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EX-32 - ICTV Brands Inc.ex32.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-Q

 

Mark One

 

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
   
  For the quarterly period ended March 31, 2018
   
[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission file number: 0-49638

 

ICTV BRANDS INC.

(Exact name of small business issuer as specified in its charter)

 

Nevada   76-0621102
State or other jurisdiction of
incorporation or organization
  IRS Employer
Identification No.

 

489 Devon Park Drive, Suite 306

Wayne, PA 19087

(Address of principal executive offices)

 

(484) 598-2300

(Issuer’s telephone number)

 

N/A

(Former Name or Former Address, if Changed Since Last Report)

 

Indicate by check mark 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 check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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]
Emerging growth company [  ]      

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of July 6, 2018, the Issuer had 52,340,700 shares of common stock, par value $0.001 per share, issued and outstanding.

 

Transitional Small Business Disclosure Format (Check one): Yes [  ] No [X]

 

 

 

 
 

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION  
     
ITEM 1. FINANCIAL STATEMENTS 3
     
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 33
     
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 39
     
ITEM 4. CONTROLS AND PROCEDURES 39
     
PART II - OTHER INFORMATION  
     
ITEM 1. LEGAL PROCEEDINGS 43
     
ITEM 1A. RISK FACTORS 43
     
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 43
     
ITEM 3. DEFAULTS ON SENIOR SECURITIES 44
     
ITEM 4. MINE SAFETY DISCLOSURES 44
     
ITEM 5. OTHER INFORMATION 44
     
ITEM 6. EXHIBITS 45
     
SIGNATURES 47

 

 2 
 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Condensed Consolidated Balance Sheets as of March 31, 2018 (unaudited) and December 31, 2017 4
   
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended March 31, 2018 and 2017 (unaudited) 5
   
Condensed Consolidated Statement of Shareholders’ Equity for the three months ended March 31, 2018 (unaudited) 6
   
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017 (unaudited) 7
   
Notes to the Condensed Consolidated Financial Statements 8 - 32

 

 3 
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   March 31, 2018   December 31, 2017 
   (Unaudited)    
ASSETS        
CURRENT ASSETS:          
Cash and cash equivalents  $317,081   $1,258,360 
Accounts receivable, net of allowances for returns and doubtful accounts of $944,235 and $913,303 respectively   3,401,807    3,576,376 
Inventories, net   5,401,483    5,631,857 
Prepaid expenses and other current assets   548,659    167,914 
Total current assets   9,669,030    10,634,507 
           
Property and equipment, net   841,247    887,093 
Intangible assets, net   2,073,865    2,248,657 
           
Total assets  $12,584,142   $13,770,256 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
CURRENT LIABILITIES:          
Accounts payable and accrued liabilities  $5,105,203   $5,911,778 
Current portion of long-term debt to related party   781,983    722,908 
Deferred revenue   282,099    403,844 
Deferred consideration due to related party   83,049    241,379 
Other liabilities- net of discount   369,826    369,563 
Total current liabilities   6,622,160    7,649,472 
           
Deferred revenue - long term   187,385    194,534 
Deferred consideration - long term due to related party   992,113    970,688 
Other liabilities - long term, net of discount   298,125    371,149 
Long-term debt to related party, net of current portion   859,824    1,074,141 
Total long term liabilities   2,337,447    2,610,512 
           
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 shares issued and outstanding as of both March 31, 2018 and December 31, 2017   42,130    42,130 
Additional paid-in capital   20,228,482    20,198,137 
Accumulated other comprehensive income   258,722    174,875 
Accumulated deficit   (16,904,799)   (16,904,869)
           
Total shareholders’ equity   3,624,535    3,510,273 
           
Total liabilities and shareholders’ equity  $12,584,142   $13,770,257 

 

See accompanying notes to condensed consolidated financial statements

 

 4 
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF

OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

   For the three months ended 
   March 31, 2018   March 31, 2017 
NET SALES  $8,970,805   $7,647,119 
           
COST OF SALES   2,405,338    2,153,580 
           
GROSS PROFIT   6,565,467    5,493,539 
           
OPERATING EXPENSES:          
General and administrative   2,058,978    2,482,269 
Selling and marketing   4,301,312    3,389,944 
Total operating expenses   6,360,290    5,872,213 
           
OPERATING INCOME/(LOSS)   205,177    (378,674)
           
OTHER INCOME/(EXPENSE), NET          
Interest expense   (174,428)   (49,047)
Miscellaneous (expense)/income   (1,679)   60,103 
           
INCOME/(LOSS) BEFORE PROVISION FOR INCOME TAX   29,070    (367,618)
           
PROVISION FOR INCOME TAXES   29,000    - 
           
NET INCOME/(LOSS)  $70   $(367,618)
           
OTHER COMPREHENSIVE INCOME/(LOSS):          
Foreign currency translation adjustment   83,847    (5,417)
           
COMPREHENSIVE INCOME/(LOSS)  $83,917   $(373,035)
           
NET INCOME/(LOSS) PER SHARE          
BASIC  $0.00   $(0.01)
DILUTED  $0.00   $(0.01)
           
WEIGHTED AVERAGE NUMBER OF COMMON SHARES          
BASIC   52,340,700    44,067,195 
DILUTED   53,093,931    44,067,195 

 

See accompanying notes to condensed consolidated financial statements

 

 5 
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2018

(Unaudited)

 

           Accumulated         
   Common Stock   Additional   Other         
   $0.001 par value   Paid-In   Comprehensive   Accumulated     
   Shares   Amount   Capital   Income   Deficit   Totals 
                         
Balance at January 1, 2018   52,340,700   $42,130   $20,198,137   $174,875   $(16,904,869)  $3,510,273 
                               
Share based compensation   -    -    30,345    -    -    30,345 
                               
Foreign currency translation adjustment   -    -    -    83,847    -    83,847 
                               
Net income   -    -    -    -    70    70 
                               
Balance at March 31, 2018   52,340,700   $42,130   $20,228,482   $258,722   $(16,904,799)  $3,624,535 

 

See accompanying notes to condensed consolidated financial statements.

 

 6 
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

(Unaudited)

 

    March 31, 2018     March 31, 2017  
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net income (loss)   $ 70     $ (367,618 )
Adjustments to reconcile net income/(loss) to net cash and cash equivalents used in operating activities:                
Depreciation and amortization     233,210       223,468  
Bad debt expense     410,344       319,330  
Share based compensation     30,345       81,959  
Issuance of stock for compensation     -       336,000  
Change in fair value of contingent consideration     -       (20,142 )
Loss on disposal of property, plant and equipment     -       3,228  
Non cash interest expense     25,748       50,122  
Change in assets and liabilities                
Accounts receivable     (185,382 )     (1,513,293 )
Other receivable     -       (589,162 )
Inventories     283,723       295,405  
Prepaid expenses and other current assets     (380,220 )     (286,750 )
Accounts payable and accrued liabilities     (848,933 )     988,182  
Deferred revenue     (134,367 )     363,628  
Net cash used in operating activities     (565,462 )     (115,643 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Purchase of property and equipment     (12,576 )     (57,076 )
Cash paid for acquisition of PhotoMedex, Inc.     -       (3,250,000 )
Net cash used in investing activities     (12,576 )     (3,307,076 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Payments of DermaWand asset purchase agreement     (75,000 )     (75,000 )
Proceeds from issuance of common stock, net of offering costs     -       6,982,930  
Repayments of long-term debt to related party     (155,242 )     -  
Payments of deferred consideration for asset aquisition     (160,415 )     -  
Net cash (used in) provided by financing activities   $ (390,657 )   $ 6,907,930  
                 
Effect of exchange rates on cash and cash equivalents     27,416       (6,427 )
                 
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS     (941,279 )     3,478,784  
                 
CASH AND CASH EQUIVALENTS, beginning of the period     1,258,360       1,390,641  
                 
CASH AND CASH EQUIVALENTS, end of the period   317,081     4,869,425  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                
Taxes paid   $ -     $ -  
Interest paid   $ 146,935     $ -  
                 
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:                
Cashless exercise of options   $ -     $ 23  
                 
Acquisition of PhotoMedex on January 23, 2017                
Fair value of assets acquired   $ -     $ 9,198,043  
Fair value of deferred consideration     -       (4,198,043 )
Other Payable     -       (1,750,000 )
Cash paid for acquisition   $ -     $ 3,250,000  
                 
Asset Acquisition of Ermis Labs on January 23, 2017                
Cost of assets acquired   $ -     $ 1,981,822  
Present value of deferred consideration     -       (1,131,822 )
Issuance of common stock     -       (850,000 )
Cash paid for acquisition   $ -     $ -  

 

See accompanying notes to condensed consolidated financial statements.

