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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
EX-4.3 - ICTV Brands Inc.ex4-3.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 June 30, 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 August 17, 2018, the Issuer had 53,140,700 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 36
     
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 45
     
ITEM 4. CONTROLS AND PROCEDURES 45
     
PART II - OTHER INFORMATION  
     
ITEM 1. LEGAL PROCEEDINGS 49
     
ITEM 1A. RISK FACTORS 50
     
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 50
     
ITEM 3. DEFAULTS ON SENIOR SECURITIES 51
     
ITEM 4. MINE SAFETY DISCLOSURES 51
     
ITEM 5. OTHER INFORMATION 51
     
ITEM 6. EXHIBITS 52
     
SIGNATURES 54

 

2
 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Condensed Consolidated Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017 4
   
Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2018 and 2017 (unaudited) 5
   
Condensed Consolidated Statement of Shareholders’ Equity for the six months ended June 30, 2018 (unaudited) 6
   
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017 (unaudited) 7
   
Notes to the Condensed Consolidated Financial Statements (unaudited) 8 - 35

 

3
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   June 30, 2018   December 31, 2017 
   (Unaudited)     
ASSETS          
CURRENT ASSETS:          
Cash and cash equivalents  $1,812,246   $1,258,360 
Accounts receivable, net of allowances for returns and doubtful accounts of $980,013 and $913,303 respectively   2,243,253    3,576,376 
Inventories, net   5,285,081    5,631,857 
Prepaid expenses and other current assets   799,308    167,914 
Total current assets   10,139,888    10,634,507 
           
Property and equipment, net   822,066    887,093 
Intangible assets, net   1,898,817    2,248,657 
           
Total assets  $12,860,771   $13,770,257 
LIABILITIES AND SHAREHOLDERS’ EQUITY          
CURRENT LIABILITIES:          
Accounts payable and accrued liabilities  $5,696,234   $5,911,778 
Current portion of long-term debt to related party   846,243    722,908 
Note payable   145,000    - 
Deferred revenue   398,058    403,844 
Deferred consideration due to related party   143,100    241,379 
Other liabilities- net of discount   408,749    369,563 
Total current liabilities   7,637,384    7,649,472 
           
Deferred revenue – long term   181,565    194,534 
Deferred consideration – long term due to related party   955,571    970,688 
Other liabilities – long term, net of discount   186,185    371,149 
Long-term debt to related party, net of current portion   626,693    1,074,141 
Total long term liabilities   1,950,014    2,610,512 
           
COMMITMENTS AND CONTINGENCIES          
           
SHAREHOLDERS’ EQUITY:          
Preferred stock, $0.001 par value, 20,000,000 shares authorized, of which 210,000 shares are designated as Series A, 210,000 and 0 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively   210    - 
Common stock, $0.001 par value, 100,000,000 shares authorized, 53,040,700 and 52,340,700 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively   42,830    42,130 
Additional paid-in capital   20,780,117    20,198,137 
Accumulated other comprehensive income   73,584    174,875 
Accumulated deficit   (17,623,368)   (16,904,869)
           
Total shareholders’ equity   3,273,373    3,510,273 
           
Total liabilities and shareholders’ equity  $12,860,771   $13,770,257 

 

See accompanying notes to condensed consolidated financial statements

 

4
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF

OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

 

   For the three months ended   For the six months ended 
   June 30, 2018   June 30, 2017   June 30, 2018   June 30, 2017 
                 
NET SALES  $7,012,056   $7,950,076   $15,982,862   $15,597,195 
                     
COST OF SALES   2,219,317    2,791,601    4,624,656    4,945,181 
                     
GROSS PROFIT   4,792,739    5,158,475    11,358,206    10,652,014 
                     
OPERATING EXPENSES:                    
General and administrative   2,206,485    2,673,271    4,265,463    5,155,541 
Selling and marketing   3,045,497    3,854,031    7,346,808    7,243,975 
Total operating expenses   5,251,982    6,527,302    11,612,271    12,399,516 
                     
OPERATING LOSS   (459,243)   (1,368,827)   (254,065)   (1,747,502)
                     
OTHER INCOME/(EXPENSE), NET                    
Interest expense   (149,449)   (1,723)   (323,877)   (50,770)
Miscellaneous (expense)/income, net   (20,877)   (130)   (22,557)   59,974 
                     
LOSS BEFORE PROVISION FOR INCOME TAX   (629,569)   (1,370,680)   (600,499)   (1,738,298)
                     
PROVISION FOR INCOME TAXES   89,000    70,000    118,000    70,000 
                     
NET LOSS  $(718,569)  $(1,440,680)  $(718,499)  $(1,808,298)
                     
OTHER COMPREHENSIVE LOSS:                    
Foreign currency translation adjustment   (185,138)   102,118    (101,291)   96,701 
                     
COMPREHENSIVE LOSS  $(903,707)  $(1,338,562)  $(819,790)  $(1,711,597)
                     
NET LOSS PER SHARE                    
BASIC AND DILUTED  $(0.01)  $(0.03)  $(0.01)  $(0.04)
                     
WEIGHTED AVERAGE NUMBER OF COMMON SHARES                    
BASIC AND DILUTED   52,409,931    52,075,703    52,375,507    48,093,572 

 

See accompanying notes to condensed consolidated financial statements

 

5
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2018

(Unaudited)

 

   Preferred Stock   Common Stock   Additional   Other         
   $0.001 par value   $0.001 par value   Paid-In   Comprehensive   Accumulated     
   Shares   Amount   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   -    -    -    -    109,690    -    -    109,690 
                                         
Issuance of stock for compensation   -    -    700,000    700    69,300    -    -    70,000 
                                         
Issuance of preferred stock   210,000    210    -    -    402,990    -    -    403,200 
                                         
Foreign currency translation adjustment   -    -    -    -    -    (101,291)   -    (101,291)
                                         
Net loss   -    -    -    -    -    -    (718,499)   (718,499)
                                         
Balance at June 30, 2018   210,000   $210    53,040,700   $42,830   $20,780,117   $73,584   $(17,623,368)  $3,273,373 

 

See accompanying notes to condensed consolidated financial statements.

