer’s Purchases of Equity Securities 24
Item 6. Selected Financial Data 26
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation 26
Item 7A. Market Risk Disclosures 35
Item 8 Financial Statements 35
Item 9 Changes in and Disagreements with Accountants on Auditing and Financial Disclosure 35
Item 9A Controls and Procedures 35
Item 9B Other Information 39
     
Part III    
Item 10. Directors, Executive Officers and Corporate Governance 39
Item 11. Executive Compensation 41
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 43
Item 13. Certain Relationships and Related Transactions and Director Independence 45
Item 14. Principal Accountant Fees and Services 45
     
Part IV    
Item 15. Exhibits and Financial Statement Schedules 46
Item 16. Form 10K Summary 48

 

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Part I

 

FORWARD-LOOKING STATEMENTS

 

The matters discussed in this Form 10-K may contain “forward looking statements” (as such term is defined in the Private Securities Litigation Reform Act of 1995). These statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “intends,” “should,” or “anticipates” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. The safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, apply to forward-looking statements made by our company. You should not place undue reliance on forward-looking statements. Forward-looking statements involve risks and uncertainties. The actual results that we achieve may differ materially from any forward-looking statements due to such risks and uncertainties. These forward-looking statements are based on current expectations, and we assume no obligation to update this information. Readers are urged to carefully review and consider the various disclosures made by us in our reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect its business.

 

ITEM 1. DESCRIPTION OF BUSINESS

 

Overview

 

ICTV Brands Inc., (“we,” “our,” “us” or “Company”) develop, market and sell products through a multi-channel distribution strategy, including direct response television, or DRTV, digital marketing campaigns, live home shopping, traditional retail and e-commerce market places, Hong Kong airlines, and our international third-party distributor network. We offer primarily health, beauty and wellness products as well as various consumer products, including:

 

  DermaWand®, a skin care device that reduces the appearance of fine lines and wrinkles, and helps improve skin tone and texture,
  DermaVital®, a professional quality skin care line that effects superior hydration,
  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.

 

Management has decided that Good Planet Super Solution is no longer part of our core business. As a result, effective January 1, 2017, ICTV no longer sells this product.

 

We acquire the rights to the products that we market primarily via licensing agreements, acquisition and in-house development and sell both domestically in the United States (“U.S”) and internationally. We are presently exploring other devices and consumable product lines currently under licensing agreements.

 

On January 23, 2017, we acquired several new brands, related intellectual property, inventory and other assets and have begun marketing and selling the following new products. However, the Company decided to cease selling Good Planet Super Solution products because the products no longer fit into our business model. See Note 3 - Business and Asset Acquisitions, to our financial statements for more information about the PhotoMedex and Ermis Labs acquisitions:

 

  no!no!® Hair, a home use hair removal device;
     
  no!no!® Skin, a home use device that uses light and heat to calm inflammation and kill bacteria in pores to treat acne;
     
  no!no!® Face Trainer, a home use mask that supports a series of facial exercises;
     
  no!no!® Glow, a home use device that uses light and heat energy to treat skin;
     
  Made Ya Look, a heated eyelash curler;
     
  no!no!® Smooth Skin Care, an array of skin care products developed to work with the devices to improve the treated skin;
     
  Kyrobak® , a home use device for the treatment of non-specific lower back pain;
     
  ClearTouch ®, a home use device for the safe and efficient treatment of nail fungus; and
     
  Ermis Labs acne treatment cleansing bars.

 

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Our Background and Corporate History

 

As of December 31, 2017 we have the following wholly-owned subsidiaries:

 

  Better Blocks International Limited, (“BBI”), a New Zealand corporation;
     
  ICTV Brands Israel Limited, (“ICTV Brands Israel”) incorporated under the laws of Israel;
     
  ICTV Brands UK Limited, Inc. (“ICTV Brands UK”), incorporated under the laws of the United Kingdom;
     
 

ICTV Brands HK Limited (“ICTV Brands HK”), a private limited company limited by shares, incorporated under the laws of Hong Kong (ICTV Brands HK Limited was formally known as “Radiancy HK Limited” and was officially renamed to ICTV Brands HK Limited on July 31, 2017); and

     
 

LK Technology Importaçăo E Exportaçăo LTDA, a private Sociedade limitada formed under the laws of Brazil (“LK Technology”).

 

On January 23, 2017, ICTV Holdings, Inc., a Nevada corporation and the Company’s wholly-owned subsidiary (“ICTV Holdings”) completed the purchase of substantially all the assets of PhotoMedex, Inc., a Nevada corporation and its 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 (as so amended, the “PhotoMedex Purchase Agreement”). (See the Notes to the Consolidated Financial Statements, Note 3 – Business and Asset Acquisitions)

 

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. (See the Notes to the Consolidated Financial Statements, Note 3 – Business and Asset Acquisitions)

 

On November 16, 2017, the Company adopted a Plan of Merger pursuant to which, effective November 16, 2017, Ermis Labs was merged with and into the Company, with the Company continuing as the surviving corporation, and each share of Ermis Labs common stock outstanding immediately prior to the effective date was cancelled and extinguished.

 

Although our companies are incorporated in New Zealand, Nevada, Israel, United Kingdom, Hong Kong, and Brazil, our operations are currently run from our Wayne, Pennsylvania office.

 

Our Growth Strategy

 

Our strategy is to introduce our brands to the market through an omni-channel platform that includes, but is not limited to direct response television, digital marketing, live home shopping, traditional retail, e-commerce market places, 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.

 

We continually seek to develop, acquire or obtain the license to consumer products that can be distributed and marketed profitably through a distribution network. Success depends, in part, on our ability to market products that appeal to consumers and that can be easily associated with a brand. In order to succeed, we need to identify new products to supplement and possibly replace the existing product lines as they mature through product life cycles.

 

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We put forth extensive effort to research and develop new products that are unique and that will be suitable for direct response marketing. The development of new product ideas stems from a variety of sources, including inventors, trade shows, strategic alliances with manufacturing and consumer product companies, industry conferences, and the continuous review of new developments within targeted brand and product categories. In addition, we receive unsolicited new product proposals from independent parties.

 

We also internally generate ideas for new products that we wish to develop. If we have an idea for a product, we will present prototype specifications to one of our manufacturers to develop a prototype, and we will then evaluate the feasibility of selling the product through direct marketing initiatives.

 

When we evaluate a product for its suitability for direct sale, its uniqueness, ability to be demonstrated and consumer’s perception of value are considered. Part of the selection criteria for new products are as follows:

 

  Products must be unique, demonstrable, have mass-market appeal and generally be unavailable elsewhere in the marketplace. Benefits must be capable of being demonstrated visually, preferably with support from customer testimonials;
     
  Must support a sufficient media cost per order allowable while still representing good perceived value to the consumer;
     
  Must have a unique “hook” to be able to catch the attention of the consumer - the bigger the problem solved by the product, the greater the sales potential;
     
  Easily and effectively promoted through sustained direct sale channels, specifically digital;
     
  Supports a margin sufficiently high enough to maintain profitability when sold through conventional retailers;
     
  Has high volume sales potential, to ensure live home shopping and retailer/e-commerce interest;
     
  Exhibits potential for “back-end” sales either through live home shopping, traditional retail or continuity programs; and
     
  Should have the capability to be marketed internationally through wholesale distributor network.

 

Brand Portfolio

 

The following is a list of brands in the ICTV portfolio through ownership or licensing agreement.

 

DermaWand®

 

Since 1998, we owned the exclusive rights to sell the DermaWand®, an at-home, skin care device that reduces fine lines and wrinkles and improves overall skin appearance. Backed by clinically proven results that have been published in accredited journals, millions have been sold around the world. Targeting the older female demographic, DermaWand® uses radio frequency technology, the same technology used in medspas and doctor’s offices but at a lower amplitude. The combination of thermal energy, instant stimulation and oxygenation show visible improvement in the skin including reduced fine lines and wrinkles, toned and tightened skin and reduced pore size.

 

In January 2016, we acquired the worldwide ownership of the DermaWand® patent and all related trademarks. The price consumers pay for DermaWand® varies from country to country, however, it generally ranges from $90-$150 while sales to third party distributors are made at a wholesale price. The DermaWand® is sold and marketed with DermaVital® skin care products, which are offered with various continuity programs. We plan to release the next generation DermaWand® model in the second quarter of 2018. This second generation DermaWand® will be branded as the DermaWand® Pro Development.

 

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DermaVital®

 

DermaVital® is a brand of cosmetics with a wide variety of skin care products that complement the DermaWand®. The product line consists of several moisturizers that allow water to penetrate the skin’s surface, thus re-hydrating the deeper layers. In addition to moisturizers, the DermaVital® line has facial cleansers, microdermabrasion treatments, eye cream, lip cream, and hand cream.

 

DermaVital® has been offered to DermaWand® buyers through Canada and U.S direct response television (“DRTV”) and digital distribution channels through an auto shipment program. Customers that enrolled can cancel at any time.

 

no!no!®

 

On January 23, 2017, we acquired the no!no!® brand, which includes an array of hair removal and skin care devices with proven technology that is portable, can be used at home and targets a broad demographic that includes anyone with unwanted hair.

 

The no!no!® hair removal products treat and remove the hair by using Thermicon® technology, which was developed on the basic principle of sending heat signals to the hair. When used consistently over time, Thermicon® can reduce the regrowth of hair. Additionally, unlike other hair removing technologies, no!no!® Thermicon® works on all hair color and skin tones. The no!no!® hair removal line includes a few options that vary in size and power including the Micro, Pro, Ultra, and yet to be released is the no!no!® Pivot, the most powerful and agile version to date, complete with a pivoting head to target hard to reach curves and 2 additional intensity levels.

 

Also, under the no!no!® brand, is the no!no!® Skin device which uses light and heat, the same technology available in dermatologist’s offices, to calm inflammation and kill bacteria in the pore to fight acne. With two ten-second treatments in the morning and evening up to 81% of consumers saw clearance of acne within 24 hours. no!no!® has a FDA 510(k) clearance with the U.S. Food and Drug administration (FDA).

 

In addition to the devices, the no!no!® brand includes an array of consumable skin care products under the name no!no!® Smooth, which are developed to work with the devices to improve the treated skin.

 

Kyrobak®

 

On January 23, 2017, we acquired Kyrobak® which was developed to relieve back pain, using continuous passive motion (CPM) to increase mobility and improve wellness from the comfort of your home. CPM technology is a standard treatment in sports health and rehabilitation clinics around the world. Kyrobak® is designed to move your spine in the same range of motion you would experience when walking at a steady pace. CPM technology brings motion to your spine allowing the vertebrae to open up and decompress. The key demographics for this brand are older men and women.

 

Cleartouch®

 

On January 23, 2017, we acquired ClearTouch® which provides FDA cleared technology resulting in a no mess option to help with nail fungus. This product is safe, clean and is backed by customer testimonials that have seen impressive results with only two treatments a day that last only 10 seconds each by emitting heat and light to the affected area. Sized no larger than a cell phone and weighing only 3.4 ounces, ClearTouch® can be easily stowed for travel and targets men and women who suffer from nail fungus.

 

On March 6, 2018, the Company and its subsidiaries, ICTV Brands UK, ICTV Brands HK and ICTV Brands Israel, entered into an asset purchase agreement (the “Asset Purchase Agreement”), with Therma Bright Inc., a British Columbia corporation (“Therma Bright”), pursuant to which Therma Bright agreed to acquire certain assets relating to the Company’s ClearTouch nail phototherapy device and no!no!® skin phototherapy device, excluding, with some exception, any liabilities relating thereto, and excluding any rights to the trademark or name “no!no!® ” or “no!no!® skin, for a purchase price of $2,250,000, subject to certain closing adjustments. The purchase price was to be payable in cash installments commencing at closing, subject to certain adjustments, through December 31, 2020.

 

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In connection with the Asset Purchase Agreement, the Company and Therma Bright entered into a Patent and Trademark Pledge Agreement, dated March 6, 2018, pursuant to which Therma Bright granted a first priority security interest in certain patents in order to guarantee the purchase price set forth in the Asset Purchase Agreement. Also, in connection with the Asset Purchase Agreement, the Company and Therma Bright entered into a Transition Services Agreement, and a Sales Representative Agreement, each dated March 6, 2018, relating to certain services to be provided upon closing of the transaction contemplated by the Asset Purchase Agreement.

 

On April 27, 2018, the Company delivered to Therma Bright written notice of termination of each of the Asset Purchase Agreement, the Transition Services Agreement, the Patent and Trademark Pledge Agreement and the Sales Representative Agreement, in each case, pursuant to the terms therein and effective April 27, 2018.

 

Ermis Labs Medicated Bars

 

On January 23, 2017, we acquired Ermis Labs Medicated Bars, which provides affordable, reliable relief for some of the toughest conditions including acne, psoriasis, dandruff, dermatitis and fungus resulting in a broad target audience. Every bar is dermatologist recommended and formulated with Sea Whip Coral Extract, – a natural, renewable resource found in the Caribbean proven to help reduce inflammation, irritation and redness. They are also enriched with Vitamin A to keep skin cells healthy, Vitamin E to protect skin cells from free radicals and Shea Butter to moisturize and heal skin.

 

CoralActives®

 

In March 2014, we entered into a licensing agreement with Ermis Labs, in which we obtained the exclusive worldwide rights to manufacture and distribute their line of CoralActives® acne treatment and skin cleansing products. In January 2017, we acquired the CoralActives® brand from Ermis Labs. This product line consists of a retinol exfoliating cleanser, penetrating acne serum gel, moisturizer, cleansing bar and motorized cleansing brush and targets younger men and women. The entire line is formulated with Sea Whip Coral Extract, a renewable resource found in the Caribbean that carries natural anti-inflammatory properties. This key ingredient allows for a higher Benzoyl Peroxide concentration, resulting in an acne treatment more powerful and gentler than the competition. On December 31, 2017, the company decided that CoralActives® is no longer part of our core products, and the remaining inventory was impaired.

 

DermaBrilliance®

 

In April 2013, we entered into a licensing agreement with DermaNew, Inc., in which we obtained the exclusive worldwide rights to manufacture and distribute DermaBrilliance®, a patented anti-aging, exfoliating and resurfacing system that targets middle aged to older women. The DermaBrilliance® Sonic Exfoliation System cleanses, exfoliates and massages your skin for a smooth, luminous more youthful appearance. Clinically proven to visibly reduce the signs of aging by removing dull, dry, skin and debris to bring new, fresh skin to the surface for a radiant, glowing look. The DermaBrilliance® System combines a revolutionary random orbit skin care device, operating at 5,000 oscillations, with the Jewel Resurfacing Cream. This patented formula is infused with 1 full carat of micronized diamond and over 100 carats of micronized garnets for a luxury spa treatment at home. The DermaBrilliance® product line also includes an array of skin care products including moisturizers, cleansers and replacement heads.

 

Elastin -rp®

 

In July 2013, we acquired the exclusive worldwide rights to Elastin-rp® through a licensing agreement with BioActive Skin Technologies. Elastin-rp® is a branded system of cosmetic formulations designed to help improve the elasticity of the skin, thereby diminishing the appearance of fine lines and wrinkles. Targeting older women, Elastin-rp® addresses the anti-aging market and is delivered using a unique body heat-activated system which enables the BioLastin Complex to penetrate quickly to help stimulate your skin’s natural ability to replenish Elastin® and collagen.

 

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Wrinkle Filler

 

In June 2016, we began purchasing and marketing and selling, Skineance Wrinkle Filler from the distributor, Intersourcing Inc., a Belgium corporation on a non-exclusive basis. Wrinkle Filler is a remarkable serum that will visually make your lines and wrinkles disappear within seconds. Targeting older women, Wrinkle Filler is effective on crow’s feet, forehead wrinkles, lion’s brow, lip/laugh lines and under eye wrinkles, this anti-wrinkle silicone gel also moisturizes giving the appearance of healthy, youthful skin. We sell Wrinkle Filler in the U.S., Canada, and United Kingdom (“U.K.”) markets.

 

JuvionTM

 

In November 2013, we acquired exclusive worldwide licenses to two unique facial beauty devices that we had brand under the trademark JuvionTM. The JuvionTM product line features a Face Wand, Eye Wand, serum and beauty masks and targets older women. The JuvionTM Face Wand and Eye Wand use three types of energy to gently, yet effectively reduce fine lines and wrinkles. Using Electroporation (Galvanic Wave Energy), Radio Frequency (RF) and Electric Muscle Stimulation (EMS), this multi anti-wrinkle technology stimulates blood circulation to increase the composition of collagen and Elastin® . Combined with the JuvionTM Serum which undergoes a patented encapsulation ion-charged treatment process, conducts the electrical currents to penetrate deeply into the skin.

 

Jidue®

 

In July 2014, we entered into an exclusive marketing agreement with Audy Global Enterprises Inc., in which we obtained the exclusive worldwide license to market and distribute the Jidue® Facial Massager Mask. Jidue® Facial Massager gently massages your temples and the skin around your eyes to help improve both your quality of sleep and under eye appearance targeting middle aged and older men and women. Using ancient acupressure principles, 18 uniquely positioned pulsating nodes to stimulate the 4 key pressure points around the eye to increase facial blood circulation and lymph flow. Jidue® is clinically proven to help relieve eye puffiness, dark circles and facial tension. Jidue® helps relieve stress to fall asleep fast and sleep soundly through the night.