 

 7 
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018 and 2017

(Unaudited)

 

Note 1 – Organization and Business of the Company and Liquidity

 

Organization and Nature of Operations

 

ICTV Brands Inc. (the “Company”, “We”, or “ICTV”), was organized under the laws of the State of Nevada on September 25, 1998. As of March 31, 2018, we have the following subsidiaries:

 

  Better Blocks International Limited, or (“BBI”), a New Zealand corporation;
     
  ICTV Brands Israel Limited., incorporated under the laws of Israel;
     
  ICTV Brands UK Limited., incorporated under the laws of the United Kingdom;
     
  ICTV Brands HK Limited, a private limited company limited by shares, incorporated under the laws of Hong Kong (ICTV Brands HK Limited was formally known as “Radiancy HK Limited” and was officially renamed to ICTV Brands HK Limited on July 31, 2017); and
     
  LK Technology Importaçăo E Exportaçăo LTDA, a private Sociedade limitada formed under the laws of Brazil (“LK Technology”).

 

On January 23, 2017, ICTV Holdings, Inc., a Nevada corporation and the Company’s wholly-owned subsidiary (“ICTV Holdings”) completed the purchase of substantially all the assets of PhotoMedex, Inc., a Nevada corporation and its wholly-owned subsidiaries, Radiancy, Inc., PhotoTherapeutics Ltd., and Radiancy (Israel) Limited, (collectively, the “PHMD Sellers”), pursuant to an asset purchase agreement, dated October 4, 2016, by and among the Company, ICTV Holdings and the PHMD Sellers, as amended by the first amendment thereto dated January 23, 2017.

 

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

 

On January 23, 2017 Ermis Labs, Inc., a Nevada corporation and the Company’s wholly-owned subsidiary (“Ermis Labs”) completed the purchase of substantially all the assets of Ermis Labs, Inc., a New Jersey corporation (“ELNJ”), pursuant to an asset purchase agreement, dated October 4, 2016, by and among the Company, Ermis Labs, ELNJ, and LeoGroup Private Debt Facility, L.P., a significant shareholder (related party), as amended by the first amendment thereto dated January 23, 2017.

 

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

 

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

 

 8 
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018 and 2017

(Unaudited)

 

Note 1 – Organization and Business of the Company and Liquidity (continued)

 

We develop, market and sell products through a multi-channel distribution strategy, including direct response television, digital marketing campaigns, live home shopping, traditional retail and e-commerce market places, and our international third-party distributor network. We offer primarily health, beauty and wellness products as well as various consumer products, including DermaWand®, a skin care device that reduces the appearance of fine lines and wrinkles, and helps improve skin tone and texture, DermaVital®, a professional quality skin care line that effects superior hydration, the CoralActives® brand of acne treatment and skin cleansing products, DermaBrilliance®, a skin care resurfacing device that helps reduce visible signs of aging, and Jidue®, a facial massager device which helps alleviate stress. We acquire the rights to our products that we market primarily via licensing agreements, acquisition and in-house development and sell both domestically and internationally. We are presently exploring other devices and consumable product lines currently under licensing agreements.

 

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

 

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

 

On April 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.

 

Liquidity and Going Concern

 

Our condensed consolidated financial statements have been prepared on a going concern basis, which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. We had a net income of $70 for the three months ended March 31, 2018 and generated negative cash flows from operating activities of approximately $565,000. In addition, we have an accumulated deficit of approximately $16,905,000 as of March 31, 2018. Additional financing will be required for the Company to successfully implement its long-term growth strategy. There can be no assurance that additional financing can be obtained on terms acceptable to the Company.

 

To increase profitability throughout 2018 and maintain sufficient cash flow and liquidity, we have taken measures to reduce expenses and restructure operations. Beginning April 1, 2018, our CEO has taken a $100,000 temporary reduction in his base pay. We have also eliminated the marketing department, as well as inside legal counsel. In addition, we have reduced media expenses and eliminated one position in operations.  We will continue throughout the year to monitor cash spending, analyze all expenditures, and make reductions where necessary until other financing efforts are achieved.

 

 9 
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018 and 2017

(Unaudited)

 

Note 1 – Organization and Business of the Company and Liquidity (continued)

 

The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. The Company’s ability to raise additional capital through the future issuances of debt or equity is unknown. The ability to obtain additional financing, the successful development of the Company’s contemplated plan of operations, or its ability to achieve profitable operations are necessary for the Company to continue operations. The ability to successfully resolve these factors raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements of the Company do not include any adjustments that may result from the outcome of these uncertainties.

 

Note 2 - Summary of significant accounting policies

 

Basis of Presentation

 

The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and within the rules of the Securities and Exchange Commission applicable to interim financial statements and therefore do not include all disclosures that might normally be required for financial statements prepared in accordance with generally accepted accounting principles. The accompanying unaudited condensed consolidated financial statements have been prepared by management without audit and should be read in conjunction with our condensed consolidated financial statements, including the notes thereto, appearing in our Annual Report on Form 10-K for the year ended December 31, 2017. In the opinion of management, all adjustments necessary for a fair presentation of the condensed consolidated financial position, consolidated results of operations and consolidated cash flows, for the periods indicated, have been made. The results of operations for the three months ended March 31, 2018 are not necessarily indicative of operating results that may be achieved over the course of the full year.

 

Principles of consolidation

 

Our accompanying condensed consolidated financial statements include the accounts of our wholly-owned subsidiaries BBI, ICTV Brands UK Limited, ICTV Brands Israel Limited, ICTV Brands HK Limited and LK Technology from their initial acquisition dates. In October 2016, ICTV Holdings and Ermis Labs, Inc. were formed as holding companies for the asset purchase agreements that were entered into with PhotoMedex, Inc. and Ermis Lab, Inc. (See Note 3 - Business and Asset Acquisitions). On November 16, 2017, ICTV Holdings and Ermis Labs, Inc. were merged into ICTV Brands, Inc. All significant inter-company transactions and balances have been eliminated in consolidation.

 

Use of estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable and prudent. The most significant estimates used in these condensed consolidated financial statements include the allowance for doubtful accounts, reserves for returns, inventory reserves, valuation allowance on deferred tax assets, valuation of intangibles, and share based compensation. Actual results could differ from these estimates.

 

 10 
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018 and 2017

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

Concentration of credit risk

 

Financial instruments, which potentially subject us to concentrations of credit risk, include cash and trade receivables. We maintain cash in bank accounts that, at times, may exceed federally insured limits. We have not experienced any losses and believe we are not exposed to any significant risks on our cash in bank accounts.

 

As of March 31, 2018, 18% of our accounts receivable were due from various individual customers to whom our products had been sold directly via Direct Response Television (“DRTV”). In addition, 42% was due from brick and mortar retailers, 7% was due from e-commerce accounts, 24% was due from live shopping, 5% was due from duty free airline, and 4% was due from miscellaneous customers

 

Major customers are considered to be those who accounted for more than 10% of net sales. There were no major customers for the three months ended March 31, 2018 and 2017.

 

Fair value of financial instruments

 

Fair value estimates, assumptions and methods used to estimate fair value of the Company’s financial instruments are made in accordance with the requirements of Accounting Standards Codification (“ASC”) 825-10, “Disclosures about Fair Value of Financial Instruments.” We have used available information to derive our estimates. However, because these estimates are made as of a specific point in time, they are not necessarily indicative of amounts we could realize currently. The use of different assumptions or estimating methods may have a material effect on the estimated fair value amounts. The carrying values of financial instruments such as cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate their fair values due to the short settlement period for these instruments.

 

Cash and cash equivalents

 

We consider all unrestricted highly liquid investments with an original maturity of three months or less to be cash equivalents.

 

Foreign currency transactions

 

Transactions we entered into in currencies other than our local currency, are recorded in our local currency and any changes in currency exchange rates that occur from the initiation of a transaction until settled are recorded as foreign currency gains or losses in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

 

 11 
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018 and 2017

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

Functional currency translation

 

The currency of the primary economic environment in which we operate our Company is conducted in the US dollar (“$” or “dollars”). Thus, our functional currency (other than the foreign subsidiaries mentioned below) is the US dollar. The operations of our foreign subsidiaries are conducted in the local currency of the subsidiary, which is the Hong Kong Dollar (HKD), Great Britain Pound (GBP), and Israeli New Shekel (NIS).

 

Assets and liabilities of our foreign subsidiaries are translated based on the exchange rates prevailing at the balance sheet date and revenues and expenses are translated at the average exchange rates for the period. Net differences from currency translation are included in other comprehensive income on the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

 

Accounts receivable

 

Accounts receivable are recorded net of allowances for returns and doubtful accounts of approximately $944,000 and $913,000 as of March 31, 2018 and December 31, 2017, respectively. The allowances are calculated based on historical analysis including customer returns and bad debts.

 

In addition to allowances for returns on accounts receivable, an accrual is made for the return of product that have been sold to customers and had cash collections, while the customer still has the right to return the product. In addition, an accrual is made for contract fees deducted by the customer. The amounts of these accruals included in accounts payable and accrued liabilities in our Condensed Consolidated Balance Sheets were approximately $330,000 and $180,000 as of March 31, 2018 and December 31, 2017, respectively.