 

6
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

(Unaudited)

 

   June 30, 2018   June 30, 2017 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(718,499)  $(1,808,298)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:          
Depreciation and amortization   471,796    519,828 
Bad debt expense   687,612    653,491 
Share based compensation   109,690    159,058 
Issuance of stock for compensation   70,000    336,000 
Change in fair value of contingent consideration   -    (48,035)
Loss on disposal of property and equipment   -    3,228 
Non-cash interest expense   51,240    53,117 
Change in assets and liabilities   -      
Accounts receivable   632,726    (3,206,920)
Other receivable   -    (837,708)
Inventories   286,847    558,342 
Prepaid expenses and other current assets   (640,975)   (299,219)
Accounts payable and accrued liabilities   (224,452)   3,049,236 
Deferred revenue   (22,227)   (16,785)
Net cash provided by (used in) operating activities   703,758    (884,665)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of property and equipment   (52,438)   (127,128)
Cash paid for acquisition of PhotoMedex, Inc.   -    (5,000,000)
Net cash used in investing activities   (52,438)   (5,127,128)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Payments of DermaWand asset purchase agreement   (150,000)   (150,000)
Proceeds from issuance of common stock, net of offering costs   -    6,982,930 
Proceeds from exercise of options   -    55,559 
Proceeds from note payable   145,000    - 
Repayments of long-term debt to related party   (324,113)   - 
Payments of deferred consideration for asset acquisition   (160,414)   (14,583)
Proceeds from issuance of preferred stock   403,200    - 
Net cash (used in) provided by financing activities   (86,327)   6,873,906 
           
Effect of exchange rates on cash and cash equivalents   (11,107)   2,031 
           
NET INCREASE IN CASH AND CASH EQUIVALENTS   553,886    864,144 
           
CASH AND CASH EQUIVALENTS, beginning of the period   1,258,360    1,390,641 
           
CASH AND CASH EQUIVALENTS, end of the period  $1,812,246   $2,254,785 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
Taxes paid  $-   $- 
Interest paid  $276,000   $- 
           
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:          
Cashless exercise of options  $-   $23 
Contingent consideration reclass to other receivable  $-   $570,248 
           
Acquisition of PhotoMedex on January 23, 2017          
Fair value of assets acquired  $-   $9,198,043 
Fair value of deferred consideration   -    (4,198,043)
Cash paid for acquisition  $-   $5,000,000 
           
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

June 30, 2018 and 2017

(Unaudited)

 

Note 1 – Organization and Business of the Company and Liquidity

 

Organization and Nature of Operations

 

ICTV Brands Inc. (the “Company”, “we”, or “ICTV”), was organized under the laws of the State of Nevada on September 25, 1998. As of June 30, 2018, we have the following subsidiaries:

 

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

 

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

June 30, 2018 and 2017

(Unaudited)

 

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

 

We develop, market and sell products through a multi-channel distribution strategy, including direct response television, digital marketing campaigns, live home shopping, traditional retail and e-commerce market places, and our international third-party distributor network. We offer primarily health, beauty and wellness products as well as various consumer products, including no!no!®, a thermicon hair removal device, DermaWand®, a skin care device that reduces the appearance of fine lines and wrinkles, and helps improve skin tone and texture, DermaVital®, a professional quality skin care line that effects superior hydration, the CoralActives® brand of acne treatment and skin cleansing products, DermaBrilliance®, a skin care resurfacing device that helps reduce visible signs of aging, and Jidue®, a facial massager device which helps alleviate stress. We acquire the rights to our products that we market primarily via licensing agreements, acquisition and in-house development and sell both domestically and internationally. We are presently exploring other devices and consumable product lines currently under licensing agreements.

 

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

 

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 was 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 loss of approximately $718,000 for the six months ended June 30, 2018 and generated positive cash flows from operating activities of approximately $704,000. In addition, we have an accumulated deficit of approximately $17,623,000 as of June 30, 2018. Additional financing will be required for the Company to successfully implement its long-term growth strategy.

 

To increase profitability throughout 2018 and 2019 and maintain sufficient cash flow and liquidity, we continue to analyze our processes to determine where further cut backs can be made, and operations can be streamlined to further reduce expenditures. On April 1, 2018, our CEO took a $100,000 temporary reduction in his annual base pay. We have also eliminated the marketing department, as well as inside legal counsel. The cost benefit of these reductions will be reflected in the third quarter of 2018. In addition, we have reduced media expenses and eliminated several positions within the Company.