 

Dr. Ho’s PerfectBackTM Rest

 

In August 2016, we entered into an exclusive marketing and distribution agreement to sell the Dr. Ho’s PerfectBackTM Rest in the United States. The Dr. Ho’s PerfectBackTM Rest transforms any chair at home, in the office or in the car into an ergonomic seating experience. Dr. Michael Ho, Doctor of Chiropractic and Acupuncture, engineered this back-support system with 16 pressure point massagers to soothe achy muscles. Targeting middle aged and older men and women, the PerfectBackTM Rest attaches quickly and easily to any chair to support the spine’s natural curve to promote healthy posture. It can also be used on the floor as a spinal bridge for stretching and to support your back during abdominal exercises

 

Other Products

 

We continue to seek new products and have plans to market several additional products within its distribution network in 2018, including an at-home pedicure device, the Ultimate Pedi by DermaWand®, and various no!no!® line extensions.

 

ICTV Brands Strategic Approach

 

As consumer trends and viewership habits evolve, a successful marketer needs to be adaptive and adjust to the marketplace. To meet this demand, we employ an omni-channel approach to test, launch and develop our brands. This strategy has become key to a brand’s success and allows marketers to meet consumers’ wants and needs no matter their demographic, habits or buying preferences.

 

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As we expand the brands and their distribution channels, the marketing efforts to support them are selected based on the type of product, the key demographic, competitive trends and historical performance across similar products/brands. As each brand differs so does the formulaic approach to the media mix, however we employ one or many of the following to profitably support our Company.

 

  Digital Advertising – The online world changes daily and with the advancements of targeted advertising based on behavioral habits and demographic, we have shifted our key testing approach from television to digital initiatives. This helps minimize the marketing waste, which leads to smaller but more efficient testing budgets to more pragmatically determine the next steps for a brand. This strategic approach is applied to the launch of new products, sustaining mature products and re-establishing dormant products with the ultimate goal of driving consumers to the brand’s direct site and converting the visitor into a sale. The digital space offers a variety of marketing opportunities that are used to test, expand and grow the brands; however, we focus on the following element of digital marketing:

 

  Paid Search – Advertising within the sponsored listings of a search engine or partner site by bidding certain keywords allows us to hit the consumer when they are searching for a term related to a brand.
  Email Marketing – Utilizing email lists, typically built from past customers, drives sales that start directly from the consumer’s inbox and allows us to customize a message and exclusive offer with direct delivery.
  Programmatic – Automated bidding on online inventory based on previous buyer’s data allows for cost efficient expansion that adjusts automatically for unsurpassed efficiencies.
  Social Media – With consistent increase in consumer’s social media intake and the demographic details available about the consumer, utilizing the top tiered social media platforms (i.e. Facebook, YouTube) allows us to deliver targeted creative in environments consumers trust to educate, communicate and interact with about the brands.
  Remarketing – Following and offering creative to those that have already visited a brand’s site is a necessary layer to our digital advertising approach as it allows to build frequency and convert the visitor to future sales.
  Text, Display & Video – ICTV uses a combination of carefully constructed text, imagery and video across a variety of digital initiatives to educate and drive the consumer to act in a way that results in a sale.

 

  Direct Response Television (DRTV) – Reaching a mass audience with a television creative that elicits an action is one of the original pillars of direct response marketing however with the advancements of DVR and online streaming alongside the massive advancements in digital advertising, DRTV has lost some of its market share to other methods. However, DRTV remains a significant source to drive large sale volumes for us. A variety of factors affect what goes into a brand’s DRTV media mix including the product category, target audience, offer/price point, and competitive behavior. We evaluate these elements for each brand to determine if DRTV is the right fit for the product. If a brand is the right fit for DRTV a strategic plan is developed around the following elements;  

 

 

Length – Different lengths of creative are employed depending on the campaign’s goal. For brands with a direct sale focus, longer lengths (longform), including infomercials and 5-minute creatives are used. We more often employ this type of length as it provides ample time to educate the consumer to a point of direct purchase for a product with a higher price point, more typical of the ICTV portfolio. Shorter lengths (short form), including any creative shorter than 2 minutes, are typically employed for brands with lower price points or for branding and drive to retail initiatives. ICTV utilizes these lengths however more sparingly.

  Geography – DRTV media is offered on a national level and local level. As we typically do not have any geographic restrictions and can deliver our products nationwide, all media options are viable. Our DRTV strategic approach involves a combination of national and local media.
  Media Type/Station – With thousands of channels and television programs to choose from, we select the appropriate media type (such as national cable, local broadcast, syndication, and network) and station combination based on the target demographic, cost structure, historical performance, competitive presence and available time.

 

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  Continuity – One of the key factors in selecting brands for our portfolio is the presence of consumables that could be packaged for a continuity program, in which the items are automatically charged and shipped to the consumer based on a predetermined usage schedule. This continuous automatic flow of sale allows us to invest more into converting the initial sale with the expectation of future revenue without additional investment.
  Cross Selling – Our portfolio consists of a myriad of products that provide solutions to different consumer problems; however, the target demographics of the brands largely overlap, creating an opportunity to cross sell. We build strong order flows that take the consumer through a variety of upsells and down sells across brands to build the final sales total. Whether on the initial inbound sales call, outbound sales call, inbound customer service call or online via the order flows at the direct sites and through email blasts across customer lists, cross selling is an essential part of the ICTV strategy that is employed across every brand in the portfolio.
  Retail/E-Commerce Sales - To capitalize on the brand and product awareness created through the direct sale media support, we move logically to the traditional retail stores and online ecommerce retailers transitioning from the direct response audience to the retail audience. Brand marketers must invest significantly in marketing costs to introduce a new brand. However, we leverage the direct sale media and the product/brand awareness incurred, to cost efficiently, enter and support the retail environment.
  Live Home Shopping – Our portfolio of demonstrable products makes them ideal for live home shopping opportunities. Live home shopping networks such as QVC, the Home Shopping Network (HSN) and The Shopping Channel Canada (TSC), have a very large and loyal consumer base providing the brands an opportunity to demonstrate the product live, offer an exclusive deal and grow brand awareness profitably.
  International Third-Party Distributors – We distribute product by either selling direct in a country or partnering with a third-party distributor who purchases the products at wholesale pricing and sells it at an agreed upon region/country exclusively. Partnering with these distributors allows us to quickly and cost efficiently enter a market and tailor the brand by region without the cost and risk of setting up a direct selling platform. We work with these distributors to geographically expand the brands in their portfolio as well as add new brands to their portfolio by licensing products from their portfolios to sell in the regions where we have direct sale capabilities.
  Print – Direct mail, inserts and print media are employed to extend a brand’s message, target specific geographic locations, increase brand awareness and/or drive direct sale. This type of media tends to resonate with an older demographic which overlaps into many of the products in our portfolio.

Airline – Due to the high level of brand awareness globally, we are afforded the opportunity for ICTV to capitalize on multiple sales channels, such as Duty-Free carts on airlines. ICTV sets the price for this activity and sell directly to the airlines, and in turn, they sell directly to consumers through in-flight magazines. Our current airline business includes airlines all over Asia and South-East Asia as well as British Airways and Virgin Atlantic in the UK. These sales channels offers a print advertising element to accrue incremental sales for ICTV Brands.

 

Regardless of the marketing initiatives, we utilize a flexible methodology to drive a brand from testing to profitable rollout. This methodology is based on a platform of continuous testing, evaluating, retesting and expansion, moving forward only with those initiatives that provide a profitable return. As the marketplace changes, this approach allows us to identify any shifts and adjust to meet the new standards. ICTV continuously looks for new media outlets, creative approaches and 3rd party vendors to cautiously test to keep the brands growing and profitable.

 

Customer Service

 

We seek to provide our customers with quality customer service. We generally offer an unconditional 30-day money back return policy to purchasers of our products. For our products newly acquired on January 23, 2017, Cleartouch, Kyrobak® and no!no!® we currently offer 60-day money back return policy to purchasers of our products. Our policy is to investigate the cause of returns if returns begin to undermine our expectations for a product’s profitability.

 

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Competition

 

We compete directly with several established companies that generate sales from infomercials and direct response television, as well as small independent direct response television producers. Products like ours may be sold in department stores, pharmacies, general merchandise stores, magazines, newspapers, direct mail advertising, catalogs, and over the internet. Many of our major competitors, which include Telebrands Corp. and Guthy-Renker Corp., have substantially greater financial, marketing and other resources than do we.

 

We expect that we will face additional competition from new market entrants and current competitors as they expand their direct marketing business models. The barriers to entry in the infomercial industry are low, but there are many difficult hurdles for young entrants to overcome for success in the long-term. To be competitive, we believe we must respond promptly and effectively to the challenges of technological change, evolving standards and our competitors’ innovations. We must also source successful products, create brand awareness and utilize good sales pitches for our products. We believe that although we have a limited operating history, we are strategically positioned to compete because of our management’s experience and strong relationships in the industry. In addition, we feel that associating our products with brands and focusing on the traditional retail environment, as we intend to do, will give us a competitive advantage over traditional infomercial companies who fail to capitalize on the consumer awareness they create through their infomercials.

 

Intellectual Property

 

Our success is dependent, in part, upon our proprietary rights to our primary products. The following consists of a description of our intellectual property rights.

 

Trademarks

 

We have several registered trademarks for DermaWand®, DermaVital®, Jidue®, Good Planet Super Solution® and DermaBrilliance®, and CoralActives® throughout the world. In addition, under our current licensing agreements for all products, all related trademarks are assigned to us. In addition, all registered trademarks for the family of no!no!®, Kyrobak®, Thermicon® and Ermis Labs® have been assigned.

 

Patents

 

We own the worldwide patent and all related trademarks for DermaWand® and CoralActives®, as is necessary to manufacture, market and distribute DermaWand® and CoralActives®. In addition, under our current licensing agreements for all products, all related patents are assigned to us. In addition, under our current licensing agreements for all products, all related patents are assigned to us. In addition, all registered patents for the family of no!no!®, Kyrobak®, Thermicon® and Ermis Labs® patents have been assigned.

 

Copyrights

 

We have copyright registrations for all versions of our infomercials.

 

There can be no assurance that our current or future intellectual property rights, if any, will not be challenged, invalidated or circumvented, or that any rights granted under our intellectual property will provide competitive advantages to us. In addition, there can be no assurance that claims allowed on any future patents will be sufficiently broad to protect our products. The laws of some foreign countries may not protect our proprietary rights to the same extent as do the laws of the United States. We intend to enforce our proprietary rights using licensing agreements and, when necessary, litigation. Although we believe the protection afforded by our patents, trademarks, copyrights and registered designs has value, rapidly changing technology and industry standards make our future success depend primarily on the innovative skills, expertise, and management abilities of our team rather than on patent and trademark protection.

 

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Royalty Agreements

 

In April 2000, we assumed from R.J.M. Ventures Limited and Better Blocks International Limited, through the share and option purchase agreement we signed with The Better Blocks Trust, the obligation to pay royalties on the sales of the DermaWand®. Under a marketing and royalty agreement with the developer of DermaWand®, we were obligated to pay them a royalty at a fixed rate per unit sold. Under a purchase agreement that we entered into on January 22, 2016 with Omega 5 Technologies, Inc., we acquired the DermaWand® patent and all related trademarks for the sum of $1,200,000 paid out as follows: $300,000 per year for calendar years 2016 through 2019, payable in uniform quarterly installments on or before the last day of each calendar quarter. No interest was charged, and we may, in our sole discretion, at any time without permission or penalty pre-pay some or all of the purchase price. Thus, effective January 1, 2016, we are no longer obligated to make royalty payments on sales of DermaWand®.

 

In April 2013, we entered into a licensing agreement with DermaNew, in which we obtained the exclusive worldwide rights to manufacture and distribute DermaBrilliance®, a patented anti-aging, resurfacing and skin polishing system. The agreement contains royalties based on a percentage of net sales.

 

In July 2013, we acquired the exclusive worldwide rights to Elastin-rp® via a licensing agreement with BioActive Skin Technologies. Elastin-rp® is a branded system of cosmetic formulations designed to help improve the elasticity of the skin, thereby diminishing the appearance of fine lines and wrinkles. The agreement contains royalties based on a percentage of net sales.

 

In March 2014, we entered into a licensing agreement with Ermis Labs, in which we obtained the exclusive worldwide rights to manufacture and distribute their line of CoralActives® acne treatment and skin cleansing products. In January 2017, we acquired the assets of Ermis Labs, which included all the intellectual property associated with the CoralActives® acne treatment system of products, as well as five unique formulas for medicated cleansing bars that treat such conditions as acne, psoriasis, dermatitis, dandruff and fungus. We are required to pay a minimum annual royalty amount of $175,000 on or before December 31 of each year commencing with calendar year ending December 31, 2017 continuing until the total royalty paid to Ermis Labs totals $1,750,000.

 

In July 2014, we entered into an exclusive marketing agreement with Audy Global Enterprises Inc., in which we obtained the exclusive worldwide license to market and distribute the Jidue® Facial Massager Mask and associated products, provided that the license does not include the right to manufacture the product. The agreement contains royalties based on a percentage of net sales.

 

In January 2017, we completed the PhotoMedex acquisition of proprietary products and services that address skin diseases and conditions of pain reduction using home-use devices for various uses.  Under the PhotoMedex Purchase Agreement, we were required to pay to PhotoMedex and its subsidiaries a continuing monthly royalty on net cash (invoiced amount less sales refunds, returns, rebates, allowances and similar items) actually received by us or our affiliates from sales of the consumer products that we acquired from PhotoMedex. Such royalty payments commenced with net cash actually received from and after January 23, 2017 and would continue until the total royalty paid to PhotoMedex and its subsidiaries totaled $4,500,000.

 

On July 12, 2017, we and ICTV Holdings entered into a Termination and Release Agreement with the PHMD Sellers (the “Release Agreement”). Under the terms of the Release Agreement, the PhotoMedex Purchase Agreement is terminated and of no further force and effect, except for certain surviving rights, obligations and covenants described in the Release Agreement. Pursuant to the Release Agreement, each of the Company and ICTV Holdings, on the one hand, and the PHMD Sellers on the other hand, fully release, forever discharge and covenant not to sue any other party, from and with respect to any and all past and present claims arising out of, based upon or relating to the PhotoMedex Purchase Agreement (other than the surviving covenants described in the Release Agreement) or the transactions contemplated thereby. The Release Agreement required that the Company pay to PhotoMedex $2,000,000 on or before July 15, 2017 (the “Payment”), subject to which, neither the Company nor ICTV Holdings shall have any further royalty or other payment obligations under the PhotoMedex Purchase Agreement.

 

On July 15, 2017, to secure the Payment, the Company issued a 30-month secured promissory note (the “Note”), to LeoGroup Private Investment Access, LLC (the “Holder”) in the principal amount of $2,000,000. The Note provides that the Company shall make monthly payments of $100,000 to the Holder for 30 months. The Note is secured by a first priority security interest in all the assets of Company, except the Company’s accounts receivable. The Note contains customary covenants of the Company and customary events of default. Subject to the terms and conditions of the Note, so long as any event of default, as described in the Note, is continuing, without cure, for a period of five (5) business days after written notice from the Holder to the Company or a longer period if set forth in in the notice from Holder or if agreed to by the parties, all obligations of the Company under the Note shall be immediately due and payable, and the Holder may exercise any other remedies available at law or in equity.

 

Governmental Regulation

 

We are subject to regulation by a variety of federal, state and local agencies, including the Federal Trade Commission, the Federal Communications Commission, the Consumer Product Safety Commission, Health Canada, the Canadian Standards Association and the Food and Drug Administration under the FDC Act. The government regulations to which we are subject vary depending on the types of products we manufacture and market. As we begin to market a broader variety of products and services, we may become subject to regulation by additional agencies.

 

We are also subject to the Federal Mail/Telephone Order Rule. Under the Mail/Telephone Order Rule, it is an unfair or deceptive act or practice for a seller to solicit any order for the sale of merchandise to be ordered by the buyer through the mail or by telephone unless, at the time of the solicitation, the seller has a reasonable basis to expect that it will be able to ship the ordered merchandise to the buyer within 30 days after the seller’s receipt of a properly completed order from the buyer. If the buyer uses credit to pay for the merchandise, the period within which the seller must ship the merchandise to the buyer is extended to 50 days. Under the Mail/Telephone Order Rule, the seller, among other things, must provide the buyer with any revised shipping date. If the seller is unable to fulfill an order within 30 or 50 days, as the case may be, then the seller must provide the buyer an option either to consent to a delay in shipping or to cancel their order and receive a prompt refund.

 

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There can be no assurance that new laws, rules, regulations or policies that may have an adverse effect on our operations will not be enacted or promulgated at a future date.

 

Employees

 

As of December 31, 2017, we employed a total of 29 employees globally. We consider our labor relations to be good. None of our employees are covered by a collective bargaining agreement.

 

Research and Development

 

Our research and development costs have consisted of efforts to discover and develop new products and the testing and development of direct-response advertising related to these products.

 

Available Information and Reports to Stockholders

 

We are subject to the information and periodic reporting requirements under Section 12(g) of the Securities Exchange Act and, accordingly, will file periodic reports, proxy statements and other information with the Securities and Exchange Commission. Any document we file may be read and copied at the Commission’s Public Reference Room located at 450 Fifth Street NW, Washington, DC 20549. Please call the Commission at 1-800-SEC-0330 for further information about the public reference rooms. Our filings with the Commission are also available to the public from the Commission’s website at http://www.sec.gov.

 

ITEM 1A. RISK FACTORS

 

Shareholders and prospective purchasers of our common stock should carefully consider the following risk factors in addition to the other information appearing in this Annual Report on Form 10-K.

 

If the response rates to our infomercials are lower than we predict, we may not achieve the customer base necessary to become or remain profitable, and the value of your investment may decrease.

 

Our revenue projections assume that a certain percentage of viewers who see our infomercials will purchase our products. If a lower percentage of these viewers purchase our products than we project, we will not achieve the customer base necessary to become or remain profitable, and the value of your investment may decrease.