 

Inventories

 

Inventories consist primarily of finished products held for resale and are valued at the lower of cost (first-in, first-out method) or net realizable value. We adjust inventory for estimated obsolescence when necessary based upon demand and market conditions. The Company’s reserve for obsolescence was approximately $238,000 and $247,000 as of March 31, 2018 and December 31, 2017, respectively. Included in inventory at March 31, 2018 and December 31, 2017 is approximately $68,000 and $51,000, respectively, of consigned product that has been shipped to customers under the 30-day free trial period for which the trial period has not expired and as such the customer has not accepted the product, as well as consigned products that are held at retailer distributors for sale.

 

Property and equipment

 

Property and equipment are carried at cost and depreciation and amortization is computed over the estimated useful lives of the individual assets ranging from 3 to 7 years for computer hardware and software and furniture and fixtures. Depreciation and amortization is computed using the straight-line method. Leasehold improvements are depreciated over the lesser of the estimated useful life and lease term. The related cost and accumulated depreciation of assets retired or otherwise disposed of are removed from the accounts and the resultant gain or loss is reflected in earnings. Maintenance and repairs are expensed currently while major renewals and betterments are capitalized. Depreciation and amortization expense amounted to approximately $58,000 and $32,000 for the three months ended March 31, 2018 and 2017, respectively.

 

 12 
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018 and 2017

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

Property and equipment consisted of the following at:

 

   March 31, 2018   December 31, 2017 
Computer hardware and software  $165,861   $154,061 
Furniture and equipment   908,357    907,586 
Leasehold improvements   55,840    55,840 
    1,130,058    1,117,487 
Accumulated depreciation and amortization   (288,811)   (230,394)
Property and equipment, net  $841,247   $887,093 

 

Intangible assets

 

Definite-lived intangibles are amortized using the straight-line method over their estimated useful lives ranging from four to five years. Amortization expense was approximately $175,000 and $191,000 for the three months ended March 31, 2018 and 2017, respectively. We evaluate the recoverability of the intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that may indicate the asset may be impaired.

 

Impairment of long-lived assets

 

In accordance with ASC 360-10, “Accounting for the Impairment or Disposal of Long-Lived Assets,” long-lived assets are reviewed for impairment when circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future net undiscounted cash flows estimated by the Company to be generated by such assets. If such assets are considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of by sale are recorded as held for sale at the lower of carrying value or estimated net realizable value. No impairment losses were identified or recorded for the three months ended March 31, 2018 and 2017.

 

Revenue recognition

 

On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers that supersedes most current revenue recognition guidance. The updated guidance, and subsequent clarifications, collectively referred to as ASC 606, require an entity to recognize revenue when it transfers control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

 

There was no significant impact to the statement of operations and comprehensive income (loss) as the Company’s existing revenue policies are in line with ASC 606.

 

 13 
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018 and 2017

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

We recognize revenue when control of the promised goods or services is transferred to its customers in an amount that reflects the consideration expected to be entitled to in exchange for those goods or services. Our products are sold direct to consumers through direct response television, live home shopping, and e-commerce market places, as well as to retailers. We distribute product to international third-party distributors who purchase the products at wholesale pricing and sell it at an agreed upon price stipulated in the contracts. We also sell product to consumers through consignment arrangements with certain airlines and retailers in Hong Kong who sell products to consumers through in-flight magazines, duty-free carts, or sales counters.

 

We recognize revenue when performance obligations identified under the terms of the contracts with its customers are satisfied, which generally occurs upon transfer of control in accordance with the contractual terms and conditions of the sale. The majority of  our revenue is recognized when product is shipped to the customer. Revenue is measured as the amount of consideration we receive upon shipment. Variable consideration includes various fees charged to us for cooperative advertising, marketing development, chargebacks, other fees and returns. The Company separately offers extended warranties that are separate performance obligations for which the associated revenue is recognized over-time based on the extended warranty period. The revenue recognition for each of our segments are described below.

 

Direct to consumer

 

Our direct to consumer segment includes sales of product directly to end users via infomercials produced by ICTV classified as Direct Response Television (“DRTV”). Revenue is recognized at the point of sale time which is upon shipment to the customer. Also included are products sold to live home shopping networks. Products sold to live home shopping networks are recognized at a point in time which is upon shipment to the live home shopping network, often with the right to return unsold products. Revenue related to our DermaVital® continuity program is recognized monthly upon shipment to customers.

 

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

 

Retail

 

We generate revenue from products sold to retailers and are payable upon satisfaction of the performance obligation. Revenue is recognized at a point in time. Certain retailers have the right to return unsold products. We generally extend credit terms to our retail customers based on their creditworthiness. Revenue is recorded at the time of shipment.

 

International third-party distributors

 

We generate revenue through the sale of products to international third-party distributors who in-turn sell the products to the consumer. Revenue related to international wholesale and third-party distributor customers is recorded at gross amounts with a corresponding charge to cost of sales upon shipment. Revenue is recognized at a point in time when product is shipped to the customer. International third-party distributors are required to pay a deposit before shipment. As of March 31, 2018 and December 31, 2017, we recorded deposits for international third-party distributors of approximately $282,000 and $404,000, respectively, in deferred revenue, current portion.

  

 14 
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018 and 2017

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

Airlines and Hong Kong Retail

 

We also sell products to consumers through consignment arrangements with certain airlines and retailers in Hong Kong to sell products to consumers through in-flight magazines, duty-free carts, or in-store counters. We control the goods shipped to the consignees until control of the goods has transferred to the customer. Control is considered transferred to a customer upon payment for goods of which we set the price for this activity. We act as the consignor and the principal, and accordingly, we record consignment sales on a gross basis, once the transfer of control of goods has been passed to the customer. Goods on consignment remain in our inventory until the product has been sold and control of the goods has transferred.

 

Warranty

 

We sell warranties on our products for various terms. Customers are offered the option to purchase an extended warranty separate from the product sale for 1 year, 5 years, or 10 years. Revenue is recognized ratably over the term, with the unearned warranty included in deferred revenue on the accompanying condensed consolidated balance sheets.

 

Variable consideration

 

The amount of consideration we receive and revenues recognized across our multi sales channels varies with changes in sales returns and other accommodations and incentives we offer to our customers. When we give our customers the right to return products or provide other accommodations such as chargebacks, promotional discounts, and rebates, we estimate the expected returns and claims based on historical rates as well as events and circumstances that indicate changes to historical rates of product returns and claims. We adjust our estimates of revenue at the earlier of when the most likely amount of consideration we expect to receive changes or when the amount of consideration becomes fixed.

 

Judgments

 

We have a return policy whereby the customer can return any product received within 30 days or 60 days of receipt for a full refund. We accrue a reserve for product returns with respect to sales of product when a right of return exists. We accrue a reserve for product returns and customer refunds at the time of sale based on our historical experience. We also accrue for contract fees based on historical experience of our retail customers, as well as expected fees as documented in our retail contracts. The provision for estimated returns as of March 31, 2018 and December 31, 2017 was approximately $639,000 and $396,000, respectively. The reserve for customer refunds and contract fees payable was approximately $330,000 at March 31, 2018 and $180,000 at December 31, 2017, and has been included in accounts payable and accrued expenses and current liabilities in the accompanying condensed consolidated balance sheets. The amount of goods to be returned to inventory was determined to be immaterial.

 

For the three months ended March 31, 2018 and December 31 2017, respectively, we recorded sales returns of approximately $1,112,000 and $1,646,000 respectively, as a reduction of net sales.

 

Sales taxes

 

Sales and similar taxes that are imposed on our sales and collected from customers are excluded from net sales.

 

 15 
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018 and 2017

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

Shipping and handling costs

 

Costs for shipping and handling costs, including those activities that occur subsequent to transfer of control to the customer, are recorded as cost of sales and expensed as incurred. We accrue costs for shipping and handling activities that occur after control of the promised goods has transferred to the customer. Revenue from shipping and handling charges was approximately $377,000 and $628,000 for the three months ended March 31, 2018 and 2017, respectively.

 

Remaining Performance Obligations

 

As part of our adoption of the new revenue standard, we have elected to use a practical expedient to exclude disclosure of transaction prices allocated to remaining performance obligations, and when we expect to recognize such revenue, for all periods prior to the date of initial application of the standard.

 

As of March 31, 2018, approximately $360,000 is expected to be recognized from remaining performance obligations for warranty revenue. We expect to recognize revenue for these remaining performance obligations during the next five years approximately as follows:

 

   Remaining Nine Months 2018   2019   2020   2021   2022 
                    
Estimated Deferred Warranty Revenue from remaining  $138,000   $113,000   $60,000   $36,000   $13,000 

 

Disaggregation of revenue

 

The following table shows the Company’s revenues disaggregated by reportable segment:

 

   Three Months Ended March 31, 
   2018   2017 
Direct to Consumer  $5,007,054   $6,400,702 
International Third Party Distributors   891,460    480,481 
Retail   2,667,945    540,549 
Airlines/Hong Kong Retail   404,346    225,387 
   $8,970,805   $7,647,119 

 

 16 
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018 and 2017

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

The following table provides information about contract assets which includes accounts receivable, and contract liabilities which includes deferred revenue and accrued returns and contract fees payable from contracts with customers:

 

   March 31, 2018   December 31, 2017 
Accounts receivable, net of allowance for returns and doubtful accounts  $3,401,807   $3,576,376 
Total contract assets  $3,401,807   $3,576,376 
           
Deferred revenue  $469,484   $598,378 
Accrued returns and contract fees payable   329,954    179,922 
Total contract liabilities  $799,438   $778,300 

 

Research and Development

 

Research and development costs are expensed as incurred and are included in selling and marketing expense in the accompanying condensed consolidated statements of operations and comprehensive income/(loss). Research and development costs primarily consist of efforts to discover and develop new products, including clinical trials, product safety testing, certifications for international regulations and standards, etc. Research and development costs approximated $36,000 and $44,000 for the three months ended March 31, 2018 and 2017, respectively.

