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, 2017

 

[  ] 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 November 20, 2017, the Issuer had 52,340,700 shares of common stock, par value $0.001 per share, issued and outstanding.

 

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

 

 

 

 
 

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION  
     
ITEM 1. FINANCIAL STATEMENTS 3
     
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 30
     
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 36
     
ITEM 4. CONTROLS AND PROCEDURES 36
     
PART II - OTHER INFORMATION  
     
ITEM 1. LEGAL PROCEEDINGS 38
     
ITEM 1A. RISK FACTORS 38
     
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 38
     
ITEM 3. DEFAULTS ON SENIOR SECURITIES 38
     
ITEM 4. MINE SAFETY DISCLOSURES 38
     
ITEM 5. OTHER INFORMATION 38
     
ITEM 6. EXHIBITS 39
       
SIGNATURES 42

 

  2  
 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Condensed Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016 4
   
Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2017 and 2016 (unaudited) 5
   
Condensed Consolidated Statement of Shareholders’ Equity for the nine months ended September 30, 2017 (unaudited) 6
   
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 (unaudited) 7
   
Notes to the Condensed Consolidated Financial Statements 8 - 29

 

  3  
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    September 30, 2017     December 31, 2016  
    (Unaudited)        
ASSETS                
CURRENT ASSETS:                
Cash and cash equivalents   $ 961,024     $ 1,390,641  
Accounts receivable, net of allowances for returns and doubtful accounts of $438,533 and $123,109, respectively     3,753,803       506,337  
Inventories, net     7,479,842       1,499,270  
Prepaid expenses and other current assets     352,678       254,303  
Total current assets     12,547,347       3,650,551  
                 
Property and equipment     1,111,900       74,098  
Less accumulated depreciation     (183,048 )     (58,099 )
Property and equipment, net     928,852       15,999  
                 
Intangible assets, net     3,733,979       872,864  
                 
Total assets   $ 17,210,178     $ 4,539,414  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY                
CURRENT LIABILITIES:                
Accounts payable and accrued liabilities   $ 5,047,357     $ 1,644,899  
Current portion of long-term debt due to related party     641,399       -  
Deferred revenue     258,189       377,445  
Deferred consideration     160,417       -  
Other liabilities     369,563       288,525  
Total current liabilities     6,476,925       2,310,869  
                 
Deferred revenue – long term     215,077       274,374  
Deferred consideration – long term     1,026,097       -  
Other liabilities – long term     443,656       665,713  
Long term debt due to related party, net of current portion     1,298,363       -  
Total long term liabilities     2,983,193       940,087  
                 
COMMITMENTS AND CONTINGENCIES                
                 
SHAREHOLDERS’ EQUITY:                
Preferred stock 20,000,000 shares authorized, no shares issued and outstanding     -       -  
Common stock, $0.001 par value, 100,000,000 shares authorized, 52,324,032 and 28,343,007 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively     42,113       18,132  
Additional paid-in capital     19,970,657       11,546,804  
Accumulated other comprehensive income     208,924       -  
Accumulated deficit     (12,471,634 )     (10,276,478 )
                 
Total shareholders’ equity     7,750,060       1,288,458  
                 
Total liabilities and shareholders’ equity   $ 17,210,178     $ 4,539,414  

 

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 nine months ended  
    September
30, 2017
    September
30, 2016
    September
30, 2017
    September
30, 2016
 
NET SALES   $ 7,559,754     $ 4,203,530     $ 23,156,949     $ 12,471,266  
                                 
COST OF SALES     3,049,989       1,158,998       7,995,170       3,698,764  
                                 
GROSS PROFIT     4,509,765       3,044,532       15,161,779       8,772,502  
                                 
OPERATING EXPENSES:                                
General and administrative     2,488,376       1,035,752       7,643,917       3,076,489  
Selling and marketing     4,102,346       2,267,103       11,346,321       6,636,950  
Total operating expenses     6,590,722       3,302,855       18,990,238       9,713,439  
                                 
OPERATING LOSS     (2,080,957 )     (258,323 )     (3,828,459 )     (940,937 )
                                 
INTEREST EXPENSE, NET     (164,377 )     (3,274 )     (215,147 )     (10,511 )
                                 
Gain on settlement     1,969,245       -       1,969,245       -  
Other miscellaneous income, net     1,508       -       61,482       -  
TOTAL MISCELLANEOUS INCOME     1,970,753       -       2,030,727       -  
                                 
LOSS BEFORE PROVISION FOR INCOME TAX     (274,581 )     (261,597 )     (2,012,879 )     (951,448 )
                                 
PROVISION FOR INCOME TAXES     112,277       -       182,277       -  
                                 
NET LOSS   $ (386,858 )   $ (261,597 )   $ (2,195,156 )   $ (951,448 )
                                 
OTHER COMPREHENSIVE INCOME:                                
Foreign currency translation adjustment     112,223       -       208,924       -  
                                 
COMPREHENSIVE LOSS   $ (274,635 )   $ (261,597 )   $ (1,986,232 )   $ (951,448 )
                                 
NET LOSS PER SHARE                                
BASIC   $ (0.01 )   $ (0.01 )   $ (0.04 )   $ (0.03 )
DILUTED   $ (0.01 )   $ (0.01 )   $ (0.04 )   $ (0.03 )
                                 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES                                
BASIC AND DILUTED     52,321,826       28,202,739       49,518,478       28,184,584  

 

See accompanying notes to condensed consolidated financial statements.

 

  5  
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017

(Unaudited)

 

                Accumulated              
    Common Stock     Additional     Other              
    $0.001 par value     Paid-In     Comprehensive     Accumulated        
    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     -       -       223,345       -       -       223,345  
                                                 
Issuance of stock for asset purchase     2,500,000       2,500       847,500       -       -       850,000  
                                                 
Issuance of stock, net of offering costs of $17,070     20,588,243       20,588       6,962,342       -       -       6,982,930  
                                                 
Issuance of stock for compensation     600,000       600       335,400       -       -       336,000  
                                                 
Cashless exercise of options     42,782       43       (43 )     -       -       -  
                                                 
Exercise of options     250,000       250       55,309       -       -       55,559  
                                                 
Other comprehensive income     -       -       -       208,924       -       208,924  
                                                 
Net loss     -       -       -       -       (2,195,156 )     (2,195,156 )
                                                 
Balance at 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.