 

If our infomercials are not successful, we will not be able to recoup significant advance expenditures spent on production and media times, and our business plan may fail.

 

Our business involves several risks inherent in operating a direct response television business. The production of infomercials and purchase of media time for television involves significant advance expenditures. A short-form infomercial generally costs around $35,000-$50,000 to produce, while production costs for a long-form infomercial are generally around $150,000-$200,000. We are dependent on the success of the infomercials we produce and the public’s continued acceptance of infomercials in general. If our infomercials do not generate consumer support and create brand awareness and we cannot recover the initial money we spend on production and media time, we will not be able to recoup the advance expenditures and may go out of business if new products and additional capital are not available.

 

If we do not continue to source new products, our ability to compete will be undermined, and we may be unable to implement our business plan.

 

Our ability to compete in the direct marketing industry and to expand into the traditional retail environment depends on our ability to develop or acquire new innovative products under brands and to complement these products with related families of products under those brands. If we do not source new products as our existing products mature through their product life cycles, or if we do not develop related families of products under our brands, we will not be able to implement our business plan, and the value of your investment may decrease.

 

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A significant portion of our product sales depend on search engines and other online sources to attract visitors to our websites, and if we are unable to attract these visitors and convert them into customers in a cost-effective manner, our business and financial results may be harmed.

 

With a significant portion of our DermaWand® sales being derived from e-commerce sites, our sales depend on our ability to attract online consumers to our websites and convert them into customers in a cost-effective manner, which depends, in part, on website design, search engines and other online sources for our website traffic. If our television media does not drive a sufficient amount of visits to our websites, if one or more of our competitors outbids us for specific search terms or utilizes search terms which are similar to those purchased by us, or if one or more of the website development companies or other online sources on which we rely for purchased listings, modifies or terminates its relationship with us, our expenses could rise, we could lose customers, traffic to our websites could decrease and our web sales and financial results could be negatively impacted.

 

We generate a significant portion of our direct response television revenue through long form infomercials, and the reduction in availability of such advertising or loss of advertising outlets could seriously harm our business.

 

We generate a significant portion of DermaWand® sales using long form 30-minute infomercials. If we cannot purchase an adequate amount of advertising time, deliver our advertising in an appropriate and effective manner, and/or reach an acceptable rate of return on our advertising spend, we will continue to receive lower levels of sales leads and ultimately customers, and will generate less revenue, which could have a material impact on our business and our revenues.

 

We may not be able to effectively integrate the business that we acquired from PhotoMedex and its affiliates or additional businesses that we may acquire in the future.

 

Our ability to realize the anticipated benefits of the PhotoMedex acquisition will depend on our ability to integrate that business with our own. The combination of two independent businesses is a complex, costly and time-consuming process and there can be no assurance that we will be able to successfully integrate the PhotoMedex business into our business, or if such integration is successfully accomplished, that such integration will not be costlier or take longer than presently contemplated. Integration of the PhotoMedex acquisition may include various risks and uncertainties, including the factors discussed in the paragraph below. If we cannot successfully integrate and manage the PhotoMedex business within a reasonable time, we may not be able to realize the potential and anticipated benefits of the such acquisition, which could have a material adverse effect on our share price, business, cash flows, results of operations and financial position.

 

We may also consider other strategic transactions, including acquisitions that will complement, strengthen and enhance growth in our consumer products direct marketing business. We evaluate opportunities on a preliminary basis from time to time, but these transactions may not advance beyond the preliminary stages or be completed. Such acquisitions are subject to various risks and uncertainties, including:

 

  The inability to integrate effectively the operations, products, technologies and personnel of the acquired companies (some of which are in diverse geographic regions) and achieve expected synergies;
  The potential disruption of existing business and diversion of management’s attention from day-to-day operations;
  The inability to maintain uniform standards, controls, procedures and policies;
  The need or obligation to divest portions of the acquired companies;
  The potential impairment of relationships with customers;
  The potential failure to identify material problems and liabilities during due diligence review of acquisition targets;
  The potential failure to obtain sufficient indemnification rights to fully offset possible liabilities associated with acquired businesses; and
  The challenges associated with operating in new geographic regions.

 

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In addition, we cannot make assurances that the integration and consolidation of newly acquired businesses will achieve any anticipated cost savings and operating synergies.

 

We depend on key management and employees, the loss of whom may prevent us from implementing our business plan, limit our profitability and decrease the value of your stock.

 

We are dependent on the talent and resources of our key executives and employees. The success of our business depends on Kelvin Claney, our Chief Executive Officer and a member of our Board of Directors, and other key management and employees. Mr. Claney has extensive experience in the direct response industry, and his services are critical to our success. The market for persons with experience in the direct response television industry is very competitive, and there can be no guarantee that we will be able to retain his services. The loss of Mr. Claney may prevent us from implementing our business plan, which may limit our profitability and decrease the value of your stock.

 

On April 18, 2018, our Board of Directors terminated the employment agreement of our president, Richard Ransom “for cause” as such term is defined in his employment agreement. Mr. Ransom has extensive experience in the direct response industry and the loss of his experience may limit our profitability and decrease the value of your stock if we are unable to successfully transition Mr. Ransom’s responsibilities and implement a succession plan.

 

If we cannot protect our intellectual property rights, our operating results will suffer, and you could ultimately lose your investment.

 

We seek to protect our proprietary rights to our products through a combination of patents, trademarks, copyrights and design registrations. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we consider proprietary. Litigation may be necessary to enforce our intellectual property rights and to determine the validity and scope of the proprietary rights of others. Any litigation could result in substantial costs and diversion of management and other resources with no assurance of success and could seriously harm our business and operating results. Investors could lose their entire investment.

 

The markets for our products are intensely competitive and we may not be able to compete effectively against the larger, more well-established companies that dominate this market or emerging, small, innovative companies that may seek to obtain or increase their share of the market.

 

The markets for our products are intensely competitive and many of our competitors are much larger and have substantially more financial and human resources than we do. Many have long histories and strong reputations within the industry and a relatively small number of companies dominate these markets.

 

We compete directly with branded, premium retail products. In addition, due to regulatory restrictions concerning claims about the efficacy of personal care products, we may have difficulty differentiating our products from other competitive products, and competing products entering the personal care market could harm our revenue.

 

Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. Our commercial opportunity will be reduced or eliminated if we are unsuccessful in convincing physician and patient customers and consumers to use our products or if our competitors develop and commercialize products that are safer and more effective than any products that we may develop.

 

The international third-party distributor segment is exposed to business and macro-economic risks, which could cause results of our operations to suffer.

 

Expanding into new international markets and bringing new brands to our international distributor network is a major element of our growth strategy. Factors such as compliance with foreign laws regarding manufacture, importation and registration of our products, currency fluctuations including the impact of the strengthening of the U.S. dollar, competition from entrenched local companies, and product integration issues may have an adverse impact on our financial condition.

 

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The international nature of our business exposes us to certain business risks that could limit the effectiveness of our growth strategy and cause our results of operations to suffer.

 

Continued expansion into international markets is an element of our growth strategy. Introducing and marketing our services internationally, developing direct and indirect international sales and support channels and managing foreign personnel and operations will require significant management attention and financial resources. We face several risks associated with expanding our business internationally that could negatively impact our results of operations, including:

 

  management, communication and integration problems resulting from cultural differences and geographic dispersion;
     
  compliance with foreign laws, including laws regarding importation and registration of products;
     
  compliance with foreign regulatory requirements and the ability to establish additional regulatory clearances necessary to expand distribution of our products in countries outside of the United States;
     
  competition from companies with international operations, including large international competitors and entrenched local companies;
     
  difficulties in protecting intellectual property rights in international jurisdictions;
     
  political and economic instability in some international markets;
     
  sufficiency of qualified labor pools in various international markets;
     
  currency fluctuations and exchange rates; and
     
  potentially adverse tax consequences or an inability to realize tax benefits.

 

We may not succeed in our efforts to expand our international presence as a result of the factors described above or other factors that may have an adverse impact on our overall financial condition and results of operations.

 

We may encounter difficulties in quality testing and the manufacturing of our products in commercial quantities, which could adversely impact the rate at which we grow.

 

There can be no guarantee that our quality assurance testing programs will be adequate to detect all defects, either ones in individual products or ones that could affect numerous shipments, which might interfere with customer satisfaction, reduce sales opportunities, or affect gross margins. In the future, we may need to replace certain of our product’s components and provide remediation in response to the discovery of defects or bugs in such products that we have shipped. There can be no assurance that such a remediation, depending on the product involved, would not have a material impact. An inability to cure a product defect could result in the failure of a product line, temporary or permanent withdrawal from a product or market, damage to our reputation, inventory costs or product reengineering expenses, any of which could have a material impact on our revenue, margins and net income.

 

Further, we may encounter difficulties manufacturing our line of products because we have limited experience manufacturing such products in significant commercial quantities. Thus, we will, in order to increase its manufacturing output significantly, have to attract and retain qualified employees for such assembly and testing operations.

 

Some of the components necessary for the assembly of our products are currently provided to us by third-party suppliers. While alternative suppliers exist and could be identified, the disruption or termination of the supply of components could cause a significant increase in the costs of these components, which could affect our operating results. Our dependence on a limited number of third-party suppliers and the challenges we may face in obtaining adequate supplies involve several risks, including limited control over pricing, availability, and quality and delivery schedules. A disruption or termination in the supply of components could also result in our inability to meet demand for its products, which could harm our ability to generate revenues, lead to customer dissatisfaction and damage its reputation. Furthermore, if we are required to change the manufacturer of a key component of our products, we may be required to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations and guidelines including Quality Systems Regulations, or QSR requirements and performance standards. Failure to do so could result in the FDA taking legal or regulatory enforcement action against us and/or our products (e.g. recalls, fines, penalties, injunctions, seizures, prosecution or other adverse actions). The delays associated with the verification of a new manufacturer could delay our ability to manufacture our products.

 

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If we fail to manage and protect our network security and underlying data effectively our businesses could be disrupted which could harm our operating results.

 

Our possession and use of personal information presents risks and expenses that could harm our business. Unauthorized disclosure or manipulation of such data, whether through breach of our network security or otherwise, could expose us to costly litigation, damage our reputation and possibly result in a lower revenue stream and the loss of some of our customers.

 

Maintaining our network security is of critical importance because the online e-commerce systems store proprietary and confidential customer data such as names, addresses, other personal information and credit card numbers. We use commercially available encryption technology to transmit personal information when taking orders. However, third parties may be able to circumvent these security and business measures by developing and deploying viruses, worms and other malicious software programs that are designed to attack or attempt to infiltrate our systems and networks. In addition, employee error, malfeasance or other errors in the storage, use or transmission of personal information could result in a breach of customer or employee privacy. We employ contractors and temporary and part-time employees who may have access to the personal information of customers and employees. It is possible such individuals could circumvent its controls, which could result in a breach of customer privacy.

 

Possession and use of personal information in conducting our business subject us to legislative and regulatory burdens that could require notification of data breach, restrict our use of personal information and hinder its ability to acquire new customers or market to existing customers. We have incurred, and will continue to incur, expenses to comply with privacy and security standards and protocols imposed by law, regulation, industry standards or contractual obligations.

 

If third parties improperly obtain and use the personal information of our customers, we may be required to expend significant resources to resolve these problems. A major breach of our network security and systems could have serious negative consequences for our businesses, including possible fines, penalties and damages, reduced customer demand for our products and services, harm to its reputation and brand and loss of our ability to accept and process customer credit card orders.

 

We are exposed to risks associated with credit card and payment fraud and with credit card processing, which could cause us to lose revenue.

 

A significant part of our sales is processed through credit cards or automated payment systems to pay for our products and services. We have suffered losses, and may continue to suffer losses, because of orders placed with fraudulent credit cards or other fraudulent payment data. For example, under current credit card practices, we may be liable for fraudulent credit card transactions if we do not obtain a cardholder’s signature, a frequent practice in internet sales. We employ technology solutions to help us detect fraudulent transactions. However, the failure to detect or control payment fraud could cause us to lose sales and revenue.

 

Any significant interruptions in the operations of our third-party call centers could cause us to lose sales and disrupt our ability to process orders and deliver our solutions in a timely manner.

 

We rely on third-party call centers to sell our products, respond to customer service and technical support requests and process orders. Any significant interruption in the operation of these facilities, including an interruption caused by our failure to successfully expand or upgrade our systems or to manage these expansions or upgrades, could reduce our ability to receive and process orders and provide products and services, which could result in lost and cancelled sales and damage to our brand and reputation.

 

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As we grow, we will need more capacity from those existing call centers, or we will need to identify and contract with new call centers. We may not be able to continue to locate and contract for call center capacity on favorable terms, or at all. Additionally, the rates those call centers charge us may increase, or those call centers may not continue to provide service at the current levels.

 

If our third-party call center operators do not convert inquiries into sales at expected rates, our ability to generate revenue could be impaired. Training and retaining qualified call center operators is challenging, and if we do not adequately train our third-party call center operators, they will not convert inquiries into sales at an acceptable rate.

 

Our marketing campaigns and advertising may be attacked as false and misleading, and our media spending might not result in increased net sales or generate the levels of product and brand name awareness that we desire. We might not be able to increase our net sales at the same rate as we increase our advertising and marketing expenditures.

 

Our future growth and profitability will depend in part on the effectiveness and efficiency of our marketing campaigns and media spending, including its ability to:

 

  create greater awareness of our products and brand name;
  determine the appropriate creative message and media mix for future expenditures; and
  effectively manage advertising costs, including creative and media costs, to maintain acceptable costs in relation to sales levels and operating margins.

 

Our consumer product’s portfolio of infomercials advertising, and other forms of media may not result in increased sales or generate desired levels of product and brand name awareness and may be attacked as false and misleading. We may not be able to increase our net sales at the same rate as we increase our advertising expenditures or may be required to defend against inaccurate claims of false advertising.

 

We periodically update the content of our infomercials and revise our product offerings. If customers are not as receptive to new infomercial content or product offerings, our sales through our infomercial sales channel will decline. In addition, if there is a marked increase in the price that we pay for our media time, the cost-effectiveness of our infomercials will decrease. If our infomercials are broadcast during times when viewership is low, this could also result in a decrease of the cost-effectiveness of such broadcasts, which could cause our results of operations to suffer. Also, to the extent we have committed in advance for broadcast time for our infomercials, we would have fewer resources available for potentially more effective distribution channels.

 

A higher than anticipated level of product returns may adversely affect our business and our customers may misuse certain of our products, and product and other damages imposed on us may exceed our insurance coverage, or we may be subject to claims that are not covered by insurance.

 

We offer consumers who purchase our consumer products directly from us an unconditional full 30-days money-back guarantee. Retailers and home shopping channels are also permitted to return the consumer products, subject to certain limitations. We establish revenue reserves for product returns based on historical experience, estimated channel inventory levels and other factors. If product returns exceed estimates, the excess would offset reported revenue, which could negatively affect our financial results. Product returns and the potential need to remedy defects or provide replacement products or parts for items shipped in volume could result in substantial costs, the requirement to conduct an FDA recall and/or submit an FDA-required report of a correction/removal and have a material adverse effect on our business and results of operations.

 

We may be subject to product liability claims from time to time.

 

Several of our products are highly complex and some are used to treat delicate skin conditions on and near a patient’s face. In addition, the clinical testing, manufacturing, marketing and use of certain of our products and procedures may also expose us to product liability, FDA regulatory and/or legal actions, or other claims.

 

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We presently maintain liability insurance with coverage limits of at least $1,000,000 per occurrence, which we believe is an adequate level of product liability insurance, but product liability insurance is expensive, and we might not be able to obtain product liability insurance in the future on acceptable terms or in sufficient amounts to protect us, if at all. A successful claim brought against us in excess of our insurance coverage could have a material adverse effect on our business, results of operations and financial condition. In addition, continuing insurance coverage may also not be available at an acceptable cost, if at all. Therefore, we may not be able to obtain insurance coverage that will be adequate to satisfy a liability that may arise. Regardless of merit or eventual outcome, product liability claims may result in decreased demand for a product, injury to our reputation, withdrawal of clinical trial volunteers and loss of revenues. Thus, regardless of whether we are insured, a product liability claim or product recall may result in losses that could result in the FDA taking legal or regulatory enforcement action us and or our products including recall and could have a material adverse effect upon our business, financial condition and results of operations.

 

Our costs could substantially increase if we experience a significant number of warranty claims.

 

We provide 12-month product warranties, and offer longer warranties available for purchase, against technical defects. Our product warranty requires us to repair defective parts of our products, and if necessary, replace defective components. Historically, we have received a limited number of warranty claims for these products. The costs associated with such warranty claims have historically been relatively low. Thus, we generally do not accrue a significant liability contingency for potential warranty claims.

 

If we experience an increase in warranty claims, or if our repair and replacement costs associated with such warranty claims increases significantly, we will begin to incur liabilities for potential warranty claims after the sale of our products at levels that we have not previously incurred or anticipated. In addition, an increase in the frequency of our warranty claims or amount of warranty costs may harm our reputation and could have a material adverse effect on our financial condition and results of operations.

 

We may be subject to litigation that will be costly to defend or pursue and uncertain in its outcome.