 

9
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018 and 2017

(Unaudited)

 

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

 

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

 

Note 2 - Summary of significant accounting policies

 

Basis of Presentation

 

The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and within the rules of the Securities and Exchange Commission applicable to interim financial statements and therefore do not include all disclosures that might normally be required for financial statements prepared in accordance with generally accepted accounting principles. The accompanying unaudited condensed consolidated financial statements have been prepared by management without audit and should be read in conjunction with our condensed consolidated financial statements, including the notes thereto, appearing in our Annual Report on Form 10-K for the year ended December 31, 2017. In the opinion of management, all adjustments necessary for a fair presentation of the condensed consolidated financial position, consolidated results of operations and consolidated cash flows, for the periods indicated, have been made. The results of operations for the six months ended June 30, 2018 are not necessarily indicative of operating results that may be achieved over the course of the full year.

 

Principles of consolidation

 

Our accompanying condensed consolidated financial statements include the accounts of our wholly-owned subsidiaries BBI, ICTV Brands UK Limited, ICTV Brands Israel Limited, ICTV Brands HK Limited and LK Technology 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

June 30, 2018 and 2017

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

Concentration of credit risk

 

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

 

As of June 30, 2018, 15% 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, 49% was due from brick and mortar retailers, 10% was due from e-commerce accounts, 15% was due from live shopping, 5% was due from duty free airline, and 6% was due from miscellaneous customers

 

Major customers are considered to be those who accounted for more than 10% of net sales. There were no major customers for the three and six months ended June 30, 2018 and 2017.

 

Fair value of financial instruments

 

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

 

11
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 Shekel (ILS).

 

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

 

Accounts receivable

 

Accounts receivable are recorded net of allowances for returns and doubtful accounts of approximately $980,000 and $913,000 as of June 30, 2018 and December 31, 2017, respectively. The allowances are calculated based on historical analysis including customer returns and bad debts.

 

In addition to allowances for returns on accounts receivable, an accrual is made for the return of product that have been sold to customers and had cash collections, while the customer still has the right to return the product. In addition, an accrual is made for contract fees deducted by the customer. The amounts of these accruals included in accounts payable and accrued liabilities in our Condensed Consolidated Balance Sheets were approximately $178,000 and $180,000 as of June 30, 2018 and December 31, 2017, respectively.

 

Inventories

 

Inventories consist primarily of finished products held for resale and are valued at the lower of cost (first-in, first-out method) or net realizable value. We adjust inventory for estimated obsolescence when necessary based upon demand and market conditions. The Company’s reserve for obsolescence was approximately $264,000 and $247,000 as of June 30, 2018 and December 31, 2017, respectively. Included in inventory at June 30, 2018 and December 31, 2017 is approximately $64,000 and $51,000, respectively, of consigned product that has been shipped to customers under the 30-day free trial period for which the trial period has not expired and as such the customer has not accepted the product, as well as consigned products that are held at retailer distributors for sale.

 

Property and equipment

 

Property and equipment are carried at cost and depreciation and amortization is computed over the estimated useful lives of the individual assets ranging from 3 to 7 years for computer hardware and software and furniture and fixtures. Depreciation and amortization is computed using the straight-line method. Leasehold improvements are depreciated over the lesser of the estimated useful life and lease term. The related cost and accumulated depreciation of assets retired or otherwise disposed of are removed from the accounts and the resultant gain or loss is reflected in earnings. Maintenance and repairs are expensed currently while major renewals and betterments are capitalized. Depreciation and amortization expense amounted to approximately $59,000 and $118,000 and $48,000 and $78,000 for the three and six months ended June 30, 2018 and 2017, respectively.

 

12
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018 and 2017

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

Property and equipment consisted of the following at:

 

   June 30, 2018   December 31, 2017 
Computer hardware and software  $205,530   $154,061 
Furniture and equipment   908,700    907,586 
Leasehold improvements   55,840    55,840 
    1,170,070    1,117,487 
Accumulated depreciation and amortization   (348,004)   (230,394)
Property and equipment, net  $822,066   $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 $177,000 and $354,000 and $251,000 and $442,000 for the three and six months ended June 30, 2018 and 2017, respectively. We evaluate the recoverability of the intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that may indicate the asset may be impaired.

 

Impairment of long-lived assets

 

In accordance with ASC 360-10, “Accounting for the Impairment or Disposal of Long-Lived Assets,” long-lived assets are reviewed for impairment when circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future net undiscounted cash flows estimated by the Company to be generated by such assets. If such assets are considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of by sale are recorded as held for sale at the lower of carrying value or estimated net realizable value. No impairment losses were identified or recorded for the three and six months ended June 30, 2018 and 2017.

 

Revenue recognition

 

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

 

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

 

13
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 June 30, 2018 and December 31, 2017, we recorded deposits for international third-party distributors of approximately $239,000 and $404,000, respectively, in deferred revenue, current portion.

 

14
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018 and 2017

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

Airlines and Hong Kong Retail

 

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

 

Warranty

 

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

 

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 June 30, 2018 and December 31, 2017 was approximately $724,000 and $747,000, respectively. The reserve for customer refunds and contract fees payable was approximately $178,000 at June 30, 2018 and $180,000 at December 31, 2017 and has been included in accounts payable and accrued liabilities in the accompanying condensed consolidated balance sheets. The amount of goods to be returned to inventory was determined to be immaterial.

