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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 September 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, 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 November 15, 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]

 

 

 

   
  Page 2 of 51

 

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 37
     
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 44
     
ITEM 4. CONTROLS AND PROCEDURES 45
     
PART II - OTHER INFORMATION  
     
ITEM 1. LEGAL PROCEEDINGS 49
     
ITEM 1A. RISK FACTORS 49
     
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 49
     
ITEM 3. DEFAULTS ON SENIOR SECURITIES 49
     
ITEM 4. MINE SAFETY DISCLOSURES 49
     
ITEM 5. OTHER INFORMATION 49
     
ITEM 6. EXHIBITS 50
     
SIGNATURES 51

 

   
  Page 3 of 51

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Condensed Consolidated Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017 4
   
Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2018 and 2017 (unaudited) 5
   
Condensed Consolidated Statement of Shareholders’ Equity for the nine month periods ended September 30, 2018 and 2017 (unaudited) 6-7
   
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 (unaudited) 8
   
Notes to the Condensed Consolidated Financial Statements (unaudited) 9 - 36

 

   
  Page 4 of 51

 

ICTV BRANDS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   September 30, 2018   December 31, 2017 
   (Unaudited)     
ASSETS          
CURRENT ASSETS:          
Cash and cash equivalents  $582,697   $1,258,360 
Accounts receivable, net of allowances for returns and doubtful accounts of $869,162 and $913,303 respectively   2,208,095    3,576,376 
Inventories   5,740,357    5,631,857 
Prepaid expenses and other current assets   649,146    167,914 
Total current assets   9,180,295    10,634,507 
           
Property and equipment, net   766,566    887,093 
Intangible assets, net   1,723,512    2,248,657 
           
Total assets  $11,670,373   $13,770,257 
LIABILITIES AND SHAREHOLDERS’ EQUITY          
CURRENT LIABILITIES:          
Accounts payable and accrued liabilities  $5,633,873   $5,911,778 
Long-term debt to related party   916,145    722,908 
Notes payable   426,130    - 
Deferred revenue   345,664    403,844 
Deferred consideration due to related party   86,392    241,379 
Other liabilities- net of discount   293,620    369,563 
Total current liabilities   7,701,824    7,649,472 
           
Long-term debt to related party, net of current portion   373,095    1,074,141 
Notes payable, net of current portion   107,580    - 
Deferred revenue – long term   158,726    194,534 
Deferred consideration - due to related party, net of current portion   1,035,788    970,688 
Other liabilities – long term, net of discount   228,040    371,149 
           
Total long term liabilities   1,903,229    2,610,512 
           
COMMITMENTS AND CONTINGENCIES          
           
SHAREHOLDERS’ EQUITY:          
Preferred stock, $0.001 par value, 20,000,000 shares authorized, of which 210,000 shares designated as Series A, 210,000 and 0 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively (Liquidation Preference of $416,632 as of September 30, 2018)   210    - 
Common stock, $0.001 par value, 100,000,000 shares authorized, 53,140,700 and 52,340,700 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively   42,930    42,130 
Additional paid-in capital   20,886,637    20,198,137 
Accumulated other comprehensive income   52,548    174,875 
Accumulated deficit   (18,917,005)   (16,904,869)
           
Total shareholders’ equity   2,065,320    3,510,273 
           
Total liabilities and shareholders’ equity  $11,670,373   $13,770,257 

 

See accompanying notes to condensed consolidated financial statements

 

   
  Page 5 of 51

 

ICTV BRANDS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF

OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

 

   For the three months ended   For the nine months ended 
   September 30, 2018   September 30, 2017   September 30, 2018   September 30, 2017 
NET SALES  $5,483,909   $7,559,754   $21,466,771   $23,156,949 
                     
COST OF SALES   1,956,153    3,049,989    6,580,809    7,995,170 
                     
GROSS PROFIT   3,527,756    4,509,765    14,885,962    15,161,779 
                     
OPERATING EXPENSES:                    
General and administrative   1,680,338    2,488,376    5,945,801    7,643,917 
Selling and marketing   2,916,372    4,102,346    10,263,180    11,346,321 
Total operating expenses   4,596,710    6,590,722    16,208,981    18,990,238 
                     
OPERATING LOSS   (1,068,954)   (2,080,957)   (1,323,019)   (3,828,459)
                     