 

Our business may bring us into conflict with its licensees, licensors, or others with whom we have contractual or other business relationships, or with our competitors or others whose interests differ from us. If we are unable to resolve those conflicts on terms that are satisfactory to all parties, we may become involved in litigation brought by or against us. Such litigation is likely to be expensive and may require a significant amount of management’s time and attention, at the expense of other aspects of our business. The outcome of litigation is always uncertain, and in some cases, could include judgments against us that require us to pay damages, enjoin us from certain activities, or otherwise affect our legal or contractual rights, which could have a significant adverse effect on our business. In addition, while we maintain insurance for certain risks, the amount of our insurance coverage may not be adequate to cover the total amount of all insured claims and liabilities. It also is not possible to obtain insurance against all potential risks and liabilities. We cannot predict what the outcome will be in any ongoing or threatened litigations, and any adverse results in any such litigations may also materially and negatively impact our business, the market price of its common stock, cash flow, prospects, revenues, profitability or capital expenditures, or have other material adverse effects on its business, reputation, results of operations, financial condition or liquidity.

 

Our failure to obtain and maintain FDA clearances or approvals on a timely basis, or at all, would prevent us from commercially distributing and marketing current or upgraded products in the United States, which could severely harm our business.

 

Our products are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental authorities. The process of obtaining regulatory clearances or approvals to market a medical device can be costly and time consuming, and we may not be able to obtain these clearances or approvals on a timely basis, if at all. The FDA permits commercial distribution of a new medical device only after the device has received clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act, or is the subject of an approved premarket approval application, or PMA, unless the device is specifically exempt from those requirements. Should the FDA require, or a change in current regulations occur, that our products be FDA-cleared for marketing and sale in the U.S., we may be required to incur significant expense and engage in a time-consuming process seeking such approvals. If we were unable to obtain the required FDA approvals for these products or as necessary to make certain claims about the efficacy of the products, our sales of these products in the U.S. could be materially adversely affected.

 

 19 
   

 

The FDA clears marketing of lower-risk medical devices through the 510(k) process if the manufacturer demonstrates that the new product is substantially equivalent to other 510(k)- cleared products. High risk devices deemed to pose the greatest risk, such as life-sustaining, life-supporting, or implantable devices, or devices not deemed substantially equivalent to a previously cleared device, require the pre-market approval (PMA). The PMA process is costlier, and lengthier, than the 510(k) clearance process. A PMA application must be supported by extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing and labeling data, to demonstrate to the FDA’s satisfaction the safety and efficacy of the device for its intended use.

 

Our failure to comply with U.S. federal, state and foreign governmental regulations could lead to the issuance of warning letters or untitled letters, the imposition of injunctions, suspensions or loss of regulatory clearance or approvals, product recalls, or corrective action, termination of distribution, product seizures or civil penalties. In the most extreme cases, criminal sanctions or closure of the manufacturing facility are possible.

 

If we fail to manage our growth effectively, our businesses could be disrupted which could harm our operating results.

 

We have experienced, and may in the future experience, growth in our business, both organically and through the acquisition of businesses and products. We expect to make significant investments to enable our future growth through, among other things, new product innovation and clinical trials for new applications and products.

 

Such growth may place a strain on our management and operations. Our ability to manage this growth will depend upon, among other factors, our ability to broaden our management team; our ability to attract, hire, train, motivate and retain skilled employees; and the ability of our officers and key employees to continue to implement and improve our operational, financial and other systems, to manage multiple, concurrent customer relationships and different products and to respond to increasing compliance requirements. Our future success is heavily dependent upon achieving such growth and acceptance of our products. Any failure to effectively manage future growth could have a material adverse effect on our business, results of operations and financial condition.

 

We may need to raise additional funds to pursue our growth strategy or continue our operations, and we may be unable to raise capital when needed.

 

From time to time, we may seek additional equity or debt financing to provide for the capital expenditures required to finance working capital requirements, continue our expansion, to increase liquidity, develop new products and services or make acquisitions or other investments. In addition, if our business plans change, general economic, financial or political conditions in our markets change, or other circumstances arise that have a material effect on its cash flow, the anticipated cash needs of our business as well as our conclusions as to the adequacy of our available sources of capital could change significantly. Any of these events or circumstances could result in significant additional funding needs, requiring us to raise additional capital, and we cannot predict the timing or amount of any such capital requirements now. If financing is not available on satisfactory terms, or at all, we may be unable to expand our business or to develop new business at the rate desired and our results of operations may suffer.

 

Our issuance of additional shares may have the effect of diluting the interest of stockholders.

 

Any additional issuances by us of common stock from our authorized but unissued shares may have the effect of diluting the percentage interest of existing stockholders. Out of our 100,000,000 authorized common shares, 47,659,300 shares, or 48%, remain unissued at December 31, 2017. We have 5,803,335 stock options outstanding as of December 31, 2017. The board of directors has the power to issue such shares without stockholder approval. Of our 20,000,000 authorized preferred shares, 210,000 were issued on May 1, 2018. We may issue additional common shares or preferred shares in the future to raise capital to fund our business operations and growth objectives.

 

The board of directors’ authority to set rights and preferences of preferred stock may prevent a change in control by stockholders of common stock.

 

Preferred shares may be issued in series from time to time with such designation, rights, preferences and limitations as our board of directors determines by resolution and without stockholder approval. This is an anti-takeover measure. The board of directors has exclusive discretion to issue preferred stock with rights that may trump those of common stock. The board of directors could use an issuance of preferred stock with dilutive or voting preferences to delay, defer or prevent common stockholders from initiating a change in control of our Company or reduce the rights of common stockholders to the net assets upon dissolution. Preferred stock issuances may also discourage takeover attempts that may offer premiums to holders of our common stock.

 

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Our Company has a concentration of stock ownership and control, which may have the effect of delaying, preventing, or deterring a change of control or reducing the price per share of our common stock.

 

Our current executive officers and directors beneficially own 23.9% of our outstanding common stock as of May 31, 2018, and stockholders that, individually or together with affiliates, own five percent or more of our outstanding common stock, beneficially owns in the aggregate, approximately 51%.  Further, Kelvin Claney, our CEO and Chairman, who beneficially owns 16.8% of our total outstanding shares of common stock, also owns 210,000 shares of series A preferred stock, par value $0.001 per share, which has a voting designation of 100 to 1, giving him an additional 21 million votes on all matters on which holders of our common stock are entitled to vote.  Accordingly, if such stockholders were to choose to act together, they would have significant influence over the outcome of corporate actions requiring stockholder approval.  The interests of such stockholders may be different than the interest of other stockholders on these matters.  This concentration of ownership could also have the effect of delaying, preventing or deterring a change in control or otherwise discourage a potential acquirer from attempting to obtain control of the Company, which in turn could reduce the price per share of our common stock and could also deprive our stockholders of an opportunity to receive a premium for their shares as part of a sale of our Company.

 

Our board of directors is staggered, which makes it more difficult for a stockholder to acquire control of our Company.

 

Our articles of incorporation and bylaws provide that our board of directors be divided into three classes, with one class being elected each year by the stockholders. This generally makes it more difficult for stockholders to replace a majority of directors and obtain control of the board.

 

Stockholders do not have the authority to call a special meeting, which discourages takeover attempts.

 

Our articles of incorporation permit only our board of directors to call a special meeting of the stockholders, thereby limiting the ability of stockholders to effect a change in control of our Company.

 

We do not anticipate paying dividends to common stockholders in the foreseeable future, which makes investment in our stock speculative or risky.

 

We have not paid dividends on our common stock and do not anticipate paying dividends on our common stock in the foreseeable future. The board of directors has sole authority to declare dividends payable to our stockholders. The fact that we have not and do not plan to pay dividends indicates that we must use all our funds generated by operations for reinvestment in our operating activities. Investors also must evaluate an investment in our Company solely on the basis of anticipated capital gains.

 

Limited liability of our executive officers and directors may discourage stockholders from bringing a lawsuit against them.

 

Our articles of incorporation and bylaws contain provisions that limit the liability of directors for monetary damages and provide for indemnification of officers and directors. These provisions may discourage stockholders from bringing a lawsuit against officers and directors for breaches of fiduciary duty and may also reduce the likelihood of derivative litigation against officers and directors even though such action, if successful, might otherwise have benefited the stockholders. In addition, a stockholder’s investment in our Company may be adversely affected to the extent that costs of settlement and damage awards against officers or directors are paid by us under the indemnification provisions of the articles of incorporation and bylaws. The impact on a stockholder’s investment in terms of the cost of defending a lawsuit may deter the stockholder from suing one of our officers or directors. We have been advised that the Securities and Exchange Commission takes the position that this provision does not affect the liability of any director under applicable federal and state securities laws.

 

 21 
   

 

We have identified material weaknesses in our internal control over financial reporting. If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results. As a result, current and potential stockholders could lose confidence in our financial statements, which would harm the trading price of our common stock.

 

Companies that file reports with the SEC, including us, are subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404. SOX 404 requires management to establish and maintain a system of internal control over financial reporting and annual reports on Form 10-K filed under the Exchange Act to contain a report from management assessing the effectiveness of a company’s internal control over financial reporting. Separately, under SOX 404, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, public companies that are large accelerated filers or accelerated filers must include in their annual reports on Form 10-K an attestation report of their regular auditors attesting to and reporting on management’s assessment of internal control over financial reporting. Non-accelerated filers and smaller reporting companies, like us, are not required to include an attestation report of their auditors in annual reports.

 

We are a smaller reporting company and, consequently, are not required to include an attestation report of our auditor in our annual report. However, if and when we become subject to the auditor attestation requirements under SOX 404, we can provide no assurance that we will receive a positive attestation from our independent auditors.

 

During its evaluation of the effectiveness of internal control over financial reporting as of December 31, 2017, management identified material weaknesses. These material weaknesses were associated with the implementation of an enterprise resource planning system, manual reporting processes regarding inventory accounts, the implementation of new accounting standards relating to revenue contracts, incomplete tax exposure studies, exposures in the Company’s information technology environment. We are undertaking remedial measures, which will take time to implement and test, to address these material weaknesses. There can be no assurance that such measures will be sufficient to remedy the material weaknesses identified or that additional material weaknesses or other control or significant deficiencies will not be identified in the future. If we continue to experience material weaknesses in our internal controls or fail to maintain or implement required new or improved controls, such circumstances could cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements, or adversely affect the results of periodic management evaluations and, if required, annual auditor attestation reports. Each of the foregoing results could cause investors to lose confidence in our reported financial information and lead to a decline in our stock price.

 

Our consolidated financial statements have been prepared on a going concern basis. If we are unable to achieve profitable operations or obtain financing to meet our obligations, we may be forced to cease operations and liquidate.

 

Our consolidated financial statements have been prepared on a going concern basis, which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. We had a net loss of approximately $6,628,000 for the year ended December 31, 2017 and generated negative cash flows from operating activities of approximately $1,510,000. In addition, we have an accumulated deficit of approximately $16,905,000 as of December 31, 2017. The net loss for the year included an impairment loss on intangible assets of approximately $1,235,000 and inventory net realizable value of approximately $1,323,000 associated with the Ermis Labs and PhotoMedex acquisitions, and bad debt expense of approximately $1,460,000. We recognized a gain on settlement of the Photomedex contingent consideration of approximately $1,969,000, had cash and cash equivalents of approximately $1,258,000, and positive working capital of approximately $2,985,000 at December 31, 2017.

 

The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. The Company’s ability to raise additional capital through the future issuances of debt or equity is unknown. The ability to obtain additional financing, the successful development of the Company’s contemplated plan of operations, or its ability to achieve profitable operations are necessary for the Company to continue operations. The ability to successfully resolve these factors raise substantial doubt about the Company’s ability to continue as a going concern. If we are unable to obtain financing or achieve profitable operations, we may have to cease operations and liquidate our assets and the holders of our equity may lose all or a significant portion of the value of their equity.

 

We are exposed to risks associated with cybersecurity breaches, which could cause system malfunctions and potential loss of data.

 

A successful cyberattack can take many forms, but a common objective of many of these attacks is to introduce computer viruses or malware into the Company’s systems. These viruses or malicious code are typically designed to obtain unauthorized access to confidential information, manipulate or destroy data, disrupt, sabotage, or degrade the Company’s systems, or steal money. A successful cyberattack could cause serious negative consequences such as significant disruption of the Company’s operations and potential loss of access to operational systems, misappropriation of confidential information of the Company or that of its customers, counterparties, or employees, damage to the Company’s computers or systems, of the inability to fully recover and restore data that has been stolen, manipulated, or destroyed. 

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

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ITEM 2. DESCRIPTION OF PROPERTY

 

PROPERTIES

 

Our executive offices are located at 489 Devon Park Drive, Suite 306 in Wayne, Pennsylvania, where we lease 5,298 square feet with a monthly lease payment of approximately $12,700, which expires in February 2022. We also lease office space in London, Hong Kong and Israel. Our London office is located at Suite 10, Landmark House Station Road, Cheadle Hulme, Cheshire SK8 7BS, where we lease 306 square feet through February 2022 for a monthly cost of approximately $2,900. In March 2017, we entered into an agreement to lease approximately 250 square feet for our Hong Kong office, which is located at 807, OfficePlus @Prince Edward Hong Kong, 794-802 Nathan Road, which expired in March 2018, and then renewed until February 2022 for a monthly cost of approximately $1,900. Our Israel office is located at is located at 5 Hangar Street, Hod Hasharon Israel, 4501307, where we lease approximately 100 square meters. Our current lease expired in April 2018 and was renewed until April 2019 for a monthly cost of approximately $1,900.

 

We believe that our present facilities will be suitable for the operation of our business for the foreseeable future and should we need to expand, we expect that suitable additional space will be available on commercially reasonable terms, although no assurance can be made in this regard. Our property is adequately covered by insurance in the Wayne location.

 

ITEM 3. LEGAL PROCEEDINGS

 

By letter dated March 23, 2018, the Company’s Board of Directors notified Richard Ransom, President of the Company, that his employment would be terminated for cause in 30 days unless Mr. Ransom cured the causes for termination, as presented in the letter, within such 30-day period. On April 12, 2018, Mr. Ransom filed a Complaint in the Court of Common Pleas of Philadelphia County, Pennsylvania, naming as defendants the Company and our CEO, Kelvin Claney. The Complaint alleges that on March 20, 2018, Mr. Ransom was terminated without cause, pursuant to the terms of Mr. Ransom’s employment agreement, as a result of certain changes to the Company’s organizational chart and management duties instituted by Mr. Claney. The Complaint seeks to recover (i) 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; (ii) benefits and any performance bonus prorated through the date of termination; (iii) immediate vesting of 150,000 stock options; (iv) and 1,000,000 shares of the Company’s common stock. The Complaint also alleges that the Company and Mr. Claney defamed Mr. Ransom and seeks damages in an unspecified amount in excess of $50,000.

 

On April 18, 2018, the Board of Directors removed Richard Ransom as President of the Company for cause based upon breaches of Mr. Ransom’s fiduciary duties to the Company. The Company and Kelvin Claney deny that any of their actions constituted a termination without cause under the terms of Richard Ransom’s employment agreement, deny that Mr. Ransom was defamed, and maintain that Mr. Ransom was terminated for cause. Termination for cause does not give rise to payment of severance compensation under the terms of Mr. Ransom’s employment agreement.

 

From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. Other than the legal proceeding described above, we are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition, operating results or cash flows.

 

ITEM 4. MINE SAFTEY DISCLOSURES

 

Not applicable.

 

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PART II

 

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER’S PURCHASES OF EQUITY SECURITIES

 

MARKET FOR COMMON EQUITY

 

Our common stock is currently traded in the Over-the-Counter Markets Group “OTCQX” under the symbol “ICTV” and on the Canadian Securities Exchange, “CSE”, under the symbol “ITV”. The range of reported high and reported low bid prices per share for our common stock for each fiscal quarter within the last two fiscal years, as reported by Yahoo! Finance is set forth below. These quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not represent actual transactions.

 

   High   Low      High   Low 
Quarter ended  ($)   ($)   Quarter ended  ($)   ($) 
December 31, 2017   0.47    0.26   December 31, 2016   0.41    0.16 
September 30, 2017   0.57    0.36   September 30, 2016   0.29    0.15 
June 30, 2017   0.63    0.38   June 30, 2016   0.32    0.16 
March 31, 2017   0.64    0.25   March 31, 2016   0.27    0.17 

 

HOLDERS

 

As of May 31, 2018, there were 52,340,700 shares of common stock outstanding. We estimate these shares are held by approximately 294 stockholders of record.

 

DIVIDENDS

 

To date we have not paid any dividends on our common stock, and we do not expect to declare or pay any dividends on our common stock in the foreseeable future. Payment of any dividends will be dependent upon our future earnings, if any, our financial condition, and other factors the board of directors determines are relevant.

 

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

 

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 in the employment of the Company or its subsidiaries. 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 of common stock. The terms of any awards under the Plan are determined by the Board of Directors, provided that no options may be granted at less than the fair market value of the stock as of the date of the grant. The Plan expired in February 2011. As of December 31, 2017, 50,000 options are outstanding under the Plan.

 

In December 2011, our Board of Directors approved our 2011 Incentive Stock Option Plan (the “2011 Plan”). The 2011 Plan is designed for our employees, officers, and directors and is intended to advance the best interests of the Company by providing personnel who have substantial responsibility for the management and growth of the Company and its subsidiaries with additional incentive by increasing their proprietary interest in our success, thereby encouraging them to remain in the employment of the Company or its subsidiaries. The 2011 Plan is administered by the Board of Directors of the Company and authorizes the issuance of stock options not to exceed 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 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. As of December 31, 2017, 3,943,335 options are outstanding under the 2011 Plan.