 

Advertising

 

Advertising costs, consisting of media, internet marketing and production costs, are expensed as incurred and are included in selling and marketing expense in the accompanying condensed consolidated statements of operations and comprehensive income(loss). Production costs associated with the creation of new and updated infomercials and advertising campaigns are expensed at the commencement of a campaign. We incurred approximately $2,266,000 and $1,632,000 in media costs for airing of television and print advertising, $1,039,000 and $846,000 in internet marketing costs, and $27,000 and $143,000 in productions costs for the three months ended March 31, 2018 and 2017, respectively.

 

 17 
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018 and 2017

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

Income taxes

 

In preparing our condensed consolidated financial statements, we make estimates of our current tax exposure and temporary differences resulting from timing differences for reporting items for book and tax purposes. We recognize deferred taxes by the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for differences between the financial statement and tax basis of assets and liabilities at enacted statutory tax rates in effect for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

 

In addition, valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. In consideration of our accumulated losses and limited historical ability to generate taxable income to utilize our deferred tax assets, we have estimated that we will not be able to realize any benefit from our temporary differences and have recorded a full valuation allowance. If we sustain profitability in the future at levels which cause management to conclude that it is more likely than not that we will realize all or a portion of the net operating loss carry-forward, we would record the estimated net realized value of the deferred tax asset at that time and would then provide for income taxes at a rate equal to our combined federal and state effective rates. Subsequent revisions to the estimated net realizable value of the deferred tax asset could cause our provision for income taxes to vary significantly from period to period.

 

Stock options

 

In June 2001, our shareholders approved our 2001 Stock Option Plan (the “Plan”). The Plan is designed for our employees, officers and directors and is intended to advance our best interests by providing personnel who have substantial responsibility for our management and growth with additional incentive by increasing their proprietary interest in our success, thereby encouraging them to remain our employee. The Plan is administered by our Board of Directors and authorizes the issuance of stock options not to exceed a total of 3,000,000 shares. The terms of any awards under the Plan are determined by the Board of Directors, provided that no options may be granted at less than the fair market value of the stock as of the date of the grant. The Plan expired in February 2011. As of March 31, 2018, 50,000 options are outstanding under the Plan.

 

In December 2011, our shareholders approved our 2011 Stock Option Plan (the “2011 Plan”). The 2011 Plan is designed for our employees, officers, and directors, and is intended to advance our best interests by providing personnel who have substantial responsibility for our management and growth with additional incentive by increasing their proprietary interest in our success, thereby encouraging them to remain our employee. The 2011 Plan is administered by our Board of Directors and authorizes the issuance of stock options not to exceed a total of 6,000,000 shares. In December 2017, the 2011 Plan was amended to increase the number of stock options that may be awarded to not exceed a total of 8,000,000 shares. The terms of any awards under the 2011 Plan are determined by the Board of Directors, provided that no options may be granted at less than the fair market value of the stock as of the date of the grant. Generally, the options granted vest over three years with one-third vesting on each anniversary date of the grant. As of March 31, 2018, 4,826,668 options are outstanding under the 2011 Plan.

 

We account for equity instruments issued to non-employees in accordance with the provisions of ASC Topic 505, subtopic 50, Equity-Based Payments to Non-Employees based upon the fair-value of the underlying instrument. The equity instruments, consisting of stock options granted to consultants, are valued using the Black-Scholes valuation model. The measurement of stock-based compensation to non-employees is subject to periodic adjustments as the underlying equity instruments vest and is recognized as an expense over the period which services are received. Nonvested stock options granted to non-employees are remeasured at each reporting period.

 

 18 
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018 and 2017

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

We use ASC Topic 718, “Share-Based Payments”, to account for stock-based compensation issued to employees and directors. We recognize compensation expense in an amount equal to the grant date fair value of share-based payments such as stock options granted to employees over the requisite vesting period of the awards using the Black-Scholes valuation model.

 

In May 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-09, which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. ASU 2017-09 will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if the award’s fair value, vesting conditions and classification as an equity or liability instrument are the same immediately before and after the change. ASU 2017-09 will be applied prospectively to awards modified on or after the adoption date. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. On January 1, 2018, we adopted the provisions of ASU 2017-09 prospectively which did not have a material impact on our condensed consolidated financial statements.

 

The following is a summary of stock options outstanding under the Plan and 2011 Plan (collectively “Stock Option Plans”) for the three months ended March 31, 2018 and 2017:

 

   Number of Shares   Weighted Average 
   Employee   Non-
Employee
   Totals   Exercise
Price
 
Balance, January 1, 2018   3,993,335    -    3,993,335   $0.27 
Granted during the year   1,050,000    -    1,050,000    0.33 
Exercised during the year   -    -    -    - 
Forfeited during the year   (166,667)   -    (166,667)   0.49 
                     
Balance, March 31, 2018   4,876,668    -    4,876,668   $0.27 

 

   Number of Shares  

Weighted

Average

 
   Employee   Non-
Employee
   Totals   Exercise
Price
 
Balance, January 1, 2017   3,680,002    -    3,680,002   $0.24 
Granted during the year   -    -    -    - 
Exercised during the year   (35,000)   -    (35,000)   0.22 
Forfeited during the year   (5,000)   -    (5,000)   0.22 
                     
Balance, March 31, 2017   3,640,002    -    3,640,002   $0.24 

 

Of the stock options outstanding as of March 31, 2018 under the Stock Option Plans, 3,516,668 options are currently vested and exercisable. The weighted average exercise price of these options was $0.25. These options expire through January 2028.

 

The aggregate intrinsic value for options outstanding and exercisable at March 31, 2018 and 2017 was approximately $14,000 and $994,000, respectively. The aggregate intrinsic value for stock options exercised during the three months ended March 31, 2018 and 2017 was approximately $0 and $13,000, respectively.

 

 19 
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018 and 2017

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

For the three months ended March 31, 2018 and 2017, we recorded approximately $30,000 and $75,000, respectively, in stock compensation expense under the Stock Option Plans. At March 31, 2018, there was approximately $368,000 of total unrecognized compensation cost related to non-vested option grants that will be recognized over the remaining vesting period of 3 years.

 

The following assumptions are used in the Black-Scholes option pricing model for the three months ended March 31, 2017 to value the stock options granted during the period:

 

2017
Risk-free interest rate   2.79%
Expected dividend yield   0.00%
Expected life   6 years 
Expected volatility   142.30%
Forfeiture rate   0.0%
Weighted average grant date fair value  $0.30 

 

There were no options granted for the three months ended March 31, 2017.

 

The following is a summary of stock options outstanding outside of the Stock Option Plans for the three months ended March 31, 2018 and 2017:

 

   Number of Shares   Weighted
Average
 
   Employee   Non -
Employee
   Totals   Exercise
Price
 
                 
Balance, January 1, 2018   333,333    1,476,667    1,810,000   $0.31 
Granted during the year   -    -    -    - 
Exercised during the year   -    -    -    - 
Expired during the period   -    -    -    - 
Balance, March 31, 2018   333,333    1,476,667    1,810,000   $0.31 

 

   Number of Shares   Weighted Average 
   Employee   Non - Employee   Totals  

Exercise

Price

 
                 
Balance, January 1, 2017   516,667    1,676,667    2,193,334   $0.35 
Granted during the year   -    -    -    - 
Exercised during the year   -    -    -    - 
Expired during the period   -    -    -    - 
Balance, March 31, 2017   516,667    1,676,667    2,193,334   $0.35 

 

 20 
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018 and 2017

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

Of the stock options currently outstanding outside of the Stock Option Plans at March 31, 2018, 1,810,000 options are currently vested and exercisable. The weighted average exercise price of these options was $0.31. These options expire through January 2026. The aggregate intrinsic value for options outstanding and exercisable at March 31, 2018 and 2017 was approximately $20,000 and $585,000, respectively. There were no options exercised during the three months ended March 31, 2018 and 2017.

 

For the three months ended March 31, 2018 and 2017, we recorded approximately $0 and $7,000, respectively in stock compensation expense related to stock options outside of the Stock Option Plans. At March 31, 2018, there was no remaining unrecognized compensation cost. There were no grants for the three months ended March 31, 2018 and 2017.