 

  6  
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

(Unaudited)

 

      2107       2016  
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net loss   $ (2,195,156 )   $ (951,448 )
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:                
Depreciation     128,835       5,637  
Amortization of intangible assets     691,957       218,213  
Bad debt expense     903,710       693,607  
Share based compensation     223,345       259,328  
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     105,459       11,933  
Gain on settlement of contingent consideration     (1,969,245 )     -  
Change in assets and liabilities:                
Accounts receivable     (4,113,466 )     (900,774 )
Inventories     922,503       751,369  
Prepaid expenses and other current assets     114,171       52,158  
Accounts payable and accrued liabilities     3,025,709       (72,073 )
Severance payable     -       (45,995 )
Deferred revenue     (178,553 )     82,304  
Net cash (used in) provided by operating activities     (2,046,569 )     104,259  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Acquisition of property and equipment     (171,196 )     (1,290 )
Cash paid for acquisition of PhotoMedex, Inc.     (5,000,000 )     -  
Net cash used in investing activities     (5,171,196 )     (1,290 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Proceeds from issuance of common stock, net of costs     6,982,930       -  
Proceeds from exercise of options     55,559       -  
Payments of deferred consideration for asset acquisition     (14,583 )     -  
Payments of DermaWand asset purchase agreement     (150,000 )     (225,000 )
Settlement payment for PhotoMedex acquisition     (2,000,000 )     -  
Proceeds from long-term debt to related party     2,000,000       -  
Repayments of long-term debt to related party     (87,441 )     -  
Net cash provided by (used in) financing activities     6,786,465       (225,000 )
                 
Effect of exchange rates on cash and cash equivalents     1,683       -  
                 
NET DECREASE IN CASH AND CASH EQUIVALENTS     (429,617 )     (122,031 )
                 
CASH AND CASH EQUIVALENTS, beginning of the period     1,390,641       1,334,302  
                 
CASH AND CASH EQUIVALENTS, end of the period   $ 961,024     $ 1,212,271  
                 
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:                
Cashless exercise of options   $ 43     $ -  
Payments of DermaWand asset purchase agreement   $ -     $ 1,200,000  
                 
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 made     (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.

 

  7  
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016

(Unaudited)

 

Note 1 - Organization, Business of the Company and Liquidity

 

Organization and Nature of Operations

 

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

 

  Better Blocks International Limited, or (“BBI”), a New Zealand corporation;
     
  Ermis Labs, Inc., a Nevada Corporation;
     
  ICTV Brands Israel Limited., incorporated under the laws of Israel;
     
  ICTV Brands UK Limited., incorporated under the laws of the United Kingdom;
     
  ICTV Holdings, Inc., a Nevada Corporation (“ICTV Holdings”);
     
  Radiancy (HK) Limited, a private limited company limited by shares, incorporated under the laws of Hong Kong; and
     
  LK Technology Importaçăo E Exportaçăo LTDA, a private Sociedade limitada formed under the laws of Brazil (“LK Technology”).

 

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.

 

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, but not limited to, DermaWand TM , 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, Derma Brilliance ® , a skin care resurfacing device that helps reduce visible signs of aging, Jidue TM , a facial massager device which helps alleviate stress, and Good Planet Super Solution TM , a multi-use cleaning agent. 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. The Company is 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 response television (“DRTV”), digital marketing, live home shopping, traditional retail, e-commerce marketplaces, 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.

 

  8  
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016

(Unaudited)

 

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

 

PhotoMedex Acquisition

 

On October 4, 2016, we and our wholly-owned subsidiary, ICTV Holdings, entered into an asset purchase agreement, as amended by the First Amendment to the Asset Purchase Agreement, dated January 23, 2017 (as so amended, the “PhotoMedex Purchase Agreement”) with PhotoMedex, Inc., a Nevada corporation (“PhotoMedex”), and its wholly owned subsidiaries, Radiancy, Inc., a Delaware corporation, PhotoTherapeutics Ltd, a private limited company limited by shares incorporated under the laws of England and Wales, and Radiancy Israel Limited, a private corporation incorporated under the laws of the State of Israel, (collectively with PhotoMedex, the “Sellers” and individually, a “Seller”), pursuant to which ICTV Holdings acquired substantially all of the assets of the Sellers, including, but not limited to, all of the equity interests of the Seller’s subsidiaries Radiancy (HK) Limited, a private limited company incorporated under the laws of Hong Kong, and LK Technology Importaçăo E Exportaçăo LTDA, a private Sociedade limitada formed under the laws of Brazil, for a total purchase price of $9,500,000. Such acquisition is referred to herein as the “PhotoMedex Acquisition.” The PhotoMedex Acquisition was completed on January 23, 2017. (See Note 3 - Business and Asset Acquisitions).

 

The PhotoMedex Acquisition included the acquisition of proprietary products and services that address skin diseases and conditions or pain reduction using home-use devices for various indications including hair removal, acne treatment, skin rejuvenation, and lower back pain; which products are sold and distributed to traditional retail, online and infomercial outlets for home-use products and include, without limitation, the following: (a) no!no! ® Hair, (b) no!no! ® Skin, (c) no!no! ® Face Trainer, (d) no!no! ® Glow, (e) Made Ya Look, (f) no!no ®! Smooth Skin Care, (g) Kyrobak®, and (h) ClearTouch ®.

 

Under the PhotoMedex Purchase Agreement, we were required to pay to PhotoMedex and its subsidiaries a continuing monthly royalty on net cash (invoiced amount less sales refunds, returns, rebates, allowances and similar items) actually received by us or our affiliates from sales of the consumer products that we acquired from PhotoMedex. Such royalty payments commenced with net cash actually received from and after January 23, 2017, and would continue until the total royalty paid to PhotoMedex and its subsidiaries totaled $4,500,000.