OTHER INCOME/(EXPENSE), NET                    
Interest expense   (189,413)   (164,377)   (513,290)   (215,147)
Miscellaneous (expense)/income, net, including gain on settlement of contingent consideration in 2017   (4,326)   1,970,753    (26,883)   2,030,727 
                     
LOSS BEFORE PROVISION FOR INCOME TAX   (1,262,693)   (274,581)   (1,863,192)   (2,012,879)
                     
PROVISION FOR INCOME TAXES   30,944    112,277    148,944    182,277 
                     
NET LOSS  $(1,293,637)  $(386,858)  $(2,012,136)  $(2,195,156)
                     
OTHER COMPREHENSIVE (LOSS)/INCOME:                    
Foreign currency translation adjustment   (21,036)   112,223    (122,327)   208,924 
                     
COMPREHENSIVE LOSS  $(1,314,673)  $(274,635)  $(2,134,463)  $(1,986,232)
                     
NET LOSS PER SHARE                    
BASIC AND DILUTED  $(0.02)  $(0.01)  $(0.04)  $(0.04)
                     
WEIGHTED AVERAGE NUMBER OF COMMON SHARES                    
BASIC AND DILUTED   53,132,004    52,321,826    52,633,008    49,518,478 

 

See accompanying notes to condensed consolidated financial statements

 

   
  Page 6 of 51

 

ICTV BRANDS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018

(Unaudited)

 

    Preferred Stock     Common Stock     Additional     Accumulated 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     -       -       -       -       30,345       -       -       30,345  
                                                                 
Foreign currency translation adjustment     -       -       -       -       -       83,847       -       83,847  
                                                                 
Net income     -       -       -       -       -       -       70       70  
                                                                 
March 31, 2018     -       -       52,340,700       42,130       20,228,482       258,722       (16,904,799 )     3,624,535  
                                                                 
Share based compensation     -       -       700,000       700       148,645       -       -       149,345  
                                                                 
Issuance of preferred stock     210,000       210       -       -       402,990       -       -       403,200  
                                                                 
Foreign currency translation adjustment     -       -       -       -       -       (185,138 )     -       (185,138 )
                                                                 
Net loss     -       -       -       -       -       -       (718,569 )     (718,569 )
                                                                 
June 30, 2018     210,000       210       53,040,700       42,830       20,780,117       73,584       (17,623,368 )     (3,273,373 ) 
                                                                 
Share based compensation     -       -       100,000       100       106,520       -       -       106,620  
                                                                 
Foreign currency translation adjustment     -       -       -       -       -       (21,036 )     -       (21,036 )
                                                                 
Net loss     -       -       -       -       -       -       (1,293,637 )     (1,293,637 )
                                                                 
Balance at September 30, 2018     210,000     $ 210       53,140,700     $ 42,930     $ 20,886,637     $ 52,548     $ (18,917,005 )   $ 2,065,320  

 

See accompanying notes to condensed consolidated financial statements.

 

   
  Page 7 of 51

 

ICTV BRANDS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017

(Unaudited)

 

   Preferred Stock   Common Stock   Additional   Accumulated 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, 2017   -   $-    28,343,007   $18,132   $11,546,804   $-   $(10,276,478)  $1,288,458 
                                         
Share based compensation   -    -    -    -    81,959    -    -    81,959 
                                         
Issuance of stock for asset purchase   -    -    2,500,000    2,500    847,500    -    -    850,000 
                                         
Issuance of stock, net of offering costs of $17,070   -    -    20,588,243    20,588    6,962,342    -    -    6,982,930 
                                         
Issuance of stock for compensation   -    -    600,000    600    335,400    -    -    336,000 
                                         
Cashless exercise of options   -    -    22,475    23    (23)   -    -    - 
                                         
Other comprehensive loss   -    -    -    -    -    (5,417)   -    (5,417)
                                         
Net loss   -    -    -    -    -    -    (367,618)   (367,618)
                                         
March 31, 2017   -    -    52,053,725    41,843    19,773,982    (5,417)   (10,644,096)   9,166,312 
                                         
Share based compensation   -    -    -    -    77,099    -    -    77,099 
                                         
Exercise of options   -    -    250,000    250    55,309         -    55,559 
                                         
Other comprehensive income   -    -    -    -    -    102,118    -    102,118 
                                         
Net loss   -    -    -    -    -    -    (1,440,680)   (1,440,680)
                                         
June 30, 2017   -    -    52,303,725    42,093    19,906,390    96,701    (12,084,776)   7,960,408 
                                         
Share based compensation   -    -    -    -    64,287    -    -    64,287 
                                         
Cashless exercise of options   -    -    20,307    20    (20)   -    -    - 
                                         
Other comprehensive income   -    -    -    -    -    112,223    -    112,223 
                                         
Net loss   -    -    -    -    -    -    (386,858)   (386,858)
                                         
September 30, 2017   -   $-    52,324,032   $42,113   $19,970,657   $208,924   $(12,471,634)  $7,750,060 

 

See accompanying notes to condensed consolidated financial statements.