 

The following is a summary of all stock options outstanding and nonvested for the three months ended March 31, 2018:

 

               Weighted 
            Average 
   Employee  

Non-

Employee

   Totals  

Exercise

Price

 
                 
Balance, January 1, 2018   476,667    -    476,667   $0.42 
Granted during the period   1,050,000    -    1,050,000    0.33 
Exercised during the period   -    -    -    - 
Forfeited during the period   (166,667)   -    (166,667)   0.49 
         -           
Balance, March 31, 2018   1,360,000    -    1,360,000   $0.35 

 

Recently Issued Accounting Pronouncements

 

In June 2018, the FASB issued ASU 2018-07 Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with the accounting for employee share-based compensation. It is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2018. We are currently in the process of evaluating the impact of the adoption of ASU 2018-07 on its condensed consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which requires measurement and recognition of expected credit losses for financial assets held. The ASU is effective for interim and annual periods beginning December 15, 2019 and early adoption is permitted. Entities are required to adopt ASU 2016-13 using a modified retrospective approach , subject to certain limited exceptions. We are currently evaluating the impact of our pending adoption of ASU 2016-13 on our condensed consolidated financial statements.

 

 21 
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018 and 2017

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842) (“ASU 2016-02”). This standard requires lessees to recognize assets and liabilities related to long-term leases on the balance sheet and expands disclosure requirements regarding leasing arrangements. The standard is effective for reporting periods beginning after December 15, 2018 and early adoption is permitted. The standard must be adopted on a modified retrospective basis and provides for certain practical expedients. We expect to adopt this guidance in the first quarter of 2019 and we currently expect that the adoption of this guidance will likely change the way we account for our operating leases and will likely result in recording the future benefits of those leases as an asset and the related minimum lease payments as a liability on our consolidated balance sheets. We are currently evaluating the impact of our pending adoption of ASU 2016-13 on our condensed consolidated financial statements.

 

Reclassifications

 

Certain prior period amounts have been reclassified for consistency with the current period presentation of Retail as a reportable segment. In addition, the amount of contingent consideration earned was reclassified from investing to operating activities on the accompanying condensed consolidated statement of cashflows for the quarter ended March 31, 2017. These reclassifications had no effect on the reported results of operations.

 

Note 3 - Business and Asset Acquisitions

 

PhotoMedex Acquisition 

 

As described in Note 1, the PhotoMedex Purchase Agreement was entered into on October 4, 2016 and was completed on January 23, 2017. The total purchase price was $9,500,000.

 

The purchase price paid by ICTV Holdings in the PhotoMedex Acquisition was paid as follows: (i) $3,000,000 of the purchase price which was raised in a private placement (described below in more detail) was deposited on October 5, 2016 into an escrow account established by counsel to the Company and ICTV Holdings, as escrow agent (the “Escrow Agent”), under an escrow agreement entered into on October 4, 2016 among the Company, ICTV Holdings, the PHMD Sellers, the Escrow Agent, and certain investors in the Company’s private placement (the “Escrow Agreement”), which escrow funds were paid to the PHMD Sellers on January 23, 2017, in accordance with the Escrow Agreement and subject to the conditions thereof; (ii) $2,000,000 of the purchase price was to be paid on or before the 90th day following January 23, 2017; and (iii) the remainder of the purchase price of $4,500,000 was payable in the form of a continuing royalty as described in more detail below. On October 4, 2016, as required by the PhotoMedex Purchase Agreement, we delivered to PhotoMedex a letter of credit from LeoGroup L.P. (a significant shareholder), a private equity fund that secured our obligation to make the $2,000,000 payment referred to in clause (ii) above. The letter of credit was valid until the earlier of; (1) full payment on demand and presentation on or before January 23, 2017, or (2) 180 days from the date of letter of credit. The Company paid $250,000 of the purchase price payable per clause (ii) above in March 2017 and the balance of $1,750,000 was paid on April 22, 2017.

 

Under the PhotoMedex Purchase Agreement, we were required to pay to PhotoMedex and its subsidiaries a continuing monthly royalty on net cash (invoiced amount less sales refunds, returns, rebates, allowances and similar items) actually received by us or our affiliates from sales of the consumer products that we acquired from PhotoMedex. Such royalty payments commenced with net cash actually received from and after January 23, 2017, and would continue until the total royalty paid to PhotoMedex and its subsidiaries totals $4,500,000, calculated as follows: (i) 35% of net cash from the sale of all acquired consumer products sold through live television promotions made through Home Shopping Network (HSN) in the United States, QVC in the European Union, and The Shopping Channel (TSC) in Canada, less (a) deductions for sales commissions actually paid and on-air costs incurred for those amounts collected related to the sale of the acquired consumer products made through HSN in the United States, QVC in the European Union, and The Shopping Channel (TSC) in Canada, and (b) the cost of goods sold to generate such net cash; and (ii) 6% of net cash from the sale of all acquired consumer products other than the foregoing sales. The fair value of the contingent consideration was determined using the present value of expected payments as of the date of acquisition and totaled $4,198,043 using the assumption of a 9.7% discount rate over 18 months. On July 12, 2017, the Company entered into a Termination and Release Agreement with the PHMD, whereby afterward no further obligation remained.

 

 22 
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018 and 2017

(Unaudited)

 

Note 3 - Business and Asset Acquisitions (continued)

 

In connection with the PhotoMedex Purchase Agreement, on October 4, 2016, ICTV Holdings entered into a transition services agreement with the PHMD Sellers (the “Transition Services Agreement”), pursuant to which PHMD Sellers had agreed to make available to ICTV Holdings certain services on a transitional basis and allow ICTV Holdings to occupy and use a portion of the PHMD Sellers’ premises and warehouses, in exchange for which ICTV Holdings was to (i) pay to the PHMD Sellers the documented costs and expenses incurred by them in connection with the provision of those services; (ii) pay to the PHMD Sellers the documented lease costs including monthly rental and any utility charges incurred under the applicable leases; (iii) reimburse the PHMD Sellers for the documented costs and expenses incurred by them for the continued storage of inventory and raw materials at warehouse locations, and for services for fulfilling and shipping orders for such inventory; and (iv) reimburse the PHMD Sellers for the payroll, employment-related taxes, benefit costs and out of pocket expenses paid to or on behalf of employees. As of July 12, 2017, pursuant to the terms of the Transition Services Agreement and the Release Agreement, ICTV Holdings has no further obligations under the Transition Services Agreement.

 

Pursuant to the Release Agreement, as of July 12, 2017, the contingent consideration balance to PhotoMedex totaling $3,579,760 was extinguished. Therefore, the balance at both March 31, 2018 and December 31, 2017 was zero.

 

The following unaudited condensed pro forma financial information for the three months ended March 31, 2018 and 2017 represent the combined results of the Company’s operations as if the PhotoMedex Acquisition had occurred on January 1, 2017. Excluded from the pro forma net loss and net loss per share amounts for the three months ended March 31, 2017 are one-time acquisition costs of $49,312 attributable to the PhotoMedex Acquisition. These pro forma results are not necessarily indicative of what historical performance would have been had this business combination been effective as of the hypothetical acquisition date, nor should they be interpreted as expectations of future results.

 

   For the three months ended March 31, 
   2018   2017 
Net sales  $8,970,805   $11,165,342 
Net Income (loss)  $70   $(124,834)
Net Income (loss) per share – basic  $0.00   $0.00 
Net Income (loss) per share – diluted  $0.00   $0.00 
Weighted average number of common shares basic   52,340,700    44,067,195 
Weighted average number of common shares diluted   53,093,931    44,067,195 

 

The results of operations for the PhotoMedex acquisition have been included in the consolidated financial statements from January 23, 2017, the effective date of the acquisition.

 

Ermis Labs Asset Purchase

 

As described in Note 1, the Ermis Labs asset purchase was entered into on October 4, 2016 and was completed on January 23, 2017. Pursuant to the agreement, the aggregate purchase price was to be paid as follows: (i) the issuance of 2,500,000 shares of our common stock to the stockholders of Ermis Labs, which had a fair value on the date of acquisition of $850,000 and (ii) $1,750,000 payable in the form of a continuing royalty as described in more detail below. The issuance of the common stock was made in reliance upon an exemption from the registration requirements of the Securities Act provided under Section 4(a)(2) of the Securities Act.

 

 23 
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018 and 2017

(Unaudited)

 

Note 3 - Business and Asset Acquisitions (continued)

 

Under the Ermis purchase agreement, we are required to pay to Ermis Labs a continuing monthly royalty of 5% of net cash (invoiced amount less sales refunds, returns, rebates, allowances and similar items) actually received by us or our affiliates from sales of the over-the-counter medicated skin care products acquired in the Ermis Labs Asset Acquisition, commencing with net cash actually received by us or our affiliates from and after January 23, 2017 and continuing until the total royalty paid to Ermis Labs totals $1,750,000; provided, however, that we are required to pay a minimum annual royalty amount of $175,000 on or before December 31 of each year commencing with calendar year ending December 31, 2017. The present value of the deferred consideration of $1,750,000 was $1,131,822, based on the assumption of a discount rate of 10.7% over ten years. All of the assets acquired from Ermis Labs were determined to be impaired and written off at December 31, 2017.