 

For the three and six months ended June 30, 2018 and 2017, we recorded sales returns of approximately $1,105,000 and $2,372,000 and $1,657,000 and $3,305,000 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

June 30, 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 $230,000 and $607,000 and $496,000 and $1,124,000 for the three and six months ended June 30, 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 June 30, 2018, approximately $341,000 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 Six Months 2018   2019   2020   2021   2022   2023 
                               
Estimated Deferred Warranty Revenue from remaining  $92,000   $121,000   $66,000   $42,000   $19,000   $1,000 

 

Disaggregation of revenue

 

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

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2018   2017   2018   2017 
Direct to Consumer  $3,915,091   $5,729,838   $8,922,145   $12,381,253 
International Third Party Distributors   580,928    1,040,250    1,472,389    1,398,850 
Retail   1,757,630    436,714    4,425,575    848,431 
Airlines/Hong Kong Retail   758,407    743,274    1,162,753    968,661 
   $7,012,056   $7,950,076   $15,982,862   $15,597,195 

 

16
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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:

 

   June 30, 2018   December 31, 2017 
Accounts receivable, net of allowance for returns of $724,278 and $747,269, respectively, and doubtful accounts of $255,735 and $166,034, respectively  $2,243,253   $3,576,376 
Total contract assets  $2,243,253   $3,576,376 
           
Deferred revenue  $579,623   $598,378 
Accrued returns and contract fees payable   177,912    179,922 
Total contract liabilities  $757,535   $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 loss. Research and development costs primarily consist of efforts to discover and develop new products, including clinical trials, product safety testing, and certifications for international regulations and standards. Research and development costs approximated $35,000 and $77,000 and $19,000 and $64,000 for the three and six months ended June 30, 2018 and 2017, respectively.

 

Advertising

 

Advertising costs, consisting of media, internet marketing and production costs, are expensed as incurred and are included in selling and marketing expense in the accompanying condensed consolidated statements of operations and comprehensive loss. Production costs associated with the creation of new and updated infomercials and advertising campaigns are expensed at the commencement of a campaign. We incurred approximately $1,481,000 and $3,747,000 and $1,834,000 and $3,465,000 in media costs for airing of television and print advertising, $851,000 and $1,890,000 and $1,243,000 and $2,090,000 in internet marketing costs, and $55,000 and $83,000 and $51,000 and $196,000 in productions costs for the three and six months ended June 30, 2018 and 2017, respectively.

 

17
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 June 30, 2018, 50,000 options are outstanding under the Plan.

 

In December 2011, our shareholders approved our 2011 Stock Option Plan (the “2011 Plan”). The 2011 Plan is designed for our employees, officers, and directors, and is intended to advance our best interests by providing personnel who have substantial responsibility for our management and growth with additional incentive by increasing their proprietary interest in our success, thereby encouraging them to remain our employee. The 2011 Plan is administered by our Board of Directors and authorizes the issuance of stock options not to exceed a total of 6,000,000 shares. In December 2017, the 2011 Plan was amended to increase the number of stock options that may be awarded to not exceed a total of 8,000,000 shares. The terms of any awards under the 2011 Plan are determined by the Board of Directors, provided that no options may be granted at less than the fair market value of the stock as of the date of the grant. Generally, the options granted vest over three years with one-third vesting on each anniversary date of the grant. As of June 30, 2018, 4,198,335 options are outstanding under the 2011 Plan.

 

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

 

18
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 six months ended June 30, 2018 and 2017:

 

   Number of Shares   Weighted Average 
   Employee   Non-Employee   Totals   Exercise Price 
Balance, January 1, 2018   3,993,335        -    3,993,335   $0.27 
Granted during the year   1,555,000         1,555,000    0.26 
Exercised during the year   -    -    -    - 
Cancelled during the year   (450,000)        (450,000)   0.33 
Forfeited during the year   (850,000)   -    (850,000)   0.36 
                     
Balance, June 30, 2018   4,248,335         4,248,335   $0.22 

 

   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   (101,667)   -    (101,667)   0.13 
Forfeited during the year   (10,000)   -    (10,000)   0.22 
                     
Balance, June 30, 2017   3,568,335    -    3,568,335   $0.24 

 

Of the stock options outstanding as of June 30, 2018 under the Stock Option Plans, 3,433,335 options are currently vested and exercisable. The weighted average exercise price of these options was $0.24. These options expire through January 2028.

 

The aggregate intrinsic value for options outstanding and exercisable at June 30, 2018 and 2017 was approximately $1,000 and $779,000, respectively. The aggregate intrinsic value for stock options exercised during the six months ended June 30, 2017 was approximately $40,000.

 

19
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018 and 2017

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

On January 9, 2018, we issued options to purchase 1,050,000 shares of the Company’s common stock to six employees, at an exercise price of $0.3318 per share. Three of those employees were terminated in the second quarter of 2018, resulting in the forfeiture of their options to purchase, in the aggregate, 600,000 shares of common stock. On June 21, 2018, the remaining three employees voluntarily surrendered their options to purchase, in the aggregate, 450,000 shares of common stock, in consideration of a future stock grant. On June 21, 2018, we issued 400,000 shares of common stock to such remaining three employees, Kelvin Claney, CEO, Douglas Crouthers, Interim President and VP of Sales, and Vincent Dargush, VP of Marketing and Operations, at a share price of $0.10 per share, in consideration of the surrender of previously granted options and, in each case, as a share bonus, which was immediately vested, for performance in the second quarter of 2018. Also, on June 21, 2018, we issued 300,000 shares of common stock to Ernest P. Kollias, Jr., CFO, at a share price of $0.10 per share, also as a share bonus, in consideration for performance during the second quarter of 2018, which was immediately vested. The shares issued on June 21, 2018 are restricted for a period of six months from issuance. The recipients of the shares of common stock are key employees of our Company, and the issuance of the common stock is exempt from registration under Section 4(2) of the Securities Act of 1933.