 

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The following table presents information as to the number of shares of our common stock which are authorized for issuance under the 2011 Plan as of December 31, 2017:

 

   (a)   (b)   (c) 
Plan Category 

Number of securities to be issued upon exercise of outstanding

options

  

Weighted-

average exercise price of

outstanding

options

  

Number of securities remaining

available for

future issuance under the 2011 Plan (excluding securities

reflected in

column (a))

 
Equity compensation plans approved by security holders   3,993,335   $.27    1,843,334 
Equity compensation plans not approved by security holders   1,810,000   $.31    N/A 
                
Total   5,803,335   $.27    1,843,334 

 

Recent Sales of Unregistered Securities

 

On January 23, 2017, pursuant to the terms of the securities purchase agreement, dated October 4, 2016 (the “2016 Purchase Agreement”), between our Company and the investors named therein (the “Investors”), we completed a private placement whereby the Investors purchased 8,823,530 shares of common stock at a price of $0.34 per share, for aggregate gross proceeds of $3,000,000. The issuance of the shares was exempt from registration under Regulation D and Section 4(2) of the Securities Act of 1933.

 

On February 1, 2017, pursuant to the terms of the 2016 Purchase Agreement, we completed a second and final private placement whereby the Investors purchased 11,764,713 shares of common stock at a price of $0.34 per share, for aggregate gross proceeds of $4,000,000. The issuance of the shares was exempt from registration under Regulation D and Section 4(2) of the Securities Act of 1933.

 

On March 16, 2017, we issued 600,000 shares of fully vested common stock as part of a share bonus to three executive officers. The stock price on date of issuance was $0.56 per share. The recipients of the shares of common stock are key employees of our Company, and the issuance of the common stock is exempt from registration under Section 4(2) of the Securities Act of 1933. Total stock-based compensation related to this transaction for the year ended December 31, 2017 was $336,000 and is included in operating expenses in the accompanying consolidated statements of operations and comprehensive loss.

 

On March 31, 2017, a former employee exercised 35,000 options previously issued to her, at an exercise price of $0.22 per share. The exercise was cashless, such that the exercise price was paid in shares of our common stock, resulting in a net issuance of 22,475 shares. The shares were issued as restricted stock, with a restrictive legend placed on the share certificate. The issuance of the shares was exempt from registration under Regulation D and Section 4(2) of the Securities Act of 1933.

 

On June 26, 2017, a director exercised 250,001 options previously issued to him, at an exercise price approximately at an average of $0.22. The exercise resulted in an issuance of 250,001 shares. The shares were issued as restricted stock, with a restrictive legend placed on the share certificate. The issuance of the shares was exempt from registration under Regulation D and Section 4(2) of the Securities Act of 1933.

 

On July 10, 2017, a former employee exercised 35,000 options previously issued to her, at an exercise price of $0.22 per share. The exercise was cashless, such that the exercise price was paid in shares of our common stock, resulting in a net issuance of 20,307 shares. The shares were issued as restricted stock, with a restrictive legend placed on the share certificate. The issuance of the shares was exempt from registration under Regulation D and Section 4(2) of the Securities Act of 1933.

 

 25 
   

 

On October 17, 2017, a former employee exercised 16,667 options previously issued to her, at an exercise price approximately at an average of $0.22. The exercise resulted in an issuance of 16,667 shares. The shares were issued as restricted stock, with a restrictive legend placed on the share certificate. The issuance of the shares was exempt from registration under Regulation D and Section 4(2) of the Securities Act of 1933.

 

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. The issuance of the Series A Preferred Stock was exempt from registration under Regulation D and Section 4(2) of the Securities Act of 1933.

 

ITEM 6. SELECTED FINANCIAL DATA

 

Not applicable

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with the consolidated financial statements in Item 8. Certain statements contained in this report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements.

 

Overview

 

We develop, market and sell products through a multi-channel distribution strategy, including selling direct to consumer, live home shopping, traditional retail and e-commerce market places, Hong Kong airlines and our international third-party distributor network. We offer primarily health, beauty and wellness products as well as various consumer products, including:

 

  DermaWand®, a skin care device that reduces the appearance of fine lines and wrinkles, and helps improve skin tone and texture;
     
  DermaVital®, a professional quality skin care line that effects superior hydration;
     
  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 the products that we market primarily via licensing agreements, acquisition and in-house development and sell both domestically and internationally. We are continually exploring other devices and consumable product lines currently under licensing agreements that would complement our current portfolio of beauty products.

 

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On January 23, 2017, we acquired several new brands, related intellectual property, inventory and other assets and have begun (or, will shortly begin) marketing and selling the following new products. See Note 3 - Business and Asset Acquisitions, to our financial statements for more information about the PhotoMedex and Ermis Labs acquisitions:

 

  no!no!® Hair, a home use hair removal device;
     
  no!no!® Skin, a home use device that uses light and heat to calm inflammation and kill bacteria in pores to treat acne;
     
  no!no!® Face Trainer, a home use mask that supports a series of facial exercises;
     
  no!no!® Glow, a home use device that uses light and heat energy to treat skin;
     
  Made Ya Look, a heated eyelash curler;
     
  no!no!® Smooth Skin Care, an array of skin care products developed to work with the devices to improve the treated skin;
     
  Kyrobak®, a home use device for the treatment of non-specific lower back pain;
     
  ClearTouch®, a home use device for the safe and efficient treatment of nail fungus; and
     
  Ermis Labs acne treatment cleansing bars.

 

Our strategy is to introduce our brands to the market through an omni-channel platform that includes, but is not limited to direct response television, digital marketing, live home shopping, traditional retail, e-commerce market places, and international third-party distributor networks. Our objective is to have our portfolio of products sold through these channels to develop long lasting brands with strong returns on investments.

 

Fluctuations in our revenue are driven by changes in our product mix. Revenues may vary substantially from period-to-period depending on our product line-up. A product that generates revenue in one quarter may not necessarily generate revenues in each quarter of a fiscal year for a variety of reasons, including, seasonal factors, number of infomercials run, the product’s stage in its life-cycle, the public’s general acceptance of the marketing campaign and other outside factors, such as the general state of the economy.

 

Just as fluctuations in our revenues are driven by changes in our product mix, our gross margins from period to period depend on our product mix. Our gross margins vary according to whether the products we are selling are primarily our own products or third-party products. As a rule, the gross margins for our own products are considerably higher based on proportionately smaller cost of sales. For third-party products, our general experience is that our gross margins are lower because we record as cost of sales the proportionately higher cost of acquiring the product from the manufacturer. Within each category (i.e., our own products versus third-party products), gross margins still tend to vary based on factors such as market price sensitivity and cost of production.

 

Many of our expenses for our own products are incurred up-front. Some of our up-front expenditures include infomercial production costs, which are expensed at the start of a campaign and purchases of media time. If our infomercials are successful, these up-front expenditures produce revenue as consumers purchase the products aired on the infomercials. We do not incur infomercial production costs and media time for our international sales to third party distributors as we supply pre-produced infomercials. It is the responsibility of the international infomercial operators to whom we sell the third-party products to take the pre-produced infomercial, adapt it to their local standards and pay for media time.

 

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Results of Operations

 

Year ended December 31, 2017 compared to the year ended December 31, 2016

 

The following table summarizes the results of our operations during the years ended December 31, 2017 and 2016 and provides information regarding the dollar increase or decrease from the prior year.

 

    Year Ended        
    2017     2016     Increase
(Decrease)
 
Net Sales   $ 31,458,000     $ 16,789,000     $ 14,669,000  
Cost of Sales     12,631,000       4,999,000       7,037,000  
Gross Profit     18,827,000       11,790,000       7,036,000  
Operating Expenses     25,802,000       12,773,000       13,029,000  
Operating Loss     (6,975,000 )     (983,000 )     5,992,000  
Other Income (Expense), Net     551,000       (13,000 )     564,000  
Provision for Income Taxes     (204,000 )     -       204,000  
Net Loss   $ (6,628,000 )   $ (996,000 )   $ 5,632,000  

 

Net Sales

 

Net Sales for the year ended December 31, 2017 were approximately $31,458,000 an approximately 87% increase, compared to revenues of approximately $16,789,000 for the year ended December 31, 2016. The primary driver of the increase in net sales was the result of the addition of sales from the no!no!®, Kyrobak® and Cleartouch products that were acquired in the PhotoMedex acquisition in January 2017. Sales resulting directly from the acquisition were approximately $8,802,000. Our direct to consumer segment increased approximately $13,812,000 or approximately 111%, from approximately $12,478,000 for the year ended December 31, 2016 to approximately $26,291,000 for the year ended December 31, 2017. Our direct to consumer segment, which consists of direct response television (“DRTV”), live home shopping, and retail and e-commerce sales, for the years ended December 31, 2017 and 2016 is summarized below:

 

    2017     2016     Increase  
DRTV   $ 11,300,000     $ 7,555,000     $ 3,745,000  
Live Home Shopping     3,684,000       31,000       3,653,000  
Retail & E-commerce     11,307,000       4,892,000       6,415,000  
Total Direct to Consumer   $ 26,291,000     $ 12,478,000     $ 13,813,000  

 

The increase in the retail and e-commerce sales also relates to the expansion of retail placement for DermaWand® in the North American market, both in traditional brick and mortar and online retail. In addition, as part of the PhotoMedex asset acquisition, ICTV inherited retail placement for no!no!® hair, primarily in the United Kingdom with retail placement in outlets such as Boots, Argos, JD Williams, and Very. We expect our retail sales to continue to grow throughout 2018.

 

Our international third-party distributor sales decreased approximately $943,000 from approximately $4,311,000 for the year ended December 31, 2016 to approximately $3,368,000 for the year ended December 31, 2017. The decrease in sales is primarily due to a shift in focus as to how ICTV is expanding its marketing and distribution platform internationally away from distributors requiring infomercials. With the acquisition of the PhotoMedex assets, ICTV now has a physical presence in Europe and Asia through our London and Hong Kong offices. Plans are underway to launch direct campaigns in other European and Asian countries, thus reducing the number of international distributors that ICTV will allow to sell our products. We are also actively working to expand retail and other distribution globally that do not require running infomercials.

 

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Sales through our Hong Kong subsidiary, which resulted from the acquisition described above, were approximately $1,800,000 for the year ended December 31, 2017, which consisted of approximately $928,000 of airline sales and approximately $872,000 of retail and e-commerce sales.

 

Gross Profit

 

During the year ended December 31, 2017, we generated approximately $18,827,000 in gross profit, compared to approximately $11,790,000 in 2016. The increase in gross profit was due to the increased sales due to the addition of the no!no!®, Kyrobak® and Cleartouch products acquired in January 2017. Gross profit percentage was 60% in 2017, compared to 70% in 2016. The decrease in gross profit percentage is attributed to the shift to lower margin sales via retailers from higher margin sales from Direct Response Television (“DRTV”), the expenses of integrating and maintaining two logistics operations post the PhotoMedex acquisition, the amortization of a portion of the fair value adjustment assigned to the purchased inventory, significantly higher returns on some of those acquired products in part driven by 60 day return policies versus 30 days for the rest of the business, and impairment of approximately $1,323,000 of the purchased inventory that was determined to be no longer salable.

 

Operating Expenses

 

Operating expenses, consisting of general and administrative expenses and sales and marketing expenses, increased approximately $13,029,000 to approximately $25,802,000 during the year ended December 31, 2017, compared to approximately $12,773,000 in the prior year. The increase in operating expenses relates primarily to the PhotoMedex acquisition.

 

General and administrative expenses for the years ended December 31, 2017 and 2016 are summarized below:

 

   2017   2016   Increase (Decrease) 
Payroll and Related Expenses  $3,084,000   $1,526,000   $1,558,000 
Share Based Compensation   783,000    417,000    366,000 
Professional Fees   1,146,000    352,000    794,000 
Consulting   934,000    305,000    629,000 
Bad Debts   1,460,000    921,000    539,000 
Office Expenses   588,000    287,000    301,000 
Depreciation and Amortization   840,000    8,000    832,000 
Rent   345,000    55,000    290,000 
Insurance   376,000    193,000    183,000 
Other General and Administrative   731,000    194,000    537,000 
   $10,287,000   $4,258,000   $6,029,000 

 

Payroll and related expenses increased approximately $1,558,000 during the year ended December 31, 2017 over the prior year ended December 31, 2016 as a result of the added staff. Our personnel increased from 11 employees in 2016 to 29 employees in 2017.

 

Share based compensation expense includes approximately $448,000 of compensation expense recognized in connection with our stock option plans for the year ended December 31, 2017 as compared to approximately $417,000 recognized for the year ended December 31, 2016. In 2017, we also recognized approximately $336,000 associated with 600,000 shares of common stock issued for executive compensation for the year ended December 31, 2017 as compared to $-0- for the year ended December 31, 2016. The increase was attributable to share bonuses to three executive officers awarded in the first quarter of 2017.

 

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Professional fees increased approximately $794,000 for the year ended December 31, 2017 over the prior year ended December 31, 2016. Professional fees consist of costs incurred for audit, tax, regulatory filings and quarterly reporting requirements, as well as legal fees incurred. The increase is driven by the large increase in volume and complexity of financial and legal issues both domestically and internationally as a result of the PhotoMedex and Ermis Labs acquisitions.

 

Consulting fees increased approximately $629,000 during the year ended December 31, 2017 over the prior year ended December 31, 2016. The increase is due to the additional costs incurred to manage our CRM platform which resulted in added subcontractor costs.

 

Bad debt expense increased approximately $539,000 during the year ended December 31, 2017, which is consistent with the increase in sales; however, bad debt expense as a percentage of net sales was approximately 4.6% for the year ended December 31, 2017 as compared to approximately 5.5% of net sales for the year ended December 31, 2016. This decrease in percentage is mainly due to sales mix and increase in retail sales which historically have lower returns.

 

Depreciation and amortization expense increased approximately $832,000 during the year ended December 31, 2017 over the prior year ended December 31, 2016 primarily due to the amortization associated with the acquired intangible assets in 2017.

 

Rent expense increased approximately $290,000 during the year ended December 31, 2017 over the prior year ended December 31, 2016 primarily due to the additional locations for our foreign subsidiaries associated with the acquisition. We also expanded our corporate headquarters in 2017.

 

Insurance expense increased approximately $183,000 during the year ended December 31, 2017 over the prior year ended December 31, 2016 primarily due to our product liability insurance to insure our increased inventory.

 

Other general and administrative expenses increased approximately $537,000 during the year ended December 31, 2017 over the prior year ended December 31, 2016 primarily due to the increased costs associated with travel, approximately $384,000, and updating our website for our new products, approximately $281,000.

 

Selling and marketing expenses for the years ended December 31, 2017 and 2016 are summarized below:

 

   2017   2016   Increase (Decrease) 
Answering Service  $648,000   $663,000   $(15,000)
Customer Service   809,000    340,000    469,000 
Merchant Fees   866,000    609,000    257,000 
Internet Marketing   4,481,000    1,348,000    3,133,000 
Media   7,787,000    4,972,000    2,815,000 
Other Marketing   924,000    583,000    341,000 
                
   $15,515,000   $8,515,000   $7,000,000 

 

Internet marketing expenses increased approximately $3,133,000 from approximately $1,348,000 for the year ended December 31, 2016 to approximately $4,481,000 for the year ended December 31, 2017. The increased expenses are the result of our continued shift to more digital marketing efforts through search engine marketing and optimization, paid social media and banner ad campaigns.

 

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Media expenses increased approximately $2,815,000 from approximately $4,972,000 for the year ended December 31, 2016 to approximately $7,787,000 for the year ended December 31, 2017. The increase in media expenses is relatively consistent with the increased sales resulting from the PhotoMedex acquisitions, as well as a shift in expenditures to  internet marketing.

 

The increased customer service, merchant fees and other marketing costs during the year ended December 31, 2017 of approximately $1,067,000 are consistent with the increased sales resulting from the PhotoMedex acquisition. The decrease in answering service expenses of approximately $15,000 is attributable to a change in vendor utilization, whereby certain customer service vendors also performed answering service functions.

 

Net Loss

 

We generated a net loss of approximately $6,628,000 for the year ended December 31, 2017, compared with a net loss of approximately $996,000 for the year ended December 31, 2016. Interest expense totaled approximately $400,000 as compared with approximately $14,000 for year ended December 31, 2016, primarily due to the long-term note secured for the PhotoMedex Release Agreement. The approximate $1,969,000 gain on settlement of this Release Agreement reduced the net loss for the year ended December 31, 2017; however, the gain was partially offset by an impairment loss of approximately $1,235,000 recognized for the year ended December 31, 2017 related to the Ermis Lab intangible assets.

 

Liquidity and Capital Resources

 

At December 31, 2017, we had approximately $1,258,000 in cash and cash equivalents compared to approximately $1,391,000 at December 31, 2016. The following table sets forth a summary of our cash flows for the periods indicated:

 

   December 31, 
   2017   2016 
Net cash (used in) provided by operating activities  $(1,510,000)  $284,000 
Net cash used in investing activities  $(5,201,000)  $(2,000)
Net cash provided by (used in) financing activities  $6,574,000   $(225,000)
Effect of exchange rates on cash and cash equivalents  $4,000   $- 
Net (decrease) increase in cash  $(133,000)  $57,000 
Cash and cash equivalents, beginning of the period  $1,391,000   $1,334,000 
Cash and cash equivalents, end of the period  $1,258,000   $1,391,000 

 

Cash decreased by approximately $133,000 for the year ended December 31, 2017. The primary change of cash used in operating activities was due to a net loss of approximately $6,628,000 and a decrease in accounts receivable, net of reserves, of approximately $3,026,000, offset by increases in accounts payable and accrued liabilities of approximately $3,843,000, inventory of approximately $2,785,000, and an impairment of intangible assets of approximately $1,235,000.

 

Cash flow used by investing activities was approximately $5,201,000 during the year ended December 31, 2017. During 2017, we paid $5,000,000 for the PhotoMedex acquisition, which was completed in January 2017, and we had capital expenditures of approximately $201,000.