 

   
  Page 8 of 51

 

ICTV BRANDS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND SEPTEMBER 30, 2017

(Unaudited)

 

   September 30, 2018   September 30, 2017 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(2,012,136)  $(2,195,156)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:          
Depreciation and amortization   702,236    820,792 
Bad debt expense   923,559    903,710 
Share based compensation   

286,310

    223,345 
Issuance of stock for compensation   -    336,000 
Change in fair value of contingent consideration   -    (48,035)
Loss on disposal of property and equipment   -    6,197 
Non cash interest expense   76,475    105,459 
Gain on settlement of contingent consideration   -    (1,969,245)
Change in assets and liabilities          
Accounts receivable   530,634    (4,113,466)
Inventories   (196,555)   922,503 
Prepaid expenses and other current assets   (493,843)   114,171 
Accounts payable and accrued liabilities   (69,192)   3,025,709 
Deferred revenue   (94,249)   (178,553)
Net cash used in operating activities   (346,761)   (2,046,569)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of property and equipment   (56,592)   (171,196)
Cash paid for acquisition of PhotoMedex, Inc.   -    (5,000,000)
Net cash used in investing activities   (56,592)   (5,171,196)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Payment of DermaWand® asset purchase agreement   (225,000)   (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- Amazon   145,000    - 
Proceeds from note payable from related party   100,000    - 
Repayments of note payable to Amazon   (10,008)     
Repayments of long-term debt to related party   (507,809)   (87,441)
Payments of deferred consideration for asset acquisition   (160,414)   (14,583)
Proceeds from issuance of preferred stock   403,200    - 
Proceeds from long-term debt to related party   -    2,000,000 
Settlement payment made for PhotoMedex Acquisition   -    (2,000,000)
Net cash (used in) provided by financing activities   (255,031)   6,786,465 
           
Effect of exchange rates on cash and cash equivalents   (17,279)   1,683 
           
NET  DECREASE IN CASH AND CASH EQUIVALENTS   (675,663)   (429,617)
           
CASH AND CASH EQUIVALENTS, beginning of the period  1,258,360   1,390,641 
           
CASH AND CASH EQUIVALENTS, end of the period  $582,697   $961,024 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
Taxes paid  $-   $- 
Interest paid  $

394,797

   $- 
           
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:          
Cashless exercise of options  $-   $43 
Conversion of accounts payable to note payable  $298,716    - 
           
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 for asset purchase   -    (850,000)
Cash paid for acquisition  $-   $- 
           
Settlement of contingent consideration to PhotoMedex on July 12, 2017          
Contingent consideration owed to PhotoMedex  $-   $3,579,760 
Other receivables amount forgiven   -    (837,708)
Payables extinguished   -    1,017,193 
Settlement payment for PhotoMedex acquisition   -    (2,000,000)
Assignment of deposit amount   -    210,000 
Gain on settlement of contingent consideration  $-   $1,969,245 

 

See accompanying notes to condensed consolidated financial statements.

 

   
  Page 9 of 51

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018 and 2017

(Unaudited)

 

Note 1 – Organization and Business of the Company and Liquidity

 

Organization and Nature of Operations

 

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

 

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

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

 

  ICTV Brands Canada, Inc. incorporated under the Canada Business Corporations Act.

 

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

 

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

 

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

 

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

 

On July 12, 2018, the Company formed a wholly owned Canadian Entity under the Canada Business Corporations Act. ICTV’s Canadian Entity is incorporated under the name of ICTV Brands Canada, Inc.

 

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

 

   
  Page 10 of 51

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018 and 2017

(Unaudited)

 

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

 

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

 

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

 

Liquidity and Going Concern

 

Our condensed consolidated financial statements have been prepared on a going concern basis, which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. We had a net loss of approximately $2,012,000 for the nine months ended September 30, 2018 and negative cash flows from operating activities of approximately $347,000. In addition, we have an accumulated deficit of approximately $18,917,000 as of September 30, 2018. Additional financing will be required for the Company to successfully implement its long-term growth strategy.