 

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

 

As partial consideration for the releases provided by ICTV Holdings to the Sellers, on July 12, 2017 the Sellers and ICTV Holdings entered into a Bill of Sale and Assignment, which provides that each Seller sell, assign, transfer, convey and deliver to ICTV Holdings, and ICTV Holdings purchase and accept from each Seller, all of the right, title and interest, legal or equitable, of each such Seller in and to a deposit in the amount of $210,000 held by a supplier, Sigmatron International, Inc. (“Sigmatron”), between the Sellers and Sigmatron.

 

On July 15, 2017, to secure the Payment, we issued a 30-month secured promissory note (the “Note”), to LeoGroup Private Investment Access, LLC (the “Holder”), a significant shareholder, in the principal amount of $2,000,000 with an effective interest rate of 34% (see Note 7 – Long-term Debt). The Note provides that the Company shall make monthly principal and interest payments of $100,000 to the Holder for 30 months beginning August 2017. The Note is secured by a first priority security interest in all the assets of Company, except the Company’s accounts receivable. The Note contains customary covenants of the Company and customary events of default. Subject to the terms and conditions of the Note, so long as any event of default, as described in the Note, is continuing, without cure, for a period of five (5) business days after written notice from the Holder to the Company or a longer period if set forth in in the notice from Holder or if agreed to by the parties, all obligations of the Company under the Note shall be immediately due and payable, and the Holder may exercise any other remedies available at law or in equity. 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 change in the amount of the Company’s contingent consideration payable due to PhotoMedex, Inc. for the period up to the date of the Release Agreement was as follows:

 

Balance at January 23, 2017-initial measurement   $ 4,198,043  
Contingent consideration earned but not paid     (570,248 )
Change in fair value     (48,035 )
Balance at July 12, 2017   $ 3,579,760  

 

The following summarizes the amounts owed to PhotoMedex (PHMD) as of July 12, 2017 and the gain on settlement recorded during the quarter ended September 30, 2017:

 

Contingent consideration owed to PHMD (see above)           $ 3,579,760  
Other payables (receivables)                
Due from PHMD   $ (837,708 )        
Contingent consideration earned but not paid     570,248          
Other payable amounts due to PHMD     446,945       179,485  
Net amount owed to PHMD           $ 3,759,245  
                 
Settlement amount           $ 2,000,000  
Assignment of Sigmatron deposit to ICTV             (210,000 )
Net settlement             1,790,000  
                 
Gain on settlement           $ 1,969,245  

 

Ermis Labs Asset Acquisition

 

On October 4, 2016, we and our wholly-owned subsidiary, Ermis Labs, Inc., a Nevada corporation (the “Purchaser”), entered into an asset purchase agreement (the “Ermis Labs Purchase Agreement”) with LeoGroup Private Debt Facility L.P. a Delaware limited partnership (the “LeoGroup L.P.”), a significant shareholder, and Ermis Labs, Inc., a New Jersey corporation (“Ermis Lab”), pursuant to which the Purchaser has agreed to acquire substantially all of the assets of Ermis Labs (collectively, the “Ermis Labs Assets”), for a total purchase price of $1,982,000. Such acquisition is referred to herein as the “Ermis Labs Asset Purchase.” (See Note 3 - Business and Asset Acquisitions).

 

  9  
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016

(Unaudited)

 

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

 

Liquidity

 

We had a net loss of approximately $2,195,000 for the nine months ended September 30, 2017 and working capital of approximately $6,070,000 as of September 30, 2017. Management believes that the current available resources, including cash and cash equivalents will provide sufficient funds to enable us to meet our operating plan for at least the next twelve months from the date of this filing.

 

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, 2016. 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, 2017 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 Holdings, Ermis Labs, Inc., ICTV Brands UK Limited, ICTV Brands Israel Limited, Radiancy (HK) Limited and LK Technology. 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). All significant inter-company transactions and balances have been eliminated in consolidation.

 

  10  
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

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 condensed 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, allocation of purchase price, valuation allowance on deferred tax assets, and share based compensation. Actual results could differ from these estimates.

 

Recently Issued Accounting Pronouncements

 

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2017-01 Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”). ASU2017-01 narrows the definition of a “business.” This standard provides guidance to assist entities with evaluating when a set of transferred assets and activities is a business. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017. This guidance must be applied prospectively to transactions occurring within the period of adoption. As a result of the recent PhotoMedex acquisition and Ermis asset purchase (See Note 3 - Business and Asset Acquisitions), we adopted this standard on January 1, 2017.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”) . The updated accounting requirement is intended to reduce diversity in practice in the classification of certain transactions in the statement of cash flows. Such transactions include but are not limited to debt prepayment or debt extinguishment costs, settlement of zero coupon debt instruments, contingent consideration payments made after a business combination and distributions received from equity method investments. ASU 2016-15 is required to be retrospectively applied and is effective for fiscal years and interim periods beginning after December 15, 2017, with early adoption permitted. As a result of the recent PhotoMedex acquisition (See Note 3 - Business and Asset Acquisitions), we adopted this standard on January 1, 2017.

 

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments , which sets forth the current expected credit loss model, a new forward-looking impairment model for certain financial instruments based on expected losses rather than incurred losses. The ASU is effective for interim and annual periods beginning after December 15, 2019, and early adoption of the standard is permitted. Entities are required to adopt ASU No. 2016-13 using a modified retrospective approach, subject to certain limited exceptions. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

 

  11  
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016

(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. The Company expects 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. The Company has not yet begun to quantify the specific impacts of this guidance.

 

In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers , on revenue recognition. The new standard provides for a single five-step model to be applied to all revenue contracts with customers as well as requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company has not substantially or timely commenced its evaluation process to implement controls and identify the impact to its consolidated financial statements of implementing ASU No. 2014-09.

 

Concentration of credit risk

 

Financial instruments, which potentially subject the Company to concentrations of credit risk, include cash and cash equivalents 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 cash in bank accounts.