 

Cash flow provided by financing activities was approximately $6,574,000 during the year ended December 31, 2017. In 2017, we issued 20,588,243 shares of common stock for proceeds of approximately $6,983,000, net of issuance costs. In addition, there was an exercise of stock options for proceeds of approximately of $59,000. We also used $225,000 of cash to pay-down the liability in connection with the DermaWand® asset purchase agreement during the year ended December 31, 2017, and we made principal payments of approximately $228,000 toward the long-term debt.

 

Our consolidated financial statements have been prepared on a going concern basis, which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. We had working capital of approximately $2,985,000 at December 31, 2017 compared to approximately $1,340,000 at December 31, 2016. We are monitoring cash flows from operations on a regular basis and continue to monitor our liquidity needs. In response to our continued losses, we have taken measures to reduce expenses and restructure operations in 2018 which we feel are necessary to ensure we maintain sufficient working capital and liquidity to operate the business and invest in our future.

 

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Recent Events

 

Corporate Secretary

 

On April 18, 2018, the Board appointed our Chief Financial Officer, Ernest Kollias, to replace John Carrino as our corporate secretary.

 

Key Management Change

 

On April 18, 2018, our Board of Directors terminated the employment agreement of our president, Richard Ransom “for cause” as such term is defined in his employment agreement. The Board terminated Mr. Ransom’s employment agreement as a result of certain breaches thereunder. We are currently performing an internal investigation concerning potential additional breaches by Mr. Ransom of his fiduciary duties to the Company and other contractual, statutory and common law violations.

 

Internal Restructuring

 

Beginning April 15, 2018, our CEO, Kelvin Claney, agreed to an annual reduction of $100,000 from his base salary. The reduction does not affect Mr. Claney’s base salary for purpose of calculating compensation, in the event of employment termination. As of April 23, 2018, the office of President has been closed and the duties will be shared between CEO, CFO, VP of Operations, and VP of Sales. Due to a redundancy of duties, ICTV’s Marketing Department has been eliminated and its duties have been absorbed by the Operations Department and the Sales Department. We also expect to eliminate our in-house counsel as a salaried employee. We anticipate implementing during 2018 a new arrangement with such counsel as a third party legal service provider. ICTV has reconfigured its office space and will reduce overall square footage which will reduce rent cost per month. We anticipate that these reductions will not compromise our overall performance or efficiency. On an annualized basis, these changes will result in approximately $692,000 of savings. The prorated amount of savings to be seen in from May 2018 to December 31, 2018 totals to approximately $436,000.

 

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. 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, the Company’s Chief Executive Officer, entered into a subscription agreement pursuant to which the Company issued to Mr. Claney 210,000 shares of Series A Preferred Stock for cash consideration of $403,200, or $1.92 per share.

 

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Therma Bright Asset Purchase Agreement

 

On March 6, 2018, the Company and its subsidiaries, ICTV Brands UK, ICTV Brands HK and ICTV Brands Israel, entered into the Asset Purchase Agreement with Therma Bright, pursuant to which Therma Bright agreed to acquire certain assets relating to the Company’s ClearTouch nail phototherapy device and no!no!® skin phototherapy device, excluding, with some exception, any liabilities relating thereto, and excluding any rights to the trademark or name “no!no!® ” or “no!no!® skin” for a purchase price of $2,250,000, subject to certain closing adjustments. The purchase price was to be payable in cash installments commencing at closing, subject to certain adjustments, through December 31, 2020.

 

In connection with the Asset Purchase Agreement, the Company and Therma Bright entered into a Patent and Trademark Pledge Agreement, dated March 6, 2018, pursuant to which Therma Bright granted a first priority security interest in certain patents in order to guarantee the purchase price set forth in the Asset Purchase Agreement. Also, in connection with the Asset Purchase Agreement, the Company and Therma Bright entered into a Transition Services Agreement, and a Sales Representative Agreement, each dated March 6, 2018, relating to certain services to be provided upon closing of the transaction contemplated by the Asset Purchase Agreement.

 

On April 26, 2018, the Company delivered to Therma Bright written notice of termination of each of the Asset Purchase Agreement, the Transition Services Agreement, the Patent and Trademark Pledge Agreement and the Sales Representative Agreement, in each case, pursuant to the terms therein and effective April 26, 2018.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The Securities and Exchange Commission, or SEC, defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Our significant accounting policies are described in Note 2 in the Notes to the Consolidated Financial Statements. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. However, the following policies could be deemed to be critical within the SEC definition.

 

Accounts receivable

 

Accounts receivable are recorded net of allowances for returns and doubtful accounts of approximately $913,000 and $123,000 as of December 31, 2017 and 2016, respectively. The majority of our receivables are from our direct to consumer customers. Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. From time to time, our customers dispute the amounts due to us, and, in other cases, our customers experience financial difficulties and cannot pay on a timely basis. In certain instances, these factors ultimately result in uncollectible accounts. The determination of the appropriate reserve needed for uncollectible accounts involves significant judgment. Such factors include changes in the financial condition of our customers as a result of industry, economic or customer-specific factors. A change in the factors used to evaluate collectability could result in a significant change in the allowance needed. We calculate our allowances based on historical customer returns and bad debt activity. We complete a validation process on our reserve estimates by performing a retrospective review on an ongoing basis.

 

In addition to reserves for returns on accounts receivable, an accrual is made for the returns of product that have been sold to customer and had cash collections, while the customer still has the right to return the product. The amounts of these accruals included in accounts payable and accrued liabilities in our Consolidated Balance Sheets were approximately $179,000 and $91,000 as of December 31, 2017 and 2016, respectively.

 

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Inventories

 

Inventories consist primarily of products held for resale and are valued at the lower of cost (first-in, first-out method) or net realizable value. Reserves for slow-moving, excess and obsolete inventories, reduce the historical carrying value of our inventories, and are provided based on historical experience and product demand. Management evaluates the adequacy of these reserves periodically based on forecasted sales and market trends. During the year ended December 31, 2017, we wrote off inventory of approximately $1,323,000 based upon an evaluation of the Ermis Labs and PhotoMedex acquired inventory. The Company’s reserve for obsolescence was approximately $247,000 and $74,000 as of December 31, 2017 and 2016, respectively. Included in inventory at December 31, 2017 and 2016 is approximately $51,000 and $67,000 of consigned product, respectively, that has been shipped to customers under the 30-day free trial period for which the trial period has not expired and as such the customer has not accepted the product.

 

Revenue recognition

 

For our direct response television consumer sales generated by our infomercials, product sales revenue is recognized when the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectability is reasonably assured. Our revenues in the Consolidated Statement of Operations are net of sales taxes.

 

We offer a 30-day risk-free trial as one of its payment options. Revenue on the 30-day risk-free trial sales is not recognized until customer acceptance and collectability are assured which we determine to be when the trial period ends. If the risk-free trial expires without action by the customer, product is determined to be accepted by the customer and revenue is recorded. Revenue for items purchased without the 30-day free trial is recognized upon shipment of the product to the customer and collectability is assured.

 

Revenue related to our DermaVital® continuity program is recognized monthly upon shipment to customers. Revenue related to international third-party distributor customers is recorded at gross amounts with a corresponding charge to cost of sales.

 

We have a return policy whereby the customer can return any product received within 30 days of receipt for a full refund excluding shipping and handling. However, historically we have accepted returns past 30 days of receipt. For our products newly acquired on January 23, 2017 of Cleartouch®, Kyrobak® and no!no!®, we currently have a return policy whereby the customer can return any product received within 60 days for a full refund excluding shipping and handling. We provide an allowance for returns based upon past experience. All significant returns for the years presented have been offset against gross sales.

 

Income taxes

 

In preparing our consolidated financial statements, we make estimates of our current tax exposure and temporary differences resulting from timing differences for reporting items for book and tax purposes. We recognize deferred taxes by the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for differences between the financial statement and tax bases of assets and liabilities at enacted statutory tax rates in effect for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. In addition, valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. In consideration of our accumulated losses and limited historical ability to generate taxable income to utilize our deferred tax assets, we have estimated that we will not be able to realize any benefit from our temporary differences and have recorded a full valuation allowance. If we sustain profitability in the future at levels which cause management to conclude that it is more likely than not that we will realize all or a portion of the net operating loss carry-forward, we would record the estimated net realized value of the deferred tax asset at that time and would then provide for income taxes at a rate equal to our combined federal and state effective rates. Subsequent revisions to the estimated net realizable value of the deferred tax asset could cause our provision for income taxes to vary significantly from period to period.

 

Our policy is to recognize interest and penalties related to tax matters in general and administrative expenses in the Consolidated Statements of Operations.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

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ITEM 7A. MARKET RISK DISCLOSURES

 

Not Applicable.

 

ITEM 8. FINANCIAL STATEMENTS

 

Financial statements are set forth on pages F-1 through F-23.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management is responsible for establishing and maintaining adequate disclosure controls and procedures. Disclosure controls and procedures are those controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

We carried out an evaluation as of December 31, 2017, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Annual Report, our disclosure controls and procedures were not effective because of the material weaknesses in our internal control over financial reporting as discussed below.

 

A “material weakness” is defined as a significant deficiency or combination of significant deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. A “significant deficiency” is defined as a control deficiency, or combination of control deficiencies, that adversely affects the Company’s ability to initiate, authorize, record, process, or report external financial information reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the Company’s annual or interim financial statements that is more than inconsequential will not be prevented or detected.

 

Management identified the following material weaknesses in the Company’s internal control over financial reporting as of December 31, 2017:

 

ERP System Implementation

 

Our operations expanded significantly primarily due to the PhotoMedex and Ermis Labs acquisitions occurring in January 2017. As a result, we had not been able to establish the proper accounting and financial reporting oversight of such increased activity. The lack of a fully implemented enterprise resource planning system (“ERP”) contributed to the situation. During the fourth quarter of 2017, we implemented an ERP system; however, issues related to the implementation of the ERP system resulted in a delay in the financial statement close process, such as execution of certain financial statement controls, including timely account reconciliations, analysis and reviews, that had not operated as intended for all financial statement accounts. Due to the unanticipated delay, the ERP system implementation resulted in business and operational interruptions and have resulted in a material weakness in the financial statement close process as of December 31, 2017.

 

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Inventory

 

During the third and fourth quarter of 2017, an internal control material weakness surrounding the Company’s inventory accounts was noted. The material weakness was the result of substantial reliance on manual reporting processes and spreadsheets, in connection with the inventory acquired from PhotoMedex, which was external to the Company’s accounting system. Inventory acquired from PhotoMedex was accounted for by using a manual Excel spreadsheet, which did not properly account for inventory transferred to our primary warehouse and distribution center during the quarter ended June 30, 2017, resulting in quantities being recorded twice and overstating the consolidated inventory balance. There were also insufficient physical count processes and insufficient compensating detective controls in place to identify the error. Management discovered the overstatement during the third quarter ended September 30, 2017 and immediately restated its second quarter 2017 financial statements. These factors resulted in a material weakness in our inventory controls and procedures. The material weakness was still present at year end due to an implementation process of our ERP system.

 

Implementation and Adoption of New Accounting Standard, ASC 606

 

As of December 31, 2017, we have not substantially or timely completed the evaluation process to implement controls and identify the impact to its consolidated financial statements of adopting ASU No. 2014-09, Revenue from Contracts with Customers, which provides for a single five-step model to be applied to all revenue contracts with customers as well as requires substantial additional financial statement disclosures. The Company is required to adopt the new standard effective January 1, 2018. We have performed a detail review of our revenue arrangements which consist primarily of product sales based on the guidance in the standard. We are continuing to review performance obligations in terms of material customer contractual arrangements in order to verify that revenue is recognized when performance obligations are satisfied. Based on our review of the interpretive guidance that has been issued, we do not expect the adoption of this standard to have a material impact on our consolidated financial statements. However, we have not completed the implementation of changes to our processes related to revenue recognition and the control activities within them. These include the development of new policies based on the five-step model provided in the new revenue standard, new training, ongoing contract review requirements, and gathering of information provided for disclosures. As a result, we have identified this as a material weakness.

 

Income Tax Study

 

With the acquisition of PhotoMedex in January of 2017, we have experienced material changes in our operations, in particular expanding its operations with foreign subsidiaries. Although we have currently engaged a third-party tax consultant to ensure tax compliance, we have not yet formalized our analysis and policies to address potential foreign tax exposures, specifically in the form of a transfer price study. The Company also experienced a significant change in ownership as a result of a private placement of common stock that occurred in January 2017.  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. As of December 31, 2017, we have not updated our analysis and have not yet analyzed the potential impact of our recent equity financing on beneficial ownership. With that being said, there has been no determination if the net operating loss carryforward of approximately $3,239,000, available prior to the equity financing, is subject to the Internal Revenue Code Section 382 limitation. These studies are currently ongoing, and a determination will be made upon completion. As a result, we have identified this as a material weakness.

 

Technology Controls

 

We have identified that our information technology security and environment have material control deficiencies, including but not limited to a lack of retention policy, lack of an audit log, weak password policies, and a lack of security of physical and file security of system. We  are currently utilizing a third-party IT firm for normal processes and support. In addition to this third-party IT support, the Company has formally engaged ADEM Solutions in order to analyze and address the deficiencies and weaknesses. ADEM Solutions will be utilized to perform an assessment of our current information and technology environment and prepare for us an action plan for remediation of deficiencies stated above. We believe, based upon our initial assessment, that the uncertainty of the extent to which the lack of controls, policies, and procedures, impact our financial reporting process, presents itself as a material weakness.

 

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Planned Remediation of Material Weaknesses in Internal Controls of our Financial Reporting

 

ERP

 

As noted above, we began to implement our ERP system on October 1, 2017. We have hired qualified team members and engaged external resources with significant prior experience with systems similar to our ERP system to provide additional capacity, analytical and functional capabilities, and cross-training. We plan to implement business process improvements that are anticipated to both strengthen controls governing management review and approvals and enable a more efficient and effective month end close. While the implementation process has caused unanticipated delays in our financial reporting, when fully implemented and operational, we believe the measures described above will remediate the control deficiencies that have led to the material weakness we have identified and strengthen our internal controls over financial reporting.

 

Inventory

 

To remediate the Company’s material weakness surrounding its inventory accounts, we have implemented an enterprise resource planning system (“ERP”) and integrated accounting software that began to be implemented on October 1, 2017. This has eliminated the manual process controls currently in place that allowed the error to occur in the second quarter 2017. The new system, when fully implemented, will allow for real time tracking of inventory balances, greatly increasing controls around the balances on hand at any given time. This will allow us to reconcile our inventory to the third-party warehouse reports on a regular basis. As of December 31, 2017, all USA PhotoMedex finished devices inventory have been moved to our primary warehouse and distribution center, which now conducts pre-counts of inventory before each quarter end, as well as a year-end wall to wall inventory count, eliminating the likelihood and/or material impact of such an error reoccurring.

 

Revenue Recognition

 

To remediate the Company’s material weakness surrounding its financial reporting, the Company’s management has hired an experienced third-party accounting firm during the quarter ending December 31, 2017 to guide management in the gathering of data, review and implementation of ASC 606. The unanticipated delays caused by the ERP implementation also led to delays in completing the revenue recognition evaluation and implementation. Management intends to invest whatever time is necessary from both management and Company staff in order to work with the said third-party accounting firm to ensure proper implementation of ASC 606.

 

Income Tax

 

On April 10, 2018 the Company formally engaged EisnerAmper LLP with a signed Master Service Agreement (“MSA”). This MSA will be followed by a series of SOWs that will outline the exact work necessary to identify all areas where the Company is exposed to risks where a material weakness is present. Management intends to complete these studies during 2018 so as to reflect the results in its 2017 tax returns for each respective operation, both domestic and foreign, which will resolve the material weakness.

 

Technology Controls

 

As part of our remediation efforts, we are currently utilizing a third-party IT firm for normal processes and support. In addition to this third-party IT support, the Company has formally engaged ADEM Solutions in order to address the deficiencies and weaknesses. ADEM Solutions will be utilized to perform an assessment of our current information and technology environment and prepare an action plan designed to resolve the Company’s material weakness  by June 30, 2018.

 

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Summary

 

As part of our ongoing remedial efforts, we have and will continue to enhance our internal controls over financial reporting, by, among other things: hiring qualified accounting and finance personnel; increasing our efforts to educate our personnel on the application of the internal control structure; emphasize with management the importance of our internal control structure; continue to seek outside consulting services where we believe the complexity of a particular matter exceeds our internal capabilities; and by continuing to implement improved accounting systems.

 

We are committed to continuing to improve our internal control processes and we will continue to review our financial reporting controls and procedures. As we continue to evaluate and work to improve our internal controls over financial reporting, we may determine additional measures needed to address control deficiencies or modify certain activities of the remediation measures described above.

 

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

  Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and disposition of our assets;
  Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with the appropriate authorizations; and
  Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework 2013.

 

Because of the material weaknesses noted above, management has concluded that it did not maintain effective internal controls over financial reporting as of December 31, 2017.

 

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to the rules of the SEC that permit us to provide only management’s report in this annual report.

 

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Changes in Internal Control over Financial Reporting

 

On October 1, 2017, we began to implement a new ERP system on a company-wide basis, which is expected to improve the efficiency of certain financial and related transaction processes. The implementation will result in business and operational interruptions as our old system is being phased out . As discussed above, we believe we have developed an appropriate plan to remediate and have begun our remediation efforts related to the material weaknesses.

 

With the exception of the foregoing remediation actions and the changes described in the previous section, there have been no changes in our internal control over financial reporting during the year ended December 31, 2017 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

None

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

 

The following table sets forth the name, age and position of each director and executive officer of ICTV. The directors serve staggered one-year terms and until their successors are elected and qualified. Officers hold their positions at the pleasure of the board of directors, without prejudice to the terms of any employment agreement.