 

The Company follows the provisions of ASC Topic 718 “Compensation — Stock Compensation” which requires the measurement and recognition of compensation expense for all share-based payment awards either modified or granted to employees and directors based upon estimated fair values. The 600,000 options forfeited were not vested at the time of forfeiture and therefore resulted in a reversal of previously recognized compensation expense in the amount of approximately $12,000. The result of the modification of issuing 400,000 shares of common stock in replacement of 450,000 options surrendered, as noted above, was to immediately recognize the fair value of the original options granted totaling approximately $124,000 and the incremental change in fair value of the replacement awards, which was de minimis. The Company recorded the issuance of the 400,000 shares awarded at $0.10 per share, totaling $40,000, the fair value on the date of issuance, and the remaining amount, totaling approximately $84,000, to stock based compensation expense.

 

For the three and six months ended June 30, 2018 and 2017, we recorded approximately $71,000 and $102,000, and $77,000 and $495,000, respectively, in stock compensation expense under the Stock Option Plans. At June 30, 2018, there was approximately $155,000 of total unrecognized compensation cost related to non-vested option grants that will be recognized over the remaining vesting period of 3 years.

 

The following weighted average assumptions are used in the Black-Scholes option pricing model for the six months ended June 30, 2018 to value the stock options granted during the period:

 

2018
Risk-free interest rate   2.84%
Expected dividend yield   0.00%
Expected life   6 years 
Expected volatility   142.79%
Weighted average grant date fair value  $0.26 

 

There were no options granted for the six months ended June 30, 2017.

 

20
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018 and 2017

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

The following is a summary of stock options outstanding outside of the Stock Option Plans for the six months ended June 30, 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   -    300,000    300,000    0.11 
Exercised during the year   -    -    -    - 
Expired during the period   -    -    -    - 
Balance, June 30, 2018   333,333    1,776,667    2,110,000   $0.27 

 

   Number of Shares  

Weighted

Average

 
   Employee   Non - Employee   Totals   Exercise Price 
                 
Balance, January 1, 2017   516,667    1,676,667    2,193,334   $0.35 
Granted during the year   -    -    -    - 
Exercised during the year   (183,334)   -    (183,334)   0.27 
Expired during the period   -    (200,000)   (200,000)   0.80 
Balance, June 30, 2017   333,333    1,476,667    1,810,000   $0.31 

 

Of the stock options currently outstanding outside of the Stock Option Plans at June 30, 2018, 1,885,000 options are currently vested and exercisable. The weighted average exercise price of these options was $0.30. These options expire through January 2026. The aggregate intrinsic value for options outstanding and exercisable at June 30, 2018 and 2017 was approximately $0 and $411,000, respectively. There were no options exercised during the six months ended June 30, 2018 and 2017.

 

For the three and six months ended June 30, 2018 and 2017, we recorded approximately $8,000 and $8,000, and $5,000 and $13,000, respectively in stock compensation expense related to stock options outside of the Stock Option Plans. At June 30, 2018, there is approximately, $24,000 of remaining unrecognized compensation cost. Change in the fair value of the options issued to non-employees, as of June 30, 2018 was de minimis.

 

21
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018 and 2017

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

The following weighted average assumptions are used in the Black-Scholes option pricing model for the six months ended June 30, 2018 to value the stock options granted during the period:

 

2018
Risk-free interest rate   2.77%
Expected dividend yield   0.00%
Expected life   3 years 
Expected volatility   143.03%
Weighted average grant date fair value  $0.11 

 

There were no options granted for the six months ended June 30, 2017.

 

The following is a summary of all stock options outstanding and nonvested for the six months ended June 30, 2018:

 

               Weighted 
               Average 
   Employee   Non-
Employee
   Totals   Exercise
Price
 
                 
Balance, January 1, 2018   476,667    -    476,667   $0.42 
Granted during the period   1,555,000    300,000    1,855,000    0.26 
Vested during the period   -    (75,000)   (75,000)   0.11 
Cancelled during the period   (450,000)   -    (450,000)   0.33 
Forfeited during the period   (766,667)   -    (766,667)   0.36 
         -           
Balance, June 30, 2018   815,000    225,000    1,040,000   $0.20 

 

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.

 

22
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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, and will begin in the third quarter outlining the necessary steps to implement these changes in the first quarter of 2019.

 

Reclassifications

 

Certain prior period amounts have been reclassified for consistency with the current period presentation of Retail as a reportable segment. 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.

 

23
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018 and 2017

(Unaudited)

 

Note 3 - Business and Asset Acquisitions (continued)

 

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.

 

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 June 30, 2018 and December 31, 2017 was zero.

 

24
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018 and 2017

(Unaudited)

 

Note 3 - Business and Asset Acquisitions (continued)

 

The following unaudited condensed pro forma financial information for the six months ended June 30, 2018 and 2017 represent the combined results of the Company’s operations as if the PhotoMedex Acquisition had occurred on January 1, 2017. Excluded from the pro forma net loss and net loss per share amounts for the six months ended June 30, 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 June 30,   For the six months ended June 30, 
   2018   2017   2018   2017 
Net sales  $7,012,056   $7,950,076   $15,982,862   $19,136,195 
Net loss  $(718,569)  $(1,440,680)  $(718,499)  $(1,501,986)
Net loss per share – basic and diluted  $(0.01)  $(0.03)  $(0.01)  $(0.03)
Weighted average number of common shares basic and diluted   52,417,623    52,075,703    53,379,374    48,093,572 

 

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

 

Ermis Labs Asset Purchase

 