 

As of September 30, 2017, 15% of the Company’s accounts receivable were due from various individual customers to whom our products had been sold directly via DRTV. In addition, 12% was due from live home shopping, 49% was due from brick and mortar retailers, 9% was due from e-commerce accounts, 11% was due from duty free airline business, and the remaining amount from miscellaneous accounts. Major customers are considered to be those who accounted for more than 10% of net sales. For the three and nine months ended September 30, 2017, there were no major customers. For the three and nine months ended September 30, 2016, there were 10% and 0%, respectively, of net sales made to one e-commerce customer.

 

  12  
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016

(Unaudited)

 

Note 2- Summary of significant accounting policies (continued)

 

Fair value of financial instruments

 

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

 

Assets and liabilities of our international subsidiaries are translated on the basis of 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 $439,000 at September 30, 2017 and $123,000 at December 31, 2016. The allowances are estimated based on historical customer returns and bad debts.

 

In addition to reserves for returns on accounts receivable, an accrual is made for the return of product that has been sold to customers and had cash collections, while the customer still has the right to return the product. The amounts of these accruals included in accounts payable and accrued liabilities in our Condensed Consolidated Balance Sheets were approximately $532,000 and $91,000 at September 30, 2017 and December 31, 2016, respectively.

 

  13  
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

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 $454,000 and $74,000 at September 30, 2017 and December 31, 2016, respectively. Included in inventory at September 30, 2017 and December 31, 2016 is approximately $60,000 and $67,000, 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 a retailer distributor for sale.

 

Property and equipment

 

Property and equipment are carried at cost and depreciation is computed over the estimated useful lives of the individual assets ranging from 3 to 7 years. Depreciation is computed using the straight-line method. 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 expense amounted to approximately $51,000 and $129,000 and $2,000 and $6,000 for the three and nine months ended September 30, 2017 and 2016, respectively.

 

Property and equipment consisted of the following at:

 

    September 30, 2017     December 31, 2016  
Computer hardware and software   $ 125,623     $ 33,549  
Furniture and equipment     944,894       40,549  
Leasehold improvements     41,383       -  
    $ 1,111,900     $ 74,098  
Accumulated depreciation     (183,048 )     (58,099 )
Property and equipment, net   $ 928,852     $ 15,999  

 

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 $251,000 and $692,000 and $73,000 and $218,000 for the three and nine months ended September 30, 2017 and 2016, 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.

 

  14  
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

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, 2017 and 2016.

 

Revenue recognition

 

We recognize revenues from product sales when the following four criteria have been met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the selling price is fixed or determinable; and (iv) collectability is reasonably assured. The Company’s revenues in the Condensed Consolidated Statements of Operations and Comprehensive Loss are net of sales taxes. Revenues from product sales are recorded net of provisions for estimated chargebacks, rebates, expected returns and cash discounts.

 

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 customer acceptance and collectability are assured, which we determine to be when the trial period ends. If the risk-free trial expires without action by the customer, product is determined to be accepted by the customer and revenue is recorded. Revenue for items purchased without the 30-day free trial is recognized upon shipment of the product to the customer and collectability is reasonably assured.

 

Revenue related to our DermaVital TM continuity program is recognized monthly upon shipment to customers. Revenue from our live home shopping and retail customers is recorded upon sale to the final customer. 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. Included in deferred revenue – short-term are payments received prior to shipment on international sales of approximately $55,000 and $142,000 as of September 30, 2017 and December 31, 2016, respectively.

 

We have a return policy whereby the customer can return any product received within 30 or 60 days of receipt for a full refund. We provide a provision for product returns based on the experience with historical sales returns, in accordance with ASC Topic 605-15 with respect to sales of product when a right of return exists. Returns for the periods presented have been offset against gross sales. Such allowance for sales returns is included in accounts payable and accrued liabilities.

 

  15  
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

We sell warranties on our products for various terms. Revenue is recognized ratably over the term, with the unearned warranty included in deferred revenue on the accompanying condensed consolidated balance sheets. Changes in deferred service revenue related to the warranties is presented in the following table:

 

    September 30, 2017     December 31, 2016  
Deferred extended warranty revenue:                
At beginning of period   $ 509,389     $ 629,143  
Revenue deferred for new warranties, year to date     103,489       118,148  
Revenue recognized year to date     (194,785 )     (237,902 )
At end of period   $ 418,093     $ 509,389  
                 
Current portion   $ 203,016     $ 235,015  
Non-current portion     215,077       274,374  
    $ 418,093     $ 509,389  

 

Shipping and handling

 

The amount billed to customers for shipping and handling is included in net sales. Shipping, handling and processing revenue approximated $427,000 and $1,550,000 and $571,000 and $1,633,000 for the three and nine months ended September 30, 2017 and 2016, respectively. Shipping and handling costs are included in cost of sales. Shipping and handling costs approximated $314,000 and $1,102,000 and $232,000 and $659,000 for the three and nine months ended September 30, 2017 and 2016, respectively.

 

Research and development

 

Research and development costs are expensed as incurred and are included in selling and marketing expense in the accompanying condensed consolidated financial statements. Research and development costs primarily consist of efforts to discover and develop new products, including clinical trials, product safety testing, certifications for international regulations and standards, etc. Research and development costs approximated $146,000 and $210,000 and $31,000 and $88,000 for the three and nine months ended September 30, 2017 and 2016, respectively.

 

Media and production costs

 

Media and internet marketing costs are expensed as incurred and are included in selling and marketing expense in the accompanying condensed consolidated financial statements. Production costs associated with the creation of new and updated video content and advertising campaigns are expensed at the commencement of a campaign. We incurred approximately $1,355,000 and $1,444,000 in media costs for airing infomercials, $66,000 and $7,000 in new production costs, and $1,243,000 and $299,000 in internet marketing costs for the three months ended September 30, 2017 and 2016, respectively and approximately $4,192,000 and $4,011,000 in media costs for airing infomercials, $260,000 and $210,000 in new production costs, and $3,332,000 and $899,000 in internet marketing costs for the nine months ended September 30, 2017 and 2016, respectively.

 

  16  
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016

(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 bases of assets and liabilities at enacted statutory tax rates in effect for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. In addition, valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. In consideration of our accumulated losses and limited historical ability to generate taxable income to utilize our deferred tax assets, we have estimated that we will not be able to realize any benefit from our temporary differences and have recorded a full valuation allowance. If we sustain profitability in the future at levels which cause management to conclude that it is more likely than not that we will realize all or a portion of the net operating loss carry-forward, we would record the estimated net realizable 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 September 30, 2017, 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. 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, 2017, 3,680,002 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.