 

The changes in the Company’s deferred consideration payable due to Ermis Labs, Inc. during the three months ended March 31, 2018:

 

Balance at December 31, 2017  $1,212,068 
Consideration payments   (160,415)
Accretion of interest   23,509 
Balance at March 31, 2018- related party  $1,075,162 
      
Current portion  $83,049 
Non-current portion   992,113 
   $1,075,162 

 

For the three months ended March 31, 2018, consideration payments represented the remaining minimum royalty for the calendar year ended December 31, 2017. We did not incur any royalties for sales of products for both the three months ended March 31, 2018 and 2017.

 

Note 4 - Commitments and contingencies

 

We entered into a lease from March 2017 through February 2022 related to the office space in Wayne, Pennsylvania. In August 2017, we entered into an amendment to expand our space, which increased the monthly base payments. On January 1, 2018, we signed a new lease for our UK office effective through February 2022. The total monthly cost for our UK office is approximately $2,900. In March 2017, our Hong Kong office entered into a lease expiring in March 2018, which was then renewed until February 2022 for our current office space, costing approximately $1,900 a month. Our Israel office lease is for a one-year term ending in April 2018, which was then renewed until April 20, 2019 for approximately $1,900 a month. Rent expense incurred during the three months ended March 31, 2018 and 2017 totaled approximately $66,000 and $82,000 respectively.

 

 24 
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018 and 2017

(Unaudited)

 

Note 4 - Commitments and contingencies (continued)

 

The schedule below details the future financial obligations under the active leases:

 

   Remaining                     
   Nine                     
   Months                   Total 
   2018   2019   2020   2021   2022   Obligation 
                         
Wayne - Corporate HQ  $113,307   $152,492   $154,190   $155,887   $26,028   $601,904 
                               
Israel Office   17,100    7,600    -    -    -    24,700 
                               
UK Office   25,997    34,663    34,663    34,663    5,777    135,763 
                               
Hong Kong Office   16,706    22,275    22,275    22,275    3,713    87,244 
                               
Total Lease Obligations  $173,110   $217,030   $211,128   $212,825   $35,518   $849,611 

 

Legal Matters

 

By letter dated March 23, 2018, the Company’s Board of Directors notified Richard Ransom, President of the Company, that his employment would be terminated for cause in 30 days unless Mr. Ransom cured the causes for termination, as presented in the letter, within such 30-day period.

 

On April 12, 2018, Mr. Ransom filed a Complaint in the Court of Common Pleas of Philadelphia County, Pennsylvania, naming as defendants the Company and our CEO, Kelvin Claney. The Complaint alleges that on March 20, 2018, Mr. Ransom was terminated without cause, pursuant to the terms of Mr. Ransom’s employment agreement, as a result of certain changes to the Company’s organizational chart and management duties instituted by the Company’s Chief Executive Officer, Kelvin Claney. The Complaint seeks to recover Mr. Ransom’s severance compensation for a termination without cause, consisting of approximately $626,000 of base salary thorough the remaining term of his employment agreement; benefits and any performance bonus prorated through the date of termination; immediate vesting of 150,000 stock options; and 1,000,000 shares of the Company’s common stock. The Complaint also alleges that the Company and Mr. Claney defamed Mr. Ransom and seeks damages in an unspecified amount in excess of $50,000.

 

On April 18, 2018, the Board of Directors removed Richard Ransom as President of 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.

 

ICTV denies any liability to Mr. Ransom and intends to vigorously defend this matter.

 

 25 
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018 and 2017

(Unaudited)

 

Note 4 - Commitments and contingencies (continued)

 

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

 

Other matters

 

Product Liability Insurance

 

For certain products, we were (and are) listed as an additional insured party under the product manufacturer’s insurance policy. We purchase our own liability insurance, which expired on May 20, 2018. This policy was renewed and will expire May 20, 2019. At present, management is not aware of any claims against us for any products sold.

 

Note 5 – Intangible Assets

 

Intangible assets as of March 31, 2018 and December 31, 2017 consists of the following:

 

   Useful Life 

Gross

Carrying

Cost

   Accumulated Amortization  

Impairment

Loss

  

Net Book

Value

 
                    
March 31, 2018                       
DermaWand® Purchase  5 years  $1,163,816    (654,434)   -    509,382 
PhotoMedex Patented/Unpatented Technology  5 years   940,628    (219,478)   -    721,150 
PhotoMedex Trademarks  5 years   1,100,000    (256,667)   -    843,333 
Total     $3,204,444    (1,130,579)        2,073,865 

  

  

Useful

Life

 

Gross

Carrying

Cost

   Accumulated Amortization  

Impairment

Loss

  

Net Book

Value

 
                    
December 31, 2017                       
Ermis Labs Formulations/Trademarks  5 years  $1,512,443   $(277,281)  $(1,235,162)  $- 
DermaWand® Purchase  5 years   1,163,816    (581,673)   -    582,143 
PhotoMedex Patented/Unpatented Technology  5 years   940,628    (172,447)   -    768,181 
PhotoMedex Trademarks  5 years   1,100,000    (201,667)   -    898,333 
 Total     $4,716,887   $(1,233,068)  $(1,235,162)  $2,248,657 

 

 26 
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018 and 2017

(Unaudited)

 

Note 5 – Intangible Assets (continued)

 

Amortization expense was approximately $175,000 and $191,000 for the three months ended March 31, 2018 and 2017, respectively, of which approximately $75,000 of amortization expense is included in cost of sales for each of the three months ended March 31, 2018 and 2017, and approximately $100,000 and $116,000 is included in general and administrative expenses for the three months ended March 31, 2018 and 2017, respectively. Management evaluates the intangible assets for impairment when there is a triggering event.

 

The following table outlines the estimated future amortization expense related to the intangible assets held as of March 31, 2018.

 

2018 (remaining nine months)  $534,000 
2019   690,000 
2020   408,000 
2021   408,000 
2022  $34,000 
Total  $2,074,000 

 

Note 6 – DermaWand® Purchase Agreement

 

On January 22, 2016, we entered into a Purchase Agreement with Omega 5 Technologies, Inc. to acquire the worldwide ownership of the DermaWand® patent and all related trademarks and intellectual property for the sum of $1,200,000 to be paid out as follows: $300,000 per year for calendar years 2016 through 2019, payable in uniform quarterly installments on or before the last day of each calendar quarter. As a result, effective January 1, 2016, we are no longer obligated to make royalty payments on sales of DermaWand®. There shall be no interest charged, and we may, in our sole discretion, at any time without permission or penalty pre-pay some or all of the purchase price. Under our old licensing agreement, we had been assigned the patents, related trademarks, and exclusive commercial rights to DermaWand® based upon a $2.50 per unit fee and maintaining annual minimum royalty requirements.

 

As a result of the agreement, we recorded an offsetting asset and liability at January 1, 2016 in the amount of $1,200,000 for the asset from the intellectual property acquired and a corresponding liability per the payment schedule. As there is no interest charged with the purchase agreement we recorded a discount for imputed interest of approximately $37,000, calculated based on the applicable federal rates at January 22, 2016 of 1.45%, which will be amortized over the term of the agreement using the effective interest method. The intangible asset balance for the patent and trademark will be amortized using the straight-line method over the four period of the agreement, which at this time is management’s best estimate of the remaining useful life.

 

As of March 31, 2018 , the other liability balance was approximately $668,000 net of the discount for imputed interest of approximately $7,000. Amortization for the three months ended March 31, 2018 and 2017 was approximately $73,000 and was recorded in cost of sales. For the three months ended March 31, 2018 and 2017, respectively, we amortized approximately $2,000 and $3,000 of interest expense related to the discount for imputed interest.

 

The accumulated amortization was approximately $654,000 and $582,000 as of March 31, 2018 and December 31, 2017, respectively,

 

Management evaluates the intangible asset for impairment when there is triggering event and concluded there was no such event at March 31, 2018.

 

 27 
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018 and 2017

(Unaudited)

 

Note 7 – Long-term Debt to Related Party

 

On July 15, 2017, the Company entered into a 30-month secured promissory note (the “Note”), to LeoGroup Private Investment Access, LLC (the “Holder”), a significant shareholder and hence related party, in the principal amount of $2,000,000 with an effective interest rate of 34%. The Note provides that the Company shall make monthly principal and interest payments of $100,000 to the Holder for 30 months through January 2020. The Note is secured by a first priority security interest in all the assets of Company, except the Company’s accounts receivable. The Note contains customary financial covenants of the Company and customary events of default. The Company is currently in compliance with this note. Subject to the terms and conditions of the Note, so long as any event of default, as described in the Note, is continuing, without cure, for a period of five (5) business days after written notice from the Holder to the Company or a longer period if set forth in the notice from Holder or if agreed to by the parties, all obligations of the Company under the Note shall be immediately due and payable, and the Holder may exercise any other remedies available at law or in equity. The note may not be prepaid, in whole or in part, at any time and from time to time, unless expressly agreed to in writing by the Holder. The total amount of related party interest expense during the three months ended March 31, 2018 and 2017 was approximately $145,000 and $0, respectively.

 

The balance of the long-term debt as of March 31, 2018 and December 31, 2017 was as follows:

 

   March 31 ,2018   December 31 ,2017 
Total Debt  $1,641,807   $1,797,049 
Less: current portion  $(781,983)  $(722,908)
Long-term debt, net  $859,824  $1,074,141 

 

Maturities of long-term debt at March 31, 2018, are as follows:

 

December 31,

2018  $567,666 
2019   976,907 
2020   97,234 
   $1,641,807 

 

Note 8 - Related party transactions

 

LeoGroup Private Debt Facility L.P. (“LeoGroup”) became a major shareholder as part of the Ermis Labs Asset Acquisition described in Notes 1 and 3. During the three months ended March 31, 2018, approximately $160,000 of payments were made to LeoGroup in connection with the deferred consideration for the Ermis Labs Asset Acquisition. On July 15, 2017 LeoGroup provided the Company with the $2,000,000 30-month secured promissory note to allow the buyout of the PhotoMedex royalty described in Notes 1 and 7. During the three months ended March 31, 2018, $300,000 of payments were made on the loan of which approximately $145,000 was interest expense.

 

Note 9 - Basic and diluted earnings (loss) per share

 

ASC 260, “Earnings Per Share” requires presentation of basic earnings per share and dilutive earnings per share.

 

 28 
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018 and 2017

(Unaudited)

 

Note 9 - Basic and diluted earnings (loss) per share (continued)

 

The computation of basic earnings (loss) per share is computed by dividing earnings (loss) available to common shareholders by the weighted average number of outstanding common shares during the period. Diluted earnings per share gives effect to all dilutive potential common shares outstanding during the period. The computation of diluted earnings per share does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect. At March 31, 2018, there were 6,686,668 stock options outstanding and 5,326,668 were vested and exercisable at an average exercise price of $0.26. The following securities were not included in the computation of diluted net (loss) income per share as their effect would have been anti-dilutive:

 

   March 31, 
   2018   2017 
Options to purchase common stock   5,933,437    5,833,336 

 

The following securities were included in the computation of diluted net income per share as their effect would have been dilutive:

 

   March 31, 
   2018   2017 
Options to purchase common stock   753,231    - 

 

The computations for basic and fully diluted income (loss) per share are as follows:

 

For the three months ended March 31, 2018:  Income
(Numerator)
  

Weighted

Average

Shares

(Denominator)

  

Per Share

Amount

 
Basic income per share            
Income to common shareholders  $70    52,340,700   $0.00 

 

For the three months ended March 31, 2018:  Income (Numerator)  

Weighted Average

Shares (Denominator)

   Per Share Amount 
Diluted income per share            
Income to common shareholders  $70    53,093,931   $0.00 

 

For the three months ended March 31, 2017:  Loss (Numerator)  

Weighted Average

Shares (Denominator)

   Per Share Amount 
Basic and Diluted loss per share               
Loss to common shareholders  $(367,618)   44,067,195   $(0.01)

 

 29 
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018 and 2017

(Unaudited)

 

Note 10 - Income taxes

 

The provision for income taxes is approximately $29,000 and $0 for the three months ended March 31, 2018 and 2017. The provision reflects an estimated current tax liability associated with the earnings of our foreign subsidiaries. The effective tax rate is 100% for the three months ended March 31, 2018, and 0% for the three months ended March 31, 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. The Company has not updated its analysis through March 31, 2018 and has not analyzed the potential impact of its recent equity financing on beneficial ownership and therefore no determination has been made whether the net operating loss carry forward of $3,239,000 available prior to the equity financing is subject to the Internal Revenue Code Section 382 limitation.

 

Note 11 - Segment reporting

 

We operate in the direct to consumer, retail, international third-party distributors, and airlines and Hong Kong retail segments which are engaged in selling of various consumer products primarily through direct marketing channels as well as selling our products through our international third-party distributor, and certain airlines. We evaluate performance and allocate resources based on several factors, of which the primary financial measure is operating income (loss) by the end customer, either direct to consumer sales, retail, international third-party distributor sales, or airlines and Hong Kong retail sales. Operating expenses are primarily prorated based on the relationship between segment sales to total sales.

 

 30 
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018 and 2017

(Unaudited)

 

Note 11 - Segment reporting (continued)

 

Information with respect to our operating income (loss) by segment is as follows:

 

   For the three months ended   For the three months ended 
   March 31, 2018   March 31, 2017 
   Direct to Consumer   Retail   International Third-Party Distributor   Airlines and Hong Kong Retail   Totals   Direct to Consumer   Retail   International Third-Party Distributor   Airlines and Hong Kong Retail   Totals 
                                                   
Net sales  $5,007,054   $2,667,945   $891,460   $404,346   $8,970,805   $6,400,702   $540,549   $480,481   $225,387   $7,647,119 
                                                   
Cost of sales   892,911    801,680    445,730    265,017    2,405,338    1,462,436    324,329    266,794    100,021    2,153,580 
Gross profit   4,114,143    1,866,265    445,730    139,329    6,565,467    4,938,266    216,220    213,687    125,366    5,493,539 
Operating expenses:                                                  
General and administrative   1,185,104    617,693    204,608    51,573    2,058,978    1,787,672    372,340    258,931    63,326    2,482,269 
Selling and marketing   2,406,054    1,290,394    427,436    177,428    4,301,312    2,825,068    508,492    33,182    23,202    3,389,944 
Total operating expense   3,591,158    1,908,087    632,044    229,001    6,360,290    4,612,740    880,832    292,113    86,528    5,872,213 
Operating income (loss)  $522,985   $(41,822)   $(186,314)   $(89,672)   $205,177   $325,526   $(664,612)   $(78,426)   $38,838   $(378,674) 

 

Selected balance sheet information by segment is presented in the following table as of:

 

    March 31, 2018     December 31, 2017  
Direct to Consumer   $ 9,803,925     $ 11,135,146  
Retail     1,619,811       1,696,601  
International Third Party Distributors     223,677       75,854  
Airlines and Hong Kong Retail     936,729       862,656  
    $ 12,584,142     $ 13,770,257  

  

 31 
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018 and 2017

(Unaudited)

 

Note 11 - Segment reporting (continued)

 

Total assets by geographical region as of:

 

   March 31, 2018   December 31, 2017 
United States  $7,782,811   $8,333,129 
Hong Kong   688,024    862,656 
United Kingdom   3,165,862    3,476,560 
Israel   947,445    1,097,912 
Total Assets  $12,584,142   $13,770,257 

 

Net sales by geographical region for the three months ended:

 

   March 31, 2018   March 31, 2017 
United States  $5,894,146   $7,421,732 
Hong Kong   404,346    225,387 
United Kingdom   2,672,313    - 
Israel   -    - 
Total Net Sales  $8,970,805   $7,647,119 

 

Note 12 - Subsequent Events

 

Effective June 29, 2018, Diana Pessin resigned as a member of the Board of Directors of the Company and as a member of the Company’s Audit Committee. In her resignation letter, Ms. Pessin stated that her philosophy and vision for the Company to improve its performance and corporate governance does not align with the current Board and management, and that she has fundamental differences with the way the Company is run.

 

On June 21, 2018, the Company’s Board of Directors appointed Douglas M. Crouthers, as interim President, to serve as such until such time as the Company’s Board of Directors determines his position as President to be permanent. Mr. Crouthers is currently our Vice President of Sales, and will retain that title while he serves as interim President. Mr. Crouthers current salary and incentive compensation will not change during his term, as interim President.

 

On June 21, 2018, we issued to nine employees options to purchase, in the aggregate, 505,000 shares of the Company’s common stock, at an exercise price of $0.115 per share. The options vest over three years with one-third vesting on each anniversary date of the grant. The issuance of such options was exempt from registration under Regulation D and Section 4(2) of the Securities Act of 1933.

 

On June 21, 2018, Kelvin Claney, Douglas Crouthers and Vincent Dargush, voluntarily surrendered their options to purchase, in the aggregate, 450,000 shares of common stock, in consideration of a future stock grant described below. The issuance of such options was exempt from registration under Regulation D and Section 4(2) of the Securities Act of 1933.

 

On June 21, 2018, we issued 200,000 shares of common stock to Kelvin Claney, 100,000 shares of common stock to Douglas Crouthers, and 100,000 shares of common stock to Vincent Dargush, at a share price of $0.10 per share, and in each case, as a share bonus for performance during the second quarter of 2018, as well as, in consideration of the surrender of previously granted options (described above). The stock price on the date of issuance to Mr. Claney, Mr. Crouthers, and Mr. Dargush was $0.10 per share, and are restricted for a period of six months from issuance. The recipients of the shares of common stock are key employees of our Company, and the issuance of the common stock is exempt from registration under Section 4(2) of the Securities Act of 1933.