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

 

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

 

25
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018 and 2017

(Unaudited)

 

Note 3 - Business and Asset Acquisitions (continued)

 

The changes in the Company’s deferred consideration payable due to Ermis Labs, Inc. during the six months ended June 30, 2018:

 

Balance at December 31, 2017  $1,212,067 
Consideration payments   (160,414)
Accretion of interest   47,018 
Balance at June 30, 2018-related party  $1,098,671 
      
Current portion  $143,100 
Non-current portion   955,571 
   $1,098,671 

 

For the six months ended June 30, 2018, consideration payments represented the remaining minimum royalty for the calendar year ended December 31, 2017. We did not incur any royalties for sales of products for both the six months ended June 30, 2018 and 2017. Interest expense was approximately $24,000 and $47,000 for the three and six months ended June 30, 2018, respectively, and $0 for both the three months and six months ended June 30,2017.

 

Note 4 - Commitments and contingencies

 

We entered a lease from March 2017 through February 2022 related to the office space in Wayne, Pennsylvania. In August 2017, we entered an amendment to expand our space, which increased the monthly base payments. 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 and six months ended June 30, 2018 and 2017 totaled approximately $62,000 and $128,000 and $65,000 and $142,000 respectively.

 

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

 

   Remaining                     
   Six                     
   Months                   Total 
   2018   2019   2020   2021   2022   Obligation 
                         
Wayne - Corporate HQ  $75,538   $152,492   $154,190   $155,887   $26,028   $564,135 
                               
Israel Office   11,400    7,600    -    -    -    19,000 
                               
UK Office   17,331    34,663    34,663    34,663    5,777    127,097 
                               
Hong Kong Office   11,137    22,275    22,275    22,275    3,713    81,675 
                               
Total Lease Obligations  $115,406   $217,030   $211,128   $212,825   $35,518   $791,907 

 

26
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018 and 2017

(Unaudited)

 

Note 4 - Commitments and contingencies (continued)

 

Legal Matters

 

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

 

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

 

On April 18, 2018, the Board of Directors removed Richard Ransom as President of 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 is vigorously defending this matter.

 

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 will expire May 20, 2019. At present, management is not aware of any claims against us for any products sold.

 

27
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018 and 2017

(Unaudited)

 

Note 5 – Intangible Assets

 

Intangible assets as of June 30, 2018 and December 31, 2017 consists of the following:

 

   Useful Life 

Gross

Carrying

Cost

   Accumulated Amortization  

Impairment

Loss

  

Net Book

Value

 
                    
June 30, 2018                       
DermaWand® Purchase  5 years  $1,163,816   $(727,451)  $       -   $436,365 
PhotoMedex Patented/Unpatented Technology  5 years   940,628    (266,509)   -    674,119 
PhotoMedex Trademarks  5 years   1,100,000    (311,667)   -    788,333 
Total     $3,204,444   $(1,305,627)  $-   $1,898,817 

 

   Useful Life  Gross Carrying Cost   Accumulated Amortization   Impairment Loss   Net Book Value 
                    
December 31, 2017                       
Ermis Labs Formulations/
Trademarks
  5 years  $1,512,443   $(277,281)  $(1,235,162)  $- 
DermaWand® Purchase  5 years   1,163,816    (581,673)   -    582,143 
PhotoMedex Patented/Unpatented Technology  5 years   940,628    (172,447)   -    768,181 
PhotoMedex Trademarks  5 years   1,100,000    (201,667)   -    893,333 
Total     $4,716,887   $(1,233,068)  $(1,235,162)  $2,248,657 

 

Amortization expense was approximately $177,000 and $354,000 and $251,000 and $442,000 for the three and six months ended June 30, 2018 and 2017, respectively, of which approximately $75,000 of amortization expense is included in cost of sales for each of the three and six months ended June 30, 2018 and 2017, and approximately $102,000 and $204,000 is included in general and administrative expenses for the three and six months ended June 30, 2018, and $116,000 and $292,000 is included in general and administrative expenses for the three and six months ended June 30, 2017, respectively. Management evaluates the intangible assets for impairment when there is a triggering event.

 

28
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018 and 2017

(Unaudited)

 

Note 5 – Intangible Asset (continued)

 

The following table outlines the estimated future amortization expense related to the intangible assets held as of June 30, 2018:

 

2018 (remaining six months)  $359,000 
2019   690,000 
2020   408,000 
2021   408,000 
2022   34,000 
Total  $1,899,000 

 

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 June 30, 2018, the other liability balance was approximately $595,000 net of the discount for imputed interest of approximately $5,000. For the three and six months ended June 30, 2018 and 2017, we amortized approximately $2,000 and $4,000 and $3,000 and $6,000, respectively, of interest expense related to the discount for imputed interest.

 

Management evaluates the intangible asset for impairment when there is triggering event and concluded there was no such event at June 30, 2018.