 

  17  
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

Stock options (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.

 

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, 2017 and 2016:

 

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

 

                      Weighted  
    Number of Shares     Average  
          Non-           Exercise  
    Employee     Employee     Totals     Price  
                         
Balance, January 1, 2016     4,036,669       -       4,036,669     $ 0.21  
Granted during the period     -       -       -       -  
Exercised during the period     (350,000 )     -       (350,000 )     0.11  
Expired during the period     (431,667 )     -       (431,667 )     0.22  
                                 
Balance, September 30, 2016     3,255,002       -       3,555,002     $ 0.21  

 

Of the stock options outstanding, as of September 30, 2017 under the Stock Option Plans, 2,525,000 options are currently vested and exercisable. The weighted average exercise price of these options was $0.23. These options expire through September 2027. The aggregate intrinsic value for options outstanding and exercisable at September 30, 2017 and 2016 was approximately $618,000 and $12,000, respectively. The aggregate intrinsic value for options exercised during the nine months ended September 30, 2017 and 2016 was approximately $49,000 and $31,000, respectively.

 

For the three and nine months ended September 30, 2017 and 2016, we recorded approximately $59,000 and $205,000 and $42,000 and $218,000, respectively, in stock compensation expense under the Stock Option Plans which is included in general and administrative expense. At September 30, 2017, there was approximately $291,000 of total unrecognized compensation cost related to non-vested option grants that will be recognized over the remaining vesting period of 3 years.

 

There were share grants totaling 280,000 for the nine months ended September 30, 2017 to two employees. There were no grants inside of the Plans for the nine months ended September 30, 2016. The following assumptions were used in the Black-Scholes option pricing model for these grants issued during:

 

2017      
Risk-free interest rate     2.17 %
Expected dividend yield     0.00  
Expected life     6 years  
Expected volatility     145 %
Weighted average grant date fair value   $ 0.46  
Forfeiture rate     5 %

 

  18  
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

Stock options (continued)

 

The following is a summary of stock options outstanding outside of the Stock Option Plans for the nine months ended September 30, 2017 and 2016:

 

                      Weighted  
    Number of Shares     Average  
          Non-           Exercise  
    Employee     Employee     Totals     Price  
                         
Balance, January 1, 2017     516,667       1,676,667       2,193,334     $ 0.35  
Granted during the period     -       -       -       -  
Exercised during the period     (183,333 )     -       (183,333 )     0.27  
Expired during the period     -       (200,000 )     (200,000 )     0.80  
                                 
Balance, September 30, 2017     333,334       1,476,667       1,810,001     $ 0.31  

 

                      Weighted  
    Number of Shares     Average  
          Non-           Exercise  
    Employee     Employee     Totals     Price  
                         
Balance, January 1, 2016     466,667       1,976,667       2,443,334     $ 0.32  
Granted during the period     50,000       -       50,000       0.21  
Expired during the period     -       (300,000 )     (300,000 )     0.08  
                                 
Balance, September 30, 2016     516,667       1,676,667       2,193,334     $ 0.35  

 

Of the stock options, outstanding outside of the Stock Option Plans as of September 30, 2017, 1,751,667 options are currently vested and exercisable. The weighted average exercise price of these options was $0.32. These options expire through January 2026. The aggregate intrinsic value for options outstanding and exercisable at September 30, 2017 and 2016, was approximately $312,000 and $7,000 respectively. The aggregate intrinsic value for stock options exercised during the nine months ended September 30, 2017 was approximately $40,000. There were no options exercised during the nine months ended September 30, 2016.

 

For the three and nine months ended September 30, 2017 and 2016, we recorded approximately $5,000 and $18,000 and $13,000 and $41,000, respectively, in stock compensation expense related to stock options outside of the Stock Option Plans which is included in general and administrative expense. At September 30, 2017, there was approximately $8,000 of total unrecognized compensation cost related to non-vested option grants that will be recognized over a remaining vesting period of 2 years.

 

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ICTV BRANDS INC. AND SUBSIDIARIES

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016

(Unaudited)

 

Note 2 - Summary of significant accounting policies (continued)

 

Stock options (continued)

 

There were no grants outside of the Plan for the nine months ended September 30, 2017. The following assumptions were used in the Black-Scholes option pricing model for one grant issued during the nine months ended September 30, 2016.

 

2016      
Risk-free interest rate     1.94 %
Expected dividend yield     0.00  
Expected life     6 years  
Expected volatility     156 %
Weighted average grant date fair value   $ 0.21  
Forfeiture rate     5 %

 

The following is a summary of all stock options outstanding and nonvested for the nine months ended September 30, 2017:

 

                      Weighted  
    Number of Shares     Average  
          Non-           Exercise  
    Employee     Employee     Totals     Price  
                         
Balance, January 1, 2017 – nonvested     1,193,335       -       1,193,335     $ 0.27  
Granted     280,000       -       280,000       0.49  
Vested     (116,666 )     -       (116,666 )     0.22  
Forfeited     (93,333 )     -       (93,333 )     0.32  
Balance September 30, 2017 - nonvested     1,263,336       -       1,263,336     $ 0.32  

 

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 Sellers, the Escrow Agent, and certain investors in the Company’s private placement (the “Escrow Agreement”), which escrow funds were paid to the Sellers on January 23, 2017, in accordance with the Escrow Agreement and subject to the conditions thereof; (ii) $2,000,000 of the purchase price was to be paid on or before the 90 th day following January 23, 2017; and (iii) the remainder of the purchase price of $4,500,000 was payable in the form of a continuing royalty as described in more detail below. On October 4, 2016, as required by the PhotoMedex Purchase Agreement, we delivered to PhotoMedex a letter of credit from LeoGroup L.P. (a significant shareholder), a private equity fund that secures our obligation to make the $2 million 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.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016

(Unaudited)

 

Note 3 - Business and Asset Acquisitions (continued):

 

Under the PhotoMedex Purchase Agreement, until the July 12, 2017 Release Agreement discussed in Note 1, 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 PhotoMedex Sellers and as of September 30, 2017, no further obligation remains. See Note 1 – PhotoMedex Acquisition for additional information.