 

On June 21, 2018, we issued 300,000 shares of common stock to Ernest P. Kollias, Jr. at a share price of $0.10 per share, as a share bonus for performance during the second quarter of 2018. The stock price on the date of issuance to Mr. Kollias was $0.10 per share, and are restricted for a period of six months from issuance. The recipient of the shares of common stock is a key employee of our Company, and the issuance of the common stock is exempt from registration under Section 4(2) of the Securities Act of 1933.

 

On June 25, 2018, the Company entered into an Investor Relations Agreement, with an independent consultant (the “Consultant”), pursuant to which the Consultant will provide the Company with certain investor and public relations services, in exchange for a monthly consulting fee of $5,000 and the issuance of stock options to purchase 300,000 shares of the Company’s common stock. The options will vest in four equal tranches as follows: (i) options to purchase 75,000 shares of common stock, which vests immediately, at an exercise price equal to the average closing price of the Company’s common stock over the 10 trading days prior to the date of the agreement; (ii) options to purchase 75,000 shares of the Company’s common stock, which vests 180 days after the date of the agreement, at an exercise price equal to the exercise price described in clause (i) above; (iii) options to purchase 75,000 shares of the Company’s common stock, which vests one year after the date of the agreement, at an exercise price equal to the exercise price described in clause (i) above plus $0.10 per share; and (iv) options to purchase 75,000 shares of the Company’s common stock, which vests two years after the date of the agreement, at an exercise price equal to the exercise price described in clause (i) above plus $0.20 per share. The issuance of such options 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 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. 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.

 

On April 18, 2018, the Board of Directors of ICTV Brands Inc. (the “Company”), appointed our Chief Financial Officer, Ernest P. Kollias, Jr., to replace John Carrino, former in house counsel, as our corporate secretary.

 

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.

 

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ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

 

Except for the historical information presented in this document, the matters discussed in this Form 10-Q, and specifically in the “Management’s Discussion and Analysis or Plan of Operation”, or otherwise incorporated by reference into this document contain “forward looking statements” (as such term is defined in the Private Securities Litigation Reform Act of 1995). These statements can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “will”, “intends”, “should”, or “anticipates” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. The safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, apply to forward-looking statements made by the Company. You should not place undue reliance on forward-looking statements. Forward-looking statements involve risks and uncertainties. The actual results that the Company achieves may differ materially from any forward-looking statements due to such risks and uncertainties. These forward-looking statements are based on current expectations, and the Company assumes no obligation to update this information. Readers are urged to carefully review and consider the various disclosures made by the Company in this report on Form 10-Q and in the Company’s other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect the Company’s business.

 

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the consolidated financial statements and accompanying notes in Item 1 and other financial information elsewhere in this report.

 

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.

 

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. 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

 

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.

 

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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.

 

Results of Operations

 

Three months ended March 31, 2018 compared to the three months ended March 31, 2017

 

Net Sales

 

Our net sales increased by approximately $1,324,000 to approximately $8,971,000 for the three months ended March 31, 2018 from approximately $7,647,000 for the three months ended March 31, 2017.

 

Our direct to consumer segment consists of direct response television (“DRTV”), live home shopping, and e-commerce sales, and is summarized below for the three months ended March 31, 2018 and 2017:

 

  

March 31,

2018

  

March 31,

2017
   Increase/(Decrease) 
DRTV  $3,796,000   $3,407,000   $389,000 
Live Home Shopping   716,000    1,938,000    (1,222,000)
E-commerce   495,000    1,056,000    (561,000)
Total Direct to Consumer  $5,007,000   $6,401,000   $(1,394,000)

 

Our total direct to consumer segment decreased approximately $1,394,000 due to the decrease in live shopping. The Company made the decision to move live shopping from QVC UK to Ideal World. The impact of this decision was that the Company had to be off air for six months resulting in a decrease in sales. The last airing with QVC was November 2, 2017, and the first airing with Ideal World was June 5, 2018. This decrease was offset by an increase in DRTV sales, due to an increase in the sales of no!no!® and ClearTouch® items.

 

Retail sales increased by approximately $2,127,000 from continued expansion in UK brick and mortar stores, including the addition of the DermaWandTM to Boots, a leading beauty and health retailer in the UK.

 

International sales increased approximately $411,000 from $480,000 for the three months ended March 31,2017 to $891,000 for the three months ended March 31,2018. This is largely due to an increase in sales primarily in China.

 

Airlines and Hong Kong retail increased by approximately $179,000 due to increased sales in airlines.

 

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Gross Profit

 

For the three months ended March 31, 2018, the Company increased its gross profit by approximately $1,071,000 from approximately $5,494,000 in three months ended March 31, 2017 to approximately $6,565,000 in three months ended March 31, 2018. The increase in retail sales for the three months ended March 31, 2018 generated a higher gross margin than March 31, 2017 due to the decrease in returns, therefore generating higher net sales.

 

The gross margin percentage also increased slightly from 72% for the three months ended March 31, 2017 to 73% for the three months ended March 31, 2018. Total returns for the three months ended March 31, 2018 decreased by $534,000, which is the primary reason for the Company’s increase in gross profit percentage. During the first quarter of 2017, there was approximately $600,000 returns that reduced gross profit, for sales that were previously recognized by PhotoMedex. This increase is also due to the increase in DRTV sales, which generates an approximate 85% gross margin.

 

Operating Expenses

 

Total operating expenses increased to approximately $6,360,000 for the three months ended March 31, 2018, from approximately $5,872,000 for the three months ended March 31, 2017, an increase of approximately $488,000.

 

Selling and marketing expenses for the three months ended March 31, 2018 and 2017 are summarized below:

 

   March 31, 2018   March 31, 2017   Increase (Decrease) 
Selling and Marketing:               
Answering Service  $212,093   $247,158   $(35,065)
Customer Service   233,173    172,338    60,835 
Merchant Fees   125,459    229,238    (103,779)
Internet Marketing   1,038,928    841,553    197,375 
Media   2,265,976    1,631,711    634,265 
Retail Advertising   40,388    17,998    22,390 
Other Marketing   385,295    249,948    135,347 
Total Selling and Marketing  $4,301,312   $3,389,944   $911,368 

 

This increase in selling and marketing expenses is due to a few key factors, the largest of which is an increase in media expenditures. Media expenditures were approximately $2,266,000 and $1,632,000 for the three months ended March 31, 2018 and 2017, respectively. Increased media expenses directly drives the increase in direct to consumer sales. In addition to media expenditures, there was an increase in internet marketing expense which increased to $1,039,000 for the three months ended March 31, 2018 from $842,000 for the three months ended March 31, 2017 as we continue to shift to more digital marketing efforts through search engine marketing and optimization, paid social media, and banner ad campaigns. Other marketing expenses increased by approximately $135,000 for this same reason. Merchant fees decreased by $104,000 due to the decrease in direct to consumer sales.

 

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General and Administrative expenses for the three months ended March 31, 2018 and 2017 are summarized below:

 

   March 31, 2018   March 31, 2017   Increase (Decrease) 
General And Administrative:               
Payroll and Related Expenses  $735,145   $693,161   $41,984 
Share Based Compensation   30,345    417,959    (387,614)
Professional Fees   126,847    182,679    (55,832)
Consulting   73,361    186,591    (113,230)
Bad Debts   410,344    319,330    91,014 
Office Expenses   49,918    193,878    (143,960)
Depreciation and Amortization   160,448    149,126    11,322 
Rent   65,970    81,581    (15,611)
Insurance   136,401    100,604    35,797 
Exchange Gain or Loss   105,483    5,883    99,600 
Travel   72,011    87,539    (15,528)
Other General and Administrative   92,705    63,938    28,767 
Total General and Administrative  $2,058,978   $2,482,269   $(423,291)

 

Payroll and related expenses increased approximately $42,000 for the three months ended March 31, 2018 over the prior three months ended March 31, 2017 as a result of additional staffing added in our marketing department.

 

Share based compensation decreased by approximately $388,000 from approximately $418,000 for the three months ended March 31, 2017 to approximately $30,000 for the three months ended March 31, 2018. This decrease was due to the stock issuances to executives in the three months ended March 31, 2017 that did not occur in 2018.

 

Consulting fees decreased approximately $113,000 for the three months ended March 31, 2018 over the prior three months ended March 31, 2017. The decrease is due to a Company-wide assessment of our current consultants and in-house staffing. The Company was able to decrease outside consultants by bringing a portion of those duties and tasks in-house, primarily in our marketing department. There were also increased costs for the three months ended March 31, 2017 related to the PhotoMedex acquisition.

 

Bad debt expense increased approximately $91,000 for the three months ended March 31, 2018 over the prior three months ended March 31, 2017. This increase is in line with the increase is in Net sales.  

 

Insurance expense increased approximately $36,000 for the three months ended March 31, 2018 over the prior three months ended March 31, 2017, which is primarily due to our product liability insurance to insure our increased inventory.

 

Exchange gain or loss increase approximately $100,000 for the three months ended March 31, 2018 over the prior three months ended March 31,2017. This increase is due is currency exchanges differences primarily in the UK based on payments and collections in different currencies.