 

NAME   AGE   POSITION
Kelvin Claney   68   Chief Executive Officer, Secretary and Chairman
Richard Ransom 1   39   President
Ernest P. Kollias, Jr.   44   Chief Financial Officer
Stephen Jarvis   64   Director, Audit Committee Member
William Kinnear   73   Director, Audit Committee Chair
Donald McDonald, Jr.   65   Director, Audit Committee Member
Diana Pessin   45   Director, Audit Committee Member

 

1On April 18, 2018, our Board of Directors terminated the employment agreement of our president, Richard Ransom “for cause” as such term is defined in his employment agreement.

 

Kelvin Claney – Chief Executive Officer, Secretary, Chairman

 

Kelvin Claney has served as a director of the Company since January 2001 and has served as the Chief Executive Officer since 2001. Mr. Claney began working in the United States direct response business in 1989 as an independent contractor to National Media Corp., where he produced, sourced, and executive-produced various infomercial projects. Since 1992 until 2014, Mr. Claney has served as President of R.J.M. Ventures, Inc., a television direct response marketing company, where he was responsible for such things as identifying projects ICTV would want to become involved with and in particular DermaWand®. Mr. Claney has written and produced 3 long form DermaWand® infomercials and multiple short form DermaWand® spots for distribution via broadcast and digital media. He also created the marketing material including multiple television commercials for the children’s toy product known as BetterBlocks®, which was then owned by The Better Blocks Trust.

 

Richard Ransom – President

 

Richard Ransom joined ICTV in July of 2008 as our Controller and was appointed as Chief Financial Officer on December 8, 2008. Mr. Ransom joined our Company with experience in financial management roles at Traffic.com, Hildebrandt International, and Grant Thornton. He is a graduate of Pennsylvania State University with a degree in Accounting and received his MBA from Delaware Valley College in December 2009. Mr. Ransom served as both President and CFO from August 2011 to January 1, 2014. Mr. Ransom resigned his position as Chief Financial Officer effective January 1, 2014 and resumed as solely President. Mr. Ransom was terminated for cause from his position of President effective April 18, 2018.

 

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Ernest P. Kollias, Jr. – Chief Financial Officer

 

Ernest P. Kollias, Jr. joined our Company in October of 2016 as our Chief Financial Officer. Prior to joining our Company, Mr. Kollias served as the CEO and President of Freedom Financial Advisory & Capital Management, Inc. He is a Certified Financial Planner professional and business owner with over 22 years of experience in growing and developing businesses. He has also worked for Fortune 100 companies such as General Electric, SmithKline Beecham, Pfizer, and PNC Bank, and has held positions in finance, accounting, international operations, taxation, financial services, and insurance. He has also worked in public accounting for a globally recognized CPA firm before starting his own businesses over 15 years ago.

 

Stephen Jarvis – Director

 

Stephen Jarvis has served as a director of our Company since December 17, 2009. Mr. Jarvis is the co-founder and President of Positive Response Vision, Inc., located in Manila, Philippines. Formed in 1996, Positive Response Vision is one of the largest infomercial-based direct response companies in Southeast Asia and has 400 employees. The Company markets and distributes a vast range of products throughout the Philippines. As President, Mr. Jarvis is responsible for product sourcing and acquisition, inventory, finance control and design issues. Mr. Jarvis also produces infomercials in a private capacity, licensing them to Positive Response Vision and other international infomercial companies. Mr. Jarvis has been engaged in direct response marketing since 1983.

 

William Kinnear – Director

 

William Kinnear became a director of our Company in March 2013. Mr. Kinnear is a Chartered Professional Accountant in Canada and has over 40 years of experience as a senior officer with a variety of companies, both public and private, in the accounting and financial disciplines. His experience includes the areas of mortgage underwriting and finance, point of sale, steel fabrication, secretarial services, and investments. Mr. Kinnear is currently Corporate Secretary for a private investment company and provides corporate secretarial services to a variety of companies, working closely with stock exchanges and security commissions within Canada.

 

Donald McDonald, Jr. – Director

 

Donald McDonald Jr. became a director of our Company in April 2014. Mr. McDonald’s 40-year career spans several organizations from financing to direct response advertising to technology and media. His responsibilities as a founder and executive over the past 30 years include strategy, vision, management, operational and sales. In particular, Mr. McDonald led National Media Corporation, a direct response marketing company, to $320,000,000 in annual sales and a NYSE listing as a public company. Mr. McDonald is currently with Great Valley Capital Advisors, assisting companies with corporate development and strategy.

 

Diana Pessin – Director

 

Diana Pessin became a director of our Company in January 2016. Ms. Pessin has more than fifteen years of senior-level business management experience in product and direct to consumer marketing. Ms. Pessin is currently Vice President of User Acquisition & Programmatic Buying with HBO, where she leads the customer acquisition strategy for HBO’s streaming service and oversees a multi-million-dollar media budget to drive subscriptions across search, display, video, paid social and programmatic buying efforts. She has extensive experience in developing coordinated marketing and promotional campaigns, partnership negotiations, and analysis of sales and finances. Additionally, Ms. Pessin has served in consumer marketing roles at Sportscapsule, Inc. and Colgate-Palmolive Company. Ms. Pessin holds an MBA with a Concentration in Marketing and Media Management from Columbia University, a Bachelor’s of Science with Distinction in Applied Economics and Business Management from Cornell University.

 

There is no family relationship between any director, executive officer, or person nominated or chosen by our Company to become a director or executive officer.

 

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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Control persons, including all directors and executive officers, of our Company are required by Section 16(a) of the Securities Exchange Act of 1934, to report to the SEC their transactions in, and beneficial ownership of, our common stock, including any grants of options to purchase common stock. To the best of our knowledge, the Company’s directors and executive officers timely filed all required reports with the SEC during the year ended December 31, 2017.

 

Audit Committee and Code of Ethics

 

Our Audit Committee consists of our four independent members, William Kinnear, Stephen Jarvis, Donald McDonald, and Diana Pessin. Mr. Kinnear is Chairman of the Audit Committee and is considered the Audit Committee financial expert. We have not yet adopted a code of ethics applicable to our senior management, or persons performing those functions, because of the small number of persons involved in management of our Company.

 

ITEM 11. EXECUTIVE COMPENSATION

 

Compensation of Named Executive Officers

 

The following table sets forth all compensation paid or earned for services rendered to our Company in all capacities during the year ended December 31, 2017 by our executive officers.

 

Summary Compensation Table

 

Name and Principal Position  Year  

Salary

($)

  

Bonus

($)

  

Stock

($) 

   Option Awards Granted 
Kelvin Claney (Chief Executive Officer) (1)   2017    290,000    -    140,000    - 
    2016    290,000    -    -    - 
                          
Richard Ransom (President) (2)   2017    225,000    -    140,000    - 
    2016    200,000    -    -    - 
                          
Ernest P. Kollias, Jr. (Chief Financial Officer)   2017    160,000    -    56,000    - 
    2016    40,000    -    -    195,000 
                          
Ryan Lebon (Former Chief Financial Officer   2016    105,000    -    -    - 

 

(1) On April 15, 2018, Kelvin Claney, CEO, agreed to an annual reduction of $100,000 from his base salary. Mr. Claney’s total compensation for 2018 will be prorated using the effective date of April 15th, 2018.

(2) On April 18, 2018, our Board of Directors terminated the employment agreement of our president, Richard Ransom “for cause” as such term is defined in his employment agreement.

 

Compensation of Directors

 

During each year ended December 31, 2017 and 2016, Stephen Jarvis, William Kinnear, Donald McDonald, Jr. and Diana Pessin each received $9,000 as compensation for their service as directors. As part of her appointment as director on January 7, 2016, Diana Pessin was awarded 50,000 options at a price of $0.2057.

 

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Employment Agreements

 

We entered into an employment agreement with Kelvin Claney, our Chief Executive Officer, effective March 1, 2011, the terms of which were amended in January 2017. Under the terms of the new employment agreement, effective January 1, 2017, the employment term is three years, which automatically renews each year for a new three-year term, unless terminated in accordance with the terms of the employment agreement. For the first three years, Mr. Claney will serve as CEO. Thereafter, Mr. Claney will serve as Creative Director, responsible for product identification and development, infomercial and video commercial development and product sales initiatives. As CEO, Mr. Claney will receive an annual salary of $290,000, subject to annual review and adjustment. Once Mr. Claney becomes Creative Director, his salary will be reduced as agreed at the time, but not less than $175,000 per year. Mr. Claney will also be reimbursed for the reasonable cost of a supplemental health insurance policy, as approved by the Company’s Compensation Committee, to supplement his Medicare primary insurance, will participate in the Company’s group life and disability policies, will receive an automobile allowance, and will be eligible to participate in all other benefits awarded to the Company’s senior management, such as employee stock option plans, profit-sharing plans and 401k plans. While he is CEO, Mr. Claney will be entitled to an annual bonus equal to a percentage of the Company’s EBITDA over $1,000,000. EBITDA, which is an acronym for earnings before interest, taxes, depreciation, and amortization, is a financial measurement of the Company’s operating performance. The percentage used to calculate the bonus ranges from 1% up to 3.5% to the extent EBITDA exceeds $5,000,000. If the Company’s EBITDA for any year does not show an increase over the prior year, the amount of the performance bonus shall be subject to review and appropriate adjustment by the Company’s Compensation Committee. Mr. Claney’s employment agreement may be terminated on death, disability, or for cause, in which event Mr. Claney will receive his salary, benefits and bonus as accrued through the date of termination. The employment agreement may also be terminated without cause, in which event Mr. Claney will be entitled to his salary through the remaining term, his benefits and bonus as accrued through the date of termination, immediate vesting of any stock options previously granted to him and 1,000,000 shares of the Company’s common stock. As a first step in addressing the operating cost structure of the Company, our CEO, Kelvin Claney has temporarily reduced his base salary by $100,000 per year. The reduction will initially be in effect from April 1 through December 31, 2018. If at December 31, 2018, it appears that it would be appropriate to extend the temporary reduction, Mr. Claney has expressed a willingness to do so. The temporary reduction does not affect Mr. Claney’s base salary for purposes of calculating any compensation that would be due him upon a termination of his employment.

 

On April 17, 2012, we entered into an employment agreement with Richard Ransom, our President, the terms of which were amended in January 2017. Under the terms of the new employment agreement, effective January 1, 2017, the employment term is three years, which will automatically renew each year for a new three-year term unless terminated in accordance with the terms of the employment agreement. Mr. Ransom will receive an annual salary of $225,000, subject to annual review and adjustment. Mr. Ransom will be eligible to participate in the Company’s group health, life and disability policies, will receive an automobile allowance, and will be eligible to participate in all other benefits awarded to the Company’s senior management, such as employee stock option plans, profit-sharing plans and 401k plans. The employment agreement provides that Mr. Ransom will be entitled to an annual bonus equal to a percentage of the Company’s EBITDA over $1,000,000. The percentage used to calculate the bonus ranges from 1% up to 3.5% to the extent EBITDA exceeds $5,000,000. If the Company’s EBITDA for any year does not show an increase over the prior year, the amount of the performance bonus shall be subject to review and appropriate adjustment by the Company’s Compensation Committee. The employment agreement may be terminated on death, disability, or for cause, in which event Mr. Ransom will receive his salary, benefits and bonus as accrued through the date of termination. The employment agreement may also be terminated without cause, in which event Mr. Ransom will be entitled to his salary through the remaining term, his benefits and bonus as accrued through the date of termination, immediate vesting of any stock options previously granted to him and 1,000,000 shares of the Company’s common stock. On April 18, 2018, our Board of Directors terminated the Mr. Ransom’s employment agreement “for cause” as such term is defined in the employment agreement.

 

On June 26, 2014, we entered into an employment agreement with Ryan LeBon, former Chief Financial Officer. Under the terms of the employment agreement, we paid an annual salary that was subject to review and, if appropriate, adjustment on an annual basis by the Board of Directors. Effective January 1, 2015, this annual salary was increased to $140,000 from $125,000 and approved by the Board of Directors. The former Chief Financial Officer was also entitled to annual performance bonuses as determined appropriate by the Board of Directors and was entitled to receive stock options and other employee benefits such as health insurance reimbursement; automobile allowance and other reimbursable expenses. Effective September 30, 2016, Ryan LeBon resigned from his position as Chief Financial Officer.

 

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On October 6, 2016, we entered into an employment letter agreement with Ernest P. Kollias, Jr., our Chief Financial Officer. In January 2017, we entered into an employment agreement with Mr. Kollias for a three-year term. Mr. Kollias will receive an annual salary of $160,000, subject to annual review and adjustment. Mr. Kollias will be eligible to participate in the Company’s group health, life and disability policies, will receive an automobile allowance, and will be eligible to participate in all other benefits awarded to the Company’s senior management, such as employee stock option plans, profit-sharing plans and 401k plans. The employment agreement provides that Mr. Kollias will be entitled to an annual bonus equal to a percentage of the Company’s EBITDA over $1,000,000. The percentage used to calculate the bonus ranges from .5% up to 2% to the extent EBITDA exceeds $5,000,000. If the Company’s EBITDA for any year does not show an increase over the prior year, the amount of the performance bonus shall be subject to review and appropriate adjustment by the Company’s Compensation Committee. The employment agreement may be terminated on death, disability, or for cause, in which event Mr. Kollias will receive his salary, benefits and bonus as accrued through the date of termination. The employment agreement may also be terminated without cause, in which event Mr. Kollias will be entitled to his salary through the remaining term or, if greater, for 18 months, his benefits and bonus as accrued through the date of termination, and immediate vesting of any stock options previously granted to him.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth, as of May 31, 2018 our outstanding voting securities owned of record or beneficially by (1) each person who owned of record, or was known by us to own beneficially, more than 5% of our common stock, (2) each executive officer, (3) each director and (4) the shareholdings of all executive officers and directors as a group. As of May 31, 2018, we had 52,340,700 shares of common stock, and 210,000 shares of Series A Preferred Stock, issued and outstanding.

 

Name   Title of Class  

Number of

Shares Owned

    Percentage of
Class
 
Kelvin Claney, Chairman and Chief Executive Officer, Member of the Board of Directors(1)(7)(14)(20)   Common Stock     8,858,536       16.8 %
    Series A Preferred Stock     210,000       100 %
The Better Blocks Trust, declared January 1, 1994 (2)   Common Stock     6,668,660       12.7 %
Richard Ransom, Former President (1)(8) (19)   Common Stock     2,080,332       3.9 %
Ernest P. Kollias, Chief Financial Officer (1)(9)   Common Stock     813,500       1.5 %
Stephen Jarvis, Member of the Board of Directors (3)(10)   Common Stock     546,999       1.0 %
William Kinnear, Member of the Board of Directors (4)(11)   Common Stock     141,667       0.3 %
Donald McDonald, Jr., Member of the Board of Directors (5)(12)   Common Stock     116,667       0.2 %
Diana Pessin, Member of the Board of Directors(6) (15)   Common Stock     2,063,518       4.0 %
Norman Pessin(16)   Common Stock     2,240,484       4.3 %
Sandra Pessin(16)   Common Stock     5,696,079       10.9 %
DG Value Partners, LP(17)   Common Stock     890,258       1.7 %
DG Value Partners II Master Fund (17)   Common Stock     3,911,235       7.5 %
LeoGroup Private Debt Facility, L.P. (18)   Common Stock     5,786,765       11.1 %
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (6 PERSONS) (21)   Common Stock     12,540,887       23.9 %
    Series A Preferred Stock     210,000       100 %

 

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Except as noted below, all shares are held of record and each record shareholder has sole voting and investment power.

 

  (1) The business address for these persons is 489 Devon Park Drive, Suite 306, Wayne, PA 19087.
  (2) The address for The Better Blocks Trust is 34 Manchester Court, Berwyn, PA 19312.
  (3) Mr. Jarvis’ business address is 320 J P Razal Street, Unit 301, 3rd Floor Aralco Bldg., Poblacion, Makati City 1210, Philippines.
  (4) Mr. Kinnear’s business address is 72 Airdrie Road, Toronto, Ontario M46 1M2, Canada.
  (5) Mr. McDonald’s business address is 431 Drummers Lane, Wayne PA 19087.
  (6) Ms. Pessin’s business address is 310 E 75th Street, Apt 2a, New York, NY 10021.
  (7) Includes 633,333 shares as to which Mr. Claney holds exercisable options within 60 days.
  (8) Includes 1,141,666 shares as to which Mr. Ransom holds exercisable options within 60 days.
  (9) Includes 450,000 shares as to which Mr. Kollias holds exercisable options within 60 days.
  (10) Includes 191,667 shares as to which Mr. Jarvis holds exercisable options within 60 days.
  (11) Includes 150,000 shares as to which Mr. Kinnear holds exercisable options within 60 days.
  (12) Includes 125,000 shares as to which Mr. McDonald holds exercisable options within 60 days.
  (13) Currently exercisable options have been included as outstanding shares for purposes of this calculation.
  (14) Includes 6,668,660 shares owned by The Better Blocks Trust, of which Mr. Claney is a joint trustee. Mr. Claney disclaims beneficial ownership of the shares and options owned or controlled by The Better Blocks Trust beyond the extent of his pecuniary interest.
  (15) Includes 1,989,561 shares owned indirectly by spouse, Brian Pessin and 16,667 shares as to which Ms. Pessin holds exercisable options within 60 days.
  (16) Mr. and Mrs. Pessin’s business address is 366 Madison Avenue, 14th Floor, New York, NY 10017.
  (17) The address for DG Value Partners, LP and DG Value Partners II Master Fund is 460 Park Avenue, 22nd Floor, New York, New York 10022.
  (18) The address for LeoGroup Private Debt Facility, L.P. is 100 Wood Avenue South, #209, Iselin, NJ 08830. The shares reported herein are held directly by LeoGroup Private Debt Facility, L.P., or LeoGroup LP. LeoGroup Management, LLC, or LeoGroup Management is the General Partner of LeoGroup LP. LeoGroup Management is 100% owned by The Leo Group, LLC, or Leo Group. The shares directly owned by LeoGroup LP may be deemed indirectly owned by LeoGroup Management and Leo Group; however, each of LeoGroup Management and Leo Group disclaims beneficial ownership of these securities except to the extent of its respective pecuniary interest therein, if any, and the inclusion of these shares herein shall not be deemed an admission of beneficial ownership of all of the reported shares for purposes of Section 16 or any other purpose.
  (19) On April 18, 2018, our Board of Directors terminated the employment agreement of our president, Richard Ransom “for cause” as such term is defined in his employment agreement.
  (20) Each share of Series A Preferred Stock is entitled to 100 votes on all matters to be voted upon by the Company’s shareholders.
  (21) Does not include shares held by Richard Ransom, who, until April 18, 2018, was President of our Company.

 

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Transactions with Officers and Directors

 

Except as described below and other than the employment agreements described above in “Executive Compensation,” since January 1, 2015, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we were or will be a party:

 

  in which the amount involved exceeds the lesser of $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years; and
     
  in which any director, executive officer, stockholder who beneficially owns more than 5% of our common stock or any member of their immediate family had or will have a direct or indirect material interest.

 

On January 23, 2017, we issued 8,823,530 shares of common stock at a price of $0.34 per share, for aggregate gross proceeds of $3,000,000 in a private placement and, thereafter, we issued an additional 11,764,713 shares of common stock at a price of $0.34 per share, for aggregate gross proceeds of $4,000,000 in the second closing of the private placement. The spouse and mother-in-law of our director, Diana Pessin, participated in the private placement and purchased a total of 4,411,765 shares at a price of $0.34 per share for a total purchase price of $1,500,000 as well as Kelvin Claney, our Chief Executive Officer, participated in the private placement and purchased a total of 500,000 shares at a price of $0.34 per share for a total purchase price of $170,000.

 

On May 2, 2018, the Company and Kelvin Claney, our Chief Executive Officer, entered into a subscription agreement pursuant to which we issued to Mr. Claney 210,000 shares of Series A Preferred Stock for cash consideration of $403,200, or $1.92 per share.

 

Our board of directors conducts an appropriate review of and oversees all related party transactions on a continuing basis and reviews potential conflict of interest situations where appropriate. Our board of directors has not adopted formal standards to apply when it reviews, approves or ratifies any related party transaction. However, our board of directors generally reviews related party transactions to ensure that they are fair and reasonable to our Company and on terms comparable to those reasonably expected to be agreed to with independent third parties for the same goods and/or services at the time they are authorized by our board of directors.

 

Director Independence

 

A majority of our directors are independent, as determined in accordance with the definition of independence in the NYSE Listed Company Manual. Our independent directors are Messrs. Jarvis, Kinnear, McDonald and Mses. Pessin.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Audit Fees

 

The aggregate fees billed to our Company for professional services rendered from EisnerAmper LLP for the audit of our annual financial statements, review of our quarterly financial statements, and other services normally provided in connection with statutory and regulatory filings or engagements was approximately  $324,000 in 2017 and approximately $118,000 in 2016.

 

Audit-Related Fees

 

The aggregate fees billed to our Company for assurance and related services by our independent registered public accounting firm that are reasonably related to the performance of the audit or review of our financial statements and are not reported above were approximately $0  in 2017 and $6,000 in 2016.

 

Tax Fees

 

The aggregate fees billed to our Company for professional services rendered for tax compliance, tax advice, and tax planning were approximately $5,000  in 2017 and approximately $19,000 in 2016.

 

All Other Fees

 

There were no other fees billed in each of the last two fiscal years for professional services rendered by our independent registered public accounting firm.

 

All fees for audit and non-audit services, and any material fees for other services, are approved in advance by the Board of Directors.

 

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PART IV

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

Financial Statements

 

Report of Independent Registered Public Accounting Firm F-2
Consolidated Financial Statements:  
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders’ Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8

 

Exhibits

 

2.1   Share and Option Purchase Agreement   Incorporated by reference to Exhibit 2.1 to the Company’s Form SB-2, filed with the Securities and Exchange Commission on October 3, 2001.
         
3.1   Amended and Restated Articles of Incorporation   Incorporated by reference to Exhibit 3.1 to the Company’s Form SB-2, filed with the Securities and Exchange Commission on October 3, 2001.
         
3.2   Amended and Restated Bylaws   Incorporated by reference to Exhibit 3.2 to the Company’s Form SB-2, filed with the Securities and Exchange Commission on October 3, 2001.
         
3.3   First Amendment to Amended and Restated Bylaws   Incorporated by reference to Exhibit 3.3 to the Company’s Form SB-2, filed with the Securities and Exchange Commission on October 3, 2001.
         
4.1   Specimen certificate evidencing the common stock   Incorporated herein by reference to Exhibit 4.1 to the Company’s Form SB-2, filed with the Securities and Exchange Commission on October 3, 2001
         
4.2   Promissory Note, dated July 15, 2017, issued by ICTV Brands Inc. in favor of LeoGroup Private Investment Access, LLC in the principal amount of $2,000,000   Incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 18, 2017
         
10.1   2001 Stock Option Plan   Incorporated by reference to Exhibit 10.2 to the Company’s Form SB-2, filed with the Securities and Exchange Commission on October 3, 2001.
         
10.2   2011 Incentive Stock Option Plan   Incorporated herein by reference to Exhibit 10.13 to the Company’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on April 14, 2017
         
10.3   Product Purchase Agreement, dated January 22, 2016, by and between Omega 5 Technologies Inc., Richard A. Zirger, Christine Boves, and ICTV Brands Inc.   Incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 10-K, filed with the Securities and Exchange Commission on January 22, 2016
         
10.4   Assignment of Trademark by Dimensional Marketing Concepts, Inc.   Incorporated by reference to Exhibit 10.6 to the Company’s Amendment No. 1 to Form SB-2, filed with the Securities and Exchange Commission on December 24, 2001.

 

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10.5   Asset Purchase Agreement, dated October 4, 2016, by and among ICTV Brands Inc., ICTV Holdings, Inc., PhotoMedex, Inc., Radiancy, Inc., PhotoTherapeutics Ltd. and Radiancy (Israel) Limited   Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 5, 2016
         
10.6   First Amendment to Asset Purchase Agreement, dated January 23, 2017 by and among ICTV Brands Inc., ICTV Holdings, Inc., PhotoMedex, Inc., Radiancy, Inc., PhotoTherapeutics Ltd., and Radiancy (Israel) Limited   Incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 27, 2017
         
10.7   Termination and Release Agreement, dated July 12, 2017 by and among ICTV Brands Inc., ICTV Holdings, Inc., PhotoMedex, Inc., Radiancy, Inc., PhotoTherapeutics Ltd., and Radiancy (Israel) Limited   Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 18, 2017
         
10.8   Bill of Sale, dated July 12, 2017, by and among PhotoMedex, Inc., Radiancy, Inc., PhotoTherapeutics Ltd., and Radiancy (Israel) Limited and ICTV Holdings, Inc.   Incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 18, 2017
         
10.9   Asset Purchase Agreement, dated October 4, 2016, by and among ICTV Brands Inc., Ermis Labs, Inc., LeoGroup Private Debt Facility, L.P. and Ermis Labs, Inc.   Incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 5, 2016
         
10.10   First Amendment to Asset Purchase Agreement, dated January 23, 2017, by and among ICTV Brands Inc., Ermis Labs, Inc., LeoGroup Private Debt Facility, L.P. and Ermis Labs, Inc.   Incorporated herein by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 27, 2017
         
10.11   Securities Purchase Agreement, dated October 4, 2016, by and among ICTV Brands Inc., LeoGroup Private Debt Facility, L.P., Sandra F. Pessin and Brian L. Pessin   Incorporated herein by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 5, 2016
         
10.12   Registration Rights Agreement, dated January 23, 2017, by and among ICTV Brands Inc. and the Investors named therein.   Incorporated herein by reference to Exhibit 10.9 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 27, 2017
         
10.13   Amendment No. 1 to the Registration Rights Agreement, dated February 28, 2017, by and among ICTV Brands Inc. and the Investors signatory thereto   Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 6, 2017
         
10.14   Escrow Agreement, dated October 4, 2016, by and among ICTV Brands Inc., ICTV Holdings, Inc., PhotoMedex, Inc., Radiancy, Inc., PhotoTherapeutics Ltd., Radiancy (Israel) Limited, LeoGroup Private Debt Facility, L.P., Sandra F. Pessin, Brian L. Pessin and Bevilacqua PLLC   Incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 5, 2016

 

 47 
   

 

10.15   Transition Services Agreement, dated October 4, 2016, by and among ICTV Holdings, Inc., PhotoMedex, Inc., Radiancy, Inc., PhotoTherapeutics Ltd. and Radiancy (Israel) Limited   Incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 5, 2016
         
10.16   First Amendment to Transition Services Agreement, dated January 23, 2017, by and among ICTV Holdings, Inc., PhotoMedex, Inc., Radiancy, Inc., PhotoTherapeutics Ltd. and Radiancy (Israel) Limited   Incorporated herein by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 27, 2017
         
10.17   Plan of Merger of ICTV Holdings, Inc. into ICTV Brands Inc., dated November 16, 2017   Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 21, 2017
         
10.18   Plan of Merger of Ermis Labs, Inc. into ICTV Brands Inc., dated November 16, 2017   Incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 21, 2017
         
31.1   Rule 13a-14(a)/15d-14(a) Certification – Chief Executive Officer   Filed herewith
         
         
31.2   Rule 13a-14(a)/15d-14(a) Certification – Chief Financial Officer   Filed herewith
         
32   Section 1350 Certifications   Filed herewith
         
101.INS   XBRL Instance Document   *
         
101.SCH   XBRL Taxonomy Extension Schema Document   *
         
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document   *
         
101.DEF   XBEL Taxonomy Extension Dedinition Linkbase Document   *
         
101.LAB   XBRL Extension Label Linkbase Document   *
         
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document   *

 

* As provided in Rule 406T of Regulation S–T, this information shall not be deemed “filed” for purposes of Sections 11 and 12 of the Securities Act and Section 18 of the Securities Exchange Act or otherwise subject to liability under those sections.

 

ITEM 16. FORM 10-K SUMMARY

 

None

 

 48 
   

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  ICTV BRANDS INC.
     
Date: May 31, 2018 By: /s/ Kelvin Claney
  Name: Kelvin Claney
  Title: Chief Executive Officer and Chairman

 

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

By: /s/ Kelvin Claney   Date: May 31, 2018
Name: Kelvin Claney    
Title: Chief Executive Officer and Chairman    
       
By: /s/ Ernest P. Kollias, Jr   Date May 31, 2018
Name: Ernest P. Kollias, Jr.    
Title: Chief Financial Officer    
       
By: /s/ Stephen Jarvis   Date May 31, 2018
Name: Stephen Jarvis    
Title: Director    
       
By: /s/ William Kinnear   Date May 31, 2018
Name: William Kinnear    
Title: Director    

 

By: /s/ Donald McDonald, Jr.   Date May 31, 2018
Name: Donald McDonald, Jr.    
Title: Director    
       
By: /s/ Diana Pessin   Date May 31, 2018
Name: Diana Pessin    
Title: Director    

 

 49 
   

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

ICTV Brands Inc. and Subsidiaries

 

Report of Independent Registered Public Accounting Firm   F-2
     
Consolidated Balance Sheets as of December 31, 2017 and 2016   F-3
     
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2017 and 2016   F-4
     
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2017 and 2016   F-5
     
Consolidated Statements of Cash Flows for the years ended December 31, 2017 and 2016   F-6
     
Notes to the Consolidated Financial Statements   F-8

 

 F-1 
   

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of

ICTV Brands Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of ICTV Brands, Inc. and Subsidiaries (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of operations and comprehensive loss, shareholders’ equity and cash flows for each of the years then ended and the related notes (collectively referred to as the “financial statements”). In our opinion the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2017 and 2016, and the consolidated results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United State of America.

 

Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has generated net losses and negative cash flows from operating activities that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these manners are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standard of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, where due to error or fraud, and performing procedures that respond to those risk. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimated made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ EisnerAmper LLP  

 
We have served as the Company’s auditor since 2010.  
 
EISNERAMPER LLP  
Philadelphia, Pennsylvania  
May 31, 2018  

 

 F-2 
   

 

ICTV BRANDS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2017 and 2016

 

   2017   2016 
ASSETS          
CURRENT ASSETS:          
Cash and cash equivalents  $1,258,360   $1,390,641 
Accounts receivable, net of allowances for returns and doubtful accounts of $913,303 and $123,109, respectively   3,576,376    506,337 
Inventories, net   5,631,857    1,499,270 
Prepaid expenses and other current assets   167,914    254,303 
Total current assets   10,634,507    3,650,551 
           
Property and equipment   1,117,487    74,098 
Less accumulated depreciation   (230,394)   (58,099)
Property and equipment, net   887,093    15,999 
           
Intangible assets, net   2,248,657    872,864 
           
Total assets  $13,770,257   $4,539,414 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
CURRENT LIABILITIES:          
Accounts payable and accrued liabilities  $5,911,778   $1,644,899 
Current portion of long-term debt to related party   722,908    - 
Deferred revenue   403,844    377,445 
Deferred consideration – due to related party   241,379    - 
Other liabilities – net of discount   369,563    288,525 
Total current liabilities   7,649,472    2,310,869 
           
Deferred revenue – long term   194,534    274,374 
Deferred consideration – long term, due to related party   970,688    - 
Other liabilities – long term, net of discount   371,149    665,713 
Long-term debt to related party, net of current portion   1,074,141    - 
Total long-term liabilities   2,610,512    940,087 
           
COMMITMENTS AND CONTINGENCIES          
SHAREHOLDERS’ EQUITY:          
Preferred stock 20,000,000 shares authorized, no shares issued and outstanding   -    - 
Common stock, $0.001 par value, 100,000,000 shares authorized, 52,340,700 and 28,343,007 shares issued and outstanding as of December 31, 2017 and 2016, respectively   42,130    18,132 
Additional paid-in capital   20,198,137    11,546,804 
Accumulated other comprehensive income   174,875    - 
Accumulated deficit   (16,904,869)   (10,276,478)
           
Total shareholders’ equity   3,510,273    1,288,458 
           
Total liabilities and shareholders’ equity  $13,770,257   $4,539,414 

 

See accompanying notes to the consolidated financial statements.

 

 F-3 
   

 

ICTV BRANDS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016

 

   2017   2016 
NET SALES  $31,458,065   $16,788,736 
           
COST OF SALES   12,631,339    4,998,682 
           
GROSS PROFIT   18,826,726    11,790,054 
           
OPERATING EXPENSES:          
General and administrative   10,286,623    4,258,177 
Selling and marketing   15,514,881    8,514,634 
Total operating expenses   25,801,504    12,772,811 
           
OPERATING LOSS   (6,974,778)   (982,757)
           
OTHER INCOME (EXPENSE), NET          
Interest expense, net   (400,480)   (13,587)
Miscellaneous income   217,134    - 
Gain on settlement of contingent consideration   1,969,245    - 
Impairment of intangible asset   (1,235,162)   - 
OTHER INCOME (EXPENSE), NET   550,737    (13,587)
           
LOSS BEFORE PROVISION FOR INCOME TAX   (6,424,041)   (996,344)
           
PROVISION FOR INCOME TAXES   204,350    - 
           
NET LOSS  $(6,628,391)  $(996,344)
           
OTHER COMPREHENSIVE INCOME:          
Foreign currency translation adjustment   174,875    - 
           
COMPREHENSIVE LOSS  $(6,453,516)  $(996,344)
           
NET LOSS PER SHARE          
BASIC  $(0.13)  $(0.04)
DILUTED  $(0.13)  $(0.04)
           
WEGHTED AVERAGE NUMBER OF COMMON SHARES          
BASIC AND DILUTED   50,229,056    28,213,675 

 

See accompanying notes to the consolidated financial statements.

 

 F-4 
   

 

ICTV BRANDS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016

 

   Common Stock $0.001 Par Value   Additional Paid-In   Accumulated Other Comprehensive   Accumulated     
   Shares   Amount   Capital   Income   Deficit   Totals 
Balance at January 1, 2016   28,027,012   $17,816   $11,130,588   $-   $(9,280,134)  $1,868,270 
                               
Share based compensation   -    -    416,532    -         416,532 
                               
Cashless exercise of options   315,995    316    (316)   -    -    - 
                               
Net loss   -    -    -    -    (996,344)   (996,344)
                               
Balance at January 1, 2017   28,343,007   $18,132   $11,546,804   $-   $(10,276,478)  $1,288,458 
                               
Share based compensation   -    -    447,202    -    -    447,202 
                               
Issuance of stock for asset purchase   2,500,000    2,500    847,500    -    -    850,000 
                               
Issuance of stock, net of offering costs of $17,070   20,588,243    20,588    6,962,342    -    -    6,982,930 
                               
Issuance of stock for compensation   600,000    600    335,400    -    -    336,000 
                               
Cashless exercise of options   42,782    43    (43)   -    -    - 
                               
Exercise of options   266,668    267    58,932    -    -    59,199 
                               
Foreign currency translation adjustment   -    -    -    174,875    -    174,875