 

To increase profitability throughout the remainder of 2018 and 2019 and to maintain sufficient cash flow and liquidity, we continue to optimize media expenses to increase profitable sales,and have eliminated several positions within the Company throughout the year including our inhouse legal counsel position. We have also combined the marketing department with the operations team to improve internal efficiencies and decrease overhead costs. We continue to analyze our processes to determine where further overhead cost cutbacks can be made, and operations can be streamlined to further reduce expenditures.

 

   
  Page 11 of 51

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018 and 2017

(Unaudited)

 

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

 

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

 

Note 2 - Summary of significant accounting policies

 

Basis of Presentation

 

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

 

Principles of consolidation

 

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

 

Use of estimates

 

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

 

   
  Page 12 of 51

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018 and 2017

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

Concentration of credit risk

 

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

 

As of September 30, 2018, 14% of our accounts receivable were due from various individual customers to whom our products had been sold directly via Direct Response Television (“DRTV”). In addition, 53% was due from brick and mortar retailers, 9% was due from e-commerce accounts, 15% was due from live shopping, 5% was due from duty free airline, and 4% was due from miscellaneous customers.

 

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

 

Fair value of financial instruments

 

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

 

Cash and cash equivalents

 

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

 

Foreign currency transactions

 

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

 

Functional currency translation

 

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

 

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

 

   
  Page 13 of 51

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018 and 2017

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

Accounts receivable

 

Accounts receivable are recorded net of allowances for returns and doubtful accounts of approximately $869,000 and $913,000 as of September 30, 2018 and December 31, 2017, respectively. The allowances are calculated based on historical analysis including customer returns and bad debts.

 

In addition to allowances for returns on accounts receivable, an accrual is made for the return of product that have been sold to customers and had cash collections, while the customer still has the right to return the product. In addition, an accrual is made for contract fees deducted by the customer. The amounts of these accruals included in accounts payable and accrued liabilities in our Condensed Consolidated Balance Sheets were approximately $103,000 and $180,000 as of September 30, 2018 and December 31, 2017, respectively.

 

Inventories

 

Inventories consist primarily of finished products held for resale and are valued at the lower of cost (first-in, first-out method) or net realizable value. We adjust inventory for estimated obsolescence when necessary based upon demand and market conditions. The Company’s reserve for obsolescence was approximately $289,000 and $247,000 as of September 30, 2018 and December 31, 2017, respectively. Included in inventory at September 30, 2018 and December 31, 2017 is approximately $55,000 and $51,000, respectively, of consigned product that has been shipped to customers under the 30-day free trial period for which the trial period has not expired and as such the customer has not accepted the product, as well as consigned products that are held at retailer distributors for sale.

 

Property and equipment

 

Property and equipment are carried at cost and depreciation and amortization is computed over the estimated useful lives of the individual assets ranging from 3 to 7 years for computer hardware and software and furniture and fixtures. Depreciation and amortization is computed using the straight-line method. Leasehold improvements are depreciated over the lesser of the estimated useful life and lease term. The related cost and accumulated depreciation of assets retired or otherwise disposed of are removed from the accounts and the resultant gain or loss is reflected in earnings. Maintenance and repairs are expensed currently while major renewals and betterments are capitalized. Depreciation and amortization expense amounted to approximately $59,000 and $177,000 and $51,000 and $129,000 for the three and nine months ended September 30, 2018 and 2017, respectively.

 

Property and equipment consisted of the following at:

 

   September 30, 2018   December 31, 2017 
Computer hardware and software  $209,509   $154,061 
Furniture and equipment   908,701    907,586 
Leasehold improvements   55,840    55,840 
    1,174,050    1,117,487 
Accumulated depreciation and amortization   (407,484)   (230,394)
Property and equipment, net  $766,566   $887,093 

 

   
  Page 14 of 51

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018 and 2017

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

Intangible assets

 

Definite-lived intangibles are amortized using the straight-line method over their estimated useful lives ranging from four to five years. Amortization expense was approximately $175,000 and $525,000 and $251,000 and $692,000 for the three and nine months ended September 30, 2018 and 2017, respectively. We evaluate the recoverability of the intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that may indicate the asset may be impaired.