 

In connection with the PhotoMedex Purchase Agreement, on October 4, 2016, ICTV Holdings entered into a transition services agreement with the Sellers (the “Transition Services Agreement”), pursuant to which Sellers have 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 Sellers’ premises and warehouses, in exchange for which ICTV Holdings shall (i) pay to the Sellers the documented costs and expenses incurred by them in connection with the provision of those services; (ii) pay to the Sellers the documented lease costs including monthly rental and any utility charges incurred under the applicable leases; (iii) reimburse the 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 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.

 

The Company accounted for the PhotoMedex Acquisition as a business combination. Under this method of accounting, the total estimated purchase consideration was allocated to the acquired tangible and intangible assets, based on their estimated fair values as of the acquisition date. There was no excess price above fair value for this transaction.

 

The following table summarizes the consideration paid in connection with the PhotoMedex Business Acquisition on January 23, 2017:

 

Cash   $ 5,000,000  
Fair value of contingent consideration due to PhotoMedex     4,198,043  
Total consideration transferred   $ 9,198,043  

 

The allocation of the purchase price based on the fair value of the PhotoMedex assets acquired as of January 23, 2017 is as follows:

 

Inventory   $ 6,300,000  
Property and equipment     857,415  
Patented/Unpatented Technology     940,628  
Trademarks/Tradenames     1,100,000  
Total assets acquired   $ 9,198,043  

 

We evaluate assets and liabilities subject to fair value measurements on a recurring and non-recurring basis to determine the appropriate level to classify them for each reporting period. This determination requires significant judgments to be made by the Company.

 

The changes in the fair value of the Company’s contingent consideration payable due to PhotoMedex, Inc. for the period up to the date of the Release Agreement was as follows:

 

Balance at January 23, 2017-initial measurement   $ 4,198,043  
Contingent consideration earned but not paid     (570,248 )
Change in fair value     (48,035 )
Balance at July 12, 2017   $ 3,579,760  

 

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 September 30, 2017 was zero (See Note 1 - PhotoMedex Acquisition).

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016

(Unaudited)

 

Note 3 - Business and Asset Acquisitions (continued):

 

The following unaudited condensed pro forma financial information for the three and nine months ended September 30, 2017 and 2016 represent the combined results of the Company’s operations as if the PhotoMedex Acquisition had occurred on January 1, 2016. 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,  
    2017     2016  
Net sales   $ 7,559,754     $ 10,345,530  
Net loss   $ (2,356,103 )   $ (2,175,597 )
Net loss per share – basic and diluted   $ (0.05 )   $ (0.04 )
Weighted average number of common shares basic and diluted     52,321,825       48,790,982  

 

    For the nine months ended September 30,  
    2017     2016  
Net sales   $ 26,695,949     $ 38,195,266  
Net loss   $ (3,858,089 )   $ (8,426,448 )
Net loss per share – basic and diluted   $ (0.08 )   $ (0.17 )
Weighted average number of common shares basic and diluted     49,518,478       48,772,827  

 

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 will 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.

 

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ICTV BRANDS INC. AND SUBSIDIARIES

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016

(Unaudited)

 

Note 3 - Business and Asset Acquisitions (continued):

 

Under the Ermis purchase agreement, we are required to pay to Ermis Labs a continuing monthly royalty of 5% of net cash (invoiced amount less sales refunds, returns, rebates, allowances and similar items) actually received by us or our affiliates from sales of the over-the-counter medicated skin care products acquired in the Ermis Labs Asset Acquisition, commencing with net cash actually received by the Purchaser or its 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.

 

The changes in the Company’s deferred consideration payable due to Ermis Labs, Inc. during the nine months ended September 30, 2017 was as follows:

 

Balance at January 23, 2017 – initial measurement   $ 1,131,822  
Consideration payments     (14,583 )
Accretion of interest     69,275  
Balance at September 30, 2017   $ 1,186,514  
         
Current portion   $ 160,417  
Non-current portion     1,026,097  
    $ 1,186,514  

 

The Company accounted for the Ermis Labs purchases as an asset purchase. Under this method of accounting, the total estimated purchase consideration was allocated to the specific acquired tangible and intangible assets based on their relative fair values.

 

The following table summarizes the consideration paid in connection with the Ermis Labs Asset Acquisition on January 23, 2017:

 

ICTV Brands shares   $ 850,000  
Deferred consideration due to Ermis Labs     1,131,822  
Total consideration transferred   $ 1,981,822  

 

The allocation of the purchase price based on the relative fair value of the Ermis Labs assets acquired as of January 23, 2017 is as follows:

 

Inventory   $ 469,379  
Formulations     1,355,983  
Trademark/Tradenames     156,460  
Total assets acquired   $ 1,981,822  

 

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ICTV BRANDS INC. AND SUBSIDIARIES

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016

(Unaudited)

 

Note 4 - Commitments and contingencies

 

Leases

 

In February 2017, we entered into an amendment to our current lease for a new space in our current building from March 2017 through February 2022. In August 2017, we entered into a second amendment to expand our space which increased monthly base rent payments. Our London office lease became month to month beginning in September 2017 for a monthly cost of approximately $8,000. In March 2017, our Hong Kong office entered into a lease expiring in March 2018 for our current office space. Our Israel office lease is for a one year term ending in April 2018. Rent expense incurred during the three and nine months ended September 30, 2017 and 2016 totaled approximately $83,000 and $224,000 and $14,000 and $41,000, respectively.