 

29
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018 and 2017

(Unaudited)

 

Note 7 – Long-term Debt to Related Party

 

On July 15, 2017, the Company entered a 30-month secured promissory note (the “Note”), to LeoGroup Private Investment Access, LLC (the “Holder”), a significant shareholder and hence related party, in the principal amount of $2,000,000 with an effective interest rate of 34%. The Note provides that the Company shall make monthly principal and interest payments of $100,000 to the Holder for 30 months through January 2020. The Note is secured by a first priority security interest in all the assets of Company, except the Company’s accounts receivable. The Note contains customary financial covenants of the Company and customary events of default. The Company is currently in compliance with this Note. Subject to the terms and conditions of the Note, so long as any event of default, as described in the Note, is continuing, without cure, for a period of five (5) business days after written notice from the Holder to the Company or a longer period if set forth in the notice from Holder or if agreed to by the parties, all obligations of the Company under the Note shall be immediately due and payable, and the Holder may exercise any other remedies available at law or in equity. The note may not be prepaid, in whole or in part, at any time and from time to time, unless expressly agreed to in writing by the Holder. The total amount of related party interest expense during the three and six months ended June 30, 2018 was approximately $131,000 and $276,000. There was no interest expense during the three and six months ended June 30, 2017.

 

The balance of the long-term debt as of June 30, 2018 and December 31, 2017 was as follows:

 

   June 30, 2018   December 31, 2017 
Total Debt  $1,472,936   $1,797,049 
Less: current portion  $(846,243)  $(722,908)
Long-term debt, net  $626,693   $1,074,141 

 

Maturities of long-term debt at June 30, 2018, are as follows:

 

December 31,     
2018  $398,796 
2019   976,906 
2020   97,234 
   $1,472,936 

 

Note 8 – Note Payable

 

On June 22, 2018, ICTV signed a formal 12-month loan agreement with Amazon Lending. The loan was given in the amount of $145,000 and carries an annual interest rate of 9.69%. For both the three and six months ended June 30, 2018, interest expense was de minimis. The loan is paid in twelve equal payments of principal and interest of approximately $13,000. These payments will be automatically deducted from any sales that ICTV generates from Amazon.com. If the sales generated do not sufficiently cover the amount of the monthly payment due, Amazon.com is authorized to charge the Company’s credit card on file. There is no early payoff fee for this loan agreement. In the event of a default by the Company, Amazon Lending has a first lien on any and all assets that are at Amazon warehousing facilities.

 

Note 9 - 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 six months ended June 30, 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 and six months ended June 30, 2018, $300,000 and $600,000 of payments, respectively, were made on the loan of which approximately $131,000 and $276,000, respectively, were interest expense.

 

30
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018 and 2017

(Unaudited)

 

Note 9 - Related party transactions (continued)

 

On January 9, 2018, we issued options to purchase 1,050,000 shares of the Company’s common stock to six employees, at an exercise price of $0.3318 per share. Three of those employees were terminated in the second quarter of 2018, resulting in the forfeiture of their options to purchase, in the aggregate, 600,000 shares of common stock. On June 21, 2018, the remaining three employees voluntarily surrendered their options to purchase, in the aggregate, 450,000 shares of common stock, in consideration of a future stock grant. On June 21, 2018, we issued 400,000 shares of common stock to such remaining three employees, Kelvin Claney, CEO, Douglas Crouthers, Interim President and VP of Sales, and Vincent Dargush, VP of Marketing and Operations, at a share price of $0.10 per share, in consideration of the surrender of previously granted options and, in each case, as a share bonus, which was immediately vested, for performance in the second quarter of 2018. Also, on June 21, 2018, we issued 300,000 shares of common stock to Ernest P. Kollias, Jr., CFO, at a share price of $0.10 per share, also as a share bonus, in consideration for performance during the second quarter of 2018. The shares issued on June 21, 2018 are restricted for a period of six months from issuance. The recipients of the shares of common stock are key employees of our Company, and the issuance of the common stock is exempt from registration under Section 4(2) of the Securities Act of 1933.

 

On May 2, 2018, the Company and Kelvin Claney, the Company’s Chief Executive Officer, entered into a subscription agreement pursuant to which the Company issued to Mr. Claney 210,000 shares of series A preferred stock, par value $0.001 per share (the “Series A Preferred Stock”), for cash consideration of $403,200, or $1.92 per share described in Note 2.

 

Note 10 –Series A Preferred Stock

 

On May 1, 2018, the Board of Directors designated 210,000 shares of the Company’s Series A Preferred Stock and authorized the sale of the Series A Preferred Stock to Kelvin Claney, the Company’s Chief Executive Officer. On May 2, 2018, the Board of Directors of the Company filed the Certificate of Designation, Preferences, Rights and Limitations of the Series A Preferred Stock with the Nevada Secretary of State.

 

The Series A Preferred Stock has dividend rights per share equal to the dividend rights of the Company’s common stock and has a liquidation preference in the amount of $1.92 per share. Each share of Series A Preferred Stock is entitled to 100 votes on all matters to be voted upon by the Company’s shareholders. The Series A Preferred Stock is redeemable at the option of the Company for a redemption price per share of $1.92, plus 8% per annum from the date of issuance until the date of redemption. If any Series A Preferred Stock is not redeemed within three years from the date of issuance, the holder may convert the Series A Preferred Stock into common stock at a ratio of eight shares of common stock for each share of Series A Preferred Stock. The Series A Preferred Stock is a non-certificated security.

 

On May 2, 2018, the Company and Kelvin Claney entered into a subscription agreement pursuant to which the Company issued to Mr. Claney 210,000 shares of Series A Preferred Stock for cash consideration of $403,200, or $1.92 per share. Issuance costs were de minimis. The redemption value as of June 30, 2018 was approximately $409,000.