 

Impairment of long-lived assets

 

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

 

Revenue recognition

 

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

 

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

 

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

 

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

 

   
  Page 15 of 51

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018 and 2017

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

Direct to consumer

 

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

 

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

 

Retail

 

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

 

International third-party distributors

 

We generate revenue through the sale of products to international third-party distributors who in-turn sell the products to the consumer. Revenue related to international wholesale and third-party distributor customers is recorded at gross amounts with a corresponding charge to cost of sales upon shipment. Revenue is recognized at a point in time when product is shipped to the customer. International third-party distributors are required to pay a deposit before shipment. As of September 30, 2018, and December 31, 2017, we recorded deposits for international third-party distributors of approximately $202,000 and $404,000, respectively, in deferred revenue, current portion.

 

Airlines and Hong Kong Retail

 

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

 

Warranty

 

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

 

   
  Page 16 of 51

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018 and 2017

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

Variable consideration

 

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

 

Judgments

 

We have a return policy whereby the customer can return any product received within 30 days or 60 days of receipt for a full refund. We accrue a reserve for product returns with respect to sales of product when a right of return exists. We accrue a reserve for product returns and customer refunds at the time of sale based on our historical experience. We also accrue for contract fees based on historical experience of our retail customers, as well as expected fees as documented in our retail contracts. The provision for estimated returns as of September 30, 2018 and December 31, 2017 was approximately $605,000 and $747,000, respectively, and has been included in the allowance for returns and doubtful accounts in the accompanying condensed consolidated balance sheets. The reserve for customer refunds and contract fees payable was approximately $103,000 at September 30, 2018 and $180,000 at December 31, 2017 and has been included in accounts payable and accrued liabilities in the accompanying condensed consolidated balance sheets. The amount of goods to be returned to inventory was determined to be immaterial.

 

For the three and nine months ended September 30, 2018 and 2017, we recorded sales returns of approximately $692,000 and $3,063,000 and $1,225,000 and $4,530,000 respectively, as a reduction of net sales.

 

Sales taxes

 

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

 

 

Shipping and handling costs

 

Costs for shipping and handling costs, including those activities that occur subsequent to transfer of control to the customer, are recorded as cost of sales and expensed as incurred. We accrue costs for shipping and handling activities that occur after control of the promised goods has transferred to the customer. Revenue from shipping and handling charges was approximately $203,000 and $810,000 and $427,000 and $1,550,000 for the three and nine months ended September 30, 2018 and 2017, respectively.

 

   
  Page 17 of 51

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018 and 2017

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

Remaining Performance Obligations

 

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

 

As of September 30, 2018, approximately $302,000 is expected to be recognized from remaining performance obligations for warranty revenue. We expect to recognize revenue for these remaining performance obligations during the next five years approximately as follows:

 

   Remaining Three Months 2018   2019   2020   2021   2022   2023 
                               
Estimated Deferred Warranty Revenue from remaining  $44,000   $126,000   $69,000   $42,000   $19,000   $2,000 

 

 

Disaggregation of revenue

 

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

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2018   2017   2018   2017 
Direct to Consumer  $

4,233,444

   $

5,401,048

   $

13,155,589

   $17,719,533 
International Third-Party Distributors   334,856    

380,755

    1,807,245    1,842,373 
Retail   

438,951

    1,377,613    4,864,526    2,226,044 
Airlines/Hong Kong Retail   476,658    400,338    1,639,411    1,368,999 
   $5,483,909   $7,559,754   $21,466,771   $23,156,949 

 

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

 

   September 30, 2018   December 31, 2017 
Accounts receivable, net of allowance for returns of $604,664 and $747,269, respectively, and doubtful accounts of $264,498 and $166,034, respectively  $2,208,095   $3,576,376 
Total contract assets  $2,208,095   $3,576,376 
           
Deferred revenue  $504,390   $598,378 
Accrued returns and contract fees payable   102,980    179,922 
Total contract liabilities  $607,370   $778,300 

 

   
  Page 18 of 51

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018 and 2017

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

Research and Development

 

Research and development costs are expensed as incurred and are included in selling and marketing expense in the accompanying condensed consolidated statements of operations and comprehensive loss. Research and development costs primarily consist of efforts to discover and develop new products, including clinical trials, product safety testing, and certifications for international regulations and standards. Research and development costs approximated $57,000 and $134,000 and $146,000 and $210,000 for the three and nine months ended September 30, 2018 and 2017, respectively.