 

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

 

    Remaining
three months
2017
    2018     2019     2020     2021     Thereafter     Total
Obligation
 
Wayne - Corporate HQ   $ 37,000     $ 151,000     $ 152,000     $ 154,000     $ 156,000     $ 26,000     $ 676,000  
                                                         
Israel Office     17,000       22,000       -       -       -       -       39,000  
                                                         
Hong Kong Office     5,000       5,000       -       -       -       -       10,000  
                                                         
Total Lease Obligations   $ 59,000     $ 178,000     $ 152,000     $ 154,000     $ 156,000     $ 26,000     $ 725,000  

 

Other matters

 

Product Liability Insurance

 

For certain products, we were (and are) listed as an additional insured party under the product manufacturers’ insurance policy. We purchased our own liability insurance, which expires on April 20, 2018. We intend to renew this policy. At present, management is not aware of any claims against the Company for any products sold.

 

Note 5 - Intangibles, net :

 

    September 30, 2017     December 31, 2016  
Beginning of period   $ 1,163,816     $ -  
Additions:                
DermaWand purchase     -       1,163,816  
Formulations     1,355,983       -  
Trademark     1,256,460       -  
Patented/Unpatented Technology     940,628       -  
End of period     4,716,887       1,163,816  
                 
Accumulated amortization     (982,908 )     (290,952 )
Intangibles, net   $ 3,733,979     $ 872,864  

 

Amortization expense was approximately $251,000 and $692,000 and $73,000 and $219,000 for the three and nine months ended September 30, 2017 and 2016, respectively.

 

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ICTV BRANDS INC. AND SUBSIDIARIES

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016

(Unaudited)

 

Note 5 - Intangibles, net (continued)

 

The following table outlines the estimated future amortization expense related to the intangible assets held as of September 30, 2017.

 

2017 (remaining three months)   $ 251,000  
2018     1,001,000  
2019     1,001,000  
2020     711,000  
2021     711,000  
Thereafter     59,000  
         
    $ 3,734,000  

 

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 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, the Company is no longer obligated to make royalty payments on sales of DermaWand TM . There shall be no interest charged, and ICTV may, in its sole discretion, at any time without permission or penalty pre-pay some or all of the purchase price. Under our old licensing agreement, ICTV 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 intangible asset and other 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 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-year period of the agreement, which at this time is management’s best estimate of the remaining useful life.

 

As of September 30, 2017, the other liability balance was approximately $813,000 including the discount for imputed interest of approximately $12,000, of which approximately $370,000 was current. For the three and nine months ended September 30, 2017, we amortized approximately $3,000 and $9,000 of interest expense related to the discount for imputed interest. The related net intangible asset balance was approximately $655,000 and $873,000 as of September 30, 2017 and December 31, 2016 with amortization expense of approximately $73,000 and $218,000 being recorded in cost of sales for the three and nine months ended for both September 30, 2017 and 2016. The accumulated amortization was approximately $545,000 and $291,000 as of September 30, 2017 and December 31, 2016, respectively. Management evaluates the intangible asset for impairment when there is a triggering event and concluded there were no such events as of September 30, 2017.

 

Note 7 – Long-term Debt due to Related Party

 

The Company has a 30-month secured promissory note (the “Note”), to LeoGroup Private Investment Access, LLC (the “Holder”), a significant shareholder, 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 covenants of the Company and customary events of default. Subject to the terms and conditions of the Note, so long as any event of default, as described in the Note, is continuing, without cure, for a period of five (5) business days after written notice from the Holder to the Company or a longer period if set forth in in the notice from Holder or if agreed to by the parties, all obligations of the Company under the Note shall be immediately due and payable, and the Holder may exercise any other remedies available at law or in equity. 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 balance of the long-term debt at September 30, 2017 was as follows:

 

       
Total debt   $ 1,939,762  
Less: accrued interest     (27,203 )
Long-term debt, less accrued interest     1,912,560  
Less: current portion     (641,399 )
Long-term debt, net   $ 1,271,161  

 

Maturities of long-term debt at September 30, 2017, are as follows:

 

2017   $ 140,712  
2018     697,707  
2019     976,907  
2020     97,234  
    $ 1,912,560  

 

Note 8 - Capital Transactions

 

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

 

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ICTV BRANDS INC. AND SUBSIDIARIES

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016

(Unaudited)

 

Note 8 - Capital Transactions (continued):

 

On February 1, 2017, pursuant to the terms of the securities purchase agreement, we completed a second and final private placement whereby the selling stockholders purchased 11,764,713 shares of common stock at a price of $0.34 per share, for aggregate gross proceeds of $4,000,000. The issuance of the shares was exempt from registration under Regulation D and Section 4(2) of the Securities Act of 1933. We incurred approximately $17,000 of offering costs related to the private placements for the nine months ended September 30, 2017.

 

On March 16, 2017, we issued 600,000 shares of fully vested common stock as part of a share bonus to three executive officers. The stock price on date of issuance was $0.56 per share. The recipients of the shares of common stock are key employees of our Company, and the issuance of the common stock is exempt from registration under Section 4(2) of the Securities Act of 1933. Total stock based compensation related to this transaction for the nine months ended September 30, 2017 was $336,000 and is included in operating expenses in the accompanying condensed consolidated statements of operations and comprehensive loss.

 

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

 

On June 26, 2017, a director exercised 250,000 options previously issued to him, at an exercise price approximately at an average of $0.22. The exercise resulted in an issuance of 250,000 shares. The shares were issued as restricted stock, with a restrictive legend placed on the share certificate. The issuance of the shares was exempt from registration under Regulation D and Section 4(2) of the Securities Act of 1933.

 

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

 

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

 

Note 9 - Related party transactions

 

The spouse and mother-in-law of one of our directors, Diana Pessin, participated in the private placement on January 23, 2017 and purchased a total of 4,411,765 shares at a price of $0.34 per share for a total purchase price of $1,500,000. Kelvin Claney, our Chief Executive Officer, participated in the private placement and purchased a total of 500,000 shares at a price of $0.34 per share for a total purchase price of $170,000. LeoGroup Private Debt Facility L.P. became a major shareholder as part of the Ermis Labs Asset Acquisition described in Notes 1 and 3. On July 15, 2017 they provided the Company the $2,000,000 30-month secured promissory note to allow the buyout of the PhotoMedex royalty described in Note 1.