 

The Company evaluated the Series A Preferred Stock issuance for liability or equity classification in accordance with the provisions of ASC 480, “Distinguishing Liabilities from Equity”, and determined that equity treatment was appropriate because the Series A Preferred did not meet the definition of the liability instruments defined thereunder for convertible instruments. Specifically, the Series A Preferred are not mandatorily redeemable and do not embody an obligation to buy back the shares outside of the Company’s control in a manner that could require the transfer of assets. Additionally, the Company determined that the Series A Preferred would be recorded as permanent equity, not temporary equity, based on the guidance of ASC 480 given that there is no scenario where the holders of equally and more subordinated equity of the entity would not be entitled to also receive the same form of consideration upon the occurrence of the event that gives rise to the redemption.

 

31
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018 and 2017

(Unaudited)

 

Note 11 - Basic and diluted earnings (loss) per share

 

Basic earnings (loss) per share is computed by dividing earnings (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share gives effect to all dilutive potential common shares outstanding during the period and is computed by dividing the earnings attributable to common stockholders by the weighted-average number of common equivalent shares outstanding for the period, including any dilutive effect from outstanding stock options and convertible preferred stock. Diluted net income per share does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect.

 

The Company follows the two-class method when computing earnings (loss) per share in periods when issued shares that meet the definition of participating securities are outstanding. The two-class method determines earnings (loss) per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The Company’s Series A Preferred Stock participates in any dividends declared by the Company on its common stock and are therefore considered to be participating securities. The two-class method requires income available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. Accordingly, in periods in which the Company reports a net loss attributable to common stockholders when participating securities are outstanding, losses are not allocated to the participating securities because they have no contractual obligation to share in the losses of the Company. For purposes of calculating diluted earnings per share attributable to common shareholders, stock options and convertible preferred stock are considered common stock equivalents.

 

As described above, the Company computes basic and diluted loss per share using a methodology that gives effect to the impact of outstanding participating securities (the “two-class method”). As the three and six months ended June 30, 2018 and 2017 resulted in net losses, there is no income allocation required under the two-class method or dilution attributed to weighted-average shares outstanding in the calculation of diluted loss per share.

 

Of the outstanding stock options, 5,318,335 were vested and exercisable at an average exercise price of $0.26. The following common stock equivalents, presented on an as converted basis, were excluded from the calculation of net loss per share for the periods presented, due to their anti-dilutive effect:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2018   2017   2018   2017 
Outstanding stock options   6,358,335    5,378,335    6,358,335    5,378,335 
Convertible preferred stock   1,680,000    -    1,680,000    - 
    8,038,335    5,378,335    8,038,335    5,378,335 

 

32
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018 and 2017

(Unaudited)

 

Note 12 - Income taxes

 

The provision for income taxes is approximately $89,000 and $118,000 for the three and six months ended June 30, 2018 and $70,000 for both the three and six months ended June 30, 2017. The effective tax rate for the three and six months ended June 30, 2018 was (14%) and (20%), respectively. The effective tax rate is (5%) and (4%), respectively for the three and six months ended June 30, 2017. The provision reflects an estimated current tax liability associated with the earnings of our foreign subsidiaries.

 

Due to the change in ownership provisions of the Internal Revenue Code, the availability of the Company’s net operating loss carry forwards may be subject to annual limitation against taxable income in future periods, which could substantially limit the eventual utilization of such carry forwards. The Company has not updated its Internal Revenue Code Section 382 analysis through June 30, 2018 and has not analyzed the potential impact of its recent equity financing on beneficial ownership. Therefore, no determination has been made whether the net operating loss carry forward of $3,239,000 available prior to the equity financing is subject to the Internal Revenue Code Section 382 limitation.

 

Note 13 - Segment reporting

 

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

 

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

 

   For the three months ended June 30, 2018   For the three months ended June 30, 2017 
   Direct to Consumer   Retail   International Third-Party Distributor   Airlines and Hong Kong Retail   Totals   Direct to Consumer   Retail   International Third-Party Distributor   Airlines and Hong Kong Retail   Totals 
Net sales  $3,915,091   $1,757,629   $580,929   $758,407   $7,012,056   $5,729,838   $436,714   $1,040,250   $743,274   $7,950,076 
Cost of sales   894,837    597,594    290,464    436,422    2,219,317    1,761,105    148,483    488,941    393,072    2,791,601 
Gross profit   3,020,254    1,160,035    290,465    321,985    4,792,739    3,968,733    288,231    551,309    350,202    5,158,475 
Operating expenses:                                                  
General and administrative   1,432,642    553,074    182,801    37,968    2,206,485    2,228,029    146,848    254,683    43,711    2,673,271 
Selling and marketing   2,106,170    763,379    8,342    167,606    3,045,497    3,541,378    211,710    14,755    86,188    3,854,031 
Total operating expense   3,538,812    1,316,453    191,143    205,574    5,251,982    5,769,407    358,558    269,438    129,899    6,527,302 
Operating income (loss)  $(518,558)  $(156,418)  $99,322   $116,411   $(459,243)  $(1,800,674)  $(70,327)  $281,871   $220,303   $(1,368,827)

 

33
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018 and 2017

(Unaudited)

 

Note 13 - Segment reporting (continued)

 

   For the six months ended June 30, 2018   For the six months ended June 30, 2017 
   Direct to Consumer   Retail   International Third-Party Distributor   Airlines and Hong Kong Retail   Totals   Direct to Consumer   Retail   International Third-Party Distributor   Airlines and Hong Kong Retail   Totals 
Net sales  $8,922,145   $4,425,575   $1,472,389   $1,162,753   $15,982,862   $12,259,372   $848,431   $1,520,731   $968,661   $15,597,195 
Cost of sales   1,682,327    1,504,696    736,194    701,439    4,624,656    3,171,811