 

Advertising

 

Advertising costs, consisting of media, internet marketing and production costs, are expensed as incurred and are included in selling and marketing expense in the accompanying condensed consolidated statements of operations and comprehensive loss. Production costs associated with the creation of new and updated infomercials and advertising campaigns are expensed at the commencement of a campaign. We incurred approximately $1,414,000 and $5,212,000 and $2,000,000 and $5,578,000 in media costs for airing of television and print advertising, $727,000 and $2,617,000 and $1,243,000 and $3,332,000 in internet marketing costs, and $31,000 and $114,000 and $113,000 and $260,000 in productions costs for the three and nine months ended September 30, 2018 and 2017, respectively.

 

Income taxes

 

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

 

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

 

   
  Page 19 of 51

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018 and 2017

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

Stock options

 

In June 2001, our shareholders approved our 2001 Stock Option Plan (the “Plan”). The Plan is designed for our employees, officers and directors and is intended to advance our best interests by providing personnel who have substantial responsibility for our management and growth with additional incentive by increasing their proprietary interest in our success, thereby encouraging them to remain our employee. The Plan is administered by our Board of Directors and authorizes the issuance of stock options not to exceed a total of 3,000,000 shares. The terms of any awards under the Plan are determined by the Board of Directors, provided that no options may be granted at less than the fair market value of the stock as of the date of the grant. The Plan expired in February 2011. As of September 30, 2018, 50,000 options are outstanding under the Plan.

 

In December 2011, our shareholders approved our 2011 Stock Option Plan (the “2011 Plan”). The 2011 Plan is designed for our employees, officers, and directors, and is intended to advance our best interests by providing personnel who have substantial responsibility for our management and growth with additional incentive by increasing their proprietary interest in our success, thereby encouraging them to remain our employee. The 2011 Plan is administered by our Board of Directors and authorizes the issuance of stock options not to exceed a total of 6,000,000 shares. In December 2017, the 2011 Plan was amended to increase the number of stock options that may be awarded to not exceed a total of 8,000,000 shares. The terms of any awards under the 2011 Plan are determined by the Board of Directors, provided that no options may be granted at less than the fair market value of the stock as of the date of the grant. Generally, the options granted vest over three years with one-third vesting on each anniversary date of the grant. As of September 30, 2018, 3,888,335 options are outstanding under the 2011 Plan.

 

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

 

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

 

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

 

   
  Page 20 of 51

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018 and 2017

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

The following is a summary of stock options outstanding under the Plan and 2011 Plan (collectively “Stock Option Plans”) for the nine months ended September 30, 2018 and 2017:

 

    Number of Shares     Weighted Average  
    Employee     Non-Employee     Totals     Exercise Price  
Balance, January 1, 2018     3,993,335           -       3,993,335     $ 0.27  
Granted during the year     1,555,000       -       1,555,000       0.26  
Exercised during the year     -       -       -       -  
Cancelled during the year     (700,000 )     -       (700,000 )     0.33  
Forfeited during the year     (910,000 )     -       (910,000 )     0.36  
                                 
Balance, September 30, 2018     3,938,335       -       3,938,335     $ 0.21  

 

   Number of Shares   Weighted
Average
 
   Employee   Non- Employee   Totals   Exercise Price 
Balance, January 1, 2017   3,680,002    -    3,680,002   $0.24 
Granted during the year   280,000    -    280,000    0.49 
Exercised during the year   (136,667)   -    (136,667)   0.15 
Forfeited during the year   (93,333)   -    (93,333)   0.32 
                     
Balance, September 30, 2017   3,730,002    -    3,730,002   $0.26 

 

Of the stock options outstanding as of September 30, 2018 under the Stock Option Plans, 3,433,335 options are currently vested and exercisable. The weighted average exercise price of these options was $0.23. These options expire through January 2028.

 

The aggregate intrinsic value for options outstanding and exercisable at September 30, 2018 and 2017 was approximately $0 and $618,000, respectively. The aggregate intrinsic value for stock options exercised during the nine months ended September 30, 2017 was approximately $49,000.

 

On January 9, 2018, we issued options to purchase 1,050,000 shares of the Company’s common stock to six employees, at an exercise price of $0.33 per share. Three of those employees were terminated in the second quarter of 2018, resulting in the forfeiture of their unvested options to purchase, in the aggregate, 600,000 shares of common stock. On June 21, 2018, the remaining three employees voluntarily surrendered their options to purchase, in the aggregate, 450,000 shares of common stock, in consideration of a future stock grant. On June 21, 2018, we issued 400,000 shares of common stock to such remaining three employees, Kelvin Claney, CEO, Douglas Crouthers, Interim President and VP of Sales, and Vincent Dargush, VP of Marketing and Operations, at a fair value of $0.10 per share based on the closing of the Company’s common stock on the date of issuance, in consideration of the surrender of previously granted options and, in each case, as a share bonus, which was immediately vested, for performance in the second quarter of 2018. Also, on June 21, 2018, we issued 300,000 shares of common stock to Ernest P. Kollias, Jr., CFO, at a fair value of $0.10 per share based on the closing of the Company’s common stock on the date of issuance, also as a share bonus, in consideration for performance during the second quarter of 2018, which was immediately vested. The shares issued on June 21, 2018 are restricted for a period of six months from issuance. The recipients of the shares of common stock are key employees of our Company, and the issuance of the common stock is exempt from registration under Section 4(2) of the Securities Act of 1933.

 

   
  Page 21 of 51

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018 and 2017

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

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

 

On November 30, 2017, Philip Solomon was granted 250,000 stock options. On July 9, 2018, the Board of Directors authorized the issuance of common stock to Phillip Solomon for the replacement of 250,000 surrendered stock options. Mr. Solomon surrendered these options in consideration of fully-vested 100,000 shares of the Company’s Common Stock. The fair value of the shares was the closing price of the Company’s common stock on July 9, 2018, which was $0.10.

 

The Company follows the provisions of ASC Topic 718 “Compensation — Stock Compensation” which requires the measurement and recognition of compensation expense for all share-based payment awards either modified or granted to employees and directors based upon estimated fair values. The result of the modification of issuing 100,000 shares of common stock in replacement of 250,000 options surrendered, as noted above, was to immediately recognize the fair value of the original options granted totaling approximately $76,000 to share based compensation expense, and there was no incremental increase in fair value of the replacement awards.

 

For the three and nine months ended September 30, 2018 and 2017, we recorded approximately $98,000 and $268,000, and $59,000 and $205,000, respectively, in stock compensation expense under the Stock Option Plans. At September 30, 2018, there was approximately $7,000 of total unrecognized compensation cost related to non-vested option grants that will be recognized over the remaining vesting period of 3 years.

 

The following weighted average assumptions are used in the Black-Scholes option pricing model for the nine months ended September 30, 2018 and 2017 to value the stock options granted during the period:

 

2018  2017
Risk-free interest rate   2.84%  Risk-free interest rate   2.17%
Expected dividend yield   0%  Expected dividend yield   0%
Expected life   6 years   Expected life   6 years 
Expected volatility   142.79%  Expected volatility   145%
Weighted average grant date fair value  $0.26   Weighted average grant date fair value  $0.46 
Forfeiture rate   0%  Forfeiture rate   5%

 

   
  Page 22 of 51

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018 and 2017

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

The following is a summary of stock options outstanding outside of the Stock Option Plans for the nine months ended September 30, 2018 and 2017:

 

   Number of Shares    
   Employee   Non - Employee   Totals  

Weighted Average

Exercise Price

 
                 
Balance, January 1, 2018   333,333    1,476,667    1,810,000   $0.31 
Granted during the year   -    400,000    400,000    0.11 
Exercised during the year   -    -    -    - 
Expired during the period   -    -    -    - 
Balance, September 30, 2018   333,333    1,876,667    2,210,000   $0.26 

 

    Number of Shares      
    Employee     Non - Employee     Totals    

Weighted Average

Exercise Price

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

 

Of the stock options currently outstanding outside of the Stock Option Plans at September 30, 2018, 1,935,000 options are currently vested and exercisable. The weighted average exercise price of these options was $0.30. These options expire through January 2026. The aggregate intrinsic value for options outstanding and exercisable at September 30, 2018 and 2017 was approximately $0 and $411,000, respectively. There were no options exercised during the nine months ended September 30, 2018. The aggregate intrinsic value for stock options exercised during the nine months ended September 30, 2017 was approximately $40,000.

 

For the three and nine months ended September 30, 2018 and 2017, we recorded approximately $9,000 and $18,000, and $5,000 and $18,000, respectively in stock compensation expense related to stock options outside of the Stock Option Plans. At September 30, 2018, there is approximately, $9,000 of remaining unrecognized compensation cost that will be recognized over the remaining service period of 3 years. Change in the fair value of the options issued to non-employees, as of September 30, 2018 was de minimis.

 

The following weighted average assumptions are used in the Black-Scholes option pricing model for the nine months ended September 30, 2018 and 2017 to value the stock options granted during the period:

 

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

 

There were no options granted for the nine months ended September 30, 2017.

 

   
  Page 23 of 51

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018 and 2017

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

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

 

               Weighted Average 
   Employee   Non-
Employee
   Totals   Exercise
Price
 
                 
Balance, January 1, 2018   476,667    -    476,667   $0.42 
Granted during the period   1,555,000    400,000    1,955,000    0.23 
Vested during the period   (10,000)   (125,000)   (135,000)   0.11 
Cancelled during the period   (700,000)   -    (700,000)   0.33 
Forfeited during the period   (816,667)   -    (816,667)   0.36 
         -           
Balance, September 30, 2018   505,000    275,000    780,000   $0.14 

 

Recently Issued Accounting Pronouncements

 

In August 2018, the Financial Accounting Standards Board (“FASB”), issued Accounting Standards Update (“ASU”), 2018-13 that eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies some disclosure requirements. The FASB developed the amendments to Accounting Standards Codification (“ASC”) 820 as part of its broader disclosure framework project, which aims to improve the effectiveness of disclosures in the notes to financial statements by focusing on requirements that clearly communicate the most important information to users of the financial statements. The new guidance is effective for all entities for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years. An entity is permitted to early adopt either the entire standard or only the provisions that eliminate or modify requirements. We are currently evaluating the effect of this guidance on our disclosure.

 

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

 

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

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend primarily on its classification as a finance or operating lease. However, unlike current GAAP-which requires only capital leases to be recognized on the balance sheet-the new ASU will require both types of leases to be recognized on the balance sheet. The ASU will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. This ASU can be applied at the beginning of the earliest period presented using the modified retrospective approach, which includes certain practical expedients that an entity may elect to apply, including an election to use certain transition relief.

 

In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which make improvements to Accounting Standards Codification (“ASC”) 842 and allow entities to not restate comparative periods in transition to ASC 842 and instead report the comparative periods under ASC 840. The Company plans to adopt this standard using the modified retrospective approach in the first quarter of fiscal 2019, coinciding with the standard’s effective date. While the Company is still evaluating this ASU and related updates, the Company has determined that the primary impact will be to recognize on the balance sheet material right-of-use assets and material lease obligations for all leases with lease terms greater than 12 months.

 

   
  Page 24 of 51

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018 and 2017

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

Reclassifications

 

Certain prior period amounts have been reclassified for consistency with the current period presentation of Retail as a reportable segment, as well as the amortization and depreciation being combined on the Statement of Cash Flows for 2017. These reclassifications had no effect on the reported results of operations.

 

Note 3 - Business and Asset Acquisitions

 

PhotoMedex Acquisition

 

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

 

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

 

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

 

   
  Page 25 of 51

 

ICTV BRANDS INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018 and 2017

(Unaudited)

 

Note 3 - Business and Asset Acquisitions (continued)

 

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

 

Pursuant to the Release Agreement, as of July 12, 2017, the contingent consideration balance to PhotoMedex totaling $3,579,760 was extinguished. Therefore, the balance at both September 30, 2018 and December 31, 2017 was zero.

 

The following unaudited condensed pro forma financial information for the nine months ended September 30, 2018 and 2017 represent the combined results of the Company’s operations as if the PhotoMedex Acquisition had occurred on January 1, 2017. Excluded from the pro forma net loss and net loss per share amounts for the nine months ended September 30, 2017 are one-time acquisition costs of $49,312 attributable to the PhotoMedex Acquisition, and the one time settlement gain of $1,969,245. These pro forma results are not necessarily indicative of what historical performance would have been had this business combination been effective as of the hypothetical acquisition date, nor should they be interpreted as expectations of future results.

 

   For the three months ended September 30,   For the nine months ended September 30, 
   2018   2017   2018   2017 
Net sales  $5,483,909   $7,559,754   $21,466,771   $26,695,949 
Net loss  $(1,293,637)  $(2,356,103)  $(2,012,136)  $(3,858,089)
Net loss per share – basic and diluted  $(0.02)  $(0.05)  $(0.04)  $(0.08)
Weighted average number of common shares basic and diluted   53,132,004    52,321,826    52,633,008    49,518,478