 

Note 10 - Basic and diluted earnings per share

 

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

 

The computation of basic earnings (loss) per share is computed by dividing earnings (loss) available to common shareholders by the weighted average number of outstanding common shares during the period. Diluted earnings per share gives the effect to all dilutive potential common shares outstanding during the period. The computation of diluted earnings per share does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect. At September 30, 2017, there were 5,540,002 stock options outstanding with 4,276,667 vested and exercisable at an average exercise price of $0.26.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016

(Unaudited)

 

Note 10 - Basic and diluted earnings per share (continued):

 

All outstanding securities were anti-dilutive for the three and nine months ended September 30, 2017 and 2016 as a result of a net losses for these periods. The following securities were not involved in the computation of diluted net loss per share as their effect would have been anti-dilutive:

 

    September 30, 2017     September 30, 2016  
                 
Options to purchase common stock     5,540,002       5,448,336  

 

The computations for basic and fully diluted earnings per share are as follows:

 

          Weighted Average        
For the three-months ended September 30, 2017:   Loss
(Numerator)
    Shares (Denominator)     Per Share Amount  
                   
Basic and diluted loss per share                        
Loss to common shareholders   $ (386,858 )     52,321,826       (0.01 )

 

          Weighted Average        
For the three-months ended September 30, 2016:   Loss
(Numerator)
    Shares (Denominator)     Per Share Amount  
                   
Basic and diluted earnings per share                        
Loss to common shareholders   $ (261,597 )     28,202,739     $ (0.01 )

 

          Weighted Average        
For the nine-months ended September 30, 2017:   Loss
(Numerator)
    Shares (Denominator)     Per Share Amount  
                   
Basic and diluted loss per share                        
Loss to common shareholders   $ (2,195,156 )     49,518,478       (0.04 )

 

          Weighted Average        
For the nine-months ended September 30, 2016:   Loss
(Numerator)
    Shares (Denominator)     Per Share Amount  
                   
Basic and diluted earnings per share                        
Loss to common shareholders   $ (951,448 )     28,184,584     $ (0.03 )

 

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ICTV BRANDS INC. AND SUBSIDIARIES

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016

(Unaudited)

 

Note 11 - Income taxes

 

The provision for income taxes is approximately $112,000 and $182,000 for the three and nine months ended September 30, 2017 and $0 for the three and nine months ended September 30, 2016. The provision reflects an estimated current tax liability associated with earnings of a foreign subsidiary. The effective tax rate is (15%) and (10%) for the three and nine months ended September 30, 2017, and 0% for the three and nine months ended September 30, 2016. As of December 31, 2016, the Company had approximately $3,259,000 of gross federal net operating losses and $951,000 of gross state net operating losses available. The Company has provided a full valuation allowance on its net deferred asset as the Company does not have sufficient history of federal, state and foreign taxable income. The Company does not believe it has any material uncertain tax positions. The Company’s policy is to recognize interest and penalties related to tax matters in general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Loss. The Company recorded $0 interest and penalties for the three and nine months ended September 30, 2017 and 2016.

 

Due to the change in ownership provisions of the Internal Revenue Code, the availability of the Company’s net operating loss carry forwards may be subject to annual limitation against taxable income in future periods, which could substantially limit the eventual utilization of such carry forwards. The Company has not updated its analysis through September 30, 2017, and has not analyzed the potential impact of its recent equity financing on beneficial ownership and therefore no determination has been made whether the net operating loss carry forward is subject to any Internal Revenue Code Section 382 limitation. To the extent there is a limitation, there would be a reduction in the deferred tax asset with an offsetting reduction in the valuation allowance.

 

Note 12 - Segment reporting

 

We operate in the Direct to Consumer segment, which is engaged in the selling of various consumer products primarily through a multi-channel direct marketing channels, as well as through e-commerce and retail market places. In addition, we sell our products through our international third party distributor segment and our airline and Hong Kong retail segment. 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, wholesale international third party distributor sale or airline/other retail sales. Operating expenses are primarily prorated based on the relationship between direct to consumer sales and international third party distributor sales.

 

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

 

    For the three months ended
September 30, 2017
          For the three months ended
September 30, 2016
 
    Direct to Consumer     International
Third Party
Distributor
    Airline
and
Hong
Kong
Retail
    Totals     Direct to
Consumer
    International
Third Party Distributor
    Airline
and
Hong
Kong
Retail
    Totals  
                                                 
Net sales   $ 6,778,661     $ 380,755     $ 400,338     $ 7,559,754     $ 3,338,816     $ 864,714     $ -     $ 4,203,530  
                                                                 
Cost of sales     2,683,194       199,835       166,960       3049,989       712,313       446,685       -       1,158,998  
Gross profit     4,095,467       180,920       233,378       4,509,765       2,626,503       418,029       -       3,044,532  
                                                                 
Operating expenses:                                                                
General and administrative     2,384,609       67,252       36,515       2,488,376       913,917       121,835       -       1,035,752  
Selling and marketing     3,922,646       22,925       156,775       4,102,346       2,253,300       13,803       -       2,267,103  
Total operating expense     6,307,255       90,177       193,290       6,590,722       3,167,217       135,638       -       3,302,855  
Operating income (loss)   $ (2,211,788 )   $ 90,743     $ 40,088     $ (2,080,957 )   $ (540,714 )   $ 282,391     $ -     $ (258,323 )

 

  28  
 

 

ICTV BRANDS INC. AND SUBSIDIARIES

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016

(Unaudited)

 

    For the nine months ended
September 30, 2017
          For the nine months ended
September 30, 2016
 
    Direct to
Consumer
    International
Third Party
Distributor
    Airline
and
Hong
Kong
Retail
    Totals     Direct to
Consumer
    International
Third Party Distributor
    Airline
and
Hong
Kong
Retail
    Totals  
                                                 
Net sales   $ 19,945,577     $ 1,842,373     $ 1,368,999     $ 23,156,949     $ 9,252,382     $ 3,218,884       -     $ 12,471,266  
                                                                 
Cost of sales     6,520,301       850,238       624,631       7,995,170       2,076,631       1,622,133       -       3,698,764  
Gross profit     13,425,276       992,135       744,368       15,161,779       7,175,751       1,596,751       -       8,772,502  
                                                                 
Operating